Exponent Inc Q4 2025 Earnings Call Transcript

Exponent Inc (NASDAQ: EXPO) Q4 2025 Earnings Call dated Feb. 05, 2026

Presentation

Operator

Good day and welcome to the Exponent inc fourth quarter and fiscal year twenty twenty five earnings conference call all participants will be in listen only mode should you need assistance please signal a conference specialist by pressing the star key followed by zero after today’s presentation there will be an opportunity to ask questions to ask a question you may press star then one on a touchtone phone to withdraw your question please press star then two please note that this event is being recorded i would now like to turn the conference over to joni konstantelos managing director at riveron please go.

Joni Konstantelos — Managing Director at Riveron

Ahead thank you operator good afternoon ladies and gentlemen thank you for joining us on exponent’s fourth quarter and fiscal year twenty twenty five financial results conference call please note that this call will be simultaneously webcast on the investor relations section of the company’s corporate website at www dot exponent dot 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 doctor kathryn 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 ten 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 doctor Catherine corrigan chief executive officer Catherine thank you joni.

Catherine Corrigan — President, CEO & Director

And thank you everyone for joining us today i will start off by reviewing our fourth quarter and fiscal year twenty twenty five business performance rich will then provide a more detailed review of our financial results and outlook for twenty twenty six and we will then open the call for questions we delivered a strong finish to twenty twenty five reflecting the strength diversification and resilience of our portfolio during the fourth quarter we saw growth in proactive engagements driven by increased demand for user research and consumer electronics along with continued expansion of our risk management work in the utility sector growth in our reactive services was driven by failure analysis and dispute related engagements across a broad range of industries including energy construction transportation and life sciences turning to our engagements in more detail growth in proactive engagements in the fourth quarter reflected continued diversification across a broader mix of clients and and an expanding range of products and technologies in consumer electronics we saw increased demand for user research engagements driven by the need to evaluate product performance and user interaction as artificial intelligence becomes increasingly embedded in both everyday and novel devices we also saw continued growth in risk management and asset integrity services for utilities supported by rising energy demand and increased focus on grid reliability in life sciences engagements increased across regulatory compliance product performance and safety consulting for medical devices as these safety critical technologies continue to become more complex turning to our reactive engagements demand for exponents failure analysis and dispute related services drove growth in the fourth quarter reflecting the essential role our engineers and scientists play when systems do not perform as expected in transportation we saw increased failure analysis work tied to electrification and battery systems in commercial vehicles as customers addressed performance safety and reliability challenges we expanded our failure investigation work in data center infrastructure for example addressing board level cooling and thermal management issues where multidisciplinary teams are required to determine the root cause of failure across the energy sector we continue to see robust demand in dispute related engagements spanning hydroelectric facilities wildfire related losses battery energy storage systems and wind and solar projects exponent continues to benefit from powerful long term market drivers as artificial intelligence and other complex technologies are increasingly incorporated into novel products infrastructure and safety critical systems demand is growing for our science and engineering expertise to support and enhance algorithm performance sensor based systems that demand the highest level of trust are also frequently found in the most challenging disrupted or intermittent connectivity environments creating settings where security and safety are inseparable while ai delivers value by learning and predicting based on historical data many of the most consequential challenges arise in physical systems where edge cases novel conditions and complex interactions fall outside of prior experience exponent thrives at the edge where ai meets the laws of physics in high stakes environments where reliability performance and security cannot be compromised these dynamics underpin sustained long term demand for exponent’s multidisciplinary expertise our teams apply deep capabilities in engineering physics biology chemistry material science cybersecurity human behavior and more to help clients validate and enhance system performance identify risk ensure security at the asset level and apply scientific judgment where complexity and uncertainty exceed the limits of algorithms alone as ai enabled systems are deployed more broadly failures whether at the algorithm or the physical system level are becoming more complex more difficult to diagnose and more consequential determining the root cause of these failures demands rigorous investigation that integrates physical sciences engineering data science and human factors to reconstruct real world conditions and system behavior exponent’s long standing failure analysis expertise uniquely positions us to support clients as they navigate these situations delivering independent science based insight that informs remediation accountability and innovation as artificial intelligence and other complex technologies increasingly intersect with performance and safety critical applications this capability remains a core and differentiating component of the long term value that we provide at the same time we are leveraging artificial intelligence within our operations to add value and support our teams as demand for our expertise continues to grow these tools enable our experts to work more effectively focused on the highest value aspects of their work and deploy their capabilities where they matter most looking ahead exponent continues to benefit from powerful long term market drivers including increasing complexity rapid technological innovation and rising expectations around safety health and the environment as artificial intelligence and other advanced technologies become more deeply embedded in novel products and critical systems clients are facing an expanding set of complex high stakes challenges this environment is driving increasing demand for independent multidisciplinary expertise and is supporting continued diversifications across technologies products and clients as reflected in our results together these dynamics position exponent to deliver rigorous science based insight across the full product life cycle and support long term growth i’ll now turn the call over to rich to provide more detail on our fourth quarter and fiscal year twenty twenty five results as well as discuss our outlook for the first quarter quarter and the full year twenty twenty six

Richard Schlenker — Executive VP, CFO & Corporate Secretary

thank you. Kathryn and good afternoon everyone let me start by saying all comparisons will be on a year over year basis unless otherwise noted i would like to remind everyone that we returned to a thirteen week fourth quarter and a fifty two week fiscal year in twenty twenty five compared to a fiscal year twenty twenty four which included an extra week that occurs every fifth or sixth year the extra week poses a headwind to revenues of approximately seven percent in the fourth quarter and one point three percent to the year for the fourth quarter twenty twenty five total revenues increased eight percent to one hundred forty seven point four million dollars and revenues before reimbursements or net revenues as i will refer to them from here on increased five percent to one hundred and twenty nine point four million dollars as compared to the same period in twenty twenty four so if you adjust for the one week one less week net revenues would have grown in the low double digits net income for the fourth quarter was twenty four point eight million dollars or forty nine cents per diluted share as compared to twenty three point six million dollars or forty six cents per diluted share in the prior year period the realized tax benefit associated with accounting for share based awards in the fourth quarter was ninety nine thousand dollars as compared to five hundred ninety one thousand dollars in the fourth quarter of twenty twenty four inclusive of the tax benefit per share based awards exponent’s consolidated tax rate was twenty seven point four percent in the fourth quarter as compared to twenty four point seven percent for the same period in twenty twenty four ebitda for the quarter was thirty four point seven million producing a margin of twenty six point eight percent of net revenues as compared to thirty one point two million or twenty five point two percent of net.

Revenues in the same period of twenty. Twenty four billable hours in the fourth quarter were approximately three hundred fifty seven thousand a decrease of one percent year over year if you adjust for the one last week billable hours would have been up approximately six percent the average number of technical full time equivalent employees in the fourth quarter was nine hundred ninety two which is an increase of five percent as compared to one year ago this increase was due to our recruiting and retention efforts utilization in the fourth quarter was sixty nine percent up from sixty eight percent in the same period of twenty twenty four the realized rate increase was approximately five percent for the fourth quarter as compared to the same period a year ago this is a result of our premium position in the marketplace unparalleled talent and differentiated interdisciplinary expertise in the fourth quarter compensation expense after adjusting for gains and losses in deferred compensation was approximately flat included in total compensation expense is a gain in deferred compensation of two point seven million as compared to a gain of six hundred twenty nine thousand in the same period of twenty twenty four as a reminder gains in losses and deferred compensation are offset in miscellaneous income and have no impact on the bottom line stock based compensation expense in the fourth quarter was five million dollars as compared to four point nine million dollars in the prior year period other operating expenses in the fourth quarter were up one percent to twelve point six million dollars included in other operating expenses is depreciation and amortization expenses of two point five million dollars g and a expenses increased seventeen percent to six point seven million dollars for the fourth quarter due to an increase in travel and meals associated with business development professional development and increased recruiting activity interest income decreased to one point nine million for the fourth quarter driven by a decrease in cash and lower interest rates miscellaneous income excluding deferred compensation gain was approximately two hundred ninety six thousand for the fourth quarter during the quarter capital expenditures were two point seven million we distributed fourteen point nine million to shareholders through dividend payments and repurchased twenty five point one million dollars of common stock at an average price of seventy dollars fifty seven cents turning to the full year results total revenues increased total revenues and net revenues grew four percent to five hundred eighty two million dollars and five hundred thirty six point eight million dollars respectively as compared to twenty twenty four net income for the year decreased three percent to one hundred six million or two dollars seven cents per diluted share as compared to one hundred nine million or two dollars eleven cents per diluted share in twenty twenty four during the year we realized a negative tax impact associated with accounting for share based awards of two hundred fifty five thousand as compared to a tax benefit of two point eight million dollars in twenty twenty four inclusive of the tax benefit for share based awards exponent’s consolidated tax rate was twenty eight percent for the full year as compared to twenty six percent in twenty twenty four for the year ebitda increased to one hundred and forty eight point one million dollars as compared to one hundred and forty seven point one million during the prior year producing a margin of twenty seven point six percent of net revenues which is a decrease of eighty basis points as compared to twenty twenty four this year over year decrease in margins was expected primarily due to the cost of associated with our managers meeting during twenty twenty five and the renewal of our phoenix land lease in june of twenty twenty four billable hours for twenty twenty five were approximately one million four hundred sixty eight thousand a two percent decrease year over year utilization for the full year was seventy two point five percent down from seventy two point nine percent to in the same period of twenty twenty four average technical full time equivalent employees for the year were nine hundred and seventy three an increase of one percent as compared to twenty twenty four the realized rate increase was approximately five percent for the year compensation expense after adjusting for gains and losses in deferred compensation increased three percent included in total compensation expense is a gain in deferred compensation of seventeen point four million dollars as compared to a gain of fourteen point nine million during twenty twenty four stock based compensation expense in twenty twenty five was twenty three point eight million dollars as compared to twenty three point two million dollars in the prior year other operating expenses were up seven percent to forty nine point five million dollars driven primarily by an increased non cash expense of our phoenix lease renewal included in other operating expenses is depreciation amortization expense of ten point one million dollars g and a were up twelve percent to twenty five point five million dollars in twenty twenty five the increase in g and a expenses was primarily due to an increase in travel and meals related to our in person managers meeting in september which was postponed in twenty twenty four interest income decreased approximately six hundred ninety four thousand to nine point three million dollars for the full year lower interest income was driven by a decrease in cash and lower interest rate miscellaneous income excluding the deferred compensation was approximately eight hundred forty thousand in twenty twenty five moving to our cash flows during twenty twenty five we generated one thirty one point seven million dollars from operations and capital expenditures were nine point four million for the full year we distributed sixty one point five million dollars to shareholders through dividend payments and repurchased ninety seven point eight million dollars of common stock at an average price of seventy two point two two as of year end the company had two hundred twenty one point nine million dollars in cash and cash equivalents turning to our segments exponents engineering and other scientific segment represented eighty five percent of net revenues during the fourth quarter and eighty four percent for the year twenty twenty five net revenues in this segment increased seven percent for the fourth quarter and four percent for the full year driven by proactive services including risk management work for the utility industry as clients addressed energy infrastructure challenges stemming from rising power demands and extreme weather events regulatory support services for medical device clients and user research services for clients in the consumer electronics industry growth during the quarter was also driven by disputes related services for the construction energy and transportation industries as clients rely on exponent in critical high stakes situations exponent’s environmental and health segment represented fifteen percent of net revenues during the fourth quarter and sixteen percent of net revenues during fiscal year twenty twenty five revenues before reimbursements in this segment decreased five percent for the fourth quarter and were approximately flat for the full year the decline during the fourth quarter was primarily due to having one less weak during the fourth quarter of fiscal year twenty twenty five as compared to twenty twenty four turning to the outlook for the first quarter and full year twenty twenty six we expect net revenues for the first quarter and full year twenty twenty six to grow in the high single digits as compared to the same periods in twenty twenty five for the first quarter of twenty twenty six we expect ebitda margin to be twenty seven point five to twenty eight point five percent of net revenues as compared to twenty seven point three percent in the first quarter of twenty twenty five for fiscal year twenty twenty six we expect ebitda margin to be twenty seven point six to twenty eight point one percent and of net revenues as compared to twenty seven point six percent in twenty twenty five we expect increased demand and corresponding recruiting to result in our average technical full time equivalent employees increasing approximately four percent year over year in the first quarter of twenty twenty six and four to five percent for the full year twenty twenty six as compared to twenty twenty five we expect utilization in the first quarter to be seventy five to seventy six percent as compared to seventy five percent in the same quarter in the prior year and we expect the full year utilization to be seventy two point five to seventy three percent as compared to seventy two point five percent in twenty twenty five we still believe our long term target of sustained mid seventies utilization is achievable as we continue to strategically manage headcount and balance utilization with market demand we expect the realized rate increase for the first quarter to be three point five to four percent and for the full year to be three to three point five percent the lower rate realization for the year is based on a historical trend as hiring rates increase for the first quarter we expect stock based compensation to be eight point six to nine million dollars and each of the remaining quarters to be five point five to six point three million dollars for the full year twenty twenty six we expect stock based compensation to be twenty six to twenty six point five million we continue to believe that our stock based compensation program effectively attracts motivates and retains our top talent for the first quarter we expect other operating expenses to be twelve point seven to thirteen point two million for the full year we expect other operating expenses to be fifty three point five to fifty four million dollars for the first quarter we expect g and a expenses to be five point four to five point eight million for the full year twenty twenty six we expect g and a expenses to be twenty seven point one to twenty eight point one million we expect interest income to be one point seven to one point nine million per quarter in twenty twenty six in addition we anticipate miscellaneous income to be approximately three hundred thousand per quarter in twenty twenty six or one point two million dollars for the full year as compared to eight hundred forty thousand in twenty twenty five we expect our first quarter twenty twenty six tax rate to be approximately thirty point four percent as compared to twenty nine point four percent in the same quarter a year ago for the full year twenty twenty six the tax rate is expected to be twenty eight point five percent as compared to twenty seven point nine percent in twenty twenty five capital expenditures for the full year twenty twenty six are expected to be twelve million to fourteen million dollars we remain encouraged by the opportunities across our markets and believe we are well positioned to drive improved growth in twenty twenty six while executing against our long term financial objectives of high single digit to low double digit organic growth and margin expansion i will now turn the call back to kathryn for closing remarks

Catherine Corrigan — President, CEO & Director

thank you rich looking. Ahead we remain encouraged by the enduring market drivers that support exponent’s long term opportunities as the pace of innovation continues to accelerate and systems become more complex expectations for safety reliability and performance will only continue to rise with a differentiated multidisciplinary platform and a proven ability to support clients across both proactive and reactive engagements exponent is well positioned to navigate these trends and deliver sustainable growth and long term value for our shareholders operator we are now ready for questions thank.

Question & Answers

Operator

You we will now begin the question and answer session to ask a question you may press star then one on your touchtone phone if you’re using a speakerphone please pick up your handset before pressing the keys if at any time your question has been addressed and you would like to withdraw your question please press star then two at this time we will pause momentarily to assemble our roster the first question comes from andrew nicholas with william blair please go ahead.

Andrew Nicholas — Analyst, William Blair

Hi good afternoon appreciate you taking my questions i guess first i was hoping you could hone in a little bit more on the consumer electronics piece of your proactive business that was something that has been a little bit more challenged the past couple years i know last quarter you spoke to some early signs of improvement there so any additional commentary on how that business performed in the quarter and maybe what the near term outlook looks like for that business in. Particular

Catherine Corrigan — President, CEO & Director

yeah thanks andrew that particular part of the business is really primarily two pronged we’ve got kind of a hardware product development consulting piece of that and then we’ve got a user research oriented piece of that where we do work around human subject human interaction with novel devices and so one of the things we’re really seeing is an uptick particularly on the user research side a number of these applications and engagements relate to health related products for example they also relate to products that are very novel where artificial intelligence is being delivered via novel form factors so you know you can think of you know traditional screen oriented devices or you can think of things like glasses or headsets or even things that use primarily audio instead of having a screen you know or using a visual input so both the health side as well as the kind of consumer product side is a lot of what was driving that there’s diversification in the product base and there’s also diversification across the client base as more and more there are more and more entrants into this arena of trying to deliver artificial intelligence via these novel hardware platforms.

Andrew Nicholas — Analyst, William Blair

Very helpful thank you and then maybe a question for rich on the guidance specifically i think this quarter second straight quarter of effectively like double digit growth if you adjust for the extra week last year looks like your outlook for utilization in the first quarter is as high as it’s been i think in some time so just curious on overall visibility and the achievability of guidance how you think about some conservatism in there to the extent there is any and maybe areas of upside or downside to. The outlook thank you

Richard Schlenker — Executive VP, CFO & Corporate Secretary

yeah so our business i think what we have good visibility into is these broader market demands and trends that katherine has talked about in her comment and i think we are actually seeing real work come in that are related to ai and novel technologies and continuing to see that the complexity of these issues are increasing as we’ve said before i mean we go out to our business units all the way down to the individuals and as we’re getting forecasts i think our people have good visibility out over six eight weeks a little bit lighter after that but the trends of what we’re seeing are positive as we enter twenty twenty six the reason that we’ve landed on our guidance that we have here of high single digit growth is really as we entered last year we had good headcount growth we had two percent sequential in the first quarter of last year which is very strong it came down a little bit in the second quarter and then we closed out the year strong but we were feeling good about really where we can be in the headcount we’re feeling that that demand is there that’s why we said the utilization will be slightly better than it was a year ago but all those things combined landed us for into that range that we have is there opportunity for upside yeah i think the demand environment is strong out there but at this time this is the best estimate that we have and we’re delivering that with good growth and margin improvement and we’ll take it from there.

Andrew Nicholas — Analyst, William Blair

Makes sense thank you very much.

Operator

The next question comes from tomo sano with jp morgan please. Go ahead

Tomohiko Sano — Analyst, Jp Morgan

hi good afternoon everyone.

Richard Schlenker — Executive VP, CFO & Corporate Secretary

Good. Afternoon to you

Tomohiko Sano — Analyst, Jp Morgan

thank you for taking my questions from management perspectives how would you categorize twenty twenty six compared to twenty twenty five and especially what do you see as the most significant changes or drivers for revenue growth and margin improvement internally and externally please yeah thanks.

Catherine Corrigan — President, CEO & Director

For that tomo clearly we are seeing on a year over year basis some acceleration of growth and of the demand environment that across a broad swath of the business i think that the consumer electronics arena is an important one to call out in this regard you know we saw strength in the fourth quarter we do have you know pretty good outlook into q one that is helping to drive that you know it gets a little a little less clear after that but again with the diversification across the products across clients and form factors and things we do expect in that electronics arena both for user research as well as the hardware side to be part of those drivers especially as ai is being delivered and making decisions in safety critical applications like health related wearables regulated medical devices and and things like that we also see the energy side as a really important driver for twenty twenty six and this was you know this was happening in twenty twenty five to some extent but we believe can continue to strengthen this is around utility related work we mentioned the risk management work that we’re doing that continues to grow and diversify across countries clients the regulatory environment continues to grow the bar continues to go up in terms of that with relationship to grid resilience to extreme weather and things of that nature we’re seeing it on the reactive side in energy too as the demand for power is driving the need for new technologies to be utilized in a lot of these capital projects whether that’s wind whether that’s solar whether that’s fuel cell you’ve got data center operators building their own gas powered plants you have multi year long waiting lists for gas turbines and so the risk issues and the disputes that arise in the building out of those energy systems are a piece of this as well and you know the data center piece we’re doing more and more failure analysis type work whether it’s around the cooling systems whether it’s around the backup battery supply systems you know the performance critical nature of those data centers really means that they need some powerful multidisciplinary expertise to diagnose some of those issues you can go over to the chemical side of the business things like pfas and its effects on human health and the environment are another area where we we expect to continue to increase the increasing demand as the year goes on so that’s a few examples i think electrification and automation and transportation maybe kind of round out that collection of things that we see in twenty twenty six.

Tomohiko Sano — Analyst, Jp Morgan

Thank you kathleen and follow up on ai you already touched in a prepared remarks but i wanted to get your thoughts especially potential risks of commoditization in certain litigation support or investigation services due to automations but also you talk i think is the significant opportunity to leverage ai for new value added offerings and margin improvement could you talk about that more specifically about the litigation support or investigation services the space. Please

Catherine Corrigan — President, CEO & Director

yeah absolutely so you know there are a number of tools clearly with large language models that we have been incorporating into our operations that are allowing our teams to engage with larger and larger data sets in an even more efficient sort of manner you know being able to have an ai application pull the data out of a police report let’s say if you’re reconstructing a vehicle accident you know these are the types of things that can be further automated and we’re seeing more efficiency in that regard and really welcome that you know but what we’re also seeing is as you alluded to in your question the higher value coming out at the other end you know the ability to put a large language model application against an increasingly large data set of complex material which is what we’ve seen happen over time you know when i first started doing litigation work a couple of decades ago you could fit everything in a black three ring binder that was a couple of inches thick and now twenty or twenty five years later you’ve got gigabytes and terabytes of data if you think about that vehicle that’s in that accident the data coming off of all of those sensors create a very complex and large data environment that needs to be analyzed right so while we’re gaining efficiencies at that sort of lower level we’re also unlocking the ability to differentiate ourselves even further because of the complexity and our ability with our phd level talent to be able to break that down and understand in a hypothetical situation if the design were changed would the product have performed better so far our reactive business continues to grow the litigation support piece of the business continues to grow automotive is the place where we’re seeing the most directly ai relevant work in our reactive business and the complexity there with the testing and those sorts of systems is continuing to grow and with our population of phd entry level talent this is different than all of our competitors many of our competitors have lower level talent they’ve invested perhaps in those lower level commodity tasks as an important part of their value proposition that hasn’t been the direction that exponent has taken that’s why we hire phds as our entry level folks people who know how to solve that unstructured problem that edge case so i really do believe that the use of these sorts of tools will make us more efficient and it will unlock even greater value.

Tomohiko Sano — Analyst, Jp Morgan

Thank you very helpful i appreciate it

Catherine Corrigan — President, CEO & Director

you’re. Welcome

Operator

the next question comes from toby sommer with truist please go ahead.

Tobey Sommer — Analyst, Truist

Thank you very much what are your expectations for net headcount growth in twenty six and could you maybe highlight the areas where you expect to add the most in any areas that you may you know expect to have fewer heads throughout. The year

Richard Schlenker — Executive VP, CFO & Corporate Secretary

yeah so our expectation is. That in line with that guidance we would expect that the headcount growth would be somewhere in the net forty to fifty growth and what we’re doing you know you’re going to acquire those over the year that we’d be in that range it could get up as high as sixty but it’s somewhere in that range look the areas of focus and the areas that are seeing the most net growth are really in these growth areas that katherine highlighted earlier every one of our practices is actually recruiting and bringing people in just as part of our natural part of a consulting firm we do have turnover that occurs and as such you’re always looking to bring in new talent those phds that have just done their once never solved before issue that they did their phd thesis in and integrating them into every single one of our practices every year but the areas that we’ll see the growth are in that higher growth will be in that transportation area the energy area battery storage automation cybersecurity and actually into that chemicals area that kathryn mentioned around pfas.

Tobey Sommer — Analyst, Truist

And associated with that headcount that pace of headcount growth is it so much so as to have accompanying negative margin implications or since you revived growth in the not too distant past is that behind us in not necessarily reflective of any requisite margin compression

Richard Schlenker — Executive VP, CFO & Corporate Secretary

yeah our. Expectation is that we are going to have margins be flat or up and that is because we expect to be able to do this level of hiring into the organization based on demand while seeing our utilization be maintained or improved in twenty twenty six.

Tobey Sommer — Analyst, Truist

Appreciate that if i could i appreciated your prepared remarks catherine on ai with the discussion there so clearly it’s also topical i want to just ask another simple question near term and recent actual results do you think ai is a net benefit or drag for the total company’s growth

Catherine Corrigan — President, CEO & Director

yeah. I think it is a net benefit if you think about the failure analysis work around advanced driver assistance technologies and automated vehicles that’s directly driven by artificial intelligence making safety critical decisions the work that i highlighted early in the q and a around the user research in the electronics industry this is all about the data collection and benchmarking and validation for devices that are utilizing ai algorithms to make some kind of decision or have some kind of signal whether it’s to tell you your heart isn’t beating properly or you know lots of other you know what your blood pressure is or so forth and the same on the hardware side and the data center side right ai is directly driving those increases in energy demand which we believe is part of what’s driving our energy sector in its growth and especially on the dispute side but also on the proactive side with the risk management work in utilities so it’s not directly in the project perhaps but it’s a fundamental driver that need for energy in the setting of a crumbling infrastructure

Richard Schlenker — Executive VP, CFO & Corporate Secretary

i mean. Just on that area again we’re seeing it drive through if it is thermal management at the board level or it’s the change in demands that the amount of infrastructure on these racks have they’re all things that fit into exponent’s expertise that we are getting business related to so we’re not seeing a change in demand for the amount of time or something that we’re putting into again processing data or doing it the data sets are growing so much that the clients just want to do more and learn more from it and it’s harder to understand why something made a decision that they are chasing so that’s what we’ve been seeing over twenty twenty five and.

Continued into the fourth quarter

Tobey Sommer — Analyst, Truist

thanks i. Have one follow up based on that at what point in recent history do you think ai started becoming a net contributor to growth i might be asking an impossible second part of this but of the low double digit year over year growth in the quarter x the extra week is there a way to get a sense for how impactful ai factors are in that year over year growth.

Richard Schlenker — Executive VP, CFO & Corporate Secretary

Well yeah i think it’s important to recognize that exponent’s been talking and working on systems that were leveraging the early parts of ai and machine learning and what we’ve been doing over the last decade or so when we were working with the automotive industry and its early days of steering control or braking or whatever may be coming into it to where we are today where we’re all seeing actual robo taxis on the road and doing it so it’s definitely growing it is driving growth in our transportation area and we expect that to continue going forward the same goes around user research back in the day we had clients that were really trying to understand how to make sure that they were developing inclusive products around facial recognition and technology like that and then driving that into other technologies that is where we got into doing user research and such and then much more into its performance in other health or other applications but again been at that for nearly ten years that we’ve been doing it but it’s been growing same goes around what i would say in the utilities industry is we’ve been developing in the risk model area which actually playing into why is that somewhat ai related now of our risk is actually that our clients have choices and some of them have chosen a let’s say at times a less expensive ai type model that isn’t giving them a refined or accurate enough answer for them to rely upon or justify the actions they took took or did not take in situations that are now asking our help in refining those and bringing physics and bringing that higher level of engineering so that we can move ai models to a level of reliability that can be in safety critical environments so all of those things are going on today i think we’ve got a long ways a lot of upward ramp to go probably today somewhere in the mid teens as a percentage of our business is related to ai probably either directly or one step removed not saying all energy stuff or any of that but really things that we can target in that close immediate or near vicinity that relates to that

Tobey Sommer — Analyst, Truist

thank. You very much.

Operator

Again if you have a question please press star then one the next question comes from josh chan with ubs please go ahead hi good.

Joshua Chan — Analyst, Ubs

Afternoon thanks for taking my questions i guess following up on rich’s comment just now i guess have you seen any evidence of clients potentially trying to use ai themselves to solve problems i know in some situations it’s completely impossible but have you seen any evidence of that kind of occurring at your customer base.

Catherine Corrigan — President, CEO & Director

Certainly look our customers are absolutely looking to incorporate ai into to their operations there are situations i mean rich just mentioned one where they’ve on the utility side incorporated those into risk models and have found that ai alone simply is not good enough but we see that in the medical device environment with software as a medical device we get pulled in on the regulatory side of that where they’re to trying trying to get there develop their plan of attack for getting through the fda in terms of approval on that so yes i mean our electronics clients are putting artificial intelligence into all kinds of different form factor devices and they’re asking us for our help in benchmarking and user research so it’s really everywhere we turn there are different levels of confidence that clients have in it some are more sort of skeptical others want to dive right in but they’re coming to us for advice and sort of reality checking if you will in a lot of these applications.

Joshua Chan — Analyst, Ubs

Okay yeah thanks for that color katherine and then maybe just a quick follow up on next year on twenty twenty six is there anything different about how free cash flow will work in twenty six than it worked in twenty five anything to kind of flag there or is that a pretty normal conversion.

Richard Schlenker — Executive VP, CFO & Corporate Secretary

Our. Expectation is that we may be able to improve upon that conversion the area we had sort of a heavy amount of reimbursables there at the end of the year tied in with the studies which made dsos a little bit higher than the average or where we would want to end the year so i would expect that that would naturally and through some efforts we’re making come into more balance so they might be able to bring down dsos by a few days and that will help us move to a steady state and improve area. To improve cash flows going forward

Joshua Chan — Analyst, Ubs

great. Thank you for the color and i appreciate the time.

Richard Schlenker — Executive VP, CFO & Corporate Secretary

Thank you

Operator

the conference. Has now concluded thank you for attending today’s presentation you may now disconnect.