Exponent Inc (EXPO) 2005 Q2 法說會逐字稿

Good afternoon. My name is Wes and I will be your conference facilitator. At this time, I would like to welcome everyone to the Exponent second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you. Ms. Johnson, you may begin your conference.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's second quarter of 2005. Please note that this call is being simultaneously web-cast on the Investor Relations section of the Company's corporate website 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 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 July 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 financial results for the second quarter and the first six months of 2005. We're pleased with our overall performance as we remain focused on building our business to drive long-term growth, and were successful in realizing strong operating margin expansion. Second-quarter total revenues were 39.9 million and net revenues were 36.7 million, an increase of 3% over the prior year and in line with our expectations.

Net income increased 21% to $4.1 million, or $0.47 per share in the second quarter of 2005 as compared with 3.4 million or $0.40 per share for the same period last year.

We are particularly satisfied with the progress made in our strategic growth initiatives, including health science consulting, construction consulting and product design consulting. Strength in selected practice areas was somewhat masked by a $1.4 million decline in the net revenue from defense technology development. As many of you might remember, defense technology development was involved in a large advanced robotic controller project during the first three quarters of 2004.

In health science consulting, we've been successful in assisting global clients with their product registrations in Europe. Additionally, we've made some key hires, which will expand our capabilities to serve the pharmaceutical industry.

In construction consulting, we have professionals now in five offices across the U.S. and are planning further expansion. We've broadened our services beyond dispute resolution to include assisting clients during project initiation, as well as throughout the life cycle, to achieve early resolution of issues that often arise with large capital projects and to be able to help reduce clients' risk of future disputes.

As planned during the quarter, we've opened our office in Hangzhou, China to serve our global clients in the area of product design consulting. With the presence in China, Exponent is now better able to help our clients develop and maintain high-quality processes, more quickly address technical problems and thereby improve the reliability of manufacturing outside the U.S.

In defense technology development, we remain committed to expanding our breadth of opportunities with the Department of Defense. As expected, we're moving forward with our contract with the U.S. Navy dealing with antisubmarine warfare and have been conducting preliminary demonstrations at sea. Additionally, we've recently signed a contract to deliver 330 robots for the U.S. Army's Rapid Equipping Force and have had our contract for supporting the REF in Afghanistan and Iraq extended to March 2006.

As we go into the second half of 2005, we will continue to focus on building our expertise to serve clients in their evolving set of needs and position ourselves to best capitalize on new opportunities.

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

Thanks, Mike. Total revenues for the second quarter were $39.9 million as compared to $39.6 million in the same quarter last year. Revenues before reimbursements were $36.7 million, an increase of 3% over $35.6 million reported in the second quarter of 2004. Net income increased 21% to $4,094,000 or $0.47 per diluted share. I should note that the total revenues from our defense technology development practice were down $2.7 million and revenues before reimbursements were down $1.4 million over the second quarter of 2004.

For the first half of 2005, revenues were $79 million. Revenues before reimbursements increased 3%, to $73.6 million from $71.5 million in the same period of 2004.

Net income for the first six months of 2005 increased 15% to $7,961,000 or $0.92 per diluted share, as compared to $6,901,000 or $0.82 per diluted share in the first six months of 2004.

I will be comparing all results on a percentage of net revenue basis. For the second quarter, we had good operating performance, increasing operating income by 15% to $6.3 million, from $5.5 million in the second quarter of 2004. Operating margins improved to 17.1% versus 15.4% in the same period last year.

Operating income for the first half of 2005 increased 9% to $12.3 million, and operating margin for the period was 16.7% of net revenues, as compared to 15.8 in the same period of 2004.

In the second quarter, we put into effect a salary increase of 4.5%. However, compensation expense increased only 1.1% to $23.6 million, or 64.4% of net revenue versus $23.4 million, or 65.7% in the second quarter of 2004.

Technical full-time equivalent employees in the U.S. for our second quarter of 2005 were 481 compared with 504 in the same period of 2004. Overall, utilization was 68%, unchanged from one year ago. Excluding defense technology development, our utilization increased to 69% in the second quarter as compared to 65% in 2004.

Other operating expenses in the second quarter increased modestly to $4.6 million or 12.5% of net revenue, as compared to $4.4 million or 12.3% in the same period a year ago. Depreciation in the second quarter of 2005 was $843,000. G&A expense for the second quarter decreased to $2,161,000, or 5.9% of net revenue, as compared to $2,328,000, or 6.5% in the same quarter one year ago.

In the second quarter, we benefited from our collections efforts, allowing us to realize a decrease in our bad debt expense versus last year. Reimbursable expenses for the quarter were $3.2 million as compared to $4.1 million in the second quarter of 2004.

In the second quarter, we benefited from strong interest income, which totaled $274,000, a function of the improved interest rate environment and our increased cash position versus a year ago. Our tax rate decreased to 39.6% from 41% in the second quarter of 2004 as a result of our increased tax-exempt interest income.

Shares used to calculate net income per diluted share of $0.47 were 8,719,000. Capital expenditures for the quarter were $700,000 and stock repurchases were $1.2 million. At quarter end, accounts receivable, net were $47.1 million and DSOs were 93 days. As a result, cash and short-term investments were $61 million at the end of the quarter, which is an increase of $21 million compared to a year ago and a $6 million increase compared to the first quarter of 2005.

For the second half of the year, we expect year-over-year revenue growth to improve. We also believe that we can improve our operating margin on a year-over-year basis.

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

Thanks, Rich. In summary, we're pleased with our strong bottom-line performance in the second quarter and first six months, and expect to show stronger revenue growth in the second half of the year, as we continue to focus on our strategic growth initiatives, including in health science consulting, where we're positioning ourselves to serve clients in the pharmaceutical industry; in construction consulting, where we're expanding our service offerings to be more than just dispute resolution by adding a broader set of services that cover the project lifecycle; in design consulting, where we are moving into China to serve our clients with the development and manufacture of their products in East Asia; and in defense technology development, where we are working with the U.S. Navy and U.S. Army on an expanding set of opportunities.

We continue to be very optimistic about our long-term business prospects as a growing, leading engineering scientific consulting firm. Let's now open up the call for your questions. Wes? Operator?

(Operator Instructions). Mike Crawford, Barrington Partners.

Mike, you mentioned some preliminary demonstration at sea on the antisubmarine warfare program with the Navy. So, what are your expectations if that goes well?

Well, I mentioned the preliminary demonstrations leading toward a major demonstration for the Navy. If -- my expectations are if that goes well, that the prospects for continued work are enhanced. At this point, it's -- I'm not going to speculate on how the demonstration is going to go. We believe that the project as it has unfolded is one that the client has interest in and we're encouraged with the progress that we've made to date. But, you know, it's too early to judge how the test will end up faring when we actually do the demo.

Okay, but it's one where if they decide to follow -- with what the solution that you've suggested, is this something that would entail potentially a couple years of work, or would you need to hire more people, or--?

Yes. It would be clearly an expanding program for us, and it would be longer-term.

Okay, great. And then, you said you bought -- you spent 1.2 million to buy back stock during the quarter. How many shares did you repurchase?

Just over 50,000.

And also, on the bad debt expense, how much did that decrease by?

The year-over-year decrease from -- is a delta of 170,000.

Mike Niehuser, The Robins Group.

It looked like, excluding the comments about defense year-over-year, it looks like a super quarter. It looks like your margins improved, and I'm just reading between the lines, but if that was due to higher utilization, lower FTE, if you are taking on more business and growing across all the business segments, and greater diversity and so forth, is that going to be hard to maintain those margins, or how do you see being able to continue expanding margins with coming off a good quarter?

Well, Mike, as we look out -- as we look into the third and fourth quarter, those, on a year-over-year basis, we do think that based on what we've demonstrated here in the first half of the year and with increased revenues, that we should be able to on a year-over-year basis see margin improvement. As we look out into the future years, we still believe that we've got room for improvement in the utilization here as an overall company in a -- in this quarter being 68%. That still leaves us on a run rate, we're only about 1% ahead of last year and we ended up 65% last year overall because our utilization goes down in the second half of the year.

So, we think there is still room for improvement in our utilization, and we're seeing that in certain practices, which is encouraging. We also believe that as a small public company, we have the infrastructure in place, we've gone through the hurdle of Sarbanes-Oxley and all that, and we believe that there is still leverage to get out of our corporate infrastructure. And we've continued to see improvement in margins as we've grown out over the last five, six years outside of our Menlo Park location and create a critical mass in some of our regional offices. And we still see that there is room for leverage in all three of those areas as we look forward over the next couple years.

Good answer. Are you still looking at year-over-year somewhere about high single, low double-digit revenue growth with a half a percent increase in operating margin? Is that still in the ballpark?

As we look into the back half of the year, from a year-over-year basis, we still think that that's achievable. Probably going to see that as we move into the third quarter, it will be sort of middle single digits sort of growth on a year-over-year basis and then progress up into the upper single or lower double-digit as we move through the back for an average that still meets in that range.

One more question and I will jump off the call. On the 330 robots, is this significant from going from an aggregator of technologies and working with others to actually manufacturing for delivery devices or technology to the military?

Well, it's in line with what we've done on some other technologies. This happens to be 330. Last year, when we were working on the advanced robotic controller, I think we delivered just about 100 units in that model to go out and have them put it in hands and use it. This obviously in numbers is a little greater than we've done on some other programs, and it's something that will be out there actively in the hands of the soldiers right away upon delivery. So, it's slightly different, but it's still at the point that it's in development. And these are early development units that are going out. We can call them version 0.5 or 1.0 -- somewhere around there.

Brian Horey, Equity Growth Management.

Just a few follow-up questions. What his headcount on a year-to-year basis? I am presuming it is up in terms of billable heads?

Actually, on a year-over-year basis, it is down. It's 481 here in the U.S. versus 504, which is what we've been reporting on.

Okay. And how do you expect that to trend over the balance of the year?

We expect that to be picking up. We've seen -- been very focused on recruiting. I have seen a good number of hires already in late second quarter that had very little impact on the full-time equivalents for the second quarter, but we would expect that as well as some other recruits that we've got on the line or pursuing to fold in.

In general terms, what do you think the growth rate will be in headcount over the course of the year?

As we look out from the second quarter going into the third and fourth, we would expect to see at least a couple of percent improvement in the FTEs as you go from Q2 to Q3, and then again from Q3 to Q4, so that we can end up from where we are today with somewhere in a 4 to 6% increase in FTEs.

Okay. And that drop in billable heads year-to-year, was that primarily due to voluntary or involuntary turnover?

Actually, it's about the same mix that we've had in the past. It's a combination of people who either identify that consulting isn't their game over a period of time and some people who we identified that aren't progressing through it, and then, you know, you always have some people who leave to go and join other consulting firms. But it's primarily a process of us hiring people in, trying to develop them up through our consulting ranks, and either them or us deciding that maybe isn't the best bet for them in the long-term.

And did I hear you right that you said utilization overall was flat year-to-year?

Yes.

And so the --

It's up about 50 basis points -- it's a rounding.

So, does that account for the kind of the margin (multiple speakers)

I'm sorry, 5 basis points -- I'm sorry.

So does that account for most of the margin improvement, or are you able to raise rates faster than you're raising compensation, or maybe you can just comment on the dynamics behind that?

Can you repeat the question, please?

Yes, well, your margins in terms of I think compensation as a percent of revenue dropped, and it sounds like utilization didn't account for a lot of that. So I'm trying to figure out what did. And I'm speculating that maybe you're raising rates faster than you're raising compensation, is that -- (multiple speakers)

Yes, we had between a 5 and a 6% increase in bill rates. We had about a 4.5% increase in the compensation expense and then, with just a slight increase in the utilization overall, although we saw in the core nontechnology development area, we saw almost a 4% increase in utilization there. So that gave us a little bit of leverage in those parts of the business with the mix that -- and the other factors, that's what played into the leverage that we got out of the comp structure.

Okay, and is that big a jump in the nondefense areas -- is that just better scheduling and management of projects?

It's just a matter of having a few less heads here, and you know, getting the same volume of hours pushed out to a more efficient or smaller set of people.

Okay. And then in terms of G&A, can you give us any -- you said -- it sounded like SarbOx expenses, to the extent that you had any this year, were substantially less than they were in the prior year. Can you quantify what that magnitude was?

Well, what I'd like to -- first -- two things. One, they're not less than they were last year. We would expect, at least from our auditors' side, we haven't gotten our final 2005 fees in line, but we are expecting them not to be substantially less than last year. We'll save some costs, maybe $100,000 for the year, off of our costs of using some third party to help us in some of the development or internal audit part, but overall, SarbOx cost us probably over $600,000.

In this quarter.

No. For the whole year last year. We would expect it to be probably 100,000 less than that.

For the year.

Yes.

(Operator Instructions). Eric Green, Osmium Partners.com (ph).

Could you comment on the accounts receivable, why that jumped by about 9 million or so?

Yes, the first half of the year for us is -- if you take a look at the fourth quarter rolling into Q1 and Q2, you get a pretty substantial jump there of, let's see, about 4 to $5 million in revenues. In addition to that, on the gross revenue basis, we net subcontractors on the reportable revenue. We've had more subcontractor revenues also in the first half of this year, due to the Navy project we're running. So, those combined have contributed to the growth in the AR number on the balance sheet.

Mike Niehuser, The Robins Group.

I couldn't hear the question -- the answer for how much annually for Sarbanes-Oxley did you say?

Approximately 600,000.

600,000. And also, the rate increase, the 5 to 6% that you mentioned, that took place in the first quarter, didn't it?

It took place January 1.

Michael Zinn, Rockdale Investments.

A quick question on the couple of practice areas at -- in fairly recent past have been a little bit soft -- seem to be improving coming out of the first quarter, but didn't hear any significant comments on this call yet on the civil engineering and environmental practices. Can you give us an update there?

Civil was -- well, both of those, I suspect you're asking because we talked about those at year-end as being particularly soft. Civil came back strong for us in the first quarter, and has continued to be a very strong performer here for us in the first half of the year. Our construction consulting area in particular, Michael, picked up. And so that is appearing like we're going to have a good year here for civil. Environmental is slightly stronger, but it's still not performing at the level that we would hope for on a longer-term basis. So some of the strength that you've seen here in the second quarter is the civil, but I wouldn't necessarily point to environmental.

And anything that you're doing, then, on the environmental side in terms of either trying to spur the revenue there or adjust the cost structure?

Yes. This is Rich. We are seeing -- we've seen a good turnaround in the -- it's not up to the level of our some of our strongest practices, but we've seen a good turnaround in the operating performance of these areas. Now, it's -- and that's part of some of the adjustments in the full-time equivalent -- the billable staff that you saw overall. Some of that came in the environmental area, where we sort of got a new business leader in in that area, made some assessments of what was working and what was not and got ourselves properly staffed. And now the focus is really turned to trying to increase the business generation for us with some focus on the energy or oil and gas segment of the market.

At this time, I'm showing no further questions. And, ladies and gentlemen, that concludes the Exponent second-quarter earnings conference call. We appreciate your time. You may now disconnect.