Exponent, Inc. (EXPO) Earnings Call Transcript & Summary

Good day, and welcome to the Exponent, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, Managing Director. Please go ahead.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Second Quarter 2026 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, Chief Executive Officer; John Pye, President; Rich Schlenker, Executive Vice President; and Eric Anderson, 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 Factors 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. 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 second quarter 2026 business performance. John will share his perspective on innovation and market trends. Eric will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions. Exponent delivered another strong quarter with double-digit growth in revenues and earnings, reflecting the continued demand for our specialized expertise across industries. Our proactive work experienced strong growth in the quarter, led by demand for user research studies as clients accelerate the development of AI-enabled products across an increasingly diverse array of hardware form factors and applications with engagements continuing to expand in scope, scale and complexity. Proactive activity was also supported by increased risk management and infrastructure-related engagements in the utility sector. Reactive work grew with strong demand for our dispute-related expertise from the consumer products, chemicals and transportation industries. Turning to these engagements in more detail. Our proactive user research work continues to grow more diverse and complex, both across our client base and across the breadth of products and technologies that we support. This quarter also benefited from a large study that drove higher-than-expected revenue and utilization. These engagements increasingly call for a combination of human factors, biomechanics, engineering and data science expertise to elucidate how people interact with AI-enabled technologies in situations where standard research approaches are woefully inadequate. While user research is often thought of as recruiting participants and gathering feedback, our work is far more sophisticated. We identify and articulate the right underlying scientific question, design a bespoke methodology capable of answering it, collect high-quality data in the real-world environment and interpret the results within a broader technical, regulatory and business context. The differentiated value lies not in data collection alone, but in the scientific judgment and multidisciplinary expertise required to design the study, execute the unique methodology and generate reliable, actionable conclusions. As companies compete aggressively to integrate AI into an expanding array of smart devices, including glasses, immersive technologies, health and wellness wearables and more, the technical safety and usability challenges increased significantly and Exponent's differentiated position grows. We also saw increased demand for risk management and infrastructure-related engagements in the utility sector as clients evaluate the resilience and reliability of critical systems amid rising power demand, more extreme weather events and the growing complexity of the electric grid. Turning to our reactive engagements. We saw strong demand for dispute and failure analysis-related work across a range of industries, including consumer products, chemicals and transportation. We helped consumer products clients evaluate product safety and recalls, investigate incidents and address disputes as manufacturers face challenges surrounding performance, reliability and quality across an increasingly complex set of technologies. In the chemical sector, we saw growing activity evaluating chemicals of concern ranging from legacy substances to emerging compounds. And in transportation, we saw greater failure analysis work related to advanced driver assistance systems as clients address performance, safety and reliability challenges. As the pace of innovation accelerates and the consequences of failure rise, clients increasingly rely on Exponent's multidisciplinary ecosystem and long-standing reputation in failure analysis to address complex novel challenges. A recent engagement involving a satellite performance issue illustrates this demand. The client required deep engineering expertise to investigate performance and risk in a highly technical and uncertain environment. This level of mastery across disciplines, whether applied to space systems, AI, energy storage, power infrastructure, cybersecurity or other domains, uniquely positions Exponent to help clients navigate both today's challenges and the inevitable disruptions that will accompany future technological advances. We remain confident in the durability and long-term growth potential of our reactive work as organizations will continue to rely on independent, science-based expertise when critical systems fail or perform unexpectedly. Our results during the quarter reflect several powerful long-term trends shaping demand for Exponent services, including rapid technological innovation, increasing complexity, growing energy demand, investments in resilient power and digital infrastructure and rising expectations for safety, reliability and performance. Clients turn to Exponent when they face high consequence challenges involving new technologies, complex systems and the interaction between people and products. Our multidisciplinary teams provide independent science-based insights that help clients innovate with confidence, reduce risk and make better decisions. Nowhere is this more relevant today than in the accelerating importance of artificial intelligence in products, which continues to be a significant force shaping demand across our business. I'd like to turn it over to our President, John Pye, to share his perspective on this shift and where he sees innovation heading across our markets. John?

Thank you, Catherine. Across industries, we're seeing an accelerating shift. Artificial intelligence is expanding beyond the digital world and into physical products and systems that operate in the real world, whether that's a vehicle, a wearable device, a piece of infrastructure or a robotic system. As that shift unfolds, the standards these systems are held to is also changing. The question is no longer simply whether a product functions as designed in a controlled setting, but whether it can be trusted to perform safely and reliably in the unpredictable conditions of everyday life, including the edge cases and complex interactions that fall outside of prior experience. This is where the human side of the equation becomes just as important as the technology itself. As AI becomes embedded in the devices and systems people rely on throughout their daily lives, things like walking, driving, working or simply going about routine tasks at home, it inevitably competes for people's attention alongside everything else happening in their environment. There's a fine line between technology that supports human performance and technology that, if not designed thoughtfully, can degrade it. Getting that balance right requires specialized expertise across multiple disciplines. Exponent has been at the forefront of this kind of human-machine interaction work for decades. It's not new for us, and it's an area where our differentiated expertise is increasingly important as more of our clients grapple with these same questions across a widening range of products and applications. We're also seeing the same dynamic extend into new areas. They are still in relatively early stages, things like autonomous vehicles, robots in the wild and the infrastructure that supports them, such as data centers and battery storage systems. These are areas where complexity is only increasing and where our multidisciplinary approach, spanning: engineering, data sciences, human factors and the physical sciences position us well to support our clients as they navigate what comes next. I'll now turn the call over to Eric, to provide more detail on our second quarter results as well as discuss our outlook for the third quarter and the full year 2026. Eric?

Thank you, John, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis, unless otherwise noted. For the second quarter of 2026, total revenues increased 21% to $171.6 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 12% to $148.9 million. Total revenues grew faster than net revenues due to a higher level of reimbursable expenses that are included in total revenues. These reimbursable expenses were due to an increase in user research studies. Because reimbursable expenses can fluctuate quarter-to-quarter based on the mix and nature of client engagements, we believe net revenue is a more meaningful measure of our underlying performance. As Catherine mentioned, our results this quarter benefited from a large user research study that represented approximately 4% of net revenues, which was higher than the 2% of net revenues that we expected from this project. Net income for the second quarter increased 11% to $29.4 million as compared to $26.6 million during the same period in 2025. Diluted earnings per share increased 15% to $0.60 per diluted share as compared to $0.52 per diluted share in the same period last year. Over the last 12 months, we utilized $211 million for repurchases of our common stock, which resulted in a 5% decrease in our average diluted shares outstanding to 49 million shares during the second quarter of 2026, as compared to $51.5 million during the same period in 2025. These repurchases also reduced our interest income. Exponent's consolidated tax rate was 27.9% in the second quarter of 2026, unchanged from the same period in 2025. The tax impact associated with share-based awards was immaterial in both the second quarter of 2026 and 2025. EBITDA for the quarter increased 16% to $42.7 million, producing a margin of 28.7% of net revenues as compared to $37 million or 27.8% of net revenues in the second quarter of 2025. Billable hours in the second quarter of 2026 were approximately 390,000, an increase of 8% year-over-year. Average technical full-time employees in the second quarter were 1,012, up 6% as compared to the same period in 2025. This increase was due to our recruiting and retention efforts. Utilization in the second quarter was 74%, up from 72% in the same period of 2025. The realized rate increase during the second quarter of 2026 was approximately 4%. In the second quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 10%. Included in total compensation expense is a deferred compensation gain of $11.8 million as compared to a gain of $17.0 million in the same period of 2025. 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 quarter was $6.7 million as compared to $5.2 million during the same period in 2025. Other operating expenses in the second quarter were up 7% to $12.9 million due to investments in our corporate infrastructure. Included in other operating expenses is depreciation and amortization expense of $2.7 million. G&A expenses increased 20% to $7.4 million for the second quarter. The increase in G&A expenses was primarily due to increases in travel and yields associated with business development, recruiting and people development activities and an increase in relocation costs. Interest income decreased to $716,000 for the second quarter, driven by a decrease in cash. Regarding capital allocation, during the quarter, capital expenditures were $1.8 million. We distributed $14.8 million to shareholders through dividend payments while repurchasing $67.4 million of our common stock at an average price of $59.88. Over the past 12 months, we returned a combined $272 million to shareholders, which included $211 million in share repurchases and $61 million in dividend payments. Additionally, our Board approved a $50 million increase in our current stock repurchase program, which reflects our conviction in Exponent's long-term growth trajectory. Turning to our segments. Exponent's Engineering and Other Scientific segment represented 85% of net revenues in the second quarter. Net revenues in this segment increased 13%, driven by strong user research study activity in consumer electronics, risk management and infrastructure-related work in the utility sector and reactive engagements across the consumer products, chemicals, and transportation industries. Exponent's Environmental and Health segment represented 15% of net revenues in the second quarter. Net revenues in this segment increased 9%, driven by engagements evaluating the impact of chemicals on human health and the environment. Turning to our outlook. Looking to the second half of the year, we expect to generate quarterly net revenue growth on top of the double-digit growth we delivered in the third and fourth quarters of 2025, when adjusted for the extra week in Q4 of fiscal 2024. For the third quarter, as compared to 1 year prior, we expect net revenues to be up 8% to 10% and EBITDA to be 28.0% to 28.5% of net revenues. For 2026, we are raising our full year guidance. We now expect net revenues to grow 9% to 10% and EBITDA to be 27.8% to 28.1% of net revenues. We expect our average technical full-time equivalent employees to increase approximately 4% to 5% year-over-year in the third quarter of 2026, and 4.5% to 5% for the full year. We expect utilization in the third quarter to be 74% to 75% as compared to 74% in the same quarter last year. We continue to expect the full year utilization to be 72.5% to 73% as compared to 72.5% in 2025. We expect the year-over-year realized rate increase to be 3% to 4% in the third quarter of 2026 and 3.5% to 4% for the full year 2026. For the third quarter, we expect stock-based compensation to be $6.5 million to $6.7 million. For the full year of 2026, we expect stock-based compensation to be $27.9 million to $28.4 million. We continue to believe that our stock-based compensation program is a key element to how we effectively attract, motivate and retain our top talent. For the third quarter, we expect other operating expenses to be $13.0 million to $13.5 million. For the full year, we expect other operating expenses to be $52.2 million to $52.7 million. For the third quarter, we expect G&A expenses to be $8.2 million to $8.7 million. For the full year, we expect G&A expenses to be $29.5 million to $30 million. We expect interest income to be $500,000 to $700,000 per quarter for the remainder of 2026. In addition, we anticipate miscellaneous income to be approximately $300,000 per quarter for the remainder of 2026. For the remainder of 2026, we do not anticipate any additional tax benefit associated with share-based awards. For the third quarter of 2026, we expect our tax rate to be approximately 28% as compared to 27.4% in the same quarter 1 year ago. For the full year of 2026, the tax rate is expected to be 28.5% as compared to 28.0% in 2025. Capital expenditures for the full year 2026 are expected to be $12 million to $14 million. We're pleased with our strong second quarter execution and confident in the underlying market dynamics that continue to support growth across our business. I will now turn the call back to Catherine, for closing remarks.

Thank you, Eric. Exponent continues to benefit from powerful long-term trends that are increasing both the pace of innovation and the complexity of challenges facing our clients. As emerging technologies move from concept to real-world deployment, the need for independent science-based expertise becomes increasingly important. Whether helping clients innovate with confidence, understand how people interact with new technologies, strengthen critical infrastructure or investigate failures, Exponent is uniquely positioned at the intersection of technology, people and high-consequence decision-making. Supported by our exceptional talent, long-standing reputation and differentiated capabilities, we remain confident in our strategy and our ability to create long-term value for our shareholders. Operator, we are now ready for questions.

[Operator Instructions] The first question today comes from Andrew Nicholas with William Blair.

I'm sorry. Can you hear me?

Yes.

Yes, we can now.

I wanted to start just in terms of the AI impact you've spent this quarter and last quarter kind of talking about all the different demand drivers that are potentially impacted positively by AI. I'm curious to what extent we should think about that being a proactive driver at the moment versus reactive? Or are you already seeing it kind of bubble up in litigation as well?

Yes. Thanks, Andrew. It's absolutely going to be in both the reactive and proactive domains. One of the places in reactive where we are probably seeing it the most is around advanced driver assistance technologies. All kinds of questions that are arising in automotive product liability litigation around the performance of those systems. And it's really growing in terms of the kinds of sort of allegations and design pieces that we're looking at. It's not just the sensors, it's not just the performance of the automated braking system, but it's now even going into the performance of the driver distraction and driver monitoring systems. So that human-machine interface is becoming very important. Another area around reactive with an AI driver is going to be the data center work, the sort of digital infrastructure side of the AI equation. We're seeing failure analysis types of investigations in so many domains that apply to those data centers. It could be the cooling systems and their performance or contaminants in cooling systems, it's the power inverter performance, it's the battery energy storage system that either is it meeting code or was there a fire? Is it performing? So reactive for sure. And then, of course, that proactive side, particularly strong in the quarter around the user research domain. And these are products and systems that are having AI embedded into them. So it's both the sort of physical product aspect of the human interface and also that performance of the algorithm that is at least in part dictated by the human factors piece. So it is a diverse set of things that we're doing that really covers both the reactive and proactive domains.

For my follow-up, you said in your release and in your prepared remarks, you talked about the scope, scale, and complexity of your work increasing. It's my impression that that tends to benefit Exponent as one of the only, if not the only kind of science and engineering firm that has that capability and the breadth of capability. And so I'm wondering, one, competitively, if that's becoming more and more of an advantage for you? And relatedly, is that a potential opportunity on the pricing front as your differentiation, and scale and multidisciplinary expertise becomes kind of more evident relative to your peers?

Yes. Thanks, Andrew. Particularly when we talk about that scope, scale and complexity in the user research domain, that's a place where we are really seeing that competitive moat kind of broadening is what I would describe. And look, there will always be a commodity layer of things that are around data collection and surveys and things like that. But as these products become more complex, as the human machine interface becomes more challenging and sort of never seen before, what we offer is really -- it's not just like it's an increment over what the rest of the so-called competitors are offering. It truly is an offering unto itself. When you think about what we are able to do that is designing the bespoke experiment, defining what that research question ought to be and getting all the way through to the regulatory and legal and business implications of that. We are hiring very aggressively in this area, our human factors expertise, biomechanics, data science and the engineering side. So we differentiate in that way. And I absolutely am with you that the offering is becoming more and more distinct. So it's important that we be delivering that value to the client and that we reflect the value that we are delivering in our pricing. I think as the aggressiveness of the competition that we see in the industry landscape, is helping in that sense because there is a speed of innovation that our clients are trying to achieve, and that helps us really articulate our value proposition as well. So all in all, I think this will be a very healthy area for us to grow.

The next question comes from Tomo Sano with JPMorgan.

In your prepared remarks, you highlighted strong AI-enabled demand. So looking back on the first half, could you help us quantify what drove the surge like more engagement versus the larger engagements? And I wanted to get more color on like is that meaning like more utilization too? If you could talk about that in the first half as well as some expectation in second half, please?

Yes, Tomo, the user experience studies were a driver of growth in the second quarter. We talked a little bit about the large study. So we had expected that to be 2% of our net revenues. That study expanded in scope during the quarter and ended up representing about 4% of our net revenues. It's a study that continues. It moderated near the end of the quarter. So we expect to continue the next part of that study at a level of about 2% of revenues through the remainder of the year. So that's an area that -- it was one piece of this sort of user study area. It's expanded not only in size, but the number of clients that we do the studies for, the number of projects has expanded and the number of types and complexity of devices has changed. So we're doing it now for more clients over more studies over a broader array of devices that our clients are looking to bring to the market.

And then on the follow-up utilization assumptions, if demand is surging, yet utilization assumption looks conservative [Technical Difficulty] half. What is the primary reason? Any seasonality factors, headcount ramp, mix onboarding and just conservatism? And if you could give us more color, I appreciate it.