Exponent Inc (EXPO) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Exponent third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). 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 third quarter 2006 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/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 start, 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-Q for the quarter ended September 29, 2006. 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.

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 third quarter of 2006. We are pleased to report strong growth and improved margins for the quarter. Revenue increased 17% over the same period last year to $43.3 million. Net income increased to $3.7 million, or $0.22 per diluted share, which includes the impact of $0.01 per share associated with FAS 123R.

During the quarter, revenues before reimbursements, excluding defense technology development, grew 13% due to good business activity in our electrical, biomechanics, civil engineering, and construction consulting practices.

In our electrical practice, we are busy assisting our clients with the safety of power supplies and batteries, with a particular focus on the use of lithium ion batteries in laptops. Some of this work is being conducted out of our China office.

In our biomechanics practice, we are analyzing injuries related to automotive accidents and assisting our clients in their development of medical devices.

In our civil engineering and construction consulting practices we performed a variety of projects, including continued consultation on the Big Dig. Yesterday's magnitude 6.6 earthquake in Hawaii will likely generate a number of new projects in coming quarters.

In defense technology development, business has improved. During the quarter we delivered 215 MARCbot robots to the Robotic Systems Joint Project Office, and won a follow-on order, which is scheduled to be delivered in the fourth quarter.

We also have now completed Phase I of our Navy contract to develop a prototype system to support Maritime Security Operations. We are actively pursuing follow-on phases with the Navy, as well as additional opportunities with the Army. During the quarter we targeted hiring in areas where we see emerging opportunities and continued to focus on integrating our new hires to drive long-term growth.

In summary, we are pleased with the results of the third quarter and optimistic about our opportunities across our practices. Exponent is strategically positioned to continue growth in the upcoming quarter and into 2007.

With that I will turn the call over to Rich for a detailed discussion of our financial results for the third quarter.

Thanks, Mike. We are pleased with both our growth and EBITDAS margin for the quarter. Total revenues increased 16.5% to $43.3 million, as compared to $37.2 million in the same period one year ago. Revenues before reimbursements, or net revenues, as I will refer to them from here on, increased 15.6% to $40 million, as compared to $34.7 million in 2005.

Net income increased to $3.7 million, or $0.22 per diluted share, as compared to $3.5 million, or $0.20 per diluted share reported in the same period of last year. For an apples-to-apples comparison, third quarter 2006 net income, excluding the implementation of FAS 123R, was $3.9 million, or $0.23 per diluted share.

EBITDAS increased 22.1% to $7.8 million as compared to $6.4 million for the same period a year ago. EBITDAS margin as a percentage of net revenues improved to 19.4% in the third quarter of 2006, as compared to 18.4 for the same period last year. On a year-to-date basis, total revenues grew 9.3% to $127 million. Revenues before reimbursements increased 9.7% to $118.7 million.

Net income for the first nine months of 2006 was $11.2 million, or $0.64 per diluted share, as compared to $11.5 million, or $0.66 per diluted share in 2005. Net income excluding the implementation of FAS 123R for the first nine months of 2006 was $11.9 million, or $0.68 per diluted share.

The increase in net revenues this quarter included a 10.5% increase in billable hours versus the same period last year, to 192,000. Net revenues, excluding defense technology development of $2.8 million in 2006 and $1.7 million in 2005, grew 13% over the third quarter of 2005.

As a reminder, revenues in the third quarter of last year were impacted by the delay of shipment of robots to the U.S. Army into the fourth quarter, which reduced revenue, expense and billable hours in the third quarter of last year.

Compensation expense for the third quarter increased 17.3% versus prior year to $26.9 million, or 67.1% of net revenue. This is compared to $22.9 million, or 66.1% reported in the same period of 2005. The third quarter of 2006 included $207,000 related to the implementation of FAS 123R, or the expensing of stock options. Additionally, the increase in compensation expense is explained by a 9.2% year-over-year increase in FTEs, or full-time equivalent employees, to 576 for the third quarter of 2006, as well as an annual increase of approximately 5% for salaries, which took effect on April 1st.

Utilization for the third quarter of 2006 improved slightly to 64%, as compared to 63% in the same period of 2005. Other operating expenses in the quarter were $4.9 million, or 12.1% of net revenues, versus $4.7 million, or 13.5% of net revenues reported in the same period one year ago.

Depreciation in the quarter was $920,000. G&A expense for the quarter was $2.7 million, or 6.7% of net revenues, versus $2.4 million, or 7% of net revenues reported in the same period a year ago. Stock-based compensation expense for the quarter was $865,000, which includes approximately $207,000 related to the implementation of 123R. Reimbursable expenses for the quarter were $3.3 million, as compared to $2.5 million in the third quarter of 2005, related to the increased revenues from defense technology development.

In the quarter, we reported total interest income of $430,000, up from $309,000 one year ago. Our tax rate was 41.6%, as compared to 33.5% in the third quarter of 2005. We expect our fourth-quarter and full-year tax rate to be 39.9%.

Shares used to calculate net income per diluted share were 16,837,000, down from the previous quarter, reflecting our share repurchase program. During the quarter we repurchased $12.9 million worth of stock, bringing our total repurchase activity for the year to $25.1 million at quarter end. We expect our share count to continue to decline in line with our share repurchase activity.

We closed the quarter with cash and short-term investments of $54 million. DSOs this quarter were 104 days, down from 106 days at the end of the second quarter, and we expect to continue to improve DSOs into the fourth quarter. Capital expenditures for the quarter were $740,000. And in summary, we are pleased with our third-quarter results.

For the fourth quarter, we expect to post high single to low double-digit revenue growth versus the same quarter last year. Just as a reminder, the fourth quarter is a seasonally-slower quarter and the fourth quarter of 2005 included deferred revenues from the delayed shipment of robots. For the fourth quarter we expect the EBITDAS margin to approximately be the same as last year as we continue our efforts to integrate our new hires.

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

Thanks, Rich. With the majority of 2006 behind us, we're pleased with our results for both revenue growth and operating performance. For the future, we are planning for continued growth and further improvements in margin. In the quarters ahead, we will be working to capitalize on our identified emerging opportunities, to target new hires, to further drive growth, to continue to improve our profitability through higher staff utilization and increased leverage of our infrastructure, to expand our portfolio of defense technology development projects, and lastly, to continue to repurchase our shares, as we believe this will provide a good return to shareholders over time. We look forward to reporting more success to you in coming orders.

Now I will turn the call over to the operator for your questions.

(OPERATOR INSTRUCTIONS). Colin Gillis, Canaccord.

Can you just talk a little bit about what you saw in terms of the vacation cycle in the quarter, just in terms of both the amount of vacation that people took, whether it was up or down from the prior year, and then just sort of the fringe time of people who were on the bench? Were you seeing higher levels of activity in the quarter?

On a vacation basis, we saw about the same level of activity as we have seen in prior years for the third quarter. What we typically see in our business is a slight step down, which impacts our utilization by a couple percentage points in the -- from the second to the third quarter. And then we see another step down of another probably 4 percentage points to our -- probably 3 to 4 percentage points to our utilization going into the fourth quarter.

Great. Looking forward, in terms of the overall federal government budget cycles, we did get the defense bill passed. Do you see any impacts to your business, either positively or negatively, from moving into the new federal fiscal year?

The answer simply is no. If it is going to have an impact, we don't see it coming. Recognize that our business coming from defense, although we would hope that it will be larger in the future, today is, round numbers, less than 10% of our total business. So, it does not play a major impact in the businesses next year, in large part because the work that we're doing tends to be fairly strategic for what -- for our customer set in both the Army and the Navy.

Mike, can you just talk in broader terms about what the reaction has been from the DoD and the people you're talking to there about the way you're using COTS technology and transforming into value-add tools?

We've had a very good relationship with the Rapid Equipping Force over the last several years, which really was formed as a result of the contributions we made back starting really in 2002 with identifying COTS solutions to put robots into the theater, first in Afghanistan. And that has been a major success in Iraq. In the current deployment we have with this 215 robots that we shipped this last quarter, we have over 500 now headed towards Iraq for use in helping identify these improvised explosive devices. I can tell you it's very heartwarming to get pictures back from Iraq of some of those robots actually blown up. That only means one thing -- that it's saving lives. Because otherwise, you know who would be incurring much of that blast would be a soldier instead of the robot. So, that's probably the most visible impact that our COTS efforts have had, but there are several other stories that I could tell you about how we have employ COTS for the Rapid Equipping Force.

The work that we're doing for the Navy is an extension of that. The work that we just completed in this demonstration of maritime security -- database, prototype system for Maritime Security Operations is heavily levered off of COTS. Some of the work that we have done in our Anti Submarine Warfare work for the Navy is also levered commercial off-the-shelf technology.

Congratulations on a nice quarter.

Kevin Liu, B. Riley & Co.

Just wanted to go back to the size of the MARCbots order. Can you provide any additional details, either regarding the number of units you guys expect to ship, or maybe the order size?

We actually have an order that is approximately the same, in the sense that it was an order for 189 robots in the next order. But in addition to that, we've gotten a second order that is -- includes some spare parts as well as additional robots. And some of that order in addition will get delivered in the fourth quarter. So, it should be the same or greater in total revenues that we deliver off of the robots in the fourth quarter as compared to the third quarter.

That helps. Kind of digging more into the utilization trends that we can expect for the next quarter, obviously, there's that seasonality effect. But also with the recruiting you guys have done, and ramping up production for the newer recruits, what would you expect utilization trends to look like going into Q4?

Well, what we would typically see, and I think we'll see as we go into -- go to this fourth quarter, is utilizations -- if we saw 64% here in the third quarter, we would expect to see something in the low 60s, meaning somewhere between 60 and 62% in the fourth quarter. So, it usually drops down to let's say about 95, 96% of what we did in the third quarter.

And also along the lines of these new recruits, are you guys seeing just typical attrition rates for them? Or are they -- are you seeing anything out of the ordinary there?

We have not -- of our new recruits, we are not seeing anything out of the ordinary there. We're not seeing -- we don't typically see turnover in the short term, and we haven't been seeing turnover of those employees here at this point in the year. Outside of that, our turnover in the third quarter was probably more typical of what we've seen; it's in that sort of middle teens as far as turnover rates. And that, we think, is healthy.

Finally, in terms of your recruiting activities going forward, I know you guys are slowing down the addition of new headcount. But what type -- what exactly are you going to be recruiting for in terms of senior-level management? What practice areas do you feel you need to continue to add headcount to?

I'll let Mike comment on some of the senior hires. On an overall basis, as we look out over, let's say, a year, we would expect to grow headcount in the 5 to 7% versus the prior year. As that plays out into the fourth quarter -- which tends to be a little bit slower, you know, recruiting time, just because you're around the holidays -- we'll still probably see 2006 Q4 be 8% greater than it was a year ago. So, we do expect to still be integrating some of the people we recruited earlier in the year.

And a lot of the hires that we do there are people at are first two rungs in our lower level in our consulting ranks. And those people we will hire across practices, depending on where there is -- we see business development coming from senior people we already have in the organization, who are helping us decide where to add people, where they need support, and what -- and then they're involved in the recruiting process. I'll let Mike talk a little bit about some of the strategic senior hires.

The areas where we're most focused on senior hires are really what we internally call our areas of emerging opportunities. That includes the health practice area, where we've been talking about for some time; our construction consulting; energy is another area where we have actually been successful here earlier this year with a couple of very senior hires that we feel good about. So, we will continue to focus on those areas that we think can be important drivers for our growth going forward.

Congratulations.

Mike Crawford, Barrington Partners.

Regarding the health practice run by Dr. Anderson, approximately how many professionals are targeting the bulk of their time towards that space right now?

We ended up -- we have two practices that make that up -- our food and chemicals practice, and our health sciences practice. And those practices combined have just over 90 professional FTEs in it.

Okay. Would it be fair to say that improvement in those practices would maybe do the most toward improving overall margins for next year?

Those practices are on the bottom half of our group, as far as if we went along our practices and looked at operating margin that we're getting; they would fit in the bottom half, yes.

Did you also -- did you give average and ending FTEs? Was it 577 or so average?

It was -- 576 was the average, and we ended at like 577, somewhere around there. So, the average is pretty close to the ending.

I think that the average bill rate might be around $205 an hour for this year.

That's about right; yes.

For next year, would you expect that to be up 5 or $10?

We will -- we are in the process of going through and reviewing each of the individuals that's currently in the firm. We in the fourth quarter go through and review their bill rates and determine where it should be set for the following year. Historically, on average, we've been able to increase rates 5 to 6%. Now, that's some people at zero and other people at 10%, depending on how fast they're growing and what the market is like. But we at this time still expect to see bill rate increases of 5, 5.5, 6% increase as we go into next year. Now, as we recruit people in, they tend to come in a little bit on the lower end of those runs. And that can draw the effective billing rate that we see increases next year down to sort of 3.5 to 4.5%, depending on how aggressively we are in the recruiting.

Great. The last question relates to the buyback and how that's going to affect diluted shares, let's say, if your stock price didn't change too much from where it is now. Where -- was the bulk of the buying done early in the quarter? Was it pretty consistent throughout? Do you have any expectations for this quarter?

It was pretty close to spread out. There's maybe a little bit of a lean towards the first half. But I would expect that if we bought back a little over 800,000 shares last quarter, maybe we'll see, call it 600,000 share impact to share count just off of those. And then depending on how many shares we purchase back and the timing of those in the fourth quarter will determine where we come out for the full year. But again, if you do this somewhere in the 600,000 share impact, that would probably work.

Can you comment on what if any activity there has been this quarter?

Yes. In the first few weeks of this quarter we have repurchased about -- we have spent $1 million in repurchases.

Brad Evans, Heartland.

A lot of my questions have been answered, but I was just curious as to whether you could discuss what remains on the existing buyback, in terms of either dollars or shares.

As of the end of the quarter it was, in dollars, $10.2 million. And I just mentioned to the previous question that we had already spent 1 million of that this quarter. So as of today, it leaves us with $9.2 million for the rest of this authorization.

That's great. Do you have an ending share count for the quarter that would be on the 10-Q?

The outstanding shares was 4.9 million. Now, as we go out and continue to repurchasing that, on the Q it will show less than that. But the outstanding share count as of September 29 was 14.9.

I was just curious for an update on capital spending for the full year. I know it's not significant, but any reasons why the fourth quarter should materially deviate from what we've seen here for the first three quarters of the year?

No. We've done -- this quarter was 740, and I think the highest quarter was 870. So, you can -- currently you can expect something in that range.

Any comments on the cost structure as you get into the fourth quarter, say, relative to the third quarter?

I would expect that operating -- other operating expenses and G&A would tend to stay at the same expense level. Obviously, you can't control it down to the dime, but I don't expect any big changes in those two areas. Compensation expense varies with growth in headcount. Again, I don't expect a big increase in headcount in the fourth quarter. Maybe we'll be out 1 or 2%, somewhere in that range, as far as headcount. But some of that is offset by the fact that there is more vacation -- a little bit more vacations taken, and that dampens the -- since that cost is already accrued. So, I don't see big changes going forward from what we would normally see in the fourth quarter.

At this time there are no further questions. Ladies and gentlemen, we apologize for the delay during the question-and-answer session caused by technical difficulties with the conference center. Thank you for your participation. You may now disconnect.