Resources Connection Inc (RGP) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Resources Global Professionals Q3 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Alice Washington, General Counsel of 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 Kate Duchene, our Chief Executive Officer; and Herb Mueller, our Chief Financial Officer.

During this call, we will be commenting on our results for the third quarter of fiscal 2017. By now, you should have a copy of today's press release. If you need a copy and are unable to access the copy on our website, please call Patricia Marquez at (714) 430-6314, and she will assist you.

Before introducing Kate, I would like to remind you that we may make forward-looking statements during this call. Such statements regarding future events or future financial performance of the company are just predictions, and actual events or results may differ materially. Please see our Form 10-K report for the year ended May 28, 2016, 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 the call.

I'll now turn the call over to Kate Duchene.

Thank you, Alice. Good afternoon, and welcome to Resources' third quarter conference call for fiscal year 2017. I will start the call with a few introductory remarks and will then give a brief overview of our third quarter operating results. Next, I will outline the strategic initiative we have launched to improve our profitability and revenue generation. I will close by reflecting on our GP's vision and the relevance of our business model in today's economy.

I want to begin by noting that our 20th anniversary as a company happens this month. We are very respectful of the strength of our core business and the exceptional client base we have built over these 20 years. It is a strong company with great people. We've been profitable every quarter but one. We have consistently created value for our shareholders.

During our 16 years as a public company, we have returned over $645 million to our shareholders through our stock buyback and dividend programs. We have a strong base of business, an excellent client list and access to powerful decision-makers in our clients. We will continue to build on these strengths.

Currently, we are facing adverse revenue trends in the financial services and energy verticals. This is impactful, because 3 of our larger geographic practices, Tri-State, Chicago and Houston, are down. I will let Herb review the quarter in detail, but I want to acknowledge our performance against 3 key metrics now.

Our total revenues for the third quarter of fiscal 2017 were $143.8 million, which is down 2% compared to the third quarter 1 year ago. Second, net income was $2.9 million or $0.09 per diluted share compared to $6 million or $0.16 per diluted share 1 year ago. Third, SG&A was $45.3 million in the third quarter compared to $43.3 million in the third quarter 1 year ago. This financial performance reflects what we have experienced since the start of fiscal 2017. We have seen limited growth while making investments in our service capabilities for our clients. As a management team, we know we must break through these challenges and, therefore, we have 3 priority initiatives underway to help us improve performance. I will outline those activities individually now.

First, we have announced a company-wide plan to reduce our SG&A by approximately $7 million on an annualized basis. This cost reduction plan eliminates approximately 6.5% of management headcount. This initiative includes the closure of 2 offices, 1 in the United States and 1 in Europe; and the elimination of some positions in our field offices and back office to better match the revenue levels of certain practices in our core business. In addition, we have taken $1.7 million annually out of our cost structure in the Pavisse business beginning in the third quarter. We have rightsized the team developing this health care-related asset and are starting to uncover some additional opportunity for this software product.

In formulating the cost-reduction plan, we carefully reviewed our client base, existing revenue and team size by market. We then identified where we had excess headcount given practice size and market focus. We sought to make decisions that would balance our existing revenue while also planning for the future state of our operating model. We know that we could not ignore our infrastructure cost through transformation, which I will discuss further in a moment, and this initiative is an important step for us in reinforcing our culture of responsibility and driving improved accountability.

I want to pause here and acknowledge what a strong partner Herb has been for me and the company in working through this plan. Herb brings excellent insight and judgment to the CFO role, having led one of our fastest-growing offices prior to moving into the corporate role. Herb is partnered with Tim O'Rourke, our Executive Vice President of Operational Excellence, to immediately improve our leverage and efficiency.

The initiative is then communicated within the company and we will see the transition activities completed by the end of the fourth quarter. We will take a restructuring charge tied to this cost reduction plan in our fourth quarter results. We will also see the headcount reductions fully complete in the fourth quarter numbers. Herb will provide additional financial details related to our SG&A costs and actions later in the call.

Our second priority initiative focuses on sales transformation. We are in the process of improving our sales culture and business development skills. Our foundation was built on our ability to provide high-level professional services and counsel. And while we've done extremely well in the actual work, we have not kept pace with our skills in developing client opportunities in new business. We must improve the size of the funnel.

During our January call, we shared our plans regarding the implementation of Salesforce as our global CRM tool. The project underway now is broader than just a technology implementation. Our sales transformation includes strategy, process, structure, compensation plan design, management and technology. This initiative is being led by our new sales leader, Executive Vice President of Revenue, Tim Brackney, who took on this role in late January 2017. Tim comes to the role having lead some of our largest accounts and our Pacific Northwest region, including Silicon Valley, which has been a strong performing market for RGP. This is a new function in the executive team and one which will help us move from a primarily geographically-focused client service delivery model to an operating model that will drive certain sales functions centrally.

This new model will drive a sales engine on an enterprise level to support and supplement the critical account development and management activities happening in the local markets. This initiative will also enable us to engage with client targets more productively as different go-to-market channels will be focused on operating in targeted and relevant ways. This will also help us execute a more productive middle-market strategy where we see opportunities for strong growth.

The sales transformation effort is a multi-step process that we believe will take approximately 12 to 18 months to complete fully. We are building a rigorous sales culture. We will also be building a sales function that has focused roles, including sales operation and inside sales functions. We have engaged an independent consulting firm to assist us with the sales transformation effort. This firm has deep experience in working with companies to improve revenue drivers, especially portfolio companies owned by private equity,, where speed is essential. They began their work with us this month.

The first 4 critical activities are: first, the completion of our sales process alignment and Salesforce implementation; second, the establishment of an enterprise-wide business development function, team and clear responsibilities; third, the establishment of a strategic client program dedicated to serving and lifting revenue in our highest level clients who know and love our business model; and fourth, the evolution of our incentive compensation plans to prioritize growth as fundamental, with clear accountabilities by role. As a result of this investment, we expect to see revenue upside by the second half of fiscal year '18.

We will report on the results of this initiative as we progress. We are balancing rapid change with the need to optimize the core business. Our teams will not be overly distracted from delivering every day for our clients as we work through these changes. As we mentioned earlier, we will progress this initiative in stages and report on results accordingly.

Our third priority initiative is dedicated to building our integrated solutions capabilities with a central team and a standard deployment model. This will enable us to deliver offerings to our clients that are multidisciplinary and bring improved structure tools, points of view and quality assurance.

In the consulting business, there have traditionally been 2 primary buckets: thinkers, or the strategy consultants; and doers in the staffing and project execution space. We have always been in the doers bucket. Since inception, our value proposition has been to bring uniquely better talent to solve our clients' execution problems. That brand promise comes to life because we deliver experienced talent who have operated from both sides of the desk, usually within the same industry and functional backgrounds. This model ensures that our project execution solves our clients' problems with practical insights and wiser perspective at a faster pace with a flatter learning curve. We work with clients who develop their strategy but lack the capacity and/or expertise to execute on their important projects alone. Project execution is our sweet spot.

Given market dynamics, competition and technology disruption, what our clients want today has expanded, and we need to respond to their needs. Clients want us to bring accomplished talent that can translate strategy to successful execution and who are also enabled by supporting programs, points of view, best practice knowledge, technology accelerators and toolkits. Increasingly, clients are requesting tools, templates and methodologies that can jumpstart their projects for success. So we won't decelerate our value proposition as doers, but we will add a solution strategy as a market differentiator and revenue driver for certain offerings.

Based upon this and what we are hearing from clients, we've established an executive team position to develop our integrated solutions practice in a careful way. Tracey Figurelli, our Executive Vice President, Integrated Solutions, is leading this effort. She, too, assumed the position in January 2017, having led our global information management practice for 5 years, achieving consistent growth in that practice area. Right now, our solutions work is focused on M&A transaction services and data solutions, which includes data governance, data management, data security and privacy and data analytics. Both of these solutions initiatives have been driving strong double-digit growth this fiscal year. She will also continue to build our change management services, which are increasingly in demand in every change-related project as more and more of our client base understands that you have to address the people side of transformation, too.

Our longer-term strategy is to identify those projects in the field that can be developed into deeper solution practices and distributed to more clients through our existing geographic channels, especially in the middle market.

Before turning the call to Herb, I would like to share the one other executive team position that is new for the company this fiscal year. Executive Vice President, Talent. Tanja Cebula has assumed this role and will lead our talent transformation efforts. Most recently, Tanja has redesigned our talent acquisitions, bringing talent in from many well-respected companies and competitors who will have a positive impact on our business. We designated talent with a seat at the executive table, because it is so core to everything else we do. A human capital business must care about people, how to attract the best people, how to retain them and how best to match them to great client work. We also need to ensure we have a scalable platform to support where the business is going. Tanja will start with an extensive review of our talent function as geographically deployed. We know that we can only deliver on our strategies if we attract and retain more than our fair share of great talent everywhere we operate. The talent marketplace is changing and we have to change with it. We are excited about the possibilities of acquiring and mobilizing talent in new ways and with an aligned approach to support our reignited sales engine and our integrated solutions business. This approach will strengthen our ability to deliver on the circle of quality philosophy. Great talent is attracted by great clients and great projects. As we improve our offerings in our solutions business, the way in which we retain and mobilize our talent will change to reflect this. Tanja's 20 years of experience with RGP, including 17 years in the field, well qualifies her to lead this critical role.

To close this portion of my remarks, I just want to recap quickly our priority initiatives: number one, complete a cost reduction plan by the end of fiscal 2017 to take approximately $7 million out of our SG&A on an annualized basis; number two, continue and accelerate our sales transformation project to improve our revenue engine and the size of the funnel in all segments of our business; and number three, build our integrated solutions practice to enhance our client offerings.

In summary, as we celebrate our 20th anniversary, we are reigniting our fundamental vision as a company, helping the world work differently. This is important to the critical elements of our business: our clients and our talent. Clients want better solutions to accelerate project results, experienced talent wants to work in more liberating and empowering ways. Innovative companies are making strategic decisions to outsource a defined portion of their talent needs. They recognize that they don't need to buy every specialized skill set year round via the permanent employee model. They are recognizing that a better workforce planning model exists. They can lease that intellectual capital for when they need it and for how long they need it. We continue to educate the market on the benefits of the sharing economy as it relates to professional work and the agile workforce. We are excited about the opportunities ahead as we engage in serious change to drive longer-term value.

I will now turn the call over to Herb for a review of our third quarter

Thank you, Kate, and good afternoon, everyone. I'll start by giving detail on our fiscal third quarter financial results, then I'll discuss the trends we're seeing in Q4. I will also give further detail on the financial impacts of the strategic initiatives outlined a little earlier.

Starting with an overview of our third quarter results, total revenue for the third quarter of fiscal 2017 was $143.8 million, a 2% decrease from the comparable quarter 1 year ago. Sequentially, revenue was down 2.5%. On a constant-currency basis, revenue decreased 1.2% quarter-over-quarter and decreased 1.8% sequentially. Our third quarter gross margin was 36.3%, representing a 110 basis point decrease from the prior year.

SG&A expenses were $45.4 million compared to $43.3 million in the third fiscal quarter 1 year ago. Our net income was $2.9 million or $0.09 per diluted share. In Q3, adjusted EBITDA was $8.4 million or 5.8% of revenue compared to $13.1 million or 8.9% of revenue in the year-ago quarter.

First, let's look next at revenue trends. As we reported in January, weekly revenues during the first 5 weeks of the third quarter totaled $51.9 million. During this 5-week period, weekly revenues averaged $10.4 million. However, 2 of those weeks were impacted by the holiday season, including Christmas and New Year's. Absent those weeks, our average revenue was $12 million. During the final 8 weeks of the quarter, average weekly revenues were $11.5 million per week, including Chinese New Year's and President's Day. Without those impacts, the average was $11.9 million. Now let me discuss some of the highlights of our revenues geographically.

As Kate mentioned, we've seen some improving trends across our international businesses, with revenues in Europe and Asia Pacific increasing during the quarter. However, our U.S. performance continues to be below our expectations due to the softness in financial services and energy areas. For the third quarter, revenues in the U.S. were $116.9 million, a decrease of 3.4% quarter-over-quarter and a decrease of 0.6% sequentially. Our third quarter revenues were moderately impacted by the seasonal impact of Christmas, New Year's and Chinese New Year. For the third quarter, total revenues internationally were $26.9 million versus $25.8 million in the third quarter 1 year ago, an increase of 4.5% quarter-over-quarter, 8.8% constant currency and a decrease of 10% sequentially, 6.7% constant currency. International revenue accounted for approximately 18.7% of total revenues for the quarter compared to 20.3% in the second quarter. Europe's third quarter revenues increased 4.7% quarter-over-quarter and decreased 9.8% sequentially, which is a normal result of the holiday season, while the Asia Pacific region saw third quarter revenues increased 5% quarter-over-quarter and decreased 10.6% sequentially, again, as a result of the holidays.

On a constant-currency basis, total international revenue increased 4.5% quarter-over-quarter and decreased 10% sequentially. On a quarter-over-quarter basis, the U.S. dollar was stronger against most currencies in Europe and Asia Pacific in countries where we do business. As a result, on a constant-currency basis, Europe's revenue would have increased quarter-over-quarter by 11.1%, and Asia-Pacific's revenue would have been up 5.5%.

Turning to the early revenue trends for the fourth quarter of fiscal 2017. Weekly revenues continue to trend 2% to 3% below 1 year ago. The actual numbers are misleading as a result of Easter falling in the first 5 weeks last year but not this year. We continue to face challenges in the financial services area and in the energy sector, while interest rates and restrictions on proprietary trading, [ along ] other things, continue to pressure financial services. The potential of deregulation is also encouraging and could provide a significant opportunity for our financial services business. We continue to make strong gains in both revenue recognition and lease accounting, growing 15% to 20% every quarter. However, it's still less than 5% of our overall business.

Turning to gross margins. Gross margin for the third quarter was 36.3% versus 37.4% in the year-ago quarter and 38.3% in the second quarter of fiscal 2017. The quarter-over-quarter decrease of 110 basis points results from reduced bill/pay spreads and an increase in medical costs from our self-insured program. The sequential decrease of 200 basis points results from higher employer payroll taxes at the beginning of the calendar year and medical costs.

Excluding reimbursable expenses, our third quarter gross margin was 37%, which compares to 38.1% in the third quarter 1 year ago. For the third quarter, our gross margin in the U.S. was 36.9% and our international gross margin was 33.8%. The average bill rate for the quarter was approximately $118, the same as the second quarter, and compared to $121 in the year-ago quarter. The average pay rate for the third quarter was approximately $59, the same as the second quarter and compared to $60 1 year ago. As a reminder, these hourly rates are derived based upon prevailing exchange rates during each given period. About 1/3 of the bill rate and pay rate changes from a year ago are influenced by currency impact.

Now to headcount. For the third quarter, the average consultant FTE count was 2,503. This compares to 2,530 in previous quarter and 2,480 in the year-ago quarter. Quarter-end consultant headcount was 2,611 versus 2,584 1 year ago. The total headcount of the company was 3,394 at quarter-end. We expect management headcount to reduce in the fourth quarter as we remove some positions in our field offices and back offices, in line with our cost reduction initiatives.

Now looking at other components of our third quarter financial results. Selling, General and Administrative expenses were $45.4 million or 31.5% of revenue. This compares to SG&A of $43.3 million or 29.5% of revenue in the third quarter of fiscal 2016. The increase relates to the additional investments we made in business development professionals and management consultants in potential growth markets as well as in Salesforce.com. We have made these investments in dedicated business development professionals and subject matter experts as we focus on building our M&A transaction services, change management and data solution teams.

The investment is delivering results. We're up 20% year-to-date in these solutions areas over the first 3 quarters in fiscal year '16.

Stock compensation expense was $1.5 million or 1% of total revenue. We would anticipate quarterly stock compensation expense in the upcoming quarters to approximate $1.5 million.

At the end of the third quarter, our office count was 67, 44 domestic and 23 international. As Kate mentioned, we're closing 2 offices in the fourth quarter of fiscal 2017, 1 in the U.S. and 1 in Europe, while adding 1 office in another location in Europe which is already up and running, that we've been servicing in a temporary office space. Related to other components of our financial statements, depreciation was $900,000 for the quarter, up slightly from the second quarter as a result of office relocations. We will expect depreciation expense to approximate this amount for the next couple quarters.

Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation, was 5.8% in the third quarter, down from 8.9% 1 year ago and down from 8.3% in second quarter of fiscal 2017. This is a result of the factors mentioned above, lower gross margins and higher SG&A.

Our pretax income was $5.6 million in the third quarter. During the quarter, we recorded a provision for income taxes of $2.7 million, representing an effective tax rate of almost 49%. 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 U.S. 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. On a cash basis, our tax rate was about 42%, and we expect that rate to continue over the next couple of quarters.

For the fourth quarter fiscal 2017, we anticipate a statutory tax rate of approximately 46%. Our effective tax rate is impacted by our current inability to offset income in tax jurisdictions in which we're profitable with losses in several tax jurisdictions in which we're not profitable.

Finally, our GAAP net income was $2.9 million or $0.09 per share during the quarter. Now let me turn to our balance sheet. Cash investments at the end of the third quarter were $44.6 million, a $14 million decrease from the end of the second quarter of fiscal 2017. The decrease stems primarily from repayment, $10 million on the credit facility. In addition, cash used in operations was $1.2 million in the quarter. Additional share repurchases and dividends during the quarter totaled approximately $10.2 million, offset in part by stock purchases of -- by employees of $3.8 million. Capital expenditures were $1.7 million during the quarter, net of landlord reimbursements. We expect that to be in the $1.5 million range in Q4.

During the third quarter, we repurchased about 400,000 shares of our common stock at an aggregate cost of $6.9 million or $17.31 per share. Our stock buyback program has approximately $125.1 million remaining. We will continue to return cash to shareholders through our quarterly dividend while balancing debt repayment, the capital requirements of growing our business organically and inorganically and fiscal prudence.

Our shares outstanding at the end of the third quarter were approximately 29.6 million. Receivables at quarter-end were approximately $96.9 million compared to $97 million at the end of the second quarter. Days of revenue outstanding were approximately 61 days compared to 60 days at the end of the second quarter of fiscal 2017.

Now turning to the financial impact and the strategic initiatives we announced today. As Kate outlined, we have 3 priority initiatives: to reduce costs, enhance our revenue and improve our operating model. On cost reduction, we expect the transition activities to incur a restructuring charge of approximately of $2 million to $2.5 million, which will be fully reflected in our fourth quarter numbers. This includes severance cost as well as lease costs that we do not expect to recover with closing offices.

On revenue enhancement, the initiatives we have outlined will put us in a stronger position going forward. Our SG&A will reflect our spend on implementing Salesforce.com and costs associated with hiring an independent consulting firm. We are offsetting these costs by reducing our marketing spend during the year.

As Kate outlined, there are multi-step changes, so there may be various costs coming through at different times. We're making significant changes to the business, and what may be a transitional period, we believe we will see real benefits to our operational financial performance. We expect to see revenue upside and cost savings begin to have positive impacts on our numbers in fiscal year '18.

At this point, I'd like to turn the call back over to Kate for some closing comments.

Thank you, Herb. As set forth in my opening remarks, we are not sitting still. We've embarked on a number of important initiatives that we believe will make the company more productive and drive more profitable growth in the future. We are extremely focused on driving growth and working hard to accelerate the return on investments we are making in the sales and solutions space. Before opening the call to questions, I will review, as is customary, our client continuity statistics.

Client continuity remains outstanding. During our third quarter, we served all of our top 50 clients from fiscal 2016 and 48 of the 50 from 2015. In fiscal 2017, we have 253 clients for whom we provide services exceeding $500,000 in fees on a run-rate basis, and that's up from 239 through the third quarter of fiscal 2016. In addition, our top 50 clients represented 37.3% of total revenues, while 50% of our revenues came from 97 clients.

Our largest client for the quarter was approximately 2.2% of revenues. During the third quarter, 94% of our top 50 clients have used more than 1 practice area, and 80% of those top 50 clients have used 3 or more practice areas. This practice area penetration reflects the diversity of relationships we have within our client organizations and supports the opportunity for growth in other significant clients. As discussed earlier, we believe an enterprise-wide aligned sales process and global sales tool and teams will help us improve such results going forward.

In closing, as I mentioned on the last call, we are very pleased by the revenue trends related to our key solutions practices: technical accounting, M&A transaction services and data solutions, all of the key initiatives of strong double-digit growth sequentially and compared to prior year. The initiatives are key elements of our strategic plan and priorities for our focus in the near term. That concludes our prepared remarks, and we're happy to answer any questions at this time.

(Operator Instructions) And our first question comes from Kevin McVeigh from Deutsche Bank.

I wonder if you could just -- in terms of the strategic actions you're taking, just wanted to kind of understand, because I always thought of Resources as kind of a supplemental staff as opposed to doing implementations and things like that. So is it -- are you going to more of a subscriptive model? And if you kind of take the lead on the implementations, does that change the type of risk you're willing to incur? And as a result of that, do you need to change kind of the insurance across the business and things like that? That was my first question.

Okay. I think -- that's a good question, Kevin, and thank you for that. So we are changing the business a little bit, but -- and going deeper in some solutions practices where it makes sense, both to follow what our clients are asking for from us and also just follow the spending trends in our clients. So let's talk about data solutions for a minute. The reason we're so deep in data solutions is because everything tells you that companies are obsessed with moving into the digital world. That's an opportunity for our classic project support activities. But certain clients, and I think more and more in the middle market, are asking us for some of the strategy and point of view work, too, so we can bring a fuller complement of solutions work to that set of clients. And that's a group of clients that have been largely ignored by our larger competitors. So we're excited about the opportunities there. We have been careful and certainly working with our General Counsel to look at how we contract with these clients and that we appropriately allocate the risk model, especially for the price point we're charging for these services. And we've also been very careful to make sure that our insurance products cover how and where our business is moving. Herb, what do you want to add?

Well, I would add that still the -- a very powerful majority of those engagements are still time- and material-based. So we will, in some occasions, have fixed-fee engagement, but traditionally it's still been time and materials.

Got it. And then in terms of the office closures, I mean, just -- can you give us a little more context? I mean Tri-State, Chicago and Houston, I trust it wasn't one of those 3, but are you scaling back those offices, just given -- I'm surprised at the continued weakness given oil's been firm and financials -- the market feels a little bit better. Is there anything? Is it just kind of the type of services that were being offered and that's part of the reason for the -- kind of part of the strategic shift? Or just any context on, again, the office closures and then were they kind of reset to smaller scale? And how are those practices -- how do they sit today in terms of percentage of revenue?

Yes. So let me uncouple your question a little bit. So first of all, the office closures were in smaller markets. And I want to be clear that while we're closing our geographic office, we're not stopping serving those clients. They are really more ancillary markets that can be served by offices in close geographic proximity. And it's not one of the big 3 that I talked about, Tri-State, Chicago or Houston. I think that the challenge with those 3 is that, in those markets, we had a couple of really large, very deep clients that for various reasons stopped spending with consultants, and we weren't the only firm hit. But that can leave a big revenue delta that you have to pick up in other ways. Tri-State, for example, in financial services, I don't think we moved quickly enough into the compliance space. Now we're moving very quickly into the data space where we're seeing a lot of those clients and institutions spend money. It's one of the reasons that's driving that solutions trend for us. So it's a combination. There's just not one easy answer. And I can tell you, we're very dedicated to those practices. Those geographies are very important to us. We have outstanding clients in those areas. And we're making changes. So we've either made some leadership changes or some structure changes in all of those practices in order to drive different results.

That's helpful. And then if I could, one more. Herb, are you kind of comfortable providing any type of range on revenue, because obviously Q4 is always a big quarter? Is there any way to just think about just directionally a range of revenue we can think about just given there's a fair amount of strategic initiatives kind of things going on, just so we could kind of -- help from a modeling perspective?

Sure, yes. I think as I said in my comments, we continue -- we're trending about 2% to 3% below last hear. That's what we're seeing in this quarter. And I think that's going to be a fair range, so things are dynamic. One of the fascinating things that we have in this business, and I had talked 3 months ago about where we're seeing some improvements, and we still are just -- I want to point out, in the past 2 weeks, we've seen office record revenue over the history of our company in 3 different offices: 1 in the Southeast, 1 in central geography; and 1 in the Southwest. So -- and in all of these, these are places where we've undergone management changes and procedural changes that are paying off. And that's where we're excited, we're seeing where we've made some important moves in several markets that it's making a difference. And to continue to do that across the board is going to be really key. But in all those, it takes time to work through those.

Our next question comes from Andrew Steinerman from JPMorgan.

Yes. I wanted to jump further into that question of, are the consultants getting affected here in terms of those verticals that you called out? Like when you think about the big 4 accounting firms, don't you think that they'll continue to grow quickly? I know we only hear their revenue growth once a year, but don't you think that they -- and last we heard, they were growing quickly. Don't you think the big 4 accounting firms are growing even though they are exposed to banking and energy also?

I think they are, Andrew. I think that's fair. I think they -- their brands are much older and much more powerful, and they have a much larger partner and employee footprint, so they can weather some of these storms probably easier than we can. I think -- but I think the premise of your question is accurate.

Okay. And then my other question is, as you get more into the advice business, do you feel like the average number of Resources professionals on assignment at a typical client will go up?

Yes. I think that, that will happen. I think there are a couple of beneficial things that will happen in our business that will drive long-term value for our shareholders. Number one, these project teams should get bigger. Number two, our pricing position with these clients, because we're delivering higher-value work and bringing thought leadership to the work, should remain higher. So we won't be as subject to some of the commoditization pressures we've seen or the VMS pressures we've seen in some of our larger client. So yes, I think both of those points are strong ones, Andrew, that we take into consideration when we're setting the future strategy for the business.

Right. And I'd add in that one of the key things that we're working on, on especially our larger strategic accounts, is expanding our sales across our service lines. Where, in some cases, we've typically been strong in A&F, and that's been our focus, we've seen great opportunity to bridge over to information management, supply chain; and then, in addition to that, having a more global structure, especially in the United States, where we can come in and help these very large clients in their remote offices. So we've made a conscious effort to come in and drive our leadership by account and which has also helped us -- and as I mentioned, 2 of the 3 offices that just set record highs were the benefit of that strategy. Through a Fortune 100 company, we expanded our relationship and drove results in different markets. So there's really, I think, a lot of opportunity for us there to better leverage and elevate the relationships we have with our large clients.

Last question, Herb, again, it's about the gross margin and the talk of pricing pressure. Is there actually pricing pressure in the marketplace for high-end F&A professionals? Or is it more that Resources has been less disciplined on price? As you're trying to get revenues up, you kind of have been willing to concede.

Yes, the pressure is on the low end of the business, with the large companies putting in VMS systems and, really, pressing that which is, again, part of our movement towards the higher end. Also, what we have on our overall pricing, the impact of the growth that we have in Asia is -- those resources are a lower price point. And then the math ends up just driving our overall business down, but when you come down -- I don't have it right in front of me right now, but the U.S. is solid there. But we are seeing it on the bottom end. What we have is a great value play on those higher level services, is where we become really attractive, where we're competing against the big 4 versus some of the lower-level staffing firms on the bottom end.

(Operator Instructions) And our next question comes from Mark Marcon from Robert W. Baird.

First, just wanted to understand a little bit more about the demand environment. Outside of the 3 big offices that you mentioned in the U.S., to what extent, and it sounds like maybe some of the smaller offices that are growing some client-specific initiatives, but just from a broad perspective, ex energy, ex financial services, do you think the economy is better or worse off from a client demand perspective, in the U.S.?

I think it's a little bit better right now. We're optimistic. The activity levels are very high. The discussions that we're having, especially in the middle market, we're seeing a lot of potential there as some of the CFOs have dusted off their project plans and are getting into discussions. There's still, I tell you, optimism, but cautious optimism.

Yes, I would echo that. I would also say that one of the reasons we're very bullish about building a true business development function in the company is that those folks are the kind of professionals that will call on any type of business leader. So while the historic foundation of our GP has been a lot of finance and accounting professionals who are very comfortable calling in those functional areas in a client, our business development folks are trained and educated to follow the money. And in an improving economy, that can have a much more positive impact in our business. And that's why, Mark, we're very excited about adding this element to our management team.

Great. And then can you talk a little bit more about 2 areas where you're seeing growth? Specifically, if we take a look at rev rec and lease accounting, it seems like we should -- particularly on rev rec, should start taking in, in a more material way. What's the sense -- just from a timing perspective in terms of getting in people who are going to get it implemented?

Yes, we're encouraged by -- I mentioned that we've got 20% sequential quarter-over-quarter growth. And so year-over-year, for the first 3 quarters, I mean we're up in the 75%, 80% range. So we're definitely doing better. It's not as big of a number as we would like. The proposal activity is significantly higher, I reported on some of those numbers last quarter. We're seeing and continuing to see the interest is there. But we're also seeing 2 things happen is -- that where one is, in some cases, has been a substitute for other spending. They come in and they realign their outside spend towards that. And then, still a lot of companies trying to do it internally. And -- but it's starting to blow up. So I still -- personally, I'm optimistic that, that can be a much bigger chunk. It just moves slower than I would have liked.

And it's currently between rev rec and lease accounting that's 5% of the business now?

It's a little bit under that. Yes, just a little bit under that. And the majority of that's rev rec. The lease accounting is starting to kick in, but I'd say 80% of it roughly is on the rev rec side.

Okay, great. And then with regards to the solutions, how big is that right now?

That is almost about 10% of our business and growing. And we're very excited. Tracey Figurelli has done a phenomenal job equipping that. That's where some of the investment in headcount was over the past year. That's where we brought in the subject matter experts to support that, and we're very excited about the opportunity there.

Okay. And then when we think about the flow-through in terms of initiative #1, relative to what may end up being absorbed by initiatives 2 and 3, how do we think about kind of the net increase -- I mean, reduction with regards to annualized spend?

Yes. It's going to vary over the quarters as we have this initial time period. We've obviously had the Salesforce.com ongoing license cost, which is under $1 million a year. You got the consulting related to the implementation, that the bulk of that spend will be complete by about halfway through Q1 of FY '18. But then you've got the additional initiative that we started on, on the sales planning that there's going to probably be between $1.5 million and $2 million. So you've got some numbers there, and that will kind of roll out over roughly a 12-month period, starting now. And then you may have different things. There's other little things that will come and go during that as we see opportunities, but those are the big, big buckets.

I mean, do you have a sense with regards to like on an -- if we were to hold revenue constant and to implement these initiatives on an annualized basis, where the SG&A would end up coming out if we were just to assume constant run rate, obviously with seasonal adjustments?

Yes. At this point, that's about as much as I'm going to say on it.

I mean, I will say, Mark, we're going to be very careful about spend. I believe we need to invest in certain activities, which we've laid out, to make the company stronger in the future. And I feel very optimistic and very strong and confident about that. But at the same time, and I told the team here, expect me to say no most of the time when you come to me with headcount, because we've got to be very careful. We've got to make the right investments to make us stronger, and we have to be very careful. So I think Herb is in -- he doesn't want to overpromise and under-deliver, none of us do. We can tell you we're going to be extremely cautious, but we also understand that we have to be building this firm for long-term value, and we're putting some new strategies in place to do that. We're listening more and more aggressively to what our clients say they want from us. We had a client the other day that said, "Why don't we spend more money with you?" This is a huge financial services client. And believe me, we're going to solve that question. But what that tells me as the leader of this organization is that our clients that know us, love us. And so we have to listen more to them and be providing what they want to buy, because we really have a unique value proposition in how we serve our clients in the project space and, in particular, how we are very committed to the knowledge transfer back into their environment, so clients are left better off than when [ we ] started. That's a pretty remarkable statement, and that's a brand promise that we want to make in all of our clients.

Great. I just -- but I do want to come back to just understand, I mean, should we anticipate that there will be some -- of that $7.5 million, will at least half of that flow through to the bottom, if we assume revenue kind of stays flattish or...

Yes. Yes, yes, I think that's definitely a fair assumption. My only hesitancy, Mark, is as we work through our sales plans and we're working through the new strategy, trying to decide if we have other short-term investments that could add that or potentially even some reduction as we find more efficient ways to do it, because that's what we're trying to accomplish is -- on both of those. But we may come into some areas where we realize we've got a shortage of the right talent. So I'll have better clarity on that as we get through, probably, the next 3 or 4 months as we further develop our plans.

Great. And then can you just give some color with regards to the change in the incentive comp in terms of the structure there, because I think that's really important? And then if you have any sort of guidance to -- as we think about the current quarter in terms of gross margin, SG&A, that would be appreciated.

Yes. I think on the incentive comp, great question. The key -- the way I'll describe that right now is, currently, we've had a linear line, you do a little bit better, you make a little bit more; you do a little bit worse, you make a little bit less on the incentive comp. We're going to be going to more of an S-curve, so it will be a more dramatic [ fault ] as markets, people start generating double-digit growth, they're going to be rewarded. At the same time, if they're not growing, then there's going to be a drop in compensation. So there's going to be more at risk, but -- and we're real excited about that. We're working through the final phase, so I don't have the exact definition of that, but this is going to impact all levels of the organization.

And then on the gross margin and SG&A for the current quarter?

Gross margin right now, we expect an uptick there, I'd say, in that 38%, 38.5% range. And SG&A, I think we're going to be somewhere in that $45 million, $45.5 million. And then plus -- on top of that though, you're still going to have the restructuring charge. And then you'll start seeing the benefit of a lot of these reductions, and it will be wrapping up with the consulting spend on the Salesforce.com. So you'll see a little better impact on Q1.

Great. And then I was wondering -- a question for Kate. What's the communication strategy? What's been communicated to the leadership in terms of the various offices so far? And what's the receptivity been to the extent that the message has been fully absorbed?

Yes, thank you, because change management is important to us, it's important to our clients. So part of my taking over the role, I wanted to have a more dedicated communication plan, not only with the management team but with our consultants, and I think we're doing that with a number of different vehicles. We've started to roll out the strategy and refine the strategy. And change is hard for people, but I think they're very receptive. And we will have a global management meeting in early May, where we'll all be together and confirming our commitment to this strategy and moving the company forward.

And at this time, I'm showing no further questions. I would now like to turn the call back over to Kate Duchene for any closing remarks.

Thank you, operator. And thank you, everyone, for listening in to our third quarter report. We thank you for your continued support and interest in Resources, and we'll look forward to updating you at the end of our fiscal year in July. Thanks, again.

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