CRA International Inc (CRAI) 2004 Q1 法說會逐字稿

Good day everyone and welcome to the Charles River Associates first quarter fiscal 2004 conference call. Today's call is being recorded. A replay of the call will be available, beginning at 2PM, Eastern Time, and will be available through Wednesday, March 24th, at midnight, Eastern Time. The rebroadcast dial-in number is 719-457-0820, and you will be asked for a confirmation code. That number is 462-794. (OPERATOR INSTRUCTIONS) With us today, is CRA's President and Chief Executive Officer, Mr. James Burrows; and Executive Vice President and Chief Financial Officer, Mr. Phil Cooper. At this time, I would like to turn the conference over to Mr. Cooper. Please go ahead.

Thank you Erica. Statements in this conference call, concerning the future business, operating results and financial condition of the Company are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectation as of today, March 18th, 2004 and are subject to a number of factors and uncertainties. Information contained in these forward-looking statements is inherently uncertain and actual performance and results may differ materially, due to many important factors. Such factors that could cause actual results to differ materially from any forward-looking statements made by the Company, include among others, dependence upon key personnel, attracting and retaining qualified consultants, dependence upon outside experts, intense competition, and professional liability. Further information on potential factors that could affect the Company's financial results is included in recent filings with the SEC. Jim?

Thanks Bill. Before we begin, I would like to outline the agenda for today's call. First, I will discuss CRA's first quarter performance, touching on the financial highlights, and then discussing the factors that influenced our business during the period. Phil will then follow with a detailed review of the financial results. I will conclude the prepared remarks with a discussion for our outlook for the remainder of the year and a discussion of our definitive agreement, subject to ratification of the InteCap board to acquire intellectual property of the consulting firm, InteCap, Increase. which we just announced earlier this morning.

Turning to the business overview, CRA's first quarter fiscal 2004 revenue rose 10.7 percent, to $38.5 million from $34.8 million in the first quarter of fiscal 2003, extending our streak of quarterly revenue growth to 24 quarters. Q1 fiscal 2004 net income increased 16.6 percent to 2.6 million from $2.2 million in Q1, fiscal 2003. Earnings per share remained at 24 cents per diluted share for Q1 2004, compared to Q1, 2003. Weighted average diluted shares outstanding used to calculate EPS in Q1 of fiscal 2004 were 10.7 million, versus 9.2 million in Q1 of fiscal 2003 or an increase of 17 percent. Phil will cover the factors that affected EPS in more detail, later in the call.

CRA's topline performance continues to be driven by our financing competition practices which grew over 50 percent and 20 percent, respectively in Q1 on a year-over-year basis. Consultant utilization in the competition and finance practice was over 85 percent and we are actively recruiting at all levels in both practice areas. The primary growth drivers in our finance practice remain the upsurge of general securities, accounting malpractice, and finance-based litigation. We expect this long-term trend to continue, particularly in view of the more difficult operating and regulatory environment related to Sarbanes-Oxley, and related issues and other trends in the business environment. In our competition practice, steady demand in the general courtroom litigation area continues to feel growth. The majority of the revenues in the practice are related to antitrust litigation. CRA continues to be involved in a number of major antitrust cases not involving mergers. We are assisting counsel, for example, in several antitrust matters involving the payment card industry in multiple venues, both here and in other countries. As another example, CRA is also assistant counsel for Alcatel in preparing its defense against claims by Cisco that Alcatel attempted to monopolize the market for broadband digital cross-connect systems, by engaging in various, allegedly anticompetitive conduct, including sham litigation. In addition, CRA is assisted counsel for IRI in its antitrust suit against the Dun & Bradstreet Company, AC Nielsen Company, and IMS International, Inc. In particular, we have analyzed both liability and damages issues. CRA also continues to be retained in many major merges and requiring competitive affects analysis. CRA is regularly retained by leading law firms with major merger practices including Joan's Day (ph), Gavin Ierson (ph), Hogan & Hartson (ph). During the quarter, CRA assisted DirectTV in its antitrust counsel Joan's Day (ph) in the regulatory process both -- before both the U.S. Department of Justice and the Federal Communications Commission, required to obtain approval for its partial acquisition by NewsCorp. This acquisition involved the partial vertical integration of the largest satellite television provider, with a major television network provider. CRA also assisted Anzen, represented by Hogan & Hartson and Wellpoint, represented by Simpson, Thatcher and Bartlett in achieving antitrust clearance from the U.S. Department of Justice to combine, thereby creating the largest private health insurer in the United States. We are just starting work on another yet unannounced health plan merger. We are working on the joint venture among Enterprise, Phil Terra and El Paso, involving a pipeline JV. CRA was retained by GE and the law firm of Arnold and Porter to assist them with securing antitrust approval for the proposed acquisition by NBC, a unit of GE, of Vivendi Universal Entertainment. CRA was involved in the merger between First Data, represented by Bingham McCutchen; and Concord, represented by Kirkland and Ellis. We are involved in two monopoly cases that have been mentioned prominently in the media.

We continue to be involved on a confidential basis on several other highly-publicized megamerger proceedings. But we cannot disclose publicly the clients until after the proceedings are over.

Turning to our other practices, Q1 revenues of the Energy and Environment practice increased by about 5 percent in Q1 of 2003. It is encouraging that the practice has been able to continue to grow in the face of very low M&A activity, which had been a strong driver of revenues of this practice in prior years. We remain very active in a wide range of regulatory and litigation matters in the energy industry, including assisting companies in responding to claims of alleged electric and gas price manipulation.

During the quarter CRA was awarded a multi-million-dollar contract in a European country related to redesigning the market for electric power in that country. We were also involved in discussions in several other countries, in connection with similar projects. Non-Middle East revenues of the chemical and petroleum practice increased by about five percent, while Middle East-related revenues continue to reflect the aftereffects of the interruption of the Middle East pipeline during the Iraq war and the subsequent period of instability in the Middle East. We are encouraged by improving business prospects in the United States from chemical and industrial firms and integrated oil companies, Mexico including PanMex (ph) and London from international petroleum and chemical firms and Middle Eastern clients.

We continue to work on major board-level assignments involving business strategy and performance improvements for a range of chemical and industrial plants and for major international oil and gas companies. Utilization of this E&P practice has been increasing for several quarters, and we believe it will continue to increase in Q2 and the balance of 2004 in all other regions in which the practice operates.

Pharmaceutical revenues grew steadily in every sequential quarter in 2003, and this sequential growth continued with the growth of 13 percent in Q1 of this year. We expect this trend to continue as the practice continues to expand its pharmaceutical pricing and managed care contracting work, expand its business in Europe, particularly with respect to the work for the European commission on the state of innovation in the European pharmaceutical industry and as CRA continues to be retained in an increasing number of patent and antitrust litigations issues in the health-care industry.

Revenue for the transportation practice increased moderately for Q1 of 2003 while revenues in the aerospace and defense practices declined moderately over the same period. Revenues of the metals practice declined substantially from the year-earlier period, when the practice was engaged in a large restructuring effort for a multinational firm. That project is still continuing at a reduced rate.

International revenue represented 11 percent of total revenue in Q1, compared with 18 percent in Q1 of fiscal 2003. These figures do not include certain revenues from foreign clients that are posted in U.S. companies. We expect revenues of most of our foreign offices, including, in particular, London and Asia-Pacific to increase significantly in Q2 and in the balance of the year.

NeuCo posted Q1 revenue of $1.9 million including over $800,000 from the Department of Energy contract which was signed in the last week of Q1. We expect that NeuCo's revenue will continue at approximately the level of Q1 for the next several quarters and that NeuCo will operate in the black. The DoE contract is a four-year contract with total funding of approximately 8.4 million.

On the headcount front, our current recruiting plans are to add about 30 to 35 consultants on a net basis by the end of the year. We will respond flexibly to the changing market conditions and to the availability of experienced senior consultants. We continued to take advantage of the availability of our world-renowned economists, having financial specialist Alan Jacobs, an aerospace and defense expert, Herb Yoskowicz to our roster in Q1. In addition, Jonathan Yellin recently joined CRA as general counsel from Reamer & Bronstein, where he had been a senior partner. John represented us in our acquisition of the ADL business. His knowledge of CRA and the business and acquisition expertise he possesses will be extremely valuable to us, as we identify and pursue growth opportunities for CRA's businesses.

Shortly following the close of Q1 we also announced that Basil Anderson had joined CRA's Board of Directors and will serve on the Company's audit committee. Basil is the current Vice Chairman of Staples and brought to us his 30 years of financial experience at a number of large corporations. His guidance in the areas of finance, acquisitions and corporate strategy will be of tremendous benefit to CRA going forward.

In addition, Nancy Rose joined our Board of Directors this month. Dr. Rose is a professor of economics at MIT and Director of the National Bureau of Economic Research Program in Industrial Organizations.

With that, I will now turn the call over to Phil, who will discuss the financials in more detail. Phil?

Thank you, Jim. As always, for those of you not familiar with CRA I would like to start my comments by reminding you that CRA's fiscal year operates on 13 4-week cycles, producing quarters unequal in length. Q1, Q2 and Q4 typically are twelve weeks each, while Q3 is a 16-week quarter. In addition, please note that CRA's discussion of anticipated revenue earnings, utilization and headcount growth, as well as our expert was our expectations for any other financial metrics do not include the impact of the InteCap acquisition.

Turning to the financial results -- as Jim said, Q1 revenue increased 10.7 percent to 38.5 million from 34.8 million in Q1 of fiscal 2003. First-quarter gross margin was 43 percent, a 540-basis point increase from 37.6 percent in Q1 of fiscal 2003 and, a 240-basis point sequential increase from 40.6 percent in Q4 of fiscal 2003. Higher consultant utilization and lower reimbursable expenses contributed to the increase in gross margin. Total reimbursable expenses were 5 million for Q1 2004, 13 percent of revenue, compared with 5.6 million or 14.4 percent of revenues for Q4 2003, and 5.2 million or 14.9 percent of revenues in Q1 of 2003.

Total consultant utilization in Q1 was 74 percent, up from 73 percent in Q4 of fiscal 2003 and substantially higher than the 71 percent we reported in the comparable period of fiscal 2003. Improved consultant utilization for the first quarter of this year reflects continued growth of the competition and finance practices. Based on this performance, we expect full-year fiscal 2004 utilization to be at the high end of our 74 to 76 target percent range.

As we have reported before, we implement rate increases during the first quarter every year. The average going rate for our consulting staff in Q1 was about $330 per hour compared to the rate in Q1 2003 of $302. That represents an increase of about 9 percent -- and compared with the average for fiscal 2003 of $309, which represents an increase of about 7 percent.

SG&A expense for the first quarter was $11.6 million or 30.2 percent of total revenue, compared with $9.3 million or 26.6 percent of revenue in Q1 a fiscal 2003 and 10.1 million or 25.9 percent of revenue in Q4 of last year. The major causes of the higher SG&A percentage were higher performance payments to consultants and write-offs caused by two bankruptcies of clients. Along with the effects of the growth of NeuCo, which had higher SG&A costs and larger-than-normal recruiting costs, these factors accounted for over half of the percentage growth in SG&A. We believe increase in performance payments to our outside senior consultants was specific to this quarter, reflecting the specific timing of certain projects. The higher outside consulting payments, which result from an increase in the share of sourcing or origination of projects accounted for by outside consultants and a decrease accounted for by employees -- which were offset by reduced obligations to employee consultants, reducing the cost of goods sold.

First-quarter operating income increased to 4.9 million compared with 3.8 million in Q1 of fiscal 2003. Operating margin was 12.7 percent compared with 11 percent in the first quarter of fiscal 2003, reflecting in-part the year-over-year improvement in utilization from 71 percent to 74 percent. Net income grew 16.6 percent year-over-year to $2.6 million or 24 cents per share compared with 2.2 million or 24 cents per share in Q1 of fiscal 2003.

Q1 fiscal 2004 EPS was calculated using 10.7 million weighted-average diluted shares outstanding, compared to only 9.2 million shares outstanding in Q1 of fiscal 2003, an increase in fully diluted share count of 17 percent.

During the quarter, we incurred approximately $340,000 in foreign exchange losses related to dollar-denominated receivables recorded outside the U.S. And, as mentioned earlier, we booked approximately $270,000 in bad debt reserves, related to two clients who entered bankruptcy. Historically, CRA has not had to reserve for bed debt of this magnitude and we consider this quarter's events to be an anomaly. The combination of the foreign exchange losses and the bankruptcy reserves negatively affected earnings in Q1 by about three cents.

The other major factor that affected the quarter was the seasonal loss in consultant time as a result of the timing of the Christmas and New York holidays during those weeks, which results in a significant reduction in filling capacity during two of the period's twelve weeks. Our analysis indicates that, holding all other factors constant, at our current size, Q1 EPS is negatively affected by 4 cents per share below normal. Q2 EPS is positively affected by about 3 cents per share above norm, as a result of low holiday and vacation time during that quarter. The corresponding effect in Q3 are negative 3 cents and in Q4 are positive 3 cents.

Professional headcount stood at 350 at the end of Q1, up from 344 in Q4 of fiscal 2003. Our current junior-to-senior staff breakdown is 118 junior consultants and 232 senior consultants compared with 116 junior and 228 seniors in the sequential fourth quarter. For the full year, we expect a net headcount addition of approximately 10 percent, with growth skewed toward senior consultants.

Looking at the balance sheet, billed and unbilled receivables increased sequentially to $51.9 million at the end of Q1 from 49.5 million at year-end. Current liabilities decreased to 37.3 million at the end of Q1 from 39.7 at year-end. Days sales outstanding were 108 days in Q1, up from 104 days at the end of the fourth quarter. This breaks down into 45 days of unbilled and 63 days of billed in Q1, compared with 30 days of unbilled and 66 days of billed and the sequential fourth quarter. Our target for DSO remains in the 95-to-100-day range, and we are currently in the process of implementing new management processes to speed up the generation of client invoices and return DSO, especially on the unbilled component, to within the target range.

Cash and equivalents and long-term investment stood at 65.9 million at the end of Q1, essentially unchanged from 65.7 million in Q4. Now back to Jim.

Thanks, Phil. Looking ahead to Q2 and the remainder of fiscal 2004, we're encouraged by the level of activity across the majority of our practices and see a number of growth opportunities for the practice. My comments here relate to CRA not including the affect of InteCap, which I will discuss further on in the talk.

Two of our largest practices, Finance and Competition, are poised to capitalize on the growing demand for M&A and securities litigation consulting in the market throughout the year. We expect revenues from our major business consulting practices including chemicals and petroleum, energy and environment and pharmaceuticals to increase in Q2 and subsequent quarters. Currently, utilization in our competition and finance practices is extremely high, and overall utilization rates are trending north of Q1 levels. With this kind of momentum, we are confident that we will continue to experience growth in this important metric in 2004.

We currently expect full-year fiscal 2004 utilization to be at the high end of our 74-to-76-percent target range. As a result of the positive indications in our core business, we're reiterating our fiscal 2004 revenue and earnings growth projections of 15 to 20 percent, with revenue growth at the low end of the range and earnings growth at the higher end of the range.

As Phil indicated, at our current size, the variation in fringe time between the first and second quarters, holding all other factors constant, generates about a seven-cent swing in EPS, between Q1 and Q2. We expect that Q2 EPS will be approximately 10 cents higher than Q1.

Before we open the call for questions, I would like to spend a moment discussing CRA's acquisition announcement for this morning. CRA announced a definitive agreement to acquire privately held InteCap, subject to approval by the InteCap aboard. InteCap is a premier intellectual property consulting firm in the United States that specializes in economic-financial evaluation and strategic issues related to intellectual property and complex commercial disputes.

The cost of the acquisition was $81.7 million. InteCap had pro forma revenues of $52.1 million and pro forma EBITDA of $10.5 million for the calendar year 2003. The acquisition of InteCap reflects our strategy of acquiring businesses to complement our core capabilities and offer opportunities for significant vertical and geographic market expansion. Through the acquisition, CRA will immediately garner a stronger competitive offering in intellectual property and commercial damages -- two areas in litigation that are growing rapidly. This transaction also would position CRA as a preeminent provider of economic and financial litigation and advisory consulting services in these sectors. The acquisition will expand CRA's geographic footprint, giving us a local presence in key markets, including Chicago and New York as well as significantly strengthening our presence in Houston and Silicon Valley.

We expect the acquisition to be approximately 8 percent accretive to CRA's full-year earnings, and we will provide additional financial details when the acquisition closes, which is currently expected sometime during our second quarter.

With that, I will ask the operator to open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). Jim Janesky with Janney Montgomery Scott.

Yes, good morning. A couple of questions. The first question has to do with the business or businesses that were responsible for the write-off of bad debt. This is unusual for your company to have a write-off of bad debt. I guess the question becomes, why do you take that type of business? And could this occur again, over the next fiscal year?

Well, we obviously do some homework on the creditworthiness of clients when we take them on. And I'm sure what happened in this case was that there was not a lot of advanced warning for these particular bankruptcies. They were both established companies. As you know, sometimes financial conditions deteriorate very rapidly.

We actually have a pretty good record over the years of avoiding this type of situation. It just happened that two of them hit this quarter. It is something that -- in most years we don't have an experience like this.

And Jim, I would add that in one case, one of the clients was actually a U.S. subsidiary of a foreign corporation and the foreign corporation is more than healthy -- it's just the U.S. sub that went bankrupt.

I guess, just to clarify it, it was the speed at which they declared bankruptcy that kind of took you by surprise?

I think that's fair.

How about the second part of the question -- in terms of -- do you see anything else on the horizon that could potentially affect 2004?

No. In terms of bankruptcy?

In terms of bankruptcy -- right, in terms of a write-off of this nature.

No. That's not to say there wouldn't be a surprise. But we try to monitor the health of our clients and take some action if we think something is headed in the wrong direction.

From a strategic point of view, why InteCap? I know what they do. But what does this -- you know, if you could kind of rank 1, 2 and maybe 3 into the strategic reasons behind it? It seems like they have very good EBITDA margins -- around 20 percent. You paid slightly less than eight times for it. And it's a pretty big company as far as professional consulting companies go. But what are your comments there?

First, Phil will deal with the financial aspects. But in terms of the ongoing EBITDA, the multiple is considerably less than that. The exception with the strategic aspects -- InteCap is very, very strong in intellectual property litigation and consulting. We think that they have a special niche there that makes them quite different from other firms -- there is no other firm like that out there.

Intellectual property litigation is probably the most rapidly growing area of litigation in the United States and probably worldwide as well. If you speak to lawyers, it's one of the areas that they will always to are every busy. Our practice in the area has been growing rapidly. But it is smaller than theirs. So, this gets us into possibly the most rapidly growing area of the market -- the overall market -- for litigation, and gets us into a lead position.

In addition, they have substantial offices in Chicago and New York, which will be new locations for CRA. Those are very important locations for litigation. They are probably the two largest -- in fact, I'm sure they are the two largest cities that we were not in before, that are major sources of legal business. We often have opportunities to hire senior people in those areas, and we have not been able to do it, because we didn't have an office. So I think that working with the InteCap people, we can expand the scope of our services at the combined firm can provide to their clients in Chicago and New York.

They also have a substantial office in Houston that is actually much bigger than our office. They focus on litigation. Our Houston office is more focused on business consulting. But I think we will be able to get a much bigger footprint in Texas and Houston, in particular. They have a substantial office in Mountain View, California, which is only a few miles from our Palo Alto office. We will be able to combine those two offices and have a much larger combined operation, which I think will be very important there. So there were a lot of functional and geographic synergies that we felt we could take advantage of here.

Let me add just a bit. They also have a significant amount of business in the financial sector, which we do also. And you know that that is a rapidly growing area because of financial litigation. A second aspect is that we have had been looking at InteCap for a long time -- since, really -- since late 2001 or early 2002. We know these folks well. We feel that their culture absolutely matches ours. And we are very comfortable with those folks and the quality and their values. So we think it's going to be a great integration.

Bill Dickenson, the CEO -- is that the same Bill Dickenson was part of Hagler BaE (ph)?

The answer is yes, he is. I also, by the way, wanted to and that with your comment about EBITDA -- their ongoing EBITDA -- we reported a 2003 pro forma EBITDA. But if we look at 2004, going forward, and with reasonable merger-related costs synergies, we see the multiple on this transaction to be more in the seven range than in the eight range that you had referred to. We also see that this is going to be accretive on an annualized basis. We estimate that it will be 7 to 9 percent accretive on EPS.

(OPERATOR INSTRUCTIONS). Matthew Liftin with William Blair & Co.

My question is -- let me start with the question on the DoE contract with NeuCo. How much Q1 revenue came from that? And are we looking at maybe straight-line kind of revenue recognition over the four-year period of that contract?

I believe, in Q1, the revenue recognition was between 800,000 and $900,000. There were also some one-time costs that we were related to the contract being signed (indiscernible) of the quarter in the $200,000-plus area. The revenues -- I think the best assumption is straight line. But they may end up being accelerated.

Yeah, it sounds a little front-end loaded there.

The reason for the 8 to $900,000 was that we had negotiated ability to be able to bill for work that started halfway through last year. So we had been doing things related to the contract in the expectation of a signing, that we were able to recognize as soon as the contract was signed.

I see. Let me just also confirm -- did you say in your prepared comments, Jim, that Q2 -- so far overall consulting utilization was trending a little north of the 74 percent you reported in Q1?

I think I said that we were expecting Q2 to trend up a bit from Q1.

And a couple questions on InteCap. When do you expect that acquisition to close? At what rate is their topline growing? And can you talk about your plans to integrate that? Will you be changing the name, et cetera, et cetera?

Let me take some of that. If I leave out one of those questions, Matt, I'm sure you will ask again. But their topline is -- currently, they are running a 10 percent or better ahead of last year. Margin is increasing faster. That's all, really, I can comment on that at this time.

We plan to preserve the InteCap name. But in which capacity, whether it's a corporation -- CRA Corporation or a branded service is going to be determined by integration task forces which have yet to be convened. We are really waiting for the signing of the merger agreement of TNS, which is happening today. What we fully expect is that there will be a multi-headed practice involving representatives of InteCap and CRA that will merge their intellectual property and commercial damages people with ours -- very soon on. We have a -- to get this really jump started, we have our annual leadership meeting. And this year, the InteCap Vice Presidential-level people -- and there are 31 of them -- are invited to that meeting. So we will, both in terms of socialization and in working out issues for future integration processes, we're beginning rapidly.

Now, that meeting is April 2nd to 4th, roughly. So we're not even waiting for the closing for that to happen. We expect -- and of course, there is regulatory clearance that we would need on this. But we would hope to close by April 30th. But the drop-dead date in our mind is May 31st.

One more, if I might. A lot of moving pieces today. I just wanted to confirm two things. One is, when you say 8 percent -- or 7 to 9, I think you said -- percent accretive, are you talking about across the calendar 2004 consensus of $1.38? Or is that on the 2003 number? In other words, are we talking 10 to 12 cents here, in terms of accretion?

Thank you for clarifying that. What my 7 to 9 percent referred to is on an annualized full-year basis.

Based on 2004?

Based on 2004 -- our 2004 level. But of course, we will only be able to recognize the benefit of that for some portion of our fiscal 2004. But if we look at this on a full-year basis, where both companies are right now, we estimate 7 to 9 percent accretive.

And the last piece here, just to confirm -- when you talked about the 15 to 20 percent EPS growth guidance, and you are reiterating that this morning, that does not include the effects of InteCap -- is that correct?

That's correct.

Thank you. Nice deal.

(OPERATOR INSTRUCTIONS). Vincent Calligio (ph), Sterling Financial (ph).

I have got a question on the InteCap, in terms of how did you tie in the senior management and senior professionals of the firm?

Oh, I'm very happy that you asked that question. The answer is, well. We already have the signatures of the six largest producers, each of whom are responsible for about four percent or more of the Company's revenue. And they have noncompete agreements that go forward. But also go for a year and a half, after the agreement is terminated -- let's say by them or by us, for cause. So I think we talked in a prior call that we are very, very careful about insisting on what we would call a tail on the noncompete -- so that people can't leave, walk across the street and immediately get into the same business. Now, the whole group of -- there will be 31 M.D.s who are VP-levels at CRA who will be signing noncompetes -- all of which will have tails on the distribution -- on the termination. I think the minimum tail is about one year.

Thank you. It sounds like a nice job on that issue. Can you talk some about the fallout from the big four consultants getting out of the litigation consulting market, or being forced in that direction from the Sarbanes-Oxley? Are you seeing a lot of folks looking to come on-board? And you're seeing a lot of business fall your way? Can you give us an update on that?

Well, we think it's an ongoing trend. We certainly have had individuals approaching us. I should say that a number of the senior people at InteCap came from the litigation business accounting firms. Actually, the InteCap people will be able to increase our exposure to that end of the marketplace. We do think that's an ongoing trend in the business.

And as one of my colleagues said, there are a lot of moving parts here. Can you comment on sort of what, if anything, was key to a shortfall on topline versus your expectations?

I think the issues are really basically on the cost side. Revenue came in pretty well on target with what we were expecting. And there were some cost issues that we think only were related to just Q1. The other issue is that -- and I think we have -- we feel that we have needed to be more specific about guidance for seasonality. There is a seasonal pattern of minus 4, plus 3, minus 3, plus 3, which comes from the effect of vacation and holiday time on available consultant hours. So holding utilization constant, Q1 will always be -- I mean, other things equal -- be worse than Q2 by a swing of around seven cents at our current size. And I think that part of what happened in Q1 was that there were just not enough things offsetting the seasonality to get us to the higher earnings estimate.

I would also mention, just to add that -- I think in a prior call -- if you look at it from a sequential standpoint, that Q1 is almost always worse than Q4. And I don't think we have been explicit enough or quantifying that. And we will try to do a better job on that in the future. I think I mentioned that in the five prior years, I think that Q4 exceeded -- I would say the prior year exceeded Q1 of the following year, four out of five times.

(OPERATOR INSTRUCTIONS). Jim Janesky with Janney Montgomery Scott.

When you go to the noncompete agreements -- as a follow-up to that question, are the shareholders -- the individuals who get stock in Charles River -- are they subject to the same lockup agreements as you instituted at the time of your IPO?

For the existing shareholders the agreements would have more to do with financial incentives and penalties. They have nonsolicitations. But they don't have noncompetes -- other than the fact that there are financial penalties.

That's existing shareholders?

Existing shareholders.

Now, again, that -- really Jim is referring to is the pre-IPO shareholders. Actually, some of the people who have received options and are associated with prior acquisitions do have noncompetes.

So there is no stock component to this?

There is a stock component. It is -- essentially the managing directors will collectively own about $3 million worth of CRA stock at roughly the trading range prior to today.

They will also be receiving stock options.

That too.

The second thing is, can you breakdown junior versus senior level consultants within InteCap versus the way -- similar, rather, the way that you look at your business? You mentioned 31 were VP levels.

I think that they are, in fact, given that they have about 140 consultants, total -- they basically are a little bit more leveraged than we are. And we like that. They basically would have -- looked at that way, they would have about 110 to our 30.

Okay. So the other 110 would be junior?

Well, some of those actually include some senior staff, because they are what in CRA's nomenclature would be called senior associates or principles. But it still represents a ratio per Vice President that is higher than CRA is at currently.

And just finally, I noticed that InteCap has got a number of smaller offices in the United States as well as some very large ones -- including the larger ones being New York and Chicago. Does your 7 to 9 percent accretion on an annualized basis include cost synergies?

Yes, it does. We anticipate no office closings. InteCap, over the last year, has trimmed a couple areas where the offices either were working apart from the -- let's say, core values of EnteCap -- or where there were highly unprofitable. So all of that has been done.

They have a small number of employees in Washington and London, which would be merged into our Washington and London offices. And I mentioned the other four offices.

Right. But you have already assumed that in your 7 to 9 percent, right?

Yes.

Susan McGary (ph) with Granahan Investment Management.

I have a few questions. The first is the GTCR -- how long have they been an investor in InteCap?

My impression is that they came in around 1998 or 1999. They essentially were a private -- they are a private equity fund and helped to work with what was then, I think, TDRC -- Technical Dispute Resolution Company -- something of that sort -- TDRT. And to help to fund the acquisition of like companies.

I'm not familiar with TDRC. Was it the original consulting firm? And so --

Yes, that was the original consulting firm.

And so, InteCap has been fairly acquisitive in the past few years?

Through about 2001 -- I believe that was the last acquisition we've done.

And, James, I know you touched briefly on your outlook -- your general outlook for the different practices -- different verticals that you have. But would you mind just running through what your expectations for them again, just in terms of which areas you expect to continue to be strong and which you expect to, perhaps, be less than strong?

Sure. We expect our competition and finance practices to continue to be strong -- particularly finance -- but also competition. We expect our small litigation practices to continue to grow. Those areas are still the core drivers of growth in this company. We expect chemicals and petroleum to increase during the remainder of the year. We expect energy and environment also to increase. And I think, in fact, all of the practices see some growth. So we expect that we will be able to continue to grow.

Will the metals have easier comparisons later in the year?

The metals practice should grow. It had a particularly good year in 2003. But it should grow from where it is.

Not relative to 2003.

Right, probably not relative to 2003.

And then just back to InteCap -- what percentage of its business, if any, is international?

Very, very small.

It's about 2 or 3 percent.

And so, am I to assume that most of the intellectual property that they are working on is domestic clients versus domestic companies?

Yes.

We have no further questions. I will turn the conference back over to our speakers for additional or closing remarks.

Thanks, everybody. We look forward to speaking with you next order. This concludes today's call.

Thank you for joining today's conference. You may now disconnect.