Exponent Inc (EXPO) 2008 Q1 法說會逐字稿

(OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Monday, April 14, 2008. I would now like to turn the conference over to Brinlea Johnson of The Blueshirt Group.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's first quarter 2008 results. Please note that this call is being simultaneously Webcast on the investor relations section of the Company's corporate Web site 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, 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 stock in Exponent's Form 10-Q for the quarter ended March 28, 2008. 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, Chairman and CEO of Exponent.

Thank you for joining us today. We are pleased to report strong financial results for the first quarter of 2008. For the quarter, net revenues increased 15% over the same period last year, net income grew 26%, and earnings per share were $0.40.

During the quarter we had strong performances in our electrical and semiconductors, thermal sciences, human factors, construction consulting, defense technology development, and mechanics and materials practices, in addition to our health group.

Project activity in the quarter included several of our core engineering practices working together to help a global consumer products manufacturer [defend its] design of a home appliance, which a major competitor claimed had infringed upon its intellectual property.

We continued to see strong demand for our product design consulting services from consumer electronics, battery technology and medical device companies. These assignments typically include professionals from our electrical and semiconductors, thermal sciences, and mechanics and materials practices.

While Europe is still a small part of the Firm's total revenues, our health sciences group is experiencing strong growth from this geographic region. Several multinational companies have retained us to help them comply with both EU and individual company regulations.

During the quarter we continued the delivery of Rapid Deployment Integrated Surveillance Systems and MARCbots to the US Army, and renewed our contract with the Rapid Equipping Force for another year of support in Iraq and Afghanistan.

Additionally, we received a five-year follow-on contract from the Department of Defense to support their Smartcard program, as well as a contract to support the Natick Soldier Center with the development of Future Force Warrior technologies and demonstrations.

We started 2008 with strong hiring, increasing FTEs 7% year-over-year and positioning the Company for future growth.

In summary, we are pleased with our results for the first quarter and remained optimistic that we are well positioned to capture future growth opportunities.

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

Thanks, Mike. As Mike discussed, we were pleased to begin the year with strong revenue growth and bottom-line results. For the first quarter of 2008, total revenues increased 15% to $56.3 million. Revenues before reimbursements -- or net revenues, as I will refer to them from here on -- also increased 15% over the prior year to $52 million.

Net income for the first quarter increased 26% to $6.3 million, or $0.40 per diluted share, as compared to $5.1 million, or $0.31 per diluted share, in 2007. This improvement is the result of leveraging our operating expenses, a slight improvement in utilization, and strong defense technology product sales. Additionally, EBITDAS increased 29% to $13.8 million in the first quarter of 2008.

Contributing to net revenue growth was a 7.6% increase in billable hours as compared to the first quarter of last year. This was the result -- this also benefited from a 7.2% increase in average full-time equivalent employees to 609 and utilization of 69.5%. We also realized an average bill rate increase of approximately 4.5% as a result of our annual pricing increase on January 1st.

Defense technology development net revenues were $3.5 million as compared to $2.2 million last year. This includes the delivery of RDISS and MARCbots of $1.8 million in net revenues, as compared to $500,000 last year.

Operating margin for the first quarter improved to 19.4% of net revenues from 16.4% in the same period last year. In the first quarter of 2008, our operating margin benefited from $1.3 million of incremental product sales, a slight improvement in utilization, and operating efficiencies. Operating margins also benefited from a $600,000 swing in deferred comp expense, which was offset by a $600,000 loss taken against miscellaneous income. This had no effect on the ultimate bottom line.

Turning to more detail on operating expenses in the first quarter, compensation expense increased 11.6% to $33.5 million. This increase is a result of our growth in FTEs and year-over-year salary increases. Additionally, the bonus accrual has increased in line with profits. Exponent's salary adjustments for 2008 of approximately 5.5% took effect on April 1st of this year.

Stock-based compensation expense for the first quarter was $2.9 million, up from $2 million last year. As a reminder, first-quarter stock compensation expense carries a disproportionate share of our annual amortization, and we expect it will be 7.5 to $8 million for the full year.

Other operating expenses for the first quarter increased 5.7% over last year in the same period to $5.4 million. Depreciation in the first quarter was $940,000. G&A expense for the first quarter increased 6.2% from the same period in 2007 to $3 million. Reimbursable expenses increased to $4.3 million as a result of increased defense technology product sales. Our tax rate for the first quarter of 2008 was 39.75%, as compared to 39.4% in the first quarter of last year.

For the quarter, diluted share count was 15,991,000. For the second quarter we expect diluted share count to be approximately 16.4 million as a result of our stock grants that normally occur in the first part of the year.

Turning to the balance sheet, we closed the quarter with cash and short-term investments of $61 million. During the quarter we repurchased $4.8 million worth of common stock as part of our authorized stock repurchase program. Capital expenditures for the first quarter were $1.2 million. At the end of the quarter, DSOs were 96 days, as compared to 104 days at the end of the same period last year.

In summary, we are pleased to report strong financial results for the first quarter of 2008, and we expect to achieve high single-digit to low double-digit net revenue growth for the full year.

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

Thanks, Rich. Throughout 2008 we will continue to pursue new opportunities in our strategic growth areas, including health sciences consulting, product design consulting, construction consulting and energy consulting. We will seek to capture new growth opportunities in our defense technology development business. We will add selective, qualified talent to the team to drive long-term growth. We will maintain our focus on growing both revenues and earnings. And lastly, we will strive to generate additional cash from operations, maintain a strong balance sheet, and undertake activities to enhance shareholder value. We look forward to reporting more success to you in the coming quarters.

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

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

First, can you fill in some color on the contracts signed during the quarter, both the renewal on the MARCbots, and then the five-year follow-ons from DOD?

The renewal of the contract with the Rapid Equipping Force is really our base contract there to continue to provide support in Afghanistan and Iraq and technology development for the US Army. We expect that they've continued to have our support either maintained or be increased even. Currently we have four people in the field. They've allowed for us to include that to be up to five. In addition to that, that order contract allows for them to come to us from time to time and pursue new technologies in the area. So that contract we expect to continue to operate as it has for the last several years, and be at or about the same level.

The contract with DOD on the Smartcards is one where we've had a contract with them for, I think, the last three to four years. They put out for renewal there, or a new contract. That again is something that has run a little less, around $1 million a year; that's what we'd expect going forward. Again, there's ability for them to order additional services under it. But at this time, we're expecting that level of demand under that contract.

And then, on the Navy one that you had mentioned, or was that tied in with the Smartcard?

That's our contract for Natick Soldier Center. It's not with, actually, the Navy; it's with the Natick Soldier Center. And that is for work that we started in the middle of last year for them on a -- more on a month-to-month contract providing some support for their development they're working on for Future Force Warrior. That contract we expect to be about $2 million in net revenues over the next 12 months.

You commented, Rich, along the lines of experiencing about 4.5% price -- or average bill rate pickup in the first quarter. But you point to 5.5% salary increases in the next quarter. Would we expect to see a little bit more price to offset that, or is this year one, where we lose a point, maybe, in price?

I think that we should be -- they should come out about approximately the same. For the same group of people that we did raises for effective April 1 is really our employee base that was here last year. It's our rewards for last year. And those were the individuals that we did the pricing increased -- we did pricing, and our pricing increase was approximately the same at January 1. The amount of that that we realized in the first quarter through both new hires coming in, as well as mix, ended up at about 4.5%. So I would expect that the salary increases and bill rates to be about the same as we go into the second quarter and beyond, sort of in that 4.5 to 5% range that we're able to realize.

Mike, one for you, my usual question about acquisition climate landscape and thinking, if it's the same, or changed any.

I would say it hasn't changed. We are still looking for the right acquisitions, tuck-ins, probably the best way to describe them, and particularly in the area of health and construction. In terms of landscape, the economic environment should be -- at least we've got the wind behind us and not in our face here at the moment, I think. And we'll see how successful we are here as the year proceeds.

Perfect. Thank you both.

(OPERATOR INSTRUCTIONS). Tim McHugh, William Blair & Co.

First, on that Navy contract, can I ask if that -- is that a time and materials contract, or product sales?

It's actually a project for the Department of Defense, not for Navy. It's the Natick -- N-a-t-i-c-k -- Soldier Center. So, that is a fixed-price contract.

Moving then to the incremental product sales that you described that came in the first quarter, what would be your expectation, at this point at least, in terms of projects you have on hand for the second quarter and as you kind of look out to the rest of the year? I know there's still some funding left on that surveillance system contract.

At this point in time, I would say the second -- what we've been able to get from the client at this point in time puts us somewhere between net revenues of 1 million to 1.2 million on the products part. And there is definitely more room on the RDISS contract; it's (inaudible) of the timing of when those funds would be available to us [forever] if we end up getting other orders. But at this point in time, we really don't have visibility out on the product side out beyond the second quarter.

Given that it seems like that's a pretty healthy rate of product sales for the second quarter still, what would be your expectations for margins this year? Do you have enough of those at this point that you could see margins expand, even against the tough comparison in '07?

I think that while the first quarter was very strong to at this point in time, the fourth quarter included about $2 million of operating income from that incremental part of RDISS sales, not our sort of core defense business, which we've always said sort of has a 0.5 million to $1 million of product sales a quarter. Clearly, the first quarter had some overflow of that contract, and we seem to have some good momentum coming into the second quarter here. At this point in time, I still see that as a stretch. We received about 110 to 120 basis points out of that one incremental contract in the fourth quarter for the full year. So we still have a little ways to go to be able to exceed those full-year margins, but, clearly, the first quarter has put us in pretty good -- in good shape to try to make a charge at that.

Any other contracts or opportunities beyond the surveillance systems in terms of product sales? What's the traction there as you continue to sell that service?

There's conversations that we have on an ongoing basis with our clients there, Tim, as we have in the past. And those have resulted in things like MARCbot and RDISS. And I can tell you that there's a series of candidates that we're continuing to explore as to whether or not those are low-volume production that may make sense. But there's nothing that we can be specific about at this point.

I think what's important to realize is that most of those have come from work that we've done in trying to find the right technologies for them, or integrated technologies for them on solutions. And that -- we're working on ideas like that for them on an ongoing basis as part of our support contract. So, hopefully not always; a lot of times those are ideas we find from that they can get right off the shelf, or buy as existing military technologies to integrate into this solution. But, sometimes they do turn around and come back to us for an integrated solution to the problem. So, we've got a couple of technology areas that we have been working on for them over the last couple of quarters. Only time will tell if they need additional units.

Lastly, can you -- what was the headcount at the end of the quarter, as well as expectations for the remainder of the year in terms of hiring plans?

The last month of the quarter had 613, so a little bit higher than the average for the quarter. As we look out for the full year, we expect that for the full year our full-time equivalent employees, probably the average for the year will range in the 5, 6% year-over-year gain, when you bring the whole year together. The first two quarters here last year were flat, so we expect that year-over-year FTEs in the second quarter will be in this 7 to 8% range.

Thank you very much.

There are no further questions. Ladies and gentlemen, this concludes the Exponent first quarter 2008 conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236, or 303-590-3000, entering passcode 11112058. ACT would like to thank you for your participation. You may now disconnect. Have a pleasant day.