Resources Connection Inc (RGP) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Resources Global Professionals third-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to hand things over to Kate Duchene, Chief Legal Officer. Please go ahead, ma'am.

Thank you, operator.

Good afternoon, everyone, and thank you for participating with us today. Joining me on the call are Tony Cherbak, our Chief Executive 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 FY16. By now, you should have a copy of today's press release. If you need a copy and are unable to access one 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 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 10-K report for the year ended May 30, 2015, 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 condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

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

Thanks, Kate.

Good afternoon, and welcome to the RGP third-quarter conference call. I'm going to start by giving you a brief overview of third-quarter operating results. Total revenue for the third quarter of FY16 was $146.8 million, the same as the comparable quarter a year ago. Our revenues for the third quarter were slightly below our own internal expectations.

Although the sequential quarterly revenue declines that we had experienced with our energy clients stabilized from our first quarter to our second quarter, during our third quarter, sequential revenue from our energy clients decreased by approximately $1.1 million. Quarter over quarter, the revenue decrease from our energy clients was approximately $2.6 million.

Third-quarter gross margin was 37.4%, an increase of 10 basis points from the comparable quarter a year ago. During the third quarter, our SG&A costs were $43.3 million, up $100,000 sequentially, but lower by $200,000 quarter over quarter. During the third quarter, our adjusted EBITDA was $13.1 million, and we used cash in operations of $3.7 million.

Additionally, we returned $12.2 million to shareholders during the third quarter, in the form of share repurchases and dividends. Our pre-tax income on a US GAAP basis was $10.8 million, versus $10.5 million a year ago. Based upon an effective tax rate of 44.7% during the third quarter, our earnings per share were $0.16, the same as in the third quarter of FY15.

As we reported in early January, non-holiday weekly revenues during the first five weeks of the quarter were $50 million, averaging $12.4 million in the non-holiday weeks. During the remaining seven non-holiday weeks of the quarter, weekly revenues averaged $12.2 million, ranging between $11.9 million and $12.5 million, and the last week of the quarter was $12.3 million.

During the early weeks of the fourth quarter, we have begun to experience a slight pullback in weekly revenue run rates, as evidenced by average weekly revenues of $11.7 million during the first four non-holiday weeks of the quarter. While a portion of this decline relates to the impact of spring break holidays spread over multiple weeks, we believe another factor relates to a cautious spending environment within the financial sector, which is assessing the impact on their business of current federal monetary policy, as well as the spill-over effect from continued turmoil in the oil and gas industry.

Based upon the amount of change that we see facing our clients, we believe this recent revenue compression is more transitory than an indication of a longer-term trend. Comparing current weekly run rates to comparable weeks a year ago, fourth-quarter revenue is trending about even.

With that, I will now turn the call over to Nate for a more detailed look at our financial results.

Thanks, Tony.

As mentioned, revenues for the quarter were $146.8 million, even with revenues in the third quarter of FY15. On a sequential basis, revenues decreased 2.7%. On a constant-currency basis, consolidated revenue increased 1.1% quarter over quarter, and declined 2.5% sequentially.

I'll now discuss our revenues geographically. For the third quarter, revenues in the US were $121 million, flat quarter over quarter, and down about 1.2% sequentially. For the third quarter, total revenues internationally were $25.8 million, up 1.2% quarter over quarter, and down 8.8% sequentially.

International revenue accounted for approximately 18% of total revenues for the quarter, down from 19% in the second quarter. Europe's third-quarter revenue increased 1.5% quarter over quarter, and decreased 10.5% sequentially, while Asia Pacific region saw third-quarter revenues increase 6.5% quarter over quarter, and decrease 7.5% sequentially.

On both a sequential and quarter-over-quarter basis, the US dollar was stronger against the euro. On a quarter-over-quarter basis, the US dollar was stronger against most of the currencies of Asia Pacific countries in which we operate, but was a push in the sequential quarter. As a result, on a quarter-over-quarter basis, Europe's revenue increase would have been 8.9%, and Asia Pacific's revenue would have increased 9.8%. On a sequential constant-currency basis, Europe's revenue decrease would have been 8.5%, and Asia Pacific's revenue would have been the same.

Let me now discuss early revenue trends for the fourth quarter of FY16. Weekly revenues for the first five weeks of the fourth quarter totaled $58.1 million, and were $11.9 million; $11.8 million; $11.7 million; $11.1 million, which includes Good Friday; and last week, $11.6 million. This run rate is similar to the comparable weeks a year ago.

Using the most recent non-holiday average weekly run rate of $11.7 million over the remaining weeks of the fourth quarter, we would achieve fourth-quarter revenues of approximately $151.5 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. It should be noted that Memorial Day will fall in the first week of FY17, so we will not be directly impacted by this holiday in the current quarter.

Now let me discuss gross margin. Gross margin for the third quarter was 37.4%, a 10-basis-point increase from 37.3% a year ago, and down 160 basis points from 39% in the second quarter. Our gross margin for the quarter is about 70 basis points higher than anticipated, resulting primarily from improved bill pay spreads.

The average billing rate for the quarter was approximately $121 per hour, compared to $120 in the second quarter, and $120 a year ago. The average pay rate for the third quarter was approximately $60, the same as in the second quarter, and up from $59 one year ago.

Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. Excluding reimbursable expenses, our third-quarter gross margin was 38.1%, which compares to 38% in the third quarter a year ago.

In thinking about gross margin in the fourth quarter of FY16, we would expect gross margin to improve sequentially by approximately 180 basis points, primarily due to the reduction of compensated holidays and reduced payroll taxes. For the third quarter, gross margin in the US was 38.2%, and our international gross margin was 33.8%, representing a quarter-over-quarter increase of 20 basis points in the US, and down 60 basis points internationally.

Now for headcount: For the third quarter, the average consultant FTE count was 2,480. This compares to 2,554 in the previous quarter, and 2,523 in the year-ago quarter. Quarter-end consultant headcount was 2,584 versus 2,577 a year ago. Total headcount of the Company is 3,353 at quarter end.

Selling, general and administrative expenses for the third quarter were $43.3 million, or 29.5% of revenue, versus $43.5 million or 29.6% of revenue in the year-ago quarter. SG&A was $43.2 million, or 28.6% of revenue, in the second quarter of FY16. We believe SG&A expenses in the fourth quarter of FY16 will increase approximately $1 million from the third-quarter level. The increase in the fourth-quarter SG&A stems primarily from increased marketing expenses, some of which relates to our revenue-recognition initiatives.

Stock-compensation expense, which is included in the SG&A amounts I just disclosed, was up slightly compared to 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 about $1.3 million. At the end of the third quarter, our office count was 68 -- 45 domestic and 23 international.

Related to other components of our financial statements, depreciation and amortization was $900,000 for the quarter, about even with last quarter. We would expect depreciation expense for the upcoming quarter to approximate $900,000 again. Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation, was 8.9% in the third quarter, versus 8.8% in the third quarter of FY15 and 11.3% last quarter.

During the third quarter, on a GAAP basis, we recorded a provision for income taxes of $4.8 million on GAAP pre-tax income of $10.8 million, representing an effective tax rate of approximately 44.7%. We anticipate a fourth-quarter effective tax rate of approximately 44.5%. 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 income was $0.16 for the third quarter, the same as a year ago.

Now I'll turn to our balance sheet. Cash and investments at the end of the third quarter were $96.5 million, a $13.2 million decrease from the end of the second quarter. The decrease stems primarily from cash used in operations of $3.7 million, and share repurchases and dividends totaling approximately $12.2 million during the quarter. Cash flow from operations was negative, primarily due to a decline in accrued compensation of $6.8 million, stemming from our biweekly payroll occurring on the last day of the third quarter. Capital expenditures were $150,000 during the quarter.

During the third quarter, we repurchased approximately 589,000 shares of our common stock, at an average aggregate cost of $8.5 million or $14.40 per share. On a fiscal year-to-date basis, we have repurchased approximately 1.3 million shares, at an aggregate cost of $20 million or $15.66 per share. The shares we purchased represent 3.5% of our outstanding shares as of the beginning of the year.

Our current Board authorization for our stock buyback program has approximately $146.7 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 36.8 million.

Receivables at quarter end were approximately $100.5 million, compared to $98 million at the end of the second quarter. Days of revenue outstanding were approximately 61 days, versus 57 days in the comparable quarter a year ago, and 60 days in the second quarter.

Now, I'll turn the call over to Tony for some concluding thoughts.

Thanks, Nate.

I continue to be encouraged by the progress we're making internationally, especially in Europe. As Nate mentioned, on a constant-currency basis, Europe grew 8.9%. Results in Europe are gratifying in light of the changes that we've made there over the past 18 months. Additionally, Asia-Pac grew 9.8% on a constant-currency basis, despite the slowing economic environment in the region.

We are very focused on revenue growth in the US. We continue to see solid activity related to M&A integration initiatives, and should start to see a ramp-up in financial reporting compliance initiatives as we progress into Q4, and then Q1 of FY17.

Let me now share some additional statistics which we believe reflect the continuing health and strength of our core business. Client continuity continues to be outstanding. Through the third quarter, we served all of the top 50 clients from 2015 and all of our top 50 from FY14.

We continue to see an increase in the number of clients with fees exceeding $500,000. Through the third quarter of FY16 on a run-rate basis, we have served 239 clients with fees exceeding $500,000, compared to 237 clients in 2015.

Our top 50 clients approximated 40% of total revenue, while 50% of our revenues came from 87 clients. Our loyal client following is reflective of our client service approach, and the quality of work performed by our consultants. Our largest client for the quarter was approximately 2.2% of revenue.

Through the third quarter, 94% of our top 50 clients have used more than one service line, and 84% of those top 50 clients have used three or more service lines. This service line penetration reflects the diversity of our relationships that we have within our client organizations.

Now, as you have read in today's press release, Nate has announced his intent to retire as our CFO following the end of FY16. Nate will stay on through the filing of our 10-K, which is expected to occur near the end of July, and will participate in the recruitment of his replacement. The Company has retained Spencer Stuart to assist us in the search for a new CFO.

Nate and I have been working together for over 30 years. During that time, not only has he been a great friend, but he's also been a true business partner. Nate has always impressed me with his intellect and work ethic, but most of all, his uncompromising integrity. On behalf of all employees of RGP and our Board of Directors, I want to thank Nate for his many contributions, and wish him well in his retirement.

That concludes our prepared remarks, and we would be happy to answer any of your questions at this time.

(Operator Instructions)

Andrew Steinerman, JPMorgan.

Nate, obviously I want to congratulate you, wish you well on your retirement. I have a question for the team. I just want to make sure I get what you are saying in terms of the hesitancy in most recent weeks, has been coming from banks, I think that's what you call them, banks, as they assess the landscape, oil exposure, market volatility. But in the same breath, you think that's a passing thing. It's not a permanent entrenchment on spending.

If I have characterized it right, could you remind me, one, what percentage of your revenues is related to banks; and two, why you feel it's going to be passing? Do you have a backlog or anything to point to, to make you feel that there's more likelihood that is how it's going to be?

Andrew, just to remind you, the financial sector, which we consider both banks and insurance companies, approximates 20% of our revenues. They are obviously being impacted by various different things right now -- Fed monetary policy, a really low interest rate environment -- which is making it harder for them to make money. They're also being impacted by the spillover from the oil and gas sector, and then certainly lower trading revenues, as we read in the paper every day. We're starting to see a few layoffs at some of these banks.

But -- however, when you look at the regulatory work that they are doing, which they cannot cut back on, we're still doing a lot of regulatory work out of the banks and other financial institutions, working on capital requirements, living wills, their annual commitments to look at their capital available to -- the comprehensive capital analysis and review process. We still think that we're still doing a lot of work for these financial institutions; it's just a little bit choppy right now.

Right. But you do feel like it's going to pick up six months from now?

I think it's a hit or miss situation with some of these clients. With some, we're actually increasing our work. We just don't think that they can put some of this regulatory work off. It's actually mandated under Dodd-Frank, that they continue to look at their capital structure. So I think we're going to continue to do a lot of work. I think it's a little uncertain if it's going to deteriorate or not at this point.

Great. I know; I work at one of those institutions. My question is about Europe. Obviously, you've been on a multi-quarter turnaround trajectory here. Would you attribute that to the change of leadership in the region? Or do you feel like it's a good combination of some nice demand just being well executed on?

I think it's a combination of the overall leadership change, as well as the individual changes that we have made in the offices. Again, we're not ready to run a victory lap or anything like that, but we tend to be going in the right direction in Europe. I think the jury is still out, as to where that is going to end up. But we keep making progress quarter after quarter. We are encouraged by it at this point in time. But like I said, there's still a lot more work to do.

Could you make a quick comment in Europe, which countries stand out to you, leading this acceleration?

We're doing much better in the Netherlands and in Sweden. And a little bit better in France and Ireland.

Okay, thanks so much. I appreciate it.

(Operator Instructions)

Mark Marcon, Robert W. Baird.

First, I want to pass along my congratulations to Nate, as well. It's been a pleasure working with you over the years. I wish you all the best. With regards to the commentary, in terms of other verticals, can you remind us, aside from financial services, the size of the most important verticals, and what you're seeing in those?

Mark, financial services is our biggest vertical at just over 20%. We really don't -- aside from the fact of you asking us questions year-over-year, we don't really look at the percentages, per se, in the other areas. But med devices is significant for us. Technology. Pharma. Oil and gas. Utilities. Petrochemicals is a fair amount of business. But they are all in that, I would say, if I had to put a percentage range, I would say that they're all in the 5% to 7% range.

So with the exception of financial services, it's all pretty dispersed? Do you feel like on the energy side that things are stabilizing, or do you think there is a little bit more still to go?

It's hard to say, because you read the same articles as I do, and oil is up one day, down the next day. Right now it's running about $35 to $38 a barrel. It's really hard to say. It's volatile, that is for sure. We thought a couple of quarters ago that we had stabilized, but then this quarter we saw that it had gone down a little bit more.

Obviously, there's a lot of pressure on fees in the oil and gas industry. That's what we're fighting. We're not losing clients. In some cases, we have to drop our rates a little bit to stay out at the client, but that's what we intend to do.

Okay. In terms of that, the rate compression with those clients, do you feel like that is over? Or do you think we still have -- we're in the relatively early stages, and we probably won't anniversary it until a year from now?

I don't think we're in the early stages of it, because I think it has developed a little bit. But it's very hard to say if it's over or not. We feel confident that we will stay at all of these big clients, even while there is a little bit of volatility in their industry, we're still going out and visiting these clients; we're still doing work. But it's too hard to call.

Okay. And then, the profitability continues to be good. As we think about the next year, just assuming that things stay steady-ish state, how would you think about the expense structure changing over the coming year?

We have had pretty good discipline with our expenses. If you look back five years, we have barely increased -- we've been under 1% in our expense structure, in terms of growth of the expense structure. So I suspect that we will continue to keep that discipline. Unless we see our revenues start to increase, and which we will probably ramp up hiring a little bit.

Okay. You mentioned that for this coming quarter, you were going to spend a little bit more around rev-rec in terms of marketing.

Marketing related to rev-rec.

Right. And what are you seeing in terms of the client response there?

We are winning a little bit of work, but we don't see the clients moving as fast as I think they should be, given the complexity of what they are facing. I think that the companies are being a little bit complacent about just the overall magnitude of what they're going to face to get this statute implemented. So I think there's a lot more work to do there, and we are winning a few engagements, but not nearly as much as I would have expected at this point.

Why do think they are being that complacent?

If you look back to the SOX days, it was exactly the same thing. They really didn't get on it until they were almost right on top of the compliance date. I think the one-year deferral probably gave them a bit of a false sense of security. But that is the impression that I get, because we're hitting it really hard out in the marketplace, and talking to our clients.

A lot of times, they tell us they don't think it relates to them so much, until they really start looking at it; and then everybody -- they get a little bit more nervous about it the more that they look at it. But it's those companies that are just deferring it, thinking, well, we will just take care of it before the compliance date. That's going to be a problem with them, it's going to get compressed. And then they are not going to have the time that they need to get ready. Then they're going to have to scramble.

For calendar filers that deadline will be 2018, right?

That's correct.

Great. Could you talk a little bit about the practice areas? If we take a look at finance versus information management, et cetera?

Yes. If we look at it on a year-to-date basis, we probably increased the most in our GRC. Human capital is doing really, really well. Accounting and finance, which is our biggest practice, a little bit over 50% of the whole mix, is up 1%. IM is doing fine. It's up about 5%. And our little legal practice is doing well, as well. So that's the landscape.

Great. Super. Thank you.

That concludes our question-and-answer session for today. I would like to turn the conference back over to Tony Cherbak for any closing comments.

I want to thank all of our investors and employees, and look forward to talking to you on our fourth quarter. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.