NV5 Global's net income in the first quarter of 2024 slumped significantly—mainly due to the delays in federal spending associated with negotiations over a continuing federal government funding resolution and integration of the company's two most recent acquisitions. But while the firm hopes to grow its more conventional design services, styling of itself as the "nexus of engineering and technology" seems to be working with its leaders predicting solid profits for the rest of 2024.
The first quarter net income reported by the Hollywood, Fla.-based testing, compliance and design consultant came in at $408,000, on $213.3 million in revenue, compared to $5.9 million on $184.3 million in the same quarter of 2023.
Yet NV5 (NASDAQ-NVEE) says that it expects to record gross profit in the 50% range for the year and earnings before interest, taxes, depreciation and amortization (EBITDA) reaching 17%—levels that other design firms aspire to.
How can it do that? The company has built up its tech-enabled services while acquiring 61 companies in different market sectors, most of them since 2019, according to information on the company website. Through those, NV5 has put together a mix of services that includes many specialized highly technical services with higher margins than those of more traditional infrastructure and building design services.
Among the 61 acquisitions, 10 are testing, inspection and consulting firms and seven are classified as geospatial technology.
The acquisitions were paid for with cash flows, debt and stock offerings. All acquired firms are renamed as part of NV5 Global.
While it still is looking to grow its conventional design work, civil, structural and mechanical design and consulting tend to have a lower profit margin while "driving work for the higher-margin parts of NV5", says Jack Cochran, marketing and investor relations vice president.
The company ranked No. 22 on the ENR Top 500 Design Firms, with $934 million in pro forma 2023 revenue, about $60 million earned outside the U.S.
Christopher Moore, senior analyst at CJS Securities, told the top executives on the NV5 earnings call that "your business model has been certainly evolving over the past couple of years."
So far the changes appear to be working. NV5 performs a lot of work related to data centers and for utilities, some of it related to monitoring and certifications. It has a proprietary algorithm related to some of that work.
About 5% of NV5's revenue comes from software subscriptions, said NV5 Executive Chairman and CEO Dickerson Wright. And the company has recently been beefing up its collection of companies that perform geospatial services. "We are the largest geospatial data analytics firm in the U.S.," says Cochran.
For all its focus on acquisitions, half of NV5's growth over the years has been organic, says Cochran.
High Confidence on Profit
With its markets robust and government funding now in place, the confidence level on profit is high.
"I would hope that we can get close to a 17% margin or so, 17% and change," said Chief Financial Officer Edward Codispoti. "The first quarter was at 13.5%, but I would expect it to be higher."
NV5 foresees that with earnings based on generally accepted accounting principles of $2.87 to $2.93 a share and adjusted earnings per share of over $5, on revenue of about $942 million. Company executives on the conference call last month remarked that they foresee gross profit for 2024 of $112.8 million, compared to $96 million last year.
Responding to an earnings call question about the sustainability of the company's gross margin—the revenue minus the direct cost of earning it without other overall company costs—Wright replied, "I would suspect that, that number, if you say 53%, we expect our margin to be better than that as we go forward" as the company integrates its latest acquisitions. CFO Codispoti concurred.
