Q3 2021 Exponent Inc Earnings Call
Good day and welcome to the exponent third quarter fiscal year 2021 financial results Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Joni constant tell US. Please go ahead.
Thank you operator, good afternoon, ladies and gentlemen, thank you for joining us on <unk> third quarter fiscal year 2021 financial results Conference call.
Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at Www Dot exponent dot com.
Faster.
This conference call is the property of exponent and any taping or other reproduction is expressly prohibited without prior written consent.
Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer, and Rich Schlenker, Executive Vice President and Chief Financial Officer.
Before we start I would like to remind you that the following discussion contains forward looking statements, including but not limited to ex.
Market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here additional information that could cause actual results to differ from forward looking statements can be found in exelon is periodic SEC filings, including those factors discussed.
Under the caption risk factor in excellence, most recent Form 10-Q.
Forward looking statements and risks in this conference call are based on current expectations as of today and excellent assumes no obligation to update or revise them, whether as a result of new developments or otherwise.
And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer Catherine.
Thank you Tony and thank you everyone for joining us today.
I will start off by reviewing our third quarter 2021 business performance Rich will then provide a more detailed review of our financial results and the outlook and we will then open the call for questions.
In the third quarter of 'twenty to 'twenty, one we continued to deliver exceptional results for the quarter net revenues grew 16%, while EBITDA margin increased over 350 basis points from the prior year period.
We saw robust demand across our diverse business lines in large part driven by our differentiated value proposition, which brings together high quality data analytics with unrivaled subject matter expertise.
Accordingly, while momentum in litigation continued the proactive side of the business continued to drive growth through a significant increase in user and machine learning data studies outpacing 2019 level additions.
Additionally, the velocity of new starts over the last several months and the caliber of that talent underscores our ability to attract the best and the brightest talent to our team.
Turning to our engagements in more detail our momentum continued into the third quarter as we won new assignments, while re engaging projects on the reactive side of the business.
As we highlighted last quarter, our litigation work has been in a mode of recovery hovering near 2019 levels.
That's the throughput of litigation in our United States courts continues to accelerate we will be positioned to capture the stickiness and inertia around the backlog of trials, making their way through the system globally delays in international arbitrations have the potential to recover with east COVID-19 restrictions facilitating more in <unk>.
Person meetings.
Exponent is well positioned to capture these growth tailwind, while also leveraging expansion into new end markets, such as pharmaceutical and software to litigation and increasing our brand recognition in the international arbitration area.
Within our proactive business, we are seeing a strong increase in user studies spanning across various end markets, particularly as it relates to artificial intelligence and machine learning for Wearables and other devices.
The increase is driven by rising demand as well as the accessibility of human participants and the ability to conduct on site work as COVID-19 restrictions eased over the year overall, our proactive engagements remained robust and diverse fulfilling complex customer requirements related to user experience.
Well, it's product optimization and performance, while leveraging data analytics to further mitigate risk for our clients our traction across our multidisciplinary offering continues to demonstrate the strength of our long term strategy and our commitment to providing customers with the tools and analysis needed to drive optimal decision making.
Utilization in the third quarter saw improvement year over year supported by strong demand for human participants studies increased litigation work and lower head count, which drove improved profitability. However, as we have said over the last few quarters, we do expect utilization to normalized summer.
In the fourth quarter of 2021 as human participants studies moderate head count grows and we see typical seasonality.
Recruiting a world class team remains a top priority for us and we have accelerated our efforts during the second and third quarters of 2021 while the market for engineering and scientific talent remains competitive and voluntary turnover has increased relative to last year, we are seeing exceptional candidates and.
<unk> depth and experience to our already world class team.
Turning to our segments exponents engineering and other scientific segment represented 83% of our net revenues in the third quarter, increasing 20% year over year.
Our growth was driven by strong demand for exponent services across a broad range of industries and use cases.
In addition to the steady increase in litigation support and human participants studies for the consumer products segment, our work around wearable technologies and asset integrity and risk management for utilities was a core driver of growth over the period.
On the automotive side, we continue to see strong reactive based demand for our unrivaled and state of the art testing and analysis capabilities for advanced driver assistance systems on.
On the proactive side of automotive we continue to engage clients in implementing safety frameworks in the automated connected electric and shared vehicles space. While also gaining traction on battery work for electric vehicles and energy storage systems.
Exponents environmental and health segment represented 17% of the company's net revenues in the third quarter net revenues in this segment were largely flat compared to the prior year period.
I'm a suitable industry remains a significant opportunity for exponent as we leverage our multidisciplinary approach and data landscape across the full product life cycle from pharma co epidemiology and real world evidence to health economics, and outcomes research and market access as mentioned last quarter our focused efforts.
In the pharmaceutical industry continue to materialize with an emphasis on recruitment and business development initiatives supporting new client engagements.
Overall, we are very encouraged by the influx of new engagements and key hires across the business. We are already seeing are accelerated recruitment efforts materialize with a strong pipeline of high quality talent positioning exponent for a record year of hiring to close out the year as we move through the remainder of fiscal year 2020.
One we remain confident that our strong reputation multidisciplinary capabilities industry, leading expertise and market driven durability will propel exponent for work towards sustained growth and increased scale.
I'll now turn the call over to rich to provide more detail on our third quarter 2021 results as well as discuss our outlook for the fourth quarter and the full year 2021.
Thank you Catherine and good afternoon, everyone.
Let me start by saying all comparisons will be on a year over year basis, unless otherwise noted.
For the third quarter of 2021 total revenues increased 18% to $116 4 million.
And revenues before reimbursements or net revenues as I will refer to them from hereon increased 16% to $108 5 million as compared to the third quarter of 2020.
Net income for the third quarter increased to $24 6 million or 46 cents per diluted share as compared to $18 1 million or 34 cents per diluted share in the prior year period.
EBITDA for the quarter increased 31%.
The $34 million producing a margin of 31, 4% of net revenues, which is an increase of 355 basis points as compared to the third quarter of 2020.
Billable hours in the third quarter were 348000, an increase of 13% year over year.
Utilization in the third quarter was 76% up from 66% in the same quarter of 2020.
Utilization in the quarter remained above expectations, driven by lower ftes or full time equivalent.
And strong demand for our human participant and machine learning studies as well as litigation support.
Technical fulltime equivalent employees in the third quarter were 883 down 2% as compared to the same period one year ago.
The realized rate increase was approximately 3% for the third quarter.
Compensation expense after adjusting for gains and losses in deferred compensation increased 9%.
Included in total compensation expense is a loss in deferred compensation of 300000 as compared to a gain of $3 2 million in the third quarter of 2020.
As a reminder gains and losses in deferred compensation are offset to miscellaneous income and have no impact on the bottom line.
Stock based compensation expense in the third quarter was $4 $4 million as compared to $3 7 million a year ago.
Other operating expenses were up 2% to $8 million driven primarily by increased activities at our offices.
Please gradually return.
Included in other operating expenses is depreciation expense of $1 6 million for the quarter.
G&A expenses were up 48% to $4 2 million.
For the third quarter the increase in G&A expense was primarily due to higher marketing and recruiting activities.
Interest income decreased 300000 to 13000 for the third quarter.
Lower interest income as a result of a steep decline in interest rates.
Miscellaneous income net of deferred compensation loss was approximately 300000.
Included inclusive of tax benefit from share based awards <unk> consolidated tax rate was 24, 1% for the third quarter as compared to 26, 6% in the prior year period.
Moving to our cash flows during the third quarter, we generated $24 9 million in cash from operations and capital expenditures were $1 2 million.
In the third quarter, we distributed $10 4 million to shareholders through dividend payments.
At quarter end, the company had $255 million in cash and short term investments.
Turning to the outlook for the fourth quarter and full year 2021.
We now expect fourth quarter 2021 revenues before reimbursements to grow in the mid single digits and EBITDA margin to decrease 175 to 225 basis points as compared to the same period in 2020.
For the full year 2021 we expect revenues before reimbursements to grow in the mid teens in EBITDA margin to increase 290 to 310 basis points as compared to 2020.
We expect utilization in the fourth quarter to be 67% to 69% as compared to 66% in the same quarter last year.
As a result, we expect a full year utilization of 74% to 75% as compared to 67% in 2020.
As a reminder, utilization is lower in the fourth quarter due to more holidays and vacations.
In particular, we expect more vacations in the fourth quarter as compared to last year even.
In the fourth quarter, we expect full time equivalent employees to reach approximately 910 to 920, <unk>, which is a sequential growth of 3% to 4% from the third quarter of 2021.
This will place US slightly ahead of where we were in the fourth quarter of last year.
As we progressed through progressed through 2020, one we have accelerated our recruiting efforts.
Well the job market remains highly competitive which has resulted in increased voluntary turnover over prior year, we continue to demonstrate our ability to attract high quality talent.
We have had a significant number of new starts over the last several months, which will temper utilization slightly in the fourth quarter.
In the fourth quarter, we we do expect you.
Year over year realized rate increase of 2.5% to 3% as a result, the full year realized rate increase is expected to be four to four 5%.
We expect stock based compensation to be three eight to $4 2 million in the quarter and 19 to $19 4 million for the full year.
We expect operating expenses for the fourth quarter to be $8 four to $8 7 million.
And for the full year, we expect other operating expenses to be 32.2 to $32 5 million as we gradually returned to the offices.
We believe our office environment provides long term value as it supports collaboration for our interdisciplinary teams and staff development, which results in a higher value for our clients and retention of our employees.
We anticipate associated expenses to be at historic levels as we entered 2022.
G&A expenses will also gradually scale as recruiting business development and travel activities increase for the fourth quarter of 2021, we expect G&A expenses to be 4.5 to $4 8 million.
For the full year 2021, we expect G&A expenses to be 15.2 to $15 5 million.
For the quarter, we expect interest income to be approximately $10000.
And 60000 for the full year.
In addition, we anticipate miscellaneous income being approximately 500000 for the quarter and $2 1 million for the full year.
For the fourth quarter of 2020, one we expect our tax rate to be approximately 27% as compared to 18, 6% in the same quarter last year.
As a result, we expect the full year 2020, one tax rate to be 19% as compared to 14, 8% in 2020.
Capex for the full year 2021 is expected to be $8 million to $9 million.
We are pleased to have delivered another strong quarter with significant margin improvement year over year.
And we are confident in our ability to continue to grow.
I will now turn the call back to Catherine for closing remarks.
Thank you rich.
Over 50 years exponent has partnered with thousands of clients to address their most complex challenges.
Our society continues to raise expectations for safety health sustainability, and reliability and our clients needs evolve and increase in complexity exponent remains uniquely qualified to deliver groundbreaking solutions for the challenges of today and to help unravel the complexities of innovations for tomorrow, we are confident.
Is that the increased level of new engagements across our broad based portfolio as well as new hires across the business will support consistent profitable growth and will ultimately drive long term value for our shareholders. Operator, we are now ready for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad if.
If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
I Cant press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Yeah.
We'll take our first question from Tobey Sommer of Truth Securities.
Yeah.
Thank you I was hoping you could give us some more color about the sort of record.
Head count and hiring additions that you've made.
And expect to continue to make this year and then maybe if you could frame that in the context of of what you think you could achieve on an ongoing basis as we look to model our future periods.
Yeah. Thanks, Tobey so we've we've certainly accelerated our efforts around recruiting.
And you know in the last few months and we're particularly encouraged by how we've been able to continue.
Continue to attract the best and the brightest talent in the organization.
There's no doubt that were seeing a competitive market place for that talent.
We always have but we feel very good about what we've been able to do in terms of bringing them on board and getting them into the flow of engagements quickly. So that they can be contributing and having an impact you know relatively quickly in their in their tenure.
So you know we've got our foot on the pedal there we intend to keep our foot on the pedal there with a goal of really as we as we come back into sort of a more a more normalized type of situation to be growing head count you know annually.
Sort of a goal of 4% to 7% range you know that that really has not changed in terms of what we're looking to do in a steady state over the long term you know what we're dealing with now is still some transient.
But that that are in the system, we've demonstrated our ability to to ramp up and really surge in order to meet client demand.
So that's been great, but you know over the long term we need these folks that are coming on board to be able to make their investments in professional development and business development and all of those things that require their time. So you know as we get back on a more long term normalized basis. You know, we do expect that the utilization will will moderate a bit as we.
Increase the head count and sort of balance those things out.
Thank you we'll take our next question from Andrew Nicholas with William Blair.
Thank you and good afternoon.
First question I wanted to ask was just on the proactive and reactive businesses as it's kind of a component of mix here. It sounds like proactive has been gaining momentum for some time post pandemic. So I was wondering if you can kind of help us think about the growth rates for those two pieces.
Both.
You know immediately found a pandemic and maybe how it's progressed over the course of the past couple of quarters.
Yeah, Thanks, and and you know things are a little bit different depending on which side of the business you're looking at them. When we look at reactive in and particularly litigation.
We're continuing along what I would call a fairly steady gradual path in terms of the pace of the engagements right. It's.
There's a there's an increasing rate of activity that's going on through the domestic court system. There are still some impacts related to restrictions them. There are still some challenges that they're seeing in the courts in terms of in person engagements, you know, bringing juries in and that sort of thing, but but.
It's getting there you know we're continuing to see this sort of steady increase as we look forward, we certainly see activities in the reactive space for growth. Although you know as I look forward I really do believe that the proactive side will grow faster.
You know if I think about the the drivers on the proactive side.
There are lots of drivers around the regulatory frameworks that you know things like our chemical regulatory work that continue to grow through the pandemic and we expect it to continue to grow as we kind of get away from the pandemic and think about the design related and reliability related.
Consulting that we're doing for the consumer products industry, that's something that's been a very strong driver lately and if you look at the kinds of innovation that are happening and you know things like virtual reality augmented reality consumer electronics you know these are all important drivers.
A lot of work around machine learning data curation and data collection studies, that's being driven by that sort of innovation landscape.
Climate change is is driving work for the utilities industry and around infrastructure in general assessing the vulnerability of of our infrastructure, we're seeing work their artwork and batteries and energy storage. If you just think about the demand sort of tipping point that we're getting to around.
Electric vehicles.
General and other areas just announced additional expenditures over the last month for it is building on a couple of extra battery plants I think even lamborghini is announcing they're going to electrify their fleet right. So there are lots of drivers for this proactive sort of safety driven and a complexity driven work on that proactive side.
So you know the reactive will grow as well we mentioned pharmaceutical litigation software litigation International disputes is an area, where we continue to build our brand.
So we've got good drivers on really on both sides of the house.
That's really helpful actually Katherine you you made note of the.
The second question I was going to ask which is around software location I don't know if that's a new name for a practice that or a new reference to a practice that you've had for some time, but I don't believe that's something that you've called out in prior calls can you talk a little bit about that opportunity. It certainly makes sense is as you know the world gets eaten by software I'm just wondering.
What that opportunity looks like how new that is and maybe what the ramp.
Schedule looks like for a package like that particularly given I would imagine.
Sourcing talent in and adding new people to be able to service that is incredibly tough in this environment.
Yeah, Yeah. Thanks, and so this this is work that we have been doing but our CAGR you know seeing some stronger growth drivers. So some of it is in the intellectual property type of space. Other software litigation is around embedded systems. In particular, you know we've had.
A lot of expertise in embedded systems within our electrical engineering and computer science practice for many years, you know think about the systems that are driving our control systems for automotive electronics, that's a big area or control systems around advanced manufacturing.
These types of.
Areas can lead to either IP litigation, they can lead to sort of product quality related litigation. It could lead to the types of litigation, where Oems are trying to recover from their supplier is you know it's sort of comes in a lot of different forms but.
But it's something we've been seeing more of you know are at it is you know that.
That as well as pharmaceutical litigation or areas, where you know we were getting more traction and so you know that along with the you know with all of the other areas of litigation like product liability like human health related litigation like Environmental litigation, we see the ability to continue increase.
<unk> sort of across this broad portfolio as we go forward.
Perfect. Thanks, so much the COVID-19.
Youre welcome.
Thank you again to ask a question. Please press star one we'll take our next question from Sam England with Bamberg.
Hey, guys. Thanks for taking the questions and the first one I had could you talk a bit about which end markets bounce back strongly in the last couple of quarters.
Then which end market.
Pre pandemic levels and whether it's silver recovery opportunity over the next few quarters.
Yeah. Thanks, Sam.
One area that I mentioned that I would highlight in this context.
Is our proactive work around consumer products and consumer electronics being a significant part of that you know this is a lot of the motivation for the human participant work for the machine learning data type of studies that we've been doing.
For our user experience capability, where we're doing research really understanding the sort of cognitive effects of the use of technologies like virtual reality and augmented reality.
You know that that end market is quite strong the utility.
That sector is another one where we're really bringing our subject matter expertise in engineering and marrying that with our sophisticated data analytics capabilities.
Our unique way you know not only can we sort of run the algorithm and crunch the numbers to utilize sort of that that artificial intelligence, but we also have the engineering expertise to lay over that and we're finding that to be very valuable unless we're assessing asset integrity as we're looking at climate.
Vulnerability and resilience in the utility sector and so those are those are some of the stronger ones. Some of the ones, where we're seeing maybe a little more slowness if I go back over to the to the reactive side. The litigation markets are sort of recovering it at different paces one of them.
That's that's may be slower than the others is around transportation and product liability. This is one that got hit particularly hard back in 2020 and part of the reason for that I believe is because of its dependent not only on the court system, but also on our ability to travel.
I'll have to do site inspections to do vehicle inspections to bring people on site to do vehicle testing you know theres a lot of that type of work in that arena and so not to mention the impact that the pandemic had on our client base in that area being very dramatic and so its taking some time, but where we are.
Absolutely sort of on that path.
But that for example has been slower than if you look at sort of a health and environmental related litigation, which was stronger through 2020, it wasn't impacted as much so a little bit of variability there that we're still looking to you know.
Kind of bring that transportation work back in litigation, but part of what's doing that right. Now is to work in advanced driver assistance systems that is a you know in terms of prospects for recovery that is a particular litigation area, where we are being sought out for a really unique set of expertise that we've got.
Got both around how these systems have been deployed and also how to test them in real sort of limit type of environment. So you know we are seeing a lot of encouraging trends in that particular sector.
Okay, great. Thanks, and then the next one I had you touched in your remarks on the highest off attrition you've seen this far.
I see how much of that do you think is just driven by the fact that you have to love our attrition. So it'll be in 2020, and then what are you doing as a business to try and improve staff retention and in light of this disease market.
Yeah, Yeah. Thanks, Sam I think there is definitely a piece of this that is sort of pent up from 2020, I don't think it explains everything but I do think it explains some you know you're in an environment in 2020, where folks are maybe less certain about wanting to sort of change course.
Whereas as we started coming out in 2021, they see sort of more opportunity for that you know as a company one of the things that is so incredibly important to the retention of our consultants is our emphasis on professional development Ah.
When we hire folks in especially the junior staff, which is a big percentage of our hiring we want to put them on a path that is going to help them to publish help them to become staying with us help them to find the niche and be engaged with clients and ultimately become a lead consultant someday so our efforts.
Sound retention are very much focused on those types of programs you know theyre focused on mentoring theyre focused on sponsorship theyre focused on ensuring that we are creating opportunities for those staff to have client engagement directly and really be able to see the impact.
Of the work that they're doing these are things that we always do and that's been part of our part of our growth paradigm as a company for many years, but we're placing particular emphasis on you know that that's sort of development paths for our team as well as some of the simple things you know when we're in a virtual environment insurer.
That we're checking in on our teams ensuring that we're.
Focused on their mental health and wellbeing, because they're very busy you know we aren't utilization is it is sort of hitting records here right and so there are those aspects as well, where we're really looking to our leadership our directors our managers all the way down to our supervisors to really find ways to foster engagement.
With the staff directly.
Okay, great. Thanks, I'll leave it at.
Thanks Sam.
Thank you we'll take our next question from Tobey Sommer of Truth Securities.
Thanks, sorry about my technical difficulty.
Could you talk about.
What you would expect realized pricing to be inflation.
Broadly in wage inflation kind of up and down the labor market.
It picks up and persist for a period of time, how would your realized pricing react.
Yeah. Thanks for the question Tobey look.
We are at ex bone and you've seen our pricing increases on a year over year basis.
Sort of range in that two to three 5% level over.
Couple of decades here as we've moved through different economic cycles in and in particular, the demand environment for high end engineering and scientific talent.
You know probably the most important thing that goes on in our sector is what is that demand for.
That those engineers and scientists what are our clients who tend to also hire engineers and scientists realizing in the employment market that the price for talent is going up it will increase and do that so I think right now we're in a we're in a straw.
<unk> demand environment.
And as.
As such and you know, we may get some inflation here and things, but I'm expecting us to be in the upper part of that range in the rate that we realize.
Yeah as we go into 2022.
Thanks.
I apologize if I missed something.
But could.
Could you expand on your.
Utility work on the resiliency.
In I'm kind of interested not just in the current work but.
Whether or not other utilities and other geographies or are building out projects as well.
Thanks, Toby Yeah. So we are seeing them sort of expansion of the work that we're doing in the utilities sector.
Of course, the western utilities have a big driver around wanting to prevent wildfire that has been an important.
Driver for the work that we've done around risk related to electrical assets over the last certainly over the last several years and so you know that that has been a strong area of growth, but there are what's what's wonderful about what we're doing is that the.
Methodology and algorithms that we have developed to apply diverse data sources and engineering too.
Look at the probability of failure you can do this not only for wind knocking down transmission lines you can apply the same paradigm to vegetation.
Risks you can apply the same paradigm to bird strike risks you can apply this paradigm to flooding risk you know there's sort of Bayesian updating concept. That's that's used statistically and this overall framework and so what's exciting to me about this is that we have an opportunity to really broaden beyond.
<unk> that are already broadening beyond beyond simply the peril of wins and you know our electrical transmission lines into a broader set of assets that include gas infrastructure that includes you know.
Water related infrastructure et cetera, So there's a nice set of opportunities I think for us as we build out our capabilities that marry these data analytics with that subject matter expertise.
Thank you for that answer.
Last question for me is are.
The multiple of appropriations bills.
Being juggled in Congress currently from the.
Regular way budget eventually the soft and hard infrastructure packages.
Or is there anything that we should watch for in terms of potential inclusion in those bills as being relevant for a growth in your marketplace understanding that you typically working with commercial clients, but.
These government initiatives can be so biggest influence trends in the commercial markets too.
Yes, Tobey I think you're right there in the sense of trends you know, we you know historically, we have not seen a sort of an immediate impact of.
Tom from a one year budget, but I, but I will bring your attention to some areas that we've been talking about it here.
First of all.
The funds that are going in it sounds like around climate change and energy and all that are are focusing along.
Incentivizing our electric.
Vehicles, which obviously ex Bunny has a lot of expertise around in and incentivizing the increased demand driving more demand.
About that that would be very continues to be positive for us in any encouragement at that would be good but the other area is our alternative energy.
As you move into a I think currently the.
What's out there is a lot around wind and technology, we do a lot.
Around the technologies and reliability.
Those are wins systems odd both turbines as well as blades and other things that come into your traditional <unk>.
Engineering, but more volume and energy into that would be a positive.
Focus around our.
Really the understanding and the and the health care area around real World data and real World data evidence and the drive in that direction to have the accountability.
For the value being delivered there that's very much.
Center to what we are trying to build in our go to market.
The pharmaceuticals industry and such so those are a couple that I I at least half.
Thank you very much I appreciate that.
Thank you at this time, we have no further questions in queue. This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
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