Q3 2026 Charles River Associates Earnings Conference Call - CRA INTERNATIONAL INC

Financial Performance:

• Third quarter 2026 revenue reached a record $214.9 million, representing a 15.6% year-over-year increase.
• Net income, earnings per diluted share, and EBITDA hit all-time highs for Q3, despite elevated non-cash forgivable loan amortization expenses.
• Full-year 2026 (constant currency) revenue guidance raised to $830–$840 million; prior guidance was $805–$820 million.
• Full-year 2026 non-GAAP EBITDA margin guidance tightened to 12.2%–12.8% (from 12.0%–13.0%).
• Year-to-date non-GAAP EBITDA margin stands at 12.3% on $624 million revenue.
• Consultant headcount grew 6.2% to 1,028; utilization rose to 78% (up from 77%).
• Net debt totaled $129.6 million; liquidity stood at $192.3 million ($20.4M cash + $171.9M credit capacity).
• Shareholder returns included $60.3 million year-to-date ($11M dividends, $49.3M in share repurchases).
• Dividend increased 17.5% to $0.67 per share, marking the 10th consecutive annual increase.
• Non-GAAP SG&A excluding expert commissions was 14.9% of revenue (down from 16.3%); effective tax rate was 34.9% due to non-deductible high-earner compensation and deferred tax adjustments.
• Days Sales Outstanding (DSO) increased to 117 days (70 billed, 47 unbilled) from 113 days in Q2.

Guidance and Future Outlook:

• Anticipates fiscal 2026 to be a 52-week year (unlike the 53-week year in fiscal 2025).
• Projects constant currency adjustment will reduce 2026 reported revenue by ~$2.9 million and EBITDA by ~$350,000.
• Expects non-cash forgivable loan amortization to increase by ~$15 million for the full year, driven by talent investments.
• Outlook remains positive based on strong sales pipeline metrics: average weekly project lead flow and new project originations both up >20% YoY.
• Management anticipates headcount growth may trend to the high-single digits, supported by faster-than-expected new hire integration.
• No specific directional forecast on AI-driven demand, though AI is acknowledged as a complexity driver increasing overall portfolio demand.

Business Segments and Product Lines:

• Seven practices grew YoY, contributing ~95% of total revenue; all seven contributed to Q3 growth.
• Forensic services, life sciences, and risk investigations and analytics practices all posted double-digit revenue growth.
• Legal and regulatory services grew 15.7%, outpacing the broader legal market (case filings +8%, court judgments +4%).
• Antitrust and competition economics practice posted its 7th consecutive record quarter, citing retained mandates for Paramount-Skydance and Norterra-B&G Foods.
• Management consulting services grew 9.8%, driven by energy and life sciences practices.
• Energy practice focused on data center power demand, utility market design, and resource adequacy.
• Life sciences practice engaged in market research for liver disease treatments and antitrust litigation in the generic pharmaceutical sector.
• Forensic services highlighted new capabilities in AI-driven vulnerability testing for software clients.
• Risk investigations and analytics engaged in cross-jurisdictional investigations regarding asset misappropriation and economic damages.

Market and Competitive Landscape:

• Worldwide M&A activity totaled $3.9 trillion in the first nine months of 2026 (+28% YoY), the strongest start to a year since 2021, though Q3 saw a 41% sequential decline.
• Antitrust practice maintained leadership position, securing share of antitrust-related work regardless of broader M&A volume fluctuations.
• International operations (Europe) grew >20% annually for the last four quarters, expected to catch up to North American growth rates.
• North American growth remains robust at ~16% YoY, supported by new revenue-generating consultant onboarding and organic expansion.
• Market sentiment indicates that while M&A volumes fluctuate, CRA's long-duration antitrust matters provide revenue stability.

Risks and Challenges:

• Uncertain global macroeconomic, business, and political conditions could impact client spending and business operations.
• Non-deductible compensation for high-earning individuals continues to elevate the effective tax rate, though mitigation strategies are in place for Q4 and beyond.
• Client hesitancy regarding AI data confidentiality and privacy remains a factor in adopting AI-driven service delivery models.
• Sequential volatility in global M&A activity requires monitoring to determine if current downturns are temporary blips or structural trends.
• Potential for higher non-cash amortization expenses impacting EBITDA metrics in the short term.

Management Commentary and Tone:

• Tone was highly confident, emphasizing record-breaking revenue and profitability despite economic headwinds and loan amortization expenses.
• Management highlighted the successful rapid integration of ~100 new consultants, allowing utilization to rise during a seasonal turnover period.
• Executives credited new revenue-generating consultants for expedited revenue ramps (12-24 months compressed) and organic same-store sales growth.
• Leadership expressed confidence in CRA's historical resilience across various political administrations and macroeconomic shifts.
• Paul Malley noted that while AI increases complexity, it is not yet a primary driver of new litigation lead flow, though it is used extensively in delivery.

Analyst Questions and Answers:

• Headcount & Utilization: Analysts noted strong headcount growth exceeding mid-single digit targets; Management confirmed potential for high-single-digit growth due to low attrition and rapid new hire integration.
• AI Demand Drivers: Analysts asked if AI is driving litigation demand; Management clarified AI is a complexity multiplier and delivery tool but not the primary client acquisition driver yet.
• M&A vs. Antitrust: Questioned the disconnect between a 41% sequential drop in M&A and strong antitrust growth; Response cited CRA's leadership status and the long duration of antitrust matters which smooth out Q3 volume dips.
• Political Uncertainty: Analysts queried impacts of recent elections; Management declined to predict specific impacts but reiterated historical performance stability across political cycles.
• Tax Rate: Questions on the 34.9% tax rate; Management indicated mitigation strategies are being implemented to address Section 162M regulation impacts in Q4.
• Geographic Shift: Analysts asked about Europe's performance relative to North America; Management expects international growth to accelerate and match North American trends as staffing capacity replenishes.

Other Key Points:

• CRA was retained by Paramount Skydance for the DOJ investigation and litigation related to the Warner Bros. Discovery acquisition, which settled in September 2026.
• CRA expert testimony contributed to the denial of a plenary injunction in the Zillow vs. COMPAS antitrust lawsuit.
• A global technology client engaged CRA for AI-based vulnerability testing, illustrating a pivot toward preventative forensic services.
• The company celebrated the 10th anniversary of its inaugural dividend, with the current quarterly amount nearly five times the 2016 initial payment.
• Fiscal 2026 is returning to a standard 52-week cycle.