NV5 Global, Inc. (NASDAQ:NVEE) Q3 2023 Earnings Call Transcript

NV5 Global, Inc. (NASDAQ:NVEE) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good afternoon, everyone, and thank you for participating in today’s conference call to discuss NV5’s financial results for the third quarter 2023 ended September 30, 2023. Joining us today are Dickerson Wright, Chairman and CEO of NV5; Edward Codispoti, CFO of NV5; Alex Hockman, President and COO of NV5; Ben Heraud, COO of NV5; Kurt Allen, Senior Vice President, Geospatial at NV5; and Richard Tong, Executive Vice President and General Counsel at NV5. I would now like to turn the call over to Richard Tong.

Richard Tong: Thank you, operator. Welcome, everyone, to NV5’s Third Quarter 2023 Earnings Call. Before we proceed, I would like to notify all participants that today’s presentation can be found on ir.nbf.com and remind everyone that today’s discussion contains forward-looking statements about the company’s future business and financial performance. Factors that could cause actual results to differ materially from these statements are included in today’s presentation slides and in our reports on file with the SEC. During this call, GAAP and non-GAAP financial measures will be discussed. A reconciliation between the 2 is available in today’s earnings release and on the company’s website at www.nv5.com. Please note that unless otherwise stated, all references to third quarter 2023 comparisons are being made against the third quarter of 2022.

In this presentation, NV5 has included certain non-GAAP financial measures as defined in Regulation G promigated by the Securities and Exchange Act of 1934 as amended. Non-GAAP financial measures included in this presentation are adjusted earnings per share and adjusted EBITDA. NV5 provides non-GAAP financial measures to supplement GAAP measures as they provide additional insight into NV5’s financial results. However, non-GAAP measures have limitations as analytical tools and should not be considered in isolation and are not in accordance or a substitute for GAAP. In addition, other companies may define non-GAAP measures differently, which limits the ability of investors to compare non-GAAP measures of NV5 to those used by peer companies. A webcast replay of this call and its accompanying presentation are also available via the link provided in today’s news release and on the Investors section of the company’s website.

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You may also find today’s presentation, which will be referenced during this call on the Investors section of the company’s website. We will begin the call with comments from Dickerson Wright, Chairman and CEO of NV5, before turning the call over to Edward Codispoti, Chief Financial Officer, for a review of the third quarter 2023 results. Dickerson Wright will then provide closing comments before we open the call for all your questions. Dickerson, please go ahead.

Dickerson Wright: Thank you, Richard, and thanks to everyone for joining us for today’s call. The third quarter results exceeded analyst consensus. Due to the timing of acquisitions and project delays, our full year forecast may vary from original guidance. The results consisted of organic growth from our existing business despite headwinds caused by interest rates to our construction and transaction real estate service lines. These 2 service lines delivered negative growth in revenue and EBITDA for the market although we have begun to see improvement in these factors. Last quarter, I spoke concerning 2 initiatives to promote further organic growth in our core business markets, particularly transportation and water resources.

Perhaps an update from then to now. We have strengthened our recruiting organization to fill project needs and to train our people on all service lines of NV5. Let’s now turn to Slide 5, where we will discuss our accomplishments for the third quarter of 2023 and to discuss our growth momentum for 2024. NV5 grew 17% in quarter #3 of ’23 over quarter 3 of 2022. This growth was comprised by a combination of organic growth and growth from earlier acquisitions. These specific areas of growth include geospatial despite some federal project delays in 2024, and also our Buildings and Technology sector growth was driven by clean energy, data centers and audio visual support for international and domestic projects. Infrastructure overpaying degradation and interest rate-sensitive businesses and has driven our recent growth with contributions of our growth initiatives through project wins.

Let’s now turn to Slide 6, where we will highlight our Building and Technology accomplishments and opportunities. International mission-critical opportunities continue to grow, and we had a total growth of 44% and 12% organic growth in the service line in Q3 this year over Q3 of ’22. This continues to be driven by increased demand for our cloud access for smartphones. We anticipate the acquisition of Red Technologies will further extend our growth. We are seeing Clean Energy and Technology services as well as international design projects. [indiscernible] is responsible for our buildings and technology growth in our international businesses. I would now like to ask them a few questions. And the international group has really been growing organically.

What is growth. As we will mention in a moment, we recently did an acquisition in Singapore of Red Technologies and tell us what they are doing?

Edward Codispoti: Thanks, Dickerson. There’s a number of factors which are driving our international growth. Firstly, we’re a premier service provider in the mission-critical data center space, which is seeing huge growth right now. We work with an impressive portfolio of well-known companies in this sector and as they grow, so do we. This includes expansion into new geographies, most recently, Japan and South Korea. It’s also worth noting our domestic mission-critical team continues to gain good traction with several large project wins. This team works closely with our international group to leverage technical expertise and client relationships. We also have a very strong reputation in the casino and hospitality sector, reopening of the tourism sector post COVID is driving a lot of spending in this area, which we’re well poised to capitalize on.

For example, earlier this year, Macau renewed the gaming licenses for major casino operators, and we are now being awarded new design projects as they ramp up investment in their properties. Red Technologies have integrated very well with our existing operations. They bring on an entirely new client base being upstream and downstream of our current services positions us well for cross-selling. We were recently awarded a project with a major insurance provider in Singapore, which incorporates all of our services. The IT support services are a source of reoccurring revenue, and we’re actively bringing this to our existing client base.

Dickerson Wright: Thanks, Ben. That’s very helpful. Another question here in the States and internationally, the Acoustics and Audiovisual group has had a very good year for organic growth and profitability. Can you tell us about their client base and focus.

Edward Codispoti: Absolutely. Audiovisual is the primary service of the Technology and EcoSys Group. In addition to AV, we also provide services in IT, Building Security, Lighting and Acoustics. For these services, we’re a market leader in higher education and have done over 1,400 projects for 400 different campuses in North America. 12 months ago, we acquired KMK [indiscernible] in hospitality and gaming. This aligns nicely with our design and commissioning groups and our revenue in this sector has grown significantly since. We’ve also broadened our core services within the group to include site lighting design and we were recently awarded our largest lighting project ever. We have a focus on diversifying the sectors we work in and have landed some large federal government projects, including new headquarter buildings for the Cybersecurity and Infrastructure Security Agency and the Immigration and Customs Enforcement both under the Department of Homeland Security.

Dickerson Wright: Thanks, Ben. Why don’t we now go to Slide 7 in our presentation deck and we can see a little more graphic highlights of Red Technologies acquisition at Penwest speaking of. So of those 3 attractive features that position us for cellular commercial expansion in Southeast Asia, reoccurring revenue due to ongoing maintenance of existing data centers and also the expanded footprint as part of NV5 and the adoption of technology in the region. Let’s now give an update on our infrastructure and utility service lines. Please turn to Slide 8. Overall, our Infrastructure Group had a very good third quarter in key geographic areas of North America. New York, a very important part of our infrastructure growth grew 14% organically in quarter 3, first quarter of ’22.

We had a 7% organic growth in California, Oregon, Washington, Idaho and New Mexico. Turning to our utility businesses, which you’ll see on the right side of the page, 21% organic growth in our utility services including substation and grid optimization. Our LNG business grew 33% organically over Q3 ’22 as well. We have also continued to replace subcontract work with our personnel based in North America as well as India and Malaysia. We continue to face headwinds in our construction quality assurance group, but we have recent improvement in this sector. Alex Hockman leads our infrastructure and utility services group. I would like to ask him a few questions to provide an update for all of us. Alex, has the interest rate increase had a detrimental effect on infrastructure work.

Alexander Hockman: Thank you, Dick. Our infrastructure end markets, including design, project management and inspection have not been impacted by interest rates. However, we have seen some regional impacts in services that are primarily focused on our private sector development. We have previously discussed the downturn state transaction services and the impact to some of our municipal outsourcing services. For example, comparing real estate transaction services, our 2022 revenue for the 9 months through September was approximately $57 million, while in 2023 the revenue was $37.7 million. Corresponding EBITDA was 10.6% versus $5.6 million. Also noteworthy is how the division adapted to the reality of higher interest rates since the Q1 EBITDA margin was 10.2%, and we have expanded margins almost 15% on a year-to-date basis.

Dickerson Wright: Thanks, Alex. Very helpful. I know in this market, you need to be creative and adaptive. So what are some of the new opportunities and growth areas that you see in infrastructure? .

Alexander Hockman: The transportation and utility end markets are very well positioned for growth. We are seeing an increase in proposal requests and awards for roadway and bridge design and inspections throughout our infrastructure offices. We are also seeing significant proposal opportunities in water, resiliency, [indiscernible] Harbor Group is poised to grow organically with opportunities in all aspects of power delivery. One project of interest is an approximately 40-month alignment of high-voltage overhead transmission lines in the Pacific Northwest. This type of project is an example of what is required to strengthen our grid and avoid power disruption and expand the infrastructure for green energy initiatives. The design involves multiple NV5 disciplines, including geotechnical, environmental, geospatial, survey and our civil and electrical engineering divisions.

Dickerson Wright: Let’s now move to our geospatial service line for an update. So we’ll start by going to Slide 9. We’re expecting a very good year from geospatials. As you can see, year-to-date total growth has been 69% over last year. Organic growth was 7%. Our recent acquisition of Axim gives us greater access to federal projects and L3Harris Geospatial acquisition provides a reoccurring revenue base for geospatial software. Both acquisitions grew 8% over the previous quarter and bookings and backlog are growing. Kurt Allen is responsible for sales for all of our geospatial services. Let’s ask him for an update. Kurt, we recently made 2 acquisitions in the geospatial space Axim Geospatial and L3Harris Geospatial businesses. You have been very involved in the integration of the entire geospatial sales organization, particularly with our recent acquisitions. How have you combined our federal and commercial sales organizations? .

Kurt Allen: Yes. In fact, the sales integration of both Axim and L3Harris Visual Information Systems Group or VIS for short, with NV5 geospatial core group is now almost complete, and it will be finalized by year-end. Organizationally, we are operating as one unit with the sales teams working together to cross-sell when possible and leverage our combined client base to upsell software or services. I say almost complete because integrating our CRM does take some time. But even with that, we expect that capability to go live during Q1 of next year. From a sales reporting perspective, the geospatial vertical is divided into 4 sub verticals. Those sub verticals are defense and intelligence, federal and civilian, state and regional and commercial.

We also have 2 cross-functional disciplines that sell into each of those 4 sub verticals that are tracked separately. They are hydrospatial and software. Additionally, with regards to all geospatial, we’ll be branding as one NV5 starting on January 1. So we’re moving into the new year in good shape, one team, one brand. I thought I’d also take a minute to discuss Axim and how they fit into the core NV5 Geospatial group. Axim brings us a hugely expanded capability within the defense and intelligence market. This means access to clients we have been unable to sell to because of the classified nature of the business. In addition, Axim is recognized as a premier enterprise GIS provider adds to our capabilities within this final portion of the life cycle.

With these 2 acquisitions, NV5 probably now has the broadest and deepest geospatial life cycle capabilities in the world.

Dickerson Wright: Thanks, Kurt. Perhaps you can also tell us how the acquisition of L3Harris component has helped introduce a new client base and revenue stream for geospatial services.

Kurt Allen: Sure. The addition of VIS has greatly expanded our ability to provide a wide range of solutions to our existing client base. It also allows us to tap in the NV software ecosystem that VIS has been known for, for the last 46 years. In a nutshell, the MV ecosystem includes more than 500,000 software users worldwide, and the acquisition has now made NV5 the world’s leader in providing advanced imaging software, particularly with respect to imaging spectroscopy and synthetic aperture radar, which is also known as SAR. From a growth perspective, this acquisition has geographically opened up the world for our geospatial vertical by adding 4 offices in Europe and 2 offices in the Asia Pacific region. It has also allowed us to open doors within the geospatial project life cycle, where the core Geospatial group was not as strong.

While Quantum Spatial was a leader in the collection and processing of geospatial data and the development of derived analytics, this enhances our ability to provide proven, developed software and modeling capabilities within the geospatial life cycle. Already, we are seeing the integration of our professional services sales team with our software team bear fruit. For example, we just recently closed an NV informed software booking with a publicly traded mining company. This company wanted to utilize NV to analyze [indiscernible] data for mineral exploration. For VIS this would probably have just been a software sale. Instead, NV5 introduced our services capability to the client and are now also providing a complete solution to optimize their workflow with hyperspectral data.

The revenue to be generated by our professional services group for that transaction is more than 5x [indiscernible]. While this is just one example, it speaks to our growth possibilities within Geospatial with the acquisition of this.

Dickerson Wright: On Slide 10, we get insights into how the overall NV5 business is doing. Our backlog has grown to $833 million, which represents work we plan to do in the coming 12 months of any new awards. The results represent growth year-over-year and quarter-over-quarter. On the right-hand side of the page, you can reference key infrastructure utility services and Geospatial. I would now like to turn the call over to our Chief Financial Officer, Ed Codispoti, to provide an overview. Ed? .

Edward Codispoti: Thank you, Dickerson, and good afternoon, everyone. If you would please turn to Slide 12 of the presentation, I’ll review our third quarter 2023 financial results. Our gross revenues were $239.3 million, compared to $204.1 million in the third quarter of last year. This percent increase in growth was fueled by organic growth and acquisitions, primarily Axim and VIS. Gross profit was $115.4 million compared to $99.9 million in the third quarter of last year, an increase of $15.5 million or 15.5%. The Net income was $13.3 million in the quarter compared to $16.1 million in the third quarter of last year, a decrease of $2.7 million. The decrease in net income was impacted by amortization expense from acquisitions, which increased $3.5 million when compared to the third quarter of last year and interest expense, which increased $2.9 million.

Additionally, our margins this quarter were impacted by the preintegration period of our VIS acquisition and LNG project cycles. Our net income during the quarter also reflects a benefit from income taxes of $2.1 million, which was driven by a larger R&D tax credits and deductions related to stock compensation. As a result, our GAAP diluted earnings per share were $0.86 per share in the third quarter of 2023 compared to $1.05 per share in the third quarter of 2022. This EPS is based on [Technical Difficulty] shares outstanding compared to 15.3 million shares outstanding in the third quarter of last year. Our adjusted EBITDA was $37.8 million compared to $36 million in the third quarter of last year. The increase was impacted by project cycles in our LNG business and by the preintegration period of our VIS acquisition.

Our adjusted earnings per share which exclude the impact of intangible amortization and the acquisition-related costs were $1.51 per share in the third quarter compared to $1.50 per share in the third quarter of last year. On Slide 13, you can see that our cash flows from operations during the third quarter were $19.9 million, seeing a sequential increase in our cash flows during each quarter this year, as we generated $11.3 million of cash from operations in the first quarter, followed by $14.2 million in the second quarter and $19.9 million in the third quarter keeping in mind that we generated $19.9 million of cash from operations in the third quarter despite higher interest rates when compared to the first and second quarters of this year.

As of September 30, 2023, we had $46.4 million of cash on hand, and our net leverage was 1.3x, down slightly from 1.4x last quarter. This net leverage includes the impact of the Axim and VIS acquisitions. We feel confident in the strength of our balance sheet and believe it positions us well for future growth. I’ll now turn it back over to Dickerson for some closing comments.

Dickerson Wright: Thank you, Ed. Let’s go now to Slide 16, and we have updated this slide from last quarter presentation, and you will see some of the initiatives that we’re doing to grow the company even further. Please note along with our 7 previous drivers, we will expand our focus on software revenues will serve as driver #8. We have also expanded our international footprint to capitalize on the growing technology market. Thank you. I would like to now turn the call over to the operator.

Operator: [Operator Instructions]. Our first question will come from Chris Moore with CJS Securities.

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Q&A Session

Christopher Moore: All right. So maybe we could start with the fiscal ’23 guide. Obviously, down a bit from Q2. You talked a little bit about it. Can you maybe talk some more about the drivers there? And was it work that you thought you might get in Q4 that’s not happening or just kind of any further insight there? .

Unidentified Company Representative: Sure, Chris. One thing I can say, it’s not — was not based on our lack of organic growth, which is actually improving, but lot of our growth is based on acquisitions as well. And so we’ve had some acquisitions that we were anticipating to come to fruition much sooner or earlier than the year that have not come. And we’re anticipating that maybe some of those acquisitions could extend over to 2024. The other thing is that we haven’t really lost any backlog or any work. But we’ve had some project delays in our geospatial group, which have federal delays, specifically that were pushed over to the fourth quarter. But so we’ve been very conservative in the guidance. A lot of that was really based on just the timing of project delays and acquisitions that have not come to fruition, but the company has been growing organically.

Christopher Moore: Maybe just in terms of what you’re seeing from utility spending. It looks like I think it slowed down a little bit in Q2. Did that slower pace continue in Q3? Is it picking up? I know typically, it had been low single digits. It was much higher than that for a while. I’m just trying to get a sense as to what you’re seeing.

Dickerson Wright: Well, I’ll let Ed maybe answer that specifically more. But generally, we’ve been — we’ve seen a real growth in our Geospatial business. And the Geospatial is much more capital intensive. So if it’s — I know your question was on utilities, and I wasn’t quite sure if you meant the capital expenditure of our clients or our capital expenditure.

Christopher Moore: Of your clients, yes.

Dickerson Wright: Well, we’ve had some delays, and we’ve seen some recent things, delay in wind farm work. So we have seen the lack of capital there, but there’s been significant improvement in capital on improving the grid, optimizing the grid, modernizing the grid and not so much in capital actually in energy generation. It’s mostly energy delivery. But maybe Ed or Alex may have a specific comment to you on that.

Alexander Hockman: I think you said it very well. We’ve seen a whole slowdown with respect to the win. But in terms of our power distribution and delivery, we’re not seeing any slowdown right now.

Christopher Moore: Maybe just last one [indiscernible] backlog $833 million, roughly what percentage of that is geospatial?

Unidentified Company Representative: Geospatial is around $156 million or so of that portion.

Christopher Moore: Has that changed much over the last year, year-over-year? Is that number much different? .

Unidentified Company Representative: Well, of course, we had the acquisition [indiscernible]– but I think the proportion that you’re seeing now should be representative going forward absent any larger acquisitions that would kind of cause a change in the mix, but I think it’s an expected mix right now as of end of Q3.

Operator: Our next question will come from Rob Brown with Lake Street Capital Markets.

Robert Brown: Just wanted to first talk about gross margins a little bit. I think you talked about some onetime things, but maybe just clarify the dynamics in gross margins. Should those kind of snap back here as those pull through Q3.

Unidentified Company Representative: Yes. I’ll just give a general comment, but I’d like to add this maybe speak specifically on that. The interesting thing to me on gross margins is if you look at our second quarter, we had a higher gross margin, but a lower net — a lower adjusted EBITDA. And it really depends on the one, the mix of the client and then on our percent of completion projects, what we think is completed. One of — we are a very labor-intensive business. And so sometimes our increase in labor or salary increases that people may not match up to the exact timing of our contract acceleration increasing. And so you’ll have some variance in gross margin from month-to-month and quarter-to-quarter. Ed?

Edward Codispoti: Yes. I think with respect to Q3, Rob, the outlier there, as we mentioned in the release is the LNG business, and that’s just timing of contracts. So as we cycle through different contracts, I would expect that those margins would get back to normal over time. But I think Q3 was lower-than-average quarter with respect to margin because of that reason.

Robert Brown: And I know you talked a little bit about Q4, but how do you sort of think about next year in terms of the trends in the business for organic growth. Are some of these headwinds kind of meeting that a little bit in the next year? Or do you feel like this sort of [indiscernible] of next year looks sort of normalized?

Unidentified Company Representative: Well, we are certainly optimistic about the business, and I’ll speak a little bit more of that in the concluding comments. But you’ll notice we have a very strong backlog and we really use our backlog in the budgeting processes, but we’re anticipating a solid, strong, good year in 2024. And I was going to comment on this, and I’ll maybe mention it again in the concluding comments. But I think we all need to look at the credibility of the company. And I’ll just kind of say in general on credibility, we can speak to specifics, but we have never had a losing year in business. We have never had since our inception, we have never had anything that would indicate any kind of a loss. So we want to base that on that credibility.

And for what I see in the backlog and all the indicators that we have used in the past from 2013 when we went public, where we were doing $100 million in revenue to today, year-to-date or year-end, we’re anticipating $864 million in revenue. So all of that growth has come from very limited leverage, always profitability. And so going into 2024, I have to use those same indicators and I’ll speak specifically of those things in our concluding comments, but we have a very strong backlog and we have a switch in stability and revenue because we’re getting more and more portion of our business, reoccurring in revenue, subscription-based revenue, and that tends to be a little more solid. So I’m very encouraged, Rob, about 2024, and we’re entering it with a — entering the year with a really optimistic viewpoint and we expect that 2024 to be a stronger year.

Operator: Our next question comes from Tim Mulrooney with William Blair.

Unidentified Company Representative: Well, welcome, and thank you for following us. We appreciate it.

Timothy Mulrooney: I wanted to ask build on an earlier question on the utility business. We’ve seen some favorable regulatory changes lately in T&D, whether that’s in Texas with the ERCOT reforms or the recent FERC quarter 2023 that will hopefully streamline the interconnection queue. I was just curious, is that helping drive that strong organic growth that you saw in the utility services business in the quarter? Do those dynamics not really impact what you’re doing in utility services?