Q3 2023 CRA International Inc Earnings Call
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Good day, everyone and welcome to Charles River Associates third 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 C. R. A I dotcom well.
With us today are Cra's, President and Chief Executive Officer, Paul O'malley, Chief Financial Officer, Dan Mahoney, and Chief Corporate Development Officer, Chad Holmes.
And at this time I would like to turn the call over to Mr. Mahoney for his opening remarks. Thank you Dan. Please go ahead.
Thank you John 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.
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 <unk>.
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 will refer to some non-GAAP financial measures and certain measures presented on a constant currency basis on this call.
One 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.
Against the backdrop of macroeconomic uncertainties, we achieved $147.6 million in revenue in the third quarter a decline of.
0.6% relative to the third quarter of fiscal 2022.
The lack of revenue growth for the company wasn't unusual departure from the prior two quarters, and which CRA established new quarterly highs for revenue as well as from Cra's long history of delivering revenue growth and profit expansion in each of the past five fiscal years, we have established.
Tablets, new record highs in revenue, while our profitability measured by non-GAAP EBITDA net income and EPS increased at multiples of revenue growth over the same period.
The strength of the business and its ability to generate strong cash flows has allowed CRA to invest in value, creating growth and to return substantial capital to shareholders.
Our efforts have resulted in a balanced growth portfolio in terms of services offered geography and contributions from organic and inorganic pursuits Mauro.
Moreover, our competitive position remains strong and we see many growth opportunities resident in the markets. We serve as such we will continue to execute on our plan with the objective of maximizing cra's long term value per share.
While our portfolio of services has demonstrated a history of exceptional performance the third quarter of fiscal 2023 represented a speed bump on our journey utilization came in below historical levels at 66% due to two main factors higher consultant head count.
And lower New project originations I will discuss both factors in greater detail.
Similar to our experience in the first and second quarters of fiscal 2023 we continue to experience surprisingly low attrition rates as a consequence, our third quarter consulting head count surged 11, 3% year over year.
Our year to date attrition in 'twenty two 'twenty three is historically low falling even below the rates we experienced in 2020, when COVID-19 related lockdowns and economic uncertainty significantly significantly limited employee movements.
We are pleased with the team we have assembled but we remain focused on balancing the supply of labor against the demand for our services by the end of the year, we forecast consulting head count to increase by mid to high single digit percentage points year over year and he further alignment.
The salary will be realized through disciplined management of hiring and attrition.
On the demand side, our project lead flow has always served as a good barometer of future expansion in our business. For example, during the period from fiscal 'twenty 18 through fiscal 2022 project lead flow grew by approximately 10% per year while.
Revenue grew by approximately 9% per year for the third quarter of fiscal 2023 are projected lead flow increased by 10% year over year. This marks the fourth consecutive quarter of double digit growth in Cra's project lead flow.
While the lead flow was strong during the third quarter. The conversion rates of those leads into new revenue producing assignments continued to fall below expectations. As a result during the third quarter, our new project originations declined 3% year over year.
Based on an examination of lead composition, we see little evidence that we are losing projects more frequently to competitors. Instead. It appears clients are delaying the start of new projects. We believe that project lead flow remains a good indicator of strong demand for our services in the long.
[noise] run even if the conversion into projects is disrupted in the short term by economic uncertainty.
Turning to results at the practice level I was pleased that six of our 11 practices expanded year over year and two of our largest practices forensic services and life sciences, delivering double digit revenue growth.
We also generated double digit revenue growth from our international operations, Our management consulting services grew 14.5% year over year with our energy and life Sciences practices driving the expansion in.
In the third quarter Cra's energy practice continued to support utilities independent system operators advanced energy technology companies and investors on engagements on engagements emerging from the energy transition for example, CRA is working with Bermuda Electric company on its.
Resource plan, which we'll consider how the island could decarbonize away from fuel oil.
For the utility Ameren, Illinois, CRA recently completed an engagement to evaluate whether the company should trade and operate in a different wholesale market as a result of the energy transition finally, an advanced nuclear reactor developer C.
CRA assisted the company's leadership with the development of our commercialization strategy for North American power markets.
Our life Sciences work and strategy and policy consulting provides a unique perspective on competition issues in the life Sciences industry. For example in the third quarter. The practices. The practice assisted with the successful defense of Amgen's acquisition have a horizon of transaction.
Isn't that the F T C. In some states had sued to prevent.
With respect to strategy consulting we continue to perform considerable work in the areas of oncology.
With more recent projects focused on the opportunity for antibody drug.
Conjugates in the treatment of cancer.
Revenue in the third quarter from Cra's legal and regulatory services declined 5% against the backdrop of mixed trends within the legal market total case filings in the third quarter were up 15% year over year, while the number of court judgments declined 2% year over year.
Within our legal regulatory services for practices grew during the quarter, our forensic services practice led the way in year over year revenue growth and was joined by the financial economics intellectual property and labor and employment practices.
Forensic services practice continues to be called upon to leverage its deep digital and expert witness competencies to it.
To investigate various kinds of misconduct for example on behalf of one of the world's largest producers of electronic devices. We were retained to investigate.
And one of our experts expected to testify regarding the alleged theft of confidential information by departing employees and related claims of spoliation of evidence driven in part by a resurgence in ransomware attacks. Our forensic services practice is regularly called on to help.
Eight and remediate cyber incident response matters and a number of cases data was stolen not only from clients directly but from third party service providers such as file transfer services that had been marked as secure our client who found themselves in precisely this situation was.
Good traded leader in cloud based human resources and payroll systems, they called on CRA to help swiftly determine which of their hundred hundreds of corporate clients had their data compromised to identify which employees of those corporate clients needed to be notified and two assessed whether the threat.
Actor had left behind any back doors that could potentially be exploited in the future.
Theories intellectual property practice continues to advise on multiple high Stakes litigation arbitration and valuation matters covering a broad range of industries, including cloud computing consumer electronics electric vehicles software financial services and Robotics for example.
<unk>, a CRA expert provided economic analysis and testimony and a commercial arbitration between a major fast food chain and a provider of online ordering systems. The practice has also seen an increase in work related to international trade Commission's investigations in which complaint.
<unk> seek to block the unlawful importation of products found to infringe U S intellectual property rights.
Cra's financial Economics practice is working with the social media platform to analyze fairness to analyze Spanish risk for a range of machine learning.
Our predictive models used in marketing third party financial products to users. The analysis is assisting the client and its legal counsel and evaluating the risk of inadvertent discriminatory effects of the models. Similarly, CRA performed a fair lending analysis for a large bank across a range.
Of consumer and small business portfolios. The analysis is directed at helping the client to understand and to monitor the risk of legal discrimination in the underwriting pricing and servicing of loans.
And helping the client to develop its internal capabilities to monitor failed ending risked on an ongoing basis.
The labor and employment practice continues to be a leading resource for clients facing complex employment issues and seeking proactive employment advice during the third quarter CRA experts, we're engaged across industries, including finance energy and leisure as a critical partner for clients entering mediation.
An early case assessment on multiple California state wage and hour claims.
There are federal Fair Labor Standards Act lawsuit entitled Seven discrimination claims for example, the practice supported the expert testimony of professor Jonathan Gary and in a matter involving alleged adverse treatment with criminal background checks. Additionally, CRA experts are regularly retained to assist.
Companies and auditing pay practice pay practices to ensure regulatory compliance as well as internal pay equity identifying potential payment corrections and pay equity adjustments finally, I would like to discuss Cra's antitrust and competition economics practice, which.
<unk> the premier provider of merger and anti trust related consulting services after posting record quarterly revenue in each of the past two quarters and four of the past six quarters since the start of fiscal 2022 the practice was down slightly during the third quarter.
Relative to year ago period. This performance was consistent with the headwinds affecting the broader M&A landscape worldwide M&A activity totaled two trillion dollars. During the first nine months of 2023, a dramatic decrease of 27% compared to year ago levels.
And the slowest first nine month period for deal, making since 2013, the third quarter up 2023 decreased 16% compared with the second quarter of 2023, and Mark the slowest third quarter for worldwide Dealmaking since two.
2012.
Turning to our full year guidance for the first three quarters of fiscal 2023 on a constant currency basis relative to fiscal 'twenty 'twenty. Two CRA generated total revenue of $463.8 million and non-GAAP EBITDA of $50 million, achieving a margin of <unk>.
10, 8%. These results incorporate our constant currency adjustments, which contribute 1.4 million to revenue and 800000 to EBITDA.
Given our results to date and the lingering uncertainty across the broader market, we are reducing our revenue and profit guidance for the year.
For full year fiscal 'twenty to 'twenty three on a constant currency basis relative to fiscal 'twenty 'twenty. Two we expect revenue in the range of $610 million to $620 million and non-GAAP EBITDA margin in the range of 10 three to 10, 7%. This updated guide.
<unk> takes into account the market's current expectations of future exchange rates for the U S dollar, which on a constant currency basis may shave $1 7 million from our reported revenue and approximately $300000 from our reported EBITDA during the fourth quarter of fiscal 2023.
With that I'll turn the call over to Chad and then to 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 $27 $6 million of cash and $32 million of borrowings under our revolving credit facility, resulting in a net debt of $4 $4 million. These figures refer.
That $48 million of payments during the quarter to reduce our borrowings under our revolving credit facility.
The third quarter of 2023 also saw cash outlays for talent investments of $3 $8 million, we spent $700000 on capital expenditures, bringing our year to date total to $2 million.
Demonstrating our confidence in the quality of the business and reflecting our commitment to return capital to shareholders earlier today, we announced a 17% increase in our quarterly cash dividend from 36 cents to 42 cents per common share this dividend will be.
Payable on December eight 2023 to shareholders of record as of November 28, 2023 year to date, we have returned $31 $4 million to our shareholders consisting of $7 $8 million of dividend payments and $23.6 million for share repurchase.
As we currently have $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 third quarter of fiscal 2020 three in terms of consultant head count we ended the quarter at 1014.
Consisting of 155 officers 529, other senior staff and 330 Junior staff.
Representing an 11, 3% increase compared with the 911 consulting head count reported at the end of Q3 fiscal 2022, non-GAAP selling general and administrative expenses, excluding the 2.4% attributable to commissions to non employee experts was 16, 5% of revenue for the third quarter.
2023, compared with 15, 8% a year ago. This quarters ratio was primarily impacted by an increase in travel and entertainment expenses and higher other operating expenses.
The effective tax rate for the third quarter of fiscal 2023 on a non-GAAP basis was 18% compared with 25, 9% on a non-GAAP basis for the third quarter of fiscal 2022, the current quarter tax rate was positively impacted by the release of a reserve in a foreign jurisdiction.
Turning to the balance sheet DSO at the end of the third quarter was 114 days compared with 115 days at the end of the second quarter of fiscal 2023 DSO in the third quarter consisted of 72 days of billed and 42 days of Unbilled. We concluded the third quarter of fiscal 2020 three.
$27 6 million in cash and cash equivalents and a further $163 5 million of available capacity on our line of credit for total liquidity of $191 $1 million.
That concludes our prepared remarks before we turn the call over for questions. Paul has one final announcement, Paul Thanks, Dan based on feedback from investors over the past year and questions regarding the markets in which we operate we will host an investor day on Wednesday November 29th at the Fairmont Copley Plaza.
Hotel in Boston to discuss our business strategy and the industry trends in greater depth, we will have a number of colleagues joining us to highlight and provide more details on our practices, including antitrust and competition economics forensic services and life Sciences.
We will provide registration and webcast information soon and look forward to seeing many of you at this event.
John We would like we would now like to open up the call for questions.
Thank you Sir we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you'd like to remove your question from the queue.
For anyone using speaker equipment and may be necessary to pick up your handset before pressing the star keys and one moment. Please while we poll for questions.
And the first question comes from the line of Andrew Nicholas with William Blair. Please proceed with your question.
Hey, guys. Good morning, I appreciate you taking my question.
I wanted to start with utilization.
Of an aberration from your historical trends and down sequentially was hoping you could unpack that a little bit I would I would imagine you have some new grads that come in pressuring that that utilization I E.
Talked about some lower conversion rates higher attrition is there any way, whether it's qualitatively or quantitatively to break that down a bit and then you know relatedly. If if you have any thoughts on your expected timeline for recovery two to kind of the historical rates that you've shown in the low to mid seventies.
Sure first of all good morning, and thanks for the question Andrew.
We throughout the year as we've commented on.
Our attrition rates have been at historically low levels are because of that we have been slowly increasing the our consulting head count beyond what we initially expected at the beginning of the year.
We have some excess capacity on the consulting side of the house.
With or without the revenue slowdown that we experienced in Q3, but it is the type of excess capacity that we believe are.
Through normal operating procedures that CRA Ah, we could get on top of say sometime by the end of Q2 of fiscal 2024, so that will take care of itself.
Clearly if revenue materializes at a faster rate.
That all moves up a bit which we will all welcome.
<unk>.
But right now given the head fake that I've had during Q1 of <unk> of 23 of Q2 of 'twenty, three and now into fits into the third quarter.
You know I'm, a little uncertain on how quickly our normal revenue flows would materialize.
So I'm, probably looking towards the middle.
Of 'twenty 'twenty four to get something I feel a bit more comfortable with Andrew.
No that's super helpful and understand that a lot of these things are difficult to predict that far out.
I guess for my follow up question, you know really strong growth internationally, which which would obviously imply you know a little bit slower growth domestically I'm just kind of curious is there anything.
Is it just lumpiness that would describe the differences by region or is there anything going on in any of these end markets that would lead you to believe that.
International will continue to outperform U S R or vice versa, and in the coming months and quarters. Thank you.
No I don't think there's anything overriding that would say international should outperform our north American operations going forward. We are as we began the third quarter.
Of 2023 July was a really strong quarter, we were up about 6% company wide August gave us a bit of a head fake a it was a very soft quarter in which we saw existing matters are slow or have delays in the work we saw.
<unk>, new project opportunities not convert to new revenue generating projects.
In the month of August we saw an improvement in September, but not enough to offset that.
That trough that we experienced in August that slowness or that general trend igloo.
Existed across our portfolio both across services and geographically.
And maybe maybe that.
That leads me to one last question, if I could sneak it in sure.
Expectation for fourth quarter that its more like September or is.
Is there some expectation of improvement or for it to look more like August I'm, just kind of trying to understand where we sit in terms of conservatism in guidance. Thanks, Paul Yeah give it given how accurate my expectations have been of late.
No I, we are expecting more of a September looking a month going forward then in August month August quite frankly.
Over the past decade, I haven't seen many periods are that.
Encompassed everything we saw in the month of August.
So I think that's an aberration hopefully not famous last words and so far we were pleased with the improvement.
In the month of September and we're pleased with the way we began.
The fourth quarter.
Very helpful. Thank you again.
Thank you Andrew.
And the next question comes from the line of Kevin Steinke with Barrington Research. Please proceed with your question.
Good morning.
Hmm.
Wanted to just start off by.
You can go a little bit more into.
What changed since your last call that led to the changed our revenue and margin outlook for the full year. It sounds like you.
Perhaps the conversion rate.
Into new projects was less than you might have expected and attrition.
<unk> was lower.
Lower than you expected is that.
Those the two main contributing factors to the <unk>.
The change in the outlook.
First of all good morning, Kevin.
The attrition we saw we saw it coming right we've been talking about low attrition rates throughout fiscal 2023.
So the fact that they did in to reverse course in the third quarter was not as much of a surprise but.
But still resulted in excess consulting capacity.
What was generally a surprise is the drop of our conversion of new business opportunities to revenue generating projects. If I compare the conversion rates that we were enjoying throughout the history of CRA, we were down about 20%.
On those conversions are on that so we weren't getting any new projects coming in are new projects are essential.
Particularly to try to get our new consulting staff, a busy on a more expeditious manner.
So it was the conversion that I think.
Led the disappointing results.
Okay understood and your comments about.
August and September that that implies then that the conversion rate has picked up a bit in September.
Correct.
The conversion rate in September and the first few weeks we have in October has improved.
From what we observed in August, but I think it's important to also note is still below our say our experiences over the last decade.
Excluding 2023.
They are just operating at a lower level and with no clear explanation from our part as to why that's happening we are not entering in two new markets. We are not trying to introduce herself.
Two new client basis. They are the same services that we have always offered and for the most part with the same people.
So the kind of drop in the conversion rate is frustrating.
But you know we're riding that storm.
And even with that kind of volatility.
Nine months into this year, we're still up 4% on revenue the profitability levels are near our historic highs that we achieved in 2021 and 2022.
So.
Could be worse, but by all means Kevin we're a bit frustrated with where the revenue came out, particularly with the head fake that we experienced in the month of August.
Okay, Yeah, that's fair.
So that's interesting because that.
Leads into my next question you mentioned that there's no.
Real clear explanation for the slow down.
Inversion rates.
<unk>.
I think you might have mentioned that it's fairly broad based.
Across practices.
And geographies is that correct and then you haven't been able to tie it to anything like perhaps you know.
M&A transactions being delayed or I mean, maybe that's a part of it but no no clear trends or themes behind the curtain.
Conversion rates slow down I guess.
It is broad based are the other thing we can note that I've made reference to some of my prepared remarks.
The asset is intact.
Well theres been no departure of any kind of key revenue generators at CRA that would lead to the kind of quarter, we just experienced.
With respect to the impact of M&A activity, we get calls on several Ah <unk>.
M&A opportunities, we clear conflicts and then we do not see the case proceed period by that I mean are we very you know either we don't get a call back.
On it after we clear the conflict or we do not see any kind of announcement of the deal in the broader press for.
For that so clearly the slowdown in M&A is one part of it but I think it goes beyond.
That headwind.
Okay. That's helpful commentary, but you know obviously as you mentioned there the asset is intact.
Really you're not you're not losing market share you know you you still for performed quite well on a relative basis year to date.
And so.
That's all that's the indication of.
Yeah.
The business is in good shape for the long term I think that.
That's evidenced by the dividend increase you announced so maybe just talk about.
No that that dividend increase and how it perhaps relates to your near long term confidence in.
The business and the long term demand outlook.
The dividend increase I think aligns with our commitment to return substantial capital back to our shareholders.
The dominant form of those redistribution of capital to our shareholders have been through share repurchases, which have accounted for roughly 75% to 80% of total distributions over the last several years. So the dividend, we're not changing significantly changing those.
Portions with the increase on the dividend clearly it talks about our confidence in the overall stability and viability of the asset going forward, but I don't believe this signals a shift in the ditch.
Tribunal in shares between share repurchases and dividend payments.
Okay understood. Thanks for the comments I will turn it over.
Thank you Kevin.
And the next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question.
Hey, good morning, I wanted to sort of first I guess, maybe go over are there any sort of large projects or anything that we should be thinking about that maybe ended during the quarter or was there anything lumpy as far as you know major projects too.
Sort of think about it from a timing perspective.
We didn't have any major projects and there was the U S approval of the Microsoft Activision matter.
On that so that's the only thing of note. We had a couple of larger projects are go on.
On a temporary pencils down request.
On those matters, we have since restarted.
The consulting efforts on those cases, so those did improve to be permanent.
On a go forward basis, we got the request of pencils down on a couple of cases in the month of August but our consulting teams are back at it.
Okay, and just wonder if you could share some thoughts as to maybe what you're seeing are on things that are sort of we we we talked a bit on the M&A side of things I just wanted to talk a little bit about maybe what you're seeing as far as things that are a demand that's driven from sort of regulatory moves in and whether or not any sort of government delays or anything.
That you think are having an effect on what you are seeing.
Yeah. There were clearly have been a impact from government delays, if we did have a government shutdown.
In terms of the amount of surplus capital they have to.
To run their important cases post shutdown, we haven't had to deal with that as of yet, but the overall regulatory temperature.
I don't think has cooled at all both here in the states and abroad.
It's the same type of market opportunities that we've been enjoying for the last couple of years.
Right now.
Great and then I was I would imagine that the long term view of things such as AI, driven regulation and the like and changed but as far as this maybe just some of the things that you're seeing now versus maybe earlier in the year are you are you seeing anything different than necessarily with what you were expecting or how maybe we should be.
Thinking about the pace of those types of projects.
No I don't I wouldn't say our view has change in terms of what the impact of technology or AI, specifically will have on our business theres been lots of technological changes are that.
We have dealt with at CRA.
For many years now many of them have resulted in improved efficiencies.
And higher quality services delivered to clients and we're excited about the opportunity and that maybe this provides another step forward for CRA across the spectrum. Our main concern with respect to this technology or AI, specifically is maintaining the car.
Potentiality and privacy of the information.
We are allowed to work with.
Great and then I was wondering can you talk a little bit about the pricing environment I mean, it certainly.
You know it seems as though nothing has gotten any less expensive, but I was wondering can talk a little bit about maybe the pricing dynamics that you're seeing and what you. What you are expecting maybe going into next year.
Sure, we're not seeing any kind of shift on the pricing environment are the rate increases that we had put in effect at the beginning of 'twenty three are sticking in large part.
On long in the long run projects are also being a.
<unk> did on new projects.
The write off and reserves that we incur on a quarter to quarter basis those haven't shifted.
But you know so that's all good news clients are being much more active in their management of their budgets. So we're having to do a better job you know increasing information flow, making sure our clients are not.
Surprised and most importantly continue to deliver the exceptional quality of the clients have come to expect.
And one more if I may is there sort of our expectation that where we're just maybe in a bit of a period of elongated sales cycles or or or you know with that client caution that youre seeing or or are you expecting sort of a reversion to the mean there going forward. Thanks.
Yeah, I'm I'm hesitating, because part of the reason that.
I, we had our Q3 results that we did part of the reason of the lower guidance is because there's just more uncertainty right now I thought Q2 was a step forward back towards the mean that CRA has grown accustomed to then all of a sudden I have Q3.
Which is you know a downward shock on that volatility trend.
So I am a bit uncertain I don't believe there's anything.
Broader in our marketplace to suggest that we are entering a new mean.
But exactly when we return to sort of business as usual.
Is a bit uncertain right now so we're just trying to be very aggressive in our pursuit of opportunities in the way, we deliver the engagements and.
The rest should take care of itself.
With the passage of time.
I appreciate it thank you very much Paul.
Thank you Mark.
At this time, we have reached the end of the Q&A session and I will now turn the conference back over to Mr. Mali for any closing or additional remarks.
Again, thanks to everyone for joining us today, we appreciate your time and interest in CRA, we look forward to seeing you at our upcoming Investor day, and providing an update on our progress on our fourth quarter call. Early next year with that that concludes today's call. Thank you everybody.
And that concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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