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

Explicit Guidance:

• Full-Year Fiscal 2026 Revenue: Raised to a constant currency range of $830 million to $840 million (up from prior $805M–$820M).
• Full-Year Fiscal 2026 Non-GAAP EBITDA Margin: Narrowed to 12.2%–12.8% (down slightly from prior 12.0%–13.0% range).
• Currency Impact: Fiscal 2026 reported revenue expected to decrease by ~$2.9M due to constant currency adjustments; reported EBITDA expected to decrease by ~$350,000. Q4 FY2027 revenue expected to decrease by ~$200,000 with no EBITDA impact.
• Non-Cash Expense: Forgivable loan amortization expected to increase by ~$15M for full-year FY2026 (up ~$1M in Q4 vs. Q4 FY2025).
• Dividends: Quarterly cash dividend increased 17.5% from $0.57 to $0.67 per share, marking the 10th consecutive annual increase.
• Share Repurchases: Approximately $16.6 million remaining available under the current buyback program.

Business-Segment Outlook:

• Forensic Services: Continues to set quarterly revenue records; expanding focus from incident response to preventative services (e.g., AI-driven security vulnerability testing) leveraging client relationships.
• Antitrust & Competition Economics: Anticipated to remain strong despite sequential M&A slowdown; practice maintains "go-to" market share and benefits from long-lived, multi-year matters initiated 6–18 months ago.
• Legal & Regulatory Services: Revenue growth (15.7%) expected to outpace broader legal market trends; driven by increased case filings and judgments.
• Management Consulting (Energy): Continued demand for data center power supply, infrastructure, and utility service options; includes work on market design and resource adequacy.
• Life Sciences: Focus on market research and strategy consulting for new commercial assets (e.g., liver disease treatments) in China, France, Germany, UK, and US.
• International Operations: European/international growth (historically 20%+ annually) expected to catch up to North American growth rates as staffing capacity and business opportunities replenish.

Market and Competitive Outlook:

• Demand Trends: Average weekly project lead flow and new project originations remain strong, increasing >20% year-over-year.
• M&A Activity: While Q3 2026 saw a 41% sequential drop in value ($993B), full-year 2026 M&A volume ($3.9T) is the strongest first three quarters since 2021; CRA expects to capture share regardless of volume fluctuation.
• Utilization Rates: Consultant utilization held at 78%; management views this as a potential "new norm" slightly above the historical 75% target due to rapid new hire integration.
• Talent Market: Recruiting environment remains favorable for high-quality university talent; attrition has been lower than expected, facilitating faster headcount growth.

Macro / Industry Outlook:

• Political/Regulatory Environment: Management expresses high confidence in portfolio performance across various political administrations and macroeconomic shocks; no specific directional leaning on post-election impacts yet.
• Tax Rate: Q3 non-GAAP effective tax rate was 34.9% (up from 28.8%) due to Section 162(m) regulations; mitigation strategies are being developed to alleviate this pressure in Q4 and subsequent quarters.
• M&A Seasonality: Acknowledgement of Q3 M&A slowdown as a potential "downward blip" versus a structural trend, with management monitoring for broader shifts.

Strategic Initiatives:

• Headcount Expansion: Hiring of 100+ new consultants in Q3; full-year growth expected to exceed prior mid-single-digit target, likely reaching high single-digit growth, supported by rapid integration capabilities (2–3 months).
• AI Integration: Widespread use of AI for service delivery and internal operations (e.g., data processing, vulnerability triage); management notes AI increases engagement complexity but is not yet a primary demand driver for new litigation.
• Capital Allocation: Continued commitment to returning capital via dividends and buybacks; FY2026 YTD capital returned totaled $60.3M ($11M dividends, $49.3M buybacks).

Risks and Headwinds to Outlook:

• Macro Conditions: Uncertain global economic, business, and political conditions may impact client needs and business demand.
• AI Adoption Friction: Client hesitation regarding AI tools due to data confidentiality, privacy concerns, and potential security vulnerabilities may slow adoption of AI-specific services.
• M&A Volatility: Potential for M&A volume fluctuations to affect the Antitrust practice, though mitigated by long-duration engagement contracts.
• Regulatory Costs: Continued impact of Section 162(m) regulations on tax rates and high-earning compensation deductibility.

Management Tone on the Future:

• Confidence Level: Highly confident, citing "record" performance, a "replenishing sales pipeline," and the ability to outperform broader market trends (M&A, legal filings).
• Guidance Changes: Raised revenue guidance and narrowed margin range due to "strong year-to-date results" and "healthy sales pipeline."
• Strategic Sentiment: Optimistic about the "step-up" in profitability and the ability to digest higher headcount with rapid utilization.

Miscellaneous:

• Fiscal Year Structure: Fiscal 2026 is a standard 52-week year (unlike FY2025's 53 weeks).
• DSO Trends: Days Sales Outstanding (DSO) increased to 117 days (70 billed, 47 unbilled) from 113 days in Q2.
• Consultant Headcount: Ended Q3 at 1,028 (163 officers, 606 senior staff, 259 junior staff), a 6.2% year-over-year increase.