Exponent Inc (EXPO) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by and welcome to the Exponent Q3 2007 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded Wednesday, the 17th of October, 2007.

I would now like to turn the conference over to Ms. 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 third 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 taping or any other reproduction is expressively 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 [in] 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 may 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 at the quarter ended September 28, 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'd 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 third quarter of 2007. As you know from our press release, we posted strong top and bottom-line results with double digit revenue growth and improved operating margins. Net revenue increased 12% over the same period last year to $44.9 million, and net income increased by 35% over the prior year to $5 million. Our strong top line results translated to better bottom-line performance primarily due to an improvement in utilization to 67% from 64% in the prior year period.

We had notable performance in several practices during the quarter. Some examples of our work include the following. In our Electrical practice, we helped a major cell phone manufacturer resolve a critical technical issue with its battery supplier. In our Thermal Sciences practice, we developed both laboratory and computational models to allow a consortium of energy companies to better understand the rate of dispersion of liquid natural gas should a tank be ruptured and to better quantify the risk if such a release were to occur.

In our Mechanics and Materials practice, we helped a major utility with a material's problem in one of their nuclear power generation plants. In our Human Factors practice, our scientists studied the correlation between increased driver distractions and the occurrences of sudden acceleration of the vehicle. In our Ecological Sciences practice, we helped a refinery owner evaluate a natural resource damage claim. In our Health group, we assisted a products company in quantifying the exposure of its customers to lead in paint and the potential health effects associated with such levels of exposure.

And finally, in our Defense Technology Development practice, we continued to support the U.S. Army's rapid equipping force. With the announcement today of a contract to deliver rapid deployment integrated surveillance systems, which we refer to as RDISS, we are well positioned for continued growth in this segment of our business during the fourth quarter. These systems that being used to improve situational awareness for our soldiers at joint security stations and combat outposts in Iraq and Afghanistan.

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

Thanks, Mike. As Mike discussed, we reported a good third quarter and are well on our way to posting a very strong 2007. For the third quarter, total revenues increased 13% to $48.9 million. Revenues before reimbursements -- or net revenues, as I will refer to them from here on -- increased 12% to $44.9 million. Net income for the third quarter of 2007 increased 35% to $5 million or $0.31 per share as compared to $3.7 million or $0.22 per share in 2006.

EBITDAS increased 32% to $10.3 million. For the first nine months of 2007, revenues grew 17% to $148.4 million. Net revenues increased 15% to $136.2 million, while net income increased 35% to $15.1 million or $0.92 per share as compared to $11.2 million or $0.62 per share in 2006.

EBITDAS increased 36% to $31.2 million. During the third quarter, utilization improved to 67% from 64% in the prior year period. We were also able to leverage our G&A expense. As a result, for the third quarter, operating margins improved by 260 basis points versus the same period last year, to 16.6% of net revenues.

Turning to more detail on expenses in the third quarter, compensation expense increased 8.9% to $29.3 million. This increase is the result of a slight growth in technical full-time equivalent employees as well as a higher bonus accrual for the period, which corresponds to the increased profits. Technical FTEs for the third quarter were 585.

Stock-based compensation expense for the third quarter was $1.4 million as compared to $865,000 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 a greater portion of bonuses in stock. We now expect total stock-based compensation expense to be $5.5 million to $6 million for the full year 2007 as compared to $4.3 million in 2006.

Other operating expenses for the third quarter increased 12.6% to $5.5 million. This is related to the implementation of a new accounting system and increased occupancy costs. Depreciation in the third quarter was $1 million. G&A expenses for the third quarter were flat with prior year at $2.7 million. Reimbursable expenses for the third quarter increased to $4 million as compared to $3.3 million last year as a result of higher material costs associated with our defense technology development work. Our tax rate for the third quarter of 2007 was 39.3% as compared to 41.6% in the third quarter of 2006.

Turning to the balance sheet. We closed the quarter with cash and short term investments of $52.5 million. During the quarter we repurchased $7.7 million worth of common stock as part of our authorized stock repurchase program, bringing our total repurchases for 2007 to $19 million. This leave $21 million available for future purchases on our most recent authorization. Capital expenditures for the third quarter were $693,000. DSOs this quarter were 108 days. We continue to believe we will end the year with DSOs in the mid to low 90s.

As Mike discussed earlier, we have been awarded a new RDISS contract with the U.S. Army. Currently, the contract is funded in the amount of $11.96 million. Exponent's net revenue should be approximately $3.5 million to $4 million, the majority of which will be recognized in the fourth quarter of 2007. While this contract is being protested, we have been authorized and already commenced work on this phase. We normally would expect fourth quarter net revenues from our defense technology development business to be approximately $2 million. We now expect net revenues from this business segment to be in the range of $3.5 million to $5 million, which will result in this project contributing to accelerated revenue growth and improved operating margin in the fourth quarter versus the same period last year. While our defense technology development business tends to be a little lumpy, this contract will have a bigger impact on our quarterly results and our year-over-year comparisons for 2008.

In summary, we are pleased to report strong financial results for the third quarter and a key contract win. As a result of improved utilizations, operating leverage and the new RDISS contract, Exponent now expects growth and net revenues to be in the mid-teens for 2007. In addition, the Company expects an improvement in operating income as a percentage of net revenues of approximately 250 basis points for the full year.

For fiscal -- for 2008 and beyond, we continue to believe we can grow net revenues in the high single digit to low double digit range, adjusting for extraordinary items such as the incremental revenues from the new RDISS contract.

Now I will turn the call back over to Mike for concluding remarks.

Thanks, Rich. In summary, the third quarter continued our strong performance for fiscal 2007, where revenues before reimbursements have grown 15% and net income has increased 35% to $0.92 per share. These results are significantly above our historical revenue growth expectations of high single digit to low double digit growth and also show an improvement in our operating margin. Our nine months 2007 results for net income, earnings per share, and EBITDAS have all exceeded the 2006 full year results for these measures.

As Rich discussed, we have positive momentum entering into our seasonally slower fourth quarter with the addition of the recent U.S. Army RDISS contract. Looking beyond 2007, we are optimistic about our future long-term growth and operating leverage. We expect strong performance across a broad set of practices, including health sciences consulting, product design consulting, energy consulting, and defense technology development.

Exponent remains uniquely positioned as a leading multidisciplinary engineering and scientific consulting firm dedicated to helping our clients solve their challenging technical problems. We thank you for your support and look forward to reporting to you in the coming quarters.

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

(OPERATOR INSTRUCTIONS). David Gold.

It's Sidoti and Company. A couple of questions. (inaudible) nice job. Let's see. To start, as you talk about this year, the 250 basis point increase operating margin, and obviously we've made good progress there, how much incrementally comes from that new contract? Or maybe another way to ask is what do the margins look like on that piece of business you'll see in the fourth quarter?

We don't have -- until we go through it, we don't have exactly -- the range of margins on that is going to be somewhere probably between on that net revenues, which has there, we can get somewhere between 50% and as high as, on parts of it, up to 67%. We've got our 33% bonus program but we should be able to get pretty good incremental profitability out of that program; somewhere between 57% and 67%.

Okay. And then part two on same contract, $12 million or so funded, how big could this contract be?

The total IDIQ ceiling that they've put on the contract is $26 million. But that's over a two year period of time.

Okay. And so there's some acceleration on, say, the first half of it?

Well, there's no guarantees at all that they would fund any amount beyond where we are right now.

Okay. And then another question for either of you. Just talk a little bit about hiring -- sort of climate. What you're seeing and presumably plans for the next few quarters or at least the next one and looking into next year.

Yes, this is Rich. I'll start off. Well, I think we had a good third quarter. We saw just around 2% growth from Q2 to Q3 in our FTEs. So we've talked in the past about a sort of annual range, we'd like to be in a sort of 4% to 7%. So, on a quarterly basis, I think we're beginning to see some pickup in our net FTEs there. We would expect sort of 1% sequential going from Q3 to Q4. I think that puts us in a good position. The full year here will only end up being up a couple of percent, but I think it puts us in a good position going into 2008 as we go forward.

We've clearly seen a pickup in the hiring activity in our organization over the last three to four months. And I had basically good numbers coming in in September and already here in October. So, I think we've got good momentum at this point in time and have the right processes in place to succeed going forward.

Okay. Rich, can you give a quarter end headcount number? I know you gave an average.

Yes, that was -- FTEs for the month of September were 586.

586. So, just about the same.

Yes, but it was clearly as we got -- a lot of those people came in halfway through the month. It might have been slightly higher than that if you took the last week. And we had some -- a number of people joined even the first week of October. So, that's what gives me some belief we can get the 1% here as we go through the next quarter.

Perfect. Thanks a lot. I'll turn it over for someone else's questions. Thank you.

David, just let me just add on some general market observations here --

Please do.

-- in terms of recruiting. We don't see anything unusual going on in the marketplace, overall. I think our recruiting activities are well focused. We've got a lot of focus internally on recruiting, particularly at the college and university level, and are quite active in that arena. We have added additional resources in our firm to support recruiting. Over this last year, we brought in what is now our second full-time dedicated staff recruiter with a focus at the more junior entry-level positions -- young Ph.D.'s coming out of academia.

We're spending a lot of time to make sure that -- our most important assets as a firm are a continuing inflow into our firm. And from that standpoint, assuring our ability to grow in the future.

Perfect. Thanks a lot, Mike. Thank you, Rich.

Tim McHugh.

Yes, it's William Blair. Just wanted to touch on operating margins or EBITDA margins, whichever you prefer, given the significant improvement you've had this year. Update us on your thoughts and where that could go for the next year?

Yes, I think that the challenges for 2008, depending on the amount of revenues that we end up and profits we end up realizing from the RDISS contract in the fourth quarter, that could impact the year-over-year performance in operating margin.

If we only had sort of normal revenues out of that incremental revenue there, where we would have had sort of $2 million in defense work, we would have expected that we could go into 2008 expecting at least 30 basis points improvement in operating margin that we would see there. Depending on how well the profits come out of this program, that could have an impact on our ability to exceed our 2008 performance because it will include this extraordinary contract.

Okay. Then can you update -- do you have operating cash flow for the quarter? And then your thoughts on -- you continue to repurchase stock here, is that still the preferred means? Are you still looking at acquisition opportunities as a potential use of cash?

Yes. The operating cash flow for the quarter was $5.9 million.

On the uses of cash, we have over the years continued to look at three broad areas -- acquisitions, dividends, and stock repurchase. We are active in two of those at this point in time, and continue to be, we believe, here in 2008. Although we have not made an acquisition, we are still active, looking for the right tuck-in, I would -- I think is probably the best way to describe it. These acquisitions that can complement our business particularly in the health sciences area; our growth there in construction as well.

As Rich indicated, we still have $21 million in our current outstanding authorization for share repurchase and we will continue to work on that authorization. At this point in time, we have nothing further to say about dividends. It continues to be on the table but not something we're going to do anything about in the near-term.

Okay. And then lastly, the technology development, that's an excellent contract it looks like you received. Looking out beyond that, are you working on other things? Do you see anything in the pipeline that could come down the road in '08? What's the outlook for that business beyond this specific contract?

Well, first, this is a contract that in fact found its origination, if you will, in working for one of our key clients in this business, which has been the rapid equipping force. There are other contracts that we have with the REF. The nature of our engagement with the REF is one that I believe that we will see other contracts; may not be of the same size or scope of this current RDISS, but as we come up with ideas that we believe can be very beneficial and helpful to the Army, particularly in the war zone, those are ideas that we put before the REF. And if they are well received and believed to really have an impact, then the REF turns around and has funded that work. So, we believe that that is something that is continuing to be before us here as opportunity.

There are other Army clients that we also are dealing with and pursuing opportunities with. In addition, as you may recall -- although we haven't talked much about it this past year -- we continue to work, pursue work with the Navy, particularly follow-on work in this area of anti-submarine warfare. And we're continuing -- we've got active discussions going on in that arena. Nothing I can talk about further as to what that may result in, in terms of a particular contract or award, but I would be hopeful that over the next year there will be some developments in that space.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). Richard Whitman.

Benchmark Capital. Question has been asked and answered. Thank you.

(OPERATOR INSTRUCTIONS).

Great. It sounds like we are out of questions today. We thank you for joining us and look forward to speaking with you here in the not too distant future.

Ladies and gentlemen, there are no further questions at this time. This does conclude the Exponent Q3 2007 conference call. If you would like to listen to a replay of today's conference, please do so by dialing 1-800-405-2236 or 303-590-3000, enter the pass code 11098780. Once again, please dial 1-800-405-2236 or 303-590-3000. The pass code to enter on both numbers is 11098780. ACT would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.