Paul Maleh - Chairman & CEO Chad Holmes - CFO.

Trevor Romeo - William Blair Marc Riddick - Sidoti & Company.

Good day, everyone, and welcome to the Charles River Associates Second Quarter Fiscal 2018 Conference Call. Today's call is being recorded. Today's release and prepared remarks from 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 Officers, 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, Donna.

I would like to remind everyone that the statements today during this conference call, including those raising guidance on revenue and reaffirming guidance on 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, committed, 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 including our 10-Q filed this morning 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 excellent results in the second quarter of fiscal 2018. Revenue grew by 13% on an entirely organic basis, and non-GAAP net income and non-GAAP EBITDA grew by 40% and 21%, respectively, compared with the second quarter of last year.

We have now reported double-digit year-over-year revenue growth for each of the past seven quarters and year-over-year revenue growth for 15 of the past 18 quarters. Our strong performance during the past several years is built on contributions across the entire portfolio.

Today, we highlight legal and regulatory services, which grew 26% year over year. This growth was led by Antitrust & Competition Economics, Finance, Forensic Services and Labor & Employment practices.

Not to be outdone, our management consulting practices of Energy and Life Sciences also contributed to this quarter's revenue growth, as each practice extended its streak of year-over-year quarterly revenue growth to two years.

In addition, we continued to demonstrate strength across geographies with revenues from North America and international operations growing 14% and 9% year over year, respectively. Looking more closely at our performance.

The Antitrust & Competition Economics practice enjoyed another strong quarter with balanced contributions from merger-related work and antitrust disputes. For example, the practice has been assisting parties in a major merger in the real estate sector involving review by state, national and Canadian antitrust authorities.

The practice also is preparing expert testimony in a private litigation project in the healthcare sector as well as assisting in the U.S. merger review of 2 firms providing consumer retail products.

Extending internationally, CRA is working for Uber and Grab in relation to Grab's purchase of Uber's ridesharing and food delivery assets in Southeast Asia. The Finance practice continued to be active on merger-related litigation in Delaware Chancery Court and federal courts including on several appraisal actions.

These matters generally relate to questions of fair value and damages. Example industries include consumer products, energy, real estate and insurance. Our Forensic Services practice, once again, posted the largest total dollar and percentage revenue growth of any practice in the second quarter.

The practice provided forensic accounting solutions to a South African mining company, which has made an acquisition in the U.S. and needed CRA's help validating the financial statement representation of the seller.

Our consultants provided forensic accounting, e-discovery and digital forensic solutions to an investment manager who retained us to investigate whistle blower claims of fraud, investor harm, retaliation and deficiencies in its risk management processes. Our findings were presented to its board, as well as to the U.S.

Securities and Exchange Commission. Turning to Life Sciences. The practice has been helping pharma and biotech companies defend their business from new biosimilar competition in such areas as oncology, immunology and diabetes.

In addition, consultants have been engaged in patient journey work in respiratory and immunology therapeutic areas that leverage real-world data analytics and primary market research to inform our clients' launch, planning and commercialization strategy in North America and Europe.

Finally, the Energy practices' second quarter growth was 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. We are excited by our record first-half revenue and by trends in lead flow and new project originations.

As a result, on a constant-currency basis relative to fiscal 2017, we are raising our fiscal 2018 revenue guidance to the range of $398 million to $406 million from $380 million to $392 million, and reaffirming our guidance for non-GAAP EBITDA margin in the range of 8.8% to 9.8%.

While we are very pleased with our first half performance, we remain mindful that uncertainties around global economic conditions and the short-term challenges associated with the integration of incoming consultants as we continue to grow headcount. With that, I will turn on the call over to Chad for a few additional comments.

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 second quarter of fiscal 2018. In terms of headcount.

We ended the second quarter with 628 consulting staff, which consisted of 127 officers, 343 other senior staff and 158 junior staff. This is a net increase of 28 consultants or 4.7% growth compared with the end of the second quarter of fiscal 2017. Sequentially, we experienced a net decline of 19 compared with the end of the first quarter of 2018.

As a reminder, we often see a drop in consultant headcount during the second quarter as a portion of our junior staff return to school and the majority of our summer hires from campus have not yet arrived.

By the end of the third quarter, the majority of our campus hires will have joined CRA and we expect to see our consultant headcount increase 6% to 8% compared with the third quarter of 2017.

Non-GAAP selling, general and administrative expenses as a percentage of revenue, excluding the 3.3% attributable to commissions to non-employee experts, was 19.2% for the second quarter of fiscal 2018 compared with 18.6% a year ago.

The effective tax rate for the second quarter on a non-GAAP basis was 27.5%, compared with 36.7% on a non-GAAP basis for the second quarter of 2017. The decrease in our effective tax rate was driven by the lower U.S. statutory rate, coupled with the impact of the accounting for stock-based compensation.

We continue to 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. Turning to the balance sheet.

DSO at the end of the second quarter was 107 days, compared with 106 days at the end of the first quarter of fiscal '18. DSO in the second quarter consisted of 74 days of billed and 33 days of unbilled, compared with 67 days of billed and 39 days of unbilled in the first quarter of fiscal 2018. 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 second quarter of fiscal 2018, we returned $13.5 million of capital to our shareholders, consisting of $1.4 million of dividend payments and $12.1 million for share repurchases of approximately 216,000 shares at an average price of $55.99 per share.

We concluded the second quarter of fiscal 2018 with $9 million in cash and cash equivalents, with a significant portion residing internationally. At the end of the second quarter, we had an outstanding balance on our line of credit in the amount of $20.8 million.

Since the end of the second quarter, as disclosed in the 10-Q that we filed this morning, we have paid down $10.8 million of this outstanding balance.

Finally, earlier today, we announced that our Board of Directors declared a quarterly cash dividend of $0.17 per common share, payable on September 21, 2018, to shareholders of record as of August 28, 2018. That concludes my prepared remarks. Donna, we would now like to open up the call for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Tim McHugh of William Blair..

Good morning it's actually Trevor Romeo, on for Tim. Thanks for taking the call. So first, I think you mentioned in the prepared remarks that you are watchful of some uncertainty in the global economy, and economic data has been a little bit choppier in Europe the last couple of months.

So I just wanted to ask, how is demand in the pipeline for management consulting in Europe?.

If I look at demand across both lines of businesses across geographies, what we're seeing is just positive trends with the entire portfolio, so I'm not seeing shifts in terms of weakening demand in Europe, strengthening in North America.

When I talk about optimism about trends, of project lead flow and new project originations, that really applies to both North America and to Europe legal regulatory and management consultant..

Okay. Got it. And then the 79% utilization is, I think, the highest we've seen in a few years.

You think you can continue to run at that level sustainably?.

I could get sort of a wise answer -- yes, I can -- but we don't want to, in that we believe the value-maximizing, utilization run rate for this firm is in the mid-70s.

That way we can ensure providing our clients with the quality of services they've come to expect from CRA, we can pursue all opportunities that exist in the marketplace and we could also reinvest in our people.

So we have, given what we're seeing in the marketplace, we have targeted mid-70s utilization as the value-maximizing point, and that's really what we try to run at..

Okay. That makes sense, and then just one more for me. A bit in the weeds, but based on the 10-Q, it looked like the commissions to nonemployee experts was up a fair amount in the quarter.

I don't know if there's anything to call out there, but maybe if you could just give any detail on what's behind that?.

Sure. Yes. It's up to 3.3% for the second quarter of '18. I think that compares to 2.4% for the second quarter of 2017. The main driver for the increase is really the 26% growth in the legal regulatory side of the portfolio year over year. Outside experts in academics that we regularly work with tend to largely reside on the legal regulatory side.

So as you see a sharp increase in the revenue on that side of the house, you will also see an increase in the performance payments -- typically see -- as much of the revenue is contributed by those individuals..

[Operator Instructions] Our next question is coming from Marc Riddick of Sidoti & Company..

I wanted to touch -- maybe if we could start with utilization, going back to that.

I was wondering if you could give some thoughts or how that pacing went through the quarter, did it -- as far as progressing on a monthly basis, did it accelerate through the quarter or no?.

I think, as we were putting together our comments for this call, the theme that we kept going back to is just consistency, in terms of the consistency of the aggregate performance of this portfolio has delivered now for the last several years. And the reason I begin with that introduction, Marc, is that same applies to the utilization.

I'm not seeing large volatility even within our quarters on the utilization. Our consultants are busy providing services and that tends to -- has existed throughout the quarter.

And I think a big part of that is the lead flow has been a growing as we have experienced year over year, quarter over quarter and the new projects are driving our ability to effectively staff our consultants on..

Okay. Great. I appreciate the color on that, as well as the color that you had in the initial comments, and I really appreciate the fact that you went through so many of the opportunities and sort of where it was coming from.

With that being said, I was wondering if you could sort of circle back to -- with all of the growth now being organic, wondering if you could sort of give us an update on your views as far as the acquisition pipeline, maybe some of the areas that you might be looking to add and take advantage of?.

Sure. The way we've always looked at our inorganic growth as -- any time we have opportunities to enhance the quality of our portfolio, we're going to take it. I don't have any kind of growth expectations that are tied to inorganic contributions when I'm looking for ways to enhance the quality of the portfolio.

That enhanced quality is going to deliver higher quality service to our clients, and the financial results will follow. For the last few years, I've called out several of our practices in terms of their exceptional performance.

And I'm saying that because if I have opportunities to invest in any one of those practice areas, I will take it, right? It all depends on is it going to make us better in terms of the quality of that portfolio. So we've done the acquisition in the Life Sciences sector.

We've added a lot of senior individuals across many of our practices over the last several years, and we're continuing to look for opportunities. Our pipeline is rather rich.

We're trying to screen through these candidates as effectively as we can, but nothing imminent on the M&A front for CRA's acquisitions, but those opportunities are rather broad-based for us..

Okay. Great. So now it's been a little over a year since the C1 acquisition in the Life Sciences, which is one of the callouts of -- well, one of the many callouts of the initial prepared remarks. So I was wondering if you could sort of give an update on how that's progressing. Certainly, it seems to be progressing very well on the top line.

I'm wondering how it's progressing as far as rightsizing and real estate and all those things..

Sure. It's actually almost been 18 months since that acquisition came on. They joined us, I believe, in the beginning of February of 2017. Around that same time, we were also adding significant staff in Life Sciences on the European side of the operation. So a lot has been going on with respect to that practice.

This quarter we didn't spend a lot of time talking about Life Sciences, but that's largely because we had a 26% growth rate on the legal regulatory side, and I think that warranted the majority of our discussion here.

With respect to the integration, integration, when you're taking a practice and in effect, doubling, tripling it in a period of 18 months, is ongoing. We're through with what I would call the administrative integration side of things, of getting people desks, computers, getting them hooked up to the organization.

But the integration efforts in terms of the coordination of our services, of our IT, of our client outreach, that is ongoing, and I hope that refinement is going to continue forevermore. I think that's part of any good organization, to continue to look at how we can improve our processes and our client services.

And our Life Sciences practice is no different, they just have a little more emphasis on them because of all the additions that we've done in the past 18 months there..

Okay. Great.

And then maybe just a quick update on CapEx expectations for the remainder of the year?.

Sure. I would invite Chad to jump in there. We're not expecting any large CapEx changes for the remainder of the year. We have some leases that are coming on board in terms of new space and expansion of that space. We're continuing to grow. We need to provide homes for our colleagues, but no real expectation of significant CapEx in the quarters ahead.

Chad?.

It's a fair answer, Paul. I think, Marc, the first half of this year, it will be representative for the second half of the year, which is very consistent with what we've seen over the past few years..

At this time, I would like to turn the floor back over to Mr. Maleh for any closing comments..

Again, thanks, everyone, for joining us today and especially thanks to all of my colleagues for making this job pretty easy to come up here and deliver such excellent news. We appreciate your time and the interest in CRA.

We'll be getting out meeting with investors in the coming months, and we really look forward to updating you on our progress next quarter. With that, that concludes today's call. Thank you, everyone..

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day..