Bowman Consulting Group Ltd. (NASDAQ:BWMN) Q4 2023 Earnings Call Transcript
Bowman Consulting Group Ltd. (NASDAQ:BWMN) Q4 2023 Earnings Call Transcript March 12, 2024
Bowman Consulting Group Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Drew, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Bowman Consulting Group Fourth Quarter and Full Year 2023 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] Please note that many of the comments made today are considered forward-looking statements under federal securities law. As described in the company’s filings with the SEC these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed and the company is not obliged to publicly update or revise these forward-looking statements.
In addition, on today’s call the company will discuss certain non-GAAP financial information such as adjusted EBITDA, adjusted net income and net service billing. You can find this information together with the reconciliations to the most directly comparable GAAP information in the company’s earnings press release and 8-K filed with the SEC and on the company’s Investor website at investors.bowman.com. Management will deliver prepared remarks after which they will be taking live questions from the published research analysts. Throughout the call attendees on the webcast may post questions from management to answer on the call or in subsequent communications, but there will be no live Q&A from the webcast attendees. Replays of the call will be available on the company’s Investor website.
Mr. Bowman, you may begin your prepared remarks.
Gary Bowman: Thank you, Operator. Good morning. And thank you everyone for joining the Bowman 2023 year-end earnings call. As always, I’m joined this morning by Bruce Labovitz, our Chief Financial Officer. We appreciate everyone taking time to participate. I’m going to start off with a quick update on Bowman then Bruce will discuss our financial results. After that I’ll talk a bit about markets and pipeline before we open the line for questions. This call this morning is our first call after completing six acquisitions since our last earnings release. I want to welcome everyone from CFA, Blankinship, High Mesa, Hess-Rountree, TCE and Speece Lewis. This is a dynamic collection of organizations with highly skilled and motivated professionals who are already making an impact on Bowman.
I also want to welcome everyone else who’s likewise joined us recently on our journey. I’m going to start off by reiterating our belief that the business of Bowman is foundationally solid. The markets we serve are well funded. The need to construct, improve and repair the infrastructure supporting the U.S. built environment remains urgent, demand for the work of qualified engineers and technical professionals exceeds the supply of resources and both our culture and our commitment to professional growth continue to attract and retain top talent. Since 2020, that’s the year preceding our IPO, we’ve grown in an exceptional compounded annual rate of 30%. We’ve completed 29 acquisitions of operating companies since the beginning of 2021, we’ve nearly tripled our staff by adding about 1,500 employees, we’ve diversified and deconcentrated our revenue streams and we’ve expanded geographically by nearly doubling our footprint of offices.
We’re all tremendously proud of these accomplishments and I firmly believe in our team and our approach. However, we’ve not been nor will we always be flawless in the execution of our strategy. The end of 2023 was disappointing. It resulted from what we consider to be a series of miscalculations on our part relating to the integration of multiple cultures, new and unfamiliar clients and expectations around year-end utilization. Put simply, we didn’t achieve the levels of collective productivity at the end of the year that we have historically experienced and relied on for guidance. While we’re chagrined to have missed our forecast by what is in effect a couple of days of earned revenue, we’re no means ashamed of the year we delivered.
Rest assured, as we persevere with our aggressive business strategy, we continually learn, adapt and change courses necessary. We press forward resolute in our commitment to continuous improvement and to delivering growth and shareholder value. Now I’ll turn it over to Bruce.
Bruce Labovitz: Great. Thanks, Gary. Good morning. I’m going to take a few minutes this morning to walk through our financial results and discuss our forecasts for 2024. For the fourth quarter, gross revenue was $93 million, up $17 million or 23% from last year. Net service billing, a non-GAAP financial metric also referred to as net revenue, was $80.5 million, up $14.3 million or 22% from last year. Our net-to-gross ratio, the indicator of how much our revenue -- of our revenue is generated by our workforce as compared to outside sub-consultants, was 86.6% for the fourth quarter, compared to 87.5% last year. That 1 percentage point change is representative of changes in client mix and really isn’t consequential. Gross revenue posted a 6% organic growth rate for the quarter, while net revenue posted a 4% organic growth rate.
The organic growth rates were depressed as compared to prior periods because of comparatively lower productivity throughout the organization at the end of 2023. Gross margin was 50.4% in the fourth quarter. Although down around 180 basis points compared to last year, it’s still within our 50% to 55% range, albeit on the low end. Compared to last year, SG&A expenses rose in the fourth quarter, both nominally by nearly $10 million and as a percentage of both gross and net revenue. This increase in percentage was to be expected as more operations labor was classified as indirect this quarter, again due comparatively reduced productivity at the end of the year. Lower than expected revenue in the quarter resulted in a net loss from operations of $3.7 million.
After other expenses and nearly $5 million R&D related tax accrual, which I’ll address later in my update on Section 174 issues, net loss after tax was $7.7 million for the quarter. Adjusted EBITDA for the quarter was $11.2 million or a 14% margin on net revenue. Add backs are limited to non-cash stock compensation and acquisition-related expenses. This year we closed on 11 acquisitions, with six acquisitions during the fourth quarter. That brought the total post-IPO to 26. During the fourth quarter, we marginally elevated acquisition -- we have marginally elevated acquisition-related expenses due to the volume of closing and the closeout of purchase accounting for 15 acquisitions. For the full year, gross revenue was $346.3 million, up $84.5 million or 32% from last year.
Net service billing was $304 million, up $68.8 million or 29% from last year. Our net-to-gross ratio was 87.8% for the year, compared to 89.9% last year. Again, the 2-percentage-point change is representative of changes in client mix and isn’t consequential. Gross revenue posted a 21% organic growth rate for the year, while net revenue posted an 18% organic growth rate. Both are significant results we intend to build from this year. Gross margin was 50.8% in the year, down around 80 basis points compared to last year and is again within our expected range. For the year, SG&A expenses rose nominally by 45% -- by $45.5 million, excuse me, and as a percentage of both gross and net revenue. The increase in SG&A is principally a result of our growth, but it’s also impacted by additional investments in corporate infrastructure and processes required for our upcoming transition out of emerging growth company status at the end of 2026.
Net loss from operations was $650,000 for the year. After other expenses and the R&D tax accruals, net loss after tax was $6.6 million. In connection with the impact of the full year loss on our three-year cumulative income, we performed an in-depth analysis of the recoverability of our deferred tax assets, most of which are related to R&D tax changes. We were closely with our auditors to conclude, based on multiple forecasted sources of future income, that the recoverability of these deferred tax assets was not impaired and no valuation allowance was warranted. Adjusted EBITDA for the full year was $47 million, up $13 million or 38% compared to last year. While adjusted EBITDA margin on net revenue was up 100 basis points over last year at 15.5%, we are disappointed not to have made more progress toward our stabilized long-term goal of high-teens margins.
Backlog at year-end was $306 million, up $63 million from last year and up $8.5 million from the end of the third quarter. Year-end backlog revenue was 55% building infrastructure, 24% transportation, 17% power, utilities and energy, 4% emerging markets, including water, mining, and environmental. Backlog is accreted both from new orders and through acquisition and is worked on by resources throughout the company. Our efforts towards revenue diversification continued this year, with building infrastructure decreasing from 65% of gross revenue last year to 56% of gross revenue this year. Transportation increased to 21% from 17%, and power and utilities increased to 19% from 13%. While these changes reduce concentration risk, we don’t expect any meaningful margin changes over time resulting from this evolution in revenue mix.
On the R&D tax front, we continue to monitor legislative developments and notices with respect to the alterations and potential reversal of tax changes enacted under the Tax Cuts and Jobs Act with respect to the deductibility of research and experimental expenditures during the tax year in which they are incurred. This change in tax law has had significant negative cash flow consequences for U.S. companies deemed to be engaging in IRS Code Section 174-related research and experimental investments. As we’ve discussed, we maintain an uncertain tax position related to what we feel are our facts and circumstances relating to IRC Section 174 as altered. In connection with our UTP, recorded in lieu of having made accelerated tax payments associated with the altered tax code, we have $38 million of deferred tax assets and have accrued a $4.8 million tax expense in 2023.
Good news for now is that on January 31, 2024, the U.S. House of Representatives passed the Tax Relief for American Families and Workers Act of 2024, also known as HR 7024 on a bipartisan basis. Along with several other features, this legislation restores U.S. taxpayers’ ability to deduct currently and retroactively domestic research and experimental expenditures paid or incurred in tax years beginning after December 31, 2021 and before January 2026. The bad news is that the Senate doesn’t seem all that anxious to bring the bill up for vote. If HR 7024 is timely adopted by the U.S. Senate and subsequently signed by the President, we would be in a position to reverse our UTP-related liability, tax expense and deferred tax assets. We continue to monitor this situation and remain hopeful that the overwhelmingly stimulative benefits of deductibility of U.S. research and experimental expenditures will be restored and widely available.
At year end, we had $20.7 million of cash on hand and $73 million of net debt. Our leverage ratio of net debt to trailing four quarters of adjusted EBITDA at $47 million was just under 1.6 times and closer to 1.2 times on a forward basis. Approximately $21 million of our net debt is related to capital expenditures financing and approximately $28 million is held by sellers of acquired companies. The remainder is outstanding under our line of credit relating to the cash portion of acquisition consideration and short-term working capital needs. The R&D credit accounting has made the dissection of our cash from operating activities a bit complicated. For 2023, cash from operations pre-working capital includes $4.7 million of accrued tax expenses associated with the UTP, which is embedded in our net loss.
It also includes the addition of roughly $20 million in new deferred R&D tax. In the working capital section of cash from operations, we add back that $24.7 million of deferred tax not paid in the UTP and accrued. This makes the pre- and post-working capital calculations a bit confusing standalone on their own. Our cash from operations was $11.7 million, which was an increase of $2.6 million over last year. As we grow, our net contract assets, a proxy for work in process, increased $7.1 million, which consumed cash but is now consistent with our fears in terms of days of work in process. To the extent we continue to post outsized organic growth rates and continue to be highly acquisitive, we will consume faster than we would -- we will consumer cash faster than we would if we were to severely moderate growth and eliminate acquisitions.
We still believe that at a high-teens adjusted EBITDA margin and normalized organic growth, we would generate a 60% plus cash flow conversion rate. As of December 31, 2023, we had 15.1 million shares issued and outstanding as listed on our balance sheet. This includes 1.7 million of restricted stock units that had been granted but are still vesting, so they remain subject to forfeiture. It’s important to remember that these unvested shares are excluded from basic counts on our income statement. In addition, there were approximately 700,000 performance units which are subject to vesting confirmation over the next two years. These PSUs, along with approximately 385,000 shares that could be converted under outstanding acquisition-related convertible notes, are not included and issued in outstanding share counts.
As of today, there are approximately 15.3 million issued and outstanding. On an adjusted basis, EPS for the quarter was $0.33 basic and $0.31 dilutive, down from $0.44 and $0.41, respectively, last year. For the full year, adjusted basic EPS was $1.12 and adjusted diluted EPS was $1.03, down from $1.46 and $1.36, respectively, last year. Adjusted EPS is a non-GAAP metric that adds back non-reoccurring expenses associated with acquisition, residual non-cash stock compensation associated with IPO grants and other expenses not in the ordinary course of business. We believe adjusted EPS is a more meaningful representation of normalized long-term earnings per share. You can find a reconciliation to GAAP earnings per share in our press release. I’m going to conclude with an update to our 2024 guidance.
We’re increasing our guidance for net revenue to a range of $363 million to $378 million and we’re increasing our adjusted EBITDA guidance to a range of $59 million to $65 million, with a midpoint net revenue margin of 16.7%. These ranges include acquisitions through Speece Lewis and do not contemplate future acquisitions. As we mentioned in yesterday’s press release, the first couple of months post-closing are challenging for an acquired company as they go through the heaviest integration lists. This will often negatively affect revenue in the short-term. While considering the impact of future guide of acquisitions, we recommend that everybody keep in mind that we add a prorated amount of announced annualized net billing based on the timing of closing within the year, increased for what is the equivalent of an additional a few months -- reduced for what is an additional -- one to two additional months of post-billing, excuse me, billing post-closing, depending on the complexity of the integration to account for utilization and revenue disruptions.
With that, I’m going to turn the call back over to Gary.
Gary Bowman: Okay. Thanks, Bruce. I’m now going to take a moment to review our markets, our revenue diversification accomplishments and our vision for 2024 and beyond. We remain committed to our core markets of transportation, power, utilities and energy, building infrastructure, and our other emerging markets, which include mining, water resources and environmental consulting. For the past several years, we’ve relentlessly pursued a deliberate expansion of our scope of services and technical capabilities to gain market share through new relationships, while simultaneously increasing wallet share from existing customers. We’ve accomplished this through both strategic hiring and acquisition. Growing a business such as ours requires continuously adding productive human capital in an efficient manner.
Our assembled group of talented professionals, which continually expands by way of acquisition and subsequent integration to a single operational -- operating organization, is the key ingredient in our ability to deliver exceptional growth and scale. To that end, our acquisition strategy is equally grounded in both expansion of capacity through accumulated of -- accumulation of assembled workforces, as well as the realization of revenue synergies. Once again, building infrastructure was our largest market at just under $195 million or 56% of our revenue. Power and utilities, however, was our fastest growing market, nearly doubling year-over-year. Starting this year, to better describe that market, we will refer to it as power, utilities and energy.
Our transportation business grew an impressive 60% year-over-year and building infrastructure increased 14% year-over-year. These results are consistent with our commitment to revenue diversification and our focus on evolving and well-funded sectors of the infrastructure market. We continue to maintain a well-balanced and diverse customer base, with no one customer representing more than 5% of 2023’s gross contract revenue. Beginning with this call in the 10-K, we’ll file after market today, we’re providing further insight into the distribution of gross contract revenue by sub-market. Over time, these categories will evolve when further dissection is warranted. As you saw on the slide that Bruce presented earlier, we’ve broken out commercial real estate revenue into subcategories of retail, hospitality and quick service restaurants, office and industrial, data centers, healthcare and other.
Within the transportation sector, we’ve broken out revenue based on work for clients who are either public agencies or private developers. In the power, utilities and energy sector, we are reporting revenue from traditional transmission compared to energy transition and renewables. We hope this additional color on revenue will be helpful to investors. During 2023, we were awarded our first Arizona DOT project as a prime contractor and just last week we were awarded a $2.6 million notice to proceed from the Rhode Island DOT to update their design manual. We continue to work on the long-term and large-scale Allegheny Tunnel project with the Pennsylvania Turnpike Authority and we’re expanding our Corridor and Program Management engagements with the Illinois Tollway Authority, IDOT and other.
Almost all IIJ money has been committed to states for transportation investment, but only a small percentage of it has been allocated to specific projects and starts. For example, the State of Illinois alone has nearly -- has approximately $43 -- $35 billion to $40 billion to spend on transportation in the next five years or so. With roughly 20% of all transportation project spending being reversed on pre-construction design, this equates to roughly $8 billion in engineering fees for these projects. As of now, there are simply not enough qualified transportation firms in the state to meet that demand and that’s just one state. We’re focused on expanding our DOT and our transportation and bridge design relationships this year, as demonstrated by our Speece Lewis acquisition in Lincoln, Nebraska.
Our M&A program remains active, with two acquisitions closed so far this year and more anticipated to close between now and the next time we report in May. We remain committed to our communicated strategy of high-frequency, limited-risk acquisitions, which are fully integrated within 12 months of closing. This is not a mere pastime for us, as evidenced by the fact that we have grown our internal acquisition machine over the past two years and now have nearly 20 of our staff dedicated to the overall M&A process, from partner identification to deal negotiation and documentation, to due diligence, to closing and finally to integration. Our primary focus remains on under $30 million annualized net service billing companies. However, we anticipate the average net service billing size will continue to increase this year over the 2023 average of around $6 million.
Our focus is on transportation, power and utilities sectors, along with technology-enabled operations and high resolution imaging and geospatial services. As we discussed on prior calls, we’re committed to being a technology leader in the pure engineering and design industry. We continue to invest in artificial intelligence platforms, advanced machine learning systems, augmented reality applications and GIS mapping to support our customers’ increasing demand for integrated solutions. In one recent customer assignment, for example, we incorporated GIS data to introduce a where variable to machine learning models that learn and process the vast volumes of data resulting in greatly improved efficiencies that benefit both us and our customers.
In our transportation group, we’re using computer vision to assist with asset inspection and condition assessment. This technology helps to identify pavement conditions, illuminate map issues and guide customers in their capital planning. Our geospatial division uses laser scanning and spatial orientation tools to develop Revit models for a wide range of facility developers, who in turn use these building information models to better manage their construction projects. In our water and wastewater practice, we’re utilizing digital twin technology to provide customers real-time information on interactive dashboards and live maps of their systems. We’re also using AI internally where it’s combined with other technologies such as generative design, 3D modeling, data processing and mapping information to generate smart and intelligent data sources that help our designers iterate faster and make the most informed decisions possible.
Digital collaboration enabled by informed technology investment fosters repeat revenue and keeps projects performing on time and on budget. I’ll conclude by reiterating we made a -- we maintain a positive outlook for our markets in 2024. Thank you for participating in today’s call and thank you to all our staff for everything you do for our customers, our shareholders and our communities. Operator, I’ll now turn it back over to you for questions-and-answers.
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