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 www.crai.com. With us today are CRA's President and Chief Executive Officer, Paul Maleh; 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 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 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 for his report. Paul.

Thanks, Dan, and good morning everyone. Thank you for joining us today. Against a 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 was an unusual departure from the prior two quarters in 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 new record highs in revenue, while our profitability measured by non-GAAP EBITDA, net income, and EPS increased at multiples of our 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. 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 headcount 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 consultant headcount surged 11.3% year-over-year. Our year-to-date attrition in 2023 is historically low,…

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 reflect $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 $700,000 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 $0.36 to $0.42 per common share. This dividend will be payable on December 8, 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 repurchases. 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 2023. In terms of consultant headcount, we ended the quarter at 1,014, consisting of 155 officers, 529 other senior staff, and 330 junior staff. This represents an 11.3% increase compared with the 911 consultant headcount 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 of fiscal 2023, compared with 15.8% a year ago. This quarter's 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 2023 with $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 29, at the Fairmont Copley Plaza hotel in Boston to discuss its 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 & 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 now like to open up the call for questions.

Thank you, sir. [Operator Instructions]. And the first question comes from the line of Andrew Nicholas with William Blair. Please proceed with your question.

Hi, guys. Good morning. I appreciate you taking my question.

Good morning.

I wanted to start with utilization. Bit of an aberration from your historical trends and down sequentially. Was hoping you could unpack that a little bit. I would imagine, you have some new grads that come in pressuring that utilization. You 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 relatedly, if you have any thoughts on the expected timeline for recovery to kind of the historical rates that you've shown in the low to mid-70s?

Sure. First of all, good morning, and thanks for the question, Andrew. We, throughout the year as we've commented, our attrition rates have been at historically low levels. Because of that, we have been slowly increasing our consulting headcount 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, through normal operating procedures at CRA, 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. But right now, given the head fake that I've had during Q1 of ‘23, of Q2 of ‘23, and now into the third quarter, I'm a little uncertain on how quickly normal revenue flows will materialize. So, I'm probably looking towards the middle of 2024 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, really strong growth internationally, which would obviously imply, 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. or vice versa in the coming months and quarters? Thank you.

No, I don't think there's anything overriding that would say international should outperform North American operations going forward. We – 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. It was a very soft quarter in which we saw existing matters, slow or have delays in the work. We saw 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 trough that we experienced in August. That slowness or that general trend existed across our portfolio, both across services and geographically.

And maybe that leads me to one last question, if I could sneak it in.

Sure.

Is your expectation for fourth quarter that it's more like September, or 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 and guidance. Thanks Paul.

Yeah, given how accurate my expectations have been of late, no, we are expecting more of a September-looking month going forward than an August month. August, quite frankly, over the past decade, I haven't seen many periods 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. I wanted to just start off by digging a little bit more into what changed since your last call that led to the changed revenue and margin outlook for the full year. It sounds like, perhaps the conversion rate into new projects was less than you might have expected, and you attrition was lower than you expected. Is that – are those the two main contributing factors to the change in the outlook?

First of all, good morning, Kevin. The attrition, we saw it coming, right. We've been talking about low attrition rates throughout fiscal 2023. So the fact that they didn’t reverse course in the third quarter was not as much of a surprise, 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 on that. So we weren't getting any new projects coming in. New projects are essential, particularly to try to get our new consulting staff 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 implies then that the conversion rate has picked up a bit in September. Is that correct?

The conversion rate in September, in 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, 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 to new markets. We are not trying to introduce ourselves to new client bases. 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 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 it 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, that's fair. So that's interesting, because that kind of leads into my next question. You mentioned that there's no real clear explanation for the slowdown in conversion rates. I think you might've 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, M&A transactions being delayed or maybe that's a part of it. But no, no clear trends or themes behind the conversion rate slowdown, I guess.

It is broad based. The other thing we can note, that I made reference to, to some of my prepared remarks, the asset is intact, meaning there's 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 M&A opportunities. We clear conflicts and then we do not see the case proceed, period. By that I mean, we – 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 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 obviously, as you mentioned there, the asset is intact. Really, you're not losing market share. You've still performed quite well on a relative basis year-to-date. And so, that's all just an indication of – that the business is in good shape for the long term. I think that's evidenced by the dividend increase you announced. So, maybe just talk about, that dividend increase and how it perhaps relates to your 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 redistributions 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 proportions 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 distribution shares between share repurchases and dividend payments.

Okay, understood. Well, thanks for the comments. I will turn it over.

Thank you, Kevin.

And the next question comes from the line of Marc Riddick with Sidoit. Please proceed with your question.

Hi, 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 major projects to sort of think about it from a timing perspective?

We didn't have any major projects end. 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 go 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 consultant teams are back at it.

Okay. And I was wondering if you could share some thoughts as to maybe what you're seeing on things that are sort of – 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, and whether or not any sort of government delays or anything like that you think are having an effect on what you're seeing.

Yeah, there were – clearly have been an impact from government delays, if we did have a government shutdown, in terms of the amount of surplus capital they have to run their important cases of 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 have been 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 seeing anything different than necessarily what you're 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 changed in terms of what the impact of technology or AI specifically will have on our business. There's been lots of technological changes 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 confidentiality and privacy of the information we are allowed to work with.

Great. And then I was wondering if you could talk a little bit about the pricing environment. I mean it certainly seems as though nothing's gotten any less expensive. But I was wondering if you could talk a little bit about maybe the pricing dynamics that you're seeing and what you were expecting maybe going into next year.

Sure. We're not seeing any kind of shift on the pricing environment. The rate increases that we had put in effect at the beginning of ‘23 are sticking in large part on long – the long run projects are also being adopted 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, increasing information flow, making sure our clients are not surprised and most importantly, continuing to deliver the exceptional quality that clients have come to expect.

And one more, I'll toss in if I may. Is there sort of a expectation that we're just maybe in a bit of a period of elongated sales cycles or with that client caution that you're seeing or are you expecting sort of a reversion to the mean there going forward? Thanks.

Yeah, I'm hesitating, because part of the reason that, I – we had the 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 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. Maleh 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.