Exponent, Inc. (EXPO) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day. And welcome to the Exponent First Quarter and Fiscal Year 2021 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Whitney Kukulka. Please go ahead, ma’am. Whitney Kukulka: Thank you, Operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent’s first quarter of fiscal year 2021 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 www.exponent.com/investors. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent. Dr. Catherine Corrigan: Thank you, Whitney, and thank you everyone for joining us today. I will start off by reviewing our first quarter 2021 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. Our business continued to gain momentum, driving strong quarterly results, which exceeded our prior expectations. In the first quarter, net revenues grew 10% and EBITDA margin increased 400 basis points from the prior year period. These results were bolstered by increased activity in human participant studies and litigation projects, as pandemic-related restrictions were eased and vaccinations became more widely available. Exponent is winning new assignments daily, and at the same time, is gradually reengaging on projects that were paused due to Coronavirus restrictions and court closures. The pandemic has altered many aspects of our lives, but one trend that has not abated is the growing complexity of our world. Exponent continues to leverage its expertise to understand and enhance human machine interactions for technologies, including wearables, medical devices and advanced vehicles. Exponent advises industry and governments on their most pressing engineering and scientific challenges as society continues to raise expectations for safety, health, sustainability and reliability. These long-term trends that existed prior to the pandemic are now only strengthening, driving increased demand for our services. Rich Schlenker: Dr. Catherine Corrigan: Thank you, Rich. For more than 50 years, Exponent has been called upon to advise clients on the causes of failures, as well as how to produce safer, healthier, more sustainable, and more reliable products and processes. As our clients’ needs evolve and increase in complexity, our team of engineers and scientists positions itself ahead of the curve, utilizing deep knowledge and multi-disciplinary capabilities to deliver unique solutions. With strong market drivers and a world-class team, Exponent is primed to deliver long-term growth. Operator: Thank you. Our first question comes from Tobey Sommer, Truist Securities. Tobey Sommer: Thank you. My first question has to do with the potential for global supply chain reconfigurations post-pandemic, what you’re hearing from customers and to the extent you are actively helping some achieve this kind of goal or expect to? Thanks. Dr. Catherine Corrigan: Yeah. Thanks, Tobey. So this is an area of concern across a number of our industries that we operate in, right? If you think about the automotive side, if you think about the consumer electronics side in particular and there is -- the opportunity for us that we’ve been seeing vis-à-vis consumer electronics in particular really relates to our presence in Asia and our ability to be on the ground for our clients in understanding what some of these supply chain impacts are, when our clients in the U.S. are in a situation where they really can’t have their folks traveling as much. So we are seeing, to some extent some demand drivers around being able to advise clients with respect to qualification of suppliers to the extent that they are reorienting. We are able to help them vis-à-vis understanding the quality implications on their product, some of the related data implications vis-à-vis their products, the likelihood of failure in terms of monitoring and auditing types of things. And so that’s primarily the area that we are seeing this is going to be around the consumer electronics and consumer products area. Our teams in Asia are being called in to advise clients with regard to some of those impacts, primarily around consumer electronics. Tobey Sommer: Thank you for that. And what’s the environment like for recruiting, you did mention that you’re active expect to be for the balance of the year. Has it changed as a result of the pandemic and the relative attractiveness of Exponent as an employer? Dr. Catherine Corrigan: Yeah. So we’re very focused on the recruiting side right now and we really pivoted, of course, during the pandemic. We’ve been able to really take advantage of the virtual space from the standpoint of the way that we are sourcing candidates. We gain these candidates through a variety of channels. One of those is our university recruiting channel and we have been able in the virtual environment to reach a much broader spectrum of these candidates, a higher level of diversity of these candidates, because of the way we can run these sort of virtual events as opposed to have to being -- having to be in person on campus. And so what we’re seeing now is we’re accelerating our recruiting process, is that we have got -- we have been able to achieve a healthy pipeline of candidates and it’s been interesting because -- look, people are attending in this environment there. They have been in the pandemic. They are sort of reexamining their lives. They may be looking for new opportunities and I think we are seeing more of that in terms of being able to capture folks who are maybe getting loose in the saddle from our competitors as well. We’ve tried to accelerate our senior recruiting. This is using the networks of our very senior leaders in a variety of spaces, whether that be environmental, whether that be on the health sciences side and we’ve been able to take advantage of some of the disruption, if you will, with folks wanting to sort of make changes and so we’re very focused on keeping our finger on the pulse of the various sources of candidates. And so we’re confident as we accelerate our activity through the second quarter and into the third quarter and fourth quarter that we’re going to be able to get ourselves accelerating that headcount growth, which of course, we had moderated to some extent in 2020, because of our focus on profitability and being able to maintain the very exceptional talent that we have. So we’ve got a very positive outlook on recruiting and we’re finding -- it’s as competitive as ever. These folks have lots of opportunity. But we are seeing that they are viewing Exponent as one of their top choices. Tobey Sommer: Thanks. And then from an expense perspective, you mentioned real estate in your prepared remarks and sort of ramping travel expenses, is there a -- on a net basis, any kind of cost difference that you see in the business exiting -- hopefully, exiting the pandemic versus pre-pandemic levels? Rich Schlenker: Yeah. Look, I think, at this point in time, we think that from a facility standpoint, the profile is going to be similar to what we were doing before. I mean, Exponent has been able to pretty much year-in, year-out, squeeze a little bit of better margin out of building critical mass in our locations. And we expect to be able to continue to do that as we look forward over the next several years. But that’s a path that we were on being able to share space better, collaborate more, do those types of things. When it comes to the -- do I expect that we’re going to see some lower level of travel expense? I think we will see some in that area as certain conferences or meetings moved to a virtual environment. What we’re working through at this time is, is there going to be a net cost savings or are those expenses going to be shifted into other forms that are marketing and recruiting expense that allow us to continue to be more effective in that area. So I think that we’re still evolving those areas. We definitely think there are some places where less travel will be more efficient and actually more effective for our business. But we think that we also need to invest in other forms of communication that can also enhance our position in the marketplace. Tobey Sommer: And last question from me, as courts’ throughput kind of slowed last year, we weren’t sure whether all projects would sort of be deferred and/or maybe parties would settle. What’s your perspective now on the degree to which some of those projects kind of went away or really just accumulated in, for lack of a better word, some sort of backlog? Dr. Catherine Corrigan: Yeah. Yeah. Thanks, Tobey. I’ve been spending a fair bit of time engaged with our clients on the litigation side, both the outside counsel, as well as the in-house folks, who make a lot of the decisions around, how they handle their litigation portfolios. And I will tell you, they have not changed their posture around wanting to fight the battles on the merits of the case. They’re really making their decisions based on the merits. I’m finding we didn’t really see waves of settlements when things started to decline in terms of the macroeconomic impact. Of course, you get a settlement, you get settlements here and there. And at the end of the day, the vast majority of these matters do settle, but what tends to happen is they get fully worked up, full expert reports, depositions, you’re almost to the courthouse steps before those settlements tend to happen. And we really have seen that our clients are just as committed to their cases as they have been whether you’re on the plaintiff side or you are on the defendant’s side. They’ve -- there has been a willingness for them to weighted it out, is what I’ve seen and just kind of push the dates. But what we see now is the dates are becoming real. The reality of bringing a jury in for an in-person trial in even the summer or the fall of this year is very real and that is pushing demand back toward us for things like the preparation of expert reports and doing these deep analyses and preparing for depositions. And so, that’s been a part of the driver really here for the activity in the quarter, where we continue to see this improvement in matters that are being brought back to life if you will. Tobey Sommer: Thank you very much. Dr. Catherine Corrigan: You’re welcome. Operator: Our next question comes from Andrew Nicholas, William Blair. Andrew Nicholas: Hi. Good afternoon. Rich Schlenker: Hi, Andrew. Andrew Nicholas: I was hoping you could speak to the outperformance that you saw in the quarter relative to your guidance, where in particular you saw upside? And then somewhat relatedly, when you look at that outperformance, is there any way to describe how much of it was a function of maybe pent-up demand flowing into the pipeline versus what might otherwise be described as more a normal course of business, I realize that that’s maybe a difficult thing to obtain? But just curious if you have any thoughts on pent up versus normal course? Thanks. Rich Schlenker: Yeah. Let me start off on this one. Look, I think, when we provided the guidance about the first quarter, at that time, clearly, we were in the process -- we had a number of human participant studies that clients had been coming to us, wanting to get ready to go when the restrictions came down and when vaccinations increased. We can all remember back to what January was like. It was not that long ago. We were all coming off a pretty devastating sort of time over the post-holidays. And but things really -- vaccinations we’re starting, we just didn’t know how quickly we would see the positive impacts of that. And it turns out that very quickly early in February those restrictions, the numbers started to go down and we were able to really let go and go full bore for the last eight weeks, nine weeks of the quarter on our human participant studies activity. So that was one area that really made a difference, I think, in that area. I’ve talked to the team, I would say maybe a third of the activity was some work that might have been done in an earlier quarter in late third quarter, early into fourth quarter, but the other two-thirds of it being activity that really wouldn’t have occurred until the first quarter at the earliest. So the majority of the work is work that’s new, that wouldn’t have been occurring until this time in the product life cycle and going from there. This is an area that we -- was probably, let’s call altogether 6% of -- 5% to 7% of our revenues in the quarter in total, just to give you a sense and there was some of it going on in January. It just accelerated really in February and continued on. On the litigation support side, again, we -- if you remember back, we saw a good push on that in the fourth quarter. That really led to a very strong fourth quarter that we had was the people realizing that vaccinations were going to -- were coming out, the court dates would probably begin to firm up and activity really started to move forward on depositions and expert reports and all that activity. Those slowed a little bit in the late December and all the way through January, but really picked back up again really late January into the beginning of February on those activities. We’ve continued to see a higher level of new engagements year-over-year. So we’re getting plenty of new engagements coming in. And I would say that again this is a majority of the work is -- work we would have been doing in the first quarter and pushing through, but you have that top off part of that level of work, might be 10%, 20% of what we’re doing in that area that might have been deferred and pushed out, but it’s starting to come off. So, again, this is an area that litigation overall is 50% of what we do and we’re seeing a little bit of that work being added on the top, but the majority of it being work that’s what we would have expected and we continue to get when we were in the -- deep in the restrictions. Andrew Nicholas: Really helpful color. Thank you. Maybe with as a follow-up to that and with your answer as context or a precursor, I was hoping you could maybe walk us through in a little bit more detail how you’re thinking about the revenue cadence throughout the remainder of the year? If I look at the implied guide for the second half, it seems like you’re baking in consistent sequential step down through year end? And so I’m wondering, if there’s anything else to call out besides typical seasonality and vacations or it’s just maybe being a bit conservative given how much uncertainty there is in the world at large? Thank you. Rich Schlenker: Yeah. So I think it’s a lot of those factors. First of all, clearly, we have easier compares in Q2 and Q3 than we have in the fourth quarter. As I just mentioned a moment ago, the fourth quarter utilization was actually pretty strong. It was a good utilization quarter. We had seen a little bit of uptick in the headcount as well and we had a very strong rate realization in that period. Based on the mix of work, based on positive realizations on projects, the rate realization was definitely the strongest of the year. So we do view that Q4 is a very different comparison for us as we move forward to that. So we’re not expecting to see as larger -- we’re expecting to see a small rate realization when we get to the fourth quarter just because of the unusual strong rate last year in that period. We think utilization underlying might be a little bit stronger than it was last year in the fourth quarter, but we realize that vacations are going to be pressing on us at that period of time. And we’re taking that into account. That likely we’re going to see a few extra days less of productivity from people in the fourth quarter of this year and over the summer, as well as people are taking vacation and doing a little bit of catching up on that. And so that is why at this point in time and the uncertainties that are out there, we have accounted for that. You’re right, it is a low -- our expectation for year-over-year growth in the fourth quarter on the topline is low because of all of those factors, but it’s not because we don’t see the business getting back to a normal growth rate as we go into 2022. We think that the strong recruiting that we’re doing right now, hiring PhDs and all that, it takes time to layer back in. We’ll start to see the results of that in the fourth quarter, but a lot of that will fall into the first quarter of next year and beyond. Where we can get the head count year-over-year growth back up into that 4% to 7% range, as we go into 2022. Where we tend to see good rate increases as we go into this demand environment that we’re all in and we’re seeing inflation and we are seeing good GDP growth and all of that. We think that will lead to us again being able to realize a good rate increase as we go into 2022. And as I indicated earlier, we expect the utilization this year to be in that 71% to 72% range and we expect over time that that can gradually grow into the mid-70%s over the next four to five years. So we think that there is room to be able to improve things as we get through the year and set ourselves up well as we go into 2022 and beyond. Andrew Nicholas: Makes sense. Very helpful color. Thank you. Operator: Our next question comes from Marc Riddick, Sidoti. Marc Riddick: Hi. Good afternoon. Rich Schlenker: Hi, Marc. Dr. Catherine Corrigan: Hey, Marc. Marc Riddick: So I wanted to sort of piggyback on that and I really appreciated the way you kind of laid out how the cadence worked out around the recovery and positive performances that you saw, both on the litigation side and the user study portion. I was wondering if you could sort of take a similar dive at what you may be seeing, what the automated vehicles and some of those types of efforts, given the focus on what would may be coming as far as increased demand and production in that space? Dr. Catherine Corrigan: Yeah. Thanks, Marc. The automotive area and advanced vehicles in particular are definitely an important driver for us right now. And this is actually -- it hits both the proactive, as well as the reactive side of the business. There has been an uptick sort of in the regulatory activity around advanced vehicles. We are seeing demand around sort of safety frameworks as the various manufacturers of advanced vehicles and automated vehicles are envisioning the actual deployment of these on the roadways. That’s really where Exponent comes in, when it gets sort of out of the lab and out of the test environment and you actually get into the realities of a 4,000 pound vehicle being driven by a computer at 70 miles per hour and what the safety implications of that are. So we’re seeing that kind of demand on the proactive side. And also around the electric vehicle piece, you’ve see all kinds of pledges recently. General Motors fleet is going to be electric by 2030 and others are rounding out… Marc Riddick: Right. Right. Dr. Catherine Corrigan: … similar sorts of pledge sorts of statements and so we are seeing that our battery expertise on the transportation side is in increasing demand. As the industry ramps up its manufacturing of batteries to meet the demands in the marketplace and to kind of meet the regulatory drivers that are pushing in that direction. There are all kinds of challenges. But I mean, if you remember back to the Samsung Galaxy Note 7 phone. All of those challenges came through when they ramped up manufacturing. And so there is opportunity that we’re seeing and there are engagements that we are seeing around quality and performance and reliability of those systems and also crash worthiness of those systems. Vehicle fires are a concern for both gas-powered vehicles, as well as electric vehicles, but the ways that you put them out and the safety implications are very different just because they’re different propulsion system. So we’re seeing it there. We’re seeing litigation work around advanced driver assistance systems. So this is not a fully automated vehicle, but this is the technology that’s being deployed in the fleet now, it’s been in the fleet, emergency braking, lane keeping kinds of technologies, adaptive cruise control… Marc Riddick: Right. Right. Dr. Catherine Corrigan: These are places where the litigation profiles are increasing. The plaintiff bar is very aggressive as they have always been around vehicle safety and so we have taken -- made investments to position ourselves ahead of the curve on this and are really developing the cutting edge testing capabilities around these systems and really digging into the data around limit performance on these systems. And so the automotive arena, both proactively and reactively is driving some of the existing demand that we’ve seen in this past quarter, but also we believe it’s going to continue through 2021 and beyond as these technologies continue to be get closer and closer to actual deployment and then once they’re deployed managing the challenges of their performance and failure analysis and things like that once they are out on the roads. Marc Riddick: Okay. That’s really helpful. Thank you. And then I was wondering from a regulatory standpoint, is there a general timeframe or framework that you tend to see for new technologies like this when it comes to I guess maybe on a state and local level involvement and sort of what type of -- is this the type of thing that you can sort of see coming in there, so you can prepare yourself for it and what type of jurisdictions might be sort of the first ones on your doorstep? Dr. Catherine Corrigan: Yeah. The regulatory environment is a key driver, right? And you hit the nail on the head when you mentioned, it’s not only at federal level, but there is a state and a local level, right? Because the -- it’s at the state level, where they have to -- states do licensing for advanced -- for human drivers, right? Well, how do you decide if you are a state -- if you’re at that state level, there are huge questions around how you determine if an automated vehicles should be quote-unquote licensed to be on the public roadways, right? And the pathway toward that is something that could be different state-by-state and so this is an area where Exponent can really help. And we would be aiming and have been assisting the industry more so than going after the states themselves necessarily as clients. But we are trying to really actualize getting the vehicle on the roadway and what that actually means in terms of what the vehicle needs to demonstrate. How do you demonstrate safety? How safe is safe enough is the real question that the whole community of manufacturers is really trying to answer and really trying to get ahead of the regulators, so that you can demonstrate to the regulators that you’ve got the best practices and that’s definitely an area of focus for us now. Marc Riddick: Okay. And then I just one more and I promise I’ll be done. Can you talk a little bit about the expansion of the wearables within DoD and sort of how that came to be and was there something that accelerated that pace or how should we think about that opportunity going forward? Thanks. Dr. Catherine Corrigan: Yeah. Yeah. So that’s an opportunity where the original work was -- we were doing it at the Army level, we were doing it at the Navy level. But now what’s happening is that, we are -- and it was focused really very exclusively on COVID-related proximity monitoring and contact tracing. And now what we’re seeing because of what we’ve been able to deliver in those engagements is more of a converged solution across -- as a joint program across the Department of Defense. We’re looking at that sensor data from the wearable from a variety of different angles in terms of the security of the data, the hardware itself, and the ability of the sensors to detect physiologic signs. The data flow and architecture are important issues here. The human factors issues associated with the display. How you manage all of those kinds of things and wanting to get all of that information onto the wearable device in a way that is robust and reliable and provides information about health and also readiness in the sense of the armed forces. And so it’s about taking it sort of out of the laboratory, out of the experimental sort of condition and being able to manage it operationally and sort of optimize that data flow to provide real insights into what the data are telling you. And so that’s really where the expansion has come through sort of a converged solution that goes across as a joint program in the Department of Defense. Marc Riddick: That’s great. Thank you very much. Dr. Catherine Corrigan: You’re welcome. Operator: With no more questions in the queue, we will be ending the call. Thank you, ladies and gentlemen. This concludes today’s teleconference. You may now disconnect.EXPO Ratings Summary
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UBS Reiterates Neutral Rating on Exponent, Sees Potential for Growth in 2025
UBS analysts reiterated their Neutral rating and maintained a price target of $88 on Exponent (NASDAQ:EXPO), following investor meetings with Exponent's CEO Catherine Corrigan and CFO Rich Schlenker.
The discussions revealed a stable demand environment, particularly in Consumer Electronics, which has shown modest sequential gains. The Reactive segment remains healthy, although slightly below the Q1 surge. Management indicated that sequential headcount growth might resume in the second half of the year, with year-over-year headcount growth anticipated in 2025. This could help Exponent return to its historical revenue growth algorithm in the high single-digit to low double-digit percentage range.
If achieved, this growth could surpass UBS's current estimate of a 5% increase. Despite being surprised by the stock's performance during Q1 earnings and its subsequent resilience, the analysts noted that management's optimistic outlook and the potential for stronger growth in 2025 could present a positive narrative for Exponent.
