Resources Connection Inc (RGP) 2026 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

At this time, I would like to remind everyone that management will be commenting on results for the second quarter ended November 29, 2025. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today. Today's press release can be viewed in the Investor Relations section of RGP's website and filed today with the SEC.

Also during this call, management may make forward-looking statements regarding plans, initiatives and strategies and the anticipated financial performance of the company. Such statements are predictions and actual events or results may differ materially. Please see the Risk Factors section in RGP's report on Form 10-K for the year ended May 31, 2025. For a discussion of risks, uncertainties and other factors that may cause the company's business, results of operations and financial condition to differ materially from what is expressed or implied by forward-looking statements made during this call.

I'll now turn the call over to RGP's CEO, Roger Carlile.

Thank you, and welcome, everyone, to Resources Connection Q2 earnings call. Before we get into the quarterly earnings discussion, I want to thank our leadership and employees for welcoming me as the company's newly appointed CEO and for supporting a smooth transition. I also want to recognize our teams for maintaining a strong focus on our clients and our business during this time.

I mentioned both our clients and our business as local points because we have employees who serve our clients' needs as well as employees who support the needs of our client service professionals and our business. Both employee groups are critical to our success. For those of you on today's call with whom I have not yet had an opportunity to speak, I look forward to doing so in the near future. I recognize that you have invested time understanding the company, its services and markets, and we appreciate your interest and effort.

Regarding our business, let me start by saying my enthusiasm for the company's future has grown since stepping into this role in November. The deeper I get into our business, the more impressed I am with the talent and capabilities here, but even more so with the commitment, enthusiasm, I find when talking with our people. The quality of our people is reflected in the caliber of long-standing and newly activated clients who trust us to assist them with issues they view as important to their success.

I also want to say that while the market for our services has been more challenging and uncertain to late for a variety of reasons, I believe there is a sufficiently large market of client needs for which RGP is positioned to serve that will allow us to grow our business and financial results. However, doing so requires that we focus on what gives us a competitive right to win. That is providing relevant skills and solutions to our clients, which satisfy their needs at a price that brings them better overall value than other providers in the marketplace.

Our balance sheet and liquidity are strong, which is a testament to the resilience of our people and client relationships as well as the flexibility of our business model. However, our quarterly earnings results also reflect a continued lack of positive momentum for our consolidated revenue and adjusted EBITDA. These results underscore the need to take decisive actions to better align our cost structure with our current revenue levels, refocus our on-demand offerings to address the evolving needs of our clients and scale our consulting business to deliver high-value solutions to both existing and new clients.

These 3 points will form the basis of our strategy going forward. We have already made progress this quarter in reducing our cost structure to better align it with our current revenue levels, and we will continue this work in the third quarter. Improving our financial results in the on-demand segment requires that we better understand our clients' current needs and adjust our ability to provide consultants that fit those needs.

Scaling our consulting business requires identifying and hiring experienced consulting professionals to grow our ability to deliver value-added solutions to our clients. In the evolving consulting marketplace, we are finding that these types of professionals understand and are excited about the competitive nature of RGP's service offering model and value proposition it offers to clients. We believe this will make us a strong employer choice for such professionals going forward.

We also believe that RGP's ability to provide in-demand finance, risk, operational performance and technology solutions and three different delivery models that is on-demand, consulting and outsourced services at a price point that is competitive to other traditional professional service firms gives us an opportunity to be uniquely successful in winning and serving clients' needs in the changing landscape for such services.

Lastly, no professional services firm can succeed in the present and future market without understanding how artificial intelligence, automation and other technologies are impacting their clients' businesses and how it impacts the professional services they seek and procure. This is no different for RGP, and we are actively working to understand how our clients' needs are impacted by their own AI and automation strategies.

Likewise, at RGP, we are continuing to implement additional AI and automation tools across our business processes to enhance the cost effectiveness of our client service delivery and internal business support functions. The work we have discussed so far today and the achievement of the expected results will certainly require time and disciplined execution. But the path forward is clear, and we are confident these actions will strengthen our business and create long-term value for our clients and shareholders.

With that, let me turn the call over to Bhadresh.

Thank you, Roger, and good afternoon, everyone. Before I begin, I want to welcome Roger as our new Chief Executive Officer. With Roger's leadership and fresh perspective, we are well positioned to strengthen execution, accelerate our strategic priorities, and drive operational discipline across the organization, capitalizing on our inherent strength.

In the second quarter, we exceeded expectations in adjusted EBITDA despite revenue coming in below consensus, reflecting disciplined cost management and execution. In North America, expanded go-to-market initiatives across our on-demand and Consulting segments, along with stronger cross-practice collaboration drove improved pipeline activity. Our Europe and Asia Pac segment delivered both year over year and sequential growth. While outsourced services revenue remained essentially flat versus the prior year, we achieved meaningful improvement in gross margins.

Overall, we remain focused on value-based pricing, targeted investments in leadership and service capabilities to drive momentum and cost discipline. Jenn will provide additional details on our performance and efficiency initiatives shortly. With that, let me turn to our performance by segment.

While Consulting segment revenue declined year over year, we delivered essentially flat sequential revenue with growth in select areas of CFO advisory and digital transformation. Bill rates continue to improve both sequentially and year over year with higher increases on new projects, reflecting the strong demand for our specialized services.

We're also moving up the value chain with existing clients, for example, highlighted in Q2 by a large technology company selecting RGP as a global preferred consulting provider expanding our role from on-demand talent into advisory services on mission-critical work streams. As part of our strategy to grow the Consulting segment, we'll complete the integration of reference point by the end of the fiscal year.

Combining reference points capabilities with our consulting platform and leadership will enhance collaboration, streamline go-to-market execution, and strengthen our focus on CFO advisory and digital transformation. This positions us to deepen relationships with existing on-demand clients while also expanding our reach to new clients.

Finally, on consulting, I want to thank John Bohman as he begins a well-earned retirement. His vision and commitment to both clients and employee value leave a lasting impact on RGP.

I'm pleased to announce Scott Rotman, who joined RGP in August, will succeed John as President of Consulting Services, leading our CFO advisory and digital transformation offerings. Under Scott's leadership, we will strengthen our integrated consulting segment and deliver client value across strategy, transformation and on-demand talent.

Turning to On-Demand. Revenue declined year over year, but continues to show signs of sequential stabilization, supported by higher average bill rates compared to both the same period last year and the prior quarter. We remain focused on execution of disciplined pipeline management with emphasis on skills for ERP, finance transformation, data and supply chain. Across North America, several markets delivered sequential revenue growth and in markets that are lagging, we're in the process of bringing in new leadership.

Turning to international. Our Europe and Asia Pac segment delivered both year over year and sequential revenue growth in the second quarter, supported by higher weekly revenue run rates and improved bill rates versus the prior year while maintaining stable gross margins. Performance was led by Europe, Japan, India, and the Philippines, underscoring the strength of our client relationships and the effectiveness of our regional strategy. We are committed to deepening multinational client relationships, along with expanding our local client base, differentiating through a combination of local delivery and scalable global delivery centers and maintaining disciplined cost management.

Lastly, in outsourced services. Revenue remained steady year over year and gross margins improved versus the prior year. We continue to add new clients to our platform while also exhibiting strong retention and bottom line performance benefited from both operating leverage and efficiency measures. To conclude, we remain focused on disciplined execution in delivering meaningful value to clients across all segments while continuing to see our strategy take shape and position RGP for sustained growth, profitability and value creation over time.

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

Thank you, Bhadresh. Good afternoon, and Happy New Year, everyone. Consolidated revenue for the second quarter was around the midpoint of our outlook range, $117.7 million.

While gross margin of 37.1% was below the outlook, run rate SG&A expense of $39.7 million was significantly more favorable enabling us to deliver adjusted EBITDA of $4 million in the second quarter or a 3.4% adjusted EBITDA margin. We incurred $11.9 million of onetime expenses in the quarter in connection with the CEO transition and a reduction in force, contributing to a GAAP net loss of $12.7 million.

I'll now provide some additional color on our revenue, gross margin and run rate SG&A expense. Consolidated revenue declined 18.4% on a same-day constant currency basis from the prior year quarter. While On-demand and Consulting segment revenues remain soft, we are encouraged by the steady year-over-year growth in the Europe and Asia Pac and Outsourced Services segment. We continue to focus on improving sales execution as well as aligning both our consulting solutions and on-demand talent pool to client demand to drive more pipeline growth and faster revenue conversion.

Gross margin for the quarter was 37.1% compared to 38.5% in the prior year quarter. We drove a 97 basis point improvement in pay bill ratio. However, leverage on indirect cost of service was unfavorable, notably related to health care costs and paid time off, including higher holiday pay due to Thanksgiving coming in the second quarter this year.

Enterprise-wide average bill rate was $121 constant currency versus $123 a year ago, driven mostly by revenue mix shift toward the Asia Pacific region. On an individual segment basis, we saw a 6.4% improvement in consulting and a 2.4% improvement in both on-demand and Europe and Asia Pac segments. As we continue to execute our pricing strategy and scale the consulting business to deliver higher value, larger scale engagement, we expect to gain more upside in bill rate.

Now on to our SG&A and cost structure. While we have been on a continuous journey to reduce costs over the last few years, we are conducting an even deeper assessment across the entire organization to streamline organizational structure, simplify processes and adopt automation and AI to ensure our cost structure is adequately sized to the current revenue levels.

The assessment is near completion, and we expect to implement the cost actions over a 12-month period. In October, we executed a reduction in force, the first in a series of actions to come in 2026. The risk impacted 5% of our management and administrative head count and is expected to yield annual savings of $6 million to $8 million.

Back to our improved SG&A performance for the second quarter, enterprise run rate SG&A expense for the quarter was $39.7 million, a 15% improvement from $46.5 million a year ago. Management compensation expense improved significantly by $3 million as a result of the reduction in force we executed this quarter and at the end of fiscal '25. The remainder of the year-over-year improvement in SG&A is attributable to lower variable compensation and reduced SG&A spend, including travel, occupancy, and professional services.

Next, I'll provide some additional color on segment performance. All year-over-year percentage comparisons for revenue are adjusted for business days and currency impact. And as a reminder, segment adjusted EBITDA excludes certain shared corporate costs.

Revenue for our On-Demand segment was $43 million, a decline of 18.4% versus prior year quarter. Segment adjusted EBITDA was $4.1 million or a margin of 9.5% relative to $5.6 million or a 10.5% margin in Q2 of fiscal '25. Revenue for our Consulting segment was $42.6 million, a decline of 28.8% from the prior year quarter. Segment adjusted EBITDA was $4.5 million or a 10.4% margin compared to $9.7 million or 16% margin in Q2 of fiscal '25.

Turning to our Europe and Asia Pac segment. Revenue was $20.1 million or a 0.6% growth from the prior year quarter. Segment adjusted EBITDA was $1.5 million in both years, representing a 7.4% margin in Q2 fiscal '26 and a 7.5% margin in Q2 fiscal '25.

Finally, our Outdoor Services segment revenue was $9.4 million, up 0.8% compared to the prior year quarter. Segment adjusted EBITDA was $1.7 million or an 18.4% margin, up from $1.5 million or 16.4% margin.

Turning to liquidity. Our balance sheet remains strong with $89.8 million of cash and cash equivalents and zero outstanding debt. Quarterly dividend distribution totaled $2.3 million with cash on hand, combined with available borrowing capacity under our credit facility, we will continue to take a balanced approach to grow allocation between investing in the business to drive growth, and returning cash to shareholders through dividends and opportunistic share buybacks under our repurchase program, which had $79 million remaining at the end of the quarter.

I'll now close with our third quarter outlook. Early third quarter nonholiday weekly revenue run rate has been largely consistent with the second quarter. As expected, due to the midweek timing of Christmas and New Year's Day, revenues from those two holiday weeks were much softer.

Taking into account the seasonality and based on our current revenue backlog and expectations on late-stage pipeline deals, our outlook calls for revenues of $105 million to $110 million in the third quarter. On the gross margin front, with the same seasonality impacting utilization and holiday pay for agile consultants as well as employer payroll tax reset at the start of a new calendar year, we expect a gross margin of 35% to 36% in the third quarter.

Now on to SG&A, reflecting realized benefits from our cost reduction efforts, offset by higher employer payroll taxes run rate SG&A expense in the third quarter is expected to be in the range of $40 million to $42 million. Non-run rate and noncash expenses will be in the range of $6 million to $7 million, consisting of noncash stock compensation and restructuring costs.

In closing, reiterating what Roger stated earlier, our strategy and our path forward are clear. We will continue to focus on improving our sales execution, optimizing our talent and consulting solutions to serve the needs of our clients, driving an efficient cost structure to strengthen our business and deliver more value for our clients and shareholders. This concludes our prepared remarks, and we will now open the call for Q&A.

(Operator Instructions) Mark Marcon, Robert W. Baird.

Good afternoon, everybody, and nice to talk to you, Roger, and welcome to the company. I'm wondering, can you talk a little bit about or elaborate a little bit on the specific areas where you're seeing AI leading to some disintermediation with regards to finance and accounting rules. I'm specifically interested in terms of how widespread is it at this point, how do you expect it to continue what specific rules and how you're adjusting to that?

Sure. Good to meet you. And I'll let Bhadresh add, you've been here longer dealing with it than me. But I think we're seeing, for example, in operational accounting roles, things that -- or you can imagine through AI or automation are easiest to replicate and replace. And so that would be some of the roles that we see as most impacted by our clients' efforts in that regard in the AI and automation world.

In terms of how widespread that is, I mean, I think it's -- my sense, again, I'll ask Bhadresh to add it as well. My sense would be that it's -- like most of the things we hear about AI, there's a lot of activity going on. Those things that are internal like those processes are where AI and automation are having the earliest impacts but there's still a lot of spending and still a lot of activity that's not being realized or benefits not been realized by clients.

So I think it remains to be seen how pervasive and how rapidly that occurs, but we are seeing that. And Bhadresh add, if you think there's something --

Sure. Thank you, Roger, and I think you're spot on. What we're seeing with clients and everyone is what I would say is experimenting with AI to seeing how the leverage they can get in the organization, especially in finance. As Roger said, the operational accounting rules, what I would call more transactional repeatable roles are getting replaced. However, what we're finding is that is that getting clients access to data quickly and rigor the data quickly and informing their ability to get their business more efficient, but that is requiring more work, right, to go execute.

So we're not seeing that big windfall that everyone is expecting that AI is going to replace so many jobs. It is accelerating the ability for our financial organization and client financial organizations to provide insights to their segments in terms of performance, predictability, future trends and things like that, so people can take action on it.

Our clients are also seeing that. I think a lot of them have continued to invest, some feel like they're overinvesting and not realizing the benefits. So we feel like, obviously, time will tell where this will land, but it's still in the early stages in to -- in the early days of digital cancelation where everyone is overspending until they normalize it.

The second part of this is as clients are understanding how to leverage AI for their organization, it's just not that AI is replacing jobs. It's also changing processes and how companies operate. So it's becoming a transformation initiative that should drive our ability to provide more services requiring higher talented people that can understand what the impact of AI is, what I can do and then how that business operates and changes the way they work, not only within the function, but the interactions with other functions.

Thanks, Bhadresh. I just want to add one thing. I think the second part of your question was what are we doing about it -- in our comments that our talent teams and our on-demand teams are working with clients to understand what skills they need in that environment. As Bhadresh said, there's certain skills and projects that are caused because of that work. And there are certain skills that are needed because of the technology being a major driver of that.

So as we mentioned in our script, ERP skills and other kinds of technology skills. So we're looking to shift our skill base towards the things that clients most need in this environment.

Yeah. And Roger, to add to that, I think what's becoming inherently clear is that the higher level skills that we are staffing in the on-demand business, what clients are seeking is that they are also becoming AI experts or AI knowledgeable for that particular function or particular role, and that's becoming critical.

I think on the consulting side, what we're seeing is that as clients are taking on to the initiatives data authenticity and accuracy is becoming a bigger issue, right, as is leading to bigger data projects with data cleanup and data tagging and things like that. So that's where a lot of focus is coming up in order for them to realize the pure benefits of AI as they look at end-to-end implementation of it.

Just to elaborate a little bit. Can you just like you have a fairly broad swath of the Fortune 500 that you serve. How widespread is what you're currently seeing? And then can you be a little bit more precise with regards to the types of rules? Are we talking about just accounts receivables and payables, reconciliations, data entry?

Or historically, you've also supplied people that were providing some analytical capabilities as well. And so I'm trying to understand to what extent are these lower level roles rather than also impacting higher level roles.

Yeah. I mean the lower level roles are definitely getting impacted, right, because AI is able to do those analysis and things like that as you leverage your learning models to do that. In the higher level roles, we don't see it as an impact. What we're seeing is a still reconciliation is with a wholesaler skill evolution, and as we're providing, for example, a controller or anything like that or in a senior financial analyst in these types of role.

They are looking for those that actually understand AI, you know how to use AI and know how to implement AI to leverage it more. And that's, I think, the distinction we're seeing in reconciliation receivables, all those types of things are the evolution of RPA into AI. But FP&A is becoming a big area where clients are starting to use AI to really start to look at how do they accelerate what we've historically done in Excel spreadsheets to drive those types of analytics and data. So that's where we really think that it then should.

Great. And then, Roger, you mentioned scaling up in consulting, and you mentioned incremental hiring there. Can you talk a little bit about the practices and the areas that you want to focus in within consulting?

Yeah. I think it's the issues that are still remain in high demand in Corporate America for example. So financial, financial transformation, financial technologies, technology generally, data analytics risk, all those kinds of things, tax that get towards the ability to -- in some cases, both for the clients to do more with less for the clients to have a better view of their own organizations. All of those things and drive value.

So all of those things, I think, are still in high demand. Clients may be a little more cautious in taking the time to assess what they're doing, but those are still in high demand services. And so we're looking to add our capabilities in those regards -- those areas.

Great. And then, Jenn, just a clarification. With regards to the SG&A, you mentioned $40 million to $42 million, and then you mentioned $6 million to $7 million in terms of stock comp and restructuring. Is the $40 million to $42 million inclusive or exclusive of that $6 million to $7 million in stock comp and restructuring?

Yeah. The $40 million to $42 million is exclusive. So $6 million to $7 million of noncash and non-run rate restructuring costs on top of the $40 million to $42 million and the reason why it's comparable essentially to our third quarter SG&A is because while we're realizing the benefits and the latest reduction in force we did in October, from a seasonality standpoint, we have the payroll tax reset and also when we did the risk in October, essentially, Q2 already kind of has almost a full quarter of benefit already in there. So -- but to answer your question, the $6 million to $7 million of non-run rate is in addition to -- not a part of $40 million to $42 million.

And then how much of an impact was the higher health care costs? And are you doing anything in terms of plan design changes with regards to what you offer to your employees to ameliorate that?

Yeah. The health care, this quarter is about $1 million plus impact compared to Q2. So it is significant. It impacted both our SG&A and probably lesser impact on SG&A, but a lot of impact on gross margin. Yeah, we do take an annual assessment of our plan design, and we also kind of look at the cost ratio sharing between employer and employees.

I would say that this quarter, this is an anomaly. We got a lot of unfavorable claims experience in October, specifically. So I don't expect that this or at least I would think that this is an anomaly.

So I think that this should normalize. Again, we don't have control over our claims experience. But we do take a pretty deep look each on an annual basis on our plan design.

Okay. Great. And then, Roger, I didn't want to focus on the micro questions initially. But I'd love to come back to just kind of broader strategic framework. It sounded like you're basically going to be looking at things over the next 12 months.

I'm wondering if you can just talk a little bit about what you're going to really focus on and what your vision is, and it's probably going to end up changing as you learn more about the company. But what your vision is for what investors should expect 12 to 24 months from now?

Well, I'm not sure the strategy itself changes at a high level. I mean we're going to be focused on our on-demand services and our consulting services. And those -- that's the two biggest things we do, and it's where we can drive a lot of value for our clients. So I think it's why we said the three focal points for our strategy in the near term, 12 months or longer if it takes, is right, get the costs structure aligned with our revenue so that we're profitable on that basis, for lack of a better word, fix our on-demand.

What I mean by that is what we've talked about, which is be sure we're getting our -- in front of our clients with our sales team and really understanding what the clients need. And then working with our talent team to be sure that we are sourcing and have that kind of talent to offer them so that we can bring that kind of value to clients and do that in a focused and system. And then thirdly, grow the consulting segment that we can deliver those services.

We do that now, but we're not particularly scaled in those capabilities that we talked about earlier. And so we want to add those and I think we can grow. I think we have a real right to win in this space because of our ability to deliver in those three different modes that we spoke about earlier. And to do so at a price point that creates, I think, a better overall value than some of the other competitors in the marketplace.

But all of that requires that we were focused on what we do and then we have the right talent in place to do it. And so there's some work in that. And that's really -- for me, that's the main thing. Those items we just spoke about are the main thing we're focused on over the next 12 months. I can't tell you when I think exactly we'll see the results of that.

I'd like to think you will start seeing it won't be three quarters of nothing and at all in one quarter. So I'd like to think you'll start to see some incremental improvement as quarters go on. But I don't think that's going to be in the next quarter. I think there's a lot of work that we have to do.

(Operator Instructions) Kartik Mehta, Northcoast Research.

Roger, I know you started talking about AI, and I'm wondering, is that causing any of your clients to maybe take a step back as they try to figure out how they want to implement AI, what roles they might want? Is that causing any delays from a decision standpoint.

Yeah. I don't know if that itself is causing any decision delay. I think there are things that happen in the market where there's some level of uncertainty that would contribute to decision delays by clients. I think in the case of AI and automation, clients -- first of all, I think by and large, like you read in a number of places, resources, I think there's more interest and effort to implement if there is more impact and value yet from any clients.

So -- but so I think it fits and starts, right? Like if you start the investment you might have told whoever was authorized that investment that we're not going to need quite so much human capital to do these process, you don't hire as much and then later, you find out you do need it. So there can be some sort of starts and stops. But I think it's really more about what roles will AI sort of successfully make less necessary.

And then as Bhadresh said earlier, what roles will AI enhance the capability of and actually make those roles more necessary or more efficient or successful in what they do. So there is some learning, I think it's going with clients, but I don't know that, that's particularly contributing to decision delay. I don't know Bhadresh you have a view on that?

Yeah, one thing I would add, Roger, is that what clients are getting bombarded with is spot technologies for a particular process or a spot process that AI can automate. And it's conflicting potentially with their enterprise applications and those vendors are also SaaS-based products, which are saying they have AI in their products. And so no one's really matured full AI into all of their products, right?

So the clients are wrestling with does my ERP system now and can leverage it? Or do I need a spot technology to fill a gap and then integrate that with my ERP technology to do that.

So we're seeing that type of confusion right now, right? We're finding some clients that are very forward thinking, willing to experiment and go aggressive and understand that they may have to do some things, and we always have laggard clients that are asking a lot of questions and want to kind of dip their toes in, but hesitant to do it. So we're seeing all sorts of spectrums around this.

I don't think we're seeing delayed decisions, right, in purchasing, but what clients are inquiring more about is what can we do with AI with what we have and what can we do with AI that what we don't have. And that's the bigger debate with clients than it is a slowdown in decision-making.

And Jenn, just on the gross margins. I know -- we talked about the health care costs, obviously impacting both gross margin and SG&A, and then there's the extra holiday. If you try to take those out kind of normalized gross margin, where do you think gross margins would have been for this quarter -- for the quarter to quarter, I apologize.

Yeah. This quarter in Q2, the impact of health care is almost 100 basis points. So without the additional sort of the abnormal health care costs, we probably would have reached 38%.

And then Q3, typically, that's our seasonality, right, because we have a lot of holidays in there. So how we -- so there's definitely seasonality, health care, a lot of noise. But if you look at our pay bill ratio, it has steadily improved over the last -- probably last full three, four probably plus quarters.

And of course, Kartik, I mean, the impact of all of these indirect costs on gross margin also has to do with our revenue level, too, and that leverage. So I think the main thing that we really focus on is things that we can control which is the average bill rate and continue to improve that. And also on the consulting side to improve our utilization, which I think we've made pretty good progress in the last couple of quarters.

I would now like to turn the call back over to Roger Carlile for any closing remarks.

Thank you, operator, and thanks, everyone, for joining our call today. As I said earlier, we appreciate your interest in RGP. And as I mentioned, I look forward to speaking with many of you in the coming months. don't hesitate to reach out with any additional questions.

I hope everyone has a Happy New Year. Thank you again.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.