Q2 2023 Exponent Inc Earnings Call
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Joni constant tell us with Investor Relations. Please go ahead.
Thank you good afternoon, ladies and gentlemen, thank you for joining us on exponent second quarter 2023 financial results Conference call. Please note that this call will simultaneously webcast on the Investor Relations section of the company's corporate website at Www Dot exponent stockpile backslash investors.
This conference call is the property of exponent and any taping or other reproduction is expressly prohibited without prior written consent joining.
Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer and.
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 exponents 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 result.
To differ from forward looking statements can be found in exponents periodic SEC filings, including those factors discussed under the caption risk factor and export our most recent Form 10-Q.
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. 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 second 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 delivered solid second quarter results growing net revenues by 10% and expanding earnings per diluted share. We continue to demonstrate the strength of our diverse and ever evolving services portfolio, which anticipate and adapt to our clients' critical needs throughout their product life cycles.
Growth in the quarter was driven by robust demand for our reactive offerings. The proactive side saw increased demand in the chemicals and life sciences sectors offset by some moderation in the electronics sector overall.
Overall, our strategic mix of capabilities across industries, and the product lifecycle performed well despite specific headwinds that I will discuss in a moment.
Turning to our engagements in more detail within our reactive services. We saw strong increased demand for our disputes and litigation related work with particular strength in the transportation construction and consumer products sectors on the automotive side, we are fielding more and more questions about the design.
Line and performance of advanced driver assistance and battery systems in accidents scenarios as these technologies become more complex and more prevalent in the fleet and the decisions made by artificial intelligence algorithms are challenged we also saw increased product safety and recall related engagements as clients.
Leveraged our expert insights to understand the root cause of issues with their products.
The proactive side benefited from increased demand in the chemicals and life science sectors driven in large part by regulatory engagements. This was offset by some moderation in the electronics industry associated with the timing of client product releases, coupled with the disruption caused by the actions the industry has taken a turn.
A reduced staff.
These factors impacted data gathering activities and human subject research as well as product development consulting as products move through their life cycles out of the development stage and into the refinement stage, while we expect these trends within electronics to persist over the next few quarters, we are optimistic.
The longer term opportunities in this sector.
We are well positioned given the increasing role of artificial intelligence and product innovation and performance with our capabilities in Curating data to drive AI algorithms as well as our experience analyzing the physical consequences of AI driven decisions.
Our diverse portfolio of proactive offerings positions us well to capitalize on the complexities associated with next generation designs and increasing expectations around safety health and the environment.
Improved retention as well as our accelerated recruiting efforts over the last year drove a 15% increase in head count year over year, which reflects the strength of our employee value proposition.
These investments in our talent are critical for our future growth, we remain diligently focused on aligning our resources with the growth of the business and future opportunities rich will share some additional color on our expected head count growth in a few moments.
Turning to our segments exponents engineering and other scientific segment represented 83% of our net revenues in the second quarter, increasing 10% in the second quarter and 11% in the first half compared to the prior year.
Growth in the quarter was driven by strong demand for exponent services across the transportation and construction sectors.
Exponents environmental and health segment represented 17% of the company's net revenues in the second quarter.
Net revenues in this segment increased 10% in the quarter and 4% in the first half compared to the prior year growth was driven by regulatory consulting around the impacts of chemicals on human health and the environment as well as activity in the life Sciences sector.
As we move into the back half of the year, we remain focused on strengthening our client relationships managing resources in line with the growth of the business and meeting the dynamic needs of our clients overall I am pleased to see the power of our diverse portfolio delivering solid growth through economic cycles as we address.
Our clients' most complex challenges.
I'll now turn the call over to rich to provide more detail on our second quarter results as well as discuss our outlook for the third 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 second quarter of 2023 total revenues increased seven 6% to 142.
$2 million in revenue before reimbursements or net revenues as I will refer to them from here on increased nine 7% to $129 7 million as compared to the same period of 2022.
Net income for the second quarter was $25 7 million or 50 cents per diluted share as compared to $25 8 million or 49 cents per diluted share in the prior year period.
The realized tax benefit associated with accounting for share based awards was immaterial in the second quarters of.
2023 and 2022.
<unk> consolidated tax rate was 29% in the second quarter as compared to 27, 3% for the same period in 2022.
EBIT for the second quarter decreased less than 1% to $36 $8 million producing a margin of 28, 4% of net revenues as compared to 30 31.
$37 $1 million, which was a margin of 31, 4% in the same period of 2022.
The year over year step down in margins was anticipated as expenses normalize post pandemic.
Billable hours in the second quarter were approximately 388000, an increase of 4.4% year over year.
The average technical fulltime equivalent employees in the second quarter were 1077, which is an increase of 15% as compared to one year ago.
It is our expectation as recruiting has been very successful and retention has improved.
In the quarter was 69% down from 77% in the same period of 2022.
Well, we expected utilization to decline from the elevated level it was in.
The second quarter of last year.
Our higher than anticipated head count resulted in lower utilization in the quarter.
As Katherine mentioned, we are diligently focused on strategically balancing our resources with the growth of the business and our pursuit of future opportunities.
The realized rate increase was approximately five 3% for the second quarter as compared to the same period a year ago.
The second in the second quarter after adjusting for gains and losses in deferred compensation expense.
Compensation expense increased 12, 6%.
Included in total compensation expense as a deferred compensation gain of $4 $1 million as compared to a loss of $11 $3 million in the same period of 2022. This is a $15.4 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 second quarter was $5 $2 million as compared to $4 6 million in the prior year period.
Other operating expenses.
For the quarter were up 17, 7% to 10 $3 million driven primarily by increased employee activity at our offices.
Included in other operating expenses is depreciation and amortization expense of $2 $2 million for the second quarter.
G&A expenses were up 15, 6% to $6.6 million for the second quarter.
The increase in G&A expenses was primarily due to.
Two increased travel as employees return to in person engagement with clients and professional development.
Interest income increased to $1 $6 million for the second quarter, driven by an increase in interest rates miscellaneous income excluding the deferred compensation game was approximately $700000 in the second quarter.
During the quarter capital expenditures were five $4 million and we distributed $13.2 million to shareholders through dividend payments. We ended the second quarter with $148 $2 million in cash and cash equivalents.
Turning to our outlook.
Our full year 2023 outlook is unchanged.
For the third quarter 2023, as compared to one year. Prior we expect revenues before reimbursements to grow in the high single to low double digits and EBITDA margin to be 27.5 to $28 five.
What percent of revenues before reimbursements.
For the full year 2023, as compared to one year prior.
We are maintaining our guidance and expect revenues before reimbursements to grow in the high single to low double digits and EBITDA margin to be 28 to 28, 5% of revenues before reimbursements.
As mentioned, we remain focused on strategically aligning our head count with the growth of the business. These actions include reducing hiring and increasing performance management.
As a result in each of the next two quarters, we expect technical fulltime equivalent employees to decline sequentially, 2% to 3%.
Over the next quarter or two are hiring will be surgical in nature to address areas of high utilization and strategic growth.
<unk> also increased performance management, which will increase turnover.
Performance management is ongoing and our firm as we evaluate each employee's career trajectory towards determining if they are on a path to principle, where if their career skills are better aligned with a career in industry government or academia.
Performance management tends to be less when we when resources are constrained.
Turnover is high such as one in 2021 and 2022.
We expect utilization in the third quarter to be 68% to 70% as compared to 73% in the same quarter last year.
Utilization in the third quarter and continue to be tempered by increased head count as well as seasonally higher vacation and holiday time during the summer months.
Our expectations for full year utilization is 69% to 70% 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 head count and balance utilization based on market demand.
We expect the 2023 year over year realized rate increase to be $4 75 to five 5%.
For the remaining quarters, we expect stock based compensation to be $4 eight to five 2 million for the full year 2023, we expect stock based compensation to be 22 to $22 8 million.
For the third quarter, we expect other operating expenses to be 10 $7 million to $11 million.
For the full year, we expect other operating expenses to be 41, 7% to $42 million in our office activities continue to pick up.
D&A expenses are increasing as post pandemic travel increases for business and professional development for.
For the third quarter of 2023, we expect G&A expenses to be 7.3 to $7 $7 million for the full year, we expect G&A expenses to be 26, 7% to $27 $2 million.
We expect interest income to be approximately $1 $8 million per quarter for the remaining quarters of 2023 and.
In addition, we expect miscellaneous income to be approximately $750000 per quarter.
For the remainder of 2023, we do not anticipate any additional tax benefit associated with share based awards. So the year over year tax benefit associated with share based awards will be $2 4 million.
Less than it was in 2022, which is <unk>.
Five cents per diluted share impact to EPS.
For 2023, we expect our tax rate exclusive of the tax benefit for share based awards to be approximately 28, 5% as compared to 27.0% in 2022.
For the third quarter of 2023, we expect our tax rate to be approximately 29% as compared to 27% in the same quarter a year ago for.
For the full year of 2023, the tax rate inclusive of the tax benefit for share based awards is expected to be 26, 1% as compared to 22, 6% in 2022.
Closing, our second quarter results continue to underscore the strength of our business model and financial position as we look to the back half of the year. We remain positioned to continue our profitable growth I will now turn the call back to Catherine for closing remarks.
Thank you rich.
<unk> continues to advance science and engineering to empower our clients with solutions to their most critical challenges.
We are uniquely positioned to advise them as they navigate the complexity of societies, increasing expectations around safety health and the environment.
Supported by the strength of our World class team and our ever evolving services portfolio, we remain confident in our ability to drive profitability and shareholder value over the long term 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 Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
Our first question comes from Josh Chan from UBS. Please go ahead.
Hi, good afternoon, Catherine and rich thanks for taking my questions.
Hi, there.
Hello, I guess I, maybe I can start with the two part question on on demand. So I guess first on the reactive side. It seems like that business is growing above what it normally grows out and you Katherine you brought up some points on what's driving that but I guess do you feel like that above normal.
Growth is sustainable going forward and then secondly on the proactive side, it's hard to tell whether that business, maybe decelerated a little bit in Q2, it sounds like it might have but its theres a way you can kind of ballpark for us how broad base. The choppiness has been that would be really helpful.
Yeah. Thanks, Thanks, Josh So first on the reactive side look I mean, we see the increasing complexity that is coming around products as a real driver of that reactive work you know I didn't give the example around advanced driver assisted.
Systems.
You know as as artificial intelligence is incorporated even more into products and making those decisions you know it could be an automated vehicle it could be a wearable device, that's giving signals about human health it could be in a R. R. V are mixed reality device that's you.
You know.
Making decisions as well, whether that's around employee training, our or various things and so we are positioning ourselves at the forefront of except those questions you know through our research and through the professional development of our teams and so we don't think this is necessarily a blip in our in the growth in our reactive.
Work, we think that portfolio has very very strong market driver as you know that in addition to the.
The opportunities for expansion internationally around disputes changes in the landscape in the EU around a product recalls and added those frameworks and so we really are optimistic about the growth potential for that side of the portfolio.
On the proactive side, we did talk about some of the moderation. That's happened you know we've got strength in a number of areas gross around the regulatory side in the agricultural chemicals for example growth on that side in life Sciences, but the electronics industry, you know that that is the place.
Where there is some moderation and you know a couple of factors that are weighing into that you know there was some disruption caused by the layoffs.
That impacted the flow of work in electrical layoffs in the industry.
You know this is groups that are having to reconfigure and stabilize them you know that it takes a couple of quarters to sort of work its way through we're seeing signs of that stabilizing that workflow starting to come back through them, but some of our like our data collection work our human subject.
Work.
These are these are impacted in the near term by the product's lifecycle, it's where our clients are in that product lifecycle. I'm. You know there can be a big push in the development phase and a big product launch and then you know that goes into the refinement phase and it can ebb and flow.
Because of that we see these clients also managing their budgets, a little more tightly which isn't surprising.
So we're seeing we're expecting that over the next couple of quarters, we saw it in Q2.
And probably we will see it over a couple of more quarters, but long term. This focus that society has.
On the quality of the data that's driving in training and I got algorithms and the quality of the decisions, it's making and the competitive landscape in that industry and that all makes us feel feel good in the long term about the.
These kinds of offerings that we have and of course, we will continue to evolve those offerings to really capture what we think is that it's a good long term opportunity.
Yeah.
Thanks, Katherine that's a really good color there I appreciate that.
And then I guess like my my second question on on margins. This quarter, just conceptually it seems like utilization ticked down from Q1 going into Q2, but somehow you were able to deliver stronger margins. This quarter. So could you talk about what's driving that kind of sequential margin improvement, even though you didn't have that.
They shouldn't help there.
Yes.
So the margin improvement there is coming from.
The balance on the compensation line. So we do tend to have a higher compensation costs in the first quarter on a stock base basis. So.
In the first quarter that was about seven five.
Really about $7 million in the in the first quarter, where you had about $5 2 million in stock based compensation in the second quarter and that's all around the timing of when we issue our grants and the accounting for those that pushes through.
In addition to that a lot of our hiring.
Has been.
They're very much at the entry level.
When you balance that with where the rates are on bill rates versus the change in the compensation area you'd get the benefit of that are also pushing through.
Okay. Yeah. Thanks, Thanks for that rich and then I guess lastly.
How are you seeing the impacts between revenue per billable hour growth and wage inflation I think you gave some color on what you expect for <unk>.
Revenue per billable hour for the year, but just wondering how you're thinking about that balance. Thank you.
Yeah, so on a on a per consultant basis, what we see.
Seen or a per dollar basis, there we haven't we've seen our rate increase on even though we gave a pretty substantial raises to our existing staff effective April one and all of those races, where there and in place.
In the second quarter that was blended down to basically a flat to 1% sort of rate increase that we saw across because of the mix of employees that we had coming in so the mix of employees that we had generated a flat to slightly up.
Ah you know wage increase at the same time that would that mix generated approximately five 3% increase in the in the billing rates.
Great. Thank you for that and thanks for your time.
The next question comes from Tobey Sommer from Truest. Please go ahead.
Thanks, I wanted to follow up on that sort of a broad head count.
And revenue and expense growth.
Are you.
Are you comfortable with this amount of head count growth in the.
The near term demand picture.
So that you can.
You too.
Maintain our bottom line growth rate.
You know, we're sort of in excess of your revenue growth.
Yeah. Thanks, Tobey. So look we are looking to slow that head count growth you know there are.
To make sure that were aligning that with the near term and longer term demands and ER and the opportunities that we're seeing you know there are two.
Really two pronged to that approach right I mean, we've got the recruiting side.
You know so we've got a number of areas have that many areas in the business. That's in fact, most of them are growing at a strong right.
And if so we need to be recruiting in those in those areas.
And we are very focused on surgically recruiting strategically to make sure when our resources are constrained that we can meet the market and meet that demand.
For example, the reactive side of the business and like that advanced driver assistance area right. This is a place where we want to be recruiting to capture that but the other side of managing that head count and working to bring that down is through performance manage that rich mentioned a little bit about this you know we're always wrong.
He's looking for that best talent right and that's what we're all about we have this rigorous process of acquiring them paradigm that puts them on a growth path from day, one, but making it all the way to principle that I just thought I'd ask a consultant it's hard it's not for everyone and so many.
Lawyers can reach a point in their career, where there are better opportunities for them elsewhere right and so we can counsel them about that and that's what our performance management process is all about so as rich said.
Sequentially, bringing that head count down by two 2% to 3% per quarter over the next couple of quarters is.
Is what we're doing in order to bring those two things back into balance again.
I appreciate that could you speak to.
Artificial intelligence in all its forms.
What do you think it means.
Internally for your company.
Are you engaged with your customers and ultimately.
How it may impact demand for your services.
Yeah, Yeah. I mean, there are we are engaged and have been engaged sort of across the lifecycle.
Artificial intelligence algorithms, telling you you know you start with the data that you feed into them in order to create that right. The training datasets, it's very important to make sure that those have the right diversity demographics.
The curation of those datasets as an important part of that first step we talk to clients about that you know we talk about the sort of ontologies that are used and the cleaning of the data because real world data are messy right. We all know that and exponent has a history of being able to take real world data.
And gain insights from that because of our subject matter expertise right. So that's the theme Toby when we're talking to clients is really about this is where AI meets the laws of physics right exponent has a long history of you now apply.
Applying.
Their understanding of the laws of physics to understand the consequences of all kinds of different decisions and that design decisions out in for products.
Decisions around the management of assets for a utility and you know whatever the case may be and so it's that combination of the data you're using to drive the algorithm. The fit the laws of physics that you are applying to make it real and then the decision that is coming.
Out the other end and we have opportunities at every stage of that process you know because of the foundation, we've laid and working around the product lifecycle for many many years and so you know the key is where it needs to lots of physics, where it meets human behavior and our ability to cross.
Ross industries with that with those assessments I think is an incredible value proposition that positions us really well to capture to capture growth there and so.
As Katherine et said earlier, you know where we've already done this work in and are gaining a.
Top recognition in the marketplace by key players Oh, yeah over the last even year or two you know is in the automated vehicle or really actually in the Adas systems subsystems within those vehicles, you don't need to be fully autonomous.
Breaking decision or a steering decision or are those other things it's been in a the risk models and decision models that utilities out here on the West coast are doing to make a decision about the resiliency of their system or particular lines and making a decision at what wind speed.
Or what environment to make a decision and do that and to have that happen real time as the weather is changing as those inputs are coming in and have that model built and in engineering.
Basis, so that you can rely upon those decisions youre doing or over into what we're seeing our clients develop in their health applications and wearable technologies, where they want their.
Their customers to ultimately be able to rely upon the feedback coming from that wearable to di device to understand when.
When they really need to seek medical attention and do such and then finally as we're moving into the E. R. N V. Our area.
Clients, who wanted to have a true real world experience and deal with the safety and reliability and quality of those experiences are wanting to make sure that they're utilizing curated data to have those experiences. So those are examples.
Ample than what we've already done a I think the future is.
You know quite significant for us in it going forward.
Yeah.
Thanks, if I could sneak last one in can you update us on the large contract.
Exposure or opportunity should there not be classically defined large contracts and.
My question comes in the context of having observed all the news around legacy telco.
Cables with led which.
At least bond and stock markets are assuming represents pretty significant.
Liabilities in exposures for those firms.
Yeah, I think so we have not had a.
Single project recently.
It is of that.
4% to 5% of revenues. We've had you know collections of different areas. Some of that in this data collection area that accumulate up near there, but not a you know a.
Single engagement around it but you are right in the history of our history.
You are those projects that have achieved that for a 5% of revenues.
<unk> been around health exposures and environmental.
Contaminants you know.
If you recall back in the mid 20 teens here.
We had.
Our work for BP related to the deep water horizon fit in that and and such so.
Issues.
No. We are not as you know we haven't had a project of this size, but we've done a lot of work over the past two decades related to asbestos and outcome and other exposures. There. So we have you know some of the leading experts in environmental and.
To help the exposure.
And and the consequences of that.
And.
We'll see where the this issue for industry goes.
Thank you.
This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
[music].
Okay.
[music].
Yeah.
Yeah.
[music].