Exponent Inc (EXPO) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Exponent quarterly earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Monday, April 19, 2004. I would now like to turn the conference over to over to Ms. Annie Palmore. Please go ahead, ma'am.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's first quarter of 2004. Please note that this call is being simultaneously webcast on the Investor Relations section of the Company's corporate Web site at www.exponent.com\investors. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without Exponent's prior written consent.

Joining me on the call today are Mike Gaulke, President and CEO and Rich Schlenker, CFO of Exponent.

Before we get started, I would like to remind you that the following discussion contains forward-looking statements, including statements about Exponent's market opportunities and future financial results that involve risks and uncertainties and that Exponent's actual results may vary materially from those discussed here. Additional information concerning factors that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic filings with the SEC, including those factors discussed under the caption Factors Affecting Operating Results and Market Price of Stock in Exponent's form 10-K for the year ended January 2, 2004. The forward-looking statements and risks stated 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 would like to turn the call over to Mike Gaulke, President and CEO of Exponent. Mike, please go ahead.

Hello. I would first like to apologize for our delayed start today. Thank you all for joining us as we report a strong first-quarter performance. For the quarter, we reported revenue of 38.8 million, up 11 percent over the same period last year. Revenues before reimbursements, which we refer to as net revenues, increased 14 percent over the prior year to 35.9 million. Net income increased 43 percent over the prior year to 3.5 million, or 43 cents per diluted share.

In the quarter, we were especially pleased with the performance of many of our core practice areas -- electrical pulse, thermal sciences, mechanics and materials and vehicle analysis, among others -- which posted solid growth. Two of our vehicle-centric -- biomechanics and vehicle analysis -- were particularly strong contributors as we continued to perform a broad range of accident reconstruction and vehicle testing projects, as well as support our clients on issues of intellectual property and product recall. These are practices that have been instrumental in our growth over the last year and we believe they will contribute to our business throughout 2004.

In the area of construction disputes, we also had good activity in the first quarter with our existing team. With the hiring of additional experts in late 2003, we expect this business will contribute more meaningfully in the coming quarters.

Our defense technology development business showed continued strength as we completed a $9.6 million contract that had been funded for the Advanced Robotic Controller. In addition, we were awarded a contract for the next phase of the Advanced Controller and have commenced work on this project, which will continue in the second quarter. We continue our work for the Rapid Equipping Force in Afghanistan and Iraq and have received funding to cover this support project for another 12 months.

Also in the quarter, we were awarded a follow-on contract by the Defense Manpower Data Center to provide continue to provide failure analysis and program support for the DOD smart card, known as the Common Access Card. This program has been and will continue to be an ongoing source of revenue for Exponent.

We're also continuing in our efforts to broaden our client base in the Department of Defense. We have had a number of discussions with the Navy about a specific project and continue to pursue business with SOCOM.

I'll now turn the call over to Rich for a detailed review of our financials.

Thanks, Mike. Total revenues for the first quarter were $38.8 million, up 11 percent over the first quarter of 2003 and net revenues were $35.9 million, up 14 percent over the prior year. Net income increased 43 percent to $3.5 million, or 43 cents per diluted share, as compared to 32 cents per diluted share in the first quarter of 2003. For comparison purposes throughout the call, we will use net revenues, excluding reimbursables.

We are quite satisfied with our financial performance in the first quarter, reflecting an 8 percent growth in billable hours to 179,000 and an increase in billing rates by approximately 5-6 percent. Utilization was up slightly from 69.6 percent in Q1 of last year to 70.5 percent this year. Compensation expenses were $22.9 million, or 64 percent of net revenue from $20.6 million, or 65 percent of net revenue in the same period last year. Salary increases, which averaged 4.5 percent, went into effect on March 27. This increase did not impact Q1 results, but will affect Q2 by approximately $700,000. Technical full-time equivalent employees rose 7 percent year-over-year to 490. Other operating expenses were $4.8 million, or 13.5 percent of net revenue, as compared to 14.5 percent of revenue in the same period a year ago. G&A expenses increased to $2.3 million, or 6.5 percent of net revenue, which is in-line with prior quarter and compares to 6.7 percent of net revenue in the same quarter one year ago.

Reimbursements were $2.8 million, as compared to $3.3 million in the prior year's first quarter. These positive trends in our business generated operating income of $5.8 million, an increase of 40 percent over $4.2 million in the first quarter of 2003. Our operating margin improved to 16 percent of net revenue from 13 in the same period last year. Our tax rate in the quarter, as expected, was 41 percent, down slightly over the prior period and reflecting greater benefits of our tax-exempt investments. Shares used to calculate net income per diluted share of 43 cents were 8,265,000.

Turning to the balance sheet -- we closed the quarter with cash and short-term investments of $38.7 million, down slightly from $41.8 million in the fourth quarter as a result of paying out bonuses for 2003 and working capital requirements. Accounts receivables were $41.2 million and DSOs were 95 days, which is six days less than last year at this time. Capital expenditures were $460,000 for the quarter.

With a strong first quarter behind us and good momentum in many of our practices, we are optimistic that we can grow net revenues in the high single-digit to low double-digit range for the year and deliver at least a 50 basis point improvement in our operating margin.

Now I will turn the call to Mike for closing comments.

As Rich discussed, we're encouraged with the financial progress we made in the first quarter and optimistic about the outlook for 2004. The good news in the first quarter is that the performance of most of our core practices was strong and they appear to be well positioned for the balance of the year. This will provide a solid foundation for the Company as we continue to pursue our strategic growth initiatives in health, product design consulting, construction consulting and defense technology development. Our clients and the market as a whole continue to view Exponent as one of the leading providers of consulting services for solving complex technical problems. We believe that we have an excellent set of growth opportunities before us and we are focusing on capitalizing upon them. These are exciting times for Exponent. I will now turn the call over to our operator for questions.

(Operator Instructions) Mike Niehuser, The Robbins Group.

Hi, Mike Niehuser. Truly an exciting release. A couple of questions. It has been a while since I remember hearing a lot about vehicle analysis and vehicle-centric practices. Can you talk a little bit about how strong that is and if that is coming back, or if it has been trending upward and I just missed it?

Well the -- what we call vehicle-centric practices, which are those practices that have some common practice area really around the transportation vehicle are, has been in our history and continues to be still the largest single market segment that we do business in, Mike. We had a particularly strong quarter in the vehicle-centric area and that business activity is continuing. It is being driven in large part defense of the problems we are assisting our clients with. We have a significant investment in that area in our Phoenix test facility, and this activity actually provides an opportunity to really help leverage that investment. So it is an important part of our core business and it is very nice when the market is strong for us, which it was this past quarter.

That's exciting. Also, isn't it your first and your third quarters that are seasonally your strongest?

Typically, our first quarter is the strongest quarter. Second, well, it does not fall off as much, if at all. Last year, we were essentially flat in the second quarter from the first quarter sequentially. The third quarter, we get into more of the summer months and vacation, both of some of our staff and our clients, and then the fourth quarter is typically our weakest quarter because of the number of holidays that exist in that time of the year.

So I guess it depends on whether they are taking an early summer vacation or a late summer vacation this year.

Typically, we will pick up just a little vacation activity in June, which is the last month of the second quarter obviously. And so that is what tends to make the second quarter about equal with the first quarter. Otherwise, the run rate in the second quarter would probably carry it to be stronger than the first quarter. But they end up being about the same before any extraordinary events occur.

Maybe I'm just thinking of my son, who's graduating and he's already on vacation, so to speak. The second phase of the Advanced Robotic Controller -- what is the size of that contract for the follow-on?

This is Rich. We would expect our net revenues from that to be somewhere about $1.5-1.$8 million. And that is to be spread across both the first and second quarters.

So I guess a question with regards to like Land Warrior, where the contract wound down, and it looks like this one is winding down as well. Is there enough follow-on business with the technology area with the Department of Defense to keep that steady or improving?

This is actually what they are calling Phase 6 of this. The first contract that we announced was the first five phases. This is Phase 6. And we are in discussions with the clients about follow-on phases from this point on forward. So we don't -- at this time, we don't expect this project to come to end, and we are in the process of discussing with the client several other technology opportunities outside of the Advanced Robotic Controller and have worked with them even during the first quarter on some of those technologies.

So when you look at that $9.6 million contract, that was actually about five different contracts?

It was one contract with five phases, yes. And our revenues from that contract as we put out in the original press release were approximately $4.9 million of net revenues to Exponent, of which were spread across -- a little bit of it in Q3 of last year, the majority of it in Q4 of 2003, and then the tail end of it in Q1.

My last question is -- as far as guidance, I missed what you said about the 50 basis point improvement in the operating margin. Is that pretty much consistent with prior guidance of high-teen, low double-digit growth net revenues, allowing for a 50 basis-point improvement in the operating margin?

What we have communicated to the market historically is that we believe over the long-term, we can grow revenues, net revenues, in the high single-digit to low double-digit range, and that in that range, we would expect to at least be able to improve our operating margin by at least 50 basis points in that model. So here, obviously, we have far exceeded that in the first quarter and will continue to be able to leverage our organization in the future.

So that basically is to continue with -- this is a very strong quarter to lead off with?

Yes.

Thank you very much.

Richard Hyon (ph), Roth Capital Partners.

I was wondering if I could get a (indiscernible) breakdown of your revenues?

Yes. Our environmental and health segment was 9.4 million in revenues, and our other scientific and engineering segment was 29.3 million in revenues.

Great. And how much is coming from technology development projects?

On a revenue basis there, we have 3.3 million at a revenue level, at the sort of total revenue level, and 2.8 million, 2.9 million, I'm sorry, on a net revenue basis.

Great. Also, if you could provide a little more detail about the SOCOM contract? (inaudible)?

The SOCOM contract, which we have referenced, the support contract, we've actually had several discussions about work with the Special Operations Command. But I think what you're referencing is we've talked in the past about the same team that we had together, or at least the leadership of the same team, that was put together for the Objective Force Warrior, is going after the five-year support contract for Special Operations Command. We were led to believe that that contract would be awarded in March of this year. It has -- our current understanding is that that has been pushed out to being now an award in June at the earliest. No one has dropped off. We think there are still four competitors and we are one of those four, along with our team, the team really being headed here by Booz Allen. And there are likely to still three awards out of that group. So that's what we know at this point.

Also, G&A for the quarter?

G&A for the quarter?

Yes, depreciation.

I'm sorry -- D&A. That was 824,000.

Last question. How much revenue was generated (technical difficulty) project?

During this quarter?

Not this quarter, it was '03.

We do not disclose individual project revenues publicly. Let me just comment on the World Trade Center activity, because it was an area of a lot of activity for us last year. At this point in time, if you watch in the papers, you will see that there are trials going on, the first trial really dealing with the form of contract that the insurance was under. The outcome of that trial and then perhaps a follow-on trial as to whether there are one events or two events, will need to take place before a third trial, of which we would get involved, would take place. So our activity in the World Trade Center project at the moment is pretty much on hold.

Okay, thank you.

And was in the first quarter. It was not a contributor to our strong performance in the first quarter.

(Operator Instructions). Richard Hyon, Roth Capital Partners.

Hi; this is Fred's (indiscernible) Steve. I have a question on the compensation expense, which was lower as a percent of revenue this quarter. Was that mainly attributable to the higher revenue numbers, or were there some other factors in play there?

The compensation is slightly lower as a percent, primarily because the utilization was up slightly from 69.6 to 70.5 percent. And when the utilization goes up, we get a little bit more leverage out of it.

Okay, thanks.

Jon Hickman, Halpern Capital.

Hi, Rich?

Yes.

Can you elaborate a little bit -- you know, you have been guiding to this like high single-digits, low double-digits revenue growth, and then with a 50 basis point improvement in your margins. And you did way better than that this time. So are you telling us that you're going to -- that the next quarters are not going to be -- you know that they're going to trend back towards that future guidance, or are you going to be able to continue on this current pass?

We are not, at this point in time, we are not telling the market that we're going to be continuing 14-plus percent growth in revenues. We are indicating that we believe that the guidance we have given historically about high single-digit, low double-digit growth at this point in time was the visibility that we have in our business, is appropriate guidance to lay out for the long-term. We have stayed with that over the long-term and it seems to be where our business is performing. As we continue to get more visibility here, that might help us out in the future to get better guidance. We clearly believe that we have demonstrated when we are at the higher end of that range, clearly, we get better than 50 basis points improvement in the operating margin. But that is sort of the baseline that we've said we at least can achieve.

Okay. Well, keep up what you're doing, okay?

Thank you.

Mike Niehuser.

Thank you. Just one more. If I could get you to elaborate a little bit more on the special operations. Did I understand it that of the four that are attempting to win, that it is pretty much that all four could stay in the pack to pick, or to participate in various contracts? It's not necessarily a winner-take-all, is it?

Our understanding is that there's going to be a desire to select three prime contractors. Recognize, this is a very large contract with up to $400 million over a five-year period. And it is really intended to cover a broad set of support activities for SOCOM. So our belief is that there will probably be three primes that will be awarded this ID/IQ -- indefinite delivery/indefinite quantity -- contract.

And you say that Booz Allen is heading that up for you? Or what -- will you be the lead developer of that technology? How do you foresee that rolling out, as far as a share of the revenues?

I would only be guessing. It would be very much dependent upon what the tasks are. Booz Allen and Wexford, another Washington D.C. firm, and Exponent were really the three that ended up forming the team, that Phase One of Wolfpack. It is that same team we have asked -- the team has agreed that Booz Allen beat the lead on the COCOM contract, because Booz Allen has been doing business with SOCOM for about 20 years. The team works very much as an entity and the role that we will play there and the portion of the work that we will get will be very dependent upon the specific assignment and how much technology is -- and technical questions are involved in the projects.

Okay, thank you.

At this time, there are no further questions. I will now turn the call back to you. Please continue with your presentation or your closing remarks.

Thank you all for joining us today. I think you can take away from the sense of my comments and Rich's that we are very pleased with the performance here in the first quarter of 2004. I think what is particularly heartening to us here is that it wasn't just one practice or a couple of practices that contributed here to the strong performance, but really a number of strong performances of our core practices. And that it is going to form a very solid foundation, we believe, here for a year where we can continue to focus on our strategic growth initiatives and look to the core to be able to perform over the balance of the year. So thank you for joining us. We look forward to speaking with you individually in the time ahead.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.