Resources Connection Inc (RGP) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Resources Global Professionals first quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded. It is now my pleasure to turn the floor over to Kate Duchene, Chief Legal Officer of Resources Connection. Ms. Duchene, the floor is your's.

Thank you, operator. Good afternoon everyone, and thank you for participating today. Joining me on this call are Don Murray, our Executive Chairman; Tony Cherbak, our Chief Executive Officer; Tracy Stephens, our Chief Operating Officer; and Nate Franke, our Chief Financial Officer. During this call, we will be providing you comments on our results for the first quarter of fiscal year 2014. By now, you should have a copy of today's press release. If you need a copy and are unable to access via our website, please call Patricia Marquez at 714-430-6314, and she will be happy to fax a copy to you. Before introducing Tony, I would like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements. In other words, statements regarding future events or future financial performance of the Company. We wish to caution you that such statements are just predictions, and actual events or results may differ materially. We refer you to our Form 10-K report for the year ended May 25, 2013 for a discussion of some of the risks, uncertainties, and other factors, such as seasonal and economic conditions that may cause our business, results of operations, and financial conditions to differ materially from results of operations and financial conditions, expressed or implied, by forward-looking statements made during this call. I will now turn the call over to Tony Cherbak.

Thanks, Kate. Good afternoon, and welcome to Resources first quarter conference call. I'm going to begin by giving you a brief overview of our first quarter operating results. Total revenue for the first quarter of fiscal 2014 was $131.7 million, a 3.8% decrease from the comparable quarter a year ago, and a decrease of 6.1% from our fourth quarter revenue of $140.2 million. First quarter gross margin was 37.7%, representing a decrease of 130 basis points from the comparable quarter a year ago, and a sequential decline of 120 basis points. The sequential decrease stems primarily from the impact of two national holidays in the US during the quarter, higher than anticipated self-insured healthcare costs, and a reduction in bill pay spreads. During the first quarter our SG&A costs were $41.6 million, a $500,000 decrease from the comparable quarter a year ago, and $700,000 less than last quarter. In Q1 we generated adjusted EBITDA and cash flow from operations of $9.8 million and $5.3 million, respectively. For the quarter our pretax income was $6.8 million.

Our GAAP net income was $3.7 million, or approximately $0.09 per share. Our GAAP net income reflects an effective tax rate of 46%, while our cash tax rate remains at approximately 42%, an impact of $0.01 a share. Nate will provide more detail on each of these items later in the call. During the first quarter we were pleased to announce a 17% increase in our quarterly dividend to $0.07 per share. Now let's talk about revenue trends. As we reported in July, weekly revenues during the first six weeks of the first quarter totaled $60.7 million. During this six-week period, nonholiday weekly revenues averaged $10.8 million. During the final seven weeks of the quarter, average weekly revenues declined to $10.1 million per week, slightly greater than the 5% decline we expected from summer vacations in Europe and the US.

As Don discussed in last quarter's call, we knew that several large clients had begun the planning to start some larger scale initiatives that would involve many of our consultants. Following Labor Day, we began to ramp up the deployment of our consultants on some of these engagements. During the two weeks following Labor Day week, our weekly revenue averaged $11.2 million, up 7.7% from the nonholiday weekly average during the first quarter, but 1.8% below the comparable two weeks last year. We are encouraged by the recent sequential improvement in weekly revenue levels, and are hopeful to see further traction as we go forward throughout the balance of the year. With that, I will now turn the call over to Nate for a detailed review of our financial results.

Thanks, Tony. As mentioned, revenues for the quarter totaled $131.7 million versus $136.9 million in the first quarter of fiscal 2013, a quarter-over-quarter decrease of 3.8% and a sequential decrease of 6.1%. As anticipated, our first quarter revenues were impacted by summer vacations, both in the US and Europe. On a constant currency basis, revenue decreased 3.7% quarter-over-quarter, and sequentially by 6%. Now let's discuss revenues geographically. In the first quarter, revenues in the US were $102.2 million, a decline of 2.5% quarter-over-quarter, and 5.6% sequentially. For the first quarter, total revenues internationally were $29.5 million versus $32.1 million in the first quarter a year ago, a decrease of 8.1% quarter-over-quarter and 7.5% sequentially. International revenue accounted for approximately 22% of total revenues for the quarter, compared to 23% last quarter. Europe's first quarter revenue decreased 6.3% quarter-over-quarter and 12.3% sequentially, while the Asia-Pacific region saw first quarter revenues decrease 7% quarter-over-quarter, and increased 1.1% sequentially. On a constant currency basis, total international revenue decreased 7.5% quarter-over-quarter, and 7.2% sequentially.

On a quarter-over-quarter and sequential basis, the US dollar was weaker against most currencies in Europe, but stronger in Asia-Pacific. As a result, on a constant currency basis Europe's revenue declined quarter-over-quarter would have been 10% and Asia Pacific's increase would have been 2%. On a sequential basis, Europe's revenue decrease would have been 12.8% and Asia Pacific's increase would have been 2.2%. Now let me discuss early revenue trends for the second quarter of fiscal 2014. Weekly revenues for the first four weeks of the second quarter totaled $42.4 million, and were $10.4 million in the first week, $9.6 million during Labor Day week, and $11.2 million in the following two weeks. As we closed out the summer vacation season, it is encouraging to see our weekly revenue trends exceeding nonholiday summer weekly levels. Using the most recent weekly run rate over the remaining weeks of the second quarter, and adjusting for certain local and international holidays, we would achieve second quarter revenues of approximately $142 million. This computation is purely mathematical, and does not consider potential increases or decreases in weekly run rates over the balance of the quarter. Please note the Thanksgiving holiday will fall in our third quarter of this fiscal year.

Now to gross margins. Gross margin for the first quarter was 37.7% versus 39% in the year-ago quarter and 38.9% in the fourth quarter of fiscal 2013. The sequential decline of 120 basis points was approximately 40 basis points more than we anticipated, and resulted from higher anticipated healthcare costs and a decrease in bill pay spreads. The quarter-over-quarter decrease of 130 basis points stems primarily from a decline in bill pay spreads of 90 basis points and increased healthcare costs of 40 basis points. Excluding reimbursable expenses, our first quarter gross margin was 38.3%, which compares to 39.7% in the first quarter a year ago. The average bill rate for the quarter was approximately $126, compared to $128 in the fourth quarter, and $126 in the year-ago quarter. The average pay rate for the first quarter was approximately $64, the same as in the fourth quarter, and $63 one year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. We would expect gross margin in the second quarter of fiscal 2014 to improve 60 to 70 basis points from first quarter's gross margin.

For the first quarter, gross margin in the US is 38.7% and our international gross margin was 34.4%. Now to headcount. For the first quarter, the average consultant FTE count was 2,173. This compares to 2,217 in the previous quarter and 2,270 in the year-ago quarter. Quarter-end consultant headcount is 2,237 versus 2,284 a year ago. Total headcount of the Company was 2,949 at quarter-end. Selling, general, and administrative expenses for the first quarter were $41.6 million, or 31.6% of revenue, a $700,000 decrease from $42.3 million in the fourth quarter of fiscal 2013. SG&A was $42.1 million, or 30.7% of revenue, in the first quarter of are fiscal 2013. We anticipate (inaudible) SG&A expenses in the second quarter of fiscal 2014 will increase approximately $1 million from the first quarter level, but remain relatively flat with a year ago. Stock compensation expense was $1.7 million, or 1.3% of total revenue, similar to amounts recorded in the fourth quarter last year, and $100,000 less than in the first quarter of fiscal 2013. We would anticipate quarterly stock compensation expense in the upcoming quarters to approximate the amount recorded in the first quarter.

At the end of the first quarter, our altered count remained at 73; 47 domestic and 26 international. Related to other components of our financial statement, depreciation and amortization was $1.4 million for the quarter, compared to $1.5 million last quarter. We would expect depreciation and amortization expense for the upcoming quarters to approximate $1.4 million. Our adjusted EBITDA, or cash flow margin, which we define as EBITDA before stock compensation and contingent consideration adjustment, was 7.4% in the first quarter, a decrease from 9.6% a year ago, and down from 9.9% in the fourth quarter of fiscal 2013. Our pretax income was $6.8 million for the quarter. During the first quarter we recorded a provision for income taxes of $3.1 million, representing an effective tax rate of 46%. Our effective tax rate during the quarter benefited by a $350,000, or $0.01 per share, reversal of accrual for international uncertain tax positions for which the statute of limitations has expired. Our effective tax rate is currently impacted by our inability to offset income and tax jurisdictions in which we are profitable with losses in several tax jurisdictions in which we are not.

Our GAAP tax rate for each of the upcoming quarters is difficult to predict, and could be volatile as the rate will be dependent on several factors, including the operating results of our US and foreign locations, each of which are taxed or benefited at different statutory rates, and the offset of the tax benefit of foreign watches and certain locations by valuation allowance. On a cash basis, our tax rate is about 42%, and we expect that rate to continue over the upcoming quarters. In summary, our GAAP per share income per share was $0.09 during the first quarter. On a non-GAAP basis, using a cash tax rate of 42%, our per-share income would have been $0.10 for the first quarter. Cash and investments at the end of the first quarter were $121.4 million, a $2.4 million increase from the end of fiscal 2013. The increase stems primarily from cash generated from operations of $5.3 million and stock purchases by employees of $5 million, partially offset by share repurchases and dividends totaling approximately $6.6 million during the quarter.

Capital expenditures was $1.4 million during the quarter. We purchased approximately 312,000 shares of our common stock during the first quarter at an aggregate cost of $4.2 million, or $13.34 per share. Our current Board authorization for our stock buyback program has approximately $68.4 million remaining. We will continue to return cash to shareholders through our dividend and share repurchases while maintaining a balance between the capital requirement of growing our business and fiscal prudence. Our shares outstanding at the end of the first quarter were approximately 39.8 million. Receivables at quarter-end were approximately $81.4 million, compared to $84.2 million at the end of the fourth quarter. Days of revenue outstanding was approximately 55 days, the same as in the fourth quarter of fiscal 2013. Now I would like to turn the call over to Don for some closing thoughts.

Thank you, Dave. As Tony mentioned, we are encouraged by the daily weekly run rate following the Labor Day holiday week. While the global economic environment is still unstable, we remain focused on revenue growth. During the past few weeks, we've committed several new engagements domestically with new and long-term clients spanning our service capabilities. These include emerging (inaudible) initiatives for a large technology company, a litigation support project for a large law firm, a regulatory compliance initiative for a multinational medical device manufacturer, a financial system transformation initiative for a global financial services company, and assistance with conflict (Inaudible) compliance. Keep in mind that a lot of these initiatives had a long sales cycle, and we're just seeing the fruit of it. While we believe the demand environment is improving and our clients remain focused on costs, tightly controlling project timelines and budgets.

While I don't believe this client attribute will diminish over time, but as previously discussed, in the previous -- and disclosed in the previous years, we have made significant investments through our G&A and new services such as resources healthcare solutions and legal practices. We are starting to experience growth in those areas. Our first healthcare solution was introduced just in June, and so far we have contracts for seven installations. Based upon recent revenue run rates, our Asia-Pacific offices have stabilized and should benefit in the second half of the fiscal year from one of the global projects previously mentioned, which we are just commencing work on in the US. Our operating environment in Europe remains challenging, as we find our Fortune 500 clients continuing to reduce [their] spend in the region. We remain focused on our efforts to improve our operating performance in Europe, but maintain our ability to serve our multinational clients globally.

So let me share some additional statistics which we believe express the continuing health and strength of our core business. Client continuity remains outstanding. During our first quarter, we served all of our top 50 clients from fiscal 2013, and 49 from 2012. In fiscal 2014, we have 221 clients for whom we provide services exceeding $500,000 in fees on a run rate basis, which is up slightly from 216 in 2013. Our top 50 clients represented 37.7% of total revenues, while 50% of our revenues come from 89 clients. Our loyal client following is reflective of our client service approach, the quality of the work performed by our consultants. Our largest client for the quarter was approximately 1.8% of the revenue. Through the first quarter, 92% of our top 50 clients have used more than one practice area, and 74% of those top 50 clients have used three or more practice areas. This practice area penetration reflects the diversity of relationships we have within our clients' organizations. That concludes our prepared remarks. And we'd be happy to answer your questions at this time.

Thank you, sir.

(Operator Instructions)

And our first question in queue will come from the line of Jeff Silber with BMO Capital Markets. Please go ahead. Your line is now open.

Thanks so much. I wanted to focus first a bit on Europe. You are still seeing, obviously, some year-over-year declines, even though you're anniversarying some pretty striking declines last year. Are there any pockets in Europe doing better or worse than others? If you can give us a little bit more color what's going on there, I would appreciate it.

The UK is doing fairly well right now, Jeff. They're profitable, and they were up in terms of their revenues. Where we're struggling is still in France and Norway. Those markets are pretty tough. I would tell you Netherlands is kind of bottomed out. They were up a couple percent in terms of growth, and Sweden is doing okay. But that's kind of a summary of Europe.

And any specific verticals doing better or worse than others, both in Europe and the US?

In the US, I would tell you the information management continues to be one of our big growth areas. It was up double digits for the quarter, as was legal and human capital. It's really our A&F business that is a little bit soft.

Okay, great. And then just one quick follow-up. You mentioned Thanksgiving this year is in the current quarter, the fiscal second-year quarter. Can you remind us where it fell out last year?

No. The Thanksgiving will fall in the third quarter. It fell in the second quarter last year.

Okay. My mistake. Thank you for clarifying that. I'll jump back in the queue.

That's a great question, to make sure that's clear.

Thank you.

Thank you, sir. Our next questioner in queue will come from the line of Andrew Steinerman with JP Morgan. Please go ahead. Your line is open.

Hi, there. I appreciate you doing the mathematical exercise of the $142 million for the second quarter. When you look at that as a litmus test, in my view that would be up sequentially approximately average for a second quarter. Is that management's view? In other words, yes, the business is picking up sequentially? Yes, it feels more normal, but it doesn't feel kind of above a normal seasonal lift. Second quarter always has a strong sequential.

Andrew, I would agree, based on that mathematical computation that we see the business strengthening, but obviously the scope of the line isn't where we'd -- as we'd like it to be.

Right. But when you look at the history of a second quarter, I see the business as being up high single digits sequentially. And so my question is that when you think about the $142 million, wouldn't you describe that as relatively kind of normal? And my second question is, could you call out what Sitrick Brincko is doing?

Sure. Like I said, we're not baking in what I would say in terms of that computation for the second quarter. Like I said, sequentially it is up. Whether that's the seasonal impact, it's probably up a little bit above that because at least on those two weeks we're above the 5% impact that we typically have from vacation. But clearly it's a step in the right direction, but it's not where we would like to be. Sitrick Brincko, was -- quarter-over-quarter, their business was actually down about 13%.

I would just add, Andrew, that one of the things that we're encouraged is that we have a lot of these projects that are finally kicking in, and even going into the second quarter we've still got one that's probably one of the larger projects that really hasn't put any meaningful amount of consultants out in the field, but we know that it's coming. So those are some of the things that we're encouraged by, in addition to what Don mentioned about the first software deployments of Pavisse.

When you talk about larger projects, what size projects, just in general, I'm not asking you to identify any specific project, would be a larger project in number of consultants?

I would just leave it at multiple consultants on one engagement.

Thank you very much.

Thank you, sir.

(Operator Instructions)

Our next questioner in the phone queue will come from the line of Mark Marcon with RW Baird. Please go ahead. Your line is now open.

Good afternoon. I was wondering, can you talk a little bit about the pay bill spreads, particularly as it is relates to the US, and how we should think about that going forward?

Yes, Mark. During the quarter we had a little bit of compression. Some of that is probably a little bit of mix with Sitrick Brincko. But my -- our sense is, is that with the guidance we gave on the gross margin that that should probably be relatively stable as we look forward, and especially with some of these newer engagements starting out.

And, I'm sorry, maybe just my line, but I didn't hear you all that well when you were going through the -- what was the specifics with regards to the gross margin?

Obviously on the bill pay spread, we've seen on the last couple of quarters a diminution in that. Of that is mix from, take the Sitrick Brincko business being down. While that work tends to be at higher bill rate, I do believe that we believe that that has somewhat -- the overall bill pay spread is probably stabilized as we look out in the coming quarter, especially with some of these new engagements that Tony had mentioned that are just starting.

And so when you are saying stabilized, do you mean stable on a sequential basis, or stable on a year-over-year basis?

Well, the bill pay stabilized sequentially. And then if you look at the improvement in the gross margin, that is primarily coming from the lack of holiday, with Thanksgiving being out of the quarter.

Okay. And so the gross margin guidance for the coming quarter was for it to be up by how much?

I think what we said is that gross margin would improve by about 70 basis points, and the bulk of that is obviously coming from not having -- only having the single holiday.

Right. And so it is going to be up 70 bips relative to a year ago?

No, that was sequential.

Sequential, okay. That's what I just wanted to clarify. And can you talk a little bit, and Don, I apologize. Your mike connection is bad. Can you talk a little bit about the healthcare consulting projects that you have coming up, and if I heard correctly, it was seven?

Yes. I think we've discussed in this previous calls, that we, over the last two years, have invested a substantial amount of money in a healthcare consulting group who joined us almost two years ago. And they are -- have developed specific software tools to help healthcare companies comply with all the new standards and laws. Some of it caused by Obamacare, some of it caused by just the evolution in medical oversight. So the first package that we have -- she has completed, our group has completed, we started to market in June. She's already signed seven contracts to install the package. And basically our intention is that we will obtain consulting work to help install and maintain the package for the clients, as well as it will become an annuity type of revenue stream for us.

And so there's two revenue streams? One would be selling the package, and then the second one would be maintaining it?

One would be the annual cost, licensing cost for the package and maintaining the package. That's the one revenue stream. The second revenue stream will be consulting to help implement the package. And that revenue stream might be a one-time stream for each installation.

But there also, Mark, would be some consulting around the fact that this is an incident reporting tool. Once an incident gets reported, it then needs to be remediated, and we would potentially be able to help the client around the remediation as well.

And there's literally, I don't want to give the right number because I don't know it off the top of my head, but there's literally dozens of potential hospitals lined up to try out the package also. So we anticipate this would be an increasing build revenue stream for us.

Okay. And from your current sense of things, how much incrementally could it end up being? You've talked about this before, but you haven't talked about selling the packages like this before, if I recall correctly.

We think this is, again, an ongoing growing business. In my mind, there's nothing factual about this, but in my mind, this healthcare certainly (inaudible) be $100 million business over time as we add more packages. Once a medical system takes one of the packages and has a great experience with it, they will be much more inclined to buy the next package to help them manage all these issues and risks. So we think it's a good investment for us. An investment, and when I say investment, it means it went through our G&A over the last 20 months without revenue, and now we're starting to see the beginning growth of the revenue. But it's going to take time, because we're going keep selling this package, the particular one that we have produced, which is an incident reporting system, and then we're busy now starting to look at the next package that needs to be developed. So one of the goals is to have an annuity stream that will repeat itself year after year after year as we also sell into the same distribution system.

Great. Thank you for the color.

Okay.

Thank you, sir.

(Operator Instructions)

And presenters, it appears to be no additional phone questions in the queue. I would like to turn the program back over to Mr. Don Murray for any additional or closing remarks.

Well, just thank you for your continued support and your interest in Resources. We look forward to our next update for the second quarter of 2014.

Thank you, sir. And again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may now all disconnect.