Q2 2023 CRA International Inc Earnings Call
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Good 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 at sea or AI dotcom.
With us today are Cra's, 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. 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.
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 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-K, and quarterly reports on Form 10-Q filed with the SEC CRA undertakes no obligation to update any forward looking statements.
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 <unk>.
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 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 extended this trend in the second quarter.
As project lead flow increased by 15% year over year. This marks the third consecutive quarter of double digit growth and 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.
Communities into revenue producing assignments during the second quarter as new project originations grew by 5% year over year. This growth reflects a sequential improvement in our conversion rate relative to the first quarter, but it's still below our historical norms the expansion of our sales.
Pipeline supported our strong performance in the second quarter revenue increased by eight 6% year over year to $162 million, which represents the highest quarterly revenue in the company's history.
Broad based contributions across our portfolio drove this performance 711 practices grew year over year for practices energy Finance financial economics, and forensic services led the way.
With each generating double digit revenue growth. Additionally, three of our larger practices and I Trust and competition economics Labour unemployment and life Sciences, each expanded year over year and contributed to our overall growth geographically, our north American and international operations.
Three contributing to a 200 basis point sequential increase in quarterly utilization the improvement in utilization helped drive year over year growth in profitability as non-GAAP EBITDA reached $18 $8 million or 11, 6% of revenue in the second 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 second quarter Cra's Finance practice was active in a wide variety of complex litigation matters during the second quarter, including the high profile merge.
Your litigations, requiring the analysis of merger efficiency disputes arising from contested trading activity, including alleged spoofing and various financial markets and lastly, a litigation about customs and practices and municipal finance. Additionally, the.
Factice was active in numerous international matters, including international Arbitrations and securities fraud matters with assets or disputes in North America, South America and Europe .
A high profile victory for our client a senior consultant to CRA Conrad sick of Tullow testified at a jury trial on behalf of the defendant Yale University and an ERISA class action related to the management of Yale's four three be retirement plan.
That's a sick of Tullow provided testimony as an expert in retirement and financial planning investment performance and monitoring of retirement plans.
During the second quarter mortgage lending experts in Cra's financial Economics practice group continued to provide testimony in support of a mortgage servicer in a litigation matter alleging discrimination in the maintenance and marketing offer of foreclosed homes. The practice also.
<unk>, it's work analyzing potential discriminatory red lighting in response to regulatory investigations depressed practice assisted self where 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 and resolving the matter with a regulatory agency CRA.
Cra's forensic services practice continues to experience strong demand from both boards and C suite clients seeking assistance with investigations into alleged fraud cyber crime trade secret theft and other misconduct.
As governments announced new export controls in section 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 noncompliance for example.
The practice was retained to assist a global manufacturer of sophisticated machine tools to enhance its compliance with U S requirements and export licenses related to control hardware and software. In addition, the forensic services practice continues to help investigate and respond to hundreds.
Our cyber incident response matters per year. Many of these are ransomware attacks, which have surged dramatically in the first half of 2023 in some cases data theft occurred while in other cases clients suffered disruptions that cause significant operational and.
Shall implications for example, we assisted our 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. For example, we were retained by a multi state health care provider to help assess and respond to scrutiny by the federal trade commission into alleged improper market practices and pricing and key members of CRH.
Life Sciences practice contributed importantly, econometric skills and insights into the engagements.
In the second quarter Cra's energy practice continued to serve clients across the industry are in management consulting and expert testimony engagements for example, within its advisory offering CRA assisted a major U S utility in formulating a deep carbonization strategy.
Our U K utility and integrating new gas transmission subsidiary and a major industry participant to formulate its nuclear power strategy 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&A activity as measured by aggregate transaction value rebounded from a decade low in the first quarter of 2023, increasing 33% on a sequential basis, making the second quarter.
Or the strongest quarter for worldwide dealmaking in the past 12 months capitalizing on this increase in merger related activity and continued demand for antitrust services. The competition practice establish yet another new high for quarterly revenue in the second quarter the Pratt.
Just the sales pipeline, followed a similar trajectory to the M&A market generating a 33% increase in merger related lead flow in the second quarter relative to the first quarter of 'twenty to 'twenty three.
Spite this sequential increase our merger related lead flow was relatively flat year over year.
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 and an evidentiary hearing on our motion for preliminary injunction filed.
By the Federal Trade Commission Doctor Bailey was the only expert witness to present life direct examination testimony during the hearing her testimony was decided by the judge numerous times during closing arguments and then the court's written opinions that denied the F T six.
Motion for a preliminary injunction ruling in favor of our clients, Microsoft and Activision Blizzard.
Turning now to guidance through the first two quarters of fiscal 2023 on a constant currency basis relative to fiscal 'twenty 'twenty. Two CRA generated total revenue of $318 million and non-GAAP EBITDA of $36 $6 million, achieving a margin of 11 five.
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These results incorporate our constant currency adjustment, which contribute $3.2 million to revenue and $1.1 million to EBITDA, reflecting the continued strength and 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 'twenty 'twenty. Two we expect revenue in the range of 625 million to $640 million and non-GAAP EBITDA margin in the range of 11.1% to 11 point.
7% this updated guidance assumes.
Excuse me assumes continued strong performance during the second half of the year. It also takes into account the market's current expectations of foreign exchange rates for the U S dollars, which on a constant currency basis may shave approximately $4 million from our reported revenue.
And approximately $1 million from our reported EBITDA during the second half of fiscal 2023 overall I'm grateful to all of my colleagues for their hard work during the second quarter as we helped our clients address their most important challenges with that I'll turn the call over to Chad and then too.
Dan for a few additional comments Chad.
Thanks, Paul Hello, everyone.
I want to update you on our capital deployment during the quarter.
We concluded the quarter with $14 $3 million of cash and $80 million of borrowings under our revolving credit facility, resulting in a net debt of $65 $7 million. The borrowings were primarily to fund bonus payments during the first two quarters, which is consistent with our practice in prior years.
Since the end of the second quarter, we have repaid $13 million of our borrowings consistent with our experience in prior years, we aim to finish the year with zero outstanding borrowings.
In addition to the normal bonus cycle. The second quarter of 2023 also saw cash outlays for talent investments of $800000 net a forgivable loan repayments, we spent $700000 in capital expenditures, bringing our year to year to date total to $1 $3 million.
We also returned $5 $5 million to our shareholders during the second quarter, consisting of $2.5 million of dividend payments and $3 million to repurchase approximately 31000 shares as of quarter end, we had approximately $19 $3 million available under our share repurchase.
Program with that 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 second quarter of <unk>.
Fiscal 2023 in terms of consulting head count we ended the quarter at 971, consisting of 156 officers 522, other senior staff and 293 Junior staff. This represents a 12, 5% increase compared with the 863 consultant head count reported at the end of Q.
Two fiscal 2022.
By the end of the year through typical hiring efforts and normal attrition patterns, we expect consultant head count 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 second quarter of fiscal 2023, compared with 15, 3% a year ago. This quarters ratio was primarily impacted by an increase in travel and entertainment expenses.
In rent expense.
The effective tax rate for the second quarter of fiscal 2023 on a non-GAAP basis was 29, 8% compared with 29, 3% on a non-GAAP basis for the second quarter of fiscal 2022.
We concluded the second quarter of fiscal 'twenty, 'twenty, three with $14 3 million in cash and cash equivalents and a further $115 6 million of available capacity on our line of credit for total liquidity of $129 $9 million.
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.
Confirmation tone will indicate your line is in the question queue.
You May press star two if he'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing this darkies one moment, please while we poll for questions.
Yeah.
Our first question comes from Kevin Steinke with Barrington Research. Please proceed with your question.
Good morning, everyone.
Good morning, Kevin.
I wanted to start off by asking about.
Your comments around a new project.
Project originations.
Yeah, the sequential improvement you saw there.
But maybe still a little bit below historical norms, just any thoughts on what maybe drove that improvement.
And the origination trends and then also what might be keeping it a bit below historic norms.
Sure.
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We began talking about our lead flow at the end of Q4, our 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 was down considerably our 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 away two competitors, but more so that the cases were just being kicked down the road a bit or mergers, we're not being announced.
Ah So we thought they were gonna come eventually or convert into revenue generating projects. The uncertainty was when so I don't know exactly what contributed to any kind of resolution of this uncertainty as the market as a whole, but we did start seeing an.
Proved meant in that conversion rate, we're still probably down about 10, 15%.
On that conversion rate relative to our historical norms.
Okay. Thank you and.
You know continued impressive growth and project lead flow I think you said.
Consecutive quarters of double digit growth there.
You talked a lot of bottle are on the call here about the areas of strength, you're seeing across the firm should we just assume it's slow growth is being driven by those areas. You highlighted are there any.
Perfect practices.
Or pockets of strength that you really want to illuminate.
No just like the revenue growth are the growth and the lead flow has been pretty broad based and that's what has US you know 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 our the amount of lead flows coming into the organization and it's very rewarding.
To see that sharp of a surge and a relatively turbulent marketplace over these past nine months are we just have to get those leads convert it into revenue revenue generating projects are and you know, we'll start seeing more of the output benefits.
When that happens.
Yeah.
Okay. Thank you.
I also wanted to.
I ask you about your increased.
Yes, well the low end of the revenue guidance range as well as the.
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 you know certainly I guess the outlook for the second half anything in particular that you would call out that that might have outperformed.
Your initial expectations on either the revenue or the margin front.
Okay.
I think to date the performance has been pretty much in line with the expectations are particularly given what market variables. We're observing we still think there's opportunities for upside as we see conversion rates returned to historical.
Warms, but that's a bit uncertain as to when so when looking out into the second half of the year. We are not projecting a any kind of significant increase in lead flows or conversion rate.
To produce those results, it's more a continuation of the strong performance we enjoyed during the first half.
Okay. Thank you and just lastly, I just wanted to ask about the.
Overall, our market for talent and talent recruitment as you see it.
Yeah.
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.
I think the ability to identify attract and hire talent has been pretty consistent with what we've seen.
In prior quarters, our what is not consistent with 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 run.
Closer to more historic lows.
For it unless yielding a bit higher head count 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 you know I think it will take care of itself as Dan noted in terms of our expectations of head count growth by the end of the year.
Okay. Thanks for the insight and congratulations on the solid results so I'll turn it over.
Thank you Kevin.
Our next question is from Marc Riddick with Sidoti and company. Please proceed with your question.
So I wanted to start with the with it first of all thanks for all the detail on the color on that that Youre seeing here. So I can talk a little bit about the utilization pick up certainly it's up from first quarter and I was wanted to talk a little bit about maybe sort of the pace of that did that sort of just in Peru.
Sequentially through the quarter are was there any lumpiness there it seems as though there's certainly that's drivers for that but once you get your thoughts on more on the improved 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 you know again over.
The second half heading into 'twenty, four I think that should take care of itself to get our utilization back to more historical patterns.
Sure I always hesitate to 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.
We still believe the overall regulatory environment, both here in North America and in Europe .
<unk> is very supportive of continued growth.
In our litigation side of the house.
There's a lot of discussion about our clean energy and you're generating capacity, which our energy practice has been at the middle of our adviser clients how best to structure. Their portfolios are so we're just seeing the growth throughout.
And the opportunities throughout the portfolio I don't foresee any kind of pop up.
But we do expect a sort of to continue the excellent performance that we've been able to share with our investors know for the.
The last several quarters.
It's greatly appreciated thank you very much.
Thank you Mark.
Our next question is from Andrew Nicholas with William Blair. Please proceed with your question.
Hi, Good morning, I. Appreciate you taking my question I just have one.
I just have one there's a lot of my questions had been had been answered already I just kind of wanted to ask a big picture on antitrust.
I think we've seen some new proposals on guidelines here in the U S are some changes internationally as well I'm just wondering how all of these kind of moving parts impact.
The outlook for your business over over a multiyear period, whether it's on the M&A side or the non M&A.
Antitrust side I'm, just would be interested in your thoughts there.
Sure.
There there's been as you were alluding to a change in terms of the overall guidelines.
<unk> 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 our mergers as I you know quite frankly are still to be seen but I still take the position that complexity is good for professional.
All services firms like CRA.
And all the uncertainty as to exactly what these new standards mean and analysis, what they mean in terms of probability of getting deals through it should bode well for our industry as a whole and for CRA in particular.
That's helpful. Thank you.
Okay. Thank you Andrew.
Yeah.
Okay. You have reached the end of the question and answer session I would now like to turn the call back over to Paul O'malley for closing comments.
Today's call. Thank you.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.