Resources Connection Q1 2024 Earnings Call Transcript

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Provided by Quartr
October 4, 2023

There are 5 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. Conference Call. Currently, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

Operator

At this time, I would like to remind everyone that management will be commenting on results for the Q1 ended August 26, 2023. They will also refer to certain non GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today. Today's press release can be viewed in the Investor Relations section of RGP's website and also filed today with the SEC. Also during this call, management may make forward looking statements regarding plans, initiatives and strategies and the anticipated financial performance of the company.

Operator

Such statements are predictions and actual events or results may differ materially. Please see the Risk Factors section in RGP's UP's report on Form 10 ks for the year ended May 27, 2023 for a discussion of risks, uncertainties and other factors that may cause the company's business results of operations and financial condition to differ materially from What is expressed or implied by forward looking statements made during this call. I'll now turn the call over to RGP's CEO, Kate Duchene.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thanks for being with us. We delivered solid performance during Q1 despite the continued uncertainty in the macro environment and despite Q1 traditionally being our most seasonally impacted quarter given summer holidays and consultant vacations. On both revenue and SG and A expense, we performed in the stronger half of our guidance range, while also continuing to deliver Strong free cash flow. During Q1, County delivered solid growth over prior year quarter.

Speaker 1

The Northern California market grew sequentially, showing movement in the tech sector after 12 months of a quiet buying environment. Regional performance in the rest of North America reflected the overall choppy operating environment with clients remaining cautious about new spend, while extending current engagements. Our pricing initiative is progressing as planned with over a 2% increase in bill rate in the U. S. Quarter over quarter and 4% in Europe constant currency.

Speaker 1

Turning to our operational metrics, Pipeline remains resilient. Engagement extension showed an uptick from the prior sequential quarter, continuing to demonstrate the stickiness of our consultants within the client environment. In recent weeks, we are seeing numerous new opportunities being added to the gross Pipeline in certain pockets of North America. In Europe, we're growing the pipeline again as 2024 client budgets are being finalized and pent up demand around technology transformation and transaction support are moving to the forefront. The Asia Pacific region, particularly in India and the Philippines, continues to show demand strength from our large global clients as they optimize their offshore service centers.

Speaker 1

In Q2, we're highly focused on revenue capture across all markets. And following the summer holidays, we have seen healthy meeting activity with in person client connectivity on the rise globally. Based on many discussions with clients, we believe patterns are starting to break for the better. 1 of our largest clients reports 10 months of uncertainty is coming to an end. Budget discussions have been renewed with recognition that there's too much pain in the system that needs to be addressed.

Speaker 1

Business resiliency is critical. Many organizations are now reaching out for support to unlock the value of prior technology implementations. For example, we have clients, large and middle market, in need of support implementing additional modules of S4HANA, SAP's modular cloud based ERP. We're also assisting in optimizing performance of previous S4HANA implementations with business process redesign, project and change management, all capabilities in RGP's sweet spot. For such work, clients do not want to hire full time, but rather in source talent to deliver the expertise with flexibility and agility.

Speaker 1

In addition, we see increasing demand for our expert solution offerings, including expansion of global shared services workflows, IT Audit and Compliance as well as Operational Accounting and Finance. In our Financial Services practice, We see increasing needs in regulatory remediation. With these client conversations as the foundation, we're Cautiously optimistic that the buying environment will improve late this calendar year and into 2024. In the near term, we will continue to expand our capabilities and engagement models, agile consulting and managed services. This strategy will improve our ability to weather market cycles and dynamics to react more quickly to varying pockets of need.

Speaker 1

For example, tax and treasury services are non discretionary even in a challenged macro cycle, while PMO services related to a client's market expansion are green lit with improving market cycles. In addition to our core Agilexpert business, we're also extending our total addressable market on both ends of the human capital and consulting Hugo is an engagement channel for an adjacent segment of the F and A market requiring more role based support and lesser scoped in team delivery. Digital Transformation Consulting expands the right side of the continuum with strategy to execution, UX to digital product development. Looking further ahead, our business model is well aligned to the future of work. We support clients in more agile and flexible ways in the areas of finance transformation, operational excellence and digital transformation.

Speaker 1

We have the exceptional talent that clients want and need to execute critical project initiatives. We also know how to attract and retain that talent who is migrating toward our model. As The Wall Street Journal reported 2 weeks The labor crisis is here to stay. Retirement trends, lower birth rates and restrictive immigration policies around skilled talent Suggest no improvement anytime soon. Thus demand for agile talent, experts who can work on project teams and plug critical skill set gaps will increase opportunity for RGP over the long term.

Speaker 1

Increasingly, talent itself is looking to lend its expertise to platforms like RGP, who offer a different compelling career experience. RGP's attractive proposition to this talent is especially apparent In the finance and accounting field, where the profession faces an existential crisis. There are Too few CPAs for market demand with many of them exiting the profession because they do not want the partnership model. RGP provides a career that values their skill set in a more dynamic model built on choice, flexibility and control. Especially given current market conditions, RGP is proud of the strong cash flow that so well reflects the underlying strength of our business As a result, we have a clean balance sheet and no debt.

Speaker 1

We have consistently paid a quarterly dividend for over 10 years with 6 Annual increases during that period. And as much as ever, we're staying disciplined on cost structure to ensure we continue to deliver value to shareholders. Before I hand it over to Jen, I want to leave you with my thoughts on how the new fiscal year will likely progress. We expect the current year's annual revenue trends to reflect the opposite of fiscal 2023, meaning last year the first And 2nd quarters were the strongest, reflecting the continued post pandemic bounce back. This year, we believe the second half of The fiscal year will be stronger given the nature of our solid pipeline and as the economy and buyer sentiment improves.

Speaker 1

As noted in the CFO survey conducted by Duke University's Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta, which was released last week. CFO optimism around revenue, hiring outlook and the economy in general has increased for 2024, which adds to our cautious optimism for this current fiscal year. In closing, I'm pleased to share that Harvard Business Review Published an article last week co authored by me and business strategist, Antonio Nieto Rodriguez, titled Creating a cohesive team for corporate transformation projects. This piece, based on our recent research, Reinforces the benefits of building a blended team to deliver transformation work with the highest impact and most successful outcome. Please visit our website for a link to the article and the insights shared.

Speaker 1

I'll now turn the call over to Jen.

Speaker 2

Thank you, Kate, and good afternoon, everyone. This quarter, our revenue of $170,200,000 and gross margin of 39.4 percent We're both within our outlook range provided in July. While run rate SG and A of $55,500,000 with better than the favorable end of our run rate SG and A outlook. Notwithstanding an uncertain macro environment, We produced solid adjusted EBITDA of $11,500,000 with a 6.8% margin and we continue to generate strong free cash flow. On a same day constant currency basis, revenue declined by 17% year over year as our clients continue to work through challenges in their own business and hold back the pace of investment.

Speaker 2

Regional performance was reflective of the overall environment. North America, specifically in the U. S. Market was most impacted by clients' hesitancy to spend as they manage their earnings through the elevated inflationary and interest rate environment, resulting in a year over year decline of 19% in revenue. Our international business showed resiliency with a modest decline of 4% year over year on a same While many international markets experienced similar macro and client trends as the U.

Speaker 2

S, albeit less severe, We will avoid by growing markets such as Switzerland, India and the Philippines. Operationally, as Kate mentioned earlier, Our growth pipeline remains resilient, illustrating healthy appetite from our clients to execute operational improvements and our strong client retention. However, conversion into engagements remains slower than normal in Q1, driven by more cautious budget planning on the part of our clients. While extensions on existing engagements have been healthy, new opportunities in the pipeline require more persistence and time to close. These opportunities represent real upside for our business as macro conditions improve.

Speaker 2

Gross margin in the quarter was 39.4 Reflecting a heavier mix of business in Europe and Asia Pac, which typically carry higher pay bill ratio compared to North America. Gross margin in the Q1 was also impacted by less favorable leverage of indirect cost of services on lower top line revenue. Next, I will provide an update on our pricing initiative through which we've made good progress raising bill rates across the majority of our regions. Our U. S.

Speaker 2

Average bill rate rose 2% compared to the Q1 of fiscal 2023, and Europe was up 4% on a constant currency basis. However, due to the shift in revenue mix to regions with lower bill and pay rates, enterprise average bill rate for the quarter to $59 from $61 a year ago. Strategic pricing will be a continued point of emphasis and expansion for the rest of fiscal 2024 and beyond. Turning to SG and A. While we always approach cost management with discipline, we have been even more judicious given the current environment.

Speaker 2

Our run rate SG and A expense for the quarter was $55,500,000 more favorable than our outlook range. We continue to identify opportunities to streamline our cost structure, including aligning resource levels to the demand environment, Reducing travel, occupancy costs and other discretionary spend. Earlier this week, we commenced a reduction $10,000,000 to $12,000,000 of reduction in our annual SG and A run rate. Turning to liquidity. We are proud of our ability To continue to generate robust free cash flow despite the macro environment, which came in at $81,000,000 or 130 percent of EBITDA over the last 12 month We ended the fiscal quarter with $112,600,000 of cash and cash equivalents and 0 outstanding debt.

Speaker 2

We distributed $4,700,000 of dividends during the quarter with total available financial liquidity of $287,000,000 We plan to invest in the most critical areas in the business to drive long term growth and profitability, while continuing to return cash to shareholders through dividends and by opportunistically buying back stock through our share repurchase program, which had $50,000,000 available at the end of the quarter. We continue to push forward our multi year technology transformation projects. We incurred $5,000,000 of costs in the quarter, of which $3,100,000 was Capitalized with the remaining $1,900,000 included as non run rate operating expense. Post go live, we anticipate the new technology platform We'll drive long term value by improving our operating efficiency, enabling scale and enhancing even further the stickiness of our talent platform. I'll now close with our Q2 outlook.

Speaker 2

The early Q2 revenue trend has been stable compared to the end of the Q1. We anticipate timing challenges related to deal closes and project starts to continue through the Q2. With early Q2 daily revenue trending Slightly below the Q1 daily run rate and after giving effect to less business days in Q2, we project revenue to be in the range of $160,000,000 to 100 and $55,000,000 We anticipate Q2 gross margin to be similar to Q1, currently estimated to be in the range of 39.2% to 39.7%, reflecting the global revenue mix and the lower top line projection. We expect our run rate SG and A to improve to a range of $53,000,000 to $55,000,000 Non run rate and non cash for the Q2 will consist of $1,500,000 to $2,500,000 of technology transformation costs, $2,500,000 to $2,500,000 of restructuring costs and $1,000,000 to $2,000,000 of stock compensation expense. Fully capitalized Costs related to the technology implementation in the second quarter is estimated to be around $3,000,000 In closing, I want to reiterate what Kate stated earlier.

Speaker 2

As we navigate through a changing economic environment, during the first half of this fiscal year, quarterly comparisons over the Prior year may not be indicative of our underlying annual performance. Based on the opportunities we're seeing in the pipeline, We believe the pace of revenue conversion will improve as the macro conditions start to recover. And we're ready to execute and excited about our business model and longer term outlook. With a durable variable cost model, a pristine balance sheet and ample liquidity, we believe we are well positioned to continue driving long term value for our shareholders. This concludes our prepared remarks and we will now open the call for Q and A.

Operator

Thank you. One moment for questions. Our first question comes from Andrew Steinerman with JPMorgan. You may proceed.

Speaker 3

Hi. I have two questions. The second one could probably be harder than the first, but I'll give it a try. On YUGO, could you Give us any sense of scale and success like how many active users you have in your database or anything quantitatively. The second one is, You talk about the current uncertain macro and clients' hesitancy to spend, but economists tell us that we're not in a recession currently.

Speaker 3

Do you feel like that label might be misappropriated? Maybe your belief is We are in a mild recession that we're going to recover from and obviously that you're also suggesting that The recovery of the macro will help your second half. Is that really coming from your economists' view? You mean views that economists have said or your clients?

Speaker 1

Yes. Thank you, Andrew. Let me take both of those and then Jen could add some color. So on HUGO, This year is about our commercialization efforts in 3 markets. And we're very Pleased with the talent inflow into the platform and we've exceeded our goals There and we are working to increase client registration and offerings.

Speaker 1

We've presented HUGO as an option for some larger enterprise clients too. So we are Optimistic about the reception we have received. We're not prepared at this stage given how small YUGO is to give you More specifics than that, but we are on track. With respect to the broader question, and that is a hard I think I read Jamie Dimon's interview yesterday in terms of his comments. I don't think we're in a recession.

Speaker 1

I think that his comments about just A muted economic environment stagflation is probably more likely right now. And that means that we're all going to have to work harder and pursue every opportunity. I'll tell you, we are very focused on sales motion right now and ensuring that our people spend time with clients talking about the initiatives they have and where our capabilities measure up. Our comments about the second half of the year are not so much based on what the economists are saying because that has been a, I would say a bumpy road, but more on the conversations that we're having with clients, and what we're hearing them tell us about their budgeting process and what they expect in Process and what they expect in 2024.

Speaker 2

Perfect. Thank you.

Speaker 1

You're welcome.

Operator

Thank you. One moment for questions. Our next question comes from Andre Childress with Baird. You may proceed. Andre, your line is now open.

Operator

One moment for our next question. Our next question comes from Marc Riddick with Sidoti. You may proceed.

Speaker 4

Hi, good evening. I wanted to ask maybe sort of a couple of questions that are more along the lines of sort of controlling the I was wondering if you could talk a little bit about where you finished with consultant count at the end of the quarter. Maybe you could sort of talk a little bit about The thought is just sort of your own needs going forward, whether we are looking So maintain that level, pay at that level, add kind of how we feel about that. And then also maybe if you could give a bit of an update, I know that there have been some mention as to sort of We're looking at the organizational structure following the announcement of Tim's resignation. Maybe you can talk a little bit about Maybe where you are with that or maybe some hiring trends or anything like that, that we should be aware of?

Speaker 4

Thank you.

Speaker 2

Hey, Mark. This is Jen. I can take the first question and maybe Kate can comment on the second one. Our consultant count at the end of the quarter did decrease, As you can imagine, due to the demand environment, we do have for our bench consultants, we are doing everything we can to deploy them and to keep them engaged. We're putting in a number of measures to share our available consultants with our entire sales team and talent team globally and also proactively Approach clients to see if there is a need there.

Speaker 2

I think our consultant count, as you know, fluctuates based on our demand environment And that's also part of our overall variable cost model that is unique to our business.

Speaker 1

Yes. So I'll jump in. I think, Mark, correct me because you got a little soft. So I hope I heard all of your questions. If I didn't, just please, ask it again.

Speaker 1

I think you asked about organizational structure and how we're continuing to build the business going forward. As we've talked about, we really have 3 components kind of of our business Currently, we have our agile model, which is the core of our GT, meaning we provide expert talent to work on Project initiatives in our client environments or to fill role or skill set gaps at a professional level in our client base. We also have certain assets in our portfolio that are consulting soup to nuts. Veracity is the perfect example. We want to do more this year in setting up CFO Advisory as a true consulting unit, and this is all about making us easier to buy and easier to in our client base.

Speaker 1

And then the 3rd component is Counsy, which is our managed services business Yes, an outsourced solution for finance and HR services more in the start up Environment, and we're also looking at how we can provide services to divested assets of businesses that don't want to stand up their own full financial function, especially in light of today's Lack of accounting and finance talent. So those are kind of the 3 segments we see continuing to pursue that As we grow and again, it's about making us easier to buy and easier to sell in our client base.

Speaker 4

Okay. Then I was just sort of wanted to also follow-up then on the I think there were some of the The commentary in the press release a couple of months ago that you're considering adding a couple of people to placed in or maybe some things might be moved out. I just wasn't sure if there's an update available there as to adding to the leadership bench there.

Speaker 1

Yes. So I think that we will through the balance of this Fiscal year reposition what we need in senior leadership positions. I think that The future of the COO role will look different than it has in the past for good reason as we build real leadership of the segments That we're talking about, and we continue to improve what Role and function that COO position can deliver across the enterprise. One of our initiatives this year too, Jen talked about pricing, that's important, but also to do a better job of cross selling Across our assets into this client base and as we determine what we need in that regard, We'll be sharing more about the roles that we'll put in place. And I don't necessarily think, Mark, these are going to be new roles.

Speaker 1

We have some really talented people that are ready to step up. And so it may be repurposing or repositioning some of the existing talent we have.

Speaker 4

Excellent. Thank you.

Speaker 1

You're welcome.

Operator

Thank you. One moment for questions. Our next question comes from Andre Childress with Baird. You may proceed. Andre, you may be on mute.

Operator

Your line is now open. And I'd now like to turn it back to Kate Duchene for any closing remarks.

Speaker 1

Yes. Thank you, operator. And Andre, if you have a question, please feel free to give us a call, offline. I want to thank everyone for attending this call. I can assure you we are focused and motivated to serve clients with excellence and value As we all learn to work differently in today's environment, we look forward to reporting again after Q2, and we'll talk with you in January.

Speaker 1

Thank you very much.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Resources Connection Q1 2024
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