Q4 2022 Exponent Inc Earnings Call
Good day, and welcome to exponent fourth quarter and fiscal year 2022 financial results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question.
You May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Johnny come to tell US. Please go ahead.
Thank you operator, good afternoon, ladies and gentlemen, thank you for joining us on exponent fourth quarter and fiscal year 2022 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 dotcom backslash investors.
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 Doctor, 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 excellent market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.
All information that could cause actual results to differ from forward looking statements can be found in exponent periodic SEC filings, including those factors discussed under the caption risk factor in extra <unk>, most recent Form 10-K or 10-Q.
Following the forward looking statements and risks in this conference call are based on current expectations as of today and exponent 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 fourth quarter and fiscal year 2020 to business performance Rich will then provide a more detailed review of our financial results and outlook for 2023, and we will then open the call for questions. We.
We delivered solid results in fiscal year 2022, growing net revenues by 7% year over year and expanding earnings per diluted share in a year marked with evolving macroeconomic challenges and uncertainty we continued to showcase the strength and resiliency of our business model.
We saw strong demand across the business for exponents diversified portfolio of services through 2022 on the proactive side, our work and the consumer products electronics automotive and life Sciences sectors were key contributors for the year on the reactive side, we saw robust litigation related activity and.
A diversified portfolio of product safety and recall related work spanning multiple industries.
As innovation and technology become increasingly complex the critical nature of our insights uniquely positions exponent to address our clients' needs throughout the product lifecycle.
Turning to our engagements in more detail within our proactive services, we saw strong demand for our work in user experience research and machine learning data studies across multiple industries clients look to exponent for our expertise in understanding the human machine interface from the cognitive impacts of virtual and augment.
Is it reality to the interactions between vehicle operators and advanced driver assistance systems, they come to us when they need to acquire the most sophisticated high quality at a curated training datasets to drive machine learning algorithms, because getting it right matters when it comes to product performance and safety we saw increase.
Activity in the life sciences sector related to regulatory issues as well as the safety and efficacy of health care products and treatments within the automotive sector. Our work with electric vehicles around batteries was a key contributor to our growth year over year.
Looking at our reactive business, we continued to experience robust demand for our domestic litigation and international Arbitrations related work, particularly in the toxic tort and environmental litigation Arena as well as advanced driver assistance system litigation.
We saw strong growth in engagements around product safety and recall, particularly in the transportation life Sciences and consumer products industries.
Science are turning to us earlier in their investigation processes in order to benefit from our insights as they make critical product recall decisions.
We saw our accelerated recruitment efforts materialize with 6% head count growth year over year, while the landscape for top tier talent remains highly competitive we successfully increased head count in key areas of the business, where we have identified the greatest need and opportunity. We are encouraged by our momentum.
And are focused on strategically building our world class team to position exponent at the forefront of innovation and to meet the dynamic needs of the market.
Turning to our segments excellent engineering and other scientific segments represented 83% of our net revenues in the fourth quarter and for the full year net revenues in this segment increased 10% in the fourth quarter and 8% during fiscal year 2022, as compared to the prior year period.
Growth during the quarter and full year was broad based with continued strong demand for exponent services across the consumer products electronics life Sciences and automotive sectors.
<unk> environmental and health segment represents represented 17% of the company's net revenues in both the fourth quarter and fiscal year net revenues in this segment decreased 2% for the fourth quarter of 2022 and were flat during the full year 2022 compared to the same period in the prior year.
Excluding the impact of foreign exchange net revenue for the environmental and health segment increased 2% in the fourth quarter of 'twenty, two 2022 and increased 4% during fiscal year 2022, as compared to the prior year period.
In this segment was primarily driven by exponents safety related work evaluating the impacts of chemicals on human health and the environment.
Since our humble beginnings in 1967 exponent has harnessed the power of technical excellence objectivity and disciplinary diversity to help unravel the complexities of innovations as they become reality looking ahead, we will continue to evolve our differentiated portfolio of services to be at the cut.
As of our clients' needs, we remain focused on advancing our long term strategy by positioning exponent to capitalize on disruptive trends and rising societal expectations for safety health sustainability reliability and performance.
Now I'll turn the call over to rich to provide more detail on our fourth quarter and fiscal year 2022 results as well as discuss our outlook for the first quarter and the full year 2023.
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 fourth quarter of 2022 total revenues increased 12, 2%.
27, $4 million and revenues before reimbursements or net revenues as I will refer to them from here on the increased seven 9% to $112 6 million.
Compared to the same period of 2021.
Quarters net revenue growth was negatively impacted by seven tenths of a percent for from foreign exchange.
Net income for the fourth quarter increased 10, 5% to $22 5 million or <unk> 44 cents per diluted share as compared to $20 4 million or <unk> 38 cents per diluted share in the prior year period.
EBITDA for the fourth quarter increased three 1% to $31 1 million producing a margin of 27, 6% of net revenues, which exceeded our guidance, we expected margins as we expected the mark.
We returned two to decline as people return to in person engagement, both our employees and clients.
Billable hours in the fourth quarter were approximately 354000, an increase of five 7% year over year.
The average technical fulltime equivalent employees in the fourth quarter were 989, which is an increase of some 3% as compared to one year ago, highlighting our focused recruiting.
Utilization in the fourth quarter was 69% down from 70% in the same quarter of 2021, as we continued to balance growth and utilization.
The realized rate increase was approximately two 5% for the fourth quarter as compared to the same period a year ago.
In the fourth quarter compensation expense after adjusting for gains and losses in deferred compensation increased seven 7%.
Included in total compensation expense is a gain in deferred compensation of $6 7 million as compared to a gain of Sig.
$4 7 million in the same period of 2021.
As a reminder gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line.
Stock based compensation expense in the fourth quarter was $4 3 million as compared to $4 million in the prior year period.
Other operating expenses in the fourth quarter were up six 8% to $9 $3 million driven primarily by increased activities as our employees continue to return to our offices.
Excluded in other operating expenses is depreciation and amortization expense of $1 $9 million for the quarter.
As expected G&A expenses were up 49, 5% to $7 million for the fourth quarter.
The increase in G&A expenses was primarily due to half the cost of our in person managers meeting and increased marketing and recruiting activities.
Interest income increased $1 3 million for the fourth quarter.
Higher interest income was driven by an increase in interest rates.
Miscellaneous income excluding the deferred compensation game was approximately $500000 for the fourth quarter.
Moving to our cash flows during the fourth quarter, we generated $46 million in.
And cash from operations and capital expenditures were $2 9 million.
During the quarter, we distributed $12 2 million to shareholders through dividend payments and repurchased $13 2 million of common stock at an average price of $87 76.
Turning to the full year results for the year 2022, total revenues increased 10, 1% to $513 $3 million and net revenues increased six 7% to $463 8 million as compared to 2021.
Net revenue growth was negatively impacted by five tenths of a percent from foreign exchange.
Net income for the year increased one 1% to $102.3 million or $1 96 per diluted share as compared to 10, $101 2 million or $1 96 per diluted share in 2021.
The tax benefit associated with accounting for share based awards for 2022 was $5 8 million or 11 cents per diluted share as compared to $10 million or 19 cents per diluted share in 2021.
Inclusive of the tax benefit from share based awards <unk> consolidated tax rate was 22, 6% for the full year as compared to 19, 6% in 2021.
For the year EBITDA margin.
EBITDA increased three 8% to $137 $2 million producing a margin of 29, 6% of net revenues, which exceeded our guidance as expense expenses were still below normal in the first half of the year.
Billable hours for 2022 were approximately $1 million 465000, an increase of four 2% year over year.
Utilization for the full year was 73, 8% down from 75, 1% during 2021.
Utilization for the full year within line with expectations as we increased head count following the pandemic.
Average technical fulltime equivalent employees for the year were 955.
An increase of six 1% as compared to 2021, the realized rate increase was approximately two 5% for the year 2022.
Compensation expense after adjusting for gains and losses in deferred compensation increased five 7% <unk>.
Included in total compensation expense is a loss in deferred compensation of $14 1 million as compared to a gain of $14 7 million. During 2021. This is result in a $28 8 million change year over year.
Stock based compensation expense in 2022 was $24 million as compared to $19 3 million in the prior year period.
Other operating expenses were up seven 6% to $35 1 million included in other operating expenses is depreciation and amortization expense of $7 1 million for the full year.
As expected G&A expenses were up 54, 8% to $23 $7 million in 2020 to.
The increase in G&A expenses was primarily due to the cost of our in person managers meeting and increased marketing and recruiting activities.
Interest income increased approximately $2 million to $2 $1 million for the full year higher interest rates was driven by an increase in interest rates.
Miscellaneous income excluding the deferred compensation loss was $3 $4 million for 2022.
Moving to our cash flows during 2022, we generated $93 $8 million in cash from operation and capital expenditures were $12 million.
For the full year, we distributed $49 2 million to shareholders through dividend payments.
$155 9 million of share repurchases at an average price of $88 69.
As of year end, the company had 161 $5 million in cash.
Turning to our outlook for the first quarter and full year 2023.
We expect first quarter 2023 revenues before reimbursements to grow in the high single to low double digits and.
And EBIT to be 27, 5% to 28, 2% of revenues before reimbursements.
For the full year 2023, we expect revenues before reimbursement to also grow in the high single to low double digits and EBITDA margin to be 28 to 28, 5% of revenues before reimbursements.
This is a step down from 2022.
It exceeds our pre pandemic EBITDA margin of 27, 4% in 2019 by 60 to 110 basis points.
During 2023, we expect the year over year growth in technical fulltime equivalent employees to be 6% to 8%.
We are having success in accelerating our recruiting and are pleased that our turnover declined to approximately 16% in 2022, and we expect it to be approximately 15% in 2023.
The increased head count will likely lead to slightly lower utilization.
We expect utilization in the first quarter to.
To be 73% to 75% as compared to 76, 5% in the first quarter of 2020 do we.
We expect full year utilization to be 72% to 74% as compared to 74% in 2022.
We still believe our long term target of sustained mid Seventy's utilization is achievable as we continue to build critical mass and offices and practices and increase the amount of proactive work.
We expect 2023 year over year realized rate, Inc rate increase to be 3% to 4%.
We expect the realized rate increase in the first quarter will be at the top end of that range.
The first quarter.
For the first quarter, we expect stock based compensation.
<unk> to be 7% to $7 $3 million in each of the remaining quarters to be four eight to $5 2 million.
For the full year 2023, we expect stock based compensation to be 21, 5% to $23 million.
For the first quarter.
We expect other operating expenses to be nine $5 million to $10 million for the full year. We expect other operating expenses to be 40% to $41 million as we continue to grow our head count and return to our offices and many of our offices, we are experiencing an increase.
<unk> of employees.
We believe our office environment provides long term value as it supports collaboration for our interdisciplinary teams and staff development, which result in a higher value for our clients and retention of our employees.
For the first quarter, we expect G&A expenses to be $6 four to $6 8 million for the full year 2023, we expect G&A expenses to be 27% to $27 6 million.
As a reminder, travel will still was still very low in the first half of 2022.
So the year over year growth in G&A expenses is related to increased head count recruiting business development and travel.
We expect interest income to be one to $1 $4 million per quarter.
In addition, we anticipate miscellaneous income to be 600 to 800000 per quarter.
For 2023, we estimate based on our current stock price.
And then our tax benefit associated with share based awards will be approximately $3 million for the first quarter and full year.
As a reminder, we had $5 8 million of tax benefit from share based awards in 2022. So this difference will reduce net income by $2 $8 million and earnings per diluted share by <unk> <unk>.
The tax benefit from share based awards is determined based on the change in value of share based awards between grant and issuance date.
For 2023, we expect our tax rate exclusive of the tax benefit for share based awards to be approximately 27, 5% as compared to 27% in 2022.
For the first quarter of 2023, we expect our tax rate inclusive of the tax benefit from share based awards to be approximately 18, 5% as compared to nine 7% in the same quarter a year ago.
For the full year 2023, the tax rate inclusive of the tax benefit associated with share based awards is expected to be 25% as compared to 22, 7% in 2022.
Capital expenditures for the full year 2023 are expected to be $12 million to $15 million.
We are pleased to have delivered another solid quarter and fiscal year 2022, further emphasizing the strength and durability of our business model.
As we look to the year ahead, we remain confident in our ability to continue to grow profitably I will now turn the call back to Catherine for closing remarks.
Thank you rich.
For decades exponent has stood firmly at the forefront of engineering and scientific excellence, our fiscal 2022 results demonstrate excellence resilient resilient business model and financial strength in a challenging and uncertain macro environment.
Our exceptional talent, coupled with our diversified and growing portfolio of services positions us as a vital partner to help address the evolving needs of our clients as we look to the year ahead, we remain keenly focused on positioning the company for continued success and creating long term value for our shareholders operator, we.
We're now ready for questions.
Thank you.
We will now begin the question and answer section.
You ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your device before speaking.
The queue you May press Star then two at this time, we will pause momentarily to assemble our roster.
The first question. This evening comes from Tobey Sommer with Chile. Please.
Please go ahead.
Hey, good afternoon. This is jasper bibb on for Tobey. Thanks for taking our questions. So I just wanted to ask about the margin guidance like how would you frame your assumptions for 'twenty three with respect to.
Office occupancy business travel and recruiting versus your pre COVID-19 rates.
On a per employee basis. Other operating expenses were 23 looks looks pretty similar to 2019. So.
Would you say, you're effectively assuming things return to normal there.
Yes, we are.
The guidance that we provided around other operating and G&A cost here as well as to the structure is what we think will return us to a normalized level in 2023.
And then following up on that could you comment on what Youre seeing with respect to <unk>.
Consultant compensation rates.
And the ability to pass those along in your realized rate gains.
Yes, so we yes.
We are entering a period of time of doing.
Our recognition and reward process that we do each year during the first quarter of the year.
We expect.
Just as we've seen.
Seeing that we're going to have stronger.
Pricing increases than we did a year ago, so that our realized rate will go up where we.
We are expecting to deliver equal.
Or or thereabouts.
Growth in the.
Compensation or raises in salaries for our consulting staff.
Thanks that makes sense.
Last one for me are you seeing any impact from economic conditions on the proactive business at this point, where clients might be pulling back spend or maybe postponing some projects that are done on the pipeline.
Yeah.
Hi, Jasper, we're very attentive to looking for signs of impact to our client base and you know as so far.
We've found essentially is that the critical nature of our work to our clients operations has really continued to support the demand across the business.
What I mean by that if you think about.
The elements that drive our proactive work innovation.
It's the urgency of that next feature set in in the electronics industry or in the life Sciences industry that they've got to get get their for their next product launch if they want to be able to compete right. So it's not so much about how many units, they're selling but it's about being able to get that new product.
Out there performing reliably and safely.
We are driven by transformation in the industries in terms of product complexity, the regulatory frameworks continue to raise the bar.
On safety and on health and so what we're seeing.
Even if the clients are downsizing themselves they still need to get their product through that regulatory framework and that bar is going up and sell.
Same is true of our risk related work on the proactive side that this is driven by climate change and extreme weather and increased demand on a stressed power grid. These are things that have to be managed even whether we are in a recessionary environment or not so do we see clients potentially tightening their belts looking more.
Closely at Scopes of course, we're not completely immune to that but as we've seen historically it really is the critical nature of our work.
That allows us to see that continued demand and that strength in the demand.
I appreciate the detail there thanks for taking the questions.
You bet.
The next question comes from Andrew Nicholas William Blair. Please go ahead.
Hi, good afternoon, thanks for taking my questions.
A really really nice top line guide.
And what seems like a.
It's all relative but a normal year in 'twenty three at least relative to the past several I'm just wondering if if this growth algorithm.
6% to 8% head count growth with 3% to 4% price.
<unk> kind of rolling that up in the high single digit low double digit topline growth is that a good way for us to think about the business over the medium to long term now is that is that your expectation for growth or are there unique things about 2023, specifically that that would have it be higher or lower than that expectation.
Yeah, So maybe I'll start off and respond to that quantitatively and I think Kathryn may want to add in qualitatively about why why we're confident in this but look I think we are overall believe that where we need to be is a obviously the pull in the market.
It has to be there that we are confident we can achieve over a long term, but we think that is going to come with growing that head count in that 6% to 8% range.
And at times, hopefully even striking above that.
We do think that pricing will vary over time on the realized rate that we get out of that.
The realized rate has a lot to do with turnover and.
Hiring rates and things of that type, but we are.
That always hover up near the four no I think it could be two.
Two and a half to three and a half would probably be a long term normalized realization range, but.
I think we can be slightly above that.
Or are at the higher end of those ranges.
This year and Thats, why we provided that guidance around the 3% to 4%.
And then in the utilization area.
This year, we have the.
The utilization flat to down, but I think over the long term, we view that that utilization has actually gradually growing youre going to have years of some fluctuation on that but as I stated, we think that the overall utilization where it might be approximately <unk> <unk>.
73% this year give or take.
Over time that thats going to move to the mid Seventy's in and meet the sustained it in that range. So that's going to be even do a plus over a over SBU year period of time.
That we can hopefully achieved there. So overall that's why we believe that it is something that we can get up performing.
Around that double high single to low double digit mark and hopefully performing on the upper end of that yeah, and just to just to add onto that Andrew from the standpoint of the marketplace right. Now we've got to have of course the work for all of those folks to do and that comes across many different sectors of the economy.
In terms of opportunity right, it's industries and transformation that can create tremendous opportunity for us innovation creates opportunity I mean, if you think about the macro trends like the energy transition that we are facing.
This is going to drive engineering expectations to the limit.
This is a place where exponent thrives in understanding the behavior of these innovations across the product lifecycle, whether thats proactive or whether that's reactive.
Do you think about life Sciences things like digital health.
Emphasis on value demonstration with medicines and therapies.
It's our job and you think about automated vehicles and electrification right. The complexity associated with those innovations is going to continue to drive work to exponent. Our job is to understand what's coming around the bend position ourselves with the talents with the capabilities and with our relationships to win the business.
But I think the opportunity landscape absolutely supports the model that rich is talking about over time, and this sort of high single to low double digit range.
That's really helpful. Thank you and then maybe just for my follow up you touched on it a couple of times Katherine I'm kind of a digital health pharma space I know, it's a major growth focus for you in the organization as a whole you've done a lot of hiring there over the past couple of years can you just give a little bit more of a detailed update on how that.
It's going I think it's only a couple of points.
As a percentage of revenue today, but you have ambitions for that to be much much larger as a percentage of your revenue base. So I was just wondering if you could give a more detailed update on that effort.
Thank you for that question and we continue to invest as you mentioned.
On the talent side, but.
But also in the building of the client relationships.
Getting those relationships established so that we can be able to.
Get those engagements started when the issues arise and we are absolutely getting increased traction around that area. We have some public work that we're doing for the front.
The.
The centers for disease control around data and Covid vaccine efficacy and safety and so there are some very tangible and very forward looking kinds of projects that we have won in that space. So you are right. It is still a relatively small percentage of the portfolio.
But I'm pleased with the progress look this is a long term opportunity and we are in the investment phase, but we are seeing some of those early returns in.
In terms of those.
Those performance indicators sell very pleased to see that and we will continue to report back on that.
Thank you.
Youre welcome.
Ladies and gentlemen, this concludes the question and answer session as well as todays presentation. Thank you.
You also your participation you may now disconnect your lines.
Okay.
[music].
Yeah.
[music].
Sure.
[music].
Yes.
Yes.
[music].
Yes.
Okay.
[music].
Thanks.
Yes.
[music].
Yes.
Yes.
[music].