Chad Holmes - CFO, EVP & Treasurer Paul Maleh - CEO, President and Director.

Timothy McHugh - William Blair & Company Marc Riddick - Sidoti & Company.

Good day, everyone, and welcome to Charles River Associates' First Quarter Fiscal 2018 Conference Call. Today's call is being recorded. Today's release and prepared remarks for CRA's Chief Financial Officer are posted on the investor relations section of CRA's website at crai.com.

With us today are CRA's President and Chief Executive Officer, Paul Maleh; and Chief Financial Officer, Chad Holmes. At this time, I would like to turn the call over to Mr. Holmes for opening remarks. Please go ahead, sir..

Thank you, Brenda.

I would like to remind everyone that the statements made during this conference call, including reaffirming guidance on revenue and non-GAAP EBITDA margin for fiscal 2018; or any other statements concerning the future business, operating results or financial condition of CRA, including those using the terms expect, believe, continue, trend, estimate 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, and actual performance and results may differ materially from those expressed or implied in these statements due to many important factors.

Additional information regarding these factors is included in today's release and in CRA's periodic reports 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 on this call and certain measures presented on a constant currency basis.

Everyone is encouraged to refer to today's release for a reconciliation of these non-GAAP financial measures to their GAAP comparable measures and descriptions of the calculation of EBITDA and measures presented on a constant currency basis. Let me now turn it over to Paul for his report.

Paul?.

Thanks, Chad. And good morning, everyone. CRA delivered strong results for the first quarter of fiscal 2018 as we continued to successfully execute our strategy to generate broad-based profitable growth. These broad-based contributions from our practice areas have also led to our consistency during the past several years.

For example, CRA has now reported year-over-year revenue growth for each of the past 9 quarters and 14 of the past 17 quarters. While this doesn't guarantee future performance, it does demonstrate the overall strength of the portfolio. I'm also particularly pleased that this quarter's results were driven primarily by organic growth.

For the first quarter, legal and regulatory and management consulting services each grew more than 10% year-over-year. More specifically, our performance was driven by double-digit revenue growth in our Antitrust & Competition Economics, Energy, Forensic Services and Life Sciences practices.

These exemplary practices represent approximately 75% of CRA's first quarter revenue. We also experienced strength across geographies, with revenues from North America and international operations growing 9.1% and 30.7% year over year, respectively.

This strong top-line performance drove higher profits, as non-GAAP EBITDA grew approximately 50% and non-GAAP net income more than doubled relative to the first quarter of last year. Looking more closely at our performance.

The excellence of our Antitrust & Competition Economics practice continues to shine, as the practice posted its highest quarterly revenue ever. This exceptional performance is, of course, tied to the quality of our consultants both here in North America and in Europe.

For example, for the third time in 6 years, a CRA-affiliated economist was named Economist of the Year by Global Competition Review, one of the world's leading antitrust and competition law journals and new services. CRA Vice President Anne Layne-Farrar was named the 2017 Economist of the Year.

Recent award winners include CRA Vice President and Competition Europe Practice Leader Cristina Caffarra; and Senior Consultant to CRA, Carl Shapiro. We announced during the first quarter of CRA that CRA consultants advised counsel to Agrium and Potash Corporation of Saskatchewan as they sought regulatory approval of their $36 billion merger.

CRA economists provided analyses related to market definition, import-supply response and the efficiencies expected from the merger. The 2 firms announced the successful completion of the merger of equals on January 2, 2018, and the formation of a new company, Nutrien.

The merger was reviewed by regulators in the United States, Canada, China, India and Brazil. Internationally, CRA also advised Axel Springer SE throughout the French competition authority review of its takeover of Concept Multimédia and Logic-Immo brand Spir communications.

Axel Springer SE, a leader in the media and digital sectors, operates SeLoger.com real estate classified ad portal in France.

After reviewing in-depth economic analysis presented by CRA with a specific focus on switching analyses based on market-wide data at the customer level, the French competition authority authorized the transaction without remedy.

The Energy practice continues to grow in its 3 core areas of strategic advisor consulting, utility advisory work and litigation support.

The group's organic growth has been driven by regulatory and commercial support for M&A activity, increased demand for international arbitration and litigation services and advisory support for utility and industrial clients.

2 significant projects involved providing commercial analyses and testimony on behalf of a utilities renewable development efforts and also intensive market power analyses to support a client's proposed acquisitions.

Our Forensic Services practice posted the largest total dollar and percentage revenue growth of any practice at CRA in the first quarter. Demand for forensic services continues to grow as clients seek independent assistance in response to allegations of fraud and misconduct.

In the areas of cybercrime, we assisted a national health care company that had been victimized by a sophisticated e-mail phishing campaign. In the area of forensic accounting, we helped a major investment company investigate and respond to whistleblower allegations that investors were being misled. Turning to the Life Sciences practice.

Projects with global perspective were among the largest for this quarter. The practice continues to be involved in global launch projects focused on pricing and market access strategy for products anticipated to reach blockbuster status.

For our projects focused on rare diseases, we are developing a toolkit to help a multinational pharmaceutical company uncover patients suffering from a variety of rare diseases around the world.

The litigation sector of the practice has been engaged to assess the value allegedly misappropriated through trade secrets for the development of products in a new category of immune oncology treatments. Congratulations to these practices, and thanks to all of the CRA contributors for delivering such an outstanding quarter.

For fiscal 2018, on a constant currency basis relative to fiscal 2017, we are reaffirming our previous guidance of revenue in the range of $380 million to $392 million and non-GAAP EBITDA margin in the range of 8.8% to 9.8%.

While we are pleased with our performance in the first quarter of fiscal 2018 and the positive trends we're seeing in project originations across the firm, we remain mindful that uncertainties around global economic conditions can affect our business. With that, I will turn the call over to Chad for a few additional remarks.

Chad?.

Thanks, Paul. As a reminder, more expansive commentary on our financial results is available on the investor relations section of our website. Before we get to your questions, let me provide a few additional metrics related to our performance in the first quarter of fiscal 2018.

In terms of headcount, we ended the first quarter with 647 consulting staff, which consisted of 131 officers, 361 other senior staff and 155 junior staff. This is a net increase of 20 consultants or a 3.2% growth compared to the end of the first quarter of fiscal 2017.

Non-GAAP selling, general and administrative expenses as a percent of revenue, excluding the 3.0% attributable to commissions to nonemployee experts, was 18.2% for the first quarter of fiscal 2018 compared with 18.1% a year ago.

The effective tax rate for the first quarter on a non-GAAP basis was 19.4% compared with 38.2% on a non-GAAP basis for the first quarter of 2017. The significant decrease in our effective tax rate was driven by the recently enacted lower U.S. statutory tax rate, coupled with the impact of the accounting for stock-based compensation.

Going forward, we currently estimate our fiscal 2018 full year non-GAAP effective tax rate will be in the range of 28% to 30% before taking into account discrete items such as the impact from stock-based compensation, which could cause volatility in our effective tax rate from quarter to quarter.

Based on recent history, the tax impact arising from stock-based compensation has been greater in the first and fourth quarters of our fiscal year, which aligns with the vesting schedule of prior share-based awards. Turning to the balance sheet.

DSO at the end of the first quarter was 106 days compared with 101 at the end of the fourth quarter of fiscal 2017. DSO in the first quarter consisted of 67 days of billed and 39 days of unbilled, compared with 69 days of billed and 32 days of unbilled in the fourth quarter of fiscal 2017.

We concluded the first quarter of fiscal 2018 with $10.9 million in cash and cash equivalents, with a significant portion residing internationally. As a result, in the first quarter, we borrowed on our line of credit in the amount of $10 million.

The first quarter is typically a period of lower cash levels, as it coincides with the timing of a significant portion of our annual bonus outlays. Turning to our capital allocation strategy.

We remain committed to maximizing long-term shareholder value by reinvesting in our business and returning capital through both share repurchases and quarterly dividends.

During the first quarter of fiscal 2018, we returned $9.8 million of capital to our shareholders, consisting of $1.5 million of dividend payments and $8.3 million for share repurchases of approximately 163,000 shares at an average price of $51.13 per share. That concludes my prepared remarks.

Brenda, we would now like to open up the call for questions..

[Operator Instructions]. Our first question comes from the line of Tim McHugh from William Blair..

Yes. I just want to ask about margins. I guess obviously continued strong top line. A lot of it flowed through. I guess, if I just stared at -- in a model, it seems like forgivable loans as a percentage of revenue were down quite a bit.

So that's the one thing that stood out to me, so can you talk about that? And from an ongoing expense, is this -- has something changed with your approach to forgivable loans? Or was it just at different times in the amortization life of those? And what should we kind of expect going forward? And then anything else related to margins and how the revenue is flowing through to profits?.

Sure. Thank you, Tim. With respect to margins, the margin was in line, actually a little north, of what we thought guidance would be at this stage of the year. We actually think there's upside potential in our margin as the year progresses, as long as we're able to continue to deliver this kind of revenue strength at CRA.

With respect to any kind of philosophy or action on forgivable loan, forgivable loans have always been a vehicle of acquisition capital, so it is opportunity driven. As we see opportunities to make our portfolio stronger by recruiting revenue generators, we're going to do that.

If forgivable loans are the vehicle for that acquisition capital, we're going to use it. Sitting here today, I don't foresee the level of amortization to change in the short to medium term.

There may be quarter-to-quarter fluctuations in that, but we are still reinvesting in the business, both organic and inorganic initiatives, and returning capital to shareholders. So I wouldn't say we had a change in expectations for the remainder of 2018..

Is this a -- if I wanted to try and tie two data points together, I guess the C1 acquisition -- and the IQVIA -- I guess I'd call that an acquisition.

Is -- together with a little bit of a decline here in forgivable loans, at least expensed, is that -- I mean, are you shifting in how you're acquiring talents? Are you seeing it more attractive to go the route of the acquisitions than paying the forgivable loans? Or am I tying two things together that aren't connecting?.

First, C1 Consulting was clearly an acquisition for CRA, as was the group purchase of our colleagues in the Life Sciences practice out of Europe. Again, they're opportunity driven.

There is nothing as part of our capital budgeting or strategic planning that states, "I'm going to go more of a traditional acquisition accounting route of purchases versus forgivable loans." If the opportunities arise for us to acquire the scaled entity and bring them on through traditional purchase accounting, we're going to do so.

So no apprehension to either vehicle, so I wouldn't say there is a tie or shift in our strategic focus, Tim..

Okay. And then the Forensic Services strength, is there anything you can, I mean, tie that to? Is it big cases? Is it some specific type of case activity that you're seeing occur more often, new hires ramping up? Can you give us a little more color on what's driving that area? Because I'm thinking that, that was the strongest area..

Yes. I'm going to start with the leader of the practice, Kris Swanson, who joined us probably, was it almost -- a little more than 2.5 -- about 2.5 years ago. And he came with a core group of people, Bill Hardin and Scott Solomon.

And that core group has recruited successfully and has done a great job in not only ramping up their personal books of business but helping the individual recruits ramp up their business, so for us right now the biggest constraint is can we continue to get qualified candidates to help bolster that practice.

We are seeing great response to our services on the demand side. Clearly as you read in the press, there is a lot of concern about cybersecurity and firms protecting their IP through these kinds of measures. And so we're clearly seeing a pickup there, not necessarily one large case but a continued flow of opportunities.

And we're also seeing matters on the investigation side not necessarily tied to the cyber piece. So I was fortunate to hire some great leaders, and they're doing a really effective job in the marketplace growing from really a zero base to now becoming a much more substantive practice at CRA..

Okay. And then last one, I guess, just Chad. Did -- I'm sorry.

Did you say, tax rate, given the kind of stock benefits, you've had, what you expect at this point then for the year?.

Yes, Tim. This is Chad. What I said was for the full year we are still expecting a rate to be in the 28% to 30% before taking into account the effects of the stock-based compensation on our taxes..

So it's not included, all right. So okay. So lower if we roll that benefit in..

Sure, yes..

[Operator Instructions]. Our next question comes from the line of Marc Riddick with Sidoti..

I wanted to start with some of the -- and you certainly laid out some of the wins and the activity that you saw during the course of the first quarter. So that was very helpful, going into some of the specific engagements.

I was wondering if there was any sort of a general thread or theme that you saw play out that maybe -- was maybe different than what you were expecting to see coming into the quarter or maybe different from original planning..

If I were to say one or two areas that we've been pleasantly surprised, they're both really pleasant surprises in that they've built already from a position of strength. So if I go back to Q3 and Q4, I was already seeing really substantive contributions from ours Forensic Services practice and our Competition Europe practice led by Cristina Caffarra.

And from that base, we just continued to see demand build for those two areas. For Forensic Services, I highlighted some of the areas for Tim McHugh. And in our competition Europe area, it's really been very active in the antitrust space and also active on really broader-based international mergers. So they exceeded already high expectations.

So those are what I would say probably the two strongest threads of positive surprises in the quarter..

Okay. I was also wondering around if you can sort of comment on what you're seeing from a pricing dynamic. Are we looking at -- I mean there seems to be very strong demand in multiple areas with double-digit growth.

I just wanted to get a sense of is some of the pricing strength more to -- more tied to the experts that you currently have that are engaged; or whether or not there's any particular price power, as opposed to increasing rates over time..

Yes, I couldn't say that we have pricing power. What I can say is we continue to see clients demand value for the dollars being expended, either on the legal regulatory side or on the management consulting side.

So our prices, we've been able to maintain our prices and modestly increase them with the start of this year, because we're able to deliver the value that clients are demanding.

So I wouldn't say it is a supplier's marketplace in which we are driving up prices, but I've been pleased with the quality of the portfolio and that we've been able to sustain prices and actually build slightly with the rate increases that went into effect at the beginning of 2018..

Okay.

And then from a timing standpoint of compensation increases and things like that, are you getting a sense that the activity that you're seeing for maybe some of your more junior folks is picking up from a utilization level of less-senior talent, if you will, and sort of keeping them engaged and busy? And what these -- the growth of these assignments mean for low -- well, less-experience-level folks that you're seeing..

Sure, sure. My colleagues never say we're paying them too much money, and that's one of the prices you pay when you're recruiting the best and brightest. So the pool we're recruiting from has a lot of different options other than CRA, so we are having to pay full, competitive wages.

We're pleased that we're able to add the quality individuals, as you probably noticed, in our headcount in the past couple of years. We have been trying to improve on the staffing leverage that exists, meaning trying to hire more consultants coming straight from undergrad to better right-size our delivery model.

And there's been modest increases in the prices, but I guess those increases are commensurate with what we're seeing in the market as a whole. They haven't been disproportionate to our experiences, say, over the last three to five years..

Okay. And then one last thing for me, I was wondering. And Paul, you've mentioned before kind of what your views are on where utilization can go longer term. And I was wondering if you could sort of update your thoughts on that and how we should be thinking about that given the strength that we're seeing on the top line..

Sure. If you look at our utilization for the last five years, I think it's been -- it almost looks made up in that it's been pegged at 74%, 75% year after year after year. That is not happenstance.

We actively manage our portfolio of consultants to try to deliver productivity at that rate, and that's because of what we're seeing in the marketplace for demand. We think we can best provide our clients the value being demanded. We can best chase opportunities for growth at those levels.

Could I increase utilization to a higher rate? Yes, I do believe I can do so in today's demand environment, but I think you're going to give something up with that effort. And now it's really going to be more top line expansion.

So I think operating in the mid-70s creates great value for our clients, creates great value for the shareholders, so I do not envision changing that target range in the foreseeable future..

Thank you. At this time, we have reached the end of the Q&A session. I would like to turn the conference back to Mr. Maleh for any closing or additional remarks..

Thank you, Brenda. And again, thanks to everyone for joining us today. We appreciate your time and interest in CRA. We'll be getting out to meet with investors in the coming months, and we look forward to updating you on the progress next quarter. And let me conclude by again thanking all my colleagues here at CRA.

We're so happy with the quarter, and we're so happy with the continuation of the momentum that all of you have observed now for the last number of years. So with that, that concludes today's call. Thank you, everyone..

Ladies and gentleman, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..