Good afternoon, everyone, and welcome to the Exponent, Inc. Q3 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded.

At this time, I'd like to turn the floor over to Joni Konstantelos, Managing Director with Riveron. Please go ahead..

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining Exponent's third 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 www.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'd 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?.

Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our third 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.

We are pleased with the alignment of our operating model with market demand, which drove 6% net income growth and expanded EBITDA margin in the third quarter. This marks the third consecutive quarter of increased utilization year-over-year as we continue our commitment to efficient resource management.

As expected, revenues before reimbursements were flat in the quarter. Our proactive business returned to year-over-year growth, driven by a healthy rebound in consumer electronics but this was largely offset by persistent headwinds in the chemical sector and an exceptionally high benchmark of over 20% growth in our reactive services last year.

The inherent strength of our diversified portfolio continued to provide stability in a dynamic operating environment. Turning to our engagements in more detail.

Proactive engagements in the quarter were driven by increased user experience studies and product development consulting in the consumer electronics sector as well as risk-related work in utilities.

Clients in electronics turn to Exponent for our breadth of expertise across the product life cycle, whether that is curating machine learning training data at the development stage, adding novel features to existing products, or addressing performance issues when incorporating more sustainable materials.

We are capitalizing on the increased use of wearable sensors in health applications which is driving opportunities at the intersection of electronics and life sciences.

These healthcare-related applications are not only driving growth, but are also serving to diversify our portfolio and to mitigate future challenges related to product life cycle timing.

In the utility sector, our growth was driven by asset integrity management engagements, advising our clients on the resilience of their infrastructure as they face increased regulatory scrutiny and challenges related to climate change.

Activity in our reactive work continues to moderate from the exceptionally high growth in the prior year, driven by several significant litigation projects, which have since been completed.

Engagements in the quarter included product liability and regulatory consulting in the transportation industry, including performance and safety evaluations of advanced driver assistance technologies and battery systems. In energy, we consulted on infrastructure disputes involving wind, solar and large-scale energy storage.

During the quarter, we continued to see headwinds in the chemicals sector. Consistent with the significant restructuring occurring among several major companies in this space. This resulted in some clients moderating near-term litigation budgets as well as regulatory work.

While the year-over-year comparisons in our reactive services are challenging, our leading market position endorse, grounded in our deep failure analysis routes.

Clients continue to seek our advice for the most complex regulatory safety and performance challenges across a diverse array of industries and technologies, supporting stability and long-term growth potential. Turning to our segments.

Exponent's engineering and other scientific segment represented 84% of revenues before reimbursements in the third quarter. Revenues before reimbursements in this segment increased 2%, driven by demand for Exponent services across the consumer electronics and utility sectors.

Exponent's environmental and health segment represented 16% of revenues before reimbursements in the third quarter. Revenues before reimbursements in this segment decreased 6%, due to headwinds in the chemicals and life sciences sectors. This year, we have made significant strides to strategically align our resources to market demand.

We have executed this plan over the last several quarters, and it has resulted in a robust utilization rate of 75% for the first nine months of 2024. Considering this progress, we are raising our margin guidance while maintaining our revenue guidance for the full-year.

While our headcount was lower than anticipated in the third quarter, we will continue our focus on strategic recruitment efforts anticipating sequential headcount growth in each quarter of 2025 to meet market demand.

As we close out the year, we are diligently focused on delivering exceptional service for our clients' current needs while preparing to solve their future challenges. We continue to build upon our multidisciplinary expertise as the increasing expectations for safety, health and the environment to drive our business forward.

While macroeconomic conditions are never certain, Exponent is strengthened by the breadth and depth of our increasingly diverse portfolio, which allows us to navigate challenges while pursuing future growth opportunities.

Looking into next year, we remain encouraged about market trends as we continue to expand our offerings to meet the evolving needs of our clients. I'll now turn the call over to Rich to provide more detail on our third quarter results as well as discuss our outlook for the fourth quarter and the full-year 2024..

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 third quarter of 2024, total revenues increased 2% to $136.3 million.

Revenues before reimbursements or net revenues, as I will refer to them from here on, were flat at $125.1 million as compared to the same period end of 2023. Net income for the third quarter increased to $26 million or $0.50 per diluted share, as compared to $24.5 million or $0.48 per diluted share in the prior year period.

The realized tax benefit associated with accounting for share-based awards in the third quarter of 2024 was $532,000 or $0.01 per diluted share, as compared to an immaterial impact in the third quarter of 2023.

Inclusive of the tax benefit from share-based awards, Exponent's consolidated tax rate was 27.5% in the third quarter of 2024 as compared to 27.9% for the same period in 2023.

EBITDA for the quarter increased 4% to $35.8 million, producing a margin of 28.6% of net revenues as compared to $34.5 million or 27.6% of net revenues in the same period of 2023. This year-over-year increase in margins was driven by an increase in utilization during the third quarter of 2024.

Billable hours in the third quarter were approximately 362,000, a decrease of 5% year-over-year. The average technical full-time equivalent employees in the third quarter were 949, which is a decrease of 10% as compared to one year-ago.

Headcount is down year-over-year as we have aligned our resources with demand, allowing us to achieve strong utilization in margins. Utilization in the third quarter was 73.4%, up from 69.6% in the same period of 2023. The realized rate increase was approximately 5% for the third quarter as compared to the same period a year-ago.

In the third quarter, after adjusting for gains and losses in deferred compensation, compensation expense decreased 3%. Included in total compensation expense is a gain in deferred compensation of $7.2 million as compared to a loss of $2.8 million in the third quarter of 2023, generating a $10 million variance.

As a reminder, gains and losses in deferred compensation are offset to miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the third quarter was $5.5 million as compared to $4.9 million in the prior year period.

Other operating expenses in the third quarter were up 9% to $12 million, driven primarily by the increased non-cash expense of our Phoenix, Arizona lease renewal. Included in other operating expenses is depreciation and amortization expense of $2.4 million for the third quarter. G&A expenses declined 12% to $5.3 million for the third quarter.

This decrease was primarily due to a decrease in travel and meals as we postponed to 2025, our in-person managers meeting, which is typically held at the end of September. Interest income increased to $2.6 million for the third quarter driven by an increase in interest rates year-over-year.

Miscellaneous income, excluding the deferred compensation gain was approximately $375,000 in the third quarter. During the quarter, capital expenditures were $1.7 million, and we distributed $14.2 million to shareholders through dividend payments. Turning to our outlook.

For the fourth quarter of 2024 as compared to one year prior, we expect revenues before reimbursements to grow in the mid single digits and EBITDA to be 23.5% to 24.5% of revenues before reimbursements. As Catherine mentioned, we are maintaining our revenue guidance and raising our margin expectations for the full-year of 2024.

For fiscal year 2024, we expect revenue before reimbursements to grow in the low to mid single digits and EBITDA to be 27.9% to 28.1% of revenues before reimbursements as compared to 27.7% for fiscal year 2023.

Both our current and previous guidance are inclusive of the extra week in the fourth quarter, which occurs approximately every sixth year and is estimated to contribute an additional 4.5% to net revenues in the fourth quarter or 1.1% for the year.

Since the extra week includes the New Year's holiday and significant vacations, it has a negative impact on utilization and margins. We expect average technical full-time equivalent employees to slightly decline sequentially in the fourth quarter of 2024.

Despite our increased recruiting activity as typically new hires wait until the New Year to start. As a result, average FTEs for the fourth quarter will be down approximately 7% year-over-year. Our full year average FTEs will be down approximately 7% to 8% on a year-over-year basis.

We will end the year with approximately 945 FTEs which will be 5% to 6% lower than the first quarter of 2024. We expect our increasing recruiting effort to result in quarterly sequential headcount growth of approximately 1% to 2% each quarter of 2025. As a result, we expect year-over-year headcount growth in the third quarter of 2025.

We expect utilization in the fourth quarter to be 66% to 67% as compared to 65% in the same quarter last year. As a reminder, utilization is seasonably lower in the fourth quarter due to more holidays and vacations compared to other quarters. We expect the full-year utilization to be 72% to 73% as compared to 69% in 2023.

We still believe our long-term target of sustained mid-70s utilization can be achieved as we continue to strategically manage headcount and balance utilization based on market demand. We expect the 2024 year-over-year realized rate increase to be 4.5% to 5% for the fourth quarter and full-year.

For the fourth quarter, we expect stock-based compensation to be $4.8 million to $5 million. For the full-year, we expect stock-based compensation to be $23.2 million to $23.4 million. For the fourth quarter, we expect other operating expenses to be $12.8 million to $13.2 million.

For the full-year, we expect other operating expenses to be $46.5 million to $46.9 million. As a reminder, on June 19, 2024, we exercised an option to early extend the lease for our testing and engineering center in Phoenix, Arizona.

This resulted in an increase in our non-cash rent expense of $1.1 million during the third quarter and will have a similar impact again in the fourth quarter. For the fourth quarter, we expect G&A expense to be $6.2 million to $6.7 million. For the full-year, we expect G&A expense to be $23.2 million to $23.7 million.

We expect interest income to be $2 million to $2.5 million for the fourth quarter. In addition, we anticipate miscellaneous income to be $100,000 to $200,000 in the fourth quarter. This includes an expected sequential decrease in rental income in the fourth quarter due to the loss of a tenant in our Menlo Park owned building.

For the remainder of 2024, we do not anticipate any additional tax benefit associated with share-based awards. For the fourth quarter of 2024, we expect our tax rate to be approximately 28% compared to 30.4% in the same quarter a year-ago. For the full-year 2024, the tax rate is expected to be 26.7% to 26.9% as compared to 26.2% in 2023.

The increase in the tax rate is due to less tax benefit from share-based awards in the first quarter. In closing, we are pleased with the alignment of our operating model with the market demand, and we remained focused on long-term growth. I will now turn the call back to Catherine for closing remarks..

new form factors and more sophisticated sensors being deployed in wearable technologies, bringing data and insights into human health like never before. Novel electronic devices like eyeglasses that are radically transforming the ways human beings engage with the world around them.

The increasing penetration of electric powertrains into the vehicle fleet with all of its safety-related challenges. The novel artificial intelligence platforms that can boost the capacity of the electric grid in the face of power-hungry data centers.

The accelerating use of artificial intelligence to make safety critical decisions, as the deployment of Robotaxi spreads to more and more cities around the world. These are just a few of the places where Exponent's insights and expertise will add critical value.

Looking ahead, we are focused on growing our team and expanding our capabilities, and we are confident in our ability to deliver long-term profitable growth. Operator, we are now ready for questions..

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Tobey Sommer from Truist. Please go ahead with your question..

Hey. Good afternoon. This is Jasper Bibb on for Tobey. I just wanted to clarify something from the prepared remarks. You said there was an expectation for FTE growth in the second half of 2025.

And if that's accurate, I guess kind of stepping back, what would the cadence of FTE growth next year potentially look like as you ramp up your recruiting efforts from where FTEs are ending the year in your 4Q guidance?.

Yes. So yes, what we indicated is we expect to end the year at around 945 FTEs. We would expect that in each of the quarters of 2025 that we would gain 1% to 2% sequentially across those. So that's our expectation is that we will grow from that base 1% to 2% a quarter..

Okay. Thank you for that. And then I just wanted to ask about the weaker reactive performance this quarter.

Is that primarily a function of just more difficult comps with more during engagements last year? Or has anything changed to seeing clients manage that spend differently?.

Yes. Thank you, Jasper, for that question. It really is about the portfolio and about timing, right? We continue to have an incredibly strong market position when it comes to our failure analysis work, product defect investigations, litigation and disputes and so forth.

We did see really strong growth in Q3 of 2023 and frankly, pretty strong growth in Q3 of 2022 as well. We also had a number of engagements earlier in this year and late last year that we're really going at full speed, which have since completed across a couple of different arenas.

We had talked about engagements in life sciences and in the energy sector around renewables. And so there are some of those things that have come to completion. We've got a lot of activity that continues along as we talk to our business units. We see the opportunities continuing to flow in.

And so we do think there is really, it's about the comparison rather than some kind of fundamental change in the market..

Thanks. That makes sense. Last question for me. How should we think about underlying industry group trends into 2025, obviously, lower levels of consumer electronics were – was the headwind this year? You also called out chemicals.

Should we think about that as having stabilized at this point? And anything to call out as far as particular strength or weakness in your industry groups headed into the next year?.

Yes. So I think what I heard is asking about electronics as well as chemicals and sort of how we're feeling about that going forward. Yes, we're very happy with sort of the sequential increases around the electronics side that we've seen. We've gotten that back to a healthy level.

We're not where we were necessarily at our peak back in late sort of 2022, but we're at what we consider a nice level to be able to now look toward growth in the future. And I highlighted a few of the examples of the kinds of things that are going on in that industry in terms of the new product pipeline, we're seeing glasses.

We're seeing the new devices that are oriented toward human health and wellness applications. And so there's this nice diversity of clients as well as products that we think gives us a good opportunity to continue growth.

And of course, the continued rollout of AI-related features and the challenges around performance and curating the data that drives and trains those algorithms is yet another place where we continue to build our market position. So I'm enthusiastic about what we're seeing in the electronics side going forward.

The chemicals industry, this is one where we've seen a lot of the major players undergoing significant restructuring.

And when this happens, like it happened to the electronics industry, 12 to 18 months ago or I guess almost starting two years ago now, they are having to restructure their teams and that kind of impact does bleed over to us as they sort of tighten their belts, they think a little bit differently about their schedules for various projects and so forth because of their uncertainty.

So it's a smaller impact on our business because it's not as big as consumer electronics is. But we are, nonetheless, seeing some of that belt tightening on the regulatory side as well as some of the litigation work.

But look, when I think about that industry longer term, I see an industry that has incredible challenges around the pressures on their products with regard to safety, with regard to health and environmental-related effects. This is not going to go away anytime soon and the emphasis on making their operations more sustainable.

There will always be fights about the level of regulation and alleged health effects of chemicals. And so we're well positioned for that. We're fully engaged with our clients around that. And we think that those fundamental market drivers will be there over the long-term..

Appreciate the color. Thank you for taking my questions..

You are welcome..

Our next question comes from Andrew Nicholas from William Blair. Please go ahead with your question..

Hi. Thank you and good afternoon. I want to maybe follow-up on the chemical piece. I realize it's a smaller part of your business than consumer electronics. But are we to understand – I think the first time that you mentioned some of these pressures was fourth quarter last year.

Are the comps at least getting a little bit easier there such that it wouldn't be – or you wouldn't expect it to be as big of a headwind in the fourth quarter and to start 2025? Or is this a new leg lower recognizing that you're still optimistic about it over the medium term?.

Yes, Andrew, I think the hurdle is lower as you get to the fourth quarter, definitely. I think that what we saw in the fourth quarter was really the pausing of some spend on certain litigation matters or larger litigation portfolios. And with the message at that time that those will likely come back early in the year.

I think what we've seen that industry go through now is a broader set of economic challenges and which has led to restructuring or disruption in their workforce, as Catherine described, and I think that needs to work itself out and people need to settle back down, who remain and get back to work and they will have to push their products through the regulatory body.

They will have to deal with the litigation portfolio that they have. And they will have to move through that. So just at a little bit different environment, but sort of a little bit similar to what we saw in the electronics where they needed to get back to product design and product development and moving things forward.

So I think that the bar is lower in the fourth quarter than the third of a year ago in that area. This is a segment that's about – was about 10% of our revenues here in the third quarter of chemicals was 10% of our business in the third quarter of 2024..

Got it. Thank you very much. And then maybe for my follow-up question. I believe on headcount, so I appreciate all the color on headcount growth expectations, both through year-end and throughout 2025.

But if I'm not mistaken, I thought that you had said that you expected sequential headcount growth last quarter or at least heading into this year third quarter.

So I'm just curious if there's any explanation for why that didn't come to fruition? Are you pruning in areas that you previously didn't expect to prune? Or is it a little bit – taking a little bit longer to recruit new talent, any kind of thoughts on maybe the timing of that onboarding? I know you mentioned some professionals wanting to wait until the end of the year, maybe that's all of it.

But any color there would be helpful..

Yes. No, thanks, Andrew. And there is – in Q3, we saw a bit higher turnover than we had anticipated. We have and continue to increase the efforts on the recruiting side. We are seeing, for example, higher rates of interviews.

And this is a good leading indicator for us that the demand in the business is strong and our business units are going out to do that recruiting, and we're getting very consistent yields out of our recruiting process.

So I really do think it is more related to a little bit higher turnover than expected rather than any particular challenge or change in the talent marketplace and so forth. I mean, our employee value proposition remains strong.

And we have good confidence going forward as we increase the activity level in recruiting that we will be able to return to that headcount growth..

Very helpful. Thank you..

You are welcome..

[Operator Instructions] Our next question comes from Josh Chan from UBS. Please go ahead with your question..

Hi. Good afternoon, Catherine and Rich. Thanks for taking my question. It sounds like in the reactive business, it was the first quarter that perhaps it kind of turned a little negative. I realize that it comes.

But yes, could you review for us what you expect the reactive business trajectory to be in the coming quarters? For example, what's embedded in Q4 with that mid-single digits within reactive and any kind of thoughts into the shape into 2025, if you have visibility on the debt? Thank you..

Yes. We definitely, as we had indicated a year ago, we in the second and third quarters of even last year, we were at 20-plus percent year-over-year growth in 2023 over 2022. As we got into the fourth quarter last year, that was still in the first quarter of 2024. That was still at a mid-teens year-over-year growth rate.

So we've historically seen this reactive business grow in the mid to high-single digits growth rate. The engagements we got were not a one big 3%, 4%, 5% of revenue engagement.

It was – if you recall, a diversified group engagements we had that materialized into engagements that we're running 1%, 1.5% of revenues, but there were a few of them in the energy sector, a few of them in the life sciences sector, a few of them in the transportation sector.

So they were just a little more, but nothing that was unusual, but clearly, we were getting the calls when the stakes were high and things were coming in. What we've seen is still a strong demand for us, but the particular engagements ongoing right now we don't have as many that are of that size. We still are seeing the volume.

We just don't have as many at that size. So while I think the hurdle in the fourth quarter and into the first quarter is a little bit lower than the third, it is still above normal. And I expect us to continue to grow our underlying sort of volume here of business over time and to work through that.

But that's sort of where we're – things are laying out at this point in time. And I would expect that we're going to – for the long-term future of the company and even out into next year that we'll start to see year-over-year growth in the reactive business. There's just too many – I think we've got the leading market position.

We're evolving our services and the issues are continuing to get more complex, which is why we're quite encouraged by when we're getting called and why clients need Exponent because of our multidisciplinary teams because the issues are more complex..

That makes sense. Thank you for the color there. On the FTE, I think this is the second quarter where FTE was less than expected.

I guess, is there a point where you think the less than expected FTE could start to impact growth going forward? It's obviously driving good utilization now, but I just wonder how you're thinking about the growth outlook given the staffing level? Thank you..

Yes. Well, thank you, Josh. I mean, we do – when we think about growth, right, headcount obviously is a big driver on that, but there are other drivers as well. We still have the ability to surge. With regard to our utilization, this team is ready to meet the needs for clients sort of whatever it takes and they are accustomed to doing that.

And so – and look, we've demonstrated the ability to operate at 75% for the year. And so as that demand increases, even if the headcount growth is lagging, we have the ability to capitalize on that demand..

Yes. So I think your assessment of a long-term model is you can't – that can't continue forever. But in the short-term, meaning fourth quarter, as we turned into the first quarter and begin to hit that growth or if there was something, as you say, the delayed that can we take that on in the short-term, yes.

In the long-term, we need the right demand, but we also – we will need the people to meet that demand..

That's really helpful color. Thanks for the color and thanks for your time..

You are welcome..

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session as well as today's conference call. We do thank everyone for attending. You may now disconnect your lines..