Exponent Inc (EXPO) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Exponent fourth-quarter 2007 earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recording today, Wednesday, January 30, 2008.

Now, I'd like to turn the conference over to Ms. Brinlea Johnson with the Blueshirt Group. Please go ahead, ma'am.

Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss to Exponent's fourth-quarter and fiscal year 2007 results.

Please note that this call is being simultaneously webcast on the Investor Relation section of the Company's corporate Web site 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 Affecting Operating Results and Market Price of the Stock" in Exponent's Form 10-Q for the quarter ended December 28, 2007. The forward-looking statements and (inaudible) 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, Chairman and CEO of Exponent. Mike, please go ahead.

Thank you, and thank you for joining us today as we report of financial results for the fourth quarter and fiscal year 2007.

As you know from our press release, we posted strong top and bottom-line results. For the fourth quarter, net revenue increased 24% over the same period last year, net income grew 76%, and earnings per share were $0.33. For the full year, net revenue increased 17% over the prior year, net income grew 43%, and earnings per share were $1.25.

During the year, we realized strong growth from a broad set of practices, as well as from the delivery of the rapid deployment integrated surveillance systems to the U.S. Army. We were able to convert this strong revenue growth into expanded margins through utilization improvement, infrastructure leverage, and increases in product sales. For the year, we improved utilization to 68% from 64% in the prior year.

In 2007, we made significant progress in several of our strategic growth areas. Some examples of our work include the following. In health sciences consulting, we helped a products company address issues related to the safety of their products manufactured in China, which contains lead in the paint. In product design consulting, we assisted a major consumer electronics company with the development of several of their new products launched in 2007. In the energy field, we were retained by an international development bank to analyze and assess failures in a 600-kilometer oil pipeline. In technology development, as mentioned earlier, we delivered rapid deployment integrated surveillance systems which we refer to as RDISS. These systems are being used to improve situational awareness for our soldiers at joint security stations and combat outposts in Iraq and Afghanistan.

In summary, we're very pleased with our results for the fourth quarter, which capped off a record year for Exponent. We have strong momentum going into 2008 and expect continued revenue and earnings growth.

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

Thanks, Mike. As Mike discussed, we were pleased to report both a strong fourth quarter and fiscal year 2007.

For the fourth quarter, total revenues increased 37% to $56.7 million. Revenue before reimbursements, or net revenues as I will refer to them from here on, increased 24% to $47 million. Net income increased 76% to $5.3 million, or $0.33 per diluted share, as compared to $3 million or $0.18 per diluted share in 2006. EBITDAS increased 57% to $10.7 million for the fourth quarter of 2007.

During the quarter, the delivery of RDISS generated approximately $9.1 million in total revenues, $3.1 million in net revenues, $1.9 million in operating income, and $0.07 per share.

In addition to the contribution of this contract, we had a very strong quarter. For the full year, total revenues increased 22% to $205.1 million, and net revenues increased 17% to $183.1 million. Net income increased 43% to $20.3 million, or $1.25 per diluted share, as compared to $14.2 million, or $0.83 per diluted share, in 2006.

EBITDAS increased 41% to $41.8 million.

Revenues in the quarter benefited from a 14% improvement in billable hours to 205,000. Utilization for the quarter was 66% versus 61% in the fourth quarter last year. For the full year, billable hours were up 9% to 825,000 and utilization was 68% as compared to 64% in 2006.

Operating margins for the quarter improved to 16.9% of net revenues from 10.2% in the same period last year. For the full year, 2007 operating margins improved to 16.4% of net revenues from 12.9% in 2006. The operating margins for the fourth quarter and year benefited from the improved utilization, operational efficiencies, and the RDISS contract.

Turning to more detail on the expenses, compensation expense in the fourth quarter increased 14.5% to $30 million but declined as percentage of net revenues to 63.9%. For the full year, compensation expense increased 12.9% to $119.5 million but declined as a percentage of net revenues to 65.2%. The average technical full-time equivalent employees, or FTEs, in the fourth quarter increased 4.9% as compared to the same period last year, to 598. For the year, the average FTEs were up 2.3% to 582. The increase in compensation expense includes the FTE growth, annual raises, as well as the Company's bonus accrual, which is 33% of operating profits.

Stock-based compensation expense for the quarter was $1.5 million, as compared to $1.4 million reported last year. For the full year, stock-based compensation expense was $6.2 million as compared to $4.4 million in 2006. In 2008, we anticipate that stock-based compensation will be between $7 million and $7.5 million. In the first quarter, stock-based compensation will be in the range of $2.5 million to $2.8 million, as the first quarter carries a disproportionate share of the annual amortization.

Other operating expenses for the fourth quarter increased 8.3% to $$5.7 million. For the full year, other operating expenses increased 8.9% to $21.6 million.

Depreciation in the fourth quarter was $957,000. For the full year, depreciation was $3.8 million.

G&A expense for the fourth quarter increased 21.3% from the prior-year period to $3.3 million but stayed flat as a percentage of net revenues at 7%. This increase was the result of increased recruiting and marketing activities. For the full year, G&A expenses increased 11.1% over 2006 to $12 million.

Reimbursable expenses for the fourth quarter increased to $9.8 million, as compared to $3.5 million last year, as a result of the increased defense technology development business. For the full year, reimbursable expenses increased to $21.7 million.

Our tax rate for the fourth quarter was the same as in 2006 at 39.4%. For the full year, our tax rate was 39.5%, as compared to 39.8% in 2006.

Turning to the balance sheet, we closed the quarter with cash and short-term investments of $63.7 million. During the fourth quarter, we used $4.9 million to repurchase common stock, bringing our total for the year to $24.6 million. This leaves $16 million available for future purchases on our most recent authorization.

Capital expenditures for the fourth quarter were $1.4 million. For the year, capital expenditures were $3.7 million. DSOs this quarter were 88 days.

Looking to 2008, we expect to post high single to low double-digit net revenue growth. We also believe that we can realize additional operating efficiencies but remind you that 2007 operating margins benefited from the RDISS contract.

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

Thanks, Rich. We're optimistic about our opportunities for 2008. Our key areas of focus will be to pursue our strategic growth initiatives, including health sciences, product design consulting, construction consulting, energy, and defense technology development; to selectively add new talent to drive further growth; to post strong profitability through continued strength in utilization and operating efficiencies; and finally, to generate additional cash from operations, maintain a strong balance sheet, and undertake activities, such as share repurchases, to enhance shareholder value. We look forward to reporting more success to you in coming quarters.

Now, I'd like to turn the call over to the operator for your questions.

Thank you, sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). David Gold. Please state your company name, followed by your question.

It's Sidoti & Co. A couple of questions for you -- first, on the military contracts, Mike or Rich, for that matter, can you speak a little bit more -- a couple of things. One, on the RDISS contract, did we complete that in the quarter or is there more to go?

Yes, in particular on that contract, we still have about 20% of that contract left. We were about $9.7 million into that contract, so that leaves us about another $2 million to $2.3 million in gross contract, probably about $900,000 in net revenues for the first quarter.

I got you. And the profit on that $900,000 would track what we've seen?

Similar to what we've seen, yes.

Then as far as other contracts or other similar contracts out there, anything you can talk about that either you're working on right now or you think you may sign over the next, say, 6 to 12 months?

There are a number of opportunities that we are pursuing. Some of those have been in the area here of supporting the rapid equipping force and with specific projects, like RDISS and MARCbot. In the past, both of those have been (inaudible) initiatives, as you know, David.

There is no contract of the size that we had with RDISS in this fourth quarter that is currently in hand, but there are some opportunities that we think look very attractive that we are pursuing and a number of smaller contracts, or smaller projects that we think will be good for the business this next year.

Outside of the rapid equipping force, there are also a number of other DoD clients. Most of those are in and around the Army as a client, but there are other opportunities outside that client set as well.

Just to add to that briefly, we do expect to deliver approximately 50 MARCbots here in the first quarter, as well as a system that that we are working to -- we're calling a [culvert denial] system, were those are being shipped out as well this quarter. So we do already have some work in hand for which we will be able to deliver and recognize revenue in this quarter.

So those, along with the RDISS work there, should allow us to be at least sort of on pace with where we've been in the past, not a fourth-quarter performance but where we have in the past and maybe a little better in the area of defense technology development.

Okay. Then can you talk about utilization showing was pretty strong at 66%, and to your point (inaudible). But as we look going forward, I think, in the past, we've spoken about trying to pick up call it 50 to 100 basis points on an annual basis. Do you think, from where we're starting the year, you still have that potential for, say, 2008?

This is Rich. David, I think that, as right now when we are sitting back, we clearly have had a discussion here that we believe that, over the next three to five years, we definitely can continue to perform in that range, meaning that we can get up to 70, into the low 70s, maybe, in that period of time.

Is that 0.5% going to come -- of utilization improvement going to come in 2008? You know, those are starting to dial it in very tight. We clearly made a huge step up. I think we're going to be see -- I'm confident we're going to see FTE growth be at a higher rate than we had here in 2007. I mean, we're entering the year about 5% up from where we entered the year last year -- 5%, 5.5%, so we are going into the year in a much stronger position than we were last year. So I think we're going to benefit both from FTE growth in how that gets integrated and do we gain 0.5% or there in 2008 versus in 2009? Only time will tell. But it clearly is a focus of ours in the near-term to continue to improve utilization.

Well, on the FTE side, two things -- one, can you give me a quarter end number or year-end number?

Yes, the year-end number was 601.

Okay. Then part two, as you think about this year, what would you consider success? In other words, what percent headcount might you be targeting for '08?

Yes, I think we will end up this year being in the range that we've discussed that we want to be in a long-term model, which is this 4% to 7% FTE growth range. I think, with the fact that we are stepping in at about 5% up from where we averaged in the first quarter of last year, I think it gives us a good chance here to perform in that 5%, 6% part of that range. So I think, if we can be in there, I think that it will be in that 5% to 6%. I don't think it -- I would hope that we're not at 4%. We may be at 7% if some of the right opportunities come along.

I got you. Fair enough. I will get back into the queue, but thank you.

Tim McHugh.

William Blair. Congratulations on another strong quarter, guys. I just want to ask, what was the total technology development revenue? You mentioned -- I thought that was just for the RDISS contract.

Yes, that was. The total for the defense area was $5.1 million in net revenues. Okay?

Okay.

Last year, what we had talked about on the third-quarter call is that we might be able to get as high as $3 million over. We had $2.1 million last year, so we ended up at a full $3 million over the -- which is the amount of the -- that I discussed we recognized from the RDISS contract. So the rest of the business sort of was at the level of last year in defense, and then this contract was above and beyond that.

Okay. Then I wanted to ask about the hiring. There's a fair number of people here in the fourth quarter, and you seem pretty optimistic about the hiring pipeline for 2008. Where are these hires coming from and where do you see a lot of opportunities? Is it fairly broad-based, or specific practices or areas that you see significant opportunities?

We go through a process, Tim, at our planning exercise at year-end going into the next year, which we just completed, and end up identifying where we want to bring in talent. That ends up being a combination of entry talent, which from a headcount standpoint is the majority of it, and then a few selected senior hires, more senior hires. That recruiting effort, particularly at the college and university level, is one that we've spent a lot of time on this past year. As we look at 2008, I think we're going to see some of the benefits of re-establishing stronger relationships in a number of the targeted universities that we seek PhD talent in and particular out of.

By and large, I would characterize it as we are hiring across all of our practices. At the entry-level, and at the more senior level, some of those practices have openings as well that we will be seeking to fill.

Okay. That's helpful. Then, can I ask about share repurchases and acquisitions as you look out to 2008, how you will prioritize those? Is it still the status quo, you continue to look but just haven't found anything yet that spurred you to make an acquisition?

Yes, I wouldn't describe it [that] we have any real change in our past philosophy here. Obviously, the balance sheet continues to be in very good shape. We ended up with nearly $64 million here of cash at year-end. We, as Rich pointed out, we still have open authorization here for share repurchase, and it's our intent to continue fulfilling that authorization.

On the acquisition side, we continue to have discussions with candidates, particularly in those areas that fall into our strategic growth initiatives. You're right in observing that we have not yet closed on one of those. I'm not going to make any prediction about numbers here in 2008, other than to just say that we would like to do something when we find the right candidate, or candidates. So we will continue to look and hopefully here at some point the able to discuss one or more of those.

Okay. Then lastly, I just wanted to ask quickly -- you know, as I understand it, there's very few pieces of your business that would be impacted by a cyclical downturn, but can you comment, if you have seen any impact perhaps I guess maybe on the product design work that you might help corporations with?

Yes. You know, this is a much-asked question, as you might expect, here over the last few months, as we've talked with investors. The facts, at this point, are that we really haven't seen any cyclical impact. Obviously, it's come off the fourth quarter here with just record performance for the Firm.

As we look at 2008 and as it's entered into our planning, I can tell you we haven't planned, at the business unit level, those who are most in -- really closest to the market, our Group VPs and practice directors don't really see that.

We have a lot of sensitivity here to an economic downturn. With that said, one has to feel that the non-proactive part of our business, the non-reactive part, I should say, that is the non-litigation part, in general has some discretionary dollars associated with it. But I will tell you that, this last quarter, we have seen actually strength in that part of the business, in part because, as companies have tightened up, they have, in the work that we've been involved in, done more outsourcing. So that may well be that it's going to more than offset what some of the rest of the economy may be experiencing.

Okay, great. Thank you. If I could slip in one more actually for Rich -- you mentioned 50 MARCbots and a little less than $1 million in revenue, perhaps from the RDISS contract. Can you quantify, then, what the range similar to what you gave last quarter for the technology practice, as we think in the first quarter here and then perhaps are those things that then would probably go away after the first quarter and we should not -- you know, what should we think about for the second quarter, then?

Yes. I think, at this point in time, what I would be thinking about is revenues in this business area sort of anywhere in the $2.5 million, $3 million range, somewhere in there. You know, because there was one contract that was such a larger part of that last time, it was easier -- it wasn't easy but it had more to give there. Clearly, we've got these pieces in hand. We should be able to be in that $2.5 million, $3 million, and with a few other things coming in, we may be able to exceed that for the defense area.

As we go forward, I think we clearly can't plan for $3 million extra net revenues in a quarter like we had in the fourth, but I would hope that this business continues to grow, you know, excluding that, will continue to grow. We do see demand from the client at this point in time. Things are going well and we continue to broaden our base. So, I'm hopeful that this business will continue to grow just as we've been able to in some of our other strategic areas.

Okay, thank you.

(OPERATOR INSTRUCTIONS). David Gold.

Just one more for you -- so I'm thinking about 2008. Presumably, if we're thinking that utilization improvement may come, maybe it doesn't, maybe it's not quite this year and we are flat -- when you think about your traditional high single/low double-digit topline, I'm curious. I mean I know you quantified 5% to 6% on the headcount. Is the rest of that, in your thought, all price?

I can tell you we've completed our evaluation of our billing rates. For the employees that were on board at the beginning of the year, we had an average bill rate increase that was just over 6%, so now we know, as we hire in more people, that gets blended down, but that we hopefully will be able to realize 4.5%, 5% of that on an average basis as we go forward through the year.

Say that again, 4.5% (multiple speakers)?

We'd expect to, on a full-year basis, to realize somewhere in the 4.5% to 5% on a bill rate price increase.

Perfect. Then just one other, if I might? I know, Mike, you spoke -- and the acquisition thinking, but I'm curious if you've seen any change in the landscape as far as -- I know, at some point, it seemed like a lot of the pricing was, say, maybe outside the range that you thought was reasonable. Have we seen anything noticeable just yet or is it still too early? In other words, has pricing come in any?

Yes. I think it's fair to say that it's headed that way. The discussions that we've had, and we've had a couple of serious discussions here recently, that the pricing is more reasonable. So, it's, from our standpoint, it's trending in the right direction.

Perfect, perfect. Thank you both.

Thank you. At this time, there are no additional questions. I'd like to turn it back to management for any closing remarks.

Okay, well, thank you all for joining us. We look forward to visiting with you or as the least seeing you again next quarter.

Ladies and gentlemen, this concludes the Exponent fourth-quarter 2007 earnings conference call. If you'd like to listen to a replay of today's Conference, please dial 800-405-2236, or 303-590-3000, using the access code of 11106971, followed by #. ACT would like to thank you for your participation. You may now disconnect.