Exponent Inc (EXPO) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Exponent second-quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, July 18 of 2007. I would now like to turn our conference over to Brinlea Johnson of The Blueshirt Group. Please go ahead.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's second-quarter 2007 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 other taping or reproduction is expressly prohibited without Exponent's prior written consent.

Joining me on the call today are Mike Gaulke, Chairman 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 Expecting Operating Results and Market Price of Stock" in Exponent's Form 10-Q at the quarter ended June 29, 2007. 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, Chairman and CEO of Exponent. Mike, please go ahead.

Thank you for joining us today as we report our financial results for the second quarter of 2007. We are pleased with our strong performance for the quarter.

Net revenues before reimbursement increased 17% over the same period last year to $45.8 million, and net income was up 37% over the prior year to $5 million. While several factors favorably impacted our results this quarter, the most significant contributor was a strong improvement in utilization. In the quarter utilization increased to 71% from 65% in the same period last year. These results are the byproduct of key hires made last year, particularly in our environmental and health sciences practices.

We had very good performance in several practices during the quarter, including in our Electrical practice, where we assisted a client with an intellectual property dispute related to electronic storage. In our Thermal Sciences practice where we evaluated certain risks associated with the development of a new LNG terminal. In our Defense Technology Development practice where we developed and delivered security surveillance systems for deployment in Iraq. In our Mechanics and Materials practice where we provided design consulting to consumer electronics companies in areas such as battery technology and material selection. In our Environmental practice where we continued our work related to the Exxon Valdez oil spill in Alaska. And in our Ecological Sciences practice where we assisted a client in evaluating claims of alleged environmental damage in Yemen.

These selected assignments demonstrate our breadth of service and the diversity of our client base.

I will now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Mike. As Mike discussed, we are quite pleased with our second-quarter results and with the progress we have already made in the first half of 2007. For the second quarter, revenues before reimbursements, or net revenues as I will refer to them from here on, increased 17% over the prior year to $45.8 million. Total revenues increased 22% to $50.6 million. Net income for the second quarter of 2007 increased 37% to $5 million or $0.30 per diluted share as compared to $3.7 million or $00.21 per diluted share reported in the second quarter of 2006. EBITDAS for the second quarter of 2007 increased 41% to $10.1 million as compared to $7.2 million in the same period last year. While net revenues increased 17%, we were able to drive more income to the bottom line through improved utilization and good management of expenses. The factors that influence revenue growth include a 10.5% increase to billable hours as compared to the second quarter of 2006 to 212,000 billable hours. The average technical full-time equivalent employees in the quarter were 574, a 1% sequential growth, resulting in a utilization of 71% as compared to 65% in the same period last year.

As discussed on previous calls, our billing rates were increased an average of 6% at the beginning of the year. Compensation expense increased 16% to $30.2 million. This increase is the result of our growth in FTEs, as well as a 5.5 to 6% salary increase which went into effect last April. Additionally the bonus accrual has increased along with profits.

Stock-based compensation expense for the second quarter was $1.3 million as compared to $855,000 last year. As I have previously mentioned, this is related to the increased bonus accrual and the decision at the end of 2006 to pay out a greater portion of the bonuses in stock. We expect total stock-based compensation expense to be 6 to $6.5 million in 2006 -- I mean 2007 -- as compared to $4.3 million in 2006.

Other operating expenses for the second quarter increased 6.8% to $5.3 million, including depreciation in the second quarter was $969,000. G&A expenses for the second quarter increased to $3.2 million as compared to $2.7 million in the prior year period. We expected G&A to range between 3 and $3.5 million in this quarter and each of the next two quarters. The primary drivers for this increase are the implementation of a new accounting system, a companywide manager's meeting that was held at the end of April, as well as increased marketing expenses related to leveraging our 40th anniversary.

Reimbursable expenses for the second quarter increased to $4.8 million as compared to $2.6 million last year as a result of increased material costs associated with the security surveillance systems for the U.S. Army. Interest income was down modestly for the same period one year ago due to a lower cash balance as a result of cash used for stock repurchases.

Our tax rate for the second quarter of 2007 was 39.9% as compared to 39.0% in the second quarter of 2006. We would expect our tax rate to remain around this level during the second half 2007.

Turning to the balance sheet, we closed the quarter with cash and short-term investments of $52.2 million. During the second quarter, we repurchased $8.8 million worth of common stock as part of our stock repurchase program. Capital expenditures for the second quarter were $854,000. DSOs this quarter were 104 days. The first half of the year has historically seen higher DSOs due to the increased sequential revenues, and we still expect DSOs at year-end will be in the low 90s.

In summary, we are pleased to report strong financial results for the first half and remind you that the second half is seasonally slower impacted by vacations and holidays. We expect low double-digit revenue growth and operating margins improving at least 100 basis points for the full year.

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

Thanks, Rich. While we saw a strong performance across many of our practices during the first half of the year, we were particularly encouraged by the progress we made in our strategic growth areas. In the second half of 2007 and beyond, we will continue our focus on building strong market positions in Health Sciences Consulting, Product Design Consulting, Construction Consulting, Energy Consulting and Defense Technology Development. We believe our unique engineering and scientific talent, as well as our historical knowledge of how products perform over time, position us for success in the future. We look forward to reporting to you in coming quarters.

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

(OPERATOR INSTRUCTIONS). David Gold, Sidoti & Co.

So a couple of questions for you. First of all, the utilization, a much stronger jump than I was looking for both sequentially and year-to-year. I'm just curious, aside from the strong demand you're seeing if you have changed anything in the way you're managing that, how you were so successful?

This is Rich. We have discussed with investors and the street over the last year or so that we felt that utilization was something that we needed to focus on over the next several years. So we have been talking about that and focusing our practices and directors and VPs around trying to improve in that area while continuing to try to grow the firm through recruiting new talent. We ended up with some of the practices that have historically been strong having good quarters, but we also, as Mike said in his comments, really saw some of the impact of the people in Environmental and Health that joined us in the second half of last year beginning to get some traction, client work coming in, and the utilization in those areas actually improving to beginning to approach levels that we would have liked to have seen over the last several years. So those have just begun to pick up, and we're hopeful that this is we believe good signs for the future.

Okay. Well, that is good, Rich. I think you have also said historically that you see, call it I don't know 70% full-year utilization numbers, maybe a peak and obviously not a tomorrow target. But I am curious with sort of the changes and the pickup if that still stands or if it might be a little bit higher than that longer-term?

Our position I think at this point in time has not changed for the full year. It really is around that we have not felt that 70 is a peak, but it is a place that at this point in time we have not performed at for the full year in a long time and felt that we wanted to get up into the high 60s to 70 range before setting targets and expectations that were in -- were above that level. And I think at this point in time, we're still have some way to go. The first half of the year is at 70%. We know the back half will be lower than that, so we will end up somewhere in the middle 60s or maybe a little higher. But we have still got some ways to go to get up to that 70% for the full year.

Okay. And then I might also ask you on hiring if you can speak to a couple of things. Number one, the attrition that you have seen, and two, if the plans have changed any? I am thinking we are still, say, 3%, 4% for the year a quarter ago.

Yes. Turnover stayed at about the same level we discussed at the end of the first quarter at an annualized rate of about 14%, is our consulting staff turnover. So we're reasonably pleased with that.

As far as the hiring, we had talked about somewhere around 1% sequentially each quarter through the year. We were able to achieve that in this quarter, and it still remains to be our target for the year to continue that as we march through the third and fourth quarters.

One last -- on that note, can you give a quarter-end headcount number? I know you gave an average.

Yes, the FTEs for June were 581.

Kevin Liu, B. Riley & Co.

Congratulations. I just wanted to ask about -- it sounds like business is pretty strong throughout all your practice areas, but are there any specific areas that you might have felt were a little bit weaker in terms of utilization than you may have expected?

Probably the ones that would stand out for us in the quarter were our Construction Consulting area, which is still small and young, and the projects are larger. We have some lumpiness in that area, so our utilization was lower there. Last year was a very strong year for Civil Engineering. That was slightly down. It was not way often, but it was slightly down, and things do look positive on a going forward basis there. Those would be two that were either down or off from last year.

And then in terms of where you guys plan to add headcount, are there any specific practice groups where you feel more headcount is needed or you may be having trouble finding the talent you want?

In general we're hiring across the board. There is not a practice that we have that we don't have a hiring plan that has us with a hire planned year-end headcount. So the overall picture is one of renewed headcount growth.

With that said, there are clearly some areas that we have more aggressive hiring plans in. We continue to build in the Health area and Biomechanics area. Those are probably the areas where we would be strongest in terms of adding headcount.

Okay. And then I was just curious if there were any kind of larger size projects that may have come to an end during the quarter or maybe at the beginning of this one?

Well, as is typical in our business with some 4000 to 5000 projects a year, there is lots coming in and lots going out. As far as the large projects, we tend to see those roll not entirely off. I don't know of anyone in particular that came to a sudden end here. Most of them might not end up being in the top 10 or 20 next quarter, but I don't -- because as they move through their project lifecycle -- but I don't have any in particular to highlight as far as falling off.

And then just one last question. In terms of -- I guess the past few quarters, there have been some shipments of MARCbots. I am just wondering if (inaudible) continued into this quarter and what that contribution might have been?

Yes, there was a couple of MARCbots or robots put out this quarter in the 10s. But the product that was in line with an effort like that was these sort of mobile security surveillance systems that we put ought in this quarter. We delivered 66 of them. We refer to them as rapid deployment integrated surveillance systems or RDIS. We ended up having about $1.1 million in net revenues and probably $2.5 million in total revenues or reportable revenues. There is a lot of materials involved in them. Those we would expect not to have that level of volume in the next quarter. We would expect it to probably drop to about two-thirds of that volume next quarter, and we don't currently have any outstanding orders signed for more of them or for more of MARCbots. We're continuing to have discussions with the client about both of those products, but we don't have any other orders in hand except for completing the remaining part of the order we got started this quarter.

Thank you.

We will have a step down on that.

(OPERATOR INSTRUCTIONS). David Gold.

Mike, can you update us I guess a little bit to the extent you could speak on presumably acquisition climate what you are seeing out there, and obviously if the thinking has changed any or if we're still in search of so to speak?

Sure. In general, we continue to pursue small what I guess today in general is called tuck-in acquisitions. As you all know, we have not made one since 2002, so it has been awhile. But we, over that time period, have looked at somewhere in the range of 10 to 15 a year and have found ourselves in negotiations generally with one or two on an annual basis. We have just not found the right value equation over the last few years to bring anybody on board. But that has not deterred us from continuing to look for group hires really if you will where we can acquire talent more than just one at a time.

In terms of the environment today, it is still a good environment for M&A activity I believe. We have not changed our plans this year in terms of continuing to find an acquisition or two that may complement where we're trying to grow strategically. And I would hope to be able to talk to you sometime over the next year or two about some success. But time will tell whether or not we will be able to find the right fit and do it in a way that we think makes good economic sense for our shareholders.

And are you still seeing many groups come through that want to chat about joining?

Yes.

Are there any particular practice areas where you look from here and say, hey, we could really use some bolstering?

Well, the areas that we have the most focus on are in the Health area and in our Construction Consulting arena. Those are the two that we have got more focused on trying to find the right candidates.

Perfect. Thank you.

Thank you. We have no further audio questions at this time. I would like to turn it back to management for concluding comments.

Right. Well, we thank you all. To just reiterate, we feel good about the performance this past quarter. We hope you do as well. We will be working hard to end up with a good third and fourth quarter here and then wrapping up a good year. We look forward to speaking with you in the near future over the next months and quarters. Thanks for attending.

Thank you. Ladies and gentlemen, this does conclude the Exponent second-quarter 2007 earnings conference call. You may now disconnect. Thank you for your participation. Please have a pleasant day.