Exponent Q4 2007 Earnings Call Transcript

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 |  About: Exponent, Inc. (EXPO)
by: SA Transcripts

Operator

Good afternoon, ladies and gentlemen; thank you for standing by. Welcome to the Exponent fourth quarter 2007 earnings conference call. Following the presentation, the conference will be opened for questions. (Operator Instructions)

Now I’d like to turn the conference over to Ms. Brinlea Johnson with the Blueshirt Group.

Brinlea Johnson

Good afternoon, ladies and gentlemen, and thank you for joining us on today’s conference call to discuss Exponent’s Fourth Quarter and Fiscal Year 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 a property of Exponent, and any taping or 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 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 captions “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 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.

Michael R. Gaulke

Thank you, and thank you for joining us today as we report our 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 contained 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 barriers in a 600-kilometer oil pipeline.

And 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 situation awareness for our soldiers at joint security stations and combat outposts in Iraq and Afghanistan.

In summary, we are 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’ll now turn the call over to Rich for a detailed discussion of our financial results.

Richard L. Schlenker

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’s 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 in 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 a 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 and $7.5 million. In the first quarter, stock-based compensation will be in the range of $2.5 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 to 11.1% over 2006, to $12.12 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.

Michael R. Gaulke

Thanks, Rich. We are optimistic about our opportunities for 2008. Our key areas of focus will be to pursue our strategic growth initiatives, including health sciences, product development, 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 and 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.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Gold – Sidoti & Co.

David Gold – Sidoti & Co.

First on the military contracts, Mike or Rich for that matter, can you speak a little bit more? On the RDISS contract, did we complete that in the quarter or is there more to go?

Michael R. Gaulke

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 to $2.3 million in gross contract, probably about $900,000 in net revenues for the first quarter.

David Gold – Sidoti & Co.

And profit on the $900 track, what we’ve seen?

Michael R. Gaulke

Similar to what we have seen, yes.

David Gold – Sidoti & Co.

And 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 may think you may sign over the next, say, 6 to 12 months?

Richard L. Schlenker

There are a number of opportunities that we’re 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 [refurnished] as initiatives, 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.

Michael R. Gaulke

Just to add to that briefly, we do expect to deliver approximately 50 MARCbot’s here in the first quarter as well as systems that we’re calling our covert Denial System where those are being shipped out as well this quarter. So we do already have some work in hand for which we will 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 have 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 and development.

David Gold – Sidoti & Co.

And then can you talk about, utilization showing was pretty strong at 66%, and as your point for the year. But as we look going forward, I think, in the past, we’ve spoken about trying to pick up probably 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?

Richard L. Schlenker

David, I think, right now, when we’re 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% of utilization improvement going to come in 2008? Those are starting to dial it in very tight. We clearly made a huge step up. 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’re 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, and how that gets integrated, and do we gain a 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.

David Gold – Sidoti & Co.

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

Richard L. Schlenker

Yes, that year-end number was 601.

David Gold – Sidoti & Co.

And then, part two, as you think about this year, what would you consider success? In other words, what percent head count might you be targeting for ‘08?

Richard L. Schlenker

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 4-7% 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 it will be in that 5-6%. I would hope that we’re not at 4%. We may be at 7% if some of the right opportunities come along.

Operator

Your next question comes from Tim McHugh – William Blair.

Tim McHugh – William Blair

What was the total technology development revenue you mentioned? I thought that was just for the RDISS contract?

Richard L. Schlenker

That was. The total for the defense area was $5.1 million in net revenues. 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, which is the amount that I discussed we recognized from the RDISS contracts. 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.

Tim McHugh – William Blair

And then I wanted to ask about the hiring of 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?

Michael R. Gaulke

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 head count 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 lot of time on this past year.

And as we look at 2008, I think we are going to see some of the benefits of re-establishing stronger relationships in a number of the targeted universities that we seek Ph.D talent, in 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.

Tim McHugh – William Blair

And then can I ask about your 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 you haven’t found anything yet that spurred you to make an acquisition?

Michael R. Gaulke

Yes. I wouldn’t describe 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. 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 are 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. And so we will continue to look and hopefully here at some point be able to discuss one or more of those.

Tim McHugh – William Blair

As I understand it, there are 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?

Michael R. Gaulke

Yes, this is a much-asked question as you might expect here over the last few months as we’ve talked with investors, and the facts at this point are that we really haven’t seen any cyclical impact. Obviously, it could come off the fourth quarter here with just near-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 and 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.

Tim McHugh – William Blair

If I could slip in one more, actually, for Rich, you mentioned 50 MARCbot’s, and a little less than $1 million in revenue, perhaps from the RDISS contract. Can you quantify 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 model? What should we think about for the second quarter then?

Richard L. Schlenker

Yes, I think at this point in time, what I would be thinking about is revenues in this business area sort of in anywhere in the $2.5, $3 million range, somewhere in there. Because there was one contract that was such a larger part of that last time, 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, $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 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.

Operator

We do have a follow-up question from the line of David Gold. Please go ahead.

David Gold – Sidoti & Co.

I’ve been thinking about 2008. Presumably, if we’re thinking that utilization improvement may come maybe in 2008, if not quite this year, and we were flat. When you think about your traditional high single, low double-digit top line, curious, I mean, I know, you have quantified 5% to 6% on the head count, is the rest of that in your total price?

Richard L. Schlenker

I can tell you we’ve completed our evaluation of our billing rates. And for the employees that were on board at that 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.

David Gold – Sidoti & Co.

So that’s, again, 4.5%?

Richard L. Schlenker

So we’d expect on a full-year basis to realize somewhere in the 4.5-5% on a bill rate price increase.

David Gold – Sidoti & Co.

Mike, that you spoke, and the acquisition, I am thinking, but 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 felt was reasonable. Have you seen anything noticeable just yet or is it still too early, in other words, has just pricing come in any?

Michael R. Gaulke

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

Operator

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

Michael R. Gaulke

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

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