Charles River Associates at Sidoti Conference: Strategic Growth Insights

On Wednesday, 19 March 2025, Charles River Associates (NASDAQ: CRAI) presented a strategic overview at the Sidoti Small-Cap Virtual Conference. The company, led by Chairman and CEO Paul Malley, highlighted its robust performance and strategic plans while acknowledging short-term volatility. CRA’s focus on long-term value creation, backed by a debt-free balance sheet, positions it well for future growth.

Key Takeaways

• CRA has achieved consistent revenue growth of 8-10% annually without incurring debt.
• The company has a strong focus on talent, with 40% of senior staff holding PhDs and a rigorous hiring process.
• Shareholder returns are prioritized, with significant share repurchases and dividend increases.
• CRA is exploring geographic expansion, particularly in Asia, and remains open to strategic debt usage.
• The company is navigating short-term market volatility, especially in M&A activity, by enhancing existing services.

Financial Results

• Revenue Growth: CRA reported a compound annual growth rate (CAGR) of approximately 9% over the past five years.
• Record Revenue: The company has achieved record revenue for seven consecutive years.
• Share Repurchases: The average repurchase price was $162 in 2024, compared to $88 over the previous five years.
• Dividend Growth: Quarterly dividends have increased from $0.14 per share in Q4 2016 to $0.49 per share in Q3 2024.
• Share Count Reduction: CRA has reduced its share count by about 25% over the last ten years.

Operational Updates

• Legal and Regulatory: This segment accounts for 80% of revenue, primarily using a time and material billing model.
• Management Consulting: Operates under a fixed price revenue model.
• Talent Acquisition: CRA uses forgivable loans to attract talent, despite the SEC disallowing adjusted EBITDA reporting that includes these loans.
• Intellectual Property and Labor Practices: Significant growth in these areas due to strategic hires and acquisitions.

Future Outlook

• Strategic Focus: CRA aims to deepen its service offerings to mitigate economic and geopolitical uncertainties.
• Geographic Expansion: The company is considering opening an office in Asia to support its antitrust and life sciences practices.
• M&A Activity: CRA anticipates a rebound in M&A activity following recent declines.

Q&A Highlights

• Market Impact: No major shifts in demand have been observed since the recent election.
• Pricing Dynamics: Clients have accepted recent rate increases.
• Energy Practice: Positioned for growth due to industry changes.

Readers are encouraged to refer to the full transcript for a detailed account of the conference call.

Full transcript - Sidoti Small-Cap Virtual Conference:

Operator: Large small cap virtual conference. Now our next presenting company is Charles River Associates, the ticker is C R A I. And joining us today is Paul Malley, Chairman and CEO and Chad Holmes, Chief Corporate Development Officer. Now before we begin, just a quick reminder, we will have time for Q and A at the end of prepared remarks. If you would like to submit a question, just click on the q a button at the bottom of your screen.

There’s no need to wait for the end of those prepared remarks. You can submit questions at any point during our time together. And with that, we can turn the call over to Charles River Associates. Good morning, gentlemen.

Paul Malley, Chairman and CEO, Charles River Associates: Hey. Good morning, Mark, and good morning, everyone. Thank you for joining us today. I have a deck I’m hoping to get through in about fifteen, twenty minutes. Hopefully, you will find it interesting, but even more so, hopefully, you’ll have some questions for me.

That’s the part of the presentation on which I learned something too. If both those things go really poorly, we can start filling out my March bracket, which I have until about end of day today to submit. So be prepared for either one. So CRA is a consulting company. We are celebrating our sixtieth year in 2025, and the core mission of the firm that launched CRE back in 1965 still exists today, which is to bring academic quality research to the business world to help leaders make more informed decisions.

Our services span across two main lines of business, one we call legal regulatory, which makes up roughly 80% of the firm’s revenue, and, management consulting, which a lot of you are probably more familiar with, which make up about the remaining 20% of CRA’s revenue. As with any consulting company, particularly CRA, our success starts and ends with our people. I have a really amazing group of colleagues at CRA, and their credentials, their training, is really, really quite remarkable. About 40% of my senior colleagues have PhDs, the majority of them in economics. On that, CRA is very selective in the hiring.

We led into our organization as you can see with the middle box, middle upper box, that we accept less than 2% of our campus applicants. And one of the statistics I’m even more proud of is our retention rate, is really rather strong across the ranks of the organization. When I talk about these two lines of business, legal and regulatory management consulting, probably the easiest thing for me to do is let you know what makes up the management consulting piece, and that is auctions and competitive bidding, energy, life sciences, and Americon. Those four practices together make up roughly 20%, of the management consulting revenue, life sciences being the largest, of those practice areas. On the legal regulatory side, our foundation is set by the antitrust and competition practice, which makes up roughly 45% of the entire firm’s revenue.

So a much larger share of the line of business revenue, but still a very prominent share of the total firm’s revenue. I will try to give some examples of the kinds of services we do a little later in the presentation. A lot of people have never heard of CRA, but the one thing I’m pretty sure is that a lot of people have heard about our clients, both the ultimate clients who hire us who hire CRA for assistance and the intermediaries being the law firms, who hire us on behalf of these clients. These are a set of logos, or sampling of logos of our ultimate clients over the past two years. As you could see from the title, CRA, has worked on behalf of 85 of the Fortune 100 companies, and that is just in the past two years.

So even though I don’t have annuity based contracts across our services, our clients are large, repeat players in the marketplace and large repeat, buyers of CRA services. The share of our market is even more impressive when you look at the law firms, that hire CRA to assist in these Fortune 100 companies, where just in the past two years, again, CRA has worked for 98 of the AMLO one hundred law firms. We don’t take these kind of penetration lightly. We work hard to provide value to all our clients across all of the services, that the firm provides. So with these services and these kind of clients serving as our foundation, the financial results are a byproduct.

And what I’m proud of here, you just see, the financial results for 2024 and then their financial results over the previous five years. If I were to show you the financial results in the previous ten years, you’re gonna see the same kind of pattern, which is substantive revenue growth, nearing eight, ten percent a year, and profit growth growing at an even faster clip. We’re doing that with no debt, at CRA, and we’re doing that with returning a substantial amount of our adjusted cash flows back to shareholders in the form of share repurchases. We’re not doing the share repurchases, merely because we have some excess capital, but we’re doing the share repurchases, because our share price is significantly less than the intrinsic valuation of the firm. And what we have enjoyed, at CRA is our valuation, this intrinsic valuation, that gap continues to close.

Whereas in the previous five years, our average share repurchase was at $88 I don’t know where we are today, but I think we’re somewhere in the $1.70 to $1.80 range on a stock price. Even if you look in the short term in terms of our return of capital through share repurchases, average price during 2024 was $1.62. So I think our view of the intrinsic value has proven to be pretty accurate, and we’re striving to continue to close that value gap. Share repurchases are not the only means by which we return capital to our shareholders. A little more than a half dozen years ago, we also initiated a quarterly dividend.

And the reason we did that is not because we didn’t have alternatives to redistribute the capital, both in terms of talent and whether the stock is fully, valued at CRA. It’s because we want more eyes looking at the stock. I need more shareholders examining CRA, forming their own conclusions about the intrinsic valuation and its relationship to the prevailing stock price. So the dividend was meant to introduce, a new class of shareholders into CRA’s, you know, investment thesis. And with that said, the amount of capital being returned, via dividends has grown pretty substantially, somewhere in the tune of 20% over that window of time since initial, initiation there.

Our investment thesis, is really quite simple. It’s to maximize CRA’s long term value per share. Each of those words capture substantial meaning to the management team at CRA. We are value based decision makers. Everything we do is through a value lens.

The way we reinvest in our services by either organic growth or either by inorganic pursuits of talent. We look at that through a value lens. When we return capital to our shareholders, it’s through the same lens. And more importantly, it’s over multiple periods of time. I’m not trying to maximize our return in a single quarter or a single year.

I’m looking to maximize the return of our shareholders over, multiple periods of time. And what we’ve been able to enjoy, we’ve been able to grow substantially, with no debt, all financed by, cash flows from operations, while still returning a substantive portion of those cash flows back to our shareholders. Here is something that I referenced earlier, but it makes for, you know, a damn good chart, so I will just cover it again. In the last five years, compound annual growth rate of revenue is right around 9%. If you wanna go back to 2013, ’20 ’14, you’re gonna see the rate of growth, to be roughly the same.

What is impressive is we have been reporting record revenue now for the past seven years in a row. And we’ve been doing that by not diluting the quality of our services, but by continuing to gain penetration in the markets in which we believe we have a competitive advantage. And so I’m quite proud of those accomplishments, and our success. I think you can look at it through a few different lenses. One, we’ve been growing at a faster rate, than the market as a whole.

So I do believe we’ve been taking share of who we’re taking share from. That’s a lot harder to measure, but we’ve been growing faster than the industry as a whole. And we’ve been able to grow profits at a faster rate than the industry as a whole. When you put that all together and you look at our retention rates of our consulting colleagues, we’re not doing that by by paying below market rates. We have to pay market, to be able to attract and retain top talent, and we are.

We’re doing that by continuing to look for ways, to optimize our profitability across the portfolio. With respect to profits, a lot of our guidance is on an EBITDA margin basis, on a constant currency EBITDA margin basis. And but if you wanna look at a measure that’s even closer to cash flows, I would encourage all of you to add back our noncash amortization of forgivable loans. Forgivable loans is a vehicle we use, to attract and maintain, talent at CRA. It’s purchase price considerations.

Okay? But since they’re not purchases of, c corps or LLCs or brick and mortar institutions, a lot of these loans are to recruit highly touted individuals, to execute group hires, from various competitors, and we use the forgivable loans as talent acquisition. The accounting rules don’t have those flowing through our cash flow statement, but they have the noncash amortization flowing through our income statement. So I’m not saying they’re not a cash outlay, these forgivable loans, but if you do not, take it into account, you are gonna double count the impact of these talent proceeds. So a number of years ago, we used to have a measure called adjusted EBITDA that added the forgivable loan amortization back to EBITDA margin.

And we thought that was best representative of the cash generating capacity of the firm. The SEC didn’t like, the measure, and asked us to stop reporting an adjusted EBITDA financial metric. So what we do is I could tell you what EBITDA is. I can tell you what adjusted, what the forgivable loan amortization, is, but I can’t add the two figures together. If you want to look at the true profitability of the firm through time, and not get the whipsaw that sometimes you do, with measures like EBITDA or net income, I would add the two together.

This is the way the executive team at CRA, is measured, on their performance relative to budget, the way the board looks at it. It’s the way our banks look at our loan coverage ratio. So this is not just a hypothetical measure of profitability. I think it generally represents the underlying economics of the firm. To demonstrate that it is not smoke and mirrors here.

The next three, four slides, what we try to do here is we try to say, let me give you a summary of the uses of our capital, at CRA. And we look at these three buckets. We look at and the uses of the capital take into account this forgivable loan amortization. And they’re in three buckets. They’re talent, which is acquisition, and talent maintenance.

It’s the money we give back to shareholders and CapEx. We do not have any kind of substantive CapEx outlays. The majority of the CapEx is for, computing systems, and any kind of expansion of our lease obligations to provide offices to our colleagues. The reason this is so important, again, we have no debt. So our cash flows the outflow of our cash flows has to foot with the inflow of the cash flows, which adjust for this forgivable loan amortization on that.

So over the past five years, Talon acquisitions, we’ve outlaid roughly $230,000,000 here of these cash flows or $1.85 to the left on the pie chart here. And, again, the majority of it is to acquire talent, and sometimes, capital needed to maintain the talent portfolio at CRA. If I have enough opportunities to invest 100% of our capital and talent acquisition and maintenance, I would. I would. But we maintain the selectivity, in terms of the services we wanna target and the people we let in to our family.

With respect to the return of capital, as I mentioned earlier oh, I’m sorry. Someone’s switching the slides on me here. This is on the CapEx. As I said earlier, there’s minimal CapEx. What we’ve experienced, in the past five years is probably even a little higher, than what we may experience in the next five years.

We still have capacity in many of our large offices, so I do not anticipate any kind of substantive, capital expenditures related to office needs. But you could see something roughly consistent with what we’ve been experiencing in from twenty twenty to twenty twenty four. And the return of capital, to shareholders. In the last five years, it is the combination of, you know, it’s roughly 200,000,000 in total, but about a hundred and 50,000,000 in share repurchases and a little south of 50,000,000 of dividend payments. With that, this is not just to offset any kind of, share issuances that we’re doing.

We are substantively reducing our share count. Over the last ten years, roughly about 25% reduction in the share count. Over the last five years, you see roughly about a 13% reduction in the share count. And the with respect to the dividend, since we launched the dividend back in q four of twenty sixteen, we came out with a dividend of 14¢ a share. And with the reporting of our q three earnings in 2024, the new dividend level is 49¢ a share.

So, you know, almost a tripling of that amount or or a little more than a tripling of that amount over that same window of time. The shareholder yield over that five year window is roughly, 6%, relative to CRA’s average market capitalization. So, again, we’re growing, we’re growing profitably, and we’re returning substantive capital back to our shareholders irrespective of how you wanna measure it. And this is just another depiction of the share count reduction. We ended 2024 with share count, actually, I believe, slightly less than 6,800,000.0 shares.

Let me see how we’re doing. Mark, I think I’m gonna stop as opposed to jumping into some of the service examples here. I’m at 10:20 and wanna give an opportunity to hear any questions that the participants may have.

Operator: Excellent. And as a reminder, folks, if you’d like to submit a question, just click on the q and a button at the bottom of the screen. We do have a few already, locked and loaded, ready to go. The first and then sort of the the question of the day, if you will, is how do you see the market for your services, particularly legal and regulatory with the changing of the with the new administration? And what steps, if any, are you taking to address those changes?

Paul Malley, Chairman and CEO, Charles River Associates: Yeah. I was gonna ask the participants the same question. You know, trying to read the tea leaves, of right now, with respect to our macroeconomy, the geopolitical, you know, forces here. Quite frankly, it’s really difficult on that. So what I can say, since the election back in November, I haven’t seen a substantive shift, a little volatility month to month maybe, but I haven’t seen a substantive shift in the demand and the inflow of opportunities coming into CRA.

There’s been a lot of publicity in the month of January. M and A activity was at sort of a ten year trough with that, but people are expecting it to rebound. When exactly, That still remains to be seen. But one of the reasons our strategic goal has always been to add depth to the current services that we provide, we think adding depth to those services as opposed to breadth enables us to weather this volatility, in the short to medium term. So, you know, as we have during the past decade, I think we’re positioned well irrespective of the outcomes of the macro forces of the geopolitical forces.

Operator: Great. And then one of the questions, talks about the the the balance sheet in the sense of asking if you have always operated, debt free, and, in what scenario might it make sense to take on debt whether that’s driven by M and A or or any other, opportunity set?

Paul Malley, Chairman and CEO, Charles River Associates: Sure. We had some convertible notes when I, assumed the CEO role that we retired, within a couple of years of assuming that role. So I haven’t had we haven’t had debt for close to fifteen years, thirteen, fifteen years on that. I’m not opposed to having debt. Our cash flows are clearly strong enough, to bring on debt, but I’m still pretty much a fundamentalist, and I’m gonna let the asset slide of the balance sheet dictate what the our liabilities look like.

What I mean by that is if there is a substantive talent opportunity in the marketplace or or a growth opportunity in the mark marketplace, I am willing to take on debt to fund the asset growth of the firm. But I’m not really one of this active financial engineering of trying to just play with the right side of that balance sheet. So the right asset opportunity comes around. Yeah. We are open, to expanding, the liabilities of CRA.

Operator: Okay. And then one of the questions actually is kind of consistent with the slide that’s actually on on the screen now. Can you talk a little bit about the revenue model and and the key drivers there? And as well as, mentioning, maybe you could talk a little bit about the pricing dynamic and and what you’re seeing there.

Paul Malley, Chairman and CEO, Charles River Associates: Sure. So the majority of the legal regulatory services are on a time and material basis, meaning we bill our hours and we get paid for our hours. On the management consulting side, it is more of fixed price kind of revenue model there. We collect a very high percentage, somewhere in the $97.98 cents on the dollar that we bill to our clients. So we don’t operate, in a world in which we are providing large discounts off the stated rates.

I think that shows a lot of discipline, by my colleagues, and it also shows their commitment, to constantly try to increase the value provided to our clients, with respect to our services on it. In a average year, we probably have rate increases in a two to 4% range. Right? Our bill rate increases. That is about the same range that we put into action in 2025.

And so far, I haven’t seen any, you know, substantive rejection of those rates by our clients. So they’re being accepted. We’re able to roll them in to the new projects coming into the firm, for that. So I think that will con you know, that should come to fruition as we go continue through fiscal twenty five.

Operator: And then we talked about, on the, during the earnings call, I should say, you made some mention on some of the areas that were performing nicely as well as some of the things that you’re seeing as far as the M and A environment for the beginning of the year and maybe wondered if you could spend a little time, updating folks who may not be familiar with that.

Paul Malley, Chairman and CEO, Charles River Associates: Sure. As as any proud parent, I I really like all of our services that we have at CRA, like loving all your children. I may not love them all equally, but the fact is what you’ve seen, if you listen into our earnings calls, through the number of years, you see certain practices have different periods of surge of expansion of their business. Growth, except if your antitrust and competition practice is not usually steady and linear. Some there’s volatility around it.

As long as that we have an upward sloping line on that volatility, I’m fine with that. And that’s exactly what we’ve been seeing across our portfolio. The antitrust and competition practice continues to demonstrate, its strength in the marketplace, and its desire by clients to use our consultants on their most pressing, merger and antitrust related matters. The others, other practices we have, there’s some volatility around it. There’s some periods of reloading your growth opportunities.

For a good half dozen years, our forensic practice went through really substantive growth on that. For the last couple of years, they’ve been reloading on the growth opportunities, but I think there is a platform that we’re looking for big things from them in the years ahead. Our energy practice, which I’ve always been quick to tout, I think the market, the industry is undergoing is undergoing, substantive changes and really can use, the kind of consulting services that CRA provides. So I see a lot of big things for that practice ahead. And then in the last few years, you saw us taking advantage of talent opportunities to double the size of a couple of our practices.

The first, about three, four years ago was our labor and employment practice with with the acquisition of Welch Consulting. And in 2024, we had a really wonderful opportunity with a group hire that almost doubled the size of our intellectual property practice, on that. So and that’s what I mean. It’s not just focusing on one or two of our services. It’s looking at the entire portfolio and taking advantage of the opportunities that are resident in the market.

Operator: And then I know we only have a minute or so left here, but I did wanna sneak in one of the quick questions here. Are there any new geographies that you’re thinking of expanding into or maybe any international opportunities that might be present?

Paul Malley, Chairman and CEO, Charles River Associates: Sure. I would love to continue to add depth to many of our, you know, operations across The Atlantic, both in The UK and in Europe. We are in regular discussions about where in Asia should we open up an offering. I think that would assist both our antitrust and competition practice and our life sciences practice, which operate in a more of a global platform in terms of the recommendations they’re providing to our clients. So, would I be surprised in the next, you know, three or so years to have an operation in Asia?

No. But we wanna make sure we choose wisely, with respect to our geographic expansion.

Operator: Excellent. And that’s a outstanding, place to leave it here as we are out of time. So I do wanna thank all of our participants. I wanna thank, Charles River Associates for joining us today, and everyone have a wonderful and productive remainder of the day. Thank you so much.

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