Participants

Daniel Mahoney; Chief Financial Officer; Charles River Associates

Paul A. Maleh; President, Chief Executive Officer and Chairman of the Board; Charles River Associates

Chad Holmes; Chief Corporate Development Officer; Charles River Associates

Andrew Nicholas; Analyst; William Blair

Marc Riddick; Analyst; Sidoti & company LLC

Kevin M. Steinke; Analyst; Barrington Research

Presentation

Operator

Good day, everyone and welcome to Charles River Associates third quarter 2024 conference call. Please note that today's call is being recorded. The company's earnings release and prepared remarks from CRAs Chief Financial Officer are posted on the investor relations section of CRAs website at crai.com. With us today are CRAs President, Chief Executive Officer and Chairman of the Board, Paul A. Maleh, Chief Financial Officer Daniel Mahoney, and Chief corporate Development Officer Chad Holmes at this time, I'd like to turn the call over to Mr Mahoney for opening remark, Daniel Mahoney, please go ahead.

Daniel Mahoney

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 even a 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 C 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. I will now turn it over to Paul A. Maleh for his report. Paul.

Paul A. Maleh

Thanks Daniel Mahoney and good morning, everyone. Thank you for joining us today. The continued its run of strong performance into the third quarter of fiscal 2024 revenue increased by 13.7% year over year to $167.7 million. A record Q3 performance that followed a record breaking Q1 and Q2.
In fact, the first three quarters of fiscal 2024 represent the three highest revenue quarters in CRA's history. During this period of strong growth, we have continued to manage the business effectively quarterly utilization improved on a year over year basis. To 76%. As consultant headcount decreased slightly compared to the third quarter of 2023.
We are especially pleased with this level of consultant productivity as the third quarter is a period of significant seasonal transition with large inflows and outflows within our junior consultant ranks. The increase in consultant utilization resulted in part from the continued replenishing of our sales pipeline. Our overall project lead flow increased in the third quarter by 8% year over year. With conversion rates remaining strong and consistent with historical norms.
This performance outpaced mixed trends in the broader legal market as total case filings declined by 10% year over year. While total court judgments increased by 3% in light of these market conditions. We are especially pleased with the strong growth in our legal and regulatory services which increased revenue nearly 20% year over year, a strong utilization and overall execution drove year over year growth in profitability as non-GAAP net income earnings per diluted share and EBITDA each increased by more than 50%. Far outpacing our revenue growth rate.
This performance represents the highest third quarter profitability as measured by net income earnings per share and EBIDA and similar to revenue. The first three quarters of fiscal 2024 represent the three highest profitability quarters in the company's history. Our performance was broad based with seven practices growing revenue year over year five practices and I trust in competition economics, energy financial economics, intellectual property and risk investigations and analytics. Each grew by more than 10% year over year. I would now like to spend a few minutes highlighting some of the projects delivered during the third quarter.
Our Antitrust and Competition economics practice continued its strong performance as it grew revenue by nearly 30% year over year. In fact, the first three quarters of fiscal 2024 represent the three highest revenue quarters in the practice's history performance in the third quarter was fueled by continued demand for antitrust and merger related services worldwide M&A activity totaled $2.3 trillion during the first nine months of 2024 an increase of 16% compared to year ago levels. The third quarter of 2024 increased 14% compared to the second quarter of the year.
Against this backdrop, I worked on transactions across a range of industries and geographies. For example, experts supported parties pursuing strategic transactions across the health care, luxury goods, high tech and transportation industries. Their work involved defining the relevant product and geographic markets, assessing the changing characteristics and participants in these markets and evaluating regulators theories of competitive harm. The practices work in jurisdictions around the world involve the combination of our expertise and economic theory with the team's empirical expertise.
The combination, this combination allows our team to process and analyze data in ways that support our clients throughout their interactions with regulators. There is antitrust and competition economics. Practice also assisted clients in the context of antitrust inquiries. For example, members of CRA's European team advised Microsoft as it hired certain employees of and entered into associated arrangements with inflection, a developer of AI foundation models and conversational AI tools.
Alongside a jurisdictional question of whether this constituted a merger, the competition and market authority in the UK investigated whether the hiring would result in a lessening of competition and the development of either foundational models or consumer chat bots. Ultimately, the CMA dismissed both concerns and cleared Microsoft hiring of the employees from inflection.
CRA's energy practice continues to benefit from the hiring of senior resources early in the year and the additional services that it can now offer CRA's clients in the third quarter. The practice supported several regional transmission organizations to comply with work orders on transmission planning.
The practice also helped multiple utility clients including subsidiaries of nice source liberty and alliance energy to develop their integrated resource plans which describes how the utilities resource mix will need to evolve to meet the demand for electricity and the need to retire coal and gas power plants.
These plans which can take up to a year to develop have been more complicated recently by the rapid increase in data centers, electric vehicles and manufacturing loads across the country. The practice is also working directly with a number of data center clients to help better understand energy markets and utilities. The team is helping with topics such as supply planning rate, design and fighting.
Finally, the practice also remained active in the third quarter. With the investment community projects included multiple large due diligence assignments that address electrical transmission portfolios and a distributed energy platform.
During the third quarter, CRA's financial economics practice provided model validation and fair lending testing services to multiple fintech lending platforms and their bank lending partners theory provided independent reviews of the statistical soundness of the client's proprietary machine learning models which are used to assess consumer credit in unsecured installment loans and credit card underwriting and evaluated models for potential risk of discrimination. Experts from the practice also continue to assist clients involved in litigation.
For example, CRA's is providing expert testimony to a large bank in a class action mortgage discrimination matter focused on the underwriting of mortgage loans dating back to 2018. In another matter, tr A is assisting clients with economic analysis in a in a false claims matter relating to mortgage underwriting and loan performance.
The strong bench of testifying experts within CRA's intellectual property practice worked on several noteworthy litigation engagements during the third quarter. For example, CRA's expert testified on behalf of a leading research university regarding economic damages arising from the infringement of the university's patent covering collaborative robotics.
The expert presented a reasonable royalty theory based on a comparable transaction with, professor led startups and performed a detailed analysis of the value of royalty and equity components of those agreements. The jury reached a verdict in favor of the university and awarded significant monetary damages.
And another jury trial was retained by one of the top consumer electronic companies to provide economic damage testimony in a patent infringement matter involving charging technology. In light of CRA's economic analysis and expert testimony, the jury awarded damages that were hundreds of millions of dollars left than what the plaintiff requested.
The third quarter marked the first full quarter with contributions from the IP team added in May and led by Chris Bakewell and Julia Rowe integration efforts have continued according to plan cross staffing of client projects and joint marketing efforts are well underway and we achieved an important milestone with the opening of our Houston office in August. This new location provides a crucial footprint to serve the highly active patent litigation market in Texas.
During the third quarter series, risk investigations and analytics practice was retained on a number of multidisciplinary investigations and disputes across the globe in the United States. The team was retained to help defend a global financial institution charged with fraud, collusion and the failure to detect red flags in $100 million Ponzi scheme.
The team provided expert testimony on the soundness of the bank's anti-money laundering policies and procedures in the context of applicable regulations and industry practices. At a time in question in Brazil was retained by a professional sports league to vet professional potential business partners for future events in the country in Europe is retained to quantify and analyze the flow of funds across various jurisdictions related to sanctioned products.
Compared to a strong third quarter of 2023. CRA's Life Sciences practice declined modestly year over year during the quarter, the team continued its work on client opportunity assessments, launch pricing, ongoing expert witness engagements and global policy work assessing the cost, the cost of rare diseases. Turning now to guidance through the first three quarters of fiscal 2024 on a constant currency basis. Relative to fiscal 2023 CRA generated total revenue of $509.4 million and a non-GAAP EBITDA of $65.6 million.
Achieving a margin of 12.9% reflecting the continued strength and quality of our business. We are reaffirmed we are reaffirming our revenue and profit guidance for full year fiscal 2024 on a constant currency basis. Relative to fiscal 2023 we expect revenue in the range of $670 to $685 million and non-Gaap even a margin in the range of 12.2 to 13.0% overall. I'm grateful to all my colleagues for their hard work during the third quarter as we help our clients address their most important challenges with that, I'll turn the call over to Chad Holmes and then to Dan for additional comments, Chad.

Chad Holmes

Thanks Paul. Hello everyone. I want to update you on our capital deployment during the quarter. We concluded the quarter with $24.5 million of cash and $60 million of borrowings under our revolving credit facility resulting in net debt of $35.5 million. These figures reflect $27 million of net payments made during the quarter to reduce borrowings under our revolving credit facility.
The third quarter of 2024 also saw net cash outlays for talent investments of $14.3 million and capital expenditures of $3 million. As a reminder, our capital expenditures are used to fund investments in our it infrastructure and in our offices to support our consulting teams. Consistent with prior commentary for the full year of fiscal 2024 we expect to spend 1$16 to $17 million on total capital expenditures.
We also delivered $2.9 million of dividends to our shareholders during the third quarter, 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 42¢ to 49¢ per common share.
This dividend will be payable on December 13th, 2024, to shareholders of record as of November 26th, 2024 year-to-date, we have returned $42.2 million to our shareholders consisting of $8.9 million of dividend payments and 33.3 million for share repurchases. We currently have $13.1 million available under our share repurchase program.
With that, I'll turn the call over to Daniel Mahoney for a few final comments. Daniel Mahoney.

Daniel Mahoney

Thanks Chad Homles as a reminder, more expansive commentary on our financial results is available in 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 2024.
In terms of consultant headcount, we ended the quarter at 978 consisting of 156 officers, 560 other senior staff and 262 junior staff. This represents a 3.6% decrease compared with the 1,014 consultant headcount reported at the end of Q3, fiscal 2023 Nongaap selling general and administrative expenses excluding the 2.4% attributable to commissions. The non-employee experts was 16.2% of revenue for the third quarter of fiscal 2024. Compared with 16.5% a year ago.
The effective tax rate for the third quarter of fiscal 2024 on a non-Gaap basis was 28.5% compared with 18.0% on a non-Gaap basis for the third quarter of fiscal 2023. As a reminder, the prior year 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 122 days compared with 110 days. At the end of the second quarter of fiscal 2024 DSO in the third quarter consisted of 78 days of build and 44 days of unbilled DSO typically follows a seasonal pattern with increases in the 2nd and 3rd fiscal quarters and a reduction in the fourth fiscal quarter. The fourth quarter, DSO reduction has ranged between 7% and 10% in each of the past three fiscal years based on the quality of our receivables and strength of our cash collections quarter to date. We expect a similar reduction in the fourth quarter of fiscal 2024.
We concluded the third quarter of fiscal 2024 with 24.5 million in cash and cash equivalents and a further 135.9 million of available capacity on our line of credit for total liquidity of $160.4 million that concludes our prepared remarks. We will now open the call for questions, Rob. Please go ahead.

Operator

Thank you at this time. We'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad.
A confirmation to indicate your line is in the question queue. You may press star two. If you'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 the star key one moment, please. While we poll for questions,

Question and Answer Session

Operator

Our first question comes from Andrew Nicholas with William Blair. Please proceed with your question.

Andrew Nicholas

Hi, good morning. Thank you for taking my questions.
First one, I wanted to ask good morning on talent and head count. Just wanted to get an update on how you're thinking about that trajectory going forward, especially in light of really good utilization quarter. Do you feel like you have enough people for the demand that you're seeing and, and within that?
And I think Paul you, you alluded to it briefly in the inflows and outflows of junior talent but looks like UCC and junior head count pick up seasonally in the third quarter. Didn't see that this quarter, anything to call out there or, or kind of where you sit in terms of the staffing issue.

Paul A. Maleh

Sure. I think in order to address the head count year over year head count change in the third quarter, I have to, you know, talk about the head count action taken during Q2 which impacted roughly about 80 consultants if you take that into account. There is actually an expansion of heads year over year in the third quarter. The reason I raised that is what we're trying to do is direct the consulting resources to areas that are busier that have a higher probability of growth in the weeks and months ahead.
And so, you, we are seeing growth in the areas that are driving the business, you see it in the utilization increase to 76%. The other thing, I will note that the legal and regulatory area of our portfolio has been growing at a faster rate than the management consulting area.
The management consulting area tends to run at a slightly lower utilization than the legal regulatory. And thus, we still have growth opportunities with the head count that exists because we can run legal and regulatory at a higher clip. We're active in the market. There's no reluctance to hire, but we're just trying to be prudent with the additions of that and the timing of those additions. But we see no restrictions on the expansion of heads in, you know, the quarters ahead.

Andrew Nicholas

Great. And, and maybe since you brought it up, I'll ask about management consulting. You know, hearing from some of your peers, seeing some headlines from, from privately held companies, it does feel like some of the more strategy focused work has been under pressure, year-to-date. Can you talk a little bit about kind of demand dynamics there? Whether or not there's been any sort of stabilization or further deterioration over the last couple of months in, in that part of your business.

Paul A. Maleh

Sure. I would say, let me talk about the two areas in our Life sciences practice and then our energy practice, which are very different stories for both. I would say Life sciences has been in the stabilization phase for several quarters. What we're seeing is more of a saw tooth pattern in their performance quarter to quarter. And really what we're waiting for is the opportunity to start executing on some of the growth opportunities that are resident in that practice. I don't have a shrinking practice. I have a practice that is sort of, you know, going along that saw tooth quarter to quarter.
So that comforts me. I would sure like us to get to the point where we are capitalizing on the growth opportunities that are resident in life sciences with respect to energy. It's been a wonderful period of time. We're seeing opportunities we are hiring aggressively to bring the right kind of expertise to our portfolio, and we're being rewarded in the marketplace with strong demand for those services. So by no means, am I seeing a contraction or even described as a stabilization in the energy practice? I'm actually seeing very strong growth in the current quarter and very Opportunist, very you know, optimistic for the quarters ahead for that practice.

Andrew Nicholas

Great.
Thank you very much.

Paul A. Maleh

Thank you, Andrew.

Operator

Our next question comes from Marc Riddick with the Sidoti & company. Please proceed with your question.

Marc Riddick

Morning,

Paul A. Maleh

morning Mark.

Marc Riddick

So, I was wondering, thanks for all the details as far as, what we're seeing, especially on the top line. I was wondering if you could talk a little bit about the cadence through the quarter, whether that was sort of, you know, consistent through the quarter or was it something that picked up? How should we think about how the, how the, how the quarter went by maybe a monthly basis or so?

Paul A. Maleh

Yeah, I have to admit, I'm a little bit scarred given what I experienced in Q3 of fiscal 2023 where we started with a strong July and then saw a deterioration this quarter, we started with strength and that strength continued through the month of August and through the month of September.
So I didn't see any kind of volatility in the performance. Strength led to more strength and we produced really attractive results in a quarter that is definitely impacted by high fringe rates, high vacation rates amongst our consulting colleagues.

Marc Riddick

Okay, great. And then I wanted to shift to and I trust for a moment and, and, and I appreciate the commentary that you had there. I was wondering if you could speak to. I mean, maybe what it is that we're seeing generally, is it just a matter of the things that you guys are working on or are larger in scale. Is it about being more complicated? These things taking longer, combination of all the above? Like, what is it that we're that we're seeing now versus maybe the last few years?

Paul A. Maleh

You know, I wish I can say it's because of the strategic decisions of the CEO. But quite frankly, my colleagues in the antitrust and competition economics practice are damn good. They generally amaze me quarter after quarter with the performance. Because you're talking about the largest practice at CRA who is able not just to grow with large dollar increments, but still at their scale, able to grow significantly on a percentage basis.
And they're doing it across the M&A marketplace and the antitrust, their projects are larger or longer lived, but I would be remiss in not stating that they're also replenishing the pipeline constantly. That is that is driving that growth. It is not merely from the expansion of older projects or those older projects continuing. Yes, we benefit from that, but it's just again, similar to the company as a whole. It's just strength, building on strength. What they're doing is exceptional and I don't want to just brush over it as, oh gee, they grew 30% in one quarter. That is really remarkable performance.

Marc Riddick

Very, very much so. And maybe we could touch a little bit on you, you made commentary around lead flow, maybe we could touch a little bit on maybe what you're seeing as far as the conversion and, and you know where that is relative to historical norms.

Paul A. Maleh

Sure. So last year, we had very last Q3 of fiscal '23 we had good lead flow. Where we fell short is on the conversion of that lead flow to new generating project. This year, we were able to still grow lead flow by 8%. But the big change is we return to our historical norms of converting roughly two thirds of our leads into revenue generating projects. So, we're pretty pleased with that, the return to historical norms of roughly two thirds.
We've seen that now for about 12 months running. It started in Q4 of fiscal '23 and continued in Q1 and Q2 and Q3. So we're pretty pleased with that. It gives us, it gave us the confidence to increase guidance at the during the Q2 fiscal '24 call. And we've seen nothing to make us regret that increase. We reaffirm guidance, we love the trend that we're on both on the profitability and on the revenue.

Marc Riddick

Okay. And then the last one for me, I'm assuming is there anything that we should be thinking about for fourth quarter relative to any seasonality blips, or you know, you know, I would imagine there would be sort of the normal holiday seasonality being taken into account with the maintaining the guidance and the like. But are there any particular blips that we should be aware of or anything out of the ordinary?

Paul A. Maleh

Sure, I sure hope not. Because again, we've enjoyed consistency month to month, quarter to quarter. And I see no indication sitting here today that that is going to change in the coming weeks. People are going to take vacations, spend time with their family as they should. But I feel good about where our service portfolio stands today.

Marc Riddick

Excellent. Thank you very much.

Paul A. Maleh

Thank you. Mark.

Operator

Our next question comes from Kevin M. Steinke, with Barrington Research. Please proceed with your.
Question.

Kevin M. Steinke

Hi, good morning and congratulations on the continued strong results.

Paul A. Maleh

Thank you, Kevin.

Kevin M. Steinke

Great. So I wanted to start out by asking about this trends in attrition. I know, you know, that you have seen lower than normal attrition at the junior consultant ranks. Which kind of contribute to that head count action you referenced just wondering if you've seen kind of a more normalization there in attrition rates or, you know, at least a change from maybe where it was, you know, a couple a few quarters ago.

Paul A. Maleh

Sure. This is always a funny topic for me to address because I embrace having low attrition. But the challenge is you're trying to plan for the future, you're trying to plan for your hiring goals for the quarter and year ahead. And having an outlier in those projections just makes it a bit more challenging with it.
But our voluntary attrition rates are still trending on the low side for the company as a whole, we are planning accordingly. And I think we've done a pretty good job with that management as you can see through the utilization rate.
But I haven't seen anything start to turn in terms of an elevation of those voluntary attrition rates to date. Perhaps if the labor market begins to tighten, we will start seeing a more normalization. But it's nice to see that cr A is still a destination of choice for top consulting talent.

Kevin M. Steinke

Okay. Got it. Thanks. That's helpful. And you know, I know you covered this pretty extensively in, you know, other settings, particularly your most recent Investor Day. But given you know, the US election right around the corner here, can you maybe just review and refresh for investors, thoughts on, you know, the regulatory environment, you know,
Potential impact on demand trends for your business and in the light of you know, potential administration change, I know, you know, there have been some more stringent guidelines put in place and you know, with regard to M&A and what have you. So just maybe if you could review all that, that would be helpful.

Paul A. Maleh

Sure. So, there are definitely positive demand drivers and offsets of those demand drivers associated with each potential administration here. I think we have; the firm has operated successfully under both these administrations. So, I think we're going to, we are well positioned; to adjust as consulting firms have to do constantly, you have to adjust to the needs of your clients.
And I think the strength of the overall service portfolio is going to allow us to do that. I feel, you know, not necessarily ill prepared, but I'm just not informed enough to sit here and tell you M&A will go up and I trust will go down or vice versa. Who knows? Who knows? But it will be that kind of mix of demand impacts and I think we'll do just fine in the quarters of head ahead, irrespective of who's elected President.

Kevin M. Steinke

Okay, sounds great. Well, again, congratulations. I'll turn it back over.

Paul A. Maleh

Thank you, Kevin and thank you to everyone for participating.
You know, we appreciate your time and interest in CRA. We're going to be participating in meetings with investors in the coming weeks and months and we look forward to updating you on our progress on our fourth quarter call early next year with that, that concludes today's call. Thanks again to everyone for joining us today.

Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.