Yahoo Finance Exponent, Inc. (NASDAQ:EXPO) Q1 2024 Earnings Call Transcript
Exponent, Inc. (NASDAQ:EXPO) Q1 2024 Earnings Call Transcript April 25, 2024
Exponent, Inc. beats earnings expectations. Reported EPS is $0.59, expectations were $0.46. Exponent, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to the Exponent, Inc. Quarter One 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos. Please go ahead.
Joni Konstantelos: Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent’s first quarter 2024 financial results conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company’s corporate website at investors.exponent.com. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent’s market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.
Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent’s periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent’s most recent Form 10-Q. The forward-looking statements and risks 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 will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?
Catherine Corrigan: Thank you, Joni and thank you everyone for joining us today. I will start off by reviewing our first quarter 2024 business performance. Rich will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions. Exponent's unparalleled reputation and decades-long expertise in failure analysis drove better than expected results in the first quarter. Despite a slow start, our reactive business grew in the mid-teens, driven by robust failure analysis and dispute-related work, spanning a wide spectrum of industries. Partway through the quarter, we experienced accelerated activity across a number of substantial engagements, contributing to our strong results in the quarter.
These matters required active, real-time regulatory and safety-related insights to inform decision-making, and our exceptionally well-qualified team surged to meet time-sensitive regulatory enforcement deadlines. While many of these matters will continue in the second quarter, we do not expect the same level of activity. In our proactive business, excluding consumer electronics, which continues to experience cyclical impacts, we achieved year-over-year growth, driven by strong activity in the transportation and utilities sectors. Turning to our engagements in more detail, in our reactive services within transportation, we continue to see robust activity in automotive product liability and regulatory matters; for example, evaluating the performance and safety implications of advanced driver assistance technologies and battery systems.
In life sciences, our experts are advising clients on the root causes of safety concerns related to medical devices and diagnostics, leveraging multidisciplinary approaches that include expertise in materials science, manufacturing, human factors and health sciences. In the energy industry, our failure analysis expertise continues to be leveraged across a range of projects from traditional oil and gas to renewables. More broadly, we are playing an increasing role in helping clients navigate the challenges of an ongoing and ever-evolving energy transition. Clients around the world rely on Exponent in renewables disputes involving wind, solar and large-scale energy storage, including technology performance challenges and life expectancy of infrastructure investments.
During the quarter, we did see ongoing budget constraints with some clients, particularly in the chemical sector. We continue to see some of these clients causing litigation work in the near term. However, we did see an uptick in momentum during the quarter, and we expect that activity to return to normalized levels. Within our proactive services, we saw strong demand in transportation, evaluating vehicle emissions issues, as well as in the utility sector, advising clients on asset integrity and risk mitigation. We continue to see strong demand in the chemical sector for our regulatory work, evaluating the impacts of chemicals on human health and the environment. Headwinds in the consumer electronics sector persisted due in part to the timing of product life cycles, as well as broader impacts in the industry and as a result, human subject research engagements decreased year-over-year.
Excluding consumer electronics, proactive revenues were up low single digits in the quarter. Our ongoing efforts to align resources with demand, coupled with our strategic investments in the growth areas of the business, contributed to 75% utilization in the first quarter. I am grateful to our world-class team, which responded with agility to the surge in client demand that we experienced in the quarter. As always, we will continue to closely monitor the market and focus on developing our top-tier talent while broadening our capabilities and continuously adapting to an evolving landscape. Turning to our segments, Exponent's engineering and other scientific segment represented 84% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 8% for the first quarter, driven by demand for Exponent services across the energy, vehicle, and medical device sectors.
Exponent's environmental and health segment represented 16% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 1% for the first quarter. Work in this sector was primarily driven by regulatory engagements for the chemicals industry. Looking ahead, we have raised our revenue and margin expectations for the full year 2024. However, we still face consumer electronics and macro headwinds, as well as a high hurdle rate for year-over-year comparisons due to the significant growth of our reactive business in 2023. Over the last few quarters, we've demonstrated the commitment and agility needed to adapt to challenging dynamics in both our consulting and talent marketplaces. Our first quarter results reflect this agility, as well as the strength of our fundamental market drivers.
In this dynamic environment, we maintain an emphasis on advancing new business development, strategically investing in growth opportunities, while aligning our resources and costs with the anticipated demand. As we look to the future, our value proposition is as strong as ever, and I am confident in our ability to accelerate and drive long-term revenue growth in the high single to low double digits. I'll now turn the call over to Rich to provide more detail on our first quarter results, as well as discuss our outlook for the second quarter and the full year 2024.
Rich Schlenker: Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis, unless otherwise noted. For the first quarter of 2024, total revenues increased 3.3% to $144.9 million, and revenues before reimbursements, or net revenues as I will refer to them from here on, increased 6.6% to $137.2 million as compared to the same period in 2023. Net income for the first quarter increased to $30.1 million or $0.59 per diluted share, as compared to $29.1 million, or $0.56 per diluted share in the prior year period. The realized tax benefit associated with accounting for share-based awards in the first quarter of 2024 was $900,000 or $0.02 per diluted share, as compared to $3.6 million, or $0.07 per diluted share in the first quarter of 2023.
Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 25.4% in the first quarter of 2024, as compared to 18% for the same period in 2023. EBITDA for the quarter increased 12.2% to $40.1 million, producing a margin of 29.2% of net revenues, as compared to $35.8 million, or 27.8% of net revenues in the same period of 2023. This year-over-year increase in margins was driven by higher revenues and an increase in utilization during the first quarter of 2024. Fillable hours in the first quarter were approximately 392,000, an increase of 2% year-over-year. The average technical full-time equivalent employees in the first quarter were 1,003, which is a decrease of 5% as compared to one year ago. Sequentially, full-time equivalent employees decreased 1% as compared to the fourth quarter of 2023, as we strategically aligned our resources with demand.
Utilization in the first quarter was 75%, up from 70% in the same period of 2023. The realized rate increase was approximately 5% for the first quarter of 2024, as compared to the same period a year ago. In the first quarter, after adjusting for gains and losses in deferred compensation expense, compensation expense increased 4.7%. Included in total compensation expense is a gain in deferred compensation of $6.3 million, as compared to a gain of $3.9 million in the same period of 2023. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the first quarter was $7.3 million, as compared to $7.1 million in the prior year period. Other operating expenses in the first quarter were up 10.1% to $10.5 million, driven primarily by increased engagement at our offices and investments in our infrastructure.
Included in other operating expenses is depreciation and amortization expense of $2.3 million for the first quarter. D&A expenses declined 3.5% to $5.6 million for the first quarter. This decrease was primarily due to a reduction in use of outsourced personnel and a decrease in recruiting expenses. Interest income increased to $2.6 million for the first quarter, driven by an increase in interest rates. Miscellaneous income, excluding the deferred compensation gain, was approximately $800,000 for the first quarter. During the quarter, capital expenditures were $1.5 million. We distributed $15.6 million to shareholders through dividend payments and repurchased $5.5 million of common stock at an average price of $77.13. Turning to our outlook, for the second quarter, as compared to one year prior, we expect revenues before reimbursements to be flat to up in the low single digits, and EBITDA to be 27.25% to 28.25% of revenues before reimbursements.
For the fiscal year 2024, we are increasing our revenue and margin guidance. We expect revenues before reimbursements to grow in the low single digits and EBITDA to be 26.25% to 27% of revenues before reimbursements. We expect the average technical full-time equivalent employees to decline sequentially 1% to 1.5% in the second quarter of 2024, as we recently completed our annual performance review process. As a result, average FTEs for the second quarter will be down approximately 8% year-over-year. We expect sequential headcount growth in the back half of the year and as a result, our full-year average full-time equivalents will be down approximately 5% to 6% on a year-over-year basis. We expect utilization in the second quarter to be 71% to 73% as compared to 69.4% in the same quarter last year.
We expect the full-year utilization to be 69.5% to 71.5% as compared to 69.9% in 2023. We still believe our long-term target of sustained mid-70s utilization is achievable as we continue to strategically manage headcount and balance utilization based on market demand. We expect our year-over-year realized rate increase to be 4% to 4.5% for the second quarter and full year. For the second quarter of 2024, we expect stock-based compensation to be $5.3 million to $5.6 million. For the full year of 2024, we expect stock-based compensation to be $22.5 million to $23.3 million. For the second quarter, we expect other operating expenses to be $11.3 million to $11.8 million. For the full year, we expect other operating expenses to be $46.5 million to $47.5 million.
It should be noted that we expect that during the second quarter, we are going to take the opportunity to early exercise an option to extend our lease for our test and engineering center in Phoenix, Arizona. Although our current lease does not expire until 2028, we want to lock in the pricing at this time. Although we will not pay any higher rent until 2028, the new lease accounting rules require us to recalculate the rent expense for the length of the new lease period. This will result in an immediate increase in our non-cash rent expense of $400,000 during Q2 of 2024 and an increase of $1.1 million during each of Q3 and Q4 of 2024. We are very excited to secure this facility as we believe it will continue to be an integral part of our future growth.
For the second quarter, we expect G&A expenses to be $6.5 million to $7 million. For the full year, we expect G&A expenses to be $24 million to $25 million. We expect interest income to be $1.8 million to $2 million per quarter for the remainder of 2024. In addition, we anticipate miscellaneous income to be approximately $700,000 to $800,000 for the second quarter of 2024. For the full year, we expect miscellaneous income to be approximately $2 million to $2.2 million. This includes an expected decrease in rental income of $400,000 in Q3 and $600,000 in Q4 due to the loss of a tenant in Menlo Park, California, where we own our building. For the remainder of 2024, we do not expect any additional tax benefit associated with share-based awards.
For the second quarter of 2024, we expect our tax rate to be approximately 28% as compared to 29% in the same quarter one year ago. For the full year 2024, the tax rate is expected to be 27.2% to 27.3% as compared to 26.2% in 2023. The increase in tax rate is due to less tax benefit from share-based awards in the first quarter. In closing, we are pleased to have delivered a profitable growth. I will now turn the call back to Catherine for closing remarks.
Catherine Corrigan: Thank you, Rich. I am pleased with our performance in the first quarter and am encouraged by the market signals we are seeing, particularly in the reactive space. Our roots in failure analysis continue to strengthen and grow, fortifying our leadership position as we branch into new, untapped areas around the product's lifecycle. As industries transform at breakneck speed, I am confident in our ability to capitalize on these strong market drivers to accelerate our growth. Operator, we are now ready for questions.
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