Resources Connection Inc (RGP) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to Resources Global Professionals' Third Quarter 2015 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference call is being recorded. At this time, I would like to hand the conference over to Ms. Michelle Gouvion, Senior Legal Counsel for Resources Connection. Ma'am, you may begin.

Thank you, operator. Good afternoon, everyone and thank you for participating today. Joining me on this call today are Don Murray, Chairman; Tony Cherbak, Chief Executive Officer; Tracy Stephens, Chief Operating Officer; and Nate Franke, our Chief Financial Officer. During this call we will be providing you with comments on our results for the third quarter of FY15.

By now you should have a copy of today's press release. If you need a copy or are unable to access the copy on our website, please call Patricia Marquez at area code (714) 430-6314 and she'll fax a copy to you.

Before introducing Tony, I would like to read an important announcement about certain statements that we will be making during today's call. Specifically, we will 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 10-K report for the year ended May 31, 2014 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 the results of operations and financial conditions expressed or implied by forward-looking statements made today during this call.

I'll now turn the call over to turn Tony Cherbak.

Thanks, Michelle.

Good afternoon and welcome to the RGP third quarter conference call. I'm going to start by giving you a brief overview of our third quarter operating results.

Total revenue for the third quarter of FY15 was $146.8 million, a 10.6% increase over the comparable quarter a year ago. It's important to remember that quarter-over-quarter comparisons are impacted by the fact that the Thanksgiving holiday fell in our third quarter last year, but was in our second quarter this year. Adjusting solely from the holiday shift, our pro forma quarter-over-quarter revenue increase was 7.6%.

Our revenues for the third quarter were slightly below our expectations at the beginning of the quarter, substantially due to the strengthening of the US dollar against certain foreign currencies, especially the euro. Sequentially, foreign currency translation reduced our revenues by about $1.6 million. Consequently, if we translated our international revenues using FY15 second quarter exchange rates, our consolidated revenue for the third quarter would have been $148.4 million.

Third-quarter gross margin was 37.3%, an increase of 130 basis points from the comparable quarter a year ago. During the third quarter our SG&A costs were $43.5 million, similar to the second quarter and up about $2 million from the comparable quarter a year ago. As Nate will expand on, our third-quarter SG&A was lower than anticipated, primarily resulting from translating expenses denominated in foreign currencies to the strengthening US dollar.

During the third quarter our adjusted EBITDA was $12.9 million, and we used cash and operations of $2.9 million. Additionally, we returned $10.1 million to shareholders during the quarter in the form of share repurchases and dividends.

Our pretax income on a US GAAP basis was $10.5 million, versus $4.9 million a year ago. Based upon an effective tax rate of 43% during the third quarter, our earnings per share was $0.16 versus $0.06 in the third quarter of FY14.

Now let's talk about revenue trends. As we reported in early January, non-holiday weekly revenues during the first five weeks of the third quarter were trending approximately 8.5% ahead of the prior year. After adjusting for currencies, this growth rate remained relatively stable over the remaining weeks of the quarter. Our weekly consolidated revenue during the first foreign non-holiday weeks of the fourth quarter is trending about 3.6% higher than the comparable weeks a year ago, or 6.5% higher on a constant currency basis.

The comparable week-over-week Q4 growth rates from a year ago by region are as follows. US up 8.5%. AsiaPac up 16%, or 25% in constant currency. Europe down 30%, or 13% in constant currency.

Improving our European operations continues to be one of the highest priorities. While we saw signs of stability in week to week hours worked in the November through January timeframe, weekly hours declined in February, leading to a sequential constant currency revenue decrease of 13.7% to close out Q3 and continues to trend in that direction in Q4.

Last month, in an ongoing effort to improve our operations in Europe, we conducted four training sessions in three different European cities on an accumulation of proven operational practices from our highest performing office. We also continue to have our practice area leaders work with our European offices in key areas like information management and supply chain management, and are seeing a little bit of success there as evidenced by seven recent information management wins in the UK, France and the Netherlands. And although we have significantly reduced headcount in Europe over the past two years, we will not hesitate to make further adjustments where needed until we finally get our European business growing again.

With that I'll now turn the call over to Nate.

Thanks, Tony. As mentioned, revenues for the quarter were $146.8 million, an increase of 10.6%, from $132.7 million in the third quarter of FY14. On a sequential basis, revenues decreased 3.1%.

As Tony mentioned, our third-quarter revenues are not directly comparable as the prior-year quarter did not include the Thanksgiving holiday. We estimate the revenue impact of the Thanksgiving holiday shift was about $4 million. Adjusting solely for this impact, consolidated quarter-over-quarter revenue increase would be approximately 7.6%. Adjusting further for the holiday shift and currency changes from a year ago, our pro forma quarter-over-quarter revenue increase would have been 9.8%.

I'll now discuss highlights of our revenues geographically. For the third quarter, revenues in the US were $121.3 million, up 17.3% quarter-over-quarter and down 1% sequentially. Adjusting for the previously mentioned shift in the Thanksgiving holiday, on a pro forma basis our US revenue would have increased by 13.4% quarter-over-quarter.

For the third quarter, total revenues internationally were $25.5 million, down 13% quarter-over-quarter and sequentially. International revenue accounted for approximately 17% of total revenues for the quarter, down from 19% in the second quarter. Europe's third-quarter revenues decreased 27.8% quarter over quarter and 19.6% sequentially, while the Asia Pacific region saw third-quarter revenues increase 15% quarter-over-quarter and decrease 4.2% sequentially.

On both a sequential and quarter-over-quarter basis, the US dollar was stronger against the euro and yen. As a result, on a sequential constant currency basis, Europe's revenue decrease would have been 13.7%, and Asia Pacific's revenue was essentially flat. On a quarter-over-quarter basis, Europe's revenue decrease would have been 17.1% and Asia Pacific's revenue would have increased 22.5%.

Let me now discuss early revenue trends for the fourth quarter of FY15. Weekly revenues for the first five weeks of the fourth quarter totaled $58 million, and were $11.9 million, $11.7 million, $11.6 million, $11.9 million, and $10.9 million last week, which includes Good Friday. Excluding the Easter week shift, this run rate is 3.6% higher than the comparable weeks a year ago. On a constant currency basis, this represents a 6.5% increase from a year ago.

Using the most recent non-holiday average weekly run rate of $11.8 million over the remaining weeks of the fourth quarter, and adjusting for the Memorial Day and other regional holidays for which we typically lose about one and a half days of revenue, we would achieve fourth-quarter revenues of approximately $150 million. This computation is purely mathematical and does not consider potential increases or decreases in weekly run rates over the balance of the quarter or exchange rate changes.

Please remember our fourth quarter last year included a 14th week, while this year's fourth quarter only consists of 13 weeks. Last year the 14th week added $9.8 million to our revenue.

To gross margins, gross margin for the third quarter was 37.3%, a 130-basis point increase from 36% a year ago, and down 190 basis points from 39.2% in the second quarter. Our gross margin for the quarter is about 60 basis points higher than we anticipated at the beginning of the quarter. This improvement results from lower health care costs and lower zero margin reimbursable expenses.

The 130-basis point quarter-over-quarter improvement primarily results from improved bill pay spreads from a year ago. The average bill rate for the quarter was approximately $120, compared to $122 in the second quarter and $125 a year ago. The average pay rate for the third quarter was approximately $59, down from $61 in the second quarter and $64 one year ago.

Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. The vast majority of the sequential and quarter-over-quarter bill and pay rate declines stemmed from foreign currency translation and an increase in work performed in lower-wage areas such as the Philippines. Excluding reimbursable expenses our third-quarter gross margin was 38%, which compares to 36.6% in the third quarter a year ago.

In thinking about gross margin in the fourth quarter of FY15, we would expect gross margins to improve sequentially by approximately 150 basis points, primarily due to the reduction in compensated holidays and reduced payroll taxes. For the third quarter, gross margin in the US was 38% and our international gross margin was 34.4%, representing a quarter-over-quarter increase of 60 basis points in the US and 330 basis points internationally.

Now to headcount, for the third quarter, the average consultant FTE count was 2,523. This compares to 2,514 in the previous quarter, and 2,233 in the year-ago quarter. Quarter-end consultant headcount was 2,577 versus 2,346 a year ago. The total headcount of the Company was 3,334 at quarter end.

Now to other components of our third-quarter results. Selling, general and administrative expenses for the third quarter were $43.5 million or 29.6% of revenue, versus $41.6 million or 31.3% of revenue in the year-ago quarter. SG&A was $43.6 million, or 28.8% of revenue in the second quarter of FY15.

While we anticipated a $1 million sequential increase in SG&A for the third quarter, due to the reset of payroll taxes we benefited from the natural foreign exchange hedge in translating international expenses paid in local currencies at a stronger dollar rate. We believe SG&A expenses in the fourth quarter of FY15 will decrease approximately $800,000 from the third-quarter level. This decrease in fourth-quarter SG&A stems primarily from lower payroll taxes and marketing expenses.

Stock compensation expense, which is included in the SG&A amounts I just disclosed, was consistent with the second quarter at $1.5 million or 1% of total revenue. We would anticipate quarterly stock compensation expense in the upcoming quarter to be approximately $1.4 million. At the end of the third quarter, our office count remained at 68, 45 domestic, and 23 international.

Related to other components of our financial statements, depreciation and amortization was $900,000 for the quarter, down $400,000 from last quarter. We would expect depreciation and amortization expense for the upcoming quarter to approximate $900,000.

Our adjusted EBITDA, or cash flow margin, which we define as EBITDA before stock compensation, was 8.8% in the third quarter versus 5.8% in the third quarter of FY14, and 11.5% last quarter. During the third quarter, on a GAAP basis we recorded a provision for income taxes of $4.5 million on GAAP pretax income of $10.5 million, representing an effective tax rate of approximately 43%. We anticipate a fourth-quarter effective tax rate of approximately 44%.

Our effective tax rate is impacted by our current inability to offset income in tax jurisdictions in which we are profitable, with losses in tax jurisdictions in which we are not. Our cash tax rate continues to approximate 42%. 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 losses in certain locations by valuation allowances. In summary, our per-share net income was $0.16 for the third quarter, up from $0.06 a year ago.

I'll now turn to our balance sheet. Cash and investments at the end of the third quarter were $92.3 million, an $11 million decrease from the end of the second quarter. The decrease stems primarily from cash used in operations of $2.9 million, and share repurchases and dividends totaling approximately $10.1 million during the quarter.

Third-quarter operating cash flow was impacted by the timing of payroll and income tax payments. Capital expenditures were $600,000 during the quarter.

During the third quarter we repurchased approximately 408,500 shares of our common stock at an aggregate cost of $7.1 million or $17.25 per share. On a fiscal year-to-date basis, we have repurchased approximately 1.3 million shares at an aggregate cost of $20.3 million or $15.47 per share. The shares repurchased represent 3.4% of our outstanding shares as of the beginning of the year.

Our current board authorization for our stock buyback program has approximately $22.7 million remaining. We will continue to return cash to shareholders through our regular quarterly dividend and share repurchases, while maintaining a balance between the capital requirements of growing our business and fiscal prudence. Our shares outstanding at the end of the third quarter were approximately $37.6 million.

Receivables at quarter end were approximately $98.2 million, compared to $97.4 million at the end of the second quarter. Days of revenue outstanding were approximately 57 days versus 59 days in the comparable quarter a year ago and in the second quarter.

I'll now turn the call over to Don for some closing thoughts.

Thank you, Nate.

We are pleased with the continued improvement in our consolidated operating results. On a year-to-date basis, we have increased revenues 7.7% while improving our gross margin by 90 basis points.

Additionally, we have increased our year-to-date adjusted EBITDA margin by more than 20%, from 8.1% a year ago to just about 10% as of the end of the first nine months of FY15. While the early weeks of the fourth quarter reflect the moderation of our quarter-over-quarter revenue growth, we remain bullish on our business through the upcoming year. In the US, we believe a portion of this moderation results from Easter occurring earlier this year, and therefore the impact of spring break-related vacation falling two weeks earlier this year than last year.

Additionally, a contraction of services in the US-based oil and gas industry has reduced current revenues probably by 1% from prior year's levels. And during the past several weeks, though, we commenced revenue recognition assessment projects at three Fortune 100 companies, and continued to work on several other engagements. We believe most companies are in the early stages of assessing the FASB's new standards.

Those that have commenced the assessment and implementation of the new standard have had difficulties from a technical and information systems standpoint, among other issues. And due to the complexity of implementing the standard, last week the FASB proposed extending the transition period by an additional year. We also continue to see opportunities to assist new and existing clients with their merger, integration and regulatory compliance, and data governance initiatives, to name a few.

So let me share some additional statistics which we believe reflect the continuing health and strength of our core business. Client continuity is outstanding. Through the third quarter we served all of our top 50 clients from FY14 and 47 from FY13. We've continued to increase the number of clients with fees exceeding $500,000.

Through the third quarter of FY15, on a run rate basis we have served 237 clients with fees exceeding $500,000 compared to 220 clients in 2014. Our top 50 clients approximated 42% of total revenues and 50% of our revenues came from 76 clients. Our loyal client following is reflective of our client service approach and the quality of the work performed by our consultants.

Our largest client for the quarter was approximately 3% of revenues. Through the third quarter, 96% of our top 50 clients have used more than one service line. 82% of those top 50 clients have used three or more service lines, so this service line penetration reflects a diversity of our relationships we have within our clients' organizations.

This concludes our prepared remarks and we'd be happy to answer your questions at this time.

Thank you.

(Operator Instructions)

Jeff Silber, BMO Capital Markets.

Wanted to focus on Europe first: Can you just remind us roughly what Europe is as a percentage of your business?

It's about 9% right now.

Okay (multiple speakers) I'm sorry, thank you so much. And then, I realize the trends have been subpar, but we are hearing from others that have exposure there, and just seeing some economic indicators that things seem to be improving a little bit, yet we are not seeing that in your numbers. I just was wondering if you can address that?

Tracy, do you want to take that one?

Sure. As we stated earlier, improving our performance in Europe is still a real big priority for us -- top priority for us. We have many people that are continuing to work hard on this issue on a daily basis.

We do have revenue growth year to date in certain of our countries in Europe. Currently, we're focusing a lot in the Netherlands, which is our largest practice currently in Europe, and spending a lot of time on improvement in that area. We're also seeing some good activities out of the UK currently that are giving us a real positive trend and possibilities in that area.

Additionally, we've added some new client service people in Europe, and we have a few more in the process. And we're hoping that's going to help stabilize and strengthen our business development efforts in the future in Europe. So --

Jeff, as I had talked about in the prepared remarks as well, we're doing everything that we can to try to help these guys, and we've implemented a new training program over there to kind of take some of the best practices that we have going in some of our top offices in the US, and train them on those. And we're trying to take some of our key service-line leaders, and help them with information management supply chain, which they don't have nearly the experience that we do in those areas. And that's starting to pay off in just a few projects that we saw on the IM side, just recently.

I think I mentioned seven wins across three different offices. So, we're trying -- we realize that it's an issue. It is only 9% of our revenues, but it's an important 9% of the revenues, and just know that it's a top priority for us.

Okay, fair enough.

And just continuing to focus outside the US, you had some real sizable margin expansion, gross margin expansion, internationally. What drove that? Is it a mix shift, either geographically or functionally? Or are you able to increase gross margins on your existing projects?

Jeff, what I would tell you is, overall, we are seeing improvement in bill pay. Obviously, in the revenue numbers that we gave, with AsiaPac, the mix of the international business leaning towards a greater portion of AsiaPac also has allowed that overall international gross margin expansion. But as I said, when you look at the quarter-over-quarter gross margin increase, substantially all of that is coming from improved bill pay spreads.

Okay, great.

Just a quick numbers question, and I'll jump back in the queue. What should we be modeling for capital expenditures in this quarter? And any early insight on what your CapEx budget will be for next fiscal year?

What I would say is, in Q4, we're probably planning between $300,000 and $400,000. The very preliminary view for FY16 is right around $3 million. And that will be somewhat front-loaded in the first half of the year, from what we can see now.

Okay. Great. Thanks so much.

Andrew Steinerman, JPMorgan.

Two questions -- the first one on gross margin. Looking at the 150-basis-point sequential improvement you're looking for, for the fourth quarter to get us to about 38.8% -- is that a normal lift, meaning, when you think about payroll taxes, reduction in holiday comp, is that usually about 150 basis points? I'm trying to get to a point of -- is the third-quarter gross margin improvement that you talked about, the bill pay rate spread, all sustainable, and the variation into the fourth quarter is seasonal? Is that the best way to think about it?

Andrew, what I would say is that I think you have -- the increase sequentially comes from one less holiday, and then the decline in the impact of the payroll taxes. We started to see improvement in the bill pay in the fourth quarter. We aren't -- in the numbers I gave you, we aren't projecting a continued improvement, but I would tell you our people are very focused on continuing to claw back the few bucks an hour that we've given up over the past few years. And we continue to strive for reporting on an annual basis, getting to a 39% GAAP gross margin.

I got it. (multiple speakers)

And I think we're going to end the year close to that, this year.

Right. And then just one quick FX question for the fourth quarter: I didn't quite hear, when you do the $150-million calculation, are you assuming current FX rates go through the end of the quarter?

Yes.

Thank you.

Mark Marcon, Robert W. Baird.

I was wondering, in the US, in terms of the year-over-year increase that you're seeing thus far in the quarter, what would that translate to? You gave us the overall numbers. And you gave it to us on a constant-currency basis, but obviously Europe is still a drag. So, just wondering if you could give a little bit of clarity with regards to the US trends, in terms of whether they're sustainable?

It was 3.6% overall. The US is up about 8.5% in the four weeks -- the four non-holiday weeks that we've had so far, Mark.

Okay. Are there any meaningful changes? Because if I heard you correctly, it was about 13% in the US during the last quarter?

That's correct. But this year, as you know, the Easter holidays fell a couple of weeks early; we believe that the spring-break holidays also occurred a little bit earlier. So, we are anticipating as we go forward a little bit of an uptick, but we won't know what that is until the next couple of weeks.

How was it with the -- exclusive of the weeks that included the spring-break holiday and the Easter time period?

What I'm saying is you can't compare them because this year they occurred earlier. So, it's not an apples-and-apples comparison. If they (multiple speakers) --

I get that. I'm just talking about -- there were a few weeks where there was absolutely no difference. That's what I was referring to.

Mark, I think the way I might look at it is, kind of the first week of the quarter, which was kind of before spring break, we were hovering around that $11.9 million, $12 million a week; and then it dropped approximately $3 million in those middle weeks. And then we popped -- or $300,000 -- and that we'd -- the week before -- Good Friday popped back up to that $11.9 million.

So, I think that's really what Tony's saying. So, when we do the computation, we've taken the average. But if the normal trends that we believe will occur, we would hope to see a bounce back. That's what I think Tony was describing.

Appreciate that, thank you.

And then, with regards to the bill rates and the pay rates, obviously there's a couple of foreign elements that are driving that. If we were just looking at the US, how would those look?

If we were looking at just the US, they would be up; in both cases with a bit of margin improvement -- again, on a quarter-over-quarter basis.

Great. And can you give us a sense for some of the areas where you're seeing continuing strength that's driving that low double-digit growth -- just in terms of the areas that are really driving that?

Certainly, the regulatory compliance is still very strong for us. We are doing a lot of work in M&A, as we talked about in some of the prepared remarks. We've gotten new revenue recognition assignments; also information management on the integrated data governance side has been working well, data privacy and security and business intelligence. So, all of those areas have been very, very strong for us.

Great. And then, those seven assignments that you ended up winning in the international offices -- the new ones -- are those sizable or significant, or are they just modest changes?

I'd say, overall, they're probably fairly modest. But I think that in information management, sometimes you'll start with a three-week assessment, and that might turn into something much larger, because if you're assessing like the application of a system, you might then get into more of an implementation effort. So, right now, those projects probably range from three weeks to six months. So, they're kind of all over the board.

Great. Thank you.

(Operator Instructions)

Kevin McVeigh, Macquarie.

Tony or Nate, it sounds like oil and gas was about 1% of revenue. Did you see any weather-related impact in the quarter that you'd expect to kind of revert back in Q4?

Kevin, I would tell you we looked at that, and clearly in several of our East Coast practices, they had days here and there where I think people struggled to get to work. I think overall, those hours were worked the next week and are being worked now. So, it wasn't anything that we would necessarily point to that was a huge impact in the quarter.

Got it. And then, just with the M&A environment being what it is, what percentage of the revenue is that today? And is that translating into -- obviously, there's been some fairly sizable deals. Is that translating into larger engagements for you folks in that sector, or has it been pretty steady?

Well, I would tell you we're seeing more and more activity. I don't have what I would call a breakdown of revenue in M&A. The things we do are pretty wide encompassing.

In the F&A side, we'll end up doing a lot of work on the financial statements, pro forma financial statements, those types of things. It impacts our IM and change management practices.

But we are seeing an uptick in, as Don mentioned, the merger integration activities; so, these are the post-merger activities of bringing systems and policies together. And I would say we have a number of very recent announcements that we're chasing as well. So, I think that as we see that activity pick up, that will be beneficial for us, given our Fortune 500 client base is where we're seeing that activity.

Got it. And then just real quick: In terms of sourcing candidates, has that gotten any more challenging, just given the current environment, or is there still a fairly sizable pool?

I think our view is there is still a very sizable and growing pool. I would tell you it's similar to what we've said in the past. You can have difficulties in certain areas, especially as you get into IM and data security, and certain software packages that are probably a little less common and perhaps industry-specific. But, again, our [recruiting] capabilities are very robust, and that's why I think so many clients use this on a consistent basis, is our ability to deliver that specific talent.

Got it. Thank you.

Mark Marcon, Robert W. Baird.

Just with regards to the European offices: Of your 10 largest offices in Europe, or your eight largest, how many are expanding at this point?

Mark, what I would tell you is it's probably split down the middle, and I think the biggest issue is some of our largest practices are the ones that are seeing the negative growth. (multiple speakers)

The UK is up, right?

The UK is growing, and that would be an example of a practice that is actually adding people. We're also adding selected individuals to some of the other offices that are having difficulty, in an effort to help them grow. So, like the -- we are seeing a little bit of progress in Sweden; a little bit of progress in the Netherlands as well.

So, when you look at our three largest practices -- UK doing fairly well -- it's actually up year to date on a revenue track. And then the Netherlands and Sweden -- just recently we've added some people, and we hope to see some growth in those two practices as well.

Great. And how big is the Netherlands at this point, just on an absolute dollar basis?

The Netherlands revenue in Q3, on just a dollar basis, was $3.4 million.

Okay. Great. Thank you.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Don Murray for closing remarks.

I'd like to thank you for your continued support and interest in Resources, and we look forward to our next update for the year end of FY15.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.