Q3 2021 CRA International Inc Earnings Call

November 4, 2021

Good day, everyone and welcome to Charles River Associates third quarter 2021 earnings 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 does theories website at sea or AI dotcom.

With us today are series, President and Chief Executive Officer, Paul Malley, Chief Financial Officer, Dan Mahoney, and Chief Corporate Development Officer, Chad Holmes.

At this time I'll turn the lights to turn the call over to Mr. Mahoney for opening remarks, Dan. Please go ahead.

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.

<unk> contained in these forward looking statements is based on management's current expectations and is inherently uncertain actual performance and results may differ materially from those expressed or implied in these statements due to many important factors, including the extent and duration of the COVID-19, pandemic and any potential impact on our financial condition and results of operations.

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-K, and quarterly reports on Form 10-Q filed with the SEC CRA undertakes no obligation to update any forward looking statements. After the date of this call. Additionally, we.

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 their GAAP comparable measures and descriptions of the calculation of EBITDA and measures presented on a constant.

Currency basis, let.

Let me now turn it over to Paul for his report Paul.

Thanks, Dan and good morning, everyone. Thank you for joining us today, the third quarter of fiscal 'twenty 'twenty. One demonstrated continued momentum in our business and strong demand for CRA services building on the impressive first half of fiscal 2021, CRA extended its run up year over year revenue growth.

As the top line increased 12% relative to the third quarter of 2020. This marked the 23rd consecutive quarter of year over year revenue growth. Furthermore, we have recorded double digit growth in 16 of those 23 quarters, including each of the past four quarters through Q.

Three our expansion was broad based with six practices producing year over year revenue growth of more than 10% geographically, both our north American and international operations contributed to the quarter's growth to support this performance. We welcome nearly 100 new colleagues during the <unk>.

Quarter, as we increased head count by six 8% year over year series topline growth drove significant profit expansion during the third quarter, specifically non-GAAP net income grew year over year by 80% earnings per diluted share grew by 89%.

And EBITDA grew by 35% it was truly an outstanding quarter.

I would now like to highlight some of the services provided during the quarter within legal and regulatory our antitrust and competition economics practice continued its strong performance as it grew revenue by approximately 25% year over year. This growth was fueled by continued demand for <unk>.

Rust and merger related services worldwide M&A activity totaled $4 four trillion dollars. During the first nine months of 2021, an increase of 92% compared to year ago levels and the strongest first three quarters of M&A activity since records began in 19.

<unk>.

First nine months of 2021, I've already surpassed the full year M&A Records set in 2015 of $4 three trillion dollars. The third quarter of 2021 set an all time high single quarter record with one six trillion and worldwide M&A.

And was the fifth consecutive quarter to surpass one trillion dollars against this backdrop CRA worked on transactions across a range of industries and geographies. For example, CRA assisted a major built building supplies distributor and winning unconditional anti trust clearance for <unk>.

Acquisitions of distribution assets in different parts of the country. The CRA team demonstrated the presence of substantial competition across multiple product and geographic areas.

Additionally, on August 10th the competition and markets authority in the U K unconditionally cleared N C. Ars two $5 billion acquisition of Cardtronics. After a phase one review.

CRA teams advise NCR during the merger proceedings in both the U K and the U S. Looking more broadly at the legal market trends in <unk>.

Trends and activity levels were mixed total case filings during the third quarter of 2021 were down 3% year over year. However, courtrooms continue their rebound in activity as the number of total court judgments during the third quarter increased by approximately 20% relative.

<unk> to the year ago period in light of these conditions I'm, especially pleased with the strong growth in our legal and regulatory services, which saw every practice grow year over year, our antitrust and competition economics financial economics, forensic services and risk investigation.

<unk> and analytics practices led the way as each increased revenue by more than 20% year over year during the quarter CRA experts and our financial economics practice, we're engaged to consult and testify on matters involving mortgage loan servicing and property maintenance after foreclosure.

Additionally, CRA has been retained by multiple clients to provide consulting services with respect to recent enforcement matters brought by the consumer financial Protection Bureau, and the department of Justice involving allegations of mortgage redlining.

They're either mortgage applications or origination activity were alleged to lag that of comparable peers in particular metropolitan areas.

The forensic services practice continues to experience strong demand from companies across all major industries that need help responding to allegations of fraud cyber crime noncompliance and misconduct for example, drawing upon cra's deep forensic accounting competencies and energy.

<unk> industry knowledge. The practice was retained to investigate and then testify on both damages and liability and a complex dispute between a global oil company and its franchisor in North America of auto of automotive maintenance and quick Lubes services, leveraging our deep cyber.

Incident response and E discovery competencies the practice helped numerous clients respond to information security incidents.

One was for a nonprofit hospital system that was victimized by a ransomware attack, which forced the hospital to shutdown it systems cancel surgeries and divert emergency patients in order to ensure adequate patient safety our team help investigate how accurate our hackers gained.

Access to its systems.

And the actions they took once access was gains as well as in assisting with reports to the FBI and the department of Homeland security during.

During the third quarter, the risk investigations and analytics team continued its solid growth winning and executing several large multi disciplinary investigation, requiring the investigation of analytic accounting and investigative skill sets in the U S and overseas the risk team for.

<unk> on the ground investigative support asset tracing and political background and context to plaintiffs' counsel and litigation involving an ongoing theft of trade.

It gives me of trade secrets, and another matter the team aided external counsel and a sophisticated vendor fraud scheme by uncovering a web of related party transactions by analyzing the flow of payments and modeling financial harm to the clients, although not enjoying year over year growth relative to an <unk>.

Streams strong third quarter of 2020, our management consulting services continued to focus on our clients' most critical issues for several pharmaceutical companies Cra's life Sciences practice has been developing patient flow models and demand forecast for new product opportunities probing.

Key sources of business and competitive dynamics. These clients are expected to launch their therapies globally and the patient journey of information and related demand forecasts are critical to inform large launch investment decisions and refine resourcing and the countries of interest.

Cra's energy practice is supporting AAP, one of the largest electric utilities in the U S with the integrated resource plans for Oklahoma, and Arkansas utilities. These resource plans contemplate a shift away from fossil fuel power plants towards more renewable and storage to support <unk>.

<unk> clean energy goals during the third quarter. The practice also supported a major infrastructure investor and a complete reorganization of our Romanian utility, including the strategy finance and.

And trading functions CRA also assisted in the assisted the client and the carve out of the retail business and strategic planning for management and growth of the company.

Our American practice continues to work with a wide variety of Ceos and their executive teams to ensure discipline around strategic resource allocation as a means to drive performance and accelerate major strategic priorities and some example marathon has been supporting the development strategy and.

Economic modeling.

And fun funding campaign for P and W. Hydrogen, which recently won a $20 million grant from the department of energy for the production of Green hydrogen a significant milestone of that work in our effort to support our clients and the transition to Green energy.

I'm grateful to all my colleagues for their hard work as we continue to help our clients address their most important challenges.

Through the first three quarters of fiscal 2021 on a constant currency basis relative to fiscal 2020, we have increased revenue by 14, 6% to $425 1 million and non-GAAP EBITDA by 43% to $52 six.

Achieving a margin of 12, 4%. These results demonstrate the strength and quality of our business as does the 13% year over year increase in new project originations experienced during the third quarter.

While the business continues to deliver strong results our performance could have been even better revenue in the third quarter was below our expectations as we experienced a rate of employee vacation time that was more than 20% higher than than in the year ago period and was the highest rate for third quarter.

<unk> over the prior five years, although helpful for the health and wellbeing of our colleagues the heightened vacation time acted as a headwind to our top line growth, which may continue during the November and December holidays. As a result, we are lowering our full year revenue guidance, while maintaining our EBITDA margin.

For full year fiscal 2021 on a constant currency basis relative to 2020, we now expect revenue in the range of $560 million to $570 million and non-GAAP EBITDA margin to exceed the upper end of the range of 11, 2%.

To 11, 7% with that I'll turn the call over to Chad and then Dan for a few additional comments Chad.

Thanks, Paul and Hello, everyone I want to provide a few comments about our capital generation and deployment during the quarter.

CRA remains committed to maximizing long term value per share through the prudent deployment of capital given CRA strong cash flow generation, we expect to invest in the business for profitable growth, while simultaneously returning meaningful capital to our shareholders against the backdrop of the pandemic CRA continues.

To generate strong cash flows for the trailing 12 months through the third quarter of fiscal 2021 Cra's. Adjusted net cash flows from operations were $103 2 million or 18, 1% of trailing 12 months revenue.

These adjusted net cash flows from operations were 34% higher than a year ago on a trailing 12 month basis, driven primarily by the growth in our business.

The third quarter of 2021 saw cash outlays of $5 $1 million for talent and $600000 on capital expenditures. In addition, during the third quarter, we reduced borrowings under our revolving line of credit by $39 million.

We also returned $6 $9 million of capital to our shareholders consisting of $1 9 million of dividend payments and $5 million of share repurchases of approximately 53000 shares.

Through the first nine months of fiscal 2021, we have returned $45 $6 million of capital to our shareholders through a combination of share repurchases and dividend payments as referenced in prior earning calls earnings calls we continue to aim to return half of our adjusted net.

Cash flows from operations to shareholders, while still investing in the growth of CRA.

Finally, demonstrating confidence in our long term outlook and reflecting our commitment to return capital to shareholders earlier today, we announced a 19% increase in our quarterly cash dividend from <unk> 26 cents to <unk> 31 per common share this dividend will be payable on December <unk>.

2021 to shareholders of record as of November 32021.

And now I'll turn the call over to Dan for a few final comments Dan.

Thanks, Chad as a reminder, more expansive commentary on our financial results 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 third quarter of fiscal 2021.

In terms of consultant head count we ended the third quarter of fiscal 2021 at 882, which consisted of 138 officers 495, other senior staff and 249 Junior staff. This represents a six 8% increase compared with the 826 consultant head count at the end of Q3 fiscal 2020.

Non-GAAP selling general and administrative expenses, excluding the three 2% attributable to commissions to non employee experts was 14, 8% of revenue for the third quarter of fiscal 2021, compared with 15, 2% a year ago. This quarter's ratio was positively impacted by the revenue growth.

Our Q3 and effective management of our overhead we will continue to monitor our discretionary expenses to efficiently manage our overall progression to a more normal operating environment.

The effective tax rate for the third quarter of fiscal 2021 on a non-GAAP basis was 14, 8% compared with 28% on a non-GAAP basis for the third quarter of fiscal 2020, the lower rate in the third quarter of 2021 was primarily attributable to a greater benefit arising from the accounting for stock based.

We estimate that our full year non-GAAP effective tax rate will be approximately 23%.

Turning to the balance sheet DSO at the end of the third quarter was 112 days compared with 103 days at the end of the second quarter of fiscal 2021 DSO in the third quarter consisted of 68 days of billed and 44 days of Unbilled.

At the end of the third quarter, the company's liquidity remains strong totaling approximately $189 million.

When taking into account the available capacity on our revolving line of credit and our cash balance looking more closely at the components at the end of the third quarter, we had $6 million of outstanding borrowings under our revolving credit facility.

We concluded the third quarter of fiscal 2021, with $19 $7 million in cash and cash equivalents with the majority residing internationally.

That concludes our prepared remarks, we will now open the call for questions. Rob. Please go ahead.

Thank you.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press star two if he would like to remove your question from the queue.

For participants using speaker equipment, please pick up the handset before pressing the star keys.

One of them. Please when we poll for questions.

Thank you and our first question comes from the line of Andrew Nicholas with William Blair. Please proceed with your question.

Hi, Good morning, and thank you for taking my question.

My first one was just going to be on differences across the different geographies. It looks like international growth was a little bit lighter.

This quarter could.

Could you speak to maybe why that would've been and maybe more broadly any.

Any differences between the different geographies in terms of demand and your outlook going forward.

Hey, Good morning, Andrew This is Paul O'malley.

I'm, not particularly concerned about the unique geographies they've been pretty consistently on an upward ascension, sometimes we have some volatility in terms of the rates of growth from quarter to quarter, but there has been.

No departures to speak of in Europe.

It would cause any kind of structural changes on the demand outlook. The inflow that we're getting of interest from clients.

<unk> remained strong so there is no factors that I can highlight for you.

To adjust your forward thinking of Europe. It is summer time.

Sometimes the holiday season, and some of the European countries are a bit heavier in the months of July August and that in North America, but that's the only real thing I could point to in terms of differences of trajectory.

Great. Thank you and then switching gears a bit on the recruiting environment.

Just wondering if you could spend some time talking about how the law.

Last couple of months have played out on that front and maybe how youre thinking about head count growth.

In 2022, with the tighter labor market as a potential governor.

Sure.

The we're constantly in the market for recruiting.

The questions, you're asking me now pertain more to our university level hires.

Which begin with recruitment of people from undergrad institutions and as we move further into the fall to mid winter.

For people with graduate degrees.

Market. This year for labor I can say is definitely tighter than it was in 2020.

But I wouldn't say it is out of the ordinary from what we observed pre pandemic.

On that talent for.

The market for top talent is always tight.

As always tie and you've found a lot of the companies who may be passed on last year's recruiting cycle are back in the market. This year given these top talent.

These talented young people more opportunities. So we still see the inflow of applicants coming into CRA to be strong.

It's early.

But our yield to date it seems to be pretty consistent with the yields we have experienced in the past.

We have seen maybe a little more upward pressure on starting salaries on people from undergrad institutions.

But in the end net net I think it's going to be largely immaterial to our overall margin.

That's helpful. Thank you and then maybe if I could squeeze one more question in.

It's been a really really good year for antitrust and competition economics.

On the M&A and on M&A side I was just wondering I think historically, you've talked about that business being around 40% of revenue.

Give or take a few viewpoints.

Could you speak to how much that practices contributed to revenue year to date.

<unk>, it's been a really good year.

They clearly have been a driver of year to date growth I'm going off my recollection now I believe.

They've enjoyed double digit growth through the first three quarters.

The year, the wonderful thing about what I'm seeing across our services, though is last year competition had.

A challenging 2020 as the M&A environment, basically evaporated, but we still delivered double digit growth in that year for our shareholders and thats because practices that maybe arent enjoying a stronger Q3 like our life Sciences practice.

<unk> really led the way last year with the expansion. So reason you have a portfolio was sometimes that volatility cancels itself out but still leaves the firm on an upward ascension. So overall I think the competition practice is probably still right around that 40% mark because other.

Of the firm continue to grow and expand.

But they definitely do lead the way in terms of brand recognition in the legal regulatory market for CRA.

Thanks, a lot appreciate it.

Thank you Andrew.

Our next question's from coming from the line of Kevin Steinke with Barrington Research. Please proceed with your questions.

Good morning, good morning, one of the.

How are you.

Good Kevin Thank you.

Great.

Why does it wanted to ask.

About the.

Higher than the increase in vacation time this is.

Purely my speculation, but have you picked up on.

Oney.

Lose that perhaps it's related to.

The pandemic and people traveling less over the last.

12 to 18 months and all of that.

Things seem to be easing a bit maybe just people are just trying to look to catch up on vacation time or just wondering what.

You might attribute the higher vacation time too.

Sure.

It's a good question and really quite frankly, a question that I would have hoped I never had to answer.

Talking about vacation time is sort of like talking about that the dog ate my homework.

And I wish there were more meaningful Midi explanations to give you why the revenue fell slightly short of what we expected.

But it comes down to vacation time.

It's the highest third quarter that I've seen in the last five six years.

It's a significant increase year over year relative to last year.

And the third quarter, it was actually 40% higher vacation usage than that what we experienced in Q1 and Q2 of fiscal 2021 my colleagues have been working really hard.

Really hard so as I saw vacation start to surge as we started getting into the month of August.

They needed to recover so I wasn't about to try to change the flow of people taking time off.

Particularly given how minor an impact it had on the overall revenue and quite frankly on the trajectory of the business because I don't want it to also be overlooked that new projects still grew by 13%.

In the third quarter. So I think there was a bit of pent up demand for vacation time. After the record lows in 2020, and really continued lows of the first two quarters of 'twenty, one, but I don't necessarily know whether that's because people were getting on planes are traveling I just think they're catching there.

Breath.

It is nothing that causes me.

Any kind of medium to longer term concerns about the health and quality of our business.

Okay.

Thats helpful. Appreciate it.

And just as you indicated there you know clearly it doesn't sound like.

The slight reduction in revenue guidance is in any way related to a demand issue you mentioned, the 13% growth in new project originations. So.

Should we still think about the solid demand environment going forward in terms of lead flow and all the other indicators you're tracking your your business.

Yes, I think the indicators are still.

You know are still very positive.

It's hard to overlook that the new case filings that we summarized in the legal regulatory community.

Community are down.

By 3%, so we're going to keep our eye on that.

But so far the new projects coming to CRA are still expanding at.

At a very healthy rate.

You know M&A environment still seems strong still continued.

Actions to increase regulatory oversight both here in the states and in Europe are also positive for a number of our litigation based practices. So I haven't seen any kind of structural change.

Right now that has me concerned.

About the long term prospects of Cri.

Okay. Thanks.

<unk>.

Wanted to ask about.

The expectation now that the.

The non-GAAP EBITDA margin.

It is actually going to exceed the guidance range.

At the high end.

At the same time.

You were adjusting revenue slightly lower so clearly a.

Strong trend in profitability, but any.

More commentary on what you would attribute that.

That strong profitability too.

Sure I think we've had record margins.

Throughout 2021 in fact, I believe margins.

Kept pace or any even increase during Q3.

And not to over play the whole idea of the softer revenue, we're talking about approximately $5 million.

So in terms of <unk>.

Impact on Q3, and Thats, roughly what we lowered the guidance to the.

The reason, we didn't reduce that range of the revenue guidance heading into Q4 like I say, we've done in the past is because of the uncertainty around vacation times and holidays that we have we continue.

To learn from these last 18 months, you've got to take something positive.

About being in a worldwide pandemic, but I think we've learned how to operate more efficiently we've learned how to service our clients.

More efficiently.

Thus they yield the benefits.

Of those efforts, but our shareholders yield the benefits of those efforts by having stronger margins you see SG&A is still towards the record low levels nowhere near pre pandemic levels.

On that and you see continued strength in our gross margins right, even with the introducing of.

More than 100, new colleagues.

Over the summer months utilization was still 73%.

So there's a lot of factors that have gone into continued strong margins.

But we were pretty pleased with the overall growth irrespective of where on the income statement and you decided to look at in terms of profits.

Okay.

Okay. Good.

I did I did notice.

When you look at the SG&A expenses, excluding the commissions to non employee experts that was up.

A little less than 1 million sequentially.

At 14, 8% of revenue compared to 13% in the second quarter and you've talked about how you expect it to.

Gradually tick up and maybe end up somewhere between that.

Somewhat artificially low 13% level in the 18%.

So level that you were prior to the pandemic I mean should we think about.

Some of the discretionary expenses starting to come back into the business now.

And that continues to come up gradually or what.

Any more commentary on kind of the expense trend line there sure sure.

First of all the 18% that you referenced words SG&A levels that we were experiencing 18% to 19% range pre pandemic.

As I've said the business has continued to grow we are better able to leverage our infrastructure and there's been a lot of learnings over these last 18 months right now our target in terms of the steady state is in the low 16% range. So a significant improvement.

Movement.

What we were pre pandemic, but an increase from what we are experiencing over these last 18 months. We are constantly looking at that figure to see if there are opportunities to deliver our services even more efficiently in the time ahead right everyone is trying to gauge what this new normal.

<unk> will look like but I think it's also pretty.

Uniform around the business world that that new normal won't look like 2019.

So the timeline of that is still a bit uncertain as we battled turned the corner on this pandemic.

But I still think there are opportunities for stronger profits in the quarters and years ahead.

Okay. Thank you with this one last question for me.

You referenced management consulting being down a bit year over year. It just sounded like that was just kind of typical ebb and flow in projects and maybe a tough comp for life sciences, but any more.

Commentary around that.

I think it has ebbs and flows when you have when you have a practice that has been growing at that.

Such a rapid rate.

In years prior to 2021.

It sometimes you have to reload.

Right you continue to hire you continue to try to develop your resources.

In that space and I believe thats all what it is I could point to practically every practice.

At CRA not just life sciences that have had these ebbs and flows.

But I'm going to say it again, what I find remarkable about this company's performance as we've been about six years running now.

Constant growth in the overall portfolio.

It's worth noting again that of those 23 quarters of constant year over year growth 16 of them are double digits. So there hasnt been a lot of time in between the reloading cycles, but it does happen as you decompose the components of your portfolio.

Alright, Thank you for all the helpful comments.

Now I'll turn it over thanks. Thank you Kevin Thank you.

Our next question is from the line of Marc Riddick with Sidoti and company. Please proceed with your questions.

Hey, good morning.

Good morning, Mark.

So several of the things I kind of had in mind, we're already just I did want to touch a little bit on the end and you started to touch on this earlier the utilization during the third quarter was fairly.

So it was ahead of my expectations, but a fairly solid despite the the.

The addition of <unk>.

Head Count I was wondering if you'd talk a little bit about that headcount addition, and sort of that onboarding that you're looking at given the.

Yeah.

Address that a little differently than maybe you might have in the past with was with summer hires and the distances situation and then maybe how should we we should think about getting them in position to.

To be able to contribute.

Think we definitely have addressed differently than in years past last year was the summer of 2020 was the first year.

Which we welcomed our new colleagues in a virtual world.

So we were sort of.

Doing things on the fly we've learned from that process and I think.

The human capital Department, our it department.

The practices that are involved definitely delivered.

Better orientation integration support to our new colleagues in 'twenty, one 'twenty, one was still a virtual onboarding.

I'm still a proponent that some in person interactions do help with that onboarding, but we definitely improved year over year and even the levels of integration are starting to resemble.

The ramps that we experienced pre pandemic, so we're pretty happy with that.

The one thing to always keep in mind, I'm, not putting up any red flags, but integration is really like a zero to six month process right.

The first phase as you get everyone Theres lever to the laptop, they're able to communicate you learn you teach them some basic skills.

But the real time Mentorship.

Training that happens as new colleagues joined the firm it takes a little time, but to date I'm pretty I'm pretty pleased mark.

With the job that my colleagues are doing.

And are there any.

Things you could share around practice areas that were added to or maybe if there are any particular services that maybe got a little bit more attention and are targeting maybe this year versus last.

No I guess it would make for a better story line, if I had to just point out one practice, but when I highlight that six of our practices all grew double digits in one quarter.

These practices have been growing pretty consistently now for several quarters several years.

So we're adding people across the portfolio, sometimes that comes in the ebbs and flows just because of the opportunities that are present in the marketplace, but those ebbs and flows quite frankly have little to do with any kind of.

On the Eve and focus on the portfolio.

Like my portfolio I like my geographies and our goal is to add depth across both.

And it's really depends on where the market is presenting us with opportunities.

And I guess Theres, a follow up to that could you maybe talk about what youre seeing out there as far as the acquisition pipeline and kind of how you're feeling about you know what.

With potential.

We might be out there or.

What your feelings are on valuation levels and the like.

Yes.

I don't think many Ceos get up here and say we are we are unattractive destination and no one wants to join us.

And I'm not going to be the first.

We have been able to attract top talent on both the grassroot level from the universities and also laterals.

Throughout these past six years of this.

Unprecedented period of growth for this firm.

And those same qualities.

I think are still present today and still make us an attractive destination as I've mentioned in the past if I were to characterize something I've observed over these last 18 months for senior level recruiting the courtship seems to be a bit longer than we had previously.

And I just think that's for a number of reasons I'm not going to attribute all of it to being largely in a virtual world.

But theres a lot of uncertainty in People's life, and a transition of employers added uncertainty. So I think the recruits are trying to manage that we're trying to manage that and make sure. We have a good match of people, we sort of bring into the family here.

With it but it's really just the length of courtship is the one thing I would say is noticeable I don't think the price.

We're seeing the cost of recruiting.

To bring on high level talent has changed it's still largely consistent.

With what we've experienced during the pandemic and pre pandemic period.

Excellent. Thank you.

Thank you Mark.

Thank you.

Now ill turn the conference back over to Mr. O'malley for any closing or additional remarks.

Again, thanks to everyone for joining us today.

We generally appreciate your time and interest in CRA, we will be participating in virtual meetings with investors in the coming months.

Which will be announced by press release, and we look forward to updating you on our progress on the next earnings call.

Thanks, again and with that that concludes today's call.

Today's call has concluded you may disconnect your lines at this time and we thank you for your participation.

[music].

Good day, everyone and welcome to Charles River Associates third quarter 2021 earnings Conference call.

Please note that today's call is being recorded.

These earnings release and prepared remarks from Cra's Chief Financial Officer are posted on the Investor Relations section does series website at CRE I dotcom.

With us today are series, President and Chief Executive Officer, Paul Malley, Chief Financial Officer, Dan Mahoney, and Chief Corporate Development Officer, Chad Holmes.

At this time I'll turn the lights turn the call over to Mr. Mahoney for opening remarks. Please.

Please go ahead.

Thank you, Rob and good morning, everyone.

Look or similar terms are forward looking statements as defined in section 21 of the Exchange Act information contained in these forward looking statements is based on management's current expectations and is inherently uncertain.

Actual performance and results may differ materially from those expressed or implied in these statements due to many important factors, including the extent and duration of the COVID-19, pandemic and any potential impact on our financial condition and results of operations.

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 their GAAP comparable measures and descriptions of the calculation of EBITDA and measures presented on a constant currency basis.

Now I'll turn it over to Paul for his report Paul.

Thanks, Dan and good morning, everyone. Thank you for joining us today, the third quarter of fiscal 2021 demonstrated continued momentum in our business and strong demand for CRA services building on the impressive first half of fiscal 2021, CRA extended its run of year over year revenue growth.

Three.

Our expansion was broad based with six practices producing year over year revenue growth of more than 10% geographically, both our north American and international operations contributed to the quarter's growth to support this performance. We welcome nearly 100, new colleagues during the quarter as we increase.

<unk> head count by six 8% year over year Cra's topline growth drove significant profit expansion during the third quarter, specifically non-GAAP net income grew year over year by 80% earnings per diluted share grew by 89% and EBITDA grew.

By 35% it was truly an outstanding quarter.

Just and merger related services worldwide M&A activity totaled $4 four trillion dollars. During the first nine months of 2021, an increase of 92% compared to year ago levels and the strongest first three quarters of M&A activity since records began in 19.

The first nine months of 2021 have already surpassed the full year M&A record set in 2015 of $4 three trillion dollars.

The third quarter of 2021 set an all time high single quarter record with one six trillion and worldwide M&A.

Acquisitions of distribution assets in different parts of the country. The CRA team demonstrated the presence of substantial competition across multiple product and geographic areas.

Additionally, on August 10th the competition and markets authority in the U K unconditionally cleared N C. Ars two $5 billion acquisition of Cardtronics. After a phase one review.

CRA teams advise NCR during the merger proceedings in both the U K and the U S. Looking more broadly at the legal market trends in that.

To the year ago period in light of these conditions I'm, especially pleased with the strong growth in our legal and regulatory services, which saw every practice grow year over year.

Antitrust and competition economics financial economics, forensic services and risk investigations and analytics practices led the way as each increased revenue by more than 20% year over year during the quarter CRA experts and our financial economics practice, where engage.

<unk> to consult and testify on matters involving mortgage loan servicing and property maintenance. After foreclosures. Additionally, CRA has been retained by multiple clients to provide consulting services with respect to recent enforcement matters brought by the consumer financial Protection Bureau, and the.

<unk> adjusted involving allegations of mortgage redlining.

We're either mortgage applications for origination activity were alleged to lag that of comparable peers in particular metropolitan areas.

Incident response and E discovery competencies the practice helped numerous clients respond to information security incidents.

Access to its systems.

And the actions they took once access was gained as well as in assisting with reports to the FBI and the department of Homeland security during.

<unk> on the ground investigative support asset tracing and political background and context to plaintiffs' counsel and litigation involving an ongoing theft of trade.

Key sources of business and competitive dynamics. These clients are expecting to launch their therapies globally and the patient journey of information and related demand forecasts are critical to inform large launch investment decisions and refine resourcing and the countries of interest.

And trading functions CRA also assisted in the assisted the client and the carve out of the retail business and strategic planning for management and growth of the company.

Economic modeling.

I'm grateful to all my colleagues for their hard work as we continue to help our clients address their most important challenges.

Through the first three quarters of fiscal 2021 on a constant currency basis relative to fiscal 2020, we have increased revenue by 14, 6% to $425 $1 million and non-GAAP EBITDA by 43% to $52 six.

<unk> for full year fiscal 2021 on a constant currency basis relative to 2020, we now expect revenue in the range of $560 million to $570 million and non-GAAP EBITDA margin to exceed the upper end of the range of 11, 2%.

To 11, 7% with that I'll turn the call over to Chad and then Dan for a few additional comments Chad.

Thanks, Paul and Hello, everyone I want to provide a few comments about our capital generation and deployment during the quarter.

These adjusted net cash flows from operations were 34% higher than a year ago on a trailing 12 month basis, driven primarily by the growth in our business.

We also returned $6 $9 million of capital to our shareholders consisting of $1 9 million of dividend payments and $5 million of share repurchases of approximately 53000 shares.

Cash flows from operations to shareholders, while still investing in the growth of CRA.

231 cents per common share this dividend will be payable on December 10, 2021 to shareholders of record as of November 32021.

And now I'll turn the call over to Dan for a few final comments Dan.

Thanks, Chad as a reminder, more expansive commentary on our financial results 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 third quarter of fiscal 2021.

For Q3, and effective management of our overhead we will continue to monitor our discretionary expenses to efficiently manage our overall progression to a more normal operating environment.

We estimate that our full year non-GAAP effective tax rate will be approximately 23%.

At the end of the third quarter, the company's liquidity remained strong totaling approximately $189 million.

We concluded the third quarter of fiscal 2021, with $19 $7 million in cash and cash equivalents with the majority residing internationally.

That concludes our prepared remarks, we will now open the call for questions. Rob. Please go ahead.

Thank you.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.

You May press star two if he would like to remove your question from the queue.

For participants using speaker equipment, please pick up the handset before pressing the star keys.

One of them please poll for questions.

Thank you and our first question comes from the line of Andrew Nicholas with William Blair. Please proceed with your question.

Hi, Good morning, and thank you for taking my question.

My first one was just going to be on differences across the different geographies. It looks like international growth was a little bit lighter this quarter.

Can you speak to maybe why that would've been and maybe more broadly.

Any differences between the different geographies in terms of demand and your outlook going forward.

Hey, Good morning, Andrew This is Paul O'malley.

No departures to speak of in Europe.

That would cause any kind of structural changes on the demand outlook. The inflow that we're getting of interest from clients.

Remained strong so there is no factors that I can highlight for you.

To adjust your forward thinking of Europe. It is summer time.

Great. Thank you and then switching gears a bit on the recruiting environment.

Just wondering if you could spend some time talking about how the last couple of months have played out on that front and maybe how youre thinking about head count growth.

In 2022, with the tighter labor market as a potential governor.

Sure.

The we're constantly in the market for recruiting.

The questions, you're asking me now pertain more to our university level hires.

Which begin with recruitment of people from undergrad institutions and as we move further into the fall to mid winter.

For people with graduate degrees.

Market. This year for labor I can say is definitely tighter than it was in 2020.

But I wouldn't say it is out of the ordinary from what we observed pre pandemic.

On that talent for.

The market for top talent is always tight.

As always tie and you've found a lot of the companies who may be passed on last year's recruiting cycle are back in the market. This year given these top talent.

These talented young people more opportunities. So we still see the inflow of applicants coming into CRA to be strong.

It's early.

But our yield to date it seems to be pretty consistent with the yields we have experienced in the past.

We have seen maybe a little more upward pressure on starting salaries on people from undergrad institutions.

But in the end net net I think it's going to be largely immaterial to our overall margin.

That's helpful. Thank you and then maybe if I could squeeze one more question then.

It's been a really really good year for antitrust and competition economics.

On the M&A and on M&A side I was just wondering I think historically, you've talked about that business being around 40% of revenue.

Give or take a few viewpoints.

Could you speak to how much that practice has contributed to revenue year to date.

<unk>, it's been a really good year.

They clearly have been a driver of year to date growth I'm going off my recollection now I believe.

They've enjoyed double digit growth through the first three quarters.

The year, the wonderful thing about what I'm seeing across our services, though is last year competition had.

A challenging 2020 as the M&A environment, basically evaporated, but we still delivered double digit growth in that year for our shareholders and that's because practices that maybe arent enjoying a strong Q3 like our life Sciences practice.

Of the firm continue to grow and expand.

But they definitely do lead the way in terms of brand recognition in the legal regulatory market for CRA.

Thanks, a lot appreciate it.

Thank you Andrew.

Our next question is from coming from the line of Kevin Steinke with Barrington Research. Please proceed with your questions.

Good morning, good morning wanted to.

How are you.

Good Kevin Thank you.

Great.

I wanted to just wanted to ask.

About.

Higher than the increase in vacation time this is us.

My speculation, but have you picked up on.

Any.

Clues that perhaps it's related to.

You know the pandemic and people traveling less over the last.

12 to 18 months and all that.

Things seem to be easing a bit maybe just people are just trying to look to catch up on vacation time or just wondering what.

You might attribute to the higher vacation time too.

Sure.

It's a good question and really quite frankly, a question that I would have hoped I never had to answer.

Talking about vacation time is sort of like talking about that the dog ate my homework and I wish there were more meaningful Midi explanations to give you why the revenue fell slightly short of what we expected.

But it comes down to vacation time.

It's the highest third quarter that I've seen in the last five six years.

It's a significant increase year over year relative to last year and the third quarter. It was actually 40% higher vacation usage than that what we experienced in Q1 and Q2 of fiscal 2021 my colleagues have been working really hard.

Really hard so as I saw vacation start to surge as we started getting into the month of August.

They needed to recover so I wasn't about to try to change the flow of people taking time off.

Their breath.

It is nothing that causes me.

Any kind of medium to longer term concerns about the health and quality of our business.

Okay No that's.

That's helpful. Appreciate it.

And just as you indicated there you know clearly it doesn't sound like.

The slight reduction in revenue guidance is in any way related to <unk>.

Demand issue you mentioned, the 13% growth in new project originations. So you know.

Should we still think about the solid demand environment going forward in terms of lead flow and all the other indicators you tracked in your your business.

Yes, I think the indicators are still.

Now are still very positive.

Hard to overlook that the new case filings that we summarized in the legal regulatory community.

Community are down.

By 3%, so we're going to keep our eye on that.

But so far the new projects coming to CRA are still expanding.

At a very healthy rate.

You know M&A environment still seems strong still continued.

Actions to increase regulatory oversight both here in the states and in Europe are also positive for a number of our litigation based practices. So I haven't seen any kind of structural change.

Right now that has me concerned about the long term prospects of Cri.

Okay. Thanks.

<unk>.

Wanted to ask about.

The expectation now that the.

The non-GAAP EBITDA margin.

It is actually going to exceed the guidance range.

At the high end.

At the same time.

Youre adjusting revenue slightly lower so.

Clearly a strong trend in profitability, but any more.

More commentary on what you would attribute that.

That strong profitability too.

Sure I think we've had record margins.

Throughout 2021 in fact, I believe margins.

Kept pace or any even increase during Q3.

And not to over play the whole idea of the softer revenue, we're talking about approximately $5 million.

So in terms of <unk>.

Impact on Q3, and that's roughly what we lowered the guidance to the.

To learn from these last 18 months, you've got to take something positive.

About being in a worldwide pandemic, but I think we've learned how to operate more efficiently we've learned how to service our clients.

More efficiently.

Thus they yield the benefits.

Of those efforts, but our shareholders yield the benefits of those efforts by having stronger margins you see SG&A is still towards the record low levels nowhere near pre pandemic levels.

On that and you see continued strength in our gross margins right, even with the introducing of more than 100 new colleagues.

Over the summer months utilization was still 73%. So theres a lot of factors that have gone into continued strong margins.

But we were pretty pleased with the overall growth irrespective of where on the income statement and you decided to look at in terms of profits.

Okay. Good.

I did I did notice.

When you look at the SG&A expenses, excluding the commissions to non employee experts that was up.

A little less than 1 million sequentially.

At 14, 8% of revenue compared to 13 <unk> percent in the second quarter and you've talked about how you expect that to.

Gradually tick up you know and maybe end up somewhere between that.

Somewhat artificially low 13% level on the 18%.

So level that you were prior to the pandemic I mean should we think about <unk>.

Some of the discretionary expenses starting to come back into the business now.

And they're continuing to come up gradually or what.

Any more commentary on just kind of the expense trend line there.

Sure sure.

First of all the 18% that you referenced whereas SG&A levels that we were experiencing 18% to 19% range pre pandemic.

Improvement.

From what we were pre pandemic, but an increase from what we're experiencing over these last 18 months. We are constantly looking at that figure to see if there are opportunities to deliver our services even more efficiently in the time ahead right everyone is trying to gauge what this new norm.

Immel will look like but I think it's also pretty.

Uniform around the business world that that new normal won't look like 2019.

So the timeline of that is still a bit uncertain as we battled turned the corner on this pandemic.

But I still think there are opportunities for stronger profits in the quarters and years ahead.

Okay. Thank you with this one last question for me.

References management consulting being down a bit year over year. It just sounded like that was.

Just kind of typical ebb and flow in projects and maybe a tough comp for life sciences, but any more commentary around that.

I think it has ebbs and flows when you have when you have a practice that has been growing at that.

Such a rapid rate in years prior to 2021.

It sometimes you have to reload.

Do you continue to hire you continue to try to develop your resources.

In that space and I believe thats all what it is I could point to practically every practice.

CRA not just life sciences that have had these ebbs and flows.

But I'm going to say it again, what I find remarkable about this company's performance as we've been about six years running now of constant growth in the overall portfolio and it's worth noting again that of those 23 quarters of constant year over year growth 16 at.

Our double digit so there hasnt been a lot of time in between the reloading cycles, but it does happen as you decompose the components of your portfolio.

Okay.

Yes.

Alright, Thank you for all the helpful comments.

I'll turn it over thanks.

Thank you Kevin Thank you.

Yeah.

Our next question is from the line of Marc Riddick with Sidoti and company. Please proceed with your questions.

Hey, good morning.

Morning, Mark.

So several of the things I kind of had in mind were already addressed but I did want to touch a little bit on the end and you started to touch on this earlier the utilization during the third quarter was.

Fairly.

So it was ahead of my expectations, but a fairly solid despite the the.

The addition of <unk>.

Head Count I was wondering if you can talk a little bit about that head. Count addition, in sort of that onboarding that you're looking at given the.

The address that a little differently than maybe you might have in the past with was with summer hires and the distances situation and then maybe how should we we should think about.

Getting them in position to be able to contribute I think we definitely have addressed differently than in years past last year was the summer of 2020 was the first year in which we welcomed our new colleagues in a virtual world.

So we were sort of.

Doing things on the fly we learned from that process and I think.

The human capital Department, our it department.

The practices that are involved definitely delivered.

Better orientation integration support to our new colleagues in 'twenty, one 'twenty, one was still a virtual onboarding.

I'm still a proponent that some in person interactions do help with that onboarding, but we definitely improved year over year and even the levels of integration are starting to resemble.

The ramps that we experienced pre pandemic, so we're pretty happy with that.

The one thing to always keep in mind, I'm, not putting up any red flags, but integration is really like a zero to six month process right.

The first phase as you get everyone. There's a lever to the laptop they're able to communicate you learn you teach them some basic skills.

But the real time Mentorship.

Training that happens as new colleagues joined the firm it takes a little time, but to date I'm pretty I'm pretty pleased mark.

With the job that my colleagues are doing.

And are there any.

Things you could share around practice areas that were added to or maybe if there are any particular services that maybe got a little bit more attention and are targeting maybe this year versus last.

No I guess, what would make for a better story line. If I had to just point out one practice, but when I highlight that six of our practices all grew double digits in one quarter.

These practices have been growing pretty consistently now for several quarters several years.

On the Eve and focus on the portfolio.

Like my portfolio I like my geographies and our goal is to add depth across both.

And it's really depends on where the market is presenting us with opportunities.

And I guess Theres, a follow up to that could you maybe talk about what youre seeing out there as far as the acquisition pipeline and kind of how youre feeling about you know what what potential.

We might be out there or.

What your feelings are on valuation levels and the like.

Yeah I.

I don't think many Ceos get up here and say we are we are unattractive destination and no one wants to join us.

And I'm not going to be the first.

We have been able to attract top talent on both the grassroot level from the universities and also laterals.

Throughout these past six years of this.

Unprecedented period of growth for this firm.

And those same qualities.

And I just think that's for a number of reasons I'm not going to attribute all of it to being largely in a virtual world.

With it but it's really just the length of courtship is the one thing I would say is noticeable I don't think the price.

We're seeing the cost of recruiting.

To bring on a high level talent has changed it's still largely consistent.

With what we've experienced during the pandemic and pre pandemic period.

Excellent. Thank you.

Thank you Mark.

Thank you.

Now ill turn the conference back over to Mr. O'malley for any closing or additional remarks.

Again, thanks to everyone for joining us today.

We generally appreciate your time and interest in CRA, we will be participating in virtual meetings with investors in the coming months.

Which will be announced by press release, and we look forward to updating you on our progress on the next earnings call.

Thanks, again and with that that concludes today's call.

Thank you today's call has concluded you may disconnect your lines at this time and we thank you for your participation.

Q3 2021 CRA International Inc Earnings Call

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