CRA International Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 7 speakers on the call.

Operator

Day, everyone, and welcome to Charles River Associates' Second Quarter 2023 Conference Call. Please note that today's call is being recorded. The company's earnings release and prepared remarks from CRA's Chief Financial Officer are posted on the Investor Relations section of CRA's website atcrai.com. With us today are CRA's President and Chief Executive Officer, Paul Malley Chief Financial Officer, Dan Mahoney and Chief Corporate Development Officer, Chad Holmes. At this time, I'd like to turn the call over to Mr.

Operator

Mahoney for opening remarks. Dan, please go ahead.

Speaker 1

Thank you, Rob, and good morning, everyone. Please note that the statements made during this conference call, including guidance on future revenue and non GAAP EBITDA margin And any other statements concerning the future business, operating results or financial condition of CRA, including those statements using the terms expect, Outlook or similar terms are forward looking statements as defined in Section 21 of the Exchange Act. Information contained in these forward looking statements based on management's current expectations, it is inherently uncertain. Actual performance and results may differ materially from those expressed Statements are implied in these statements due to many important factors, including the level of demand for our services as a result of changes in general and industry specific economic conditions. Additional information regarding these factors is included in today's release And in CRA's periodic reports, including our most recently filed annual report on Form 10 ks and quarterly reports on Form 10 Q filed with the SEC.

Speaker 1

CRA undertakes no obligation to update any forward looking statements after the date of this call. Additionally, we will refer to some non GAAP financial measures and certain measures presented on a constant currency basis on this call. Everyone is encouraged to refer to today's release and related CFO remarks For reconciliations of these non GAAP financial measures to the GAAP comparable measures and descriptions of the calculation of EBITDA and measures presented on a constant currency basis. I will now turn it over to Paul for his report. Paul?

Speaker 1

Thanks, Dan, and good morning, everyone. Thank you

Speaker 2

for joining us today. For the past several quarters, we have discussed our sales pipeline and in particular, The growth in our project lead flow is a good indicator of the overall health of CRA's business. I'm pleased to report that we This marks the 3rd consecutive quarter of double digit growth in project lead flow and together represents the strongest period of lead flow activity in CRA's history. More importantly, we translated this flow of client opportunities into revenue producing assignments during the Q2 as new project originations grew by 5% year over year. This growth reflects a sequential improvement in our conversion rate relative to the Q1, but it's still below our historical norms.

Speaker 2

The expansion of our sales pipeline supported our strong performance in the second quarter. Revenue increased by 8.6 percent year over year to $162,000,000 which represents the highest quarterly revenue in the company's history. Broad based contributions across our portfolio drove this performance. 7 of 11 practices grew year over year. Four practices, energy, finance, financial economics and forensic services led the way With each generating double digit revenue growth, additionally, 3 of our larger practices, antitrust and competition economics, Labor and Employment and Life Sciences each expanded year over year and contributed to our overall growth.

Speaker 2

Geographically, our North American and international operations both grew in the second quarter led by our international operations, which increased Revenue by 18.6 percent year over year. During the period of strong growth, we continued to manage the business effectively. Consultant headcount remained relatively flat compared to the Q1 of 2023, contributing to a 200 basis point sequential increase in quarterly utilization. The improvement in utilization helped drive year over year growth and profitability As non GAAP EBITDA reached $18,800,000 or 11.6 percent of revenue in the 2nd quarter. I would now like to spend a few minutes highlighting the market for our services and some of the projects delivered to our clients during the Q2.

Speaker 2

CRA's finance practice was active in a wide variety of complex litigation matters during the Q2, Disputes arising from contested trading activity, including alleged spoofing in various financial markets And lastly, litigation about customs and practices in municipal finance. Additionally, the practice was active in numerous international matters, including international arbitrations and securities fraud matters with assets or disputes In North America, South America and Europe. In a high profile victory for our client, Senior Consultant to CRA, Conrad Ciccatello, testified at a jury trial on behalf of the defendant, Yale University, In an ERISA class action related to the management of Yale's 403 retirement plan, Professor Ciccatello provided testimony As an expert in retirement and financial planning, investment performance and monitoring of retirement plans. During the Q2, mortgage lending experts in CRA's Financial Economics Practice Group continue to provide testimony in support of a mortgage servicer in a litigation matter alleging discrimination in the maintenance and marketing of foreclosed homes. The practice also continued its work analyzing potential discriminatory redlining.

Speaker 2

In response to regulatory investigations, The practice assisted several banks and mortgage companies by providing statistical analysis of the clients' geographic lending patterns In relation to other lenders in the market, in some instances, the CRA team assisted the client in resolving the matter with a regulatory agency. CRA's forensic service practice continues to experience strong demand from both Boards and C Suite clients seeking assistance with investigations into alleged fraud, cybercrime, trade secret theft and other misconduct. As governments announce new export controls and sanction requirements, the forensic services practice is increasingly being called upon to help enhance the efficacy of existing compliance programs and to assist with investigations into potential non compliance. For example, the practice was retained to assist a global manufacturer of sophisticated machine tools To enhance its compliance with U. S.

Speaker 2

Requirements and export licenses related to controlled hardware and software. In addition, the forensic services practice continues to help investigate and respond to 100 of cyber incident response matters per year. Many of these are ransomware attacks, which have surged dramatically in the first half of twenty twenty three. In some cases, data theft For example, we assisted a multinational insurance brokerage respond to and recover from a massive ransomware incident In which large quantities of third party customer data were stolen, triggering privacy laws across multiple states and countries. Additionally, the Forensic Services practice has partnered with other CRA practices.

Speaker 2

For example, We were retained by a multistate healthcare provider to help assess and respond to scrutiny by the Federal Trade Commission into alleged improper market practices and pricing and key members of CRA's life sciences practice Contributed important econometric skills and insights into the engagement. In the Q2, CRA's energy practice continued to For example, within its advisory offering, CRA assisted a major U. S. Utility in formulating a decarbonization strategy, A U. K.

Speaker 2

Utility in integrating new gas transmission subsidiary and a major industry participant to formulate its nuclear power Within the courtroom, the practice provided expert witnesses, in a dispute involving the prudence of investments related to synthetic fuels. Turning to the market for our antitrust and competition economics practice. Worldwide M and A activity as measured by aggregate transaction value rebounded from a decade low in the Q1 of 2023, Increasing 33% on a sequential basis, making the 2nd quarter the strongest quarter for worldwide deal making in the past 12 months. Capitalizing on this increase in merger related activity and continued demand for antitrust services, The competition practice established yet another new high for quarterly revenue in the 2nd quarter. The practice's sales pipeline followed a similar trajectory to the M and A market, generating a 33% increase Despite the sequential increase, our merger related lead flow was relatively flat year over year.

Speaker 2

Finally, I would like to highlight a valued colleague in the competition practice, Liz Bailey. During the quarter, She provided expert testimony and economic analysis on behalf of Microsoft and Activision Blizzard in an evidentiary hearing On a motion for plenary injunction filed by the Federal Trade Commission, Doctor. Bailey was the only expert witness to I present live direct examination testimony during the hearing. Her testimony was cited by the judge Numerous times during closing arguments and in the court's written opinions that deny the FTC's motion For a preliminary injunction, ruling in favor of our clients, Microsoft and Activision Blizzard. Turning now to guidance.

Speaker 2

Through the 1st two quarters of fiscal 2023 on a constant currency basis Relative to fiscal 2022, Seere generated total revenue of $318,000,000 and non GAAP EBITDA of 36 $600,000 achieving a margin of 11.5%. These results incorporate a constant currency adjustment, which contribute $3,200,000 to revenue and $1,100,000 to EBITDA. Reflecting the continued strength quality of our business, we are raising the lower end of our revenue guidance and increasing our profit guidance. For full year fiscal 2023 on a constant currency basis relative to fiscal 2022, we expect revenue in the range of 6 $25,000,000 to $640,000,000 and non GAAP EBITDA margin in the range of 11.0% to 11.7%. This updated guidance assumes continued strong performance during the second half of the year.

Speaker 2

It also takes into account the market's current expectations Foreign exchange rates for the U. S. Dollars, which on a constant currency basis may shave approximately $4,000,000 from our reported revenue and approximately $1,000,000 from our reported EBITDA during the second half of fiscal twenty 23. Overall, I'm grateful to all of my colleagues for their hard work during the Q2 as we helped our clients address their most important challenges. With that, I'll turn the call over to Chad and then to Dan for a few additional comments.

Speaker 2

Chad?

Speaker 3

Thanks, Paul. Hello, everyone. I want to update you on our capital deployment during the quarter. We concluded the quarter with $14,300,000 of cash $80,000,000 of borrowings under our revolving credit facility, Resulting in a net debt of $65,700,000 The borrowings were primarily to fund bonus payments during the 1st two quarters, which is consistent with our practice in prior years. Since the end of the second quarter, we have repaid $13,000,000

Speaker 4

of our

Speaker 3

borrowings. Consistent with our experience in prior years, we aim to finish the year with 0 outstanding borrowings. In addition to the normal bonus cycle, the Q2 of 2023 also saw cash outlays for talent investments of $800,000 Net of forgivable loan repayments, we spent $700,000 in capital expenditures, bringing our year to date total to $1,300,000 We also returned $5,500,000 to our shareholders during the 2nd quarter, consisting of $2,500,000 of dividend payments and $3,000,000 to repurchase approximately 31,000 shares. As of quarter end, we had approximately $19,300,000 available under our share repurchase program. With that, I'll turn the call over to Dan for a few final comments.

Speaker 1

Dan? Thanks, Chad. As a reminder, more expansive commentary on our financial results It is available on the Investor Relations section of our website under prepared CFO remarks. Before we get to questions, let me provide a few additional metrics related to our performance in the Q2 of fiscal 2023. In terms of consultant headcount, we ended the quarter at 971 consisting of 156 officers, consultant headcount reported at the end of Q2 fiscal 2022.

Speaker 1

By the end of the year, through typical hiring efforts and normal attrition patterns, We expect consultant headcount to increase by a percentage in the mid to high single digits year over year. Non GAAP selling, general and administrative expenses, Excluding the 2.3% attributable to commissions to non employee experts was 16.1% of revenue for the Q2 of fiscal 2023 compared with 15.3% a year ago. This quarter's ratio was primarily impacted by an increase in travel and entertainment expenses and rent expense. The effective tax rate for the Q2 of fiscal 2023 on a non GAAP basis was 29.8% compared with 29.3% on a non GAAP basis for the Q2 of fiscal 2022. Turning to the balance sheet.

Speaker 1

DSO at the end of the second quarter was 115 days compared with 112 days at the end of the Q1 of fiscal 2023. DSO in the 2nd quarter consisted of 74 days of billed We concluded the Q2 of fiscal 2023 with $14,300,000 in cash and cash equivalents And a further $115,600,000 of available capacity on our line of credit for total liquidity of $129,900,000 That concludes our prepared remarks. We will now open the call for questions. Rob, please go ahead.

Operator

Thank you. At this time, we'll be conducting a question and answer Our first question comes from Kevin Steinke with Barrington Research. Please proceed with your question.

Speaker 5

Good morning, everyone.

Speaker 4

Good morning, Kevin.

Speaker 5

I wanted to start off by asking about Your comments around new project originations, the sequential improvement You saw there, but maybe still a little bit below historical norms. Just any thoughts on So what might be keeping it a bit below historic norms?

Speaker 2

Sure. We began talking about our lead flow at the end of Q4, reporting of our earnings in March and continued that discussion during Q1. During that time, we noted that we saw a significant increase in lead flow coming into the firm. And we also noticed that the conversion of that lead flow into revenue generating projects It was down considerably relative to our historic norms. As we analyze those lead flows, we felt confident That we weren't losing the opportunities in any kind of disproportionate way to competitors, But more so that the cases were just being kicked down the road a bit or mergers were not being announced.

Speaker 2

So we thought they were going to come eventually or convert into revenue generating projects. A resolution of this uncertainty is the market as a whole, but we did start seeing an improvement in that conversion rate. We're still Probably down about 10%, 15% on that conversion rate relative to our historical norms.

Speaker 5

Okay. Thank you. And certainly, continued impressive growth in project lead Hello, I think you said 3 consecutive quarters of double digit growth there. You talked a lot about a lot on the call here about the areas of strength you're seeing across the firm.

Speaker 2

Should we

Speaker 5

just assume lead flow growth is being driven by those areas you highlighted? Or are there any specific practices Or pockets of strength that you really wanted to illuminate?

Speaker 2

No. Just like the revenue growth, The growth in the lead flow has been pretty broad based, and that's what has us cautiously bullish About the prospects of CRA, we always try to focus on inputs that we can influence into our business model, And we think we can influence the amount of lead flows coming into the organization, and it's very rewarding To see that sharper surge in a relatively turbulent marketplace over these past 9 months, We just have to get those leads converted into revenue generating projects, and We'll start seeing more of the output benefits when that happens.

Speaker 5

Okay. Thank you. I also wanted to ask about your the increased The low end of the revenue guidance range as well as the increase in the non GAAP EBITDA margin guidance range, Is that just based on what you've seen here in the first half and certainly, I guess, the outlook for the Second half, anything in particular that you would call out that might have outperformed Your initial expectations on either the revenue or the margin front?

Speaker 2

I think today the performance has been pretty much in line with the expectations, Particularly given what market variables we're observing, we still think there's opportunities for Upside as we see conversion rates return to historical norms, but that's a bit uncertain as to when. So when looking out into the second half of the year, we are not projecting any kind of significant of the strong performance we enjoyed during

Speaker 3

the first half. Okay. Thank you.

Speaker 5

Just lastly, I just wanted to ask about the Overall market for talent and talent recruitment as you see it, Noticeable trends in terms of loosening or tightening or is it pretty much as it has been In terms of your ability to attract and hire talent?

Speaker 2

I think the ability to identify, attract and What we've seen in prior quarters is sort of the lower voluntary attrition rates we typically observe During Q2, Q3 and into the second half of the year, that is running closer to more historic lows for it and thus yielding a bit higher headcount than we otherwise would have anticipated. So we're happy to have our colleagues here. We're doing our best to make the most productive use of all this talent we have, But I think it will take care of itself as Dan noted in terms of our expectations of headcount growth by the end of the

Speaker 5

Okay. Thanks for the insight and congratulations on the solid results. I'll turn it over.

Speaker 2

Thank you, Kevin.

Operator

Our next question is from Marc Riddick with Sidoti and Company. Please proceed with your question.

Speaker 4

Hey, good morning. Hey, good morning, Mark. So I wanted to start with

Speaker 5

the first

Speaker 4

of all, thanks for all the detail on the color that you're seeing here. So So you talk a little bit about the utilization pickup, certainly it's up from Q1, and I was wondering

Speaker 5

if you could talk

Speaker 4

a little bit about maybe sort of The pace of that, did that sort of just improve sequentially through the quarter? Was there any lumpiness there? It seems as though there's certainly there's drivers for that, but Once again, your thoughts on the improved utilization?

Speaker 2

We definitely saw an improvement in overall demand for our services during quarter and it was pretty steady throughout the quarter. Utilization is, of course, influenced by that improvement in demand, But it's also influenced by the growth of headcount as we welcomed a lot of new colleagues during the Q2. So one, The demand has sort of upward pressure on utilization, but all the new colleagues coming aboard, particularly as we get them integrated and Staffed on projects has a downward pressure on the utilization. But again, over The second half heading into 2024, I think that should take care of itself to get our utilization back to more historical patterns.

Speaker 4

Great. I was wondering if you could and I know

Speaker 5

you gave a lot of details as to what you're seeing, but I

Speaker 4

was sort of curious as to maybe what you're Thinking about or seeing with court filings and judgments and those pacings and sort of how that plays into your thoughts for the remainder of the year?

Speaker 2

We saw roughly mid single digit growth year over year on the number of new cases and a number of court judgments being produced during the quarter, so a modest expansion, Which I'm sure is helping some of that new lead flow that we're observing.

Speaker 4

Okay. And then wanted to sort of shift gears and certainly there's a lot of benefits as far as the top line growth That you've already shared us. Why don't you talk a little bit about the maybe some of the opportunities that you're seeing with some of the upside internationally And maybe some of the driving forces there.

Speaker 2

Sure. I always hesitate I try to give answers about opportunities and upside just because of the continued strength of the performance, if I do say so myself. We've been delivering strong performance quarter after quarter, record levels of performance for a number of our practices. So I don't know whether anything is a surprise or upside pop, but just more Excellent execution by my colleagues throughout the service portfolio. We still believe the overall regulatory environment, both Ear in North America and in Europe, is very supportive of continued growth In our litigation side of the house, there's a lot of discussion About clean energy and you generating capacity, which our energy practice has been at the middle of, Advising clients how best to structure their portfolios.

Speaker 2

So we're just seeing the growth Throughout and the opportunities throughout the portfolio, I don't foresee any kind of pop, But we do expect sort of to continue the excellent performance that we've been able to share with our investors now for The last several quarters.

Speaker 4

It's greatly appreciated. Thank you very much. Thank you, Mark.

Operator

Our next question is from Andrew Nicholas with William Blair. Please proceed with your question. Hi, good morning. I appreciate you taking my question.

Speaker 6

I just have one As a lot of my questions have been answered already, I just kind of wanted to ask big picture on antitrust. I think we've seen some new proposals on guidelines here in the U. S, some changes internationally as well. I'm just wondering how all these kind of moving parts impact The outlook for your business over a multiyear period, whether it's on the M and A side or the non M and A Antitrust side, just would be interested in your thoughts there.

Speaker 2

Sure. There's been, as you were alluding to, a change in terms of the overall guidelines Of what the commissions will be looking at for mergers or antitrust enforcement here, how exactly that will play out and what will be The company responds to those guidelines, whether it will increase or decrease mergers is, Quite frankly, it's still to be seen, but I still take the position that complexity is good for professional Services firms like CRA, and all the uncertainty at exactly what these new standards mean and analysis, What they mean in terms of probability of getting deals through, should bode well for our industry as a whole And for CRA in particular.

Operator

That's helpful. Thank you.

Speaker 2

Okay. Thank you, Andrew.

Operator

We've reached the end of the question and answer session. I would now like turn the call back over to Paul Maley for closing comments.

Speaker 2

Thanks, Rob. And again, thanks to everyone for joining us We appreciate your time and interest in CRA. We'll be participating in meetings with investors in the coming days months, And we look forward to updating you on our progress on our Q3 call. With that, that concludes today's call. Thank you.

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Earnings Conference Call
CRA International Q2 2023
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