Exponent Inc. Q1 2023 Earnings Call
Good afternoon, and welcome to the exponent first quarter 2023 earnings 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.
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Please note this event is being recorded.
I would now like to turn the conference over to Joni constant Telus with Investor Relations. Please go ahead.
Thank you good afternoon, ladies and gentlemen, thank you for joining us on exponents first quarter 2023 financial results Conference call.
Please note that this call will simultaneously be 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 Dr. Catherine Corrigan, President and Chief Executive Officer, and Rich Linker, 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 exponents 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 of risk factor X five most recent Form 10-Q.
The 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 ill turn the call over to Dr. Catherine Corrigan Chief Executive Officer Catherine.
Thank you Tony and thank you everyone for joining us today I'll start off by reviewing our first quarter 2023 business performance Rich will then provide a more detailed review of our financial results and outlook and we will then open the call for questions.
We're pleased to report another solid quarter growing net revenues by over 9%, despite evolving macroeconomic challenges and uncertainty.
Our results demonstrate the strength of our business with a diversified portfolio of offerings, serving a broad range of industries across the entirety of the product lifecycle.
The health and the environment are increasingly important as companies deliver innovation and push the envelope with new technologies.
<unk> remains uniquely positioned as a trusted adviser harnessing the power of technical excellence objectivity and disciplinary diversity to help our clients solve their toughest science engineering and business challenges.
Increased demand for our reactive services, which have been foundational to exponent from our inception bolstered our growth in the first quarter in the quarter. We saw an influx of litigation related activity as well as product safety and recall related work that spans multiple industries on the proactive side activity in the quarter was.
Driven primarily by work in the consumer products chemicals utilities, automotive and life Sciences sectors.
Turning to our engagements in more detail within our reactive business. We saw strong demand for both our domestic litigation and international arbitration related work, particularly involving the transportation and energy sectors as well as intellectual property disputes. We also saw increased engagements around the <unk>.
Safety and recall across a number of end markets, including transportation and life Sciences.
Within our proactive business engagements in the quarter were primarily driven by regulatory issues across multiple industries product design consulting in the electronics and medical device spaces and asset integrity and risk related work engagements continued related to machine learning data collection and use of research.
The range of end markets. This work is reflective of the ongoing demand from our clients as they seek differentiated data to improve user experience and advanced product performance and reliability of their next generation designs.
In the quarter, our head count grew 12% year over year, driven by our ability to attract and retain top tier talent. We are an employer of choice for the best and brightest scientists and engineers, who choose exponent because of our esteemed reputation for technical excellence objectivity and disciplined.
My diversity, we are committed to growing our world class team and are pleased with our accelerated recruiting efforts over the last year, which have strengthened our unique position to meet the complex and dynamic needs of our clients as always we will continue to balance strategically expanding our team with utilization to ensure that we are.
Positioned correctly for any market environment to deliver value over the long term for all of our stakeholders.
Turning to our segments excellent engineering and other scientific segment represented 83% of our net revenues in the first quarter, increasing 11% as compared to the prior year period with continued strong demand for our services across the transportation utilities consumer products and life Sciences sectors.
Excellence Environmental and health segment represented 17% of our net revenues in the first quarter net revenues in this segment decreased 1% compared to the same period in the prior year, excluding the impact of foreign exchange net revenues for the environmental and health segment increased 2%.
In the first quarter as compared to the prior year period work. In this segment was primarily driven by exponent safety related engagements evaluating the impacts of chemicals on human health and the environment.
Before I turn the call over to rich to review the financials I do want to highlight the recent launch of exponents newly designed website, which underscores how we are helping clients create a safer healthier and more sustainable world. We are incredibly proud to showcase our people and the diverse and impactful work of our team of X.
Birch, who have helped us that some of the world's biggest disasters and challenges, including building collapses chemical spills and high profile product failures excellence World class team come by that experience with a vast array of scientific and engineering expertise to help our clients build future focused solutions for their <unk>.
Profamily unique unprecedented and urgent challenges.
Overall, our first quarter results exemplify the strength of our adaptable business model unique market position and depth of our client relationships. We will continue to position ourselves for the future investing in our talent knowledge base and skill to deliver increasing value to our clients and our shareholders.
I'll now turn the call over to rich to provide more detail on our first quarter results as well as discuss our outlook for the second 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.
The first quarter of 2023 total revenues and revenues before reimbursements or net revenues as I will refer to them from hereon increased nine 2% to $143 million and $128 $7 million respectively.
Compared to the same period of 2022.
The quarter's revenue growth was negatively impacted.
By half a percent from foreign exchange.
Net income for the first quarter decreased one 6% to $29 1 million or <unk> 56 per diluted share as compared to 29 6 million or <unk> 56.
Per diluted share in the prior year period.
The realized tax benefit associated with accounting for share based awards in the first quarter of 2023 was three $6 million or seven cents per diluted share as compared to $6 million or 11 per diluted share in the first quarter of 2020.
Sue.
Inclusive of the tax benefit for share based awards export its consolidated tax rate was 18% in the first quarter as compared to nine 7% for the same period in 2022.
EBIT.
For the first quarter increased three 7% to $35 $8 million producing a margin of 27, 8% of net revenues.
Mobile hours in the first quarter were approximately 385000, an increase of three 1% over the prior year.
Average technical fulltime equivalent employees in the first quarter were 1052, which is an increase of 12% as compared to one year ago. This exceeded our expectations as recruiting has been very successful and our retention rate has improved.
Route.
Utilization in the first quarter was 74% down from 76, 5% in the same period of 2022.
We expected utilization to step down from its elevated level in the first quarter of last year.
Utilization was lower due to the very strong head count growth, which resulted in a corresponding decline in utilization.
We are pleased to have delivered EBITDA margin in line with our guidance.
The realized rate increase was approximately 6% for the first quarter as compared to the same period a year ago.
In the first quarter compensation expense after adjusting for gains and losses in deferred compensation increased nine 3%.
Included in total compensation expense is a deferred compensation gain of $3.9 million as compared to a loss of $4 7 million in the same period of 2022.
This is a $8.6 million swing.
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 first quarter was $7 1 million as compared to $6 9 million in the prior year period.
Other operating expenses in the first quarter were up 17.1% to nine $6 million driven primarily by increased activity as our employees continue to return to our offices.
Included in other operating expenses is depreciation expense of $2 million for the first quarter.
As expected G&A expenses were up 38, 1% to $5 $8 million for the first quarter. The increase in G&A expenses was primarily due to increased marketing and recruiting activities as in person activities increase.
Interest income increased to one 8 billion for the first quarter driven by an increase in interest rates.
Helane its income excluding the deferred comp gain was approximately $730000 in the first quarter.
During the quarter capital expenditures were $5 $7 million.
And we distributed $14 5 million to shareholders through dividend payments. We ended the first quarter with 125 6 million in.
In cash and short term investments.
Turning to our outlook.
Our full year 2023 outlook is unchanged.
For the second quarter 2023, as compared to one year prior.
We expect revenues before reimbursements to grow in the high single low double digits and EBITDA margin to be 27, five to 28, 5% of revenues before reimbursements for the full year 2023 as compared to one year prior.
We expect revenues before reimbursements to grow in the high single to low double digits and EBIT to be 28 to 28, 5% of the revenues before reimbursements.
We've continued to benefit from the success of our recruiting and retention efforts.
As a result, we expect technical fulltime equivalent employees to grow 1% to 2% sequentially each of the remaining quarters.
As a result, ftes will grow 10% to 13% year over year.
We expect utilization in the second quarter to be 69% to 72% as compared to 76, 6% in the same quarter last year.
Utilization in the second quarter will continue to be tempered by the increased head count.
We expect the full time full year utilization to be 70% to 72% as compared to 73, 8% in 2022.
We still believe our long term target of sustained mid Seventy's utilization is achievable as we continue to strategically manage headcount and balance utilization based on market demands.
For the full year, we expect G&A expenses to be 27% to 27 6 million.
As a reminder, travel was very low in the first half of 2020 due 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 five to $1 $8 million per quarter. In 2023. In addition, we anticipate miscellaneous income to be approximately 600.
And the 800000 per quarter.
For the remainder of 2023, we do not expect any additional tax benefit associated with share based awards so the year over year.
The year over year lower tax benefit associated with share based awards will reduce net income by $2.2 million and earnings per diluted share by <unk>.
For the for 2023, we expect our tax rate exclusive of the tax benefit for share based awards to be approximately 28% as compared to 27% in 2022.
Exponent stands at the cornerstone of engineering and scientific excellence connecting the lessons of past failures with tomorrow solutions to create a safer healthier and more sustainable world. Our first quarter results demonstrate excellent leading position in the market as well as our financial strength.
Backed by our World class team multidisciplinary capabilities and diverse client relationships, we remain confident in our ability to grow exponent profitably and drive long term value for our shareholders. Operator, we are now ready for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad if.
If you are using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Andrew Nicholas with William Blair. Please go ahead.
Hi, good afternoon, thanks for taking my questions.
I'll just start with one on head count growth.
Just maybe more broadly you've seen.
Yeah, a couple of percentage point contribution from both sides of the net head count equation and that included.
The fact that we were seeing strong.
Acceptance rates.
And good access to top talent, which led to a little bit higher.
Inbound.
Level of people based on the quality of what we're getting on that side and the same occurred.
In the retention sort of side, we saw that.
Pulling back to levels that approximate the rate that we were seeing in the first quarter.
Quarter to now four months of 2019 so.
Back to a more normalized level pre COVID-19 than obviously, what we saw which was.
New levels during 'twenty, one and 'twenty two especially in those first four months as we pay out our bonuses.
I think it's quite strong you know it always has been that we're in an environment of some level of uncertainty and I think that this this engineering and scientific talent perceives exponent as a company with a strong foundation with a with a diverse portfolio of exciting and interesting work that they want to be a part of so I think.
There are absolutely the quantitative aspects that rich cited but you.
Also that overall overall value proposition that we feel is quite strong.
Makes sense. Thank you and then.
For my follow up I wanted to ask about the proactive business. It seems like and correct me if I'm wrong that the reactive side was a bit stronger than the proactive side this quarter.
That is true and that was the case, what would you attribute that to and.
Kind of related to the market uncertainty has there been any change in demand.
From your proactive clients are in the current environment.
Yeah, Thanks, Andrew for that.
Like you said the you know the reactive side of the business very strong in the quarter both inner.
Nationally as well as domestically you know this is our litigation portfolio. It's our recall related work some of the defect investigation is very strong around automotive life Sciences.
Some of the toxic tort areas on the proactive side, where we're finding it to be pretty variable across clients.
We've got a lot of critical work that we're doing around the regulatory environment. The regulations don't go away. When you have sort of uncertainty in the macroeconomic environment that need for innovation in industries like consumer electronics, or let's say medical devices that.
There, but what we are seeing in <unk> with some clients is there theyre getting themselves oriented around the uncertainty maybe they've had some layoffs. There teams are resetting themselves and saying Okay look we've got to do this work, but it's going to be maybe in next quarter not this quarter. So we're seeing a little bit.
Is that sort of behavior from some clients.
But the reality is that that critical work is still moving forward right. So we've got a few areas where there you know there may be a pause or we're going to start that in another month or two kind of thing, but we're seeing the workflow of those critical items continue to be part of that demand.
Equation for us.
Very helpful. Thank you Youre welcome.
The next question is from Tobey Sommer with truly Securities. Please go ahead.
Okay.
Thanks.
Let's start out with a sort of numbers question in terms of pricing.
What was the the nominal rate increase in January and how it is.
Realize right.
Impacted the model I wasn't sure if there'd be any nuances because of the better kind of retention and acceptance rate held up well.
Puts and takes are there.
Yeah. So.
Or a rate increase for our employees who were here on.
On the January one timeframe was approximately 10%.
That.
The realization.
All of that was approximately 6% that we realized out of that and that is.
Based on mix and what you mentioned there so we have always.
Had this in our portfolio, it's not because we are having a yo yo.
As you are quite aware tobey each of our employees have a single rate for the calendar year.
Each of them individually based on their experience.
Credentials.
Our position in the marketplace.
Is how that set for all clients and all work.
And and that remains that way and we've been able to break continue to push that through.
In 2023, but as we're hiring in new people, which we had a lot of in the first quarter here.
That is blended down.
And is why I have that stepping down a little bit further as we move through the year and provided that guidance on where the rate would be but where we're quite pleased with.
Where that realization is realize that a little higher head count, especially because we're hiring in typically it.
The entry level, which is for us typically a new Phd out of a top school are bringing.
Bringing them in and then growing them up over their career.
Fully achieve.
The level of principal in our organization so.
That is what we're seeing at this time.
Yes.
I'm curious do you see it.
The connection in demand for Expos services win.
No.
When we've seen in recent months.
Layoff announcements either in TMT consumer electronics, I guess, it's not uniquely in those verticals, but they were sort of top of mind. These days.
Yes, so tobey clearly the environment for hiring with regard to engineering and scientific talent that has shifted with.
With the sort of larger picture that we see in tech the tech sector and other sectors.
So you know, we're always having to compete with those entities for our talent.
And this really goes back to the sort of employee value proposition that I was talking about before we do have an ability to sort of acquire that talent, but at the same time in the past we have seen situations, where because clients are unable to hire or are laying off.
Asked that there is.
There was an impact on our demand needing more help from consultants, we've seen that in the past in the regulatory world.
We haven't seen so much of that thus far around the technology side, but certainly seeing that shifts from the standpoint of.
Our talent acquisition I think it is early these teams as I said before are sort of resetting after after a series of layoffs and technology and so we're going to continue to develop those relationships and develop our people to ensure that we can serve all of the needs that they've got.
And innovation.
And I'm curious if based on the debt.
Better retention and higher acceptance rate.
Uh huh.
Does it change your assumptions for those metrics throughout the year and if so do you do you tap the brakes on gross external hires based on how you see the the marketplace and the opportunity to grow revenue.
Yeah. Thanks, Tobey so it's really all about the portfolio and hiring strategically where we are seeing the need and the demand in the marketplace right. So it's less about.
We're gonna.
Take a flat cut in our efforts across the board right. We've got to be looking at every one of our business units every one of our capabilities in industries for.
For example, all electric vehicles is that it is a great example of this is an area where we are looking to acquire more talent because of the opportunity that we see and so we're not tapping the brakes, there but in other areas, where you know where there is more softness we can do different things right. So I've got multiple dials on my dashboard.
That I can say all right. We've got a ramp up here, we've got a pull back and it's very strategic according to the market.
Thanks and.
Maybe it's been too short a period of time, but.
The banking turmoil commenced Ah.
Or is that a long enough stretch of time to notice whether it's it has mattered in the marketplace.
I suspect if it did it would it would matter more on the proactive side, but does that represent sort of a break point in the year to date calendar, but before STB and after.
Tobey, we really we haven't seen a change.
Relative to that event.
And I think that is that but.
Most of her at X, but it's engagements are not with startup organizations, while I realize that SBB.
Clearly had mature.
Entities or are there competitors have mature entities banking with them, we have not seen.
That impact and you know I've had those discussions with our employees that are engaged in the in the tech area and I don't think where we see a clear.
Clients that are you know sort of a little bit slower to move board and such I don't think its relative to them waiting on funding or not having funding.
As such.
That's just hasn't been our market in about.
But you know as you say it hasnt been that long time will tell.
I actually suspect where our mature clients, which make up the vast majority of our revenues.
If anything this creates.
Creates more open market for them.
Okay last question for me.
Rich any change in the composition of our big projects versus last time, we heard from you.
On the portfolio and in the P&L.
So are we sort of have a what I'll call a more normalized portfolio at this point in time, you know the large projects or 2% of revenue or such and and going on a cross quarters end and such and we'll expect it to be a more north.
More in that range.
Outsized ER projects like we've had in prior years, where something might be in that four 5%.
Of the revenue range, so right now no.
Thank you very much.
This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
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