Exponent Q1 2023 Earnings Call Transcript

There are 6 speakers on the call.

Operator

Afternoon, and welcome to the Exponent First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Joni Constantelos with Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Q1 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. .Com/investors.

Speaker 1

This conference call is the property of Exponent, and any taping or other reproduction is Joining me on the call today are Doctor. Catherine Corrigan, President and Chief Executive Officer And Rich Slinker, 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, Exponent's market opportunities and future financial results that involve risks in Exclent's most recent Form 10 Q. The forward looking statements and risks in this conference call are based on current expectations as of today, And Exelent 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 Doctor.

Speaker 1

Catherine Oregon Chief Executive Officer. Catherine?

Speaker 2

Thank you, Joanie, and thank you, everyone, for joining us today. I will start off by reviewing our Q1 2023 business performance. Rich will then provide a more detailed review of our financial results and outlook, Diversified portfolio of offerings serving a broad range of industries across the entirety of the product lifecycle. Safety, health and the environment are increasingly important as companies deliver innovation and push the envelope with new technologies. Exponent remains uniquely positioned as a trusted advisor, harnessing the power of technical excellence, objectivity And disciplinary diversity to help our clients solve their toughest science, engineering and business challenges.

Speaker 2

Increased demand for our reactive services, which have been foundational to Exponent from our inception, bolstered our growth in the Q1. 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.

Speaker 2

We also saw increased engagements around product 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 Engagements continued related to machine learning data collection and user research across a range of end markets. This work is reflective of 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. Across the business, Exponent is well positioned to capitalize on macro trends, including escalation in safety, health and environmental concerns That will have a significant impact on our business over the next several years. We are excited about transformations related to energy storage, Vehicle Electrification and Automation, Consumer Electronics and Digital Health as the complexities associated with these innovations continue to drive work for our services.

Speaker 2

We are intently focused on understanding what is on the horizon and are positioning ourselves with the talent, capabilities and relationships to grow our client base and expand our business. In the quarter, our headcount 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 disciplinary diversity. We are committed to growing our world class team and are pleased with our accelerated recruiting efforts over the last year, which has strengthened our unique position to meet the complex Turning to our segments. Exponent's Engineering and Other Scientific segment represented 83% of our net revenues in the Q1, 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. Exponent's Environmental and Health segment represented 17% 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.

Speaker 2

Work in this segment was primarily driven by Exponent's 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 Exponent's newly designed website, which underscores how we are helping clients create a safer, healthier and more We are incredibly proud to showcase our people and the diverse and impactful work of our team of experts who have helped assess some of the world's biggest disasters and challenges, including building collapses, chemical spills and high profile product failures. Exponent's world class team combines that experience with a vast array of scientific and engineering expertise to help our clients build future focused solutions for their most profoundly unique, unprecedented and urgent challenges. Overall, our Q1 results exemplify 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 skills to deliver increasing value to our clients and our shareholders.

Speaker 2

I'll now turn the call over to Rich to provide more detail on our Q1 results as well as discuss our outlook for the Q2 and the full year 2023.

Speaker 3

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 Q1 of 2023 total revenues and revenues before reimbursements or net revenues as I will refer and $128,700,000 respectively as compared to the same period of 2022. The quarter's revenue growth was negatively impacted by 0.5% from foreign exchange. Net income for the Q1 decreased 1.6 percent to $29,100,000 or $0.56 per diluted share as compared to $29,600,000 or $0.56 per diluted share in the prior year period.

Speaker 3

The realized tax benefit associated with accounting For share based awards in the Q1 of 2023 was $3,600,000 or $0.07 per diluted share as compared to $6,000,000 or $0.11 per diluted share in the Q1 of 2022, Inclusive of the tax benefit for share based awards, Exponent's consolidated tax rate was 18% in the 1st quarter as compared to 9.7% for the same period in 2022. EBITDA For the Q1 increased 3.7 percent to $35,800,000 producing a margin of 27.8 percent of net revenues. Billable hours in the first quarter The average technical full time equivalent employees in the Q1 were 1052, which is an increase of 12% as compared to 1 year ago. This exceeded our expectations As recruiting has been very successful and our retention rate has improved, utilization in the Q1 With 70.4%, down from 76.5% in the same period of 2022. We expected utilization to step down from its elevated level in the Q1 of last year.

Speaker 3

Utilization was lower due to the very strong headcount growth, which resulted in 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 Q1 as compared to the same period a year ago, in the Q1, compensation expense after adjusting For gains and losses in deferred compensation increased 9.3%. Included in total compensation expense Is a deferred compensation gain of $3,900,000 as compared to a loss of $4,700,000 in the same period of 2022. This is a $8,600,000 swing.

Speaker 3

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 Q1 was $7,100,000 as compared to 6 $900,000 in the prior year period. Other operating expenses in the Q1 were up 17.1 percent to $9,600,000 driven primarily by increased activity as our employees continue to return to our offices. Included in other operating expenses is depreciation expense of $2,000,000 for the Q1. As expected, G and A expenses were up 38.1% $5,800,000 for the Q1.

Speaker 3

The increase in G and A expenses was primarily due To increase marketing and recruiting activities as in person activities increase, interest income increased 1 $800,000 for the Q1 driven by an increase in interest rates. Miscellaneous income, Excluding the deferred comp gain was approximately $730,000 in the first quarter. During the quarter, capital expenditures were $5,700,000 and we distributed $14,500,000 to shareholders Through dividend payments, we ended the Q1 with $125,600,000 in cash and short term investments. Turning to our outlook. Our full year 2023 outlook is unchanged.

Speaker 3

For the Q2 2023 as compared to 1 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 28.5% of revenues before reimbursements. For the full year 2023 as compared to 1 year prior, We expect revenues before reimbursements to grow in the high single to low double digits and EBITDA to be 28% to 28.5 percent of the revenues before reimbursements. We continue to benefit from the success of our recruiting and retention efforts. As a result, we expect technical full time equivalent to grow 1% to 2% sequentially each of the remaining quarters. And as a result, FTEs in the 2nd quarter to be 69% to 72% as compared to 76.6% in the same quarter last year.

Speaker 3

Utilization in the second quarter will continue to be tempered by the increased headcount. We expect the full year utilization to be 70% to 72% as compared to 73.8% in 20 We still believe our long term target of sustained mid-70s utilization Is achievable as we continue to strategically manage headcount and balance utilization based on market demands. We expect 2023 year over year realized rate increase to be 4.75% to 5.5%. We expect that approximately the same rate will be realized for our annual salary increases that begin on April 1. For the remaining quarters, we expect stock based compensation to be 4 point $5,000,000 to $5,200,000 For the full year 2023, we expect stock based compensation to be $22,000,000 to $23,000,000 For the Q2, we expect other operating expenses to be $10,000,000 to $10,500,000 For the full year, we expect other operating expenses to be $40,500,000 to $41,500,000 As we continue to grow headcount and return to our offices.

Speaker 3

For the Q2, we expect G and A expenses to be $6,400,000 to $6,800,000 For the full year, we expect G and A expenses to be $27,000,000 to 27.6 As a reminder, travel was very low in the first half of twenty twenty two. So The year over year growth in G and A expenses is related to increased headcount, recruiting, business development and travel. We expect interest income to be $1,500,000 to $1,800,000 per quarter in 2023. In addition, We anticipate miscellaneous income to be approximately $600,000 to $800,000 per quarter. For the remainder of 2023, we do not expect any additional tax benefit associated with share based awards.

Speaker 3

So the year over year lower tax benefit associated with share based awards will reduce Net income by $2,200,000 and earnings per diluted share by 0 point 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. For the Q2 of 2023, we expect our tax rate to be approximately 28% as compared to 28.3% in the same quarter a year ago. For the full year 2023, the tax rate, including The benefit tax benefit associated with share based awards is expected to be 25.3% as compared to 22.6% in 2022. In closing, We delivered yet another solid quarter and remain well positioned to continue our profitable growth. I will now turn the call back to Catherine for closing remarks.

Speaker 2

Thank you, Rich. Exponent stands at Cornerstone of engineering and scientific excellence, connecting the lessons of past failures with tomorrow's solutions to create a safer, Healthier and more sustainable world. Our first quarter results demonstrate Exponent's 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

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. Our first question is from Andrew Nicholas with William Blair. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks for taking my questions. Wanted to start with 1 on headcount growth. Just maybe more broadly, it seems like you hired a little bit stronger than even you had expected. Could you unpack Why you think that was in the quarter?

Speaker 4

Did attrition come in lower than you thought? Is there particularly strong Demand for working on Exponent now relative to previous quarters, just any other color on the recruiting environment and what As driven your success there would be great.

Speaker 3

Yes. Why don't I'll start off there and give a few back. So Look, we knew that we are coming into what we thought was a strong quarter for headcount growth. We had had good momentum In the back half of twenty twenty two and part of that carries over to those people you already have lined up coming in. But What we ended up seeing is a couple of percentage point contribution from both sides Of the net headcount 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 are getting on that side and the same occurred in the retention Sort aside, we saw that pulling back to levels that approximate the rate that we were seeing in the first Quarter to now 4 months of 2019.

Speaker 3

So back to a more normalized level Pre COVID, then obviously what we saw, which was new levels during 2021 2022, Especially in those 1st 4 months as we pay out our bonuses in the middle of March And we provide reviews and communicate our salary increases That would take effect April 1, we had seen more higher turnover. And again, it's been a short period of time. We'll see how the next couple of quarters go, but we're optimistic that we're in a good position In both of these areas.

Speaker 2

Yes. And Andrew, I would just add a little bit color on top of what Rich Provided for us and that really just is around our the strength of our employee value proposition. I think it's Quite strong. It always has been, but we're in an environment of some level of uncertainty. And I think that this engineering and scientific Talent perceives Exponent as a company with a strong foundation with a diverse portfolio of Citing and interesting work that they want to be a part of.

Speaker 2

So I think there are absolutely the quantitative aspects that Rich cited, But just also that overall value proposition that we feel is quite strong.

Speaker 4

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. If 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 in the current environment.

Speaker 2

Yes. Thanks, Andrew, for that. Like you said, the reactive side of the business, Very strong in the quarter, both internationally as well as domestically. This is our litigation portfolio. It's Our recall related work, some of the defect investigations, very strong around automotive life sciences, some of the toxic tour areas.

Speaker 2

On the proactive side, 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's But the reality is that, that critical work is still moving forward, right? So we've got a few areas where There may be a pause or we're going to start that in another month or 2 kind of thing, but we're Seeing the workflow of those critical items continue to be part of that demand equation for us.

Speaker 4

Very helpful. Thank you.

Speaker 2

You're welcome.

Operator

The next question is from Tobey Sommer with Truist Securities. Please go ahead.

Speaker 5

Thanks. I want to start out with a sort of numbers question in terms of pricing. What was the nominal rate increase in January and how has realized Rate impacted the model. I wasn't sure if there'd be any nuances because of the better kind of retention And acceptance rate, what the puts and takes are there?

Speaker 3

Yes. So our rate increase for our employees who were here on the January 1 timeframe was Approximately 10%. That the realization 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 as you're quite aware, Toby, Each of our employees have a single rate for the calendar year, each of them individually based on their experience and And credentials and position in the marketplace is how that's set for all clients and all work. And that remains that way and we've been able to continue to push that through in 2023, but as we're hiring in new people, which we had a lot of in the Q1 here, That is blended down and is why I have that stepping down a little bit further As we move through the year, and it provided that guidance on where the rate would be.

Speaker 3

But we're quite pleased with Where that realization is, realize that a little higher headcount, especially because we're hiring in Typically at the entry level, which is for us typically a new PhD out of a top school, Bringing them in and then growing them up over their career, to hopefully achieve, the level of principle in our organization. And so, that is, what we're seeing at this time.

Speaker 5

I'm curious, do you see a Connection in demand for Expo Services When we've seen in recent months, a layoff announcements either in TMT, consumer electronics, I guess it's not Uniquely in those verticals, but they're sort of top of mind these days?

Speaker 2

Yes. So, Tobey, clearly, the environment For hiring with regard to engineering and scientific talent, that has shifted, with the sort of larger picture that we see in the Tech sector and other sectors. So 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 that there is an impact on our demand needing more help from We've seen that in the past in the regulatory world.

Speaker 2

We haven't seen so much of that, thus far around the technology side, It is early. These teams, as I said before, are sort of resetting after There are a series of layoffs in 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 around innovation.

Speaker 5

And I'm curious if based on the Better retention and higher acceptance rate, does it change your assumptions for those metrics Throughout the year and if so, do you tap the brakes on gross external hires Based on how you see the marketplace and the opportunity to grow revenue?

Speaker 2

Yes. Thanks, Tobey. So it's really all about The portfolio and hiring strategically where we are seeing the need Across the board, right? We've got to be looking at every one of our business units, every one of our capabilities and industries. For example, electric vehicles is a great example.

Speaker 2

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 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 to ramp up here, we've got to pull back, and it's Very strategic according to the market.

Speaker 5

Thanks. And Maybe it's been too short a period of time, but since the banking turmoil commenced, is there Is that a long enough stretch of time to notice whether it has mattered in the marketplace? And I suspect if it did, it would matter more on the proactive side, but does that represent sort of a breakpoint in the year to date calendar The before SVB and after?

Speaker 3

Toby, we've really we haven't seen a change Relative to that event, and I think that is that Most of Exponent's engagements are not with startup organizations, while I realize that SVB Clearly had mature entities or their competitors have mature entities Banking with them, we have not seen that impact in I've had those with our employees that are engaged in the tech area. And I don't think where we see clients That are sort of a little bit slower to move forward and such. I don't think it's relative To them waiting on funding or not having funding and such, that's just hasn't been our market in the past. But as you say, it hasn't been that long, time will tell. But I actually suspect where Our mature clients, which make up the vast majority of our revenues, if anything, this Creates more open market for them.

Speaker 5

Okay. Last question for me. Rich, any change in The composition of big projects versus last time we heard from you in the portfolio and in the P and Ls?

Speaker 3

No. We sort of have a, what I'll call, a more normalized portfolio at this point in time. The Large projects are 2% of revenue or such and going on across quarters and such and we'll Expected to be more normal in that range. No outsized projects Like we've had in prior years where something might be in that 4% or 5% of revenue range. So right now, no.

Speaker 5

Thank you very much.

Operator

This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now

Earnings Conference Call
Exponent Q1 2023
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