Q2 2024 Earnings: Mixed Results for Financial and Tech Companies

The Bancorp, Inc. (TBBK) Q2 2024 Earnings Call Transcript

Andres Viroslav - Director, Investor Relations Damian Kozlowski - Chief Executive Officer Paul Frenkiel - Chief Financial Officer Good day and welcome to The Bancorp, Inc. Q2 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Please note today's call will be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the call over to Andres Viroslav. Please go ahead. Andres Viroslav Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's second quarter 2024 financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frenkiel, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call available via webcast on our website beginning at approximately 12:00 p.m. Eastern time today. The dial-in for the replay is 1-800-934-5153. Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties which could cause actual results, performance, or achievements to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, please see the Bancorp's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now I'd like to turn the call over to the Bancorp's Chief Executive Officer, Damian Kozlowski. Damian? Damian Kozlowski Thank you, Andres. Good morning, everyone. The Bancorp earned $1.05 a share, or $1.07 adjusted for interest on a residual security from the securitization business exited in 2020. With revenue growth year-over-year of 7% and expense growth of 3%. ROE was 27%. NIM contracted to 4.97% from 5.15% quarter-over-quarter versus 48% year-over-year. This contraction was primarily due to the purchase of $900 million of long-term fixed rate securities in April at a 5.11% yield. These purchases have mostly been financed through ongoing FinTech program deposits with limited borrowings. Thus, the impact of NIM has been lower than anticipated. The FinTech Solutions Group continues to show significant growth momentum from the ramp up and expansion of new and existing programs broadly across the portfolio, and especially in B2B payments. GDV increased 13% year-over-year and total fees from all FinTech activities increased 13%. This quarter is the first where we will begin to break out our credit sponsorship loan balances and fees and our financial reporting with balances reported as consumer FinTech loans. As a key strategic initiative of the bank and objective of our APEX 2030 strategy, we have spent the last few years building a platform that will enable existing and new partners to issue credit solutions to their customers. These loans will be generally short-term and mostly secured by our partners or distributed to investors. Over the next five years, we intend to build a diversified group of regulator-compliant credit sponsor programs that will mirror our best-in-class innovative capabilities in our FinTech payments ecosystem. On the lending side, we had year-over-year growth across a portfolio of 6%, led by small business lending with growth of 16% year-over-year and 4% quarter-over-quarter. Most notably, our institutional book has continued to stabilize and showed incremental growth quarter-over-quarter of 1%. Concerning our commercial real estate portfolio of multifamily transitional loans, we continue to expect little or no losses due to the current portfolio and individual loan leverage and our underwriting standards for loans at their inception. We recently entered an agreement to sell our one OREO multifamily property expected to close in December '24 with a sales price to cover the current other real estate owned balance plus the forecasted cost of improvements in process. Lastly, with continued strong growth in our FinTech activities, including credit sponsorship and growth across our lending portfolio, we are lifting our guidance to $4.35 from $5.25 a share without the impact of $50 million per quarter of share buybacks in 2024. We intend to issue preliminary 2025 guidance in our third quarter press release. I now turn over the call to Paul Frenkiel for more color on the first quarter. Paul Frenkiel Thank you, Damian. As a result of its variable rate loans and securities, Bancorp performance continues to benefit from the cumulative impact of Federal Reserve rate increases. Additionally, as Damian stated, the purchase of $900 million of fixed rate U.S. Government sponsored agency securities in April 2024 has significantly reduced exposure to future Federal Reserve rate decreases. Overnight borrowings for the quarter averaged $92 million as the majority of the purchases were funded by deposits. While deposits generally decline in the second quarter with continuing reductions in tax refund-related balances, this quarter deposits on average increased over $200 million, compared to the first quarter of 2024. At an estimated average 5.11% yield, the securities purchases had only a modest impact on current income, while significant prepayment protection is reflected in estimated eight-year weighted average lives. Additionally, the bank continues to emphasize fixed-rate loans to continue to further reduce lower rate exposure to modest levels. In addition to the impact of the Federal Reserve rate increases, the company benefited from loan growth with year-over-year decreases in S-block and I-block, significantly offset by increases in other higher yielding lending categories. In Q2 2024, S-block and I-block reversed trend from net quarterly decline since the fourth quarter of 2022 to net growth in Q2 2024, notwithstanding the persistence of higher rates. We believe that higher rates have resulted in payoffs from customer rate sensitivity. The impact of the aforementioned Federal Reserve rate increases on variable rate loans and securities and lesser increases in deposit rates with growth in higher yielding loan categories was reflected in an 8% increase in net interest income in Q2 2024, compared to Q2 2023. As a result, in Q2 2024, the yield on interest earning assets had increased to 7.3% from 7% in Q2 2023, or an increase of 0.3%. The cost of funds in those respective periods increased by only $0.1% to 2.5%. Those factors were reflected in the 4.97% NIM in Q2 2024. The provision for credit losses was $1.3 million in Q2 2024, compared to $361,000 in Q2 2023. Provision for credit losses in Q2 2024 reflected the impact of $1.4 million of leasing net charge-offs, while the majority of such charge-offs had been previously reserved. The largest single component of leasing charge-offs was local trucking, transportation, and related activities for which total exposure was approximately $34 million at June 30, 2024. As described in our press release, the company entered into a purchase and sale agreement with a year-end 2024 closing deadline with a $39.4 million balanced apartment loan, which was reported as non-accrual last quarter and which now comprise the majority of other real estate owned. Non-accrual loans, loans 90-days still accruing and other real estate owned total $77.1 million at June 30 2024, compared to $76.7 million at March 31 2024. While a $12.3 million loan became delinquent during Q2 2024 after having been modified with a payment deferral, the as-is and as-stabilized LTVs for related collateral are 72% and 56% based on a May 2024 appraisal. While the macroeconomic environment has challenged the multifamily bridge space, the stability of Bancorp's rehabilitation bridge loan portfolio is evidenced by the estimated values underlying collateral. The $2.1 billion apartment bridge lending portfolio has a weighted average origination date as-is LTV of 70% based on third-party appraisals. Further, the weighted average origination date as stabilized LTV, which measures the estimated value of the apartments after the rehabilitation is complete, may provide even greater protection. One of the accounting estimates as described in the notes to our financial statements as the allowance for credit losses, which is sensitive to a variety of inherent portfolio and external factors. Rebel may be one of the more sensitive portfolios to such factors. In the second quarter of 2024, rebel loans classified as either special mention or substandard increased to $177.1 million from $165.2 million at March 31, 2024. Each classified loan was evaluated for potential increase in the allowance for credit losses on the basis of third-party appraisals of related apartment building collateral. On the basis of as-is and as-stabilized loan to values, increases in the allowance for specific loans were not required. The respected weighted average as-is and as-stabled LTVs of those classified loans were 81% and 69%. The current allowance for credit losses for rebel is primarily based upon historical industry losses for multifamily loans in the absence of significant historical losses within the company's rebel portfolio. However, as a result of increasing amounts of loan classified as special mention and substandard, the company will evaluate potential related sensitivity of that factor for rebel. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change as more information becomes available. Non-interest expense for Q2 2024 was $51.4 million, which was 3% higher than Q2 2023. The increase included a 2% increase in salaries and benefits, higher FDIC insurance expense, reflecting higher levels of deposits and higher other real estate owned expense. Book value per share at quarter end increased 15% to $15.77, compared to $13.74 a year earlier reflecting the impact of retained earnings. In summary, The Bancorp's balance sheet has a risk profile enhanced by the special nature of the collateral supporting its loan niches and related underwriting. Those loan niches have contributed to increased earnings levels even during periods in which markets have experienced various economic stresses. Real estate bridge lending is comprised of workforce housing, which we consider to be working class apartments at more affordable rental rates in selected states. We believe that underwriting requirements provide significant protection against loss as supported by LTV ratios based on third-party appraisals. S-block and I-block loans are respectively collateralized by marketable securities and the cash value of life insurance, while SBA loans are either 7A loans that come with significant government-related guarantees or SBA 405 loans that are made at 50% to 60% LTVs. Additional details regarding our loan portfolios are included in the related tables in our press release as are the earnings contributions of our payments businesses, which further enhances our risk profile. The risk profile inherent in the company's loan portfolios, payments funding sources, and our earnings levels may present opportunities to further increase shareholder value, while still prudently maintaining capital levels. Such opportunities include the recently concluded share repurchases of $100 million for second quarter 2024 from the original $50 million. Thank you, Paul. Operator, please open the line for questions. The floor is now open for questions. [Operator Instructions] Our first question will come from David Feaster with Raymond James. Please go ahead. I wanted to first touch on the rebel book quick. I was hoping to get a bit more update on that rebel OREO loan. It's great to see the buyer lined up. Still a decent amount of time for that to close though. I guess, could you talk about the plans in the intermediate term with the construction and timeline for that. And then just with the non-accrual migration you see more broadly, is there any commonality with where you're seeing that migration from a regional perspective or anything? Damian Kozlowski So first part is -- it's on track. It's the property in Houston, and we should be pretty much finished with the work going through the summer to the close. And so the buyer is involved and has done due diligence on the property and is involved in the plan -- the executed plan. The trend in the book is really from that '21, '22 vintage. Once again, there's been stress because of the rise of interest rates and also the supply problems that were that happened during the pandemic. So you get it when you're not on plan and you're off that plan it could be time or cost. It will be have a weakness and that weakness may drive that loan into substandard. So that's the credit migration that we've seen. So we're working very diligently with our sponsors in order to help them. If they're off plan, usually if there's any significant off plan, the sponsor will put in additional equity or we won't disperse our own funds. So most of them are -- we don't have a lot of, you know, non-paying at this point, which is a very good sign. And there's clearly pools of capital and sponsors, who have -- or who are in the market now looking for these opportunities. When you have these low leverage levels, there is capital available to recap these loans as we've demonstrated here with that Aubrey loan. So there could be more credit migration, but we're not seeing,. you know, we're not seeing losses at this point. David Feaster Okay, that's helpful. And then obviously the regulatory backdrops challenging. We've seen some competitors under pressure, but I'm curious how does this benefit you and your pipeline? I mean you're understanding your pipeline is always full. We've talked about that in the past, but have you seen any shift? Are you seeing maybe stronger or higher quality partners come to you? And is this giving you maybe more pricing power, just kind of given the strength of your platform? Curious what you're seeing? Damian Kozlowski Yes, and there's no doubt that's happening. We can't facilitate, there is broad dislocation across the entire banking as a service space and a lot of regulatory scrutiny. Things like third-party risk management, model risk management, fair lending, BSA, AML, all these things are under scrutiny with the regulators. And we've invested over the last seven years in building a portfolio and totally rebuilding our middle office and technology and compliance envelope to be compliant with regulatory expectations. So, but we can't take smaller programs. There's been incoming is substantial and we're working with large partners, who are potentially looking to move, because of the regulatory scrutiny. And no doubt it does have an effect, a positive effect on pricing. We've maintained basically our pricing over the last five years. It hasn't really moved very much. And -- but our costs have gone down because our platform is very scalable. So you don't see a big build in our cost structure. And that's due to the fact that we're incredibly scalable. So incremental programs do have a big impact on profitability, because of the scalability of the cost, but also the size of the programs we're putting on. Usually they're much more profitable up front too, and they bear the cost of implementation, and they're tiered. So as they grow their volume substantially the pricing will adjust, but you know it gets more profitable as the because of the scalability of the platform. Thank you. Our next question will come from Tim Switzer with KBW. Please go ahead. Tim Switzer Hey, good morning. Thank you guys for taking my questions. I have kind of a follow-up on the Vast regulatory landscape here. So the Fed and some of the other regulators published a joint press release yesterday kind of discussing the risk of what they call third-party deposit arrangements and they requested additional information from participants? Can you provide your thoughts on how regulator expectations are changing for these Vast partnerships? And if you think there are any significant rule changes coming, particularly given the developments over, when you say the last year, but particularly with the [Indiscernible] situation, it's kind of gotten a lot of media headlines and might start to get some politician attention as well? Damian Kozlowski The regulatory expectation is that if you're doing these banking and service arrangements, that you have to validate the operations on a third-party basis. So, they really think of it as you running the business, that it's not outside of you. So you have third-party risk management, BSA, AML, consumer compliance, [Regi] (ph), whatever it is, you have to overlook and assure that it's compliant. And I think that because the industry grew so quickly, there were a lot of small players, a lot of smaller players got into the market without building out sufficient infrastructure, that the regulators are now going back and ensuring that, that's true. And they've obviously gone back and there's been inadequacies and people's ability to demonstrate that validation. And so while we were under scrutiny, obviously years ago and under consent orders and we worked very closely with the FDIC and now with the OCC and the Novel Banking Group, I think we had a big head start on creating that compliant model and making sure that, that validation can happen. And that lowers, as far as the regulators view, you're more compliant and you're far lower risk. And so now, obviously, now that, that scrutiny has come to the industry, we are already at the finish line and people now have to catch up. The thing I would say is to be that compliant platform that can do that validation is incredibly expensive. So We have a fair amount of broad verticals 15. We have great positions across many industries. So we have the volume and the ability to invest in that platform. So it's unlikely that everyone in the industry would be able to do that, and some have exited. And so that dislocation will continue for some time. Tim Switzer Okay, understood. That was a great summary. I guess just to be a little bit more specific to The Bancorp, do you think there's anything, because the regulators have kind of had this expectation for a while that just really cracking down on it. Do you think there's anything new that would maybe, I know you're continuing to invest part of it. There's anything new the regulators might come out with their change of expectation a little bit that will change how you operate or require a little bit additional investment to stay ahead of it? Damian Kozlowski So we always invest in the front. So, you know, it took us years to -- we didn't get into credit sponsorship in three months. We've been investing in that platform for years. We're going to do the same thing with embedded finance as we now are starting to build that platform. And we worked very, very closely with the regulators to understand their expectations. And we adjust it ongoing, right? So of course, as a leader in this space, increased scrutiny will be placed on all our competitors, large and small, but also will be increased on us. But we've got such a multi-year head start in time and investment, that it's far easier for us to adjust. And this has been going on for years, because when we were in trouble with the consent orders, there wasn't great agreement at the time, I believe, in the regulatory bodies of exactly how you regulate that validation process, I was talking about, that compliant third-party risk management. And I think there's a lot more contextual understanding by both the industry and the regulators now. So that's some of the problem that the smaller players are having and be able to make those type of investments with much lower volume, much earlier stage programs. So they're going to have a greater dislocation between expectations and actuality. And so we don't expect to have a big dislocation. We're going to continue to prove our platform as regulators change your expectations. We will invest the necessary resources, whatever they are, in order to meet those expectations. However, if they change it too much, it's likely to affect everybody else more than us, because we're closer, by definition, we're going to be closer to those expectations on an ongoing basis. Tim Switzer Okay, totally understood. Thank you. I'll jump back in the queue. Thank you. Our next question will come from Frank Schiraldi with Piper Sandler. Please go ahead. Given the -- well, I think it's still limited supply for new credit in this rebel sector. Is it safe to assume that that Bancorp would be financing the sale of this property in Houston? Damian Kozlowski Oh, no, we'll be out of that property. There'll be new financing in place. Frank Schiraldi Okay, great. And then, Paul, I think you mentioned that, you know, you take a look at your criticized classifies here, even in lieu of any historic losses, you could -- would consider, I guess, and tell me if I'm paraphrasing correctly, that you consider reserve builds here in that book? And I'm just wondering how we would think about that as we sit today? Is that potentially meaningful or just incremental? Is that a potential risk to the $4.35 target? Just how we should think about the potential for any reserve bills over the next couple of quarters. Paul Frenkiel So we looked at each of the special mention and substandard loans and none of them required an individual reserve. So as we've been saying, we don't expect any losses, notwithstanding that our classified loans are up. But Cecil requires you to look at sensitivity to various factors and clearly if there are loans that have some type of issue, then you should take a special look at the trends in those loans and the possible impact on the allowance for credit losses. So that's what we're doing. And so yes it is possible that we would recognize some additional provision. And yes, that would impact the guidance. But as I said before, we don't really expect any losses. So I think you have to make that differentiation. If Cecil -- if there's some way that Cecil implies that there's additional allowance, then we would take that, but we don't expect any actual losses. Frank Schiraldi Okay, and I guess that's a process ongoing now. And well, just -- one last one before I re-queue. Just in terms of the move in the share price here, the new guy, just want to make sure just in terms of the current buyback, the plan, obviously you double it up in the second quarter, but the buyback to $50 million a quarter, is that still something you guys are very comfortable with through the back half of the year? Damian Kozlowski Yes, there are -- it'll -- we're very comfortable with the $50 million. The $100 million was a very unique opportunity. We bought the shares at $33, $13, I believe. But we'll probably do the $100 million, unless the board decides otherwise, but I think it'll be the $100 million. And then when we give guidance, we'll also mirror the buyback next year off the net income. Right now we have sufficient capital, even if extra $50 million didn't really change our ratio that much in the Tier 1 leverage ratio and the other ratio. So, we're extremely strong capital position. And we're -- we pretty much have around the amount of capital we'll ever need, because of the Durbin Amendment limitation on the $10 billion bank. So we're in an incredibly good earnings and capital position. And we will continue to buy back the shares when they're undervalued, and we believe those shares are undervalued as of today. Thank you. Our next question will be a follow-up from David Feaster. Please go ahead. David Feaster Hey, thanks for taking the follow-up. You got a lot of pretty exciting initiatives going on. I was hoping to touch on some of them. We're starting to see the benefits of the credit sponsorship, which we talked about. You alluded to embedded finance, which you're rolling out. We've also talked about monetizing your risk and compliance functions. Just curious if you could give us an update on those and any other initiatives you're working on and maybe how AI could play into that, because that's a pretty big buzzword these days. Just hoping to get an update on some of the things you're working on and what you're excited about? Paul Frenkiel You're right about AI. We have a whole group that's working on how we're going to use AI in the future, including a technology vision. So we really have to really think about that. We've invested a lot in totally redoing our tech stack and redundancy and everything and strengthening our cybersecurity walls. All that stuff has been ongoing, but we're really thinking about as we transform the bank into really a FinTech centered platform and not just being you know a majority of our business, but really being focused on that we're of course thinking through the tech and AI requirements. It's incredibly exciting. And the credit sponsorship side, all the hard work is paying off. We have multiple programs and multiple partners that want to implement at The Bancorp. We could easily see this first Tier, we're in the 70s, it's growing now. We could see upwards towards $300 million to $500 million on the balance sheet at the end of this year and we could see $1 billion next year. So that's how fast growing that is. It's extremely a creative because with that business is a -- also the ecosystem for payments is also connected to that. So it's incredibly profitable business and very and many times the partners will have both the deposits at the bank already. So in essence, we're kind of using the liquidity of our partners to lend to their clients. That's very exciting. When we think about APEX 2030 balance sheet, five years from now, we hope to have 20 programs. It's going to mirror the banking as a service size, 20 programs. Most of it will be extremely balance sheet light. It'll be distributed, but also secured by many of our partners and provide the deposits. So that's incredibly exciting itself, but the ongoing now building is an embedded finance, which is a program management element, which we don't do today. That companies, retail companies that control their apps, that need a financial services capability within their app, and we would provide that, we would manage that part of it for them. That's a very, very, that's a -- it predicted to be a highly growing capability that people will want across the economy. And so we already have -- we think, the best banking and service ecosystem so that applying that to it will be kind of a no brainer, we think, for the marketplace. And by the way, we've been asked for it a lot already. So people have asked us, hey, can you do that element? We say, well, no, we don't. We don't do that today. We've actually partnered with other people in the space to talk about providing that in certain cases. So, you know, those two things alone are enormous fee opportunities and balance sheet opportunities in themselves. So, you know, when we say APEX, we're talking about a 3 times, 4 times on our current fees of $100 million in five to seven years. And that may be 100 to 200 of increase in the spread revenue. So it's very exciting, I think it's going to be played out for credit sponsorship in the near-term. You'll see those balances grow very aggressively. And then for embedded finance, we're going to walk and be very deliberate and make sure that we provide the best-in-class and that capability to the partners. And so we're not rushing anything. And our base business is growing very aggressively, so and we've been asked by the largest players in the marketplace to think about them joining our ecosystem. So we're very excited. Thank you. We have a follow-up question from Frank Schiraldi. Please go ahead. Frank Schiraldi Thanks. Yes, just back to the increase in guide, is the primary driver of that credit sponsorship, and just when you talk about balances moving higher in the near-term, is something along the lines of $0.5 billion in balances, a reasonable place to land at the end of this year? And I assume that would be more than one program? Damian Kozlowski Yes, well, especially with credit sponsorship, yes. No doubt. If we're at $300 million to $500 billion in that alone, you're going to see that increase in balances. The game changer here is one thing that maybe we didn't emphasize enough is the deposits. So with the activity across all the verticals, we're seeing an increase in deposits we haven't really seen this time of year before. Taking away the stimulus checks and all that stuff that happened during the pandemic. Why that's so important is because we can facilitate a lower funding cost over time, because we can take the higher cost deposits and higher cost borrowings off the balance sheet. And so with interest rates dropping, you know, it's potential that we could drop our funding of the bank even more by having more demand non-interest-bearing deposits on balance sheets. So that is very supportive of the increases in profitability. So -- and the FinTech, you know, the incoming on the FinTech side is dramatic. So the addition of large programs, additional large programs is expected over the next 12 months. So all that combined supports the guidance, but also supports continued significant profitability increases over the next two years. Frank Schiraldi Okay, great. And then as we think about just near-term trends you talked about the deposits being a bit higher than you would have thought based on previous seasonality, I guess, end of period. And as I think about, as we think about NII for the third quarter, kind of, a good run rate, is it better to use kind of end of period balances or average balances for the court, any guardrails you guys can put around kind of NII expectations just because there's so many different things going on in terms of drivers? Paul Frenkiel Well, I'd go end of period and our NIM is going to be around 5% regardless of the loan type. So, it might even, it's going to be around, it could actually, we had that million dollars in there that we had to back out after tax, because of that one securitization that was a long time ago. And we do have plenty of coverage on that security, so we're not expecting a loss on that either. So 5-ish, it might take a little bit higher, depending on the class. But the issue with the loans that we're doing in certain cases on the FinTech side, some of that will be in fees, because of the way some of these loans work instead of in NIM. So you'll see some of the fees growing and some of that will actually be NIM related technically. But the 5% is I think a good, because we don't know exactly who's going to grow and in what cases, but in our modeling, that's kind of where it is. Thank you. At this time, I would like to turn the call back to Damian Kozlowski for any additional or closing remarks. Damian Kozlowski Thank you, everyone. We appreciate you attending our conference call. Operator, you may disconnect the lines. Thank you. This does conclude The Bancorp, Inc. Q2 2024 earnings conference call. You may disconnect your line at this time and have a wonderful day.

AppFolio, Inc. (APPF) Q2 2024 Earnings Call Transcript

AppFolio, Inc. (NASDAQ:APPF) Q2 2024 Earnings Conference Call July 25, 2024 5:00 PM ET Company Participants Lori Barker - Investor Relations Shane Trigg - President & Chief Executive Officer Fay Sien Goon - Chief Financial Officer Conference Call Participants Operator Good afternoon. Thank you for standing by. Welcome to AppFolio Inc.'s Second Quarter 2024 Financial Results Conference Call. Please be advised that today's conference is being recorded and a replay will be available on AppFolio's Investor Relations website. I would now like to hand the conference over to Lori Barker, Investor Relations. Lori Barker Thank you. Good afternoon, everyone. I'm Lori Barker, Investor Relations for AppFolio. And I'd like to thank you for joining us today as we report AppFolio's second quarter 2024 financial results. With me on the call today are Shane Trigg, AppFolio's President and CEO, and Fay Sien Goon, AppFolio's Chief Financial Officer. This call is simultaneously being webcast on the Investor Relations section of our website at appfolioinc.com. Before we get started, I would like to remind everyone of AppFolio's safe Harbor policy. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections, future market conditions or future product enhancements or development is a forward-looking statement. AppFolio's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed on our SEC filings. AppFolio assumes no obligation to update any such forward-looking statements, except as required by law. For greater detail about risks and uncertainties, please see our SEC filings, including our Form 10-K for the fiscal year ended, December 31st, 2023, which was filed with the SEC on February 1, 2024. In addition, this call includes non-GAAP financial measures. Reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures are included in our third quarter earnings release posted on the Investor Relations section of our website. With that, I will turn the call over to Shane Trigg. Shane, please go ahead. Shane Trigg Thanks, Lori, and welcome to everyone joining us for AppFolio's second quarter 2024 financial results. I'm pleased to report that revenue was up 34% year-over-year to $197 million in the second quarter. At the same time, we improved our margins, driving non-GAAP operating margin to 26%, and non-GAAP free cash flow margin to 25%. These results are a testament to our industry leadership. What makes us the leader is how we consistently find ways to meet and exceed our customers' expectations. And there's no better place to connect with current and future customers than the largest multifamily industry event NAA's Apartmentalize, where we announced a number of innovations to advance our product vision. We heard repeatedly that AppFolio is solving problems differently and better than anyone in the industry, including being the first to bring embedded generative AI to the market. Through our thought leadership, our brand, our people, and of course our product innovation, we showed that we're building the platform where real estate industry comes to do business. Bob Pinnegar, NAA's President and CEO, recognized AppFolio's progress in advancing the industry, commenting "across all sectors of the rental housing industry from affordable to student housing and beyond. AppFolio's commitment to innovation continues to make a tangible impact. Their involvement as a 2024 NAA strategic partner at such a pivotal time for rental housing is paramount and we appreciate their enduring contributions to our industry now more than ever." I'm so proud of our organization and excited for our customers to benefit from the enormous opportunity ahead. Our strategy is working, and I'd like to highlight some examples of recent progress across each of its components, starting with how we differentiate to win. We hear consistently from our customers that their biggest challenge is driving operational efficiency. Our new capabilities in AppFolio, Realm-X, our embedded -- embedded generative AI are creating differentiated value that enables our customers to truly transform their operational performance all within AppFolio's one powerful platform. One of these capabilities is Realm-X Assistant, a co-pilot experience. With a single prompt, Realm-X assistant can generate reports and initiate individual and bulk actions. Another capability is Realm-X Messages, a reimagined inbox that helps property managers sort through, act on and respond to routine resident communications. Every AppFolio user can access Realm-X Assistant and Realm-X Messages right now. In upcoming release, we're really excited about is Realm-X Flows, an automation engine that helps users standardize their processes through workflows defined by users and automated with AI. Realm-X Flows can be taught to complete tasks like rental applications, rent collection and lease renewals. This will boost productivity and allow teams to stay in control with visibility into each workflow step from inception to completion. Our customers recognize Realm-X is a huge strategic advantage. According to a June 2024 survey of early Realm-X users, they are already saving an average of 12.5 hours per week using Realm-X. Not only are they achieving operational efficiency, their people are happier. 75% of those users agree that Realm-X reduces busy work. We believe this is just the beginning of the value we can deliver for our customers through Realm-X. According to one of these users, Simon Wong, CEO of Hogan Invest, "AppFolio Realm-X has completely shifted how we manage our properties. With its intuitive interface and powerful capabilities, we've seen significant improvements in efficiency and productivity across our portfolio. Tasks that used to take hours can now be completed in minutes, allowing us to focus more on providing exceptional service." The second component of our strategy is to unlock upmarket customers. A report from the National Multifamily Housing Council found it's common for multifamily operators to utilize 10 to 20 different solution providers throughout the customer journey, resulting in complexity, integration challenges and inconsistencies in the customer experience. AppFolio is rapidly innovating to solve these pain points. Building the platform where the real estate industry comes to do business involves giving customers the power to manage multiple portfolio types in a single place. We're making this easier and more intuitive than ever through our recent innovations in affordable housing and now student housing. For customers with student housing, we now offer pre-leasing metrics to give property managers a comprehensive real-time view of leasing performance. We've also introduced flexible leasing, offering property managers versatility to lease units to either groups or individuals as well as mix the two lease types within the same unit. Indiana-based Granite is an AppFolio property manager plus customer with 5,000 units and 11,000 student housing beds. According to President and Chief Development Officer, John Raybould, "AppFolio has allowed us to stay very competitive and at the forefront of our competition because of the technology and tools they allow us to work with. We've seen the significant investment AppFolio has made into the student housing side of the business and that really shows a commitment to wanting to be a big player in that sector of real estate. In our opinion, there isn't another software out there that we feel would give us the same competitive leverage that we have with that AppFolio." Another way we're capturing the upmarket segment is by extending the value of our platform through our app integration partners. We continue to rapidly scale our AppFolio stack marketplace, which now has more than 3 million units connected. Stack seamlessly integrates our customers' preferred software applications with our platform, giving customers more choice and flexibility. One of our newest partners is resident app, Livly. This integration empowers connected AppFolio customers with tools for apartment management, smart access and resident experiences. It represents another step on our journey of delivering the best experience in the market to our property management customers and the residents they serve. The investments we're making in expanding our coverage of a different -- of additional property types and in growing our partner ecosystem are giving large multifamily operators increasingly more reasons to choose AppFolio as the single platform from which to consolidate, manage and grow their business. At the same time, these innovations are creating added value for our smaller owner operator and property management customers. The third component of our strategy is to elevate our customers by driving their adoption and success on our platform. Our multi-tier product lineup creates instant upgrade paths to our customers. So as our customers grow, we have offerings that grow with them. The newest plan in our lineup, AppFolio Property Manager Max, is geared towards large operators with complex and diversified property portfolios and includes a number of powerful differentiating features. We continue to see strong adoption of this plan as Max proves to be a valuable way for us to deepen and extend our existing customer relationships as well as win new business and competitive situations. The fourth component of our strategy is to scale the business. At the end of 2023, we launched the AppFolio Stack Solution Partner program, offering customers easy access to some of the best accounting and consulting solution partners in the industry. This program is thriving as we continue to onboard new solution partners such as KSC Group, 111 Advisors and Redirect. An example of the value these partners bring is the recent sale of the AppFolio Property Manager Max plan to a new 10,000 plus unit customer. By collaborating with a solution partner, we have made it easier for this new customer to migrate onto our platform by solving their unique requirements in efficient and scalable way. The final component of our strategy is great people and culture. Our vision is to power the future of the real estate industry, but our people are the catalysts that makes it a reality. During the second quarter, AppFolio's product development team put our company value, innovation power success into practice during Hack Day, one of our focused innovation events. We take pride in creating space both in-person and virtually for our teams to think big and build innovative solutions that improve our customers' lives in fun inspiring ways. We believe technology is one of the best ways to create thriving communities. And during the event, our team identified a number of opportunities where our products and services can improve the lives of our customers' customers. As we've discussed before, we believe there is huge potential to create additional value for residents through our platform and we are committed to exploring and expanding these opportunities. As we head into the second half of the year and beyond, I'm grateful for the dedication of our team to building a company that will power an entire industry. We will continue to invest in strategic foundations that create extraordinary outcomes for our customers, our shareholders and each other. I'll now turn the call over to Fay Sien for more detail on AppFolio's second quarter financial results. Fay Sien Goon Thank you, Shane. We are pleased with our continued strong growth in revenue and increase in profitability as our commitment to industry-leading innovation is driving adoption and usage of our products and services. In the second quarter, we delivered revenue of $197 million, growing 34% year-over-year. Non-GAAP operating margin expanded to 26% from 6.4% last year. And we generated free cash flow margin of 25%, compared to 4.2% last year. Core solutions revenue was $44 million in Q2, a 14% year-over-year increase driven by new customers, additional total units on platform and continued adoption of AppFolio Property Manager Plus and Max. At the end of this quarter, we managed approximately 8.4 million units from 20,167 customers compared to 7.7 million units from 19,145 customers a year earlier. This represents a 5% increase in customers and a 9% increase in ending units as we continue to emphasize high margin residential portfolios. Second quarter revenue from value added services grew 43% year-over-year to $152 million. The growth primarily resulted from our decision to stop waiving out eCheck fees and higher resident usage of online payments and risk mitigation products. Partially offset by reduced transaction fees associated with card-based payments. Turning to spending. We exited the quarter with 1,524 employees, which is up slightly from the prior quarter as we are investing in delivering even more innovation to our customers, including the initiatives Shane discussed earlier, such as, Realm-X, student housing and affordable housing. Cost of revenue exclusive of depreciation and amortization was 35% of revenue compared to 39% last year. The decrease was primarily due to eCheck fees and internal operational improvements. On a sequential basis, costs were up slightly as 8% of revenue due to the previously discussed reduction in transaction fees associated with card-based payments. As a result -- as a percent of revenue combined sales and marketing, R&D and G&A fell to 37% from 51% last year due to growth in revenue and our collective focus on operational efficiency. Sales and marketing expenses, as a percentage of revenue decreased from 18% in the second quarter of last year to 13% this quarter. On a sequential basis, we strategically increased our investments in sales and marketing initiatives to enable us to best position win in the market. This investment, as Shane mentioned, included our increased presence at the recent Apartmentize industry conference. In R&D, we improved expenses as a percentage of revenue from 22% last year to 17% this quarter by optimizing operations and maintaining discipline in our investments. Our G&A expenses as a percentage of revenue decreased from 11% last year to 8% this quarter. Overall, non-GAAP operating margin grew to 26%, compared to negative 6.4% last year. Free cash flow margin this quarter was 25%, compared to 4.2% last year. We are raising our projected full year revenue guidance to $772 million to $778 million, which implies an annual growth rate of 25% based on the midpoint of the range. Our updated guidance reflects our expectations for continued customer upgrades to premium product tiers and growing usage and adoption of our value-added services. In addition, our guidance also factors in a modest increase in card usage and reduced transaction fees associated with card-based payments. Cost of revenue exclusive of depreciation and amortization is expected to decrease slightly from prior year. As a percentage of revenue due to eCheck fees, product mix and operational efficiencies. The second half of the -- of 2024 is expected to be slightly higher than the first half, primarily due to the margin impact of the previously mentioned reduced transaction fees associated with card-based payments. We are raising our guidance for the full year non-GAAP operating margin to 23.5% to 24.5% and raising guidance on our free cash flow margin to 22% to 24%. This reflects continued growth in units and expansion of ARPU, partially offset by the reduced card-based transaction fees and increasing headcount growth to enable us to achieve our strategic objectives. In terms of seasonality, demand for our screening services and risk mitigation is typically slower in the fourth quarter as leasing activity declines during the winter months. Diluted weighted average shares outstanding are expected to be approximately 37 million shares for the full year. The first half of this year demonstrates consistent successful execution towards our long-term strategy to grow with our customers. As we innovate through AI and expand into multiple portfolio types, to further elevate our customers and scale the business. Thank you all for joining us today. Operator, this concludes today's call. Operator Thank you. This concludes the conference. Thank you for your participation. You may now disconnect. Question-and-Answer Session End of Q&A

Earnings call: AppFolio Inc. reports strong Q2 2024 financial growth By Investing.com

AppFolio Inc. (NASDAQ:APPF) has announced its second quarter 2024 earnings, revealing a significant 34% increase in revenue year-over-year, reaching $197 million. The property management software company also reported notable improvements in its non-GAAP operating margin, which rose to 26%, and its non-GAAP free cash flow margin, now at 25%. Amidst these financial gains, AppFolio has raised its full-year revenue guidance to between $772 million and $778 million, with an expected annual growth rate of 25%. In summary, AppFolio's second quarter of 2024 has been marked by robust financial performance and strategic initiatives aimed at expanding its market reach. The company's focus on operational efficiency and product innovation, along with its targeting of the upmarket customer segment, has contributed to its strong revenue and margin growth. Despite an anticipated seasonal slowdown in certain service demands, AppFolio's raised guidance reflects confidence in its continued growth trajectory. AppFolio Inc. (APPF) has demonstrated a remarkable financial trajectory in its second quarter of 2024, with a 34% year-over-year revenue increase. The company's strategic focus on operational efficiency and expansion into upmarket segments is reflected in its robust financial metrics. Here are some key insights based on InvestingPro data and tips that may interest investors: Investors seeking a deeper dive into AppFolio's financial health and growth prospects can find additional InvestingPro Tips that provide a comprehensive analysis of the company's performance and valuation. With 16 additional tips available on InvestingPro, ranging from debt levels to return on assets, investors can gain a more nuanced understanding of AppFolio's market position and potential investment value. For those interested in leveraging these insights, consider using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription at InvestingPro. This exclusive offer allows investors to access a wealth of financial data and expert analysis to inform their investment decisions. Operator: Good afternoon. Thank you for standing by. Welcome to AppFolio Inc.'s Second Quarter 2024 Financial Results Conference Call. Please be advised that today's conference is being recorded and a replay will be available on AppFolio's Investor Relations website. I would now like to hand the conference over to Lori Barker, Investor Relations. Lori Barker: Thank you. Good afternoon, everyone. I'm Lori Barker, Investor Relations for AppFolio. And I'd like to thank you for joining us today as we report AppFolio's second quarter 2024 financial results. With me on the call today are Shane Trigg, AppFolio's President and CEO, and Fay Sien Goon, AppFolio's Chief Financial Officer. This call is simultaneously being webcast on the Investor Relations section of our website at appfolioinc.com. Before we get started, I would like to remind everyone of AppFolio's safe Harbor policy. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections, future market conditions or future product enhancements or development is a forward-looking statement. AppFolio's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed on our SEC filings. AppFolio assumes no obligation to update any such forward-looking statements, except as required by law. For greater detail about risks and uncertainties, please see our SEC filings, including our Form 10-K for the fiscal year ended, December 31st, 2023, which was filed with the SEC on February 1, 2024. In addition, this call includes non-GAAP financial measures. Reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures are included in our third quarter earnings release posted on the Investor Relations section of our website. With that, I will turn the call over to Shane Trigg. Shane, please go ahead. Shane Trigg: Thanks, Lori, and welcome to everyone joining us for AppFolio's second quarter 2024 financial results. I'm pleased to report that revenue was up 34% year-over-year to $197 million in the second quarter. At the same time, we improved our margins, driving non-GAAP operating margin to 26%, and non-GAAP free cash flow margin to 25%. These results are a testament to our industry leadership. What makes us the leader is how we consistently find ways to meet and exceed our customers' expectations. And there's no better place to connect with current and future customers than the largest multifamily industry event NAA's Apartmentalize, where we announced a number of innovations to advance our product vision. We heard repeatedly that AppFolio is solving problems differently and better than anyone in the industry, including being the first to bring embedded generative AI to the market. Through our thought leadership, our brand, our people, and of course our product innovation, we showed that we're building the platform where real estate industry comes to do business. Bob Pinnegar, NAA's President and CEO, recognized AppFolio's progress in advancing the industry, commenting "across all sectors of the rental housing industry from affordable to student housing and beyond. AppFolio's commitment to innovation continues to make a tangible impact. Their involvement as a 2024 NAA strategic partner at such a pivotal time for rental housing is paramount and we appreciate their enduring contributions to our industry now more than ever." I'm so proud of our organization and excited for our customers to benefit from the enormous opportunity ahead. Our strategy is working, and I'd like to highlight some examples of recent progress across each of its components, starting with how we differentiate to win. We hear consistently from our customers that their biggest challenge is driving operational efficiency. Our new capabilities in AppFolio, Realm-X, our embedded -- embedded generative AI are creating differentiated value that enables our customers to truly transform their operational performance all within AppFolio's one powerful platform. One of these capabilities is Realm-X Assistant, a co-pilot experience. With a single prompt, Realm-X assistant can generate reports and initiate individual and bulk actions. Another capability is Realm-X Messages, a reimagined inbox that helps property managers sort through, act on and respond to routine resident communications. Every AppFolio user can access Realm-X Assistant and Realm-X Messages right now. In upcoming release, we're really excited about is Realm-X Flows, an automation engine that helps users standardize their processes through workflows defined by users and automated with AI. Realm-X Flows can be taught to complete tasks like rental applications, rent collection and lease renewals. This will boost productivity and allow teams to stay in control with visibility into each workflow step from inception to completion. Our customers recognize Realm-X is a huge strategic advantage. According to a June 2024 survey of early Realm-X users, they are already saving an average of 12.5 hours per week using Realm-X. Not only are they achieving operational efficiency, their people are happier. 75% of those users agree that Realm-X reduces busy work. We believe this is just the beginning of the value we can deliver for our customers through Realm-X. According to one of these users, Simon Wong, CEO of Hogan Invest, "AppFolio Realm-X has completely shifted how we manage our properties. With its intuitive interface and powerful capabilities, we've seen significant improvements in efficiency and productivity across our portfolio. Tasks that used to take hours can now be completed in minutes, allowing us to focus more on providing exceptional service." The second component of our strategy is to unlock upmarket customers. A report from the National Multifamily Housing Council found it's common for multifamily operators to utilize 10 to 20 different solution providers throughout the customer journey, resulting in complexity, integration challenges and inconsistencies in the customer experience. AppFolio is rapidly innovating to solve these pain points. Building the platform where the real estate industry comes to do business involves giving customers the power to manage multiple portfolio types in a single place. We're making this easier and more intuitive than ever through our recent innovations in affordable housing and now student housing. For customers with student housing, we now offer pre-leasing metrics to give property managers a comprehensive real-time view of leasing performance. We've also introduced flexible leasing, offering property managers versatility to lease units to either groups or individuals as well as mix the two lease types within the same unit. Indiana-based Granite is an AppFolio property manager plus customer with 5,000 units and 11,000 student housing beds. According to President and Chief Development Officer, John Raybould, "AppFolio has allowed us to stay very competitive and at the forefront of our competition because of the technology and tools they allow us to work with. We've seen the significant investment AppFolio has made into the student housing side of the business and that really shows a commitment to wanting to be a big player in that sector of real estate. In our opinion, there isn't another software out there that we feel would give us the same competitive leverage that we have with that AppFolio." Another way we're capturing the upmarket segment is by extending the value of our platform through our app integration partners. We continue to rapidly scale our AppFolio stack marketplace, which now has more than 3 million units connected. Stack seamlessly integrates our customers' preferred software applications with our platform, giving customers more choice and flexibility. One of our newest partners is resident app, Livly. This integration empowers connected AppFolio customers with tools for apartment management, smart access and resident experiences. It represents another step on our journey of delivering the best experience in the market to our property management customers and the residents they serve. The investments we're making in expanding our coverage of a different -- of additional property types and in growing our partner ecosystem are giving large multifamily operators increasingly more reasons to choose AppFolio as the single platform from which to consolidate, manage and grow their business. At the same time, these innovations are creating added value for our smaller owner operator and property management customers. The third component of our strategy is to elevate our customers by driving their adoption and success on our platform. Our multi-tier product lineup creates instant upgrade paths to our customers. So as our customers grow, we have offerings that grow with them. The newest plan in our lineup, AppFolio Property Manager Max, is geared towards large operators with complex and diversified property portfolios and includes a number of powerful differentiating features. We continue to see strong adoption of this plan as Max proves to be a valuable way for us to deepen and extend our existing customer relationships as well as win new business and competitive situations. The fourth component of our strategy is to scale the business. At the end of 2023, we launched the AppFolio Stack Solution Partner program, offering customers easy access to some of the best accounting and consulting solution partners in the industry. This program is thriving as we continue to onboard new solution partners such as KSC Group, 111 Advisors and Redirect. An example of the value these partners bring is the recent sale of the AppFolio Property Manager Max plan to a new 10,000 plus unit customer. By collaborating with a solution partner, we have made it easier for this new customer to migrate onto our platform by solving their unique requirements in efficient and scalable way. The final component of our strategy is great people and culture. Our vision is to power the future of the real estate industry, but our people are the catalysts that makes it a reality. During the second quarter, AppFolio's product development team put our company value, innovation power success into practice during Hack Day, one of our focused innovation events. We take pride in creating space both in-person and virtually for our teams to think big and build innovative solutions that improve our customers' lives in fun inspiring ways. We believe technology is one of the best ways to create thriving communities. And during the event, our team identified a number of opportunities where our products and services can improve the lives of our customers' customers. As we've discussed before, we believe there is huge potential to create additional value for residents through our platform and we are committed to exploring and expanding these opportunities. As we head into the second half of the year and beyond, I'm grateful for the dedication of our team to building a company that will power an entire industry. We will continue to invest in strategic foundations that create extraordinary outcomes for our customers, our shareholders and each other. I'll now turn the call over to Fay Sien for more detail on AppFolio's second quarter financial results. Fay Sien Goon: Thank you, Shane. We are pleased with our continued strong growth in revenue and increase in profitability as our commitment to industry-leading innovation is driving adoption and usage of our products and services. In the second quarter, we delivered revenue of $197 million, growing 34% year-over-year. Non-GAAP operating margin expanded to 26% from 6.4% last year. And we generated free cash flow margin of 25%, compared to 4.2% last year. Core solutions revenue was $44 million in Q2, a 14% year-over-year increase driven by new customers, additional total units on platform and continued adoption of AppFolio Property Manager Plus and Max. At the end of this quarter, we managed approximately 8.4 million units from 20,167 customers compared to 7.7 million units from 19,145 customers a year earlier. This represents a 5% increase in customers and a 9% increase in ending units as we continue to emphasize high margin residential portfolios. Second quarter revenue from value added services grew 43% year-over-year to $152 million. The growth primarily resulted from our decision to stop waiving out eCheck fees and higher resident usage of online payments and risk mitigation products. Partially offset by reduced transaction fees associated with card-based payments. Turning to spending. We exited the quarter with 1,524 employees, which is up slightly from the prior quarter as we are investing in delivering even more innovation to our customers, including the initiatives Shane discussed earlier, such as, Realm-X, student housing and affordable housing. Cost of revenue exclusive of depreciation and amortization was 35% of revenue compared to 39% last year. The decrease was primarily due to eCheck fees and internal operational improvements. On a sequential basis, costs were up slightly as 8% of revenue due to the previously discussed reduction in transaction fees associated with card-based payments. As a result -- as a percent of revenue combined sales and marketing, R&D and G&A fell to 37% from 51% last year due to growth in revenue and our collective focus on operational efficiency. Sales and marketing expenses, as a percentage of revenue decreased from 18% in the second quarter of last year to 13% this quarter. On a sequential basis, we strategically increased our investments in sales and marketing initiatives to enable us to best position win in the market. This investment, as Shane mentioned, included our increased presence at the recent Apartmentize industry conference. In R&D, we improved expenses as a percentage of revenue from 22% last year to 17% this quarter by optimizing operations and maintaining discipline in our investments. Our G&A expenses as a percentage of revenue decreased from 11% last year to 8% this quarter. Overall, non-GAAP operating margin grew to 26%, compared to negative 6.4% last year. Free cash flow margin this quarter was 25%, compared to 4.2% last year. We are raising our projected full year revenue guidance to $772 million to $778 million, which implies an annual growth rate of 25% based on the midpoint of the range. Our updated guidance reflects our expectations for continued customer upgrades to premium product tiers and growing usage and adoption of our value-added services. In addition, our guidance also factors in a modest increase in card usage and reduced transaction fees associated with card-based payments. Cost of revenue exclusive of depreciation and amortization is expected to decrease slightly from prior year. As a percentage of revenue due to eCheck fees, product mix and operational efficiencies. The second half of the -- of 2024 is expected to be slightly higher than the first half, primarily due to the margin impact of the previously mentioned reduced transaction fees associated with card-based payments. We are raising our guidance for the full year non-GAAP operating margin to 23.5% to 24.5% and raising guidance on our free cash flow margin to 22% to 24%. This reflects continued growth in units and expansion of ARPU, partially offset by the reduced card-based transaction fees and increasing headcount growth to enable us to achieve our strategic objectives. In terms of seasonality, demand for our screening services and risk mitigation is typically slower in the fourth quarter as leasing activity declines during the winter months. Diluted weighted average shares outstanding are expected to be approximately 37 million shares for the full year. The first half of this year demonstrates consistent successful execution towards our long-term strategy to grow with our customers. As we innovate through AI and expand into multiple portfolio types, to further elevate our customers and scale the business. Thank you all for joining us today. Operator, this concludes today's call. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect. End of Q&A:

Earnings call: Data I/O Corporation faces Q2 challenges, eyes future growth By Investing.com

In the second quarter of 2024, Data I/O Corporation (DAIO) reported a decline in bookings and revenue, especially in the Americas region. Despite the downturn, the company secured eight new customers, primarily in the industrial Internet of Things (IoT) and Electronic Manufacturing Services (EMS) sectors, and experienced strong bookings for adapters, software, and services. Data I/O's balance sheet remains robust with $11.4 million in cash and no debt, and they are optimistic about a resurgence in automotive demand in the long term. The company has a significant backlog of orders expected to be fulfilled in the second half of the year. Gross margins stood at 55%, and operating expenses decreased by 21% year-over-year. However, the company incurred a net loss of $797,000 for the quarter. Data I/O is planning to repatriate cash to the U.S. for increased flexibility and higher interest earnings and sees potential in Edge AI applications, with promising opportunities in Asia. Data I/O Corporation, facing a challenging Q2 2024, remains resilient with a strong financial position and strategic focus on emerging markets and technology sectors. The company's efforts to control spending and reduce direct product costs have helped maintain a strong balance sheet, and their optimism for the second half of the year is underscored by a significant backlog and new customer acquisitions. With plans to repatriate cash and capitalize on growth opportunities in Edge AI, Data I/O is positioning itself to navigate through current market softness and emerge with stronger prospects. Data I/O Corporation (DAIO) has recently navigated a challenging quarter, but their financial health is reflected in some key metrics and InvestingPro Tips that investors should consider. With a market capitalization of $25.18 million, the company shows a commitment to liquidity, holding more cash than debt on its balance sheet, and liquid assets that exceed short-term obligations. These factors are crucial for investors looking for stability in their investments. InvestingPro Tips reveal that DAIO is trading near its 52-week low, which may represent an opportunity for investors to consider the stock at a potentially undervalized price. Additionally, while the company has not been profitable over the last twelve months and is trading at a high EBITDA valuation multiple, it is important to note that DAIO does not pay a dividend, which could be a strategic move to conserve cash during this turnaround period. From a data standpoint, DAIO's P/E ratio stands at -60.53, reflecting its current lack of profitability. However, the company's revenue over the last twelve months as of Q1 2024 amounts to $26.93 million with a modest growth of 1.7%. The gross profit margin is strong at 56.08%, which is a positive indicator of the company's ability to manage costs relative to its revenue. For those interested in deeper analysis, there are additional InvestingPro Tips available that could provide further insights into DAIO's potential for growth and recovery. To explore these further, investors can visit https://www.investing.com/pro/DAIO and use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. Operator: Good afternoon, and welcome to the Data I/O Second Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead. Jordan Darrow: Thank you, operator, and welcome to the Data I/O Corporation second quarter 2024 financial results conference call. With me today are the company's President and CEO, Anthony Ambrose; and Chief Financial Officer and Vice President, Gerry Ng. Before we begin, I'd like to remind you that statements made in this conference call concerning future revenues, results from operations, financial position, markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, product releases, new industry partnerships and any other statements that may be construed as a prediction of future performance or events are forward-looking statements, which involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such statements. These factors include uncertainties as to the impact on global and geopolitical events, international trade regulations, order levels for the company and the activity level of the automotive and semiconductor industry overall, ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part shortages, pricing and other activities by competitors and other risks, including those described from time to time in the company's filings on Forms 10-K and 10-Q with the Securities and Exchange Commission, press releases and other communications. The accuracy and completeness of forward-looking statements should not be unduly relied upon. Data I/O is under no duty to update any forward-looking statements. And now, I would like to turn over the call to Anthony Ambrose, President and CEO of Data I/O. Anthony Ambrose: Thank you very much, Jordan. I'll begin my formal remarks by addressing our second quarter 2024 financial and operational performance, and then I'll turn over the call to Gerry Ng for a more detailed look at the numbers. As we mentioned in the release, bookings and revenue were soft in Q2 and below our expectations. This wasn't monolithic, however, as we saw divergent business conditions across our sales regions and various markets. Throughout the first half of the year, Asia and EMEA sales regions are performing ahead of expectations as the Americas have substantially below plan. By market, we saw strength in programming centers, industrial IoT and EMS and weakness in the automotive sector. We continue to have strong traction in new customer acquisition with eight new customer and location wins in Q2 for a total of 13 year-to-date. Most of these were in the IoT industrial and EMS markets, supporting edge AI applications. This has contributed to our bookings of 13.7 million in the first half of the year, increased slightly from 13.3 million over the prior year period. At the same time, we're winning new business. We saw significant push outs from existing automotive customers who were planning capacity additions, primarily in North America. While system capacity demand slowed, we still saw good bookings for adapters and software and services. Together, they reached 49% of our revenue year-to-date, including that is our centric security provisioning platform, and that set a record for units processed by our programming center partners in the second quarter. Moving along to spending, we made significant progress on spending controls, process efficiencies and reducing direct product costs. Gerry will go into more details on the spending side, but we were pleased with the progress made in Q2. We're focusing on long-term structural efficiency improvements, including deploying AI and machine learning capabilities and other tools to accelerate these efficiency gains. Our balance sheet remains very strong. We moved cash from China to the USA in Q2 and paid the associated dividend taxes. Having the cash in the USA gives us more flexibility on the balance sheet as well as an opportunity to earn more on our cash. Looking to Q3 and Q4, all of us are wondering when automotive demand returns. We still see a long-term secular growth in electronics content in cars and view the recent softness as inventory corrections and a change in mix from EV to hybrid and internal combustion engine models. Automotive name plates are recalibrating or at least taking a measured approach to their investments in EV development and related capital investments. The example of this is Ford (NYSE:F) moving their Super Duty production to Oakville assembly plant, that was originally meant for EV trucks to Super Duty trucks, which is an internal combustion engine product. Political uncertainty around U.S policy as well as hopes for an interest rate reduction going forward may also be holding back capital additions in our customer base. Recent statements by automotive OEMs, Tier 1s, equipment suppliers, and semiconductor companies do not indicate a snapback in automotive demand in Q3, however. Our historical experience shows auto electronics demand moves sharply once they decide to add capacity. We have the capacity in our manufacturing plant in place to move quickly once demand returns. We also have the right technology for our automotive customers as they begin to add more capacity. This includes recent new releases for our UFS programming technology as well as entry-level programming trends. Our focus will continue to be on the things we can control, attracting new customers, making continued progress on spending and cost controls, and being ready with the right products for customers as their capacity needs returned. Despite the softness in North American automotive, there's still a significant amount of contractual backlog that's expected to be shipped and recognized as revenue in the second half of 2024. As we ship this backlog, we look forward to benefiting from the operating leverage in our model, especially given the progress made on managing costs and expenses. With that, I'll pass it over to Gerry Ng. Gerry? Gerry Ng: Thank you Anthony, and good day to everyone. I look forward to outlining and elaborating on our recent financial performance in more detail. My comments today will focus on key points of interest for the second quarter of 2024 and our perspective looking forward, including our progress on spinning in efficiencies, unit cost reductions, and balance sheet management. Despite the current automotive market headwinds, Data I/O financial condition remains strong at the end of Q2. We maintain a strong back backlog heading into the second half of 2024, a healthy balance sheet and a lower operating cost structure, which will contribute to improved financial performance as the markets recover, as Anthony commented on earlier. Despite the second quarter revenue shortfall, cash remain relatively steady at $11.4 million as of June 30th, down $559,000 from the $12 million at the end of Q1. Cash benefited from continued strong customer collections and lower operating expenses, which were offset by a $337,000 tax related to a $3.4 million cash dividend [indiscernible] from our China operations. Accounts receivable at $3.3 million as of June 30 is maintaining a steady day sales outstanding or DSO at 55 days and very low credit loss exposure. Inventory at $6.7 million increased from $6.4 million from the beginning of the quarter on lower Q2 sales volume and anticipation of higher sales volume and backlog reductions for system deployments in the second half of 2024. Overall, networking capital at $17.6 million at the end of Q2 declined slightly from the $18.1 million at the end of Q1 2024. The company continues to have no debt. Moving to the income statement, second quarter revenue at $5.1 million was down 32% compared with $7.4 million from the prior year period, reflecting sluggishness in the Americas region and extended timing of our backlog conversion to shipments. Second quarter bookings were $5.7 million on strong opportunity conversion in Asia and Europe as Anthony indicated. Our consumables software and services at 49% of total year-to-date revenue have provided a steady base of recurring sales helping offset the current CapEx system softness in the Americas region. Finally, ending Q2 backlog at 5.4 million has increased by 2.6 million from the beginning of the year. Moving on to gross margins, Q2 was at 55%, down 3 percentage points from the 2023 prior year level due largely to lower sales volume. However, our Q2 margins were 2 percentage points higher than the preceding Q1 2024 quarter from improved product mix and favorable cost control efforts. The improvement reflects ongoing initiatives to reduce material manufacturing and service costs. Product value, re-engineering, sourcing optimizations, quality improvements and process streamlining have all contributed to the overall improvement and sustainable impacts. Similarly, I'd like to address the progress we have made on operating expenses. Second quarter operating expenses were $3.3 million down $886,000 or 21% from the prior year, and down $757,000 or 19% from the preceding quarter. Core personnel facilities, IT and other outside services costs decline through prioritization of critical initiatives and overall efficiency improvements. This lower and efficient cost structure has allowed the company to partially mitigate the current revenue decline and will contribute to improved financial performance when the overall market conditions and related assistance shipments improve. The company incurred a net loss of $797,000 for Q2 compared to a net income of $300,000 in the second quarter of 2023. Again, the decline was due largely to lower revenue. A foreign tax expense for cash repatriated from China, which was partially offset by significantly lower operating expenses and higher interest income. A form withholding tax of $337,000 was incurred in China from a $3.4 million dividend pay from our China operations to a parent company in the U.S. This was undertaken to number one, optimize the cash position and operating needs of each operation. The increased interest earning potential of our overall cash hoardings and ensure available liquidity in the U.S to support future strategic and operational initiatives. Overall, we remain very solid financially, we'll say strong cash position, no debt and the ability to navigate market opportunities and challenges. Looking ahead, our contractual backlog is expected to be shipped and recognized as revenue in the second half of 2024, as well as leveraging the progress we have made in managing costs that have discussed earlier. That concludes my remarks for the second quarter of 2024. Operator, would you please start the Q&A process? Operator: [Operator Instructions] The first question comes from David Canan with Canan Wealth Management. Please go ahead. David Canan: Hi. Good afternoon guys. Thanks for taking my questions. Got a couple and then I'll go back into queue. Gerry, good job on the reduction of expenses and the cost efficiencies, and I'm assuming there's a sustainable benefit to gross margins on a go-forward basis as volumes increase. My first question is, in theory, if revenues were to increase, let's say from $5 million to $7 million, with the various measures that you've taken in cost of goods, can gross margins get into the high 50s, even 60% based on significant volume increases. Gerry Ng: Yes, I believe we can. Let me give you a good example. For our current quarter, we -- our revenue was at $5 million and our operating income was a $400,000 loss. We typically get a 60% fall through on revenue to the extent that we can maintain our efficient cost structure, we should see again, a similar future, 6% fall through on revenue increases. So correspondingly, as our revenue goes from 5 to 6 to 7, we should see a comparable and corresponding fall through to the bottom line. Anthony Ambrose: Yes, the only thing I would add there, Dave, is, Gerry is right, it just depends on the mix, the location of the revenue. As you know, we have different margin structures and we sell-through distribution versus selling direct. So just it assumes kind of a normal mix and then I think [indiscernible]. David Canan: Okay. So the next question relates to that. And again, we don't know how much is going to be direct or through distributors, but assuming a normal mix as you put it, what is the -- Gerry, what is the variable expense on the next million dollars of revenue? So let's say, for example, revenues were $6 million instead of $5 million on that incremental million, what is the variable component? Is it 10%, 15%? Anthony Ambrose: Yes, so Dave, I'll interject in this. I think it's primarily going to be related to obviously the sales expenses. And that's the primary variable component. And again, if we're in a situation where we sell directly those expenses will be higher. If we go through distribution, they'll be lower. But that's -- there's not -- not going to burn more electricity in the factory. There might be incremental travel, there might be some incremental other G&A to build stuff depending on how much not G&A so much as operations to build the product. But again, I don't anticipate that being very much. Gerry Ng: Yes, just to add to that again, material costs, freight, logistical costs, commissions, those are typical variable expenses associated with revenue activity. And again, if you kind of follow our typical leverage fall through on revenue, we should get a beneficial impact. David Canan: Okay. So -- but what I'm trying to nail down is, with the variable component assuming a normal mix on a million dollar delta in revenue, is it 10%, 15%? What is that approximately? Because SG&A will go up, okay. Anthony Ambrose: Historically, we've always told people, Dave that, the operating leverage is 40%. Given where we are, it might be better. But we've always told people when you net everything out, that's where the operational leverage comes to. David Canan: Okay. And then, guys, are there incremental expense reductions or efficiencies that we should see in the back half of the year? Or is everything complete at this juncture? Anthony Ambrose: It will be smaller as we continue kind of work through the opportunities. A lot of these initiatives we have some short-term as well as longer term benefits, particularly on material cost reduction, that may have a longer term but more sustainable impact. So we expect some continued improvement as we move forward. David Canan: Okay. And then final question, and I'll go back into queue, I promise. A lot of hype around artificial intelligence. So, Anthony, if you could sketch out for us the impact of AI on your business. I know you're, you guys are using it, but also can you talk about various enterprises using AI, their deployment of it, and how that affects your business and the opportunity, if any? Anthony Ambrose: Sure. And I would refer you and just all investors to our latest investor material on the website. I think it looks like Slide 8 has some of this conversation and a little bit better graphics. But in short, Dave, there's a series of applications that we've identified, and others use the term as well called Edge AI. And it's built around a set of products that will require AI implementations to become better, but they will not be able to leverage the AI capabilities in the cloud. And I'll give you an example. So for an automotive application, this would be ADAS, advanced driving assist. You're not going to go back with a latency and unpredictable connection to, go to the cloud for directions on whether you're taking a right turn on Main Street or not. You're not going to teach the car from the cloud. It's going to have to come. You're going to have to learn as you go. There are other applications around smart cities, industrial automation, a lot of the smart metering applications we've talked about. The whole set of other IoT applications, smart homes, etcetera. Now, those applications benefit Data I/O in a number of ways. We've talked a lot about automotive and ADAS and the demand increase that we see there. The code size gets bigger. The minute you add AI or machine learning components, right? You just increase the code size. It also ensures that you're developing newer platforms, replacing some of the older platforms that may have even smaller code size, which again is good for us. So the whole AI market that I think will benefit Data I/O more directly is in this segment called Edge AI and the -- in the various segments that I just highlighted. Gerry Ng: Thank you, Dave. And the next question comes from David Marsh with Singular Research. Please go ahead. David Marsh: Hi guys. Thanks for taking the questions. So I guess we just start on the automotive side. I mean, you guys specifically said that Americas is weak. Could you just kind of give us a little bit of a broader global landscape, I thought you guys had some pretty promising opportunities in China and perhaps India. Maybe you could just talk about those a little bit. Anthony Ambrose: Yes. Hi, Dave. So basically most of the promising opportunities in Asia closed as we expected. Asia is far ahead of our -- their plan for the year, and that's been on strength in Q1 and Q2, including some strength in China. The Americas by contrast, it's gone from a Fiesta (NASDAQ:FRGI) to a Siesta. We've seen -- [indiscernible] seen a deals that we know of that went to competition, but they just [indiscernible] pushed out. And in my checks with other channel partners, other companies and similar industry they're seeing a very similar set of activities. Automotive after really two big years for us in Mexico, they're just digesting the capacity, and I think trying to figure out how much are going to build in Mexico, how much they might have to build in the U.S depending on the election. And then also there's talk -- there's been talk of interest rate reductions and corporate CFOs like to pay 4.5% for something instead of 5% for something if they can. And so I think that's also contributed to some of the potential waiting. You heard comments from Ford Stellantis (NYSE:STLA), NXP (NASDAQ:NXPI), some of the tier ones really talking about also a product rotation. So I think all that contributes to, Hey, let's run the factory with what we've got as long as we can. And then as you know, our experiences with, especially with the automotive guys, they always seem to come in when they're ready to buy with demands where I need it right away. We saw that in 16 and 17, we saw it in 20 and 21. We had a little mini bump I think 18 months ago. And so when it comes back, I think it will come back fairly rapidly. But I'm telling you, it was, among the roughest quarters for a region I've ever seen just in terms of everything got pushed out. Gerry Ng: Okay. That's really helpful. And then just, obviously you got to wait for the queue for the breakdown on revenues, but, maybe could you just give us some sense directionally, with regard I guess specifically with regard to the, the kind of software centric business. that's clearly the line you really want to see your growth in because it's kind of more recurring. Can you just talk a little bit about, specifically what's going on there? I mean, there were, I did catch some comments there, but I didn't get a lot of details. So just can you just give us a sense of how that ... Anthony Ambrose: Yes. So from a shipment's perspective, we had record units processed by our programming center partners on SentriX, okay. And that continues a pretty steady upward ramp there. It's -- it's a question of when you look at SentriX and software overall combined with our consumable adapters, I don't know if it's a record, but it's pretty close to one if we -- I have to go back and look, but it was 49% of our revenue in the first half. And that's typically been running 43%, 44%% I think for the year last year. So we talk about a long-term goal of 50-50 split between recurring revenue and systems. We almost hit that so far this year. Now admittedly that's because the systems orders were down a bit. But it indicates the strength we have in the consumables, which when you combine that with some of the things Gerry's doing on expense reductions, will help us continue to preserve cash. When we have a systems divot, and then be ready to have a couple really good quarters when the demand turns around. David Marsh: Okay. Thank you. And then just, one quick last one. I mean, and I'm not trying to read anything into this. I mean, I understand that there was an opportunity there to repatriate that cash from China and get it, but that that's not by any means kind of an indicator that you feel like your China businesses is slowing or you're not going to need as much cash over there to support the business operation. It's just you had an opportunity and took advantage of it. Am I reading that correctly? Anthony Ambrose: You got it. As Gerry indicating his earlier, earlier comments, um, we have substantial operations in the U.S., China, and Germany. And it's fundamental that we maintain working capital to support those operations flawlessly. And we continue to do that. But as he indicated the benefit for us, even though you have to pay the tax, is you get the flexibility of having it in the U.S and opportunity to earn a little bit more on interest. And so, when we just talked this with the Board, it's pretty clear. Let's go ahead and repatriate the cash and move on. David Marsh: Got it. Okay. Thanks guys. I'll yield to other callers. Thank you very much. Anthony Ambrose: Thanks, Dave Operator: And the next question comes from Kevin Garrigan with WestPark Capital. Please go ahead. Kevin Garrigan: Yes. Hey Anthony and Gerry, thanks for letting me ask a couple questions. Anthony, just to clarify, so in Q1 you had said that your bookings had said -- have strong demand across all end markets. So compared to 3 months ago, automotive companies are just kind of waiting to see how things play out in the market, like interest rates as you mentioned, are -- they noting a significant decline in demand at all? Anthony Ambrose: Yes, Kevin, I mean, it just disappeared in Q2 in North America, right? I mean, I can't -- I wish I could come up with a softer way of explaining it, but that's basically what happened. Kevin Garrigan: Yes, no, that makes sense. Okay. Yes, that's what I was kind of wondering. Okay. And then you sound pretty confident that you're going to fulfill backlog orders in the second half of the year. So I mean, does your backlog consist of non cancelable orders or what kind of gives you the confidence that these orders won't get pushed out or, canceled? Anthony Ambrose: Some of the terms are non-cancellable, some are not. But the -- way our industry has traditionally behaved is people don't cancel orders on us once they place an order, okay. We had one exception when COVID hit and shut down, and literally one customer that canceled it 4 hours after they sent us the order. But knock on wood, we, we don't see behavior where customers come in and cancel. Now they have the right to do so under our standard terms up until we ship, but it's not something that's plagued us. Kevin Garrigan: Got it. Got it. Okay. That makes sense. And then just as a last quick question. On ,Dave's question earlier regarding Edge AI. I know automotive and ADAS are large markets for you guys. But I would say ADAS might be taking a little bit longer than expected. Is there another application that you're kind of seeing take off more now for Edge AI? Gerry Ng: Well, went over the list earlier a little bit around certainly the smart metering. we've won a number of deals there. IoT factory automation, we had a number of factory automation wins over the past couple of years. And on the new customer, new location wins. I mean, it skewed more towards everything besides automotive and including Edge AI in Q2 with the eight wins, I think, auto was two of the eight. So yes, I mean, it's -- it has not displaced automotive. I'm not going to go that far. I think automotive will come back hopefully sooner rather than later, but it does represent some interesting growth opportunity for us. And, you know, we're going to continue to dig a little deeper on that. Operator: Thank you. Ladies and gentlemen, This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Anthony Ambrose: Well, operator, thank you very much. I'd like to thank everyone who ask questions, and at this point I would like to conclude.

Pathward Financial, Inc. (CASH) Q3 2024 Earnings Call Transcript

Darby Schoenfeld - Senior Vice President, Chief of Staff and Investor Relations Brett Pharr - Chief Executive Officer Greg Sigrist - Executive Vice President and Chief Financial Officer Ladies and gentlemen, thank you for standing by, and welcome to Pathward Financial's Third Quarter Fiscal Year 2024 Investor Conference Call. During the presentation, all participants will be in listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. And I would now like to turn the conference call over to Darby Schoenfeld, Senior Vice President of Investor Relations. Please go ahead. Darby Schoenfeld Thank you, operator. And welcome. With me today are Pathward Financial's CEO, Brett Pharr, and CFO, Greg Sigrist, who will discuss our operating and financial results for the third quarter of fiscal 2024, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks, and supplemental slides may be found on our website at pathwardfinancial.com. As a reminder, our comments may include forward-looking statements, including with respect to anticipated results for future periods. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to update any forward-looking statement. Please refer to the cautionary language in the earnings release, investor presentation, and in the company's filings with the Securities and Exchange Commission, including our most recent filings, for additional information covering factors that could cause actual and anticipated results to differ materially from the forward-looking statement. Additionally, today, we will be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation. Finally, all periods referenced are fiscal quarters and fiscal years, and all comparisons are to the prior-year period, unless otherwise noted. Now let me turn the call over to Brett Pharr, our CEO. Brett Pharr Thanks, Darby. And welcome everyone to our third quarter 2024 conference call. We're very pleased with our results in the first nine months and continue to execute on what we set out to accomplish this year. Our focus on balance sheet management, led by risk adjusted returns and continued evolution of our product offerings, has helped us deliver solid financial results. We plan to continue this focus into next year, but before I talk about strategy, I want to give some results from the quarter. Net income was $41.8 million and earnings per diluted share were $1.66. Results were driven through an increase in net interest income of 14% when compared to the same quarter last year. We also expanded NIM and adjusted NIM, which includes contractual rig related processing expense, to 6.56% and 4.92%, respectively. These were both increases when compared to last year's quarter and the second quarter of this year. Performance metrics remain strong, with return on average assets for the first nine months of the year of 2.33%. and return on average tangible equity of 47.3%. For reference, these metrics were 2.46% and 50.8%, respectively, for the same time period last year. Finally, we are narrowing our guidance range to $6.40 to $6.60 in EPS for the full fiscal year. On the asset side of the balance sheet, our focus has been to optimize assets, and the team has been proven very disciplined in sourcing and underwriting loans that have the highest risk-adjusted returns. We also continue to see a robust pipeline in working capital and government guaranteed loans, both SBA and USDA. We put in a new technology system that should create efficiencies through the underwriting process and enhanced asset management capabilities to help us maximize our efforts, while reducing costs. In consumer lending, we have seen solid originations and continue to co-innovate. We expect to launch additional products as well as add partners in the future, generating growth for us and enabling our partners to thrive. In BaaS or partner banking, being a trusted partner to our clients means we can deliver on a number of value propositions. First, we offer experience. We were pioneers in the space, starting our issuing business back in 2004. We believe our deep expertise in payments positions us as a forward-thinking partner with decades of leadership and the capability to expand across multiple solutions, including payments, issuing, credit, tax, and now solutions for financial institutions, which I will expand on in a moment. Second, we provide operational excellence. We believe we have the right people and the right tools. This creates an operating structure that ensures reliable and sustainable programs. Third, we build strong partnerships. We have a high level of commitment to enabling our partners' success and work closely with them every day to ensure they feel supported and valued. Finally, we believe we have a mature risk and compliance infrastructure. We offer partners a scalable platform, led by a governance-focused approach. This has generated a pipeline that we continue to be optimistic about. As a reminder, these deals have a long sales cycle, so anything that we are working on now would be expected to benefit fiscal 2025 and beyond. During the quarter, we announced the expansion and transformation of our solutions for financial institutions, which previously only provided prepaid cards to banks and credit unions. With this expansion, we can now also provide commercial finance solutions to their business clients that do not qualify for traditional financing or when a product isn't offered. We also provide financial institutions the ability to offer merchant services to the business clients. Our strategy is to be the trusted platform that enables our partners to thrive. As we get close to the end of our fiscal year and look toward 2025, we will continue to execute on many of the initiatives across the enterprise that were started in 2024 and laid the foundation for growth. First, we need to have not only the right-sized balance sheet, but also one with an optimized asset mix. Looking ahead, we intend to continue to favor asset rotation to areas where we believe we have a competitive advantage to deliver higher return on assets. Second, we are regularly investing in technology to ensure that our platform is capable of evolving and scaling as our partners remain on the forefront of innovation and expand their reach with new products and markets. This has been ongoing for years and will continue to be a focus as we grow with our partners. Third, we believe that people and culture are Pathward's most important assets. And as a testament to that, we once again earned the Great Places to Work certification in 2024 for the second year in a row. We intend to remain a talent anywhere organization with intentional inclusion efforts to support a workforce spread across the country. Our talent anywhere approach is so successful that four out of five of our top workplace strengths, according to our employees, were directly connected to Pathward's remote work policies. Finally, we have built a risk and compliance framework and culture that provides us with what we believe is a competitive advantage in our space, and this starts with the tone at the top. This has been and will continue to be a priority for Pathward, especially since the industry is in a more difficult regulatory environment. And it is this strategy allows us to introduce fiscal year 2025 earnings per diluted share guidance in the range of $7 to $7.50. Now I'd like to turn it over to Greg, who will take you through the financials and discuss our updated and new guidance in more detail. Greg Sigrist Thank you, Brett. And good afternoon, everyone. Net interest income continues to be a driver of our results, growing 14% when compared to the prior-year quarter. We continue to focus on risk-adjusted returns, which is helping to drive our new production yields higher and increasing the overall yield on the loan and lease portfolio. New production yields on commercial finance loans and leases in the quarter was 8.58% compared to the quarterly yield on the same portfolio from last quarter of 8.19%. New production yield in the quarter was impacted by a seasonal renewal period in insurance premium finance, which tends to carry a lower yield due to the lower risk. The higher production yields and the focus on risk-adjusted returns over the past few quarters have helped expand the net interest margin and adjusted net interest margin in the quarter to 6.56% and 4.92%, respectively, both showing healthy increases over the March quarter. Provision for credit losses was $5.9 million compared to $1.8 million for the same quarter last year, with the increase primarily stemming from our commercial finance division. We're still experiencing a benign credit environment and the increase in provision largely reflects growth and mix in the commercial finance portfolio during the quarter. Non-interest income declined slightly, primarily driven by a decrease in card and deposit fee income due to lower servicing fee income from reduced levels of off-balance sheet custodial deposits when compared to the prior year. Total non-interest expense increased versus the same quarter last year, primarily driven by higher rate-related card processing expenses due to continued deposit growth with our banking partners. Non-interest expense, apart from rate-related card costs, increased approximately 2% from the last year as the company continues to diligently monitor expenses and responsibly add FTEs to support growth. Deposits on balance sheet at June 30 totaled $6.4 billion, an increase of $125 million from a year ago. We continue to hold higher levels of deposits on balance sheet to support growth in loans and leases. Off-balance sheet custodial deposits held at partner banks, as of June 30th, totaled $353 million compared to $781 million last year. This declined approximately $840 million sequentially, given that these deposits were elevated due to tax season during the second quarter of 2024. We expect deposits to continue their seasonal trend downward, bottoming out around the end of our September quarter. Total loans and leases at June 30th totaled $4.6 billion, an increase of 13% from a year ago. Growth stemmed primarily from working capital and structured finance, including SBA, USDA, and renewable energy. As Brett mentioned, we are seeing healthy pipelines in commercial finance as well as in consumer lending. Compared to March 31st, total loans and leases balance increased approximately $200 million. We saw increases in insurance premium finance. renewable energy, working capital, and warehouse finance. From a liquidity perspective, we remain in a strong position with approximately $2.5 billion in available liquidity. And as part of our continued goal to optimize the balance sheet and rotate out of securities and into higher earning assets, we expect the securities portfolio to continue drawing down with close to $300 million of cash flows available for reinvestment over the next 12 months. Finally, during the quarter, we repurchased approximately 287,000 shares at an average share price of $52.24. We are narrowing our fiscal year 2024 GAAP earnings per diluted share guidance to a range of $6.40 to $6.60. This includes a number of assumptions. First, we expect earning asset yields to exceed those of fiscal 2023, given our focus on risk adjusted returns, continued pricing discipline, and securities portfolio cash flows, which continue to be reinvested into higher yielding loans. With our investment tax credit pipeline, we estimate our effective tax rate to be in the range of 14% to 18% for the full year. And we expect core card fee income to follow normal historical seasonal patterns, as has been the case during the first three quarters of the fiscal year. We are also introducing our fiscal year 2025 GAAP earnings per diluted share guidance in the range of $7 to $7.50 per diluted share. This guidance includes the following assumptions. One rate cut in September 2024 heading into our fiscal 2025. Any additional cuts would have a muted impact on net income given our relatively neutral stance. An effective tax rate of 18% to 22% for the year based on expected investment tax credit volumes and includes expected share repurchases. Additionally, our 2025 guidance also takes into account the success we have had an asset rotation, which we believe will continue to scale net interest income. We also expect our quarterly results to follow our typical seasonality, but be slightly more weighted toward additional earnings in the back half of the year. This concludes our prepared remarks. Operator, please open the line for questions. [Operator Instructions]. Our first question comes from Tim Switzer with the company KBW. Tim Switzer We appreciate the 2025 EPS guidance. Very helpful. Could you talk a little bit about the expense outlook you have embedded in that? And I'm sure there's some puts and takes depending on how macro trends go in the revenue side. But could you maybe discuss what you guys are expecting there and then what levers would be available to you if revenue doesn't come in like you hope? Greg Sigrist Happy to have you touch on the expense guidance for next year. Starting point, as you know, we're always going to invest in human capital and technology. I'm actually expecting a fairly muted FTE expansion next year, but we are definitely going to see some. And you're also going to see just normal cost of living adjustments there that will pull through to comp and benefits. On the tech side, you're going to see probably a fairly consistent increase as we saw this year on the tech side. But we're going to work really hard to self-fund as much as we can for all of that across the rest of the P&L, things like consulting spend, etc. So, we're going to keep a real tight eye on it. So, in total, other than some modest increases on the FTE side and just cost of living and inflationary items, there's really nothing significant I'd pull forward for you on it. On rate related card expenses, though, you're going to have to model that out just based upon the historic trends you've seen the last couple of years. You're going to see seasonality in the deposit balances as you always do. I would also say, as part of that, we're really excited about the pipelines on the BaaS side and the consumer finance side or commercial finance side. But I would say that the excitement hasn't necessarily drawn into us putting a lot of deposits growth into this yet. We really want to see how the pipeline evolves and starts to pull through. But we have put a modest uptick in BaaS deposits into the latter half of next year that we'll keep you informed on as we go forward. Tim Switzer Could you guys also spend a minute discussing - there's a tick up in NPA, net charge-offs excluding - the tax business is also a bit higher this quarter. I think you mentioned the commercial finance loan or something. Can you guys talk a little bit about what you're seeing there and what your expectations are going forward? Greg Sigrist On the NPL or NPA is ticking up a little bit, just dollar wise, it's really, I think, more on the consumer finance side. We have one program manager who we typically contractually settle up our - there's a waterfall that protects us from a credit perspective. We typically settle up with them annually by June 30th. And this year, we pushed that out to July 31st. So what you're going to see is both an increase in the consumer loans and consumer NPLs related to that. We feel that we're adequately reserved for any potential Pathward exposure at June 30th. But we expect to wrap that up here in July without any additional exposures. Tim Switzer And if I could squeeze in one more, could you guys give us a little bit of guidance or help on what the average off-balance sheet deposits should look like in Q4? And then, if you expect anything outside of normal seasonality in 2025? Greg Sigrist For off-balance sheet, again, I would point you back to last year as well. I don't think I would see anything untoward in the fourth quarter for off-balance sheet. As you know, as I commented in my prepared remarks, fourth quarter is our low point for BaaS deposits overall, just seasonally speaking, and that's going to pull forward into the fourth quarter. So I think you're definitely going to see down from where we are June 30th. And as I mentioned just a few minutes ago, I think for next year, I think I'm really expecting next year's BaaS deposits for the first couple of quarters to trend very similar to the way we did a year ago. But as we get into the back half of next year, I think we're very hopeful that the pull through on the BaaS pipeline will result in some modest uptick in those BaaS deposits relative to either existing programs with current partners, new programs, et cetera. But it's really back-half loaded, so we're not going to see as much impact as you would see if it happened early in the year. Our next question is from Frank Schiraldi with the company Piper Sandler. Frank Schiraldi You guys talked about favoring asset rotation still and a mix shift out of securities into higher yielding loans. It would seem that you still would expect some balance sheet growth into 2025. Just curious if maybe you can size that a little bit or is that the right way to think about it in terms of higher yielding loans growing faster than maybe securities are rolling off the books? Greg Sigrist Yeah, I would, again, I would kind of bifurcate it a little bit. Early part of the year, first half at least, I would say you're going to see historic trends continue, Frank. So if we're growing loans, just focus on the loans, historically 10% to 15%, I think that trend is going to continue for the full year. From a total asset perspective, I do think we're expecting to see BaaS deposits tick up again, both current programs, but back half loaded. I think you're going to see a scaling in deposits and total assets that correspond to that. But again, I think it's going to be fairly muted. And as you know, we haven't historically given you guidance on that deposit growth. So I'm probably not going to be any more helpful for you today. But we do expect to see some benefit and uplift on that, in part because if you think about how we fund our third quarter tax season. We typically have some wholesale borrowings to fund that. I'm very hopeful that, for next year, we can eliminate some of that and self-fund it through BaaS deposit growth. Frank Schiraldi I guess speaking about strong pipelines, obviously, seeing what's going on with some of the smaller banks and the banking as a service business, kind of surprised, Greg, your commentary around modest uptick in deposits in the back half of next year. Is the pickup more on the fee side in 2025 for bass or is the pipeline just such that deposits and revenues could be kind of pushed out even further from this strong pipeline into future periods, into 2026? Brett Pharr It's Brett. So I think one thing to think about this is what you're seeing in the marketplace is some trouble with a lot of smaller fintechs that actually won't be in the business. And so, there are a few that are big enough that are profitable, that are fleeing the quality. And that's the kind of thing that's in our pipeline that we're looking at. But as you can tell, just reading the news, there's some unwinding that's going to be going on. And just because a business existed in one place doesn't mean they're going to be able to put it someplace else. And I think that's a little bit of what's happening in this. Kind of reminds you that early in this whole phase, we were highly selective on any we would bring in. And that was because we didn't like those businesses anyway. I don't know if that answered your question, but there are some meaty things in the pipeline, but it's certainly not all the volume that has been out there. Greg Sigrist Just to add to that too, Brett's already touched on it, we talk about it, I think, every quarter, but it's a long sales cycle. And I think until we're at the point where we're completing that cycle and announcing deals - I think the reason I use the word modest is, until we kind of get through that and we can let you guys know, the market know that we're closing some of these deals, I think it's appropriate to haircut some of the expectations. We're still very excited about the business, though. And to Brett's point, we're being very selective on what we're letting through the pipeline as well. So, again, we're very optimistic, but just being a bit, call it, conservative in terms of how much we pull into the guidance for next year. Frank Schiraldi If I could just ask one more on the buybacks, buyback levels were a bit down significantly, I guess, quarter-over-quarter. And so, capital levels were up. Certainly, where they were year over year, I know there's seasonality there, but how do we think about repurchases here? Just given the recent run up in stock, is there any change? You mentioned, Greg, that 2025 does include expectations on buyback, your guide, but just curious if - obviously, you've got a lot out there in the current authorization. Just wondering if you guys are maybe tempering that a little bit in terms of activity from what we've seen in previous quarters, given just where the stock is. Greg Sigrist As it relates to the June quarter, buybacks were down a little bit, but one quarter does not make a full year. So I just make that point. We're still very committed to optimizing our capital and highest and best use of capital going forward. And I still continue to believe share buybacks falls in that category. I think the slight slowdown is giving you some perspective on it. Historically, our buybacks have equated to roughly a 70% to 80% payout ratio in terms of how much of our earnings we've put back into the buybacks. For the 2025, that's likely to come down modestly, and I think that's really to the 60% to 70% payout range versus 70% to 80$. So when I think about four quarters, I think about it moderating slightly. And I think a big part of the driver behind that is we do see the organic growth opportunities. I'd rather have the capital here before we need it. But when I look out the next several years, whether it's building deposit base, being able to deploy that into the loan book, et cetera, I'm looking at this out three to five years, I'd rather build ahead and get ahead of that a little bit. But I think by the time we get into the middle to the latter part of next year, you're likely to see us go back to more normalized levels of buybacks. Brett, I don't know if there's anything you'd add to that. Brett Pharr I think that's exactly right. And we've got some opportunities that are out there. And where we need capital for the balance sheet, we'll use it. But 60% to 70% payout ratio is pretty healthy. Our next question is from David Feaster with the company Raymond James. David Feaster Just kind of following up on the partners, some of the disruption commentary that you talked about in your prepared remarks, I'm curious maybe some of your thoughts on how this impacts partnerships agreements. I've heard that some partners may be looking for backup partners just kind of as a downside protection. I'm kind of curious, how does that impact your negotiations? Do you think that's a positive for the industry? Is that something you're seeing? And how does that impact contracts and pricing and overall just negotiations? Brett Pharr Yeah, that is happening. We're getting those phone calls. There are some whale of partners that are - I wouldn't say they're looking for a backup. They're looking for their second one. And that's something we're clearly seeing. We're not terribly excited about being the secondary backup. We've got some capacity to do things and we want to use it for things that are going to have a lot of juice coming through it. And as to agreements, every one of those is custom. And you can have conversations about how that's going to work. There's volumes, there's minimums, those kinds of things. And in some cases, we have agreements where we have a percentage of majority that we expect to get in it. So very much custom. But all those things are happening because more sophisticated program managers have recognized, oh, I better have an out or a couple of banks in line if I need it, so I can keep doing new programs. David Feaster Just looking at the slide deck, you talked about implementing a new tech system that's going to create efficiencies. I'm curious. I was hoping you could elaborate on that. What are you looking at? I guess with AI being all the rage these days, is there any opportunity for you guys to leverage AI across your platform and how would you do it? Brett Pharr Quite a lot in what you just said, but let me start with what we did in commercial. There are readily available packaged solutions that help with sales process through underwriting, credit management, collateral management, all the way to reporting. And we spent some time and money putting some efficiencies in by installing that in our commercial finance group. I wouldn't say it's particularly competitive advantage, but it's a basic tools that will help us there and will help us with the FTE counts and those kinds of things. So we're happy that's in there and we're starting to reap the benefits of some of that. I think your comment about AI is correct, but I think that there's a limited view of what we have at the moment. And as you know, everybody's got to be very focused on the data, the info security, the controls that are in it. We can see some very basic ways where it could be used. I'll give you a simple bread example. Adverse action reports that are due monthly, people hate writing those things. You can get an initial start with an AI process and then modify it later and make it according to standards. There's a whole bunch of things that are like that, but we haven't even started to scratch the surface on that. I just hope, over time, we figure out how to efficiently use it. David Feaster Just last one for me. Look, there's still a lot of earnings power that's locked up in the securities book. The good news is that you've got the deposit growth - you don't have a liquidity challenge, you've got the deposit growth to fund the loan growth that you've got coming. But I guess just given the moving rates and the loan growth outlook that you have, is there any increased appetite for securities sales at this point? You're not hurting for earnings growth, but maybe that could accelerate. I didn't know if your appetite for that had changed. Greg Sigrist Hasn't changed, David, to be candid. We might be opportunistic down the road if we saw an opportunity just here and there. But as a practical matter, when I think about the balance sheet as a whole, we're really just looking at the shape of the curve. And one thing we haven't touched on yet this call is, when I think about the loan book combined with the securities book and the ability to rotate into loans, just even at that cash flow level, as long as the middle part of the curve stays fairly static, and I think the market does believe that, I think that's really going to be to our benefit and be a real tailwind for us in addition to the pipelines. But as it relates specifically to loan sales and then recycling that, no, our appetite really hasn't changed on that side. Brett Pharr And just to remind you, I think you know this, but as to the cash flow, I think it's about $300 million a year, right, that we are coming out of the securities book, and so then putting that into the loan portfolio. So sort of self-funding, providing the liquidity to be able to grow a loan book, not counting any new deposits. That will conclude today's conference call. Thank you for your participation and enjoy the rest of your day.

Earnings call: Orion Group Holdings lowers 2024 guidance amid project delays By Investing.com

Orion Group Holdings (NYSE:ORN) has reported its financial outcomes for the second quarter of 2024, revealing a revenue of $192 million and an adjusted EBITDA of $5.5 million. Despite facing project delays, the company has managed to get back on track, although these setbacks have led to a decrease in the full-year financial projections. The revised annual guidance now stands at a revenue range of $850 million to $900 million and an adjusted EBITDA range of $40 million to $45 million. Orion Group Holdings remains optimistic about the long-term future, backed by a robust backlog and awarded work totaling $876 million. The company also secured significant project contracts with Port Everglades, Port Tampa Bay, and Costco Wholesale (NASDAQ:COST). Orion Group Holdings (ticker not provided), with its recent financial report and earnings call, has presented a mixed outlook for 2024. While the company faces challenges due to project delays, it remains poised to capitalize on a strong backlog and a series of new contract wins. The lowered guidance reflects caution but also a realistic appraisal of the current business landscape. Orion's strategy to improve margins and manage expenses suggests a proactive approach to navigating the remainder of the year. Investors and stakeholders will be watching closely as the company strives to meet its revised targets and leverage its growing opportunity pipeline. Orion Group Holdings, despite facing headwinds with project delays, has demonstrated resilience with a solid backlog and significant new contracts. The company's financial performance and future prospects can be better understood through key metrics and insights from InvestingPro. InvestingPro Data shows a market capitalization of $265.3 million, indicating the size of Orion in the marketplace. The revenue for the last twelve months as of Q1 2024 stood at $713.28 million, with a slight quarterly growth of 0.94%. This underscores the company's ability to increase revenue despite recent challenges. Additionally, a notable EBITDA growth of 840.9% over the same period signifies potential operational efficiency improvements. An InvestingPro Tip highlights that analysts predict Orion will become profitable this year, aligning with the company's own optimistic outlook for the future. However, it's worth noting a concern regarding weak gross profit margins, which stands at 10.0%. This could be an area where the company may focus its efforts to improve financial health and investor confidence. For those seeking deeper insights and additional InvestingPro Tips on Orion Group Holdings, there are 10 more tips available that could provide further guidance on investment decisions. Use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, and gain access to these valuable tips. The tips and real-time data from InvestingPro offer a comprehensive view of Orion's financial standing and future outlook, helping investors to make informed decisions. Operator: Good day, and welcome to the Orion Group Holdings Second Quarter of 2024 Conference Call. [Operator Instructions] Please also note that this call is being recorded today. I would now like to turn the call over to Margaret Boyce of Investor Relations. Please go ahead. Margaret Boyce: Thank you, Joe, and thank you all for joining us today to discuss Orion Group Holdings' second quarter 2024 financial results. We issued our earnings release after market last night. It's available in the Investor Relations section of our website at oriongroupholdingsinc.com. I'm here today with Travis Boone, Chief Executive Officer of Orion; and Scott Thanisch, Chief Financial Officer. On today's call, management will provide prepared remarks and then we'll open up the call for your questions. Before we begin, I'd like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts are forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-Q and 10-K. With that, I'd now like to turn the call over to Travis. Travis, please go ahead. Travis Boone: Thank you, Margaret. And good morning, everyone, and thank you for joining our second quarter 2024 conference call. I'll start with an overview of our second quarter results, recent wins and a market update, and then I'll turn it over to Scott to cover our financial results. In the second quarter, we generated revenue of $192 million and adjusted EBITDA of $5.5 million. As we discussed over the past two quarters, we anticipated a slower ramp-up with two large projects over the first half of the year. We don't like surprises and recognize that we fell short of consensus. We have been transparent about what we were seeing ahead. There's nothing more important to me than doing what we say we will do. This is a short-term challenge. We have an incredibly talented team and a strong foundation with a huge market opportunity ahead. While we had some logistical setbacks late in the quarter, our Grand Bahama Shipyard Dry Dock project is now back on track, and our teams on the Pearl Harbor project are working double time to get back on schedule. In construction, work delays beyond our control are not uncommon and can sometimes cause our results to vary from quarter-to-quarter. While the total value of the contracts remain unchanged, revenue recognition will shift. While these delays are not expected to have any impact on the critical completion of these large projects, they will affect our full year 2024 financial results. For this reason, we are lowering our annual guidance to a revenue range of $850 million to $900 million and an adjusted EBITDA range of $40 million to $45 million. We are still on target to deliver a very strong second half on a comparable basis. More importantly, our long-term outlook remains very strong. We are no less confident about our ability to grow and perform in our business. We continue to add attractive projects to our backlog and our pipeline of opportunities have increased to more than $14 billion. This puts us in a great position for an outstanding 2025. Our market is developing as we thought it would. Activity is ramping up and will continue over the coming years. Our business development efforts translated into some noteworthy second quarter wins in both Marine and Concrete segments, including our first large Orion Concrete Award in Florida since expanding our concrete business there. In addition to the awards previously announced, so far in July, we have won a total of $118 million in work across both segments, bringing our total backlog and awarded work to $876 million. For our Marine business, we announced an $80 million contract with a long-standing customer, Port Everglades in Fort Lauderdale. The scope of work includes the replacement of over 2,000 linear feet of aging steel sheet pile bulkhead walls, including large diameter combi-wall systems, soil anchors and encapsulated concrete caps. This project has started and will continue through next year. We also announced a $20 million project for our long-time customer, Port Tampa Bay. We have a 40-year relationship with Port Tampa Bay and have completed several projects with them over the last 10 years. In this project, we are building a new berth that will include additional breasting dolphins connected to the walkways and onshore high wind mooring points. This marine project is a prime example of the infrastructure upgrades needed throughout our country's ports to improve and expand port capabilities. Turning to our Concrete segment, we won our first large award since expanding our concrete business to Florida. It is a $28 million contract for Costco Wholesale through Southeast Industrial Construction as general contractor. The project is for the new construction of the Port St. Lucie Costco Depot Phase 1, a pivotal distribution center located in Southeast Florida, one of the nation's fastest-growing regions. This facility will be one of Costco's largest distribution centers and our 16th project with Costco today. This is a reputation building project in the Florida market. Orion Concrete was also awarded a significant data center project in North Texas by a major hyperscaler. While details cannot be fully disclosed, the scope is in the range of $15 million. Our competitive advantage in winning data centers is not only our experience and the high quality of our work, but also our unmatched safety record, which is extremely important to data center owners. We have an extraordinary culture of safety and for two consecutive years, our team has had zero lost time incidents. In addition to the wins previously announced, during July, we won several notable projects in our Concrete and Marine segments. In Marine, we won a $28 million construction project at the Clearwater Beach Marina, a $28 million construction project for Port of Galveston, and a $29 million dredging project for the U.S. Army Corps of Engineers. In Concrete, we won a $16.5 million tip wall project in South Texas and two additional data center projects for $8 million and $5 million, our 23rd and 24th data center projects. Looking forward, the data center market is going strong at a time when commercial development work is slowing in this higher interest rate environment. The massive data center market is filling, helping to fill the gap, and we feel good about our ability to continue to be successful in this area that is being driven by the AI juggernaut. Demand for marine construction work is increasing and is perfectly suited for our expertise. We expect multiple strong tailwinds to drive our Marine business going forward. These include significant investments by the U.S. Navy to deter potential Chinese expansion in the Pacific, the $1.2 trillion infrastructure bill, capital projects for expansion of port facilities along the U.S. Coast, coastal restoration and numerous large opportunities in private investment for alternative fuels like LNG, methanol and ammonia, primarily along the Gulf Coast. We expect to see project volume ramp up in 2024 through 2025 and the investments we are making to improve our fleet, our systems and our teams will enhance our competitive position. As we enter the second half of the year, I continue to be optimistic about our future. Together with our teams, we've made great strides in strengthening the foundation of our company. By instilling disciplined processes, investing in business development, training in IT systems, we are much stronger today. Our teams are aligned on the same mission, delivering predictable excellence through outstanding execution. We look forward to delivering improving results for our stakeholders. I'll turn it over to Scott for the financial review. Scott? Scott Thanisch: Thanks, Travis. In our second quarter, we generated revenue of $192.2 million, up 5% over last year. As Travis mentioned, projects that were delayed in the first half are back on track, and we expect revenue to ramp in the second half of the year. Similar to last quarter, the mix of revenue continued to shift. Marine revenue was up 30%, while Concrete revenue was down 25%. This change in mix reflects our focus on Marine segment growth opportunities as well as the disciplined bidding standards we adopted to win quality work at attractive margins in our Concrete segment. Second quarter gross profit margin increased to $18.3 million or 9.5% of revenue, up from 13.8% -- $13.8 million or 7.6% of revenue in the second quarter of 2023. Both segments increased both gross margin dollars and gross margin percentage over the prior year. The 190 basis point increase in consolidated gross margin was primarily driven by improved pricing of high-quality projects and improved execution in both segments. SG&A expenses were $21.1 million, up from $18.1 million in the second quarter of 2023. As a percentage of total contract revenues, SG&A expenses increased to 10.9% from 10%. The increase in SG&A dollars and percentage of revenue reflected an increase in compensation expense, business development spending and legal cost. Over the next few months, we will be rolling out new IT tools and processes for our operations and our back office. These tools will share information and provide insight to the progress of our projects, improving our ability to effectively manage these projects on the ground. We are also migrating our business segments to the same financial platform, delivering efficiencies and greatly improving our line of sight across the entire business. Turning to profitability, we reported an adjusted net loss of $5.2 million or $0.16 per diluted share in the second quarter compared to an adjusted net loss of $4.5 million or $0.14 per diluted share in the prior year period. The second quarter net loss included $1.4 million or $0.04 per diluted share of non-recurring items. Our GAAP net loss for the second quarter of 2024 was $6.6 million or $0.20 per diluted share. EBITDA for the second quarter was $3.3 million, and adjusted EBITDA was $5.5 million. Adjusted EBITDA margin was 2.9%, up from 2% in the prior year period. Moving on to bidding metrics. In the second quarter, we bid on approximately $1.3 billion worth of opportunities, winning $194 million. This resulted in a contract value weighted win rate of 15.2% and a book-to-bill ratio just over 1x for the quarter. As of June 30, our backlog was $758.4 million compared to $756.6 million at March 31 of last year and $818.7 million at June 30th of this year -- I'm sorry, June 30th of last year. Breaking out our second quarter backlog, $567.1 million was in our Marine segment and $191.3 million was in our Concrete segment. During the second quarter, adjusted EBITDA margin in the Marine segment was 1.1% compared to 3.4% last year. Adjusted EBITDA margin in our Concrete segment improved to 6.6%, up from 0.3% in the second quarter last year. As a reminder, our goal is to generate adjusted EBITDA margins in the low-double digits from marine and high-single digits for concrete. We've been pleased with the progress of our Concrete segment since they returned to EBITDA profitability a year ago. Everything starts with winning the right jobs with good margins. With this better starting point, our project teams have implemented new field practices focused on delivering projects to our customers more efficiently and at better-than-bid margins. Margins in our Marine business retreated somewhat this quarter, largely a result of unabsorbed costs related to delayed projects and lower margins in our maintenance dredging business. We expect to see marine margins improve in the back half of the year as activity levels increase. Turning to the balance sheet. As of June 30, we had $4.8 million in cash and total debt outstanding of $60.3 million. We had $21 million in outstanding borrowings under our revolving credit facility at the end of the quarter. In June, our East West Jones deal with the last buyer did not close and was terminated. While this is disappointing, we are confident that the difficulties in closing this sale have been related to the interest rate environment and not due to the lack of interest in the property. Throughout this sale process, we've had multiple serious buyers, a good due diligence has been completed without identifying any remediation or related issues specific to the property. On July 2, we entered into a purchase and sale agreement with Capital Development Partners for the East West Jones property for $30.5 million with an anticipated close on or before September 30, 2024. We remain confident that we will close this sale to free additional liquidity to fuel our growth. As Travis mentioned, we anticipate growing our backlog and the top line substantially over 2023. We expect revenue to ramp up, and we will see a nice increase in cash flow in the back half of the year. At the same time, we plan to continue to improve margins by managing the business more effectively, more efficiently and more productively. For the full year 2024, we are lowering our guidance both for anticipated revenue in the range of $850 million to $900 million and expected adjusted EBITDA in the range of $40 million to $45 million. And with that, we'll open up the call for questions. Operator: [Operator Instructions] And our first question here will come from Aaron Spychalla with Craig-Hallum. Please go ahead with your question. Aaron Spychalla: Yes. Good morning. Travis and Scott, Thanks for taking the questions. Maybe first for me on the two large projects, can you just give a little bit more detail on the logistical setbacks at Grand Bahama and some of the issues in Hawaii that you're working to get back on schedule. Just confidence there. And it sounds like really not any changes to overall profitability on the projects per se, just more timing where you can still make that up? Travis Boone: Sure. Thanks, Aaron. Yes. So I'll start with Grand Bahama shipyard project. That one, we did have a delay with one of our subcontractors getting on site. Fortunately, it was a critical path work. They did get on site in the -- late in the second quarter and got their work finished in early July. So we were able to catch up there without impacting the overall projects, just a bit of a delay in some of the revenue. And then on the Hawaii project, we talked about a few of these before, but we had some issues early in the year with the Panama Canal and delays getting material deliveries through there from -- with our piles that are coming from Houston and going to Hawaii. And then we've had some other hiccups, if you will, related to some work that needed to be done before we did our work, that wasn't completed on time. And so we were in a bit of a waiting scenario, waiting to be able to get our work done. So in both cases, it was issues out of our control. And we've done everything we can to catch up on the Hawaii project, and we'll continue to push forward on that one and feel good about where we're going to be able to finish for the rest of the year. Aaron Spychalla: All right. Thanks for that. And then maybe second, just on the Navy opportunity, saw the $15 billion RFP that came out. Can you just talk about the process and time line there? And then just broadly, the overall opportunity with the Navy in the coming years? Is there still opportunities additional that are outside of that RFP for you as well? Travis Boone: Definitely, that was the -- that RFP that came out was the PDI MACC, which stands for Multiple Award Construction Contracts. It's a $15 billion contract, they'll select three contractors for the work there. Timing is, we'll be working on the proposal here for several months. I think they're anticipating selection late this year or early next year. And basically, that's one of multiple MACC contracts and other contracting mechanisms the Navy is using for the billions of dollars that they're going to be spending in the Pacific. So that's just one of multiple different contracts that are -- that we've either already pursued or will be pursuing in the coming months. So there's quite a few of those out there like that. Aaron Spychalla: All right. And then just maybe last one. You mentioned a $20 million dredging project for the Army Corps, are you starting to see that market come back a little bit? And then just maybe talk about how you're managing your equipment fleet there given market dynamics? Travis Boone: Yes. We're still seeing that market disrupted. It's not -- still not returning to what was the norm a couple of years ago still been fairly slow with new projects coming to bid. So it's continued to be a challenge for us. Fortunately, we've been able to keep our dredges busy on doing some private work and a few other contracts that we won earlier in the year and last year with the core. So we'll obviously continue to pursue those projects when they do come out. And at some point, it will get back to normal because it's maintenance dredging that has to happen. And so there's -- that work never ends. It's an ongoing process to maintain the shipping channels and the intercoastal waterways. Operator: And our next question will come from Julio Romero with Sidoti & Company. Please go ahead with your question. Julio Romero: Thanks. Hi, good morning. Maybe to start on the guidance range, still implies even at the low end of the sales range, very strong year-over-year growth in the third and fourth quarters. Can you maybe speak to the confidence in hitting the lower end of your guidance -- of your sales guidance? And then secondly, the kind of the -- if you could help us out with the cadence of sales expected for the third and fourth quarters? Travis Boone: Sure. So we do feel really good about the second half of the year. There's a large amount of work happening in our Atlantic division in Florida in the Caribbean, that's really cranked up in the last half of the year. And then obviously, we've got the Hawaii project that's gaining momentum, and we expect strong performance there for the rest of the year. Additionally, we got multiple opportunities that we're continuing to pursue throughout our operating areas in both concrete and marine. So we're feeling good about the second half of the year and... Scott Thanisch: Yes. And when it comes to how it kind of develops out, the second quarter, you'll see a pretty substantial increase over the -- I'm sorry, the third quarter, you'll see a pretty substantial increase over the second quarter, and then it will kind of hang at that pace in the fourth quarter. So we expect it to develop -- it will increase a little bit as we go through the year, but the big jump is in the third quarter. Julio Romero: Okay. Thanks. That's very helpful there. And then how does the guidance change on the sales and EBITDA lines translate to the EPS guidance on both GAAP and adjusted? Scott Thanisch: How does the guidance change on the EBITDA line? In terms of dropping it $5 million, recognizing a little bit that there's the impact of what we've seen in the second quarter, we think that we can offset a lot of that as we continue to improve the performance of those delayed projects. So as we think about the full year EBITDA range, we feel pretty confident about where you've cited at the new level. Julio Romero: Got you. Sorry, just to clarify, I mean, how does that translate to the EPS guidance that you had from GAAP earnings per share and adjusted earnings per share? Scott Thanisch: Sorry, I misunderstood you. Yes, I believe there's a reconciliation in the press release that gives you kind of the walk down from the various lines down to EPS. So that should give you the components. Julio Romero: And that's -- I'm sorry, that's for the guidance. Scott Thanisch: Yes. There's a reconciliation of the guidance range in the press release. Julio Romero: Okay. I'll take another look, I guess afterwards for that. And just last one for me would be, you talked about the opportunity pipeline now standing at $14 billion and then how that sets you up for 2025. Can you maybe expand on that a little bit? And how does that opportunity pipeline kind of sets you up for order growth over the next two quarters? And then how would you have us think about the sales growth in '25? I know it's early stage, but any thoughts there? Travis Boone: Sure. You may remember on our last call, we talked about our pipeline being around $11 billion -- just over $11 billion. It's increased $3 billion since our last quarterly call. So it's definitely -- and it's increased multiple millions over the past year, which indicates more and more opportunities out there for us to pursue. And again, it's a constrained market in the marine space. And so we feel really good about the number of opportunities that are out there. And that pipeline is primarily marine business just because our concrete work is a shorter visibility to that. So the majority of that pipeline is concrete project -- or is marine projects, sorry. Operator: And our next question will come from Alex Rygiel with B. Riley Securities. Please go ahead. Min Cho: Hi. Good morning. Travis and Scott, this is Min for Alex. Just couple of questions. So you did talk about the opportunity pipeline growing. Can you talk a little bit about what the kind of bulk of that increase is from? Is it for more federal funding, just kind of new geographies? Just any details there. Travis Boone: It's not really new geographies, and we've stayed pretty consistent with the geographies that we work in. And so it's not necessarily increasing geographies, it's more increasing opportunities with clients. Yes, a lot of it is federally funded or federal projects, whether it's for ports or DOTs or for DoD clients like the Navy and Army Corps of Engineers. There's quite a few opportunities that are showing up on a regular basis for us. Min Cho: Okay, excellent. You mentioned that you've won a couple of data center projects, and they seem a little smaller in size in general. Just want to talk about margin relative to your segment margin targets. Are they at the lower end or higher end or just pretty much right within that target range? Travis Boone: We have minimum bid margins that we hold steady on and then different projects, there's different margins. Generally speaking, our data center projects provide good margins at the end of the job, and we've been able to perform them very well. Min Cho: Okay. And then finally, you mentioned the new -- the concrete award in Florida for Costco. You also mentioned that this is just Phase I. So can you talk about what the opportunities are there with Costco and just maybe in Florida in general? Travis Boone: Yes, there'll be a large Phase 2 on that project as well that we're pursuing, obviously, and hope to bring in the door. But there's opportunities with quite a few different companies, Costco and others, that we did actually just win another Costco project in Texas yesterday. So we're continuing to add into the mix there, whether it's Costco or other clients that we work with on a regular basis that continue to add to our backlog. Operator: [Operator Instructions] Our next question will come from David Storms of Stonegate Capital. Please go ahead. David Storms: Just wanted to try to get a sense of how we should think about margins going forward. I know you mentioned a couple of times that revenues are expected to ramp through the balance of 2024 and into 2025. Should we expect there to be maybe a bit of delay in margin expansion due to the catch-up that's going to need to take place in Hawaii and the Grand Bahama? Scott Thanisch: Well, we do expect margins to continue to improve. They're not going to just immediately spring up to those target ranges that we've kind of talked about. But we do expect as the activity levels on those delayed projects come up and they're absorbing more of the cost, the indirect cost, we'll see gross margin improvements there. So we'll -- I would say that as you look forward into the projections, steady kind of progress on margins as opposed to just kind of seeing the immediate realization of the single-digit and the double-digit goals. David Storms: Understood. That's very helpful. And then just on the SG&A expenses, it sounded like a couple, a little bit of increase year-over-year, maybe onetime in nature. But Scott, I know you mentioned there's going to be maybe a little more IT spending and a little more expenses coming from business transitions. Should we expect that, call it, 11% low double-digit run rate -- low double-digit SG&A expenses as relative to revenues via fair run rate? Scott Thanisch: I think that you'll see the percentage come down as the revenue ramps more quickly. But I think that in absolute terms, you kind of consistent with what you saw in the second quarter would be a good assumption. David Storms: Sounds great. Thank you. And then just one more, due to some of the interruptions at your larger projects, do you expect any impact on, call it, the Port Everglades project or the Port of Tampa project? Is there going to be any impact to those newer projects from those interruptions do you think? Travis Boone: No, we don't foresee anything, Dave. Those projects are starting off well and seem to be on track. I don't anticipate anything on -- coming up on those that cause any issues. I guess I'll add to that and say it is construction. There are a lot of variables in the field and -- but we don't anticipate anything. David Storms: Understood. Thank you very much and good luck in the next quarter. Travis Boone: Thanks, Dave. Operator: And this concludes our question-and-answer session. I'd like to turn the conference back over to Travis Boone for any closing remarks. Scott Thanisch: Before Travis says that, I realized that in our press release, the EPS is not listed there, just the EBITDA. So the EPS range that we're expecting is adjusted EPS of $0.07 to $0.20 for 2024. Sorry, go ahead, Travis. Travis Boone: Thanks, Scott. Thank you, everyone, for joining today. We appreciate your time. In closing, I just want to thank you -- thank all of our employees who are working really hard in our business every day to work safely and to work profitably and bring the best they can to work every day. Also, I want to thank our shareholders for their continued confidence in us, and I look forward to our continued growth in the second half of the year and going forward. Thanks, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Earnings call: UCT reports strong Q2 results, optimistic on AI and China market By Investing.com

Ultra Clean Technology (UCT) has delivered robust financial performance for the second quarter of 2024, with both revenue and earnings surpassing expectations. The company has experienced significant growth, particularly in the China market and sectors related to artificial intelligence (AI) applications. With industry indicators pointing to a favorable outlook, UCT is set to capitalize on emerging technological trends and market demands. Ultra Clean Technology's positive second-quarter results and optimistic projections for the near future demonstrate the company's strong position in the market. With strategic initiatives and favorable industry trends, UCT is well-prepared to navigate the evolving landscape of high-tech manufacturing and services. Operator: Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technology Q2 2024 Earnings Call and Webcast. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, July 25, 2024. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead. Rhonda Bennetto: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Scholhamer, Chief Executive Officer, and Sheri Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business and Sheri will follow with the financial review. And then we'll open up the call for questions. Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the Risk Factors section in our SEC filings. All forward-looking statements are based on estimates, projections, and assumptions as of today and we assume no obligation to update them after this call. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website. And with that, I'll turn the call over to Jim. Jim? Jim Scholhamer: Hello, everyone. And thank you for joining our call this afternoon. I will start with a high-level summary of our financial and operating results for the second quarter. Then share some thoughts on the broader industry trends we are seeing. I'll close by highlighting another important award before turning the call over to Sheri for a more inclusive financial review before opening the call up for questions. We continue to perform well in 2024 with second quarter revenue and earnings at the high end of our guided range. We saw strength in both products and services across all geographies and, in particular, elevated equipment spending within the domestic China market and customers supplying high bandwidth memory and equipment supporting advanced packaging for AI applications. Over the past several years, we have expanded and diversified our content, broadening the applications and platforms where we participate, providing us with a unique competitive edge to engage in all stages of industry growth, from fab construction through equipment buildup and supporting the install base. Our broad engagement in the semiconductor ecosystem and our technical and operational capability has enabled us to participate in some of the early AI hotspots that are front-running the next wave of AI innovation. AI servers and AI-enabled devices are experiencing elevated demand, leading to increased investment supporting capacity expansion. This surge requires high performance chips for data center training and other leading edge chips, creating a cycle where AI computing requirements drives semiconductor content growth, spurring further industry investment throughout the whole ecosystem. We believe AI will be the most significant technological breakthrough of our era, with some of the world's most advanced chips at its core. UCT is uniquely positioned to capitalize on this technology migration by driving earlier, deeper, and broader collaboration with our customers as they move towards high volume production, particularly at the leading edge. Other metrics pointing to an industry recovery that we are tracking closely include further rebalancing of inventories, increased shipments of high performance computing chips, favorable memory pricing adjustments, elevated data center demand, and a meaningful increase in installed wafer fab capacity. The order and speed at which these segments rally will be uneven for the supply chain. However, we are seeing signs of momentum now that indicate a recovery could start later this year instead of early 2025. Our internal marketing intelligence is aligned with the industry belief that wafer fab equipment sales should grow by at least mid-teens next year, driven by increasing demand for leading-edge technology, the introduction of new device architectures, and increased capacity expansion purchases, all of which UCT supports in one manner or another. Our expanded suite of offerings and global footprint position us well to, again, outperform the markets in the next upturn. Our site optimization strategy, including automation and other efficiencies, is on track. Part of that plan, to shift some production to lower cost regions, remains a priority. And it's worth noting that revenue from our Malaysia facility has doubled from the fourth quarter as we focus on qualifications and ramping that flagship site in advance of the ramp. The investments we have made in capacity expansion and operational efficiency support our customers' innovation roadmap and manufacturing of their next generation technologies. Lastly, I am very happy to announce that, in addition to the Intel (NASDAQ:INTC) and Texas Instrument Awards of excellence we received last quarter, we were the proud recipients of the Outstanding Partner Award from Piotech China last month. We started our operations in China 20 years ago and have grown to over 700 dedicated employees who continue to drive our success today. We are honored by this recognition and are thankful for Piotech's continued confidence in us. As our list of accomplishments continue to grow, I want to thank all our employees around the world who are executing at a very high level to ensure we are meeting current demand and preparing for the next up cycle. Our ability to persevere has been instrumental in driving customer success and maintaining our position as the leading manufacturer in the industry. In summary, we are capitalizing on some early inflection points in what will be a significant transformation of our industry. We are performing at a very high level to meet current demand while prudently investing to secure future share gains. And we're ready to meet major increases in demand throughout the next ramp with the available capacity, operational excellence, and quality products and services to ensure our customers' success. And with that, I'll turn the call over to Sheri for our financial review. Sheri? Sheri Savage: Thanks, Jim. And good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As Jim mentioned, total company-wide revenue was up quarter-over-quarter across all geographies and major customers, most notably in the domestic China market. We also saw additional revenue supporting high bandwidth memory and equipment for advanced AI packaging, which put us at the high end of our guided range. Total revenue for the second quarter came in at $516.1 million compared to $477.7 million in the prior quarter. Revenue from products increased to $452.7 million compared to $418.5 million last quarter. Services revenue was $63.4 million compared to $59.2 million in Q1. Total gross margin for the second quarter came in at 17.7% compared to 17.9% last quarter. Product gross margin was 15.6% compared to 15.8% in the prior quarter. And services was 32.7% compared to 32.3% in Q1. Margins can be influenced by fluctuations in volume, mix in manufacturing region, as well as material and transportation costs. So there will be variances quarter to quarter. Operating expense for the quarter was $55.8 million compared with $54.5 million in Q1. As a percentage of revenue, operating expense decreased to 10.8% compared to 11.4% in Q1. Total operating margin for the quarter increased to 6.9% compared to 6.5% in the first quarter. Margin from our product division was 6.2% compared to 6% in Q1 and services margin was 11.8% compared to 10.1% in the prior quarter. Operating margin improvements were largely different by holding OpEx relatively flat on higher revenue. Based on 45.4 million shares outstanding, earnings per share for the quarter were $0.32 on net income of $14.4 million compared to $0.27 on net income of $12.1 million in the prior quarter due to increased volumes. Our tax rate increased from 19.7% last quarter to 24.7% this quarter, representing a year-to-date effective tax rate of 22.5%. Given the growth we've experienced in higher tax jurisdictions like China and the Czech Republic, we now expect our tax rate for 2024 to be in the low 20s. Turning to the balance sheet, our cash and cash equivalents were $319.5 million compared to $293 million in Q1. Cash flow from operations was $23.2 million compared to $9.8 million last quarter, driven by improved operating results and timing of payments. For the third quarter, we project total revenue between $490 million and $540 million. We expect EPS in the range of $0.22 to $0.42. And with that, I'd like to turn the call over to the operator for questions. Operator: [Operator Instructions]. Your first question comes from the line of Krish Sankar from TD Cowen. Krish Sankar: I had a couple of them. Jim or Sheri, first one, on the domestic China strength that you saw, is it still kind of low-single-digits of revenue? So do you expect that to continue increasing as we go forward? Jim Scholhamer: It used to be low-single-digits, but now we're looking at $40 million to $50 million of order coming out of that site for those customers. Krish Sankar: And then, the strength in HBM, is that mainly you're seeing on the plating side or how do you get the color into where the end application is? Jim Scholhamer: Definitely, plating is the biggest piece, but we've also seen it trickle through in other applications like ALD and other areas. Krish Sankar: And my final question, Jim, where are your cycle times and lead times today compared to like three months ago? Are they still the same? Jim Scholhamer: I'm sorry, Krish, can you repeat that? Krish Sankar: Where are your cycle times today or your lead times today for shipping these [indiscernible] (00:11:40) boxes? Jim Scholhamer: Basically, right after they order it. Cycle times are very short these days. Krish Sankar: So that hasn't changed, right? So it's kind of pretty much... Jim Scholhamer: No. No, it hasn't. Obviously, there's still a lot of inventory in the pipeline, but it's all the way back through the supply chain. So, part of what makes us special is our ability to turn things around really quickly as well. And so, that's what's really been an enabler for us to take advantage of some of these things. Operator: And your next question comes from the line of Charles Shi from Needham. Charles Shi: Congrats on the consistent execution. I'm glad to see the total revenue retaking that $500 million. Well, we haven't seen that since, I guess, fourth quarter 2022, right? But I want to follow up a few things that Krish just asked. First thing about China, I know that you talk about China, that's your direct China exposure somewhere around 10%, sounds like. Going into the second half of this year, how is that business going to trend? Do you see more consistent half-over-half growth or any chance to see any inflection, maybe level off, start to decline? What's the scenario there, what you're seeing in the China business from this point and forward? Jim Scholhamer: As I said last quarter, we expect this high level of business to continue in China through the rest of the year. And it's really been a huge benefit for us to have this unusual footprint that we have in China that most suppliers do not have, but we do not see it really, really tailing off. But I don't think that's the whole story. We're also seeing strength in other parts of our diversified business. It's really helping us kind of move forward. So when you think about detractors or what might degrade, we're not looking at that. I think we're looking at things pretty much saying how they are and we're looking more at potential upside to certain areas as we go forward. Charles Shi: I know that the core part of the UCT business, obviously, still with the Lam, with Applied, other - ASML (AS:ASML), those kinds of suppliers. So maybe one more follow-up, the HBM, advanced packaging side, I'm going to ask the question in a similar fashion. So it has been an upside contributor. to your numbers last quarter and once again this quarter. The obvious question is how much more upside do you see from either plating and some of the broadened out opportunities like ALD, for going into the AI related packaging, will still be there in second half or do you expect that you're going to stay at this level for those kind of business through the rest of the year? Or any upside for next year and anything that you can tell us about this part of the business would be helpful. Jim Scholhamer: We definitely see the levels that we're operating at. For example, one of our factories, which is one of the major contributors to the wet systems that do a lot of the interconnect layers, is at a level three to four times higher than it was a few years ago. And we see that continuing through this year. And if you're watching what's going on in the chip market and where things are going, I think we only see upside into next year. Charles Shi: Only see upside. This is what we want to hear as well. It does seem like your revenue numbers from Lam, from Applied, that's in your PowerPoint - I know this doesn't include some of the OEM related to service revenue there, but it seems like your top two customers are already buying a little bit more in Q2 than in Q1. Seems like some sign of growth there. But going back to what you said in your prepare remarks about the WFE, sounds like you are thinking maybe Q4, you should see a little bit of more pickup in the general market. Because the only reason I ask this is that you did guide Q3 to be flat relative to Q2, but sounds like Q4 expecting some pickup. Jim Scholhamer: Yes, I think we are seeing early indications that Q4, in a broader area, could be better for sure. And of course, we remain ready. We've done a lot of work to get - I think anyone who's been in this industry for a long time knows that when the gas gets hit, it goes up fast, it goes up hard. So we've done a lot of work to bring up our capacity, to take advantage of when it starts to go. So what are we seeing in Q4? We're seeing early signs of some broader improvement, but yet still slight, but we all - I think many of us know that when it does come, it comes fast. So we're very encouraged by the fact that we're seeing some bottoms up, small improvements in the fourth quarter, and we're kind of anticipating what that might turn into. Charles Shi: Maybe lastly from me, I do want to ask you about your litho business. I kind of recall that you said the customer used to have a little bit more aggressive build plan, but that they walked that back. And it has been rather stable, consistent. But do you see any sign of pickup for the litho business yet? Jim Scholhamer: So maybe I break that into two parts. I think litho - and maybe I can flip that over to Cheryl Knepfler, our marketing expertise, what she sees for the whole litho market. But what we have been talking about, UCT in particular, we have made nice share gains in the new equipment going out. So what we are seeing is, as the new equipment and our contribution to that, we are seeing that uptick through the third and the fourth quarter for us, in particular. But as far as the whole litho market in general, maybe I would turn it over to Cheryl to talk a little bit more deeper about that. Cheryl Knepfler: As we look overall, we know that DRAM is expanding their litho. The timing is coming in as they're qualifying and as different processes are coming in. So we are seeing that being a little bit dynamic and are seeing things slowly translate into more firm orders going forward. So we do expect that to be a solid business for us going forward. Operator: And your next question comes in the line of Christian Schwab from Craig-Hallum Capital Group. Christian Schwab: Great quarter, guys. So the 15% mid-teens type of WFE growth that you're looking for, as well as other third-party experts who get paid to make those type of expectations are also in line with that. But given the fact that the WFE then would be north of $110 billion a year, is there any reason should that play out exactly that way that you wouldn't be approaching 2022, your previous 2022 revenue type of numbers potentially in 2025 or do you think there was some over ordering that you want to see a little bit more clarity before suggesting that could be the case? Jim Scholhamer: If the market does go up like we think - we've already been in two years of the doldrums, right, since November of 2022. Not every segment of WFE, but the majority of segments. We do see that kind of broad growth in WFE in 2025 and also we have always traditionally outgrown that growth by a significant margin, absolutely, I have a lot of confidence that we could meet and potentially significantly exceed the numbers that we had in 2022. Operator: Thank you. That concludes our question-and-answer session for today. I will now hand the call back to Mr. Jim Scholhamer for closing remarks. Jim Scholhamer: So thank you, everyone, for joining us today. And we look forward to speaking with you again for our next quarter conference call. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may all disconnect.

Old Republic International Corporation (ORI) Q2 2024 Earnings Call Transcript

Joe Calabrese - MWW Craig Smiddy - President and CEO of Old Republic International Corporation Francis Sodaro - CFO Carolyn Monroe - President and CEO of Title Insurance Thank you for standing by. At this time, I would like to welcome everyone to today's Old Republic International Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Joe Calabrese with MWW. Joe, please go ahead. Joe Calabrese Thank you. Good afternoon, everyone. And thank you for joining us for the Old Republic conference call. Second quarter 2024 results. This morning, we distributed a copy of the press release and posted a separate financial supplement. Both of the documents are available on all republics website at www.oldrepublic com. Please be advised that this call may involve forward-looking statements as discussed in the press release and financial supplement dated July 25th, 2024. Risk associated with these statements can be found in the company's latest SEC filings. This afternoon's conference call will be led by Craig Smiddy, President and CEO of Old Republic International Corporation and several other senior executive members as planned for this meeting. At this time, I'd like to turn the call over to Craig Smiddy. Please go ahead, sir. Craig Smiddy Okay, Joe, thank you. Well, good afternoon, everyone. We hope you're enjoying your summers and welcome again to Old Republic's second quarter 2024 earnings call. With me today are Frank Sodaro, our CFO of ORI and Carolyn Monroe, our President and CEO of Title Insurance. So during the second quarter, we produced $254 million of consolidated pre-tax operating income. That was up from $227 million in 2023. Our consolidated combined ratio was 93.5, which was little changed from the 92.6 we saw last year. General Insurance's strong underwriting results continued through the first half of 2024, producing $202.5 million of pre-tax operating income in the quarter, an increase of 10%. The General Insurance combined ratio was 92.4% in the quarter. In Title Insurance, they continued to face headwinds from mortgage interest rates in the real estate market, but we were still able to produce 46 million of pre-tax operating income in the quarter, an increase of 32%. The Title Insurance combined ratio was 95.4% in the quarter. Our conservative underwriting and reserving practices continue to produce favorable prior year loss reserve development in both General Insurance and Title Insurance, though as expected, not to the same outsized degree that we saw in General Insurance the last couple of years. It's worth noting that in 2024, we're on track to produce our 10th consecutive year with favorable loss reserve development. Our balance sheet, it remains strong while we continue to return capital to shareholders through both dividends and share repurchases. And focused on the long term, we will continue to invest in our new General Insurance underwriting subsidiaries, as well as in technology in both General Insurance and Title Insurance. So with those as opening remarks, I will now turn the discussion over to Frank. He'll then turn things back to me to cover General Insurance, followed by Carolyn, who will discuss Title Insurance, and then we'll open it up to the usual Q&A. So with that, Frank, I hand it to you. Francis Sodaro Thank you, Craig, and good afternoon, everyone. This morning, we reported net operating income of $202 million for the second quarter, compared to $180 million last year. On a per share basis, net operating income was $0.76 in the quarter, up over 20% from last year. Net investment income increased 20% in the quarter, driven by the impact of higher yields as we continue to turn over the bond portfolio. The average reinvestment rate on corporate bonds was just under 5%, while the comparable book yield on corporate bonds disposed of was 3.6%. Total bond portfolio book yield now stands at 4.2%, compared to 3.5% at the end of the second quarter last year. Our investment portfolio mix remained largely unchanged from last quarter. The stock portfolio is comprised of blue chip dividend paying companies, and the bond portfolio is comprised of 99% investment grade securities, with an average maturity of 4.3 years. Turning now to loss reserves, both General and Title Insurance groups recognized favorable development in the quarter, leading to a benefit of 2.2 percentage points to the consolidated loss ratio. This is representative of a more normalized level of favorable reserve development when compared to 4.6 points last year. I will now give you some line of business color about the reserve development coming from the General Insurance group in the quarter. Commercial auto continued to have some favorable development, but at a lower level than last year. Workers' Comp had significant favorable development, but it too was at a lower level than last year. General liability had some unfavorable development, the majority of which came from accident years prior to 2014. More recent development was spread throughout several of our subsidiaries, with no one entity having a significant amount. Now as a reminder, with 85 million of earned premium in the quarter, this is a relatively small line for us compared to Commercial Auto and Workers' Comp. We ended the quarter with book value per share of $23.59, which inclusive of dividends equates to an increase of 3.5% since year end, resulting primarily from our strong operating earnings. In the quarter, we paid about 70 million in dividends and repurchased $410 million worth of our shares for a total of just under 480 million returned to shareholders. Now since the end of the quarter, we repurchased another $94 million worth of our shares, leaving us with about 480 million remaining in our current repurchase program. I will now turn the call back over to Craig for discussion of General Insurance. Craig Smiddy Okay. Thanks for that, Frank. So, in General Insurance, net written premiums were up 15% in the quarter because of strong renewal retention ratios, rate increases on most lines of coverage, new business growth, and premium production in our new underwriting subsidiaries. It's worth noting that most of our growth in these new underwriting subsidiaries is E&S premium, with the last 12 months of direct written premium in Old Republic Union, which is our non-admitted policy issuing company, running at $553 million. As mentioned in my opening remarks, General Insurance pre-tax operating income was $202.5 million, and the combined ratio was 92.4%. So, we're growing at a profitable level. The loss ratio for the quarter was 64.3%, including 2.5 points of favorable reserve development, which compares to 60.9% loss ratio. That included 6 points of favorable reserve development in the same quarter of 2023. The expense ratio was lower at 28.1%. Now, to provide you with some more color on our two largest lines of coverage, commercial auto net premiums written grew 14% in the quarter, while the loss ratio came in at 72.3%, compared to 67.5% last year, due to the lower levels of favorable prior year loss development. Rate increases were up approximately 10%, which is commensurate with the loss trends that we're observing. So, we're holding steady there. Workers' compensation net premiums written increased by 8% in the quarter, while the loss ratio came in at 50.7%, which compares to 37.9% last year, again, due to lower levels of favorable prior year loss development. The loss frequency trend that we're seeing for work comp continues to decline, while the loss severity trend remains relatively stable. So, given the higher wage trend within payroll, which is our rating base, the declining loss trend in frequency, the stable loss trend in severity, we think our rate levels remain adequate, even though we gave rate decreases of approximately 7% in the quarter. We expect solid growth and profitability and General Insurance to continue in the second half of 2024, reflecting our specialty strategy, our operational excellence initiatives, and our new underwriting subsidiaries that are still in their early stages of scaling up. So, with that summary for General Insurance, I will now hand it over to Carolyn, so she can report on Title Insurance. Carolyn? Carolyn Monroe Thank you, Craig. The Title Group reported premium and fee revenue for the quarter of $663 million. This represents an increase of 2% from second quarter of 2023. Directly produced premium and fees represented 24% of revenue versus 23% in the second quarter of last year. These premium and fees were up 7% from second quarter of last year, while agency produced premiums were up 1%. Direct open order counts increased by 11% this quarter when compared to second quarter of 2023. These metrics are also found in our recently enhanced financial supplement. Commercial premiums were 21% of our earned premiums this quarter, consistent with the second quarter of 2023. Although mortgage rates remain high and the overall real estate market is slow, we're pleased to see revenue growth in the quarter in both the direct and agency channels. We're cautiously optimistic that the market has found some footing, although the timing and the pace of the recovery really remain difficult to forecast. Our pre-tax operating income of $46 million was an increase of 33% over the second quarter of 2023. Our combined ratio of 95.4% compared to 96.9% in the second quarter of last year. Our expense ratio improved to 93.1% from 94.4% in the second quarter of 2023. This is primarily driven by recent expense and efficiency gains, as well as the modest growth in our revenue. We continue to emphasize that investing in technology is a critical priority. Our investments include internally developed solutions and the deployment of technology through strategic partnerships and alliances. One such recent partnership allows us to provide our offices and agents a technology tool and verification service to help mitigate wire fraud and diversions. Utilizing the strategic alliance, we can quickly respond to the industry-wide high-cost issue of real estate fraud and security. Housing affordability also remains a significant issue in our industry. A byproduct of this issue has been policymaker challenges to the benefits and cost of Title Insurance, resulting in unregulated Title Insurance alternative title waiver programs being brought into play. We continue to work through our industry association on ways to address housing affordability challenges and educating policymakers about the benefits of Title Insurance in protecting homeowners and the biggest financial decisions many of them will ever make. While we are pleased with our second quarter results and activities, we remain mindful that the market is still recovering and we will remain focused on managing expenses while executing on our strategic plan built around our agents and our people. Thank you, Carolyn. So, profitable growth continues in General Insurance and we've been able to remain profitable in Title Insurance and for the remainder of 2024, we remain optimistic for General Insurance and the same goes for Title Insurance as a way to transition in the real estate market. So, that concludes our prepared remarks and we'll now open up the discussion to Q&A where I'll answer your questions or I'll ask Frank or Carolyn to help out and respond. Thanks, Craig. [Operator Instructions] And it looks like our first question today comes from the line of Greg Peters with Raymond James. Greg, please go ahead. Let's go to the General Insurance segment first. And I appreciate the color on the line of business reserve development, Frank. Maybe you could spend a minute and sort of revisit your methodology and approach to loss picks for the most recent accident years. It's come up under intense review for other companies because of concerns about loss cost inflation not being adequately compensated for and the loss picks and so you've seen some other companies raise their loss picks and some of the longer-tail liability lines. And so having some perspective on how Old Republic is thinking about that would be helpful. Craig Smiddy Greg, I'll respond initially and then hand it to Frank for a little more color. I think the first thing is the proof is in the pudding. And as we've talked about the last several quarters, we've had very large amounts of favorable development in historic years, and we've even hit up against the top end of the range in a favorable way on the more recent years. We feel like we're very good at measuring frequency, and severity and very good at selling our value proposition so that we can get the necessary rate changes commensurate with those trends in frequency and severity that we're seeing. And again, it has proven itself out on commercial auto. Going five years back, it was a very difficult time for the industry and a few challenging years for us, where there was a considerable spike in severity that was unforeseen. However, over the last four or five years, we've been very diligent measuring, monitoring frequency, severity and responding in real time to what we're seeing. So we remain conservative when we set those loss picks. We assume that things might not go as planned, and we set them in a conservative fashion. And then, Frank, maybe you can comment about our hold periods and how we approach those recent years. We'll be very quick to increase the recent year pick if we see something coming in higher than what we expected, but on the other hand, we're very conservative about reducing those, if you could comment on those lines, Frank? Francis Sodaro Sure. Just to give you some color here, generally speaking, for workers comp, we set a pick and then we hold it for four years plus the current year. For commercial auto, we hold three years plus the current year. And for GL, generally speaking, it's four years plus the current year. Now, Craig mentioned we were up against the top end of the range at Great West and we have dipped into some of those hold periods, but that's actually been reduced recently. And outside of Great West, we're back at a point where we're really not lowering our picks in those hold periods below the original pick. So it's just Great West is the one spot where, as we've talked about in the past, we've had the good problem of running up against the top end of the actuarial range. Greg Peters Okay. Thanks for that color. I appreciate that. Craig, in your comments, you also spoke about the new ventures and you talked about how much premium, has been written over the last, I think it was the last 12 months. And I'm looking at your operating statistics and on slide two of your financial supplement, not quite sure where that is picked up in these numbers. So maybe you can sort of piece it together for us. Craig Smiddy Sure. I'd be happy to, Greg. So just to reiterate, the number that I gave you for Old Republic Union, our non-admitted insurance policy issuance company, is a number that several lines of business are written in. It's a company that several of our new subsidiaries utilized to write that business. And I gave that number just to give you a little more color about the fact that we are an E&S player and that we're writing a decent amount of E&S business. And where you see that come through on the line of business page in that financial supplement is property. You can see there, $165 million, for instance, compared to $124 million last quarter, and you can see where we're at 6 months and where that compares. General liability, again, that's a line where we're focused on very specialized small account types of general liability, different from the kinds of general liability exposures that perhaps others in the industry write with larger limits and higher hazard levels of exposure. And here, too, you can see the increase from, what, $103 million compared to $67 million in the same quarter last year. So those are the lines that we're primarily writing. Again, we're not focused in our new E&S company subsidiary on property cat. We're not focused on large limit or umbrella kind of business. It's small commercial E&S business, and it's also -- Inland Marine is the other new underwriting subsidiary that's contributing here, and they are very focused on the bread and butter Inland Marine type of exposures. So hopefully, that gives you a little more color, Greg. Greg Peters It does. Thanks. I recognize there's others going to ask questions, so I'll just focus on the amount of capital returned. And more importantly, because it's been a phenomenal quarter and year-to-date result with returning capital to shareholders, as we think forward, what kind of ordinary capital return math should we be thinking about? Because it seems like at least recently it's been elevated. Craig Smiddy Yes. Well, here, too, we have had a very good problem. And that is, even though we've returned significant levels of capital over the last few years because we're producing so much favorable income, net income to the balance sheet, we really haven't been able to bring the balance sheet down to a more appropriate level. So again, a nice problem to have, but we do see it that we have, as a result, carried more capital than we needed to in the last few recent years, even though we increased the pace. And Frank mentioned in his comments about the remaining capital that's available to return to shareholders through the share repurchase program of about $480 million. We would hope to complete that by the end of the year. But again, with strong earnings this year, we keep refilling the coffers, if you will, and anticipate that we'll have more capital to return to shareholders as we go forward. So hopefully, that helps anything that you would add, Frank? Okay. Just a minor follow-up on that point. Is the capital from the sale of the mortgage insurance business, has that been fully accounted for and returned to shareholders, or is there still some remaining on the balance sheet? Francis Sodaro Yes, I would say, for the most part, that's been returned. The sale's been closed. We've contemplated that in this buyback program that we put in place. So... And our next question comes from the line of Matt Carletti with JMP Securities. Matt, please go ahead. Hi. I just want to go back to the reserve stuff. A couple questions there, just given what focus it's in at the industry level. Maybe start with just a numbers question, and that is, are you able to give us the dollar amount of development in those three main buckets of business for you, commercial auto, workers' comp, and GL in the quarter? Francis Sodaro We can. Yes, we could give you those numbers. So, I'll just give you dollar amounts in the quarter. Workers' comp was about $39 million of favorable. Commercial auto was a little over $3 million of favorable. And GL was about $9.5 million of unfavorable. That's the lion's share of the development we had. The rest of it, there's nothing else there of significance. Matthew Carletti Okay, perfect. And I caught in your comments, GL was older years. I think you said 14 and prior. Broad strokes, was there a concentration where, I guess workers' comp, commercial auto is very small. Was workers' comp a particular set of years or pretty broad-based? Francis Sodaro Well, workers' comp was pretty broad-based. It's just about every year on the analysis we look at. So it was across all of our subsidiaries and across most of the years that we look at. Matthew Carletti Okay. And then maybe just a higher-level question. Obviously, we've all listened, I think, probably the same earnings calls this quarter, and there's really been a point to kind of put on particularly more recent accident years, but particularly a couple of your big lines, GL and commercial auto. And you guys seem to be performing better than a lot of your peers. And so my question is, why is that? Is it come out of the reserving process that you guys just started a much more conservative spot and kind of that's what's leading it out? Or do you think it's more kind of the underlying business, and whether it be how you write the business or what you write within that line as is because they are large catch hauls [ph] that is a different subject matter maybe that you're writing versus those peers? Craig Smiddy Yes, Matt. So I think the answer is probably slightly different depending on the lines of business. But it's really a combination of all of the things that you mentioned. In my response to Greg earlier, I talked about how diligent we are in analyzing frequency and severity trends on a very frequent basis, a real-time basis, and certainly, at least a quarterly basis, and adjusting our rates as necessary. I think we were -- on commercial auto, we were more quick in responding four, five years ago, and we've been staying on top of it and even ahead of loss cost trend. And that has proven out in our -- as I said in my earlier remarks, to Greg, the proof was in the pudding. Our reserves for commercial auto have been favorable for the last few years, even though the industry has continued to put up unfavorable development. And in addition to our diligence in how we underwrite the business, price the business, set our initial loss pick, how we set our reserves -- case reserves is very conservative. We set case reserves to ultimate as soon as possible so that our underwriters and actuaries have as clear line of sight as possible into what those case reserves ultimately are going to play out to be. And then Frank mentioned Great West, where a large amount of our commercial auto is coming from. And here too, it's about the value proposition, the distribution model. We -- our clients understand when they write their first policy with Great West that they're going to have rate increases every year commensurate with loss trend, but they're going to receive superior claims service, underwriting service, risk control service, that will ultimately bring their losses down, and they buy into that value proposition. And not only they, but we only deal with a very select set of distribution partners on that business, distribution partners that buy into that value strategy I just outlined, and that bring us clients that also buy into that value strategy. We don't work with brokers that want to spreadsheet us for clients that want to buy the lowest ultimate possible price out there in the marketplace. That's not how we sell that business. So that was a mouthful, but as I said, it's really a lot of different variables that I think help us deliver the results that you've seen the last few years and that you will continue to see. Matthew Carletti Okay. That's very helpful. Thank you. And then one quick numbers question, if I could squeeze it in, not reserves. Fee income this quarter took a nice step up from kind of $40 million, $41 million, $42 million for several quarters and stepped up to more like $47 million. Is there anything one-time mission there? Or is that more of a sustainable number? Maybe just a quick comment on what's going on there. Craig Smiddy Sure, Matt. It is not onetime. It is a deliberate strategic effort to grow our fee business. And a good amount of that fee business is coming from our TPA operation within PMA, again, where we have had a path of strategic growth, expanding into new states, offering our TPA product and services with a unique value proposition around claims management and risk management. And we're starting to see the fruits of that labor and that strategy. So it's not onetime, and we're very focused on growing fee business going forward. So that is a growth area for us. Matthew Carletti Wonderful. Thank you for the color. Much appreciated. Thanks, Matt. [Operator Instructions] And our next question comes from the line of Paul Newsome with Piper Sandler Companies. Paul, please go ahead. Paul Newsome Good afternoon. Thanks for the call guys. One more question on reserves because the horse is not dead enough. I wanted to ask about the commercial, a little bit more on the commercial auto business in particular. It looks like actually your picks relative to peers over time have actually improved a lot and a lot more than your peers. Is there something about the book of business that you write or that some of you are doing from a rate perspective or, fill in the blanks, that would have allowed you to pick actually your loss ratio, a lot of picks are a little bit better than a little bit more improved, I should say, than what the industry is overall. Obviously, the caveat is that there's a lot going on within this segment. But any thoughts you had that could address that would be great. Craig Smiddy Sure. Sure, Paul. I'd be happy to comment there. And if Frank wants to add anything, he can. We've been first very conservative in our loss picking methodology. So, as I think I commented on prior earnings calls, even though all indications from trends, severity, rate increases might suggest you could lower your loss pick by five points, we would only, for example, lower it by maybe one point, we would never make a move, a big move from one year to the next. We would want to see those things prove out. On auto, we started with a high pick five years ago, it comes back to the point we were talking about earlier. We had those as the industry did five, six, seven years ago, those surprise severity shocks. And we responded back then by raising our picks to a pretty high level. And we've been very conservative in bringing those down. And we've made no major reduction in our current accident year loss picks for commercial auto this year relative to last year. Again, maybe a point, but that's coming off those years, five, six years ago where it was very high, where we were very conservative in bringing those down. And that's our philosophy, that's our thinking. And then I won't repeat it all, but if you just go back to the earlier question from Matt about why have we been able to perform so much better than the industry on commercial auto, again, it's coming from our Great West business and that conservative pricing approach, that robust pricing approach, monitoring frequency severity, a robust conservative approach to case reserves, to IV&R reserves, the loss pick, it all, and then down to distribution and insured value proposition buy-in. It all goes to all of that. And that's why we're confident. And that's why we've had the track record we've had in commercial auto. Paul Newsome I feel obligated to ask a question on Title. The -- we've talked quite some time about ongoing technology spending. Maybe just sort of your updated thoughts as to how that should play out over time. Are we still talking about -- having been talking about something that is essentially ongoing from now until the end of time? Or is there some point where there's some ability to pull back on that technology spend in the future, assuming that the market doesn't change? Craig Smiddy Yes, I'll be happy to comment, and then Carolyn, you can kick in your thoughts. But we -- our investments in technology have really been about efficiencies and efficiency gains. And so investments in technology are able to more than offset expenses in other categories. So from that standpoint, it's a good investment. The other thing is, as Carolyn has talked about on several earnings calls, we are trying to make it as streamlined and friendly as possible for our Title agents that we focus 85% of our business on. And we will continue to do that and continue to be the premier provider for independent agents so that we're easy to work with, and our technology is cutting edge. So I would say we're going to continue to make investments in both of those areas in Title. And then just one other area, where we are actually -- for both General Insurance and for Title Insurance, we are looking at various AI technologies that we think will improve productivity, efficiency, decision-making in the future. And we're going through a rigorous process to analyze all that's available in those industries, all that might come, and where we should be in making those investments. So at this point, I would say because of our modernization efforts within IT, our exploration of AI, our desire to want to be premier provider for independent agents and our desire to create as many expense efficiencies as we can in Title Insurance especially given some of the focus by regulators and lawmakers on that, we will continue to invest in technology across the board, General Insurance and Title Insurance as we go forward. So I would not assume any kind of reductions. And it looks like we've got another question from Greg Peters with Raymond James. Greg, please go ahead. Greg Peters Okay. Probably relevant follow-up to your comments you're just making, Craig, about expenses... Craig Smiddy I think you're coming back, Greg, just because you haven't heard a siren yet and you want to give us more time, so you can hear that in Chicago Fire Department siren. Greg Peters No, it usually comes at around 2:20 your time. So I don't know what happened to the fire department. They're not running like clockwork today. Can you spend a minute and talk to us about the improvement. And let's -- I don't want to look at the quarter, let's looks like at the six-month result and the expense ratio in General Insurance. And is there something structural that's happened to lead that improvement? Should we expect that to continue? Craig Smiddy Sure, Greg I'd be happy to comment on that. So if we look at the six months in General Insurance, 27.9% as opposed to 28.6% last year. Last year, we ended at 28.2%. And I know we spoke in several of the earnings calls about why the trend from about 26% up to 28% was happening a good portion of that because of line of business mix changes where we might be having to pay higher commissions, but we're writing business at a lower loss ratio. In the -- specifically about where we sit today, I think that the current expense ratio is of, call it, 28%, consistent with where we ended last year, call that 28% is probably a pretty good run rate. As you just heard in the response that I gave to Matt or Paul, I can't recall which, we are continuing to make investments in technology. And as I said in my opening remarks, we're scaling up these new underwriting subsidiaries. We've had four new underwriting subsidiaries in General Insurance that we've added. And those are still expense drivers, and three of the four have not yet become profitable. They're carrying a very heavy expense load relative to what they're able to produce in premium. So as they scale up, if we're talking a few years out, and we don't make further investments in yet additional new underwriting subsidiaries. That could come down, however, we do plan on continuing to add new underwriting subsidiaries and keep it at a similar run rate. But to the extent that scale catches up quicker than expected, that could come down. But I think a good assumption is that we hold around the 28%. Greg Peters Okay. And pivot to the title business and the expense ratio there because I know there's some moving parts inside that. Again, just looking at the six-month result versus last year, given what's going on with title revenues. Carolyn, do you have an expectation the expense ratio could come down later this year or next year or what's your view there? I would say that our expectations for the full year will be pretty close to what we saw in 2023. We're really looking at a combined ratio to stay similar to 2023. Our expense ratio is always going to be commensurate with the revenue. There's a lot of expenses that get tied to revenue. So I would hope that we would be right around what 2023 was. Craig Smiddy And Greg, here, too, if there's a surprise upside and there's a rebound in the real estate market sooner rather than later, that scale is really the big driver there in Title Insurance. As you know, those expense ratios came down into the 80s during the good years, and we feel like we're -- we've hit the bottom. And as I said in my opening comments, we await to see what happens, but with respect to top line, it feels like we've -- we're bouncing along the bottom and ready for a turn. And to the extent that, that turn comes at a steeper slope or to the extent that it comes earlier, you could see improvement in that expense ratio more rapidly. And going back to what we say, we're targeting -- we're not satisfied with 95% combined ratios in Title. We want to see just as we do in General Insurance, those combined ratios averaged between 90% and 92.5% over time right now with the lower level of revenues, it's elevated. But we expect with a reasonable amount of top line coming through title that we would be able to get those combined ratios back down into the 90% through 92% range. Alright, thanks Greg. And that looks like all the questions we have today. So I will now turn the call back over to management for closing remarks. Management, you have the floor. Craig Smiddy Okay. Well, I think we've pretty much drained the discussion from our standpoint and covered everything that we had hoped to touch on, either in our opening remarks or through the Q&A. And with that, we would just say that we continue to focus on delivering results to shareholders that are superior and exceed expectations. And we wish everyone a good rest of the summer and look forward to seeing you for our third quarter conference call. Thank you very much. And ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

QuantumScape Corporation (QS) Q2 2024 Earnings Call Transcript

QuantumScape Corporation (NYSE:QS) Q2 2024 Earnings Conference Call July 24, 2024 5:00 PM ET Company Participants John Saager - Vice President, Capital Markets and FP&A Siva Sivaram - Chief Executive Officer Kevin Hettrich - Chief Financial Officer Conference Call Participants Doug Dutton - Evercore Jordan Levy - Truist Securities Mark Shooter - William Blair Ben Kallo - Baird Operator Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the QuantumScape Corp. Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to John Saager, QuantumScape's Vice President of Capital Markets and FP&A. John, you may begin your conference. John Saager Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's second quarter 2024 earnings call. To supplement today's discussion, please go to our IR website at ir.quantumscape.com to view our shareholder letter. Before we begin, I want to call your attention to the safe harbor provision for forward-looking statements that is posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress, or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial theories are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There are risk factors that may cause actual results to differ materially from the content of our forward-looking statements the reasons that we cite in our shareholder letter, Form 10-K, and other SEC filings, including uncertainty posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape's CEO, Dr. Siva Sivaram, and our CFO, Kevin Hettrich. With that, I'd like to turn the call over to Siva. Siva Sivaram Thanks, John. I'm excited to provide an update on our activities since our last earnings call. First, we recently announced a landmark agreement with PowerCo, the battery company of the Volkswagen Group. This deal reflects the value created by consistent execution on our development roadmap and customer validation of our technology. We forecast that this capital-light licensing arrangement lengthens our cash runway into 2028, an extension of 18 months relative to our previous guidance. Upon satisfactory technical progress, the deal allows for a $130 million prepayment of royalties to QuantumScape in exchange for a non-exclusive license, covering an initial production volume of 40 gigawatt hours per year with an option to expand to 80 gigawatt hours, enough for approximately 1 million vehicles per year. The license covers the technology platform used in our upcoming QSE-5 product. This agreement is a major step in our global scale-up strategy to bring our solid-state lithium-metal battery technology to market for electric vehicles. By joining forces, we can combine our cutting-edge technology with PowerCo's capabilities in industrialization and manufacturing. Under this licensing model, we can leverage our partners' investment of billions of dollars to industrialize our technology while maintaining our focus on innovation and development. We believe that this capital-light model will enable us to reach gigawatt-hour scale faster, and when combined with financial prudence, will allow us to extend the cash runway into 2028. We see this collaboration and this intellectual property framework as potential template for future deals with other customers. In addition to the deal with PowerCo, our customer engagement continues to be robust. We have shipped Alpha-2 prototype cells to multiple customers in the automotive and consumer electronics sector. We also continue to work closely with our prospective launch customer for the QSE-5 cell. The core innovation that will allow our solid-state lithium-metal battery technology to be manufactured at gigawatt-hour scale is our fast separator production process, which we are rolling out in two stages, Raptor and Cobra. We're on track to complete our ramp of the Raptor process, one of our four key goals for the year. The Raptor process has also been the important testbed for key element of Cobra, and our progress on the Raptor has allowed us to begin shifting increased resources towards Cobra development. We are starting to take delivery of Cobra equipment, in line with our annual goal. Next, we published an update on safety testing of our prototype battery cell. One noteworthy result from prototype cell testing was demonstrating thermal stability up to 300 degrees centigrade. For reference, we tested conventional high-energy lithium-ion cells, which burst into flame between 174 and 185 degrees C. In our discussions with our customers, safety is a different maker. A cell that can offer a fundamentally safer chemistry not only adds value to existing applications like automotive and consumer electronics, but also potentially opens up new markets that current technology is unable to serve effectively. Next, let me hand things over to Kevin for a word on our financial outlook. Kevin Hettrich Thank you, Siva. Capital expenditures in the second quarter were $18.9 million. Q2 CapEx primarily supported equipment purchases in preparation for low-volume QSE-5 prototype production, as well as the Cobra process and other equipment as we prepare for higher-volume QSE-5 prototype production in 2025. We expect to be on the lower end of our full-year 2024 guidance for capital expenditures of between $70 million and $120 million. GAAP operating expenses and GAAP net loss were $134.5 million and $123 million, respectively. Adjusted EBITDA loss was $72.5 million in Q2. We maintain our full-year 2024 guidance for adjusted EBITDA loss to be between $250 million and $300 million. We ended the quarter with $938 million in liquidity. As we mentioned previously, our long-term capital requirements are a function of our commercialization pathway. We believe the licensing deal with PowerCo offers capital-efficient path to market, and we now project our cash runway to extend into 2028, an 18-month extension relative to previous guidance. Any additional funds raised, including under our ATM prospectus supplement, would further extend this cash runway. With that, I'll let Siva conclude with some closing remarks. Siva Sivaram Thanks, Kevin. I'd like to look at how the PowerCo deal affects our strategic outlook. The secular trend towards EV adoption continues, but despite decades of development, existing conventional battery technology still cannot address the requirements of large segments of the automotive market. There is a clear need for a next-generation battery to drive broad adoption of EVs, and this need represents extraordinary market opportunity, potentially hundreds of billions of dollars annually. We believe that our solid-state lithium-metal platform is the clear leader in the next-generation battery race, and to seize this massive market opportunity, a global manufacturing ecosystem must be developed. This is where our collaboration with PowerCo fits in. They can bring their industrial expertise and operational excellence to bear on the formidable practical challenges of producing our next-generation battery platform at the gigawatt-hour scale. This non-exclusive deal also allows us to pursue additional opportunities while maintaining our tenacious focus on innovation and return on invested capital. Above all, we see this collaboration with PowerCo as an opportunity to quickly and efficiently get our battery technology into series-production electric vehicles. The inherent leverage of this industrialization model takes advantage of the investments being made by automotive OEMs such as the Volkswagen Group, and our highly differentiated technology allows both partners to benefit from this collaboration. Moreover, under this model, our market share is not directly constrained by the size of our balance sheet or the bandwidth of our operations team. Though significant work remains to achieve our ambitions, we are excited to begin our collaboration with PowerCo. It's the first step in the next phase of our journey to revolutionize energy storage and create exceptional value for our shareholders. We look forward to reporting on our progress in the months to come. Question-and-Answer Session A - John Saager Thanks, Siva. We'll begin today's Q&A portion with a few questions we've received from investors or that I believe investors would be interested in. Siva, why is the PowerCo deal so significant for QuantumScape? Siva Sivaram John, in my mind, there are four powerful reasons why this deal is so important. First, this demonstrates the value we have created for our customers and shareholders with our solid-state lithium-metal platform. Second, by combining our unique technology with the global capabilities of the Volkswagen Group, we can get our technology to gigawatt-hour scale and into series-production vehicles as rapidly as possible. Third, this deal is non-exclusive, and it provides a template for future deals with other customers. And lastly, the capital-light arrangement presents the most efficient allocation of our resources. John Saager Thanks for that. Kevin, turning to you now. Siva mentioned the capital-light approach. How is this agreement better for investors than the joint venture [indiscernible]? Kevin Hettrich This deal allows both PowerCo and QuantumScape to focus on respective strengths. Benefits of the licensing model for us include increased operating leverage, a reduction in our forecast capital requirements, and an ability to utilize our partners' balance sheet. Additionally, an exciting benefit is that the potential scale of this deal is roughly 4 times the size of the prior JV. A licensing model that creates value for both parties has to start with differentiated technology, Our QSE-5 technology and its targeted benefits to safety, energy density and power, we believe achieve that strong performance differentiation and creates an opportunity for both QuantumScape and PowerCo with an excellent financial return. In the near term, one of the benefits we discussed in the letter is that it helps extend our cash runway by 18 months relative to prior guidance. John Saager On that last point, can you talk in a little bit more detail about how this deal enables your cash runway extension? Kevin Hettrich Our forecast 18-months runway extension, now into 2028, is driven by the following: First, under the licensing agreement, PowerCo will invest CapEx required for gigawatt-hour scale production facilities. The deal frees up to $134 million previously earmarked for our investment into JV. Second, PowerCo will contribute resources and skilled personnel as part of the collaboration, which helps reduce our expected costs to industrialize our technology platform. Third, the licensing agreement features an inflow to QuantumScape, specifically a $130 million royalty prepay contingent upon satisfactory technical progress. And separate from the PowerCo deal, we are continuing to make improvements to the efficiency of our operations, and these improvements are now incorporated into the forecast. John Saager Okay. Thanks, Kevin. Siva, turning back to you and summarizing a couple of incoming questions we've received. Can you tell investors anything more about the joint collaboration team and the milestones that are part of this agreement? Siva Sivaram John, now that we have signed this agreement, work begins immediately. We are planning to ramp the joint scale-up team to around 150 experts. The initial team will begin the collaboration activities here in San Jose. As the technology transfer proceeds, we expect it to move to a PowerCo facility with more of the resources coming from them as manufacturing ramps up. The project plan will address all the verticals of manufacturing, process, equipment, infrastructure, and continuous improvement. In terms of milestones, these are related to QSE-5 B-samples, the Cobra process, and finalizing the target design for the cell. We will then grant the license and receive the royalty prepayment. John Saager Okay. Great. And my final question on the collaboration of licensing agreement. What does it mean from an intellectual property perspective? Siva Sivaram Now, we believe we've built a strong IP portfolio in the next-generation battery industry. We've always been incredibly careful about protecting our IP, and we'll continue to push the envelope on innovation to create more value for shareholders and customers. We have and we will continue to protect all IP relating to the separator in its manufacturing, including the Cobra process. QuantumScape and PowerCo will jointly own new IP we create relating to automotive battery cells and their industrialization. QS will remain an innovation-focused company, and we will continue to develop new intellectual property and technical know-how. For more information on the IP licensing, please do refer to our SEC filings. John Saager Okay. Thanks so much, Kevin and Siva. We're now ready to begin the live portion of today's call. Operator, please open up the line for questions. Operator Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Doug Dutton with Evercore. Doug, your line is now open. Doug Dutton Thank you. Hi, team. Congrats again on the nice deal with PowerCo. I just wanted to ask about what your timeline looks like with that partnership now consummated. So, does this make any change on the B-sample timing, on other commercialization timing, or was everything just the same sans the capital spending on gigafactories? Siva Sivaram Thanks, Doug. To the first order, we have already told you what our big goals for this year are, getting Alpha-2 to customers, making sure B-sample -- low-volume B-sample production starts this year, ramping up Raptor and getting ready for Cobra. They don't change. For next year, getting ready for high-volume B-samples, that doesn't change either. So, in a big picture, this deal has been signed, and we will begin collaboration work immediately, but our goals and targets in the short term do not change. Doug Dutton Okay. Excellent. And then, I'll just ask one more here on, if more of these deals are likely to follow as the new sort of modus operandi or the approach that you're going to take, or if you've opted for a more wait-and-see approach to understand how this first tie-up goes? It sounds like yes from your prepared remarks, but wanted to give you the opportunity to expand on that. Thanks, team. Siva Sivaram Yeah. That's a very good question, Doug. We are a very highly differentiated technology that adds a lot of value to the customer. So, we expect to see a lot of interest in what we are offering. However, the model we are going with, which is a high-touch licensing model, requires that we be very strategic and prudent in our customers. So, there is going to be a level of careful inspection in matching our customers' needs and us. So, we're going to be very, very picky and careful in the way we get to the next deal. Doug Dutton Awesome. Thanks, everyone. Operator Your next question comes from the line of Joe Spak with UBS. Joe, your line is now open. Unidentified Analyst Hi. This is [Gabriel] (ph) on for Joe. Thank you for taking my questions. Kevin, just want to go back on monetization of the PowerCo agreement. I know you can't disclose the specifics, but can you kind of give us a sense of what you'll be charging PowerCo for? Like, is it a percent of the ASP or the COGS of the entire battery cell, or would you only be charging for the materials and costs specifically used for your ceramic separator process? Kevin Hettrich Gabriel, thank you for the question. I have empathy that these are important inputs into your modeling going into the future. I'd just point you back to the contract that we attached to our 8-K in Article 3 of the IP licensing agreement. It does have detail on the royalty rate and there's a section on outperformance sharing. Unfortunately, I won't be going beyond the detail of what we already provided in that contract on this call. Unidentified Analyst Understandable. Appreciate it. Kevin Hettrich One other -- and then, Gabriel, just one thing to add is just that, not providing very specific detail in the contract is customary as it is in the best interest of both parties not to disadvantage ourselves in further negotiation and especially for QuantumScape as this deal could be a template for future such licensing deals. It's also in our shareholders' interest. Unidentified Analyst No, that makes sense. I appreciate it. And just to clarify on the $130 million of prepaid royalties, do you get that immediately and now it's implemented into your cash runway forecast, or are you unable to access it until the technical requirements are met? Kevin Hettrich So, the $130 million initial prepayment of the royalty is contingent on satisfactory technical progress being made. Siva mentioned in his remarks it's things like those B-sample shipments, progress on Cobra, finalization of the final target cell design. To your question, it is an input into our cash runway that now extends into 2028. Unidentified Analyst So, it would be usable as of when you get it? Kevin Hettrich It would be usable as we get it for cash runway purposes. We, of course, reserve the right in our methodology to be as conservative as we can realistically be. We like to issue guidance and achieve it. Unidentified Analyst Great. Thanks. I'll pass it on. Operator Your next question comes from the line of Jordan Levy with Truist Securities. Jordan, your line is now open. Jordan Levy Good afternoon, all, and congratulation again on the deal. Maybe -- you kind of touched around this, but if you could just help us understand a bit more how the work with the joint team at PowerCo and the core QuantumScape team work will differ from what you're already kind of doing on Raptor and Cobra? I guess, not to get too into the details, I'm just not sure I understand kind of the difference between the collaboration work and the work being done as you kind of push manufacturing or commercialization. Siva Sivaram Jordan, thank you. The basic work on QSE-5, that platform is done by us here. That's what the B-sample is, the small-volume production that is starting this year and the larger-volume B-sample that is starting next year. We need to take that and we will agree on a target design and industrialize it to gigawatt scale. That work will be jointly done by a group of experts, approximately 150 people initially that would start working in San Jose. And as that work matures and we begin to transfer to a PowerCo site, we will move from here into the PowerCo site and more and more and more people will join from PowerCo to ramp it up for production. So, the intent here is this word industrialization. The core technology to be made to be compatible with high-volume production in a gigawatt-scale factory. Kevin Hettrich Yeah. And, Jordan, if I could just put a little color around that. In Volkswagen Group and PowerCo, specifically, you have one of the most committed partners to electrification, a large balance sheet, strong leadership. Like what a more fantastic partner to combine with our differentiated solid-state lithium-metal technology and the benefits we'd like to bring to the cell and to the vehicle level in terms of energy density, power and safety. Jordan Levy Totally agree, and appreciate that. Maybe just a quick follow-up. In the prepared remarks, you all talked to on the safety metrics, the possibility to open up some new markets that the current technology is unable to serve effectively. I just wanted to see if there's anything specific you were referring to there, if there's anything of interest. Siva Sivaram Yeah. So, before I go too far, I want to make sure that safety testing is never complete. We will continue to test and these were with prototype samples, and we need to do the same thing with final product and we need to collect a lot more data. Having said that, we have a technology that -- because of the ceramic separator and the solid-state nature of our technology, we are inherently safer. What this does is if you are trying to design a pack or a module, additional heat and thermal suppression precautions that you need to take, you have advantages with our inherently safer device. Now, you think of an application, I'm just using a fairly generic application as a long-haul truck. A long-haul truck carries more than a megawatt hour of batteries in it. Currently, making sure that megawatt hour of trucks can have the safety standards that you want it to have is a very onerous technical problem. The additional safety precautions, the additional engineering, the additional safety technology that needs to be added. We now make that imminently possible. That's the kind of opportunity we are talking about. Of course, in the existing applications, whether it is an automotive or consumer electronics, you can inherently see the value of better safety that it brings it. Jordan Levy Absolutely. Appreciate that. Operator Your next question comes from the line of Jed Dorsheimer with William Blair. Jed, your line is now open. Mark Shooter Hi. This is Mark Shooter on for Jed. You did mention the consumer electronics in the opening remarks and the shareholder letter. I was wondering if you could explain or give any more color on that. Do you see that as a potential green shoot for revenue before an electric vehicle? Kevin Hettrich Mark, I believe the reference was specifically to the Alpha-2 shipments, which went to a number of customers, including those in automotive and consumer electronic sectors. As you can imagine, a differentiated technology that has advantages in safety, power and energy density is very interesting to any application that has a battery in it. That's true of consumer. That's true certainly of automotive. We are very much a automotive-focused company. You see that just in the sheer number of like -- with this release, the deep partnership with VW and PowerCo, that is where our focus lies. That said, we do receive interest from those parties and we do continue to sample into them as -- we think it creates optionality. And on this call, there's nothing to add in terms of the timing of revenue. Mark Shooter Understood. Thanks for the color. And just seeing with all the AI apps coming out and being pushed to on device, I can see that the battery demand on device could have a pretty big pull through from those customers. So, looking forward to any updates in the future. One last one is I know you are focused on the EVs, but in a similar vein, eVTOL company, the electric vehicle -- or sorry, the vertical landing and take-off, do you see that as a potential as well? Are you talking to those customers? Siva Sivaram Clearly, we are in conversations. eVTOLs uniquely have an additional requirement that they require a lot of power during take-off and landing, and they require lot of energy for the range. The uniqueness of our differentiated technology is that we are good with both energy and power. Now having said that, our initial focus is, of course, in the automotive sector, and we have just entered this very big deal with PowerCo. We are watching all of these other additional opportunities very carefully. Kevin Hettrich I'd just add that, aviation is certainly a application that greatly appreciates differentiated safety as well, which plays into the whole system design. And then, just as a passenger on airplanes from time to time, it is nice that they are robustly safe. Mark Shooter Got it. Thank you for -- thanks for the color. Operator Your next question comes from the line of Ben Kallo with Baird. Ben, your line is now open. Ben Kallo Hey, good evening, guys. Congratulations on the PowerCo deal. Maybe just, you touched on trucks and just -- do you guys -- have you guys tested with any trucks, or is that in the plans or any discussions? I think that was the first time I ever heard you guys say trucks. Siva Sivaram Ben, I'm illustrating the differentiated advantages of safety. We often take safety for granted, but for a cell to come back and say that we have thermal stability, checked up to 300 degree C, opens up a lot of new opportunities. Having said that, our focus clearly remains with EV for now. We are working closely with PowerCo. PowerCo, serving Volkswagen, has a very, very broad brand portfolio that includes every segment of the mobility market. So, we are talking closely with PowerCo. Ben Kallo Great. And then, for the remainder of your customers, do you think that this -- or has this changed your discussions with them and their desire to move faster, or is it kind of a wait-and-see approach? I think you touched on this a little bit earlier. And then maybe, what about any new customers approaching you or new potential OEMs approaching you? Siva Sivaram Ben, once we announce the deal, we individually updated every one of our customers, and there is a large and continued interest from our customers. We have also sampled and continuing to sample Alpha-2s to multiple automotive and consumer electronics OEMs, and we take their feedback into how we design and run the B-samples. The interest from our OEM partners has been very, very strong. Having said that, the PowerCo model is a high-touch, intellectual property-intensive transfer of our technology to a customer. So, we are very carefully evaluating every customer's needs so as we can develop a model specific to them with us having the preference of the capital-light approach. Ben Kallo Okay. Thank you very much. Operator That concludes our Q&A session. I will now turn the conference back over to QuantumScape team for closing remarks. Siva Sivaram Thank you for -- with that, I'd like to thank you all for joining us today. We look forward to sharing more on our progress in the coming months. Thank you. Operator This concludes today's conference call. You may now disconnect.

Exponent, Inc. (EXPO) Q2 2024 Earnings Call Transcript

Joni Konstantelos - Investor Relations Catherine Corrigan - President and Chief Executive Officer Rich Schlenker - Executive Vice President and Chief Financial Officer Good afternoon and welcome to the Exponent, Second Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, Managing Director, Riveron Consulting. Please go ahead. Joni Konstantelos Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's second 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 Joanie and thank you everyone for joining us today. I will start off by reviewing our second 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 delivered net income growth of 14% and expanded EBITDA margin in the second quarter, reflecting the results of efforts to align our operating model with market demand. As expected, revenue growth moderated during the quarter due to ongoing headwinds in the consumer electronics and chemical sectors and a tough comparison against 20% growth in our reactive work last year. Despite these challenges, our reactive business delivered mid single digit growth fueled by demand across the transportation, utilities and medical device sectors. Our proactive business continued to experience softness in consumer electronics, partially offset by modest year-over-year growth in the utility sector. Turning to our engagements in more detail in our reactive work, we saw strong demand within transportation related to product liability and regulatory matters. These included evaluating the performance and safety implications of advanced driver assistance technologies and battery systems, as well as railway failure investigations in life sciences. Our team continued to leverage their expertise in engineering, manufacturing, and human factors to understand the root causes of medical device safety concerns. The energy transition continued to be a driver as we advised clients facing infrastructure disputes involving wind, solar, and large scale energy storage during the quarter, we continued to see headwinds in the chemical sector as some clients paused near term litigation work within our proactive services. Engagements in the quarter were driven by our asset integrity work in the utility sector, for example, evaluating ignition risks and mitigations for electrical infrastructure and in transportation evaluating vehicle emissions technologies. While we continue to experience headwinds in the consumer electronics industry related to product life cycle timing and broader industry impacts, we are seeing more signs of stabilization. Our product development consulting activities began to recover modestly in the quarter and were encouraged by an uptick in human subject research engagements. Turning to our segments, exponents engineering and other scientific segments represented 84% of revenues before reimbursements in the second quarter. Revenues before reimbursements in this segment increased 4%, driven by demand for exponent services across the transportation and energy sectors. Exponents environmental and health segment represented 16% of revenues before reimbursements in the second quarter. Revenues before reimbursements in this segment decreased 4% due to ongoing headwinds in the chemical sector. Looking ahead, accelerating transformation across industries will continue to create attractive market opportunities, from groundbreaking technology and data applications in life sciences to renewables and infrastructure resilience in the energy sector, and electrification and automation of transportation. Exponent remains well positioned to support our clients with vital insights for current challenges while preparing the path toward the future. Considering our encouraging performance in the first half of 2024 and the outlook for the remainder of the year, we are raising our full year revenue and margin expectations. Rich will take us through the details of that. However, we still face headwinds in the chemical sector as well as tough comparisons based on unusually strong prior year growth in our reactive services. Over the last several quarters, our incredible team has demonstrated agility in adapting to ongoing dynamics in both our consulting and our talent marketplaces. Going forward, we will continue to leverage and build upon our diversified portfolio of talent and capabilities as we flex to meet market demands. I'll now turn the call over to rich to provide more detail on our second quarter results as well as discuss our outlook for the second for the third 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 second quarter of 2024, total revenues were approximately flat at $140.5 million and revenues before reimbursements or net revenues as I will refer to them from here on, increased 2% to $132.4 million as compared to the same period in 2023. Net income for the second quarter increased to $29.2 million or $0.57 per diluted share as compared to $25.7 million or $0.50 per diluted share in the prior year period. The realized tax benefit associated with accounting for share based awards in the second quarter of 2024 was $700,000 or $0.01 per diluted share as compared to an immaterial impact in the second quarter of 2023. Inclusive of the tax benefit for share based awards exponents consolidated tax rate was 26.3% in the second quarter of '24 as compared to 29% for the same period in 2023. EBITDA for the quarter increased 8% to $39.9 million, producing a margin of 30.2% of net revenues as compared to $36.8 million or 28.4% 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 second quarter of 2024. Billable hours in the second quarter were approximately 381,000, a decrease of 2% year-over-year. This decrease was primarily related to the year-over-year decline in machine learning data studies for consumer electronics clients. The average technical full time equivalent employees in the second quarter were 975, which is a decrease of 9% as compared to one year ago. As we have strategically aligned our resources with demand over the past year, utilization in the second quarter was 75%, up from 69% in the same period of 2023. As Catherine mentioned, our efforts to align our operating model to the market demand while also selectively expanding our capabilities drove utilization back to historical norms. The realized rate increase was approximately 4% for the second quarter as compared to the same period a year ago. In the second quarter, after adjusting for gains and losses in deferred compensation expense, compensation was approximately flat. Included in total compensation expense is a deferred compensation gain of $875,000 as compared to a gain of $4.1 million in the same period of 2023. As a reminder, gains and losses and deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock based compensation expense in the second quarter was $5.6 million as compared to $5.2 million in the prior year period. Other operating expenses in the second quarter were up 9% to $11.2 million, driven primarily by increased engagement at our offices and investment in our corporate infrastructure. Included in other operating expenses is depreciation and amortization. Expense of $2.5 million for the second quarter. G&A expenses declined 9% to $6 million for the second quarter. This decrease was primarily due to decrease in travel and meals and bad debt expense. Interest income increased to $2.2 million for the second quarter, driven by an increase in interest rates. Miscellaneous income, excluding the deferred compensation gain, was approximately 800,000 in the second quarter. During the quarter, capital expenditures were $1.1 million and we distributed $14.2 million to shareholders through dividend payments. Turning to our outlook for the third quarter, 2024 as compared to one year prior, we expect revenues before reimbursements to be approximately flat in EBITDA to be 26.75% to 27.5% of revenues before reimbursements. As Kathryn mentioned, we are raising our revenue and margin expectations for the full year 2024. For fiscal year 2024, we expect revenues before reimbursement to grow in the low to mid single digits and EBITDA to be 27.5% to 28% of revenues before reimbursements as compared to 27.7% for fiscal 2023. Both our current and previous guidance are inclusive of the extra week in the fourth quarter, which occurs approximately every sixth year, which is estimated to contribute an additional 5% to net revenues in the fourth quarter or 1.25% for the year. We expect sequential revenue -- sequential growth in headcount by the end of the third quarter. The average technical full-time equivalent employees in the third quarter of 2024 will be approximately 1% less than in the second quarter. As a result, average FTEs for the third quarter will be down approximately 8% year-over-year. We expect headcount to grow sequentially in the fourth quarter, and year-over-year average FTEs in the fourth quarter to be down 4% to 5% on a year-over-year basis. We expect utilization in the third quarter to be 71% to 73% as compared to 70% in the same quarter last year. We expect the full year utilization to be 70.5% to 72.5% as compared to 69% in '23. 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 demands. We expect the 2024 year-over-year realized rate increase to be 4% to 4.5% for the third quarter and full year. For the third quarter, we expect stock-based compensation to be $5.2 million to $5.5 million. For the full year, we expect stock-based compensation to be $23 million to $23.5 million. For the third quarter, we expect other operating expenses to be $12.5 million to $13 million. For the full year, we expect other operating expenses to be $46.75 million to $47.75 million. It should be noted that on June 19, 2024, we exercised an option to early extend the lease for our testing and engineering center in Phoenix, Arizona. Although our current lease doesn't expire until 2028, we wanted to lock in the pricing at this time. Although we will not pay any higher rent until 2028, the lease accounting rules require us to recalculate the rent expense for the length of the new lease period. This resulted in an immediate increase in our noncash rent expense of $150,000 during the second quarter and an increase of $1.1 million during each of the third and fourth quarters. We are very excited to secure this facility as we believe it will continue to be an integral part of our growth. For the third quarter, we expect G&A expenses to be $5.5 million to $6 million. For the full year 2024, we expect G&A expenses to be $23.5 million to $24.5 million. We expect interest income to be $2 million to $2.5 million per quarter for the remainder of 2024. In addition, we anticipate miscellaneous income to be approximately $500,000 to $600,000 for the third quarter of 2024 and $100,000 to $200,000 in the fourth quarter. This includes an expected sequential decrease in rental income in the third and fourth quarters due to the loss of a tenant in our Menlo Park building, which we own. For the remainder of 2024, we do not anticipate any additional tax benefit associated with share-based awards. For the third quarter of 2024, we expect our tax rate to be approximately 28% as a 27.9% in the same quarter one year ago. For the full year 2024, the tax rate is expected to be 26.7 to 26.9% as compared to 25.1% 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 expanded profitability this quarter and remain focused on growing and maintaining the balance between our operating model and market demand. I will now turn the call back to Catherine for closing remarks. Catherine Corrigan Thank you, Rich. Excellent variety that abounds in products, technologies and regulations. In this environment of relentless innovation and safety-critical applications, we are focused on fueling the growth engines of the future through expanded capabilities, recruitment of top talent and development of our exceptional team. Looking forward, we will maintain our strategic position in cutting edge of innovation, and remains steadfast in our ability to deliver sustained profitability and long-term shareholder value. The first question comes from Andrew Nicholas with William Blair. Please go ahead. Andrew Nicholas Hi. Good afternoon. Thank you for taking my questions. I wanted to first ask about kind of the second half outlook. It looks like you're expecting maybe a bit better growth than we had thought previously in the third and fourth quarter. And I'm just wondering what's driving that. Is it specific momentum and any specific is some increased optimism on the consumer product side? Is it increased visibility in conditions? Just any more color on what gives you more conviction in growth in the back half of the year, that would be great. Catherine Corrigan Yes. Yes. Thank you, Andrew. I'll start and Rich can, of course, add on here. But thinking about the electronics side, that is certainly part of the equation here. We're very pleased to have seen sequential improvements in the last -- really in Q1 and Q2 around our user research work and our machine learning data studies in electronics. We continue to be in close conversations with those -- with that client group and talking to them a lot about what the back half of the year looks like. We're getting some more visibility into Q3. We're seeing signs of that sort of continuing trend of some sequential improvement. And on the other side of the house in electronics, that's more of the hardware related work and the product development consulting work. And this is another area where we've seen some upticks, some modest sort of improvement there. And so there is -- there are good signals coming from that side of the market. And so we're pleased with that. And that's certainly part of the equation. We are encouraged by the general outlook on the market drivers as well in our reactive business, when you look at the work we're doing in advanced driver assistance technologies. And other areas of automation and electrification and transportation and work around wearables that we're doing as well. This has given us some encouragement, I would say, as we look into the back half of the year. Richard Schlenker Yes. I would just add, we clearly knew that, yes, there were some areas that we needed to work through relative to consumer electronics and still some headwinds in chemicals. But the biggest thing that we had a real question of trying to forecast is how strong we would -- where we would end up being able to come out relative to a really exceptional growth rate that we had last year in the reactive business. Something we've been doing for 57, 58 years here now 57 years, I guess. And -- to be able to last year, the second quarter having reactive growth that was 20%. The third quarter being even higher than that into the low 20s and continuing to be in the high teens even in the fourth quarter. The fact that we realized that we had some plethora of good-sized jobs during that period of time and where -- what was that to mean for going forward. And I think we're very encouraged by the fact that we were able to grow on a year-over-year basis here in that area in the second quarter, not modest. We don't even 6% growth there. We want to see it be better and but -- and we realized that the overall guidance performance of 2% net revenues in Q2 and flat in Q3 are not inspiring on the surface. But when you look at the market that we're in and the growth we've been getting over the last several. Last year's growth was not over negative circumstances the prior year. That had strong growth, too. So we're just very -- there's always timing. We're a public company. We know we're held accountable to the quarters. But the underlying demand that this is demonstrating is encouraging for the long term. We've got to work through these periods. But I think long term, we're very encouraged. Andrew Nicholas Very helpful. And then maybe as a follow-up to that commentary, if you could just talk to us a little bit about headcount and ambitions on the hiring front. It certainly seems like things are turning around and improving enough to want to lean back into headcount growth. If you could just talk about whether or not that aligns with how you're thinking about it or if you're hesitant to do that, absent maybe a multi-quarter, I would appreciate it. Catherine Corrigan Yes. Thanks, Andrew. So we are absolutely in recruiting mode. But it is strategic based on the areas of the market where we see the key growth opportunities. And this has always been our philosophy, as you know, that we target our recruiting in those areas because it's those individuals as they develop, two true engines of growth for the future. And so we're getting through some of the ripples in head count, and we've been able to balance that to get our utilization back where we would like it to be, and we are hiring. We are coming into the fall recruiting season at the universities. That is a really important time of year for us, not the only time of year that we hire new PhDs, but it's a really important one. And so we are already those engines are running and we are interviewing in those key areas, vehicle automation and batteries and sensor technology. And over on the health side, toxicologists and epidemiologists, these are all areas of disciplines where we need those growth engines. So for sure, we are in that mode. Richard Schlenker Yes. I think it's always -- you got to turn it back around. It's recruiting PhDs and that is a longer game. And we didn't let up on that, keeping our market recognition and doing those things. But it's there, that was there. I just -- it's important for all to remember. We got ourselves into it. But the last year, in the second quarter, headcount growth year-over-year in Q2 of 2023 was 15%. And yes, that came from low turnover and high acceptance rates and lots of other things, but we were there. We did need to gradually make an adjustment to that, which we've tried to do in a prudent way as Catherine described, in the performance management and moderating recruiting. But that led to, I think, a really sort of healthy place that we are now where we came down 9% off of that. But we didn't take it all back. We are -- and I think with that 75% utilization in the second quarter, which is slightly better than first quarter when you adjust for holidays and vacations. There's more holidays and vacations in the second quarter than first and then it takes another a couple of points step down in the third quarter and then again in the fourth because of the timing of holidays, admissions but the equal utilization in Q2 means it's a slight tick up in utilization. Now that came because the head count was slightly down. But overall, I think it's getting into a good balance and gives ourselves a position where our business units can be more comfortable leaning into the recruiting and hiring process. The next question is from Josh Chan with UBS. Please go ahead. Joshua Chan Hi, good afternoon. Thanks for taking my questions. Maybe on the headcount topic, -- how do you feel like your Q4 projected exit rate will position you for any growth that you expect in 2025? I guess you're exiting the year possibly in low 70s utilization already. So just kind of curious how you're thinking about head count versus growth going into next year again. Richard Schlenker Yes. First of all, I'll address the utilization part of that because, obviously, you're trying to keep that model. I think what we're expecting is utilizations that are, give or take, around what we're guiding here in the third quarter. Adjusted for what we have in additional vacations and holidays that occur in the fourth quarter. That's what we would expect. And yes, it's lower, but it's because only of that a judge. So we're not -- we're expecting that. Secondly, on the exit, I would expect us to be, again, having momentum moving in the sequential growth area. We'll have to see where that's progressing, how far we've gotten along on that and where we are in our 2025 planning that we'll do this where it's just going to get started on here this fall about where we are because we've still got a lap within Q2 that have stepped down. And based on those sequential step downs at this time, I'm not prepared to predict that it will -- where it will be relative to -- it will still be a little bit down year-over-year early in the year because of still trying to catch up or will we have brought that even or up. I think we need a few more months to be able to see what we've got lined up to come out of the year and what we've got lined up for early acceptances into 2025, and we probably won't have that until we get into the fourth quarter. Joshua Chan Perfect. And maybe my second question is on the Q3 growth guidance. Is there any reason why growth slows down in Q3 versus Q2? I know that you mentioned the reactive comp gets a little tougher, but I wonder if there's any other reasons behind the slightly more moderate growth in Q3 than. Richard Schlenker Yes. It really is about -- well, first of all, I think it is two things. One, it is the comp comparison here. If you -- if you look at what we did, I talked about the fact that Q3's growth rate in reactive business was in the low 20s -- growth rate a year ago in the third quarter versus 2022 -- there. And overall, as a company, we grew 10%, including the fact that we had a 5% drop in consumer electronics as an overall business. So that area had a negative 5%. So ex consumer electronics a year ago, we had that sort of 15%. So very strong, a lot of litigation stuff, a lot of other activity were very, very strong in that period. So those comparisons -- in addition to that, we do have a few good projects that we had in a couple of areas in the second quarter that are stepping down in the third quarter. And so we have a little bit of headwind, a little bit of step off of those activities, and we've accounted for that we provided as well. [Operator Instructions] The next question is from Tobey Sommer with Truist. Please go ahead. Tobey Sommer Thanks. I was interested in getting your updated perspective on AI-related projects, maybe how often that is coming up in your new business and how it might compare to 2, 3, 4 quarters ago, if it's increasing or decreasing. What expectation is for the relevance of that as a topic and driver for your business? Catherine Corrigan Yes. Thanks, Toby. So we continue to see AI coming in, in different ways. We've talked about some of these before. One is our traditional failure analysis work, but oriented toward a system that is making decisions using artificial intelligence. So this is our advanced driver assistance technologies and transportation. That is an area that continues to grow as the questions of whether you equipped your vehicle with that transition into even more complex question of did your vehicle systems perform properly now that they had it. And we're seeing early signs of encouraging trends around testing in that area. We have been developing some very novel test methodologies that are drawing business around the litigation side for that. And this is part of our investment in our Phoenix facility that Rich mentioned. So we're seeing it there. We're still fairly early in the curve around the medical device side of questions around AI in terms of the reactive business. But that is, I think, coming. This is the wearable that is -- or the glucose monitoring system or what have you, that is making decisions about health-related aspects using an artificial intelligence algorithm. There are also places where we are seeing more and more opportunities to leverage machine learning in the way that we solve problems for clients. So they come to us with a question about the durability of their packaging during shipping, and we can use machine learning to take massive amounts of data about the exposure of that packaging during its journey and make decisions about what testing that packaging needs to be exposed to in order to be robust in that application. So creating great efficiencies for our clients. So we're using the tools and developing the tools to answer the questions. And then there are also, of course, just the fundamental questions about the algorithms themselves. And software as a medical device and areas like that. So still relatively early days on some of those more proactive areas, but I am encouraged by the continued development of our capabilities and our increasing use of machine learning in our applications to solve problems. Richard Schlenker Yes. I think one other -- one or two other things to add on there. I really think that the real questions that are coming back and increasingly coming back around our studies are really about help us benchmark and understand how our health applications algorithms are and applications are performing versus a medical device or versus a gold standard in what they're doing. And what we need to do, what the client we can do to help the client in gathering enough data in the training and doing it. So benchmark and then augment so that you can continue to get that improvement out of it. Is it improved the hardware and the sensor? Or is it improved the algorithm, machine learning tool that you're doing there. So that's a big area. And the other one, and we've been deep in that one in multiple clients, multiple applications. The other one is really as our clients in the utility sector are building and relying upon risk models here to make decisions about the reliability and the decision of when to shut power off in their systems in extreme weather events. And what is happening is we're able to gather with -- help them in validating the data and the algorithms here so that they can build more robust and reliable decision models in that environment. Tobey Sommer In your conversations with customers when you're hearing from senior consultants. What are you hearing about any impact that global elections are having? And I guess I cater the question a bit more towards proactive is my assumption, but I'll let you respond because we've already had globally some surprise snap elections with unanticipated outcomes and now we're in the middle of our own relatively new election process. Catherine Corrigan Yes. Thanks, Toby. Certainly, always paying attention to these sorts of things. Historically, the company has not -- there hasn't been a time when we've seen significant swings with administrations changing and things of that nature. Of course, changes of administration around the globe can absolutely have an impact on regulatory frameworks. And -- but we find that they don't change overnight. And we also find that even efforts to perhaps ease on regulation tend to be counterbalanced over time with society's increasing expectations around safety, health and the environment. And we're also able to because of different parts of the portfolio, let's say, there is deep pullback in regulations and there's more building of pipelines. That can increase some of our opportunities on the reactive side around construction disputes, whereas if you're driving more higher bars in regulation, then we get more work around our chemicals area and human exposure and things of that nature. So we've found there to be a balancing aspect and it hasn't been any different so far. But another question -- related question that we're getting asked and absolutely tracking is the potential impact of the Chevron decision by the Supreme Court, the Chevron case in overturning that case, it really empowers regulated entities to challenge some of the regulations based on how they're grounded in science and in engineering. And so look, we haven't seen a step change or anything like that, but we're tracking closely. We're engaged with our clients and wouldn't be surprised to see increasing questions over time about the scientific foundations of these regulations. And when regulations get complicated and there are those kinds of questions and there about health and safety in the environment, we're we'll certainly be well positioned to capitalize on that. But again, no material change in a step function kind of way. Tobey Sommer I appreciate you leading right into Chevron because that's where I was going next. This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.