Sezzle Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 8 speakers on the call.

Operator

Good morning. My name is Megan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Baumann Consulting Group Second Quarter 2024 Conference Call. All lines have been placed on mute for the presentation portion of the call with the opportunity to questions and answers at the end. Please note that many of the comments made today are considered forward looking statements under federal securities laws.

Operator

As described in the company's filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and the company is not obligated to publicly update or revise these forward looking statements. In addition, on today's call, the company will discuss certain non GAAP financial information such as adjusted EBITDA, adjusted net income and net service billing. You can find this information together with the reconciliations to the most directly comparable GAAP information in the company's earnings press release and 8 ks filed with the SEC and on the company's investor website at investors. Beauman.com. Management will deliver prepared remarks, after which they will take live questions from published research analysts.

Operator

Throughout the call, attendees on the webcast may post questions for management to answer on the call or in subsequent communications, but there will be no live Q and A from the webcast attendees. Replays of the call will be available on the company's investor website. Mr. Bowman, you may begin your prepared remarks.

Speaker 1

Thanks, Megan. Good morning, and thank you for joining the Bowman Consulting Group Second Quarter 2024 Earnings Call. With me this morning, Bruce Labovitz, our CFO. We also want to welcome all of our new employees, including everyone who joined us recently from Element Engineering in Colorado and the FCS Group in Washington State. This morning, I'm going to start off with some introductory comments, after which Bruce will discuss our financial results.

Speaker 1

I'll then come back on the line for some additional remarks about our trajectory into 2025 and end with Q and A. Okay. During the 3 months ended June 30, 2024, we generated record quarterly gross and net revenue, surpassing $100,000,000 in a single quarter for the first time. While short of expectations, it is a meaningful advance toward our goal of a $500,000,000 annual gross revenue pace within our first five years as a public company. The acquisitions we made during and after the quarter expand our geospatial business, increase our public sector revenue, add capabilities around renewable energy engineering and they broaden our growing national water services practice.

Speaker 1

I'm pleased with the evolving position of the firm in the marketplace and the strategy that we're using to grow the business. It gives me great confidence in our collective ability to execute on our long term vision. So during our quarterly calls and as we meet with investors, we spend a lot of time distinguishing between organic and acquired revenue and the associated growth rates. It's sometimes a tricky distinction to make because while we're highly acquisitive and much of our growth has been through acquisition, we are also both committed to and highly proficient at post closing integration. By the time an acquired firm reaches its 12 month anniversary closing, it is often challenging to distinguish it within the overall organization and even more difficult to disaggregate it from our overall results of operations.

Speaker 1

In most cases, we have by that time integrated the systems, individual practice areas and professional staff throughout Bowman. While this enables us to be efficient at work sharing, unconstrained by geographic boundaries or legacy affiliations, It makes reporting on organic and acquired growth a challenge. As opposed to seeing this as a negative, it's an aspect of our approach that we're proud of and that we believe distinguishes us from many of our peers and adds value for our shareholders. Bruce will present a deeper dive into growth rates in his presentation, but suffice it to say, we believe our diversification efforts have been extremely impactful. With this, I'm going to turn the call over to Bruce to discuss financial results.

Speaker 1

Bruce? Thanks, Gary. Let's turn to slide

Speaker 2

4. Quick reminder, we refer to net service revenue net service billings and net revenue interchangeably. It's a non GAAP revenue metric that eliminates pass through billings associated with subcontractors and outside production costs. Since pass through billings are generally without markup, net revenue is meaningful because it reflects margin contributing revenue generated by our workforce. Reconciliations of all non GAAP metrics we'll discuss are available in the press release we issued last night.

Speaker 2

Let's start with the quarter. Gross revenue for the Q2 was $104,500,000 which as Gary mentioned is a milestone for us. Net revenue was $94,000,000 representing a 27% increase over Q2 2023 with a 90% net to gross ratio, which shows growth of net revenue is keeping pace with the growth of gross revenue. Gross margin was slightly improved during the quarter at 52% compared to 50% last year with SG and A holding steady at around 52% of net revenue. Net loss before tax increased by about $1,000,000 to a loss of $3,200,000 from a loss of 2,200,000 dollars Net loss after tax increased by approximately $1,400,000 to a net loss of $2,100,000 Our tax benefit in the quarter was approximately $1,200,000 after accounting for the unwinding of our uncertain tax position relating to Section 174 R and D Expensing, more on that in a bit.

Speaker 2

Adjusted EBITDA was up 21% or $2,400,000 for the quarter at $13,400,000 which is a 14.3% margin on net revenue, Not where we had hoped it would be, but up 20 basis points over Q1 2024 nonetheless, so in the right direction. We're committed to holding overhead and we're taking actions to ensure our labor is right sized for our adjusted revenue projections, which position us positions us for higher margins in the second half. Fortunately, this does not require extreme or dramatic action to accomplish. Turning to the first half of twenty twenty four, gross revenue for the 6 months ended June 30 was 199,400,000 dollars Net revenue was up 27 percent or $38,300,000 at $179,700,000 as compared to the first half of twenty twenty three. Gross margins for the 6 months was slightly improved at 52% compared to 51% last year with SG and A up around 1 percentage point at 52% of net revenue.

Speaker 2

Net loss after tax increased by approximately $2,800,000 to a net loss of 4,600,000 dollars Adjusted EBITDA was up 23 percent or $4,800,000 for the 6 months at 25,500,000 which is a 14.7 percent margin on net revenue. Let's turn to Slide 5. Non cash stock compensation was just under $6,100,000 in the 2nd quarter, down nearly 12% from the Q2 of 2023 and nearly 23% from the Q1 of 2024. We're currently projecting non cash stock compensation for 2024 to be in the range of $24,000,000 to $26,000,000 including accruals for 2024 related awards that will not be issued until early 2025. I'll point out that the number in the future expense table in the stock comp footnote of the 10 Q is limited to issued awards only.

Speaker 2

Let's turn to slide 6. Based on net losses in the quarter and the 6 months, basic and diluted EPS are the same in each period at negative $0.13 for the quarter and negative $0.24 for the year. Basic and diluted adjusted EPS also a non GAAP metric were both negative $0.03 for the 3 months and they were positive $0.17 and positive $0.16 respectively for the 6 months. Let's turn to Slide 7. 2nd quarter gross revenue by vertical was impacted by the introduction of Certex as their revenue was allocated to the emerging markets vertical.

Speaker 2

This resulted in a slight dilution of the other verticals with building infrastructure at 53%, transportation at 18%, power at 19% and emerging markets at 9%. CertX related revenue will continue to be included in emerging markets for the remainder of the calendar year. Let's turn to Slide 8. Now I'm going to take a few minutes to discuss organic growth in a bit more detail. In our earnings release, we reported organic growth consistent with how we've reported it in the past.

Speaker 2

This approach to organic growth eliminates acquisitions from the acquired revenue bucket after their 12 month closing anniversary and reclassifies their prior period revenue as non acquired. We then compare the results. On June 30, 2024, the acquired revenue pool included Excellence, Dennis, CFA, Blankenship, Imesa, S. Rountree, TCE, Spieth Lewis, CertX and more. Richter, Fisher, Home Montes, MTX and Infrastructure converted to non acquired.

Speaker 2

Based on that approach, the underlying disaggregated organic growth of net revenue in the 2nd quarter by vertical was 33% for emerging markets, 17% for transportation, 10% for power and effectively 0 for building infrastructure, resulted in the reported weighted average of just around 6%. By the same approach, the underlying disaggregated organic growth of net revenue by vertical for the 1st 6 months of 2024 was 57% for emerging markets, 23% for power, 15% for transportation and around 2% for building infrastructure, resulting in the weighted average of just around 10%. This quarter, however, we went a little further and evaluated organic growth for the first half of twenty twenty four in 2 additional ways. First, we looked at it on a pro form a as adjusted basis, whereby we increased the base of revenue in the first half of twenty twenty three to add pro form a 1st and second quarter results for the companies acquired during the Q2 of 2023. This effectively normalized their revenue for the periods, although it no longer ties to our reported revenue.

Speaker 2

For the first half of twenty twenty four, we again eliminated revenue from the companies acquired after the Q2 of 2023. 2nd approach, we looked at it on a pro form a as eliminated basis whereby we eliminated all revenue from acquisitions completed in both 2023 and 2024 from both 2023 and 2024 revenue. This effectively created a level playing field of revenue for the first half 2023 2024 based on the end of 2022. In the first case, pro form a as adjusted, organic growth of net revenue disaggregated by vertical for the first half of twenty twenty four was 57% for emerging markets, just under 20% for power, just under 15% for transportation and negative 1.4% for building infrastructure with a weighted average of 7.1 percent for the 6 months. In the second case, pro form a has eliminated organic growth of net revenue by vertical for the first half of twenty twenty four was 50% for emerging markets, 9.7% for power, 11.4% for transportation and negative 10% for building infrastructure with a weighted average for the 6 months of 14% for non building infrastructure, a negative one overall.

Speaker 2

Keep in mind, this approach ignores all organic growth associated with acquisitions from the first half of twenty twenty three and beyond. Let's turn to slide 9. Transitioning to the balance sheet. We had approximately $71,000,000 of net debt at the end of the quarter with $23,000,000 in cash and over $72,000,000 available on the renewed revolver. Our debt to adjusted EBITDA ratio was just under 1.4 times on a trailing 4 quarter basis.

Speaker 2

There's no distress with respect to our capitalization and capabilities to continue to invest in growth. With respect to cash flow, we generated $5,600,000 of cash from operating activities during the 6 months, which is roughly 2.5 times last year's results. CapEx spending was roughly $7,500,000 or 3.7 percent of gross revenue during the first half, which I will point out is the total of the purchase of property and equipment and property and equipment acquired under finance leases lines on our statement of cash flow. Important that you add those 2 together. We're pleased with our 70% free cash flow conversion from adjusted EBITDA after CapEx.

Speaker 2

Shares outstanding on June 30, 2024 was $17,600,000 As of today, including subsequent acquisitions, buybacks and withhold to cover activity and activity under our incentive bonus plan accounts approximately 18,000,000 approximately 1,300,000 of those shares being subject to forfeiture. There is an additional 700,000 shares of performance stock units, which vest based on total shareholder returns over the next 4 years. Those are not included in today's outstanding share count. Returning to R and D, we reversed the uncertain tax position this period in anticipation of finalizing our 2023 returns in October. Between diminishing likelihood that the Senate would act on the House resolution to repeal the tax change retroactively and increasingly unfavorable guidance, we decided it was time to unwind the position.

Speaker 2

The reversal alone had no effect on the P and L with only reclassifications between long and short term liability accounts on the balance sheet. The only real net impact was the reversal of approximately $5,000,000 of previously accrued penalties and interest through our tax provision. In the future, if the tax is repealed, we will adjust our accounting accordingly. Otherwise, this is case closed. Let's turn to Slide 10.

Speaker 2

As Gary mentioned in the release yesterday, backlog is up 19 percent year over year and 5% as compared to the end of last quarter. The distribution of backlog on June 30 was 48% of building infrastructure, 27% transportation, 18% power and 9% emerging markets. This relative increase in transportation after the increase for emerging markets is reflective of some of the issues we've been having with transportation starts. Let's turn to slide 11. Lastly, as detailed in the press release, we're revising and narrowing our outlook for 2024 net service billing to a range of $375,000,000 to $385,000,000 and are likewise adjusting our outlook for adjusted EBITDA to a range of $58,000,000 to 63,000,000 dollars implying a midpoint margin of around 16%.

Speaker 2

While we're not pleased with having to lower guidance for the first time as a public company, we look forward to the reset and the ability to return to our old patterns with respect to guidance. As always, that guidance does not contemplate additional acquisitions we expect to announce between now year end.

Speaker 1

Gary? Thank you, Bruce. Now let's turn to Slide number 12. Before opening the call to Q and A, I want to take a few minutes to address markets, share some recent successes and awards, touch on areas of our business where we are excited about for the future and reassure everyone that we are laser focused on the performance of our operations. In 2022, we acquired Anchor Consultants, that's a small company in Philadelphia focused on bridge and marine engineering.

Speaker 1

This acquisition and its talented staff laid a foundation for what is now a flourishing expanded ports and harbors group. With added depth of leadership, this submarket of our transportation vertical is now proving to be an extremely promising practice area. The group's been very active lately with several wins up and down the East Coast from private and public port operators, both as a prime and as a team member along some of the biggest firms in the industry. Leveraging our extensive skills in geographic information systems or GIS for short, our Ports and Harbors group is providing delivery to clients utilizing sophisticated integrated technology that has distinguished us as a leader in port asset conditions tracking, assessment and management. Ports and harbors, they're an interesting micro economies into themselves exhibiting diverse demands for land and water based infrastructure, logistics, safety and sustainability planning.

Speaker 1

I'm really excited about the inroads we're making, the successes we're seeing and the potential for the future of our ports and harbors practice. Over the past couple of years, the growth in our capabilities related to geospatial, high resolution imaging, mapping and GIS services has kept pace with the other practice areas at Bowman. We've gone from being a terrestrial based surveying firm to one that offers multiple altitudes of geospatial imaging, lidar and scanning, including both aerial and underwater. Accelerated by the recent of Certex, we've added a variety of new scanning services to our portfolio. As an example, aerial scanning to detect methane emissions provides enormous long term potential.

Speaker 1

By combining GIS, high and low altitude scanning and terrestrial based mobile mapping, we've developed a comprehensive end to end methane detection, documentation, remediation planning and information management offering that is well aligned with numerous federal, state and local funding opportunities available over foreseeable future. The combination of multiple acquisitions including 15/19 Surbang, Spatial Acuity, MTX, excellence, CertX and others has enabled us to credibly pursue this long lived opportunity. Elsewhere throughout the company, we're seeing interesting transitions and evolutions in markets. As an example, the demand for usable data center land is voracious and commercial and residential land owners, along major overhead electric quarters are utilizing us to assess the viability of land use modifications. Climate change and alterations of historical weather patterns have led to significant storm preparedness and response assignments in areas that have and have not been susceptible to extreme weather in the past.

Speaker 1

As a real time example, just yesterday, it was announced that tropical storm Debbie was predicted to dump 4 inches to 10 inches more rain on Charleston than the city experienced a mere 9 years ago during what was then categorized as a 1000 year storm. We have a very active presence in Charleston. We recently added senior executive level leadership to our team with extensive experience in climate change, sea level rise and coastal resiliency. As public utilities and their municipalities struggle to attack professionals to manage their operations, demand for utility services and staff augmentation has increased. As an example, we were just awarded a 5 year contract valued at approximately $10,000,000 to embed staff within a local jurisdiction in California.

Speaker 1

This was a direct result of our Infrastructure Engineers acquisition in 2023. In Austin and Houston, we were recently selected for county roadway projects valued at more than $1,000,000 with the opportunity to add construction management and inspection services known as CEI as the project progresses. The CEI opportunity in Texas is a result of skills exported throughout the company from our Chicago operation. Also in Texas, we were recently awarded a 2,500 Acres Solar Engineering project, which is a result of other renewables oriented acquisitions such as SEI and more. In Arizona, a significant heap leach construction support and quality assurance assignment is just one of several recent substantial mining wins.

Speaker 1

While building infrastructure has lagged in terms of organic growth over the past 12 months, we have both experiential and anecdotal evidence that causes us to foresee a likely rebound ahead. In both Texas and Arizona, we were recently awarded new engineering contracts for single family master plan communities valued at over $2,000,000 We expect forthcoming reductions in rates to reignite subverticals of the building infrastructure market, particularly multifamily and build for rent housing. Convenience stores, quick service restaurants and even big box retailers are active with many of our well known national brand customers engaging us with new projects. Our growing national MEP practice is poised to benefit from recent EPA regulatory changes to HVAC refrigerant standards. Fire protection, part of our buildings practice catalyzed by the acquisition of Fisher Engineering last year has been notified of a new NAVFAC assignment to perform surveys of hazardous materials storage facilities worldwide, including Marine Corps bases in the continental U.

Speaker 1

S. And Japan. This is a good example of our complementary philosophies of not expanding our footprint internationally and serving customers anywhere anytime as needed. We were also recently notified of a pending award to perform small and medium scale spill and fire testing to support alternative fire protection approaches for aircraft hangars. The public sector clients we are working for in fire protection provide tremendous crossover synergy opportunities.

Speaker 1

Okay. Now let's turn to Slide 13. The bottom line to all of this is our growth plan is working. Every day we're winning assignments that while not necessarily newsworthy individually are collectively propelling our growth. I've been in the industry a long time and my experience tells me this is a time for adjacent diversification across complementary verticals and skill sets, and that's what I'm committing to advancing at Bowman as we grow.

Speaker 1

And while the growth and opportunity I've outlined is promising, we all recognize it must be accompanied by sustainable improvement of bottom line results. This is a business where success is built around a right sized workforce and rationalized overhead. We constantly assess our workforce and overhead considering evolving visibility to both short and long term revenue, customer demand and quality assurance. As needed, we have, we are currently and we will again in the future adopt our cost structure to changing circumstances as they evolve. With that, I'll now turn the call back to Megan for Q and A.

Operator

Your first question comes from the line of Aaron Spachala with Craig Hallum. Your line is open.

Speaker 3

Yes. Good morning, Gary and Bruce. Thanks for taking the questions. First for me, last quarter you kind of noted you were looking for a very strong year for building infrastructure and now calling out organic contraction in the first half. Can you just kind of talk about what's changed in the past few months?

Speaker 3

What end markets are you seeing slowdown the most? And what areas are you maybe excited about data centers in the past that we've talked about? I'd appreciate that. Thanks.

Speaker 2

Good morning, Aaron. I'll say we still do believe in the aggregate that building infrastructure is going to be a strong performer. I mean it's when you start to assess it in very granular detail between organic and acquired. But it is we are investing in it. We think it's a good place to be.

Speaker 2

It's not somewhere we want to withdraw from. So we do think that there's going to be strong performance there. Gabe, you want to talk a little bit to the sort of which parts and what?

Speaker 1

We're selling work in multifamily and but it's being booked, but being put on hold waiting for a more promising or a more favorable interest rate environment. So that's what we are seeing optimism amongst our clients, but they're both rationalizing their business models for a new interest rate environment and sitting tight waiting for the interest rates to decrease.

Speaker 2

Yes. There's been sort of general, I think, confusion of late, in the last few months in the marketplace between impacts of discussion of changing evolution in the trajectory of rate discussions, a lot going on certainly in the geopolitical world and uncertainties. And those have impacted they've impacted us more quickly, I think, than circumstances like these in the past have, but I think they're temporary as you think it's still a promising market. Data center is obviously very strong. We've got big box retailers who are issuing new orders for new stores.

Speaker 2

We've got a lot going on in healthcare. We've got a lot going on in the MEP world. And as talked about in terms of sort of preparing for transitions in regulatory environments and fire protection all in that group.

Speaker 1

But there are definitely the submarkets of multifamily, certainly urban commercial, which it doesn't really dramatically affect us, our drag areas. A market that was very strong for us up until a year ago was the built for rent market and that has really slowed down. But we hear from our clients in that market that they're poised to reignite once the interest rates start coming down.

Speaker 3

Okay. Understood. Thanks for the color there. And then on transportation, you noted multiple large projects where you've been selected that are still working through final contracting and notice to proceed. Can you just give a little bit more detail on what items are causing those delays?

Speaker 3

How confident you are that they'll start up in the second half and that they'll are they still to be added to backlog and what could this mean for kind of segment growth as we look towards 2025?

Speaker 2

Yes. So the process in that is you submit, you get awarded in broad strokes here, You get awarded, then you go through a negotiation. So you've submitted a price target and a characteristic of your package, but then you still have to go through a negotiation, get the contract executed and get a notice to proceed. That just has seemed to take longer in the last 6 months. More recently, they don't get added to backlog until they're contracted.

Speaker 2

So there's the process of getting a contract and getting it into backlog and then getting everybody at the authorities lined up to proceed. In some cases, as Gary talked about, with shortages of personnel, things are just sort of dragging a little bit longer than we anticipated

Speaker 1

with some of these larger projects. We are in touch with these DOT clients continuously and they give us a lot of reason to be confident that it will indeed commence in the second half of this year.

Speaker 3

All right. Thanks for taking the questions. I'll turn it over. Thanks, Aaron.

Operator

Thank you. Your next question comes from the line of Andy Wittmann with Baird. Your line is open.

Speaker 4

Great. Good morning. Thanks for taking my questions, guys. I guess I just had a question here about Bruce you mentioned that like some of the multifamily award, it sounds like you've got the contract, but there's like the developers are kind of holding off and waiting for interest rates or something else to happen before you are able to get to work. So in a situation like that where you have the contract where but the job isn't moving yet, you don't have the notice to proceed.

Speaker 4

Does that still wind up in backlog? Or do you need also the notice to proceed for you to feel comfortable putting that in your backlog number?

Speaker 2

So a little bit different in the multifamily world. You don't get the same sort of big contract number. It generally comes in phases more so than like a single big contract with one notice to proceed. But our philosophy is when it's under contract and there is a reasonable determination that it is going to proceed, it goes into backlog.

Speaker 4

Got it. Okay. So given all of this and given your comments in the prior answer about just how things are taking a little bit longer, Is it a fair assumption to think about the backlog that you are reporting this quarter as maybe extending out in time? Or do you think the burn rate

Operator

will be consistent with historical averages?

Speaker 4

I think there may be

Speaker 2

normally in the backlog. So you sort of figure that 70%, 80% of your backlog turns in a 12 month period. The rest of it turns a little longer. Maybe the turns a little longer part turns a little longer than it normally than it otherwise was and that maybe there's a small portion of that current portion still turns within the 12 months, but it might be a little bit later in the 12 months right now than previously. But I don't I mean it's delaying, but we do continue to backfill with shorter term projects that come and go out of backlog.

Speaker 2

So there's probably a little bit of an extension there. I don't know that I would say it's like, okay, now it's 2 years as opposed to a year.

Speaker 4

Yes. Okay. Appreciate that perspective. And then

Speaker 2

That's part of Andy, that's part of the reassessment in the second half of the year. So, okay, contemplating that there may be a little bit of drag in that backlog.

Speaker 4

Yes, that makes sense. I just thought I would ask you to just comment on kind of your outlook for free cash flow this year, Bruce. I don't know what you're thinking, but I thought maybe be a good form to kind of talk about what your expectations are on that end.

Speaker 2

So everybody I talked to 4 people, I get 5 definitions of how they think about cash flow conversion and free cash flow. In the absolute sort of simplest of sense of saying, well, adjusted EBITDA, net of CapEx, we're running in that 70% range. On adjusted EBITDA to cash flow. Things are going to get a little bit impacted this year by the change in the tax for us. If you just think about having to write a big advance of our taxes this year, so that's going to have a short term negative impact on cash flow conversion from adjusted EBITDA because that portion of real money that goes out the door for tax is going to go up.

Speaker 2

But if you think about on a GAAP basis, not accounting for timing change, I think we're still consistent with where we are today going forward.

Operator

Thank you. Your next question goes to the line of Brent Thielman with D. A. Davidson. Your line is open.

Speaker 2

Good morning, Brent.

Speaker 5

Yes, thanks. Bruce, I guess hoping you could create maybe a little more of a bridge to the EBITDA this year versus last in some of the moving pieces within that. I mean, if I kind of go back and tally up the deals you guys have done since the Q2 last year, it's around kind of $60 plus 1,000,000 in annualized net service billings, but we're up $2,500,000 in EBITDA from last year. So I understand some of the moving pieces you've given from an organic perspective, but maybe just around EBITDA, what's working against you and what's working for you because I would have thought we'd seen a bigger increase just from those deals?

Speaker 2

Yes. I mean, I think what's working against us is we're not hitting the revenue that we expected the labor force we have to be able to generate and that we our cost structure is designed for a higher revenue base and we are addressing how to optimize that cost structure in a somewhat adjusted revenue expectation. So I think that the answer is that we're a little out of whack on our conversion of labor to revenue and associated profitability. Okay.

Speaker 5

And obviously, there's an implied kind of back half ramp in EBITDA here and it seems like a lot of that and correct me if I'm wrong is contingent on converting this sort of transportation awards or backlog. Being in August now, is there any evidence in the business that's happening? Garrett, I heard you give a couple of signals there, but any other details that kind of give you a confidence that that's going to convert here in the second half versus

Speaker 2

maybe pushing

Speaker 1

it out there. I would actually

Speaker 2

suggest to play a little bit differently, Brent, that the revision in our outlook contemplates that we think there is some delay in revenue and we do have a strong strong base of business. We have a strong demand from clients, a good backlog and we do feel that there is the reason we've adjusted to where we have is that that is visible to us at this point in time and believe that that's achievable. We don't need additional cost structure to generate additional revenue. So we think we can that the increase in pace in the second half with upside from some of the things that we think are scheduled a little later than we think coming in a little sooner than we think.

Speaker 5

Okay. And just the last question is you've evolved the business here in the last few years and agree the diversity has benefited you in the long run. But it seems as though you are taking on larger sort of assignments. Does that mean we should sort of expect more lumpiness? Is that the new normal in the business?

Speaker 5

Or do you sort of consider these kind of isolated issues?

Speaker 2

I think they're isolated issues that frankly may be there may be a little more regularity to the isolation. We are growing, we are getting bigger, we are taking on bigger assignments. Impact to them can have bigger short term effect. They can also but they're also very productive in the long run to have. So I'm not sure I would call it the new normal.

Speaker 2

It may be a little more extreme, but I think there is in all honesty, there is some likelihood that there that some bigger projects could have in I think this period where we are transitioning, there can be some more impact from them. We will get to the other side of that where there are enough of them and they are the norm and they really don't have effect. I think we're in that sort of growth spurt where they could for the short term have a little bit more visibility, if that makes sense.

Operator

Your next question comes from the line of Alex Rygiel with B. Riley. Your line is now open.

Speaker 2

Good morning, Alex.

Speaker 6

Thanks. Good morning, Gary and Bruce. A couple of questions here. In organic growth, are you seeing any pressure on billing rates? And any thoughts directionally on gross margin over the next couple of quarters?

Speaker 1

We're not seeing pricing pressures downward. So we are that's not been an issue that we're seeing in the marketplace.

Speaker 6

And then I don't think this question really came up yet. Net service billing growth is up kind of 27% year over year. Your backlog growth is only up about 19%. So what do you think organic growth inside backlog is right now?

Speaker 2

I'm only pausing because it's a little complicated in some respect. It depends to a certain extent when it delivers at what point in the lifecycle of an acquisition in terms of whether they're in their 1st year period or not from the way we think about it. There is I'm not exactly sure how to parse it out because of what organic growth is in backlog other than to say I would expect that it's slightly consistent overall with our mid single digit organic growth rate. Perfect. Thank you.

Speaker 1

Thanks, Alex.

Operator

Thank you. Your next question comes from the line of Jeff Martin with Roth MKM. Your line is now open.

Speaker 7

Thanks, Gary and Bruce. Good morning, Jeff.

Speaker 5

I wanted to drill down a

Speaker 7

little more on transportation segment. Those new awards, are those existing markets or those new markets? And is the funding is funding the primary issue or are there other factors that are delaying the starts?

Speaker 2

It's not funding at all. That's really not the issue. And when you say new markets, they are they're existing geographies, they're generally existing clients. Sometimes they are new services within the portfolio of things we do because the authorities are expanding the range of things that they're subcontracting and outsourcing. So there are we are continually sort of adjacently expanding the capabilities in those markets.

Speaker 2

Yes. Just to reinforce

Speaker 1

what Bruce said, the big contracts that we're sitting tight to get notice to proceed on, they are in markets that we've been serving.

Speaker 7

Okay, great. And then you've owned CertX almost 4 months now. I know that's not a long time, but just was curious if you could provide an update on 1, integration and 2, the ability to take their services across your business lines?

Speaker 1

We're very pleased with the pace and progress in integration and also very pleased with some of the synergies even this early on. There's been a good bit of cross selling. The folks are very excited about the cross selling opportunities. And I mean, I'm hearing anecdotally that some of the folks that may be had initial some reluctance to go to a new provider that being ourselves are seeing successes and getting over that reluctance. So we're quite pleased with the prospect of synergies.

Speaker 7

Great. And then one more if I could. You mentioned a market focus and labor adjustments. Just was curious if you could elaborate on that 1. And 2, what kind of timeline you anticipate that to be over?

Speaker 2

Well, Jeff, we're looking at we want to be able to deliver improved margin by during the course of the rest of this year, particularly Q4 have it be evidenced. This is not we're not going through and making huge adjustments. It's assessing where we can be better at labor sharing as opposed to growing labor. It's looking around and deciding where we where and how we can optimize the what we call the revenue factor on our business units by addressing how we utilize labor around the system.

Speaker 7

Thank you.

Operator

Thank you. Your next question comes from the line of Aaron Spachala with Craig Hallum. Your line is open.

Speaker 3

Yes. Hi, again, guys. I just had one yes, thank you. I just had one follow-up on guidance. Can you just talk about how you're thinking about the split between 3rd Q4?

Speaker 3

Are you still trying to be somewhat conservative on 4Q just given some of the issues last year? And then maybe just a breakdown on organic growth in guidance. It seems like it might be kind of mid to high single digits, but just wanted to confirm.

Speaker 2

Yes. So I think at the moment we're kind of looking at the 3rd Q4 relatively ratably, maybe a slight marginal higher third than 4th, but not dramatic certainly. As I look ahead kind of at year end at the midpoint of the guidance and I think about on the pro form a as adjusted basis that we talked about in the call, maybe in the 6% to 8% organic rate for the year. That's not going to tie to our actual revenue, right, because we're sort of on a pro form a basis, but that's about mid single digits.

Speaker 3

Right. Okay. No, I think that's helpful to just kind of try to parse that out. So thanks for that.

Speaker 2

Okay.

Operator

Thank you. Alright. Well, we may be closing the call. At this time, Mr. Bowman, I turn the call back over to you.

Speaker 1

Great. Thanks, Megan. Just to wrap up, we've had a very successful run-in our first 3 years as a public company. But that said, we are not going to rest on our laurels. We've got a lot of work to do to achieve our profitability and long term organic growth goals.

Speaker 1

Rest assured that both operational excellence and organic growth are and will continue to be a primary focus for both myself and our entire leadership team. So I want to thank everybody for participation in this morning's call. Good morning.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Sezzle Q2 2024
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