Q3 2019 Earnings Call
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David the 80, I'd and right now.
It was David Brown.
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Thank you one moment.
The event is now being recorded percent sequentially and 5% versus the prior year.
This recent has turned the corner as the government sector heats up.
Key clients in the quarter included the Australian Department of Defense, The Australian Taxation Office Energy, Australia and Suncor.
Yes, Ryan Department of Defense awarded the IRS GE, New 12 month contract to provide IP advisory work around sourcing transactions and quality assurance with an option to extend for an additional 12 months beyond September 2020.
Our I asked you automation business continues to perform.
We expect to exceed $30 million in revenues during 2020.
This is a valuable asset that is not reflected in todays stock price.
We continue to believe that I asked you shares are undervalued.
In consideration of this our board recently approved increasing our share repurchase authorization from 9.2 million to $20 million.
The timing of the amount of any repurchases will be determined based on our valuation of market conditions capital allocation alternatives and other factors.
The new authorization gives us the ability to increase our share repurchases consistent with the terms of our credit agreement.
Turning to fourth quarter guidance, we continue to monitor the overall global macro economic environment, especially in Europe for any impact you may have on our performance in the near term.
At present, we are projecting Q4 revenues in the range of 67, the $69 million and adjusted EBITDA of at least $10 million.
Based on increasing demand for our higher margin digital solutions.
Together with our record EBITDA quarter in Q3. This means we will reach second half EBITDA more than $20 million a record six months variety.
So with that let me turn the call over to David Berger, who will summarize our financial results.
Thanks, Mike and good morning, everyone revenues for the third quarter was $68.1 million compared with 68 million in the prior year, which is an increase of 2% in constant currency and flat on a reported basis.
Revenues were 40.3 million in the Americas up 5% versus the prior year on a reported basis.
$22.6 million in Europe down, 2% in constant currency and down 6% on a reported basis.
And $5.3 million in Asia Pacific up 5% in constant currency and down 2% on a reported basis.
Currency negatively impacted reported revenues by 1.3 million or 2% versus the prior year.
Third quarter 2019, adjusted EBITDA reached a quarterly record up to $10.3 million up 17% compared with 8.1 8.8 million in last year's third quarter.
We reported third quarter operating income of 5.7 million, which was up 2.3 million or 68% compared with operating income of 3.4 million in the prior year.
Net income was 1.7 million compared with net income of 4 million last year.
Adjusted net income for the third quarter was 4.4 million compared with adjusted net income of 6.6 million in the prior year.
Included in net income and adjusted net income for the 2018 third quarter.
Was the reversal of $3.6 million in tax accruals of which 900000 was offset by a charge to SG a associated with prior acquisition.
[noise] ice GE delivered a good EPS quarter.
Excluding the previously mentioned tax reversal in 2018 reported fully diluted earnings per share was four cents.
This is two cents last year and adjusted fully diluted earnings per share was nine cents versus eight cents last year.
Including the impact of the tax reversal reported fully diluted earnings per share in 2018 was eight cents and adjusted fully diluted earnings per share was 14 cents.
Consultant utilization for the quarter was 68%, which was up 200 basis points versus the prior year.
Quarter, Ed headcount was 1287, essentially flat with last quarter.
Our balance sheet continues to have the strength and flexibility to support our business over the long term.
Net cash provided by operations for the first nine months was 5.8 million.
On the balance sheet, we ended the quarter with $14.2 million of cash.
36%.
Total debt outstanding was 96.4 million.
We have repurchased $3 million the stock through September 2019.
Our average borrowing rate for the quarter was 5.6% and we had 47.5 million shares outstanding as of October 30 Onest.
Mike will now share concluding remarks before we go to Q today.
Thank you David.
To summarize we were building a profitable growth momentum in our business.
We generated our best quarterly EBITDA, however of more than 10 million with margins at 15%.
Our go digital strategy is working with digital revenues more than 45% of our total.
And our Americas business delivered its best quarterly revenue growth since 2017.
We generated solid cash flow in the quarter with our cash balance up 36% from Q2.
And our board increase the size of our share repurchase program.
And we expect to close the year strong.
As always we are focused on creating shareholder value for the long term and we are steadfast in our mission to deliver operational excellence to our clients. Thanks very much for calling in this morning.
And now let me turn the discussion over to the operator for questions.
Thank you very much ladies and gentlemen at this time, we would like to open the floor for questions. If you would like to ask a question. Please press star one on your telephone keypad is now again that is still our one to ask a question.
Our first question will come from Marco Rodriguez Stonegate capital markets.
Good morning, guys. Thank you for taking my questions. Good morning, Mark I was.
Hey, I was wondering if maybe you could talk a little bit more about the government work that you're seeing some strength in here on the U.S. side.
Just kind of give us your thoughts as we kind of heading into fiscal 20, obviously an election year at the federal level, just kind of how are you thinking through that and what are sort of driving the resurgence that you're seeing unleashing the last couple of quarters at the at the U.S. level.
Yes. Thanks.
So look I think as we've talked about earlier in the year with all of the governor cheap either changes or Reelections that occurred that is now began to settle Len and especially I would say in the Republican States Theres been a loosening up of activity levels.
Around around Digitization of of a lot of the state and the large I'll call large local government sectors. So there are more oil RFP is on the market that allows us to compete more and now that we're beginning to get into certain states. Once you are in you're able to be able to look to expand.
And extend some of that work that goes on there so.
We believe as we move into 2020 that our public sector business I'm speaking of the you asked for the moment, our public sector business will contribute to growth where it did not contribute during 2019 and in fact during the first part of the year. It was down as it was last year. So we see.
He a nice kind of movement going there I think the federal elections will not have a lot of impact on our public sector use state business.
During the course of 2020, we kind of had our paid if you will with all the governor changes. So we feel pretty good about where that looks like the pipeline look strong.
And we look to see that as a contributing member of our growth for 2020 Marco.
Got it very helpful and maybe if you can talk a little bit more on on the recurring revenue side of the business here you called out to govern Axa as part of the managed services. If you could just maybe talk a little bit about.
The marketing push the sales initiative that may or may not have changed just kind of how you're going to market with those particular services and the feedback you're receiving from potential customers.
Yes, so we have been investing into what we call the iOS platform, which we've discussed here on a few calls that platform will enable us to build products off of that kind of in a much more efficient way our first big product in the market is called govern acts it's a SaaS product it helps.
Enterprises from a software standpoint understand a lot of their processes with large and supplier contracts.
Our move to move from services to leading with Whatsapp product like govern acts.
In the world of automation in digital we felt this was a good moved to make so we made that transition during 2019, and we're now beginning to see good traction with that product. We also launched a product called in Formax, which is also a SaaS product. This is a product that clients can put on their assist.
Comes if you will and load and their cost around technology.
And then compare it to our database of life companies industries peers et cetera, all mast.
They can do what if scenarios if I moved 100 million applications and moved into another area, how would that stack up relative to my peer group et cetera. So between govern acts and Formax, we have benchmarking as a service we're looking at a potential new product in the whole sourcing area that we will consider for 2020 so the.
Platform will help us drive toward the $100 million of recurring revenue. Our overall recurring revenue were heard a bit this year, because our multiyear contracts in the public sector. There is weren't very many of them, but as we move to 2020 on your question on the government contracts those all tend to be multiyear contracts and those will help our.
So in 2020 as well.
Got it and are you seeing.
Customers.
Pick up like inform extra Governor next you guys XI platform products as as solo purchases or are they integrated to a much larger.
Spend with you guys.
Well they normally are a larger spend so govern ex would always.
Almost every instance, also have a services dimension to it so they would have the software on premise. They would have it's in the cloud of course, but they would have an available to them on the premises.
And clients like.
Like Marriott or Mcdonald's et cetera, and then we would have a set of services around that and then those agreements are multiyear agreements with those enterprises. So we have a software stream and we have a services stream. So we tend to do the software packages with services.
And then Formax case, it's with our benchmarking and assessment services that tends to lead to downstream work around strategy than around execution et cetera. So those are the reasons, we actually have the products not only for its its recurring nature, but also to drive downstream business and almost.
All cases, it's a combination of software plus services.
Very helpful. And then just in terms of capital allocation priorities. I mean, you guys mentioned, you're going to be increasing that is a share buyback. It doesn't look like any shares were purchased.
This particular quarter and you also in your prepared remarks talked about.
Limits to your your ability to make.
Stock repurchases based on your credit agreements, if maybe you can kind of walk us through the thought process for capital allocation for the say the next couple of 12 next 12 months or so in terms of where you're seeing the priorities and then if you could also possibly address the acquisition landscape.
Okay. So let me start and then I'll have David talk about the repurchase of strategy.
We have three areas clearly we have the debt we have buyback than we have strategic.
Strategic acquisitions, all let me cover all three saw in the acquisition front. We are continuing to look at assets that could help us a primarily around our digital business and or our recurring revenue stream business. So think research. They digital think automation business that that's the complete focus we havent.
We continue to have a number of discussions in dialogues and in the marketplace to see if there is something that is out there that makes sense, both from a value standpoint, and it could accelerate growth.
In certain areas.
On the.
On the.
Since the acquisition side of side of side of things on the on that on the debt repayment. David you want to just comment on that yeah. I mean, we obviously continue to focus to pay pay down debt.
Were down from where we were in the prior year debt balance last year September we were at 101, we're down to 96 million and.
It continues to remain.
A priority of the business to drive down the overall debt balance.
In terms of the repurchase.
The increase in the repurchase.
Authorization.
We plan to prepare.
To utilize some of our our cash that we generate.
Particularly notice we had good cash generation the third quarter.
We expect to have good cash generation in the fourth quarter.
So we plan.
To increase our buybacks once we have clearance from our banks to to be able to do that.
Got it thanks, guys appreciate your time.
Thanks Marco.
Thank you very much. Our next question will come from Vincent Colicchio Barrington Research.
Yes, Mike.
Last quarter, you had a project delay with a large auto client and some other delays did they start to come back what what are the outlook, what's the outlook there.
Hey, good morning, Vince, Yes, you'll recall that we had our largest.
One of our largest clients and automotive client.
Now we had to bite the bullet here and it does affect about a million dollars plus each quarter or that will continue through the fourth quarter. As we moved to 2020 that particular client we believe.
We will have stabilized and the run rate that we have for 2020 will be have been reset with the reduction of roughly $4 million or so.
During 2020, and we expect them to be if not our largest.
One of our top few.
If you will pop in the house large clients. So as we move to 2020 from a growth standpoint.
That will not be a drag if you will on growth as it was in 2019.
And in the UK.
Was the growth.
Broad based or was it one or two large deals and is the growth there sustainable.
Yes, so the growth in the UK is around digital and automation at the moment with all the noise around Brexit.
The tendency is to do a bit of shorter term.
Work with a lot of the enterprises not the longer term work.
But that also happens to be a little higher margin business for us. So it helps us. So you saw the growth both sequentially and overall, we do expect.
UK to grow.
Again in the fourth quarter.
And our expectation is once they can work their way through the Brexit thing that opens up the opportunity for even larger transformational work again. So we're we're cautious with the UK, but the UK looks like its perform pretty good for US certainly in Q3 and Q4 looks just as just as optimistic as as.
Q3 did.
Okay nice quarter. Thank you.
Yes, thanks very much Vince.
Thank you very much again as a quick reminder, at your last question that style line on your telephone keypad now.
Our next question will come from Marc Riddick Sidoti.
Hi, good morning.
Good morning, Mark.
I wanted to sort of follow up that's the right.
Moving over to Asia Pac and I wanted to touch on one of the things you mentioned as far as a big government activity and once we get a sense of if you get a sense of whether or not that was something that was stimulated by maybe somewhat easing potential tensions or was there any particular specific driver that that was was.
Behind that and if you think that might have legs going.
Yes, So I think Mark our view and the Asia Pacific Region is if the government work is there we have opportunities to really grow that business over there because it represents a nice chunk of the overall size of the market I think it's opened up because there has been such instability regarding the governor.
Leadership in Australia literally over the last few years they've been through a few as you will know a few prime ministers that seems to have now settled down and once that has settled down we now see an opening up of workloads that we're not there before with all the uncertainty in the changes it kept occurring.
At the federal level in Australia. So we saw some opening up we saw the.
Department of taxation Australian Department taxation, we saw a few other departments and some contracts that were issued for us.
And we actually are optimistic about the government sector as we move into 2020, so unless theres. Other some type of other change relative to the government, which there has been a lot of the last few years, we think a bit of stability helps takeout uncertainty and that opens up opportunities for is g. So we're costs.
Cautious, but we believe that as we move to 2020 that should be a good opportunity for Austin and our Asia Pacific Region, then returned back to what I would call more normalized growth.
Okay, great. Thank you for the color there and I wanted to then switch gears and sort of follow up and maybe an update on your views on recurring revenue as far as the business mix and what we might see there whether or not maybe the near term might be a little bit more.
Project specific was recurring revenue growth.
So it's a come in 2020 it'd be a thanks.
Thanks, very much marks on the recurring revenue, yes, I mean, we were held back a little bit on our growth rate on recurring revenue. This year, primarily because we didnt have the the government sector contracts that are the multiyear contracts will help our recurring revenue, but we had good strong software licensing sales that included things like our own govern axogen format.
Thanks.
In recur also in terms of license sales around automation with Blue Prism and automation anywhere in particular, you I path as well our benchmarking as a service business, we have a pricing software product out on the market now called pro benchmark, which is also a subscription based.
Product and our research business.
He is also from a subscription standpoint also we should see a nice lift in 2020. So when you combine all those factors you also get the government contracts.
Not holding you down in terms of being a reduction which they were in 2019, we see that then helping not put a drag on the growth rate on recurring revenues and we can then continue our journey toward $100 million, a recurring revenue, which we would like to achieve by the into 2021. So we are we feel very.
Good about that Thats all on the organic standpoint, we continue to look at some inorganic capability around recurring revenue as well.
But I'm just talking right now about organic so we think the recurring revenue streams should pick up growth rate back to double digits in 2020.
Okay, Great and then last one for me I was wondering given a quick update on the what you're seeing on automation and where we are right noise. I. I think you were like about close to 30 if I.
Last quarter, so maybe we get a quick update on what you're seeing from a customer adoption on automation because it seems as though there is a long way to go there as far as opportunity. Thanks, yeah. Okay. Good. So on the automation business continues to be a red hot out in the marketplace. This is our you'll recall our robotic process automation.
Now we're doing some cognitive work as well the market continues to have high demand again. It is still early innings, there's a lot of adoption going on by enterprises, not many have gone to quote scale. Yet. So we see that is as real opportunities for four I SG and the.
Automation market overall, you've seen some of the big valuations with you I path and automation anywhere and blue prisons public overrun in the UK. So there's they they've got some very strong if you will.
Valuations for the software companies, we also see on the advisory side such as ourselves.
We also see that that market place is still tends to be quite robust out on the market. This is why we have a little bit of a frustration around not recognizing the value of this asset inside our stock. So we'll continue to look at ways to unleash that so we're very confident in our automation business, we will not be at 30.
And this year, but we should be as I mentioned earlier, we should see that 30 number plus during 2020 as that is a business. As you know we started essentially from kind of an emerging startup in January of 2017, and we've got ourselves in a nice position. There. So we expect that business to continue.
To deliver double digit type growth for us, but we're also be continuing to look at how we can unleash the value of this asset that we think is is undervalued in the market today.
Okay, certainly encouraging thank you very much of the color.
Thanks Mark.
Thank you very much once again as a quick reminder, if he would like to ask a question. Please press star one on your Touchtone phone now.
Next question will come from Joe Gomes Noble capital.
Okay.
Good morning, Thanks for taking my my questions Good morning, Joe.
It's just a point of clarification here you when you're talking about the potential for doing some repurchases.
On the stock you said once you have clearance from the banks you could just given a little more color as to what are the banks have to sign off bought in order for you guys too.
You know, we get get more aggressive on the repurchase program. So you have so as you'll recall right now the agreements we have with our banks as we can buyback $3 million year, which we have done.
Once we achieve a EBITDA ratio of to debt of.
Three X under three X.
Then we have the flexibility.
To do what we'd like with our cash.
Yes.
Okay.
Thanks on that and then.
Maybe.
To clarify something for me here on the public SEC there last quarter.
We you talked about I think was up 13 contracts that you had been signed on to public sector.
And that you expected to see them contribute to revenue here the second half of 19, but now it seems like you're you're being a little.
More modest on their contributions and in what.
And it's happening here in 2019, and I was wondering again you can just provide some more.
Color, our detail of what's going on and on the public sector side.
No no I didn't mean to be modest we do have those contracts. They began during the third quarter. They will then go into fourth quarter, but what I was saying on a full year 2019, because the first half was down we will not see growth overall in the public sector. So on held us back on overall growth. So now we see that mark.
Good picking up as I stated.
And we have those contracts signed there are few others that are out in the market today that we are pursuing so as I said I think we will be able to see the public sector give us on a full year basis in 2020, we will contribute to growth, whereas this year. It did not contribute to our growth in held us back that's what I meant.
Okay, great. Thanks, I appreciate it thanks for the time.
Yes, thanks very much Joe.
Yeah.
Thank you ladies and gentleman once again quick reminder, to ask a question.
Hey Press Star one on your attached enzymes now.
Lets speakers at this time, we have no further questions in the queue. So we'd like to turn this conference back to Mr. Connors for any closing remarks.
Thank you very much we'll let me close by saying I'm energized by the great enthusiasm or employees are showing.
For our future as I travel around meeting with our employees and clients I get a real sense of the forward momentum that we are building as a firm and the excitement or people have for being part of a digital revolution that is transforming the world's top enterprises for operational excellence and faster.
Growth.
I want to thank all of our professionals around the world for their contributions to our success.
And I want to thank all of you on the call for your continued support and confidence in I SG enjoy the upcoming holiday season and have a great rest of the debt.
Thank you very much ladies and gentlemen. This now concludes today's conference you may disconnect your phone lines and have a great rest the week. Thank you.
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