Exponent Inc (EXPO) 2005 Q1 法說會逐字稿

Good afternoon. My name is Rebecca, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Exponent first-quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce Brinlea Johnson. 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 2005 results. Please note that this call is being simultaneously webcast on the Investor Relations section of the Company's corporate website at www.Exponent.com. This conference call is the property of Exponent, and any taping or other reproduction is expressively 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 includes forward-looking statements, including statements about Exponent's market opportunities and future financial results that involve risks and uncertainties, 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 periodical 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-Q for the quarter ended April 1, 2005. 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.

Thank you for joining us today as we report our results for the first quarter of 2005. For the quarter, reported revenues increased to 39.2 million, while revenues net of reimbursables were $36.9 million. Net income for the first quarter increased 10% to 3.9 million or $0.45 per share as compared to 3.5 million or $0.43 per share for the same period in 2004.

As we discussed with you at the end of 2004, we had anticipated low single digit year-over-year revenue growth in our business in the first half of this year with higher expectations for the latter half of the year. The first quarter came in as we expected.

On the bottom line, we are pleased with the strong profitability for the first quarter which continued to demonstrate our ability to improve our operating margins over time. We are encouraged by the pickup in business in our Civil Engineering and Environmental practices. We also made progress in our defense technology development practice, winning a follow-on contract with the U.S. Navy and continuing to advance our work with the U.S. Army's rapid equipping force in the field in Afghanistan and Iraq.

We're pleased to announce that in the second quarter we will be opening an office in Hangzhou, China to expand our services to global clients. Hangzhou is located near Shanghai and its economic and technological development zone, and its new high-tech industrial development zones have attracted a number of our clients to establish offices there. We will assist our clients in their efforts to maintain high quality during the design and manufacturing processes.

In addition, we were successful in attracting two senior hires in our Health Sciences practice that will be joining us in the second quarter. These two hires will expand our services in the areas of health risk management and health economics.

I will now turn the call over to Rich to review the financial details for the quarter.

Thanks, Mike. Total revenues for the first quarter were 39.2 million as compared to 38.9 million in the same quarter last year. Revenues before reimbursements were 36.9 million, an increase of 3% when compared to the first quarter of 2004. Net income increased by 10% to 3,867,000 or $0.45 per diluted share.

In the first quarter, we benefited from $400,000 in revenues from work done in the fourth quarter of 2004, but recognizable when we signed the follow-on contract with the Navy in late February. Also effective January 1 we implemented a billing rate increase of approximately 5% over the prior year.

Hereafter I will compare the results as a percentage of net revenues. Operating income for the first quarter was 6.1 million, an increase of 4% when compared to 5.8 million in the same period of 2004. For the first quarter, operating margin was 16.4% versus 16.2% for the same period last year. Compensation expense increased 4% over the same period a year ago to 23.9 million or 65% of net revenue versus 22.9 million or 64% in the first quarter of 2004. The Company's annual salary increases of approximately 5% were effective April 1 which will impact the second quarter.

Technical full-time equivalent employees for the first quarter of 2005 were 484 compared to 490 in the same period of 2004. The utilization was 69% compared to 70% a year ago. Other operating expenses in the first quarter decreased to 4.7 million or 12.6% of net revenue as compared to 4.8 million or 13.5% in the same period a year ago.

In the first quarter of 2004, we had a onetime write-off of $230,000, which explains the year-over-year decline. Depreciation in the first quarter of 2005 was 800,000. G&A expenses for the first quarter decreased modestly to $2,329,000 or 6.3% of net revenue as compared to $2,340,000 or 6.5% in the same quarter a year ago. Reimbursable expenses for the quarter were $2.3 million as compared to 2.8 million in the first quarter of 2004.

Our tax rate in the first quarter declined to 39.6% from 41% in the first quarter of 2004, demonstrating the benefit of our tax-exempt investments. Shares used to calculate net income per diluted share of $0.45 or 8,632,000.

Turning to the balance sheet, we were actively repurchasing shares using approximately 3 million in cash for this purpose. Additionally capital expenditures for the quarter were $1.1 million. We closed the quarter with cash and short-term investments of $55 million. At quarter end, net Accounts Receivables were $44 million, and DSOs were 101 days.

Looking ahead, we continue to expect to experience growth in the low single digits in the coming quarter. We also expect to return to high single digit to low double-digit growth in the second half of the year. Now I will turn over the call to Mike for closing comments.

Thanks, Rich. We experienced some encouraging signs for our business in the first quarter which leads us to believe that we will have stronger growth in the second half of the year. First, we saw a pickup in business activity in our Civil and Environmental practices from the slowdown we had experienced in both in the fourth quarter of last year.

Second, we are encouraged by the progress we are making in the four strategic growth initiatives that we have discussed with investors over the past year. Progress in the first quarter included in the defense technology development area, signing the follow-on contract with the U.S. Navy for our work on antisubmarine warfare. In construction consulting, building a strong market for our services. In product design consulting, expanding to China to support our global clients' design and manufacturing activities. And in health, adding two senior hires to expand our services in health risk management and health economics. We continue to be optimistic about our long-term business prospects and believe that our unique multidisciplinary approach will continue to present Exponent with a broad range of opportunities.

Let's now open up the call for your questions.

(OPERATOR INSTRUCTIONS). Mike Crawford, Barrington Partners.

Yes, did you give the utilization rate for the quarter?

Yes, the utilization was 69%, Mike.

69%?

Yes.

And that is including reimbursable revenue?

The utilization is just based on labor revenues, Mike.

Okay, I understand. Right, based on your hours per year.

Yes.

And then could you go into a little bit more detail on the hires and the health practice? That brings how many senior managing level employees in that area?

Mike, I don't actually have the breakout in front of me of senior business generators per area. So I cannot give you those numbers on the phone, but let me just say a couple of words about them.

We are excited about them and mention them here because they really expand us into areas of the Health Science practice that we have been viewing as attractive but have not really had a strong presence.

The Health Economics area is one that we think has significant opportunities for us. It is one that in the case of the pharmaceutical clients that we think that we will be better positioned to serve, is particularly attractive from an economic standpoint.

The health risk management services is also one that suits the general service capabilities of our firm we think very well. The kinds of assignments that this particular hire has been working on, he is well-known in the marine world, the cruise market, the kinds of problems that you have seen in the news where large ships end up having either a virus outbreak or food poisoning, those kinds of incidents that end up being very large potential exposures because you cannot put the ships back out to sea until you have truly dealt with what was the cause of the health problem. So we will see these two hires come on about mid-quarter, and look for clearly their impact here on the second half of the year.

Okay. And are you also still looking at maybe some small boutique acquisitions in this area, or is it more of just one by one hire strategy?

We continue to do both. The review of candidates, potential acquisition candidates is something that is an ongoing activity here. We are not in a position to announce anything on this call, but I can tell you that we have been active in continuing to look at candidates where we can make additions more than one at a time, and they tend in particularly in the markets that we are looking at to come in small professional service firm bites. We continue to look for those where they will fit nicely with the capabilities we already have in-house.

Okay. And then the final question is regarding the antisubmarine warfare business. What is the approximate size of this award, and is there a follow-on that you're going to be working toward?

Yes and unfortunately we have not gotten permission to talk about the details of the contract. So we cannot do that. I can comment some on the back-end as their future work. Yes, at least assuming this project goes well and depending on the results and dollars available, we have put forward other options or tasks that the Navy could exercise in the future as well in this area.

Brian Horey, Equity Growth Management.

I just wanted to confirm the employee numbers. Did you say you had billable people of 484 versus 490 a year ago? Did I hear that right?

That is correct.

Okay. And how does that compare to the last quarter, prior quarter?

The Q4 was 490 as well.

Okay, and what do you all think is the outlook for billable headcount over the balance of the year?

We are in the position of growing roughly 5% this year. That is what we think that we will likely see.

Okay. And how would you characterize the kind of the employment market in terms of the kind of people you are looking for?

It is -- I would not say that it is strong or weak. It is somewhat steady. The type of hires that we are looking for are always somewhat unique in the sense that they tend to be star performers. At the more junior level, star performers coming out of PhD programs in the best-known schools. We have not seen that become a heated market as it was five years ago. So that is still a good outlook.

And the more senior hires are -- we have had some success there, and so we are encouraged by that. But that is always a market that is challenging. You know our challenge is to make this their employer of choice and the best opportunity, and fortunately we're doing some exciting things. So I think I don't have any doubts that we are going to be able to be successful there.

What was turnover like this quarter?

I don't have the exact numbers right in front of me, but it is -- over the last year, it has really been at about 15, 16%, and we are not seeing any difference in activity in the first quarter.

So it is an annualized percentage?

Yes, it is. And just to comment that is maybe a couple a percentage points higher than we would like to see it, but we are not looking for single digit turnover. We need -- we know from an extended period of time here that we need to have turnover to create opportunities for our staff that are up and coming. And I wish we could have 100% success in identifying the right candidates to be good consultants, but we know over time that there is some yield factor there where even though they may have great academic credentials, they either don't have some of the other skillsets needed to be successful consultants or they have concluded that they are not cut out to be one.

So that is a process that ends up having a yield overall in the low teens. And that is -- if we operate there, we are in good shape. And historically that is where we have been. During the dot-com era, we exceeded that a bit, but the market has been much more rational here the last five or six years, four or five years.

With respect to China, can you give us some sense as to how big you think the Hangzhou office will be, say, by the end of the year, and do you have any feel for how big a market China could be, say, two to three years out? Is this the first of several offices there, or is it kind of too early to say how big things might --

Yes, I think it is too early to say how big it is going to be. Obviously there is a lot of activity going on in China. I think we are not going to have the doors open until May, early June. By the end of the year, you know we will probably have some place between 5 and 10 people there.

We are initially going into China to, as I indicated in my comments, to really be responsive to clients that we are currently serving principally in the U.S., that have operations where they are either designing products or sourcing products or manufacturing products in China. And we have had over the last two years a number of requests as to whether or not we could provide support in China. We have had a number of projects where we have had -- where we have sent people to China to work on specific problems for those clients. And so we have got some confidence that there is a business base there to better serve our existing clients.

What we don't really know is what we are going to find when we get over there, over and above that. Whether there is an opportunity to serve Chinese clients in a way that we don't really have built into the business plan. So that in a sense maybe some upside. But we feel like we have got a very sound basis to be opening an office now, and there is only additional new opportunities that I think we will run into down the road.

Mike Niehuser, The Robins Group.

Before I forget, I have got to tell you after coming off last quarter you could not have done a better job getting back on track. In fact, I think you did a little bit better job than I expected, but congratulations on coming back there.

Thanks.

Just you mentioned that some of the segments were a little bit modest this quarter, and that might have been anticipated. I'm just curious what those areas might have been?

Well, I think Mike's comment really is overall we, as we were coming into this quarter, we had anticipated that we would see low single digit growth for us in general. We would consider that to be moderate or low growth, not where we want to be for the long-term. And the growth really was across -- the slower growth was across a number of practices, and part of the challenge was last year in our core consulting areas of the old failure analysis side, the engineering, we did have very strong growth a year ago, a high to mid double-digit growth, and we were coming in against a pretty good challenge there. We were a little slow coming out of the fourth quarter, and that is what we saw in January. January and halfway through February was still pretty slow across the board, and then as we approach the latter half of February and into March, things really started to pick up for us. The stronger practices ended up being our Electrical practice, Civil Engineering, the ones that were sort of around the middle. Last year we had a really strong time in Vehicle Analysis. That practice was down in revenues this year in the first quarter versus a year ago. And our Mechanics and Materials practice was down versus a year ago. So not that those practices did not have strong profitability still this year, but they were slightly down in revenues.

Okay, I understand. For the second quarter, if I could get you to repeat the guidance. I know that the latter half of the year is going to resume faster growth, but in the past second quarter has been a little bit down for some seasonality reasons. But you I think mentioned low single digit growth year-over-year for the second quarter. Is that right?

Yes, that is what we would expect. So that would put us last year we were down a couple hundred thousand dollars from the first to the second quarter, but we would expect to see this on a net revenue basis, see this low single digit growth again that we saw in the first quarter and the second quarter.

And then can you comment on margins for the second quarter? Would that be pretty similar to what it was the same quarter of the year before?

The margins will trend in a similar way as they did last year as well. We have our salary increases that step in, so we would anticipate the margins coming down slightly as they did last year.

So it sounds like if not for the first half of the year, you pretty much would be right in with your historic guidance of high single digit, low double, half a percentage point increase in operating margin? Is that correct?

If -- yes, if it was not for the first half of the year.

And you bought back some shares. Is there more available for repurchase under the approval?

Yes, we still have some authorization.

Can you tell how much is left?

Currently 1.6 million, and if we go through that, then we will discuss further authorization with the board.

And one last question if I could. I just missed it. I could listen to the replay. But the billing rate increase or the 5% was effective when?

January 1.

All right. That is everything. Thank you very much.

(OPERATOR INSTRUCTIONS). Brian Horey, Equity Growth Management.

Can you just tell us how many shares you purchased this quarter?

Just over 130,000.

Gentlemen, at this time we have no further questions.

Okay. Thank you all for joining us, and we look forward to speaking with you either before, three months from now or on a call when we report our second-quarter results.

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