Q2 2020 PRGX Global Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly police contended just standby. Thank you for your patience.
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Second quarter 2020 earnings conference call.
This time, a participant lines are not listen only mode.
After the speaking presentation, there will be a question and answer session.
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In my CFO. Please go ahead Sir.
Thank you Victor and good afternoon to all of those on the call.
Let us note at the outset that certain statements in this conference call maybe considered forward looking statements under the Safe Harbor provisions of the private Securities Litigation Reform Act.
These statements include statements relating to management's views with respect to future events and financial performance there based on management's current expectations and beliefs and are subject to risks.
Uncertainties and other factors, which could cause actual results to differ materially from historical experience for from future results expressed or implied by such forward looking statements.
For additional information.
On these factors please refer to PR Gx Incs filings with the securities.
Change commission, including but not limited to its reports on forms 10-K 10-Q.
PR Gtx undertakes no duty to update or revise any forward looking statements, whether as a result of new information future offense or otherwise.
This presentation also contains references to certain non-GAAP financial measures such as EBIT EBITDA and adjusted EBITDA metrics that we use internally to measure our operating performance a reconciliation between these non-GAAP measures that income or loss. The most directly comparable GAAP measure is.
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Site PR Gx dotcom.
I'll now turn the call over to Ron.
[noise] thanks turret.
Well, we had a great quarter continuing to deliver on our promises the school discipline improve productivity and expanded operating leverage we achieved another milestone.
Delivering our second highest quarter adjusted EBITDA in seven years.
And very important to all of US It was a third strong quarter in a row, which demonstrates consistency in our business performance and fulfillment of our commitment to improve profitability and cash flow that we laid out the street a year ago.
Establishing a track record of strong operating and financial performance has been our primary objectives as we work to deliver improved client and shareholder value.
Oh, So let me give you an overview of the quarter.
I'll take a few minutes to share a few notable highlights of the quarter, which hurt well described will discuss in greater detail.
Revenue was relatively stable at $39 million during the first full quarter and they are cool did 19 environment.
Decrease of 5.4% on a constant dollar basis. This is a testament to the composition of our revenue streams and the disciplined focus of our audit teams as we learned to operate effectively in this challenging environment.
We achieved 7.6 million of adjusted EBITDA, which was primarily driven by our focus on continued productivity enhancements over the last year.
In addition, we had positive net income of $400000, which was our first parts of the second quarter net income performance in five years I would like emphasize that that's notable accomplishment was not that she due to a one time benefit rather is the result of improved operating.
Performance.
So I'm very pleased with our improved financial performance over the last several quarters.
This journey has truly been at full team effort and I want to formally recognized the PR gx team around the world for stepping up to the challenge during this global pandemic.
Looking ahead I am confident that we continued to deliver.
A strong results.
We shared previously.
Over three quarters about revenue comes from clients, providing were considered essential goods and services. These businesses have not been adversely impacted from a global pandemic.
The large majority of our clients continue to place high value on our ability to identify source to pay discrepancies in generate critical working capital.
Further our recovery audit in contract compliance services continue to perform at normal levels of productivity or higher.
So based on our strong operating performance during the first half of the year.
Positive outlook for the remaining party be here, we're increasing our guidance for 2020, adjusted EBITDA to a range of 29 million to 30 million.
We are confident in our ability to deliver this level of operating profitability for 2020 and value the importance of establishing this new elevated level of operating profitability and delivering it consistently into the future.
Now I'd like to take a few minutes and talk about our progress toward the strategy objectives. We established at the beginning of this year I'm going to keep my comments brief as I think our results largely speak for themselves.
The first strategic objective relates to your performance.
That is to be the highest performing in most efficient recovery audit firm in the world.
So we've made meaningful progress against this objective with significant improvement in operating performance introduction of new technology platforms and innovations in our audit services.
On our fourth quarter call in late February we establish an objective of achieving over 20% adjusted EBITDA margins over the next two to three years.
No. We believe will pick up 500 basis points of adjusted EBITDA margin in 2020 alone to improve from 13% adjusted EBITDA margin.
In 2019 to at least 18% adjusted EBITDA margin this year with actions that we've taken already.
As a result of the progress we've made this year, we believe we'll achieve our objective earlier than originally expected and look to exceed our original goal within the next two three year timeframe.
The second strategic objective relates to our new technology platform and associated revenue model.
He just this objective is to evolve our core business from a contingency fee oriented post audit recovery audit provider to a prepayment error prevention and subscription oriented business partner.
In order to achieve this future state that we vision for the business is absolutely critical that we build out the foundational components required for a next generation approach.
Element these components across our client base.
Now this objective requires moving our audit business to a common next generation audit platform built around global best practices innovative audit concepts in advanced automation.
Now as we put ticket, arguing celebrities platform, we expect to drive further improvements in operating efficiencies increase revenue with a larger percentage of subscription revenues.
And sustainable competitive differentiation as we lead our industry forward into next generation source to pay compliance services.
We're making steady progress on getting these pieces in place, but it will take time for us to fully realize this transformation.
Based on results, we are seeing thus far and their response from our clients as we share our strategy ambition.
After that that we're moving down the right path, it's imperative that we keep pushing forward on the strategic objective.
We believe will result in enhanced shareholder value creation.
Now I'd like to turn the conversation over the third to go over our strong results of the quarter in greater detail.
Yeah.
Thank you Ron.
I'm pleased to report that the second quarter was our third straight quarter of strong performance very strong and significantly improved adjusted EBITDA. Net income was positive. These are real learnings and improved cash flow generation, which I think is much more impressive considering the challenging business environment. The companies face these days so.
Now, let's go into a little bit deeper detail into Q2 results.
Consolidated revenue was 39 billion a decrease of 7.1% from the second quarter of 29 team on an as reported basis.
I Didnt decrease of 5.4% on a constant dollar basis adjusted for changes in foreign currency exchange rates.
While revenue was down around 3 million on an as reported basis year over year [noise].
I would note that the recurring revenue from the core recovery audit business is more stable than may appear from the consolidated as reported results.
Furthermore, I believe our revenue performance in light of the challenges posed by the Covina.
Operating environment highlight the resilience of our business model in this sort of environment. We believe the contingency fee based nature of our business actually plays to our advantage is it poses no obligation to our clients other than to share their data with us. So we can find discrepancies that yield cash for our clients and revenue for PR.
Yes.
Of the roughly 3 million decline year over year about 300000 was due to a decline in adjacent services, which was the result of a decision on our part to pull back from journey unprofitable advisory projects and about 700000 of the decline was due to the weakening of the currencies of our international.
Operations.
Core recovery audit part of our business declined about 4.8% year over year.
As for some color on our quarterly revenue performance in the service lines and regions recovery audit America's decreased 6.8% year over year on an as reported basis and 5.5% on a constant dollar basis.
The retail part of the business was down modestly while the commercial side had a bigger decline.
As we've noted before the commercial as well as the contract compliance part of the business can be lumpy from time to time and last year's quarter was relatively stronger period, which made for a challenging comps this year.
So covered 19 has lengthened or delayed the audit process for some do audits, which generally has more of an impact on the commercial side of the business.
Overall this part of the business continues to be developing as expected.
Recovery audit in Europe, and Asia Pacific decreased 5.7% on an as reported basis.
And by 3.1% on a constant dollar basis.
As I just noted currency swings during the quarter as wells during the last year created a headwind for international operations on an as reported basis. The retail part of the business decreased more than the overall segment, while the commercial part of the business run both.
As reported and constant currency basis as was the case in the first quarter of 2020.
As for adjacent services revenue was down about $300000 year over year.
This decline was primarily due to the de emphasis on the advisory project based part of our business, which was not producing the profitability we desired.
Revenue from the more recurring revenue based analytics solutions part of our business grew year over year, and we're optimistic that scale. This in a profitable but measured fashion as we ramp up our next generation technology platform.
As for second quarter adjusted EBITDA and this is the part that we're particularly pleased to talk about adjusted EBITDA was 7.6 million compared to 2.9 billion in the second quarter of 29 team.
And the adjusted EBITDA margin was 19.4% of revenue in the second quarter 2020 versus 6.8% in the second quarter of 29 team an increase of over 1200 bips year over year.
This is due to the efforts of our entire team to deliver on our commitment of improved efficiency and profitability beginning in mid 2019.
This is a third straight quarter of strong financial performance, reflecting the benefits of our efficiency initiatives as Rob noted. This is our best second quarter adjusted EBITDA in seven years, which is a follow up to our two prior quarters that were similarly, the best quarterly adjusted EBITDA results in a number of years.
PR Gx team has done a tremendous job and driving efficiencies and improving productivity and I look forward to us driving further productivity enhancements in the future.
Moving to our discussion of net income net income for the second quarter of 2020 was 400000.
Significant improvement from a loss last year and was largely driven by the same factors impacting revenue and adjusted EBITDA performance.
Going forward, we expect to increasingly focused on net income is a key profitability you measure.
This is the first quarter positive net income since I joined the company in early 2019, So I'm very pleased that we've achieved this milestone.
Due to the yen annual cyclicality claim generation and the associated expenses versus the revenue realization as claims is typically more challenging to achieve profitability in the first and second quarters of the year versus the third and fourth quarter severe which makes achieving that income in the second quarter.
Not much more notable.
I'd also note that we had a nonrecurring expense of 1.3 million during the quarter, which also adversely impacted net income.
This expense resulted from the investigation and final final settlement for the claimed by former employee.
While this expenses included in SGN expense, we have broken out this nonrecurring item in our adjusted EBITDA reconciliation.
That should provide some additional context that mix or achievement, but positive net income that's much more noteworthy.
Moving onto the balance sheet, we ended the second quarter with 21.1 million in cash and cash equivalents.
37 million in debt and 36.8 million net accounts receivable.
Our net debt balance at the end of the quarter defined as borrowings less cash balances was 15.5 billion down from 19.3 million in the first quarter of 2020 and down from a peak of 24.8 million at the end of Q3 of last year.
As for our accounts receivable.
Days sales outstanding improved during the quarter. Despite the generally more challenging business environment, which speaks to the general strong quality of our client base.
Turning the capital expenditures there were 3.1 million for the second quarter 2020 down from 3.2 million in the second quarter 2019.
We're focused on the rollout and adoption of our new audit Foundation and platform, which we believe will be important in achieving further efficiency gains we expect capex for 2020 to be down significantly from 29 team and expect it's kind of mid around 10 million.
Turning to adjusted EBITDA guidance for 2020, we're increasing our guidance in establishing a range of adjusted EBITDA of 29 to 30 million. This guidance is based on our current assessment of the business environment in a couple of 19 world and our current expectation of a modestly lower revenue level for 22.
Many compared to 29 team.
As Rob noted earlier this would represent.
18% plus adjusted EBITDA margins for 2020, an increase of more than 500, bips compared to the 13% we reported in 2019.
With respect to the strategic objective of being the highest performing in most efficient recovery audit firm with a goal of achieving 20% plus adjusted EBITDA margins on an annual basis within the next two to three years.
Because we have made such progress during 2020.
We believe will likely achieved 20% margins earlier than originally originally expected.
We are working to reengineer, both audit processes in the field as well as the information we used to manage our business and make resource allocation decisions as we make progress with those sorts of reengineering efforts. We believe that we'll be able to further expand margins to continue to improve profitability and free cash flow.
As you've heard from US more recently, we've increased our focus on free cash flow generation, which we believe to be even more important than usual in this pandemic environment.
The combination of expected 2020, adjusted EBITDA of 29 to 30 million less the combination of the following capex guidance of around 10 million interest expense and income taxes of around 4 million.
And transformation related expenses of around 2 million should enable us to generate free cash flow near the mid teens during 2020.
Achieving this would be a significant improvement compared to our average performance over the last six years.
Of around $6 million per year, which is clearly more than a doubling of that level with what I just laid out.
We believe this is the primary driver of shareholder value in our business and we intend to maintain our team focused on free cash flow generation going forward.
To accentuate some of Ron's points from earlier, we think we ever strategic priorities clearly set for the next few years first focus on performance consistent delivery of these newly elevated levels of profitability year in Europe, we will incessantly focused on being the highest performing.
And most efficient recovery audit firm and we believe we've made some really good progress in this area already second focus on our platform as we migrate our business to the common next generation audit platform. These foundational pieces are necessary in order for us to evolve our core business from a country.
Engine SIFI oriented host audit recovery provider to a prepayment error prevention subscription oriented business partner in the future.
Hi executed executing on these strategic objectives, we believe will best be able to drive shareholder value for investors.
And with that I'll turn the call back over to the operator for today.
Thank you as a reminder to ask a question you wanted to press star one on your telephone.
To address your question press the pound King.
Please stand by that we compare the Ken a roster.
And our first question comes line of Alex Paris from Barrington Research you may begin.
Hi, guys. Congratulations on the third beat in a row like to see the Oh raised guidance as well.
Thanks.
So you did this all during cold that and you had a very good first half relative to expectations.
That has to do with your client base. Your your long term and stable client base.
Grocery mass market retail pharmacy E commerce.
I suspect this group of clients are benefiting in terms of increased revenue as a result, you quoted.
As you talked about on previous calls supply chains out of whack more complexity. These are good things for pure gx.
My question is when do you begin auditing this call that impacted data I need to audit in arrears like you said before six month nine months 12 months when should we start to see a little lift from that.
Second half of the year or not until 2021.
Well, we up thanks, Thanks, Alex and I did hear from your we Oh.
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As you know we will be auditing, we're just starting to audit the first wave of our cool good.
Costs and expenses that we what we audit and over the last quarter was primarily focused on creek.
Recall that although we haven't seen clients that are no more more real time and closer to the transaction.
So we just started to get into it and it'll be we have some clients that are no three to six to nine months. After the transaction that were auditing so.
It will continue but no we should start seeing some indications this quarter.
Of the world of Cold. It now we track on <unk> regular basis, what's going on especially in the retail sector, which also.
In the grocery World you look to what I would direct relationship to the.
To the consumer goods manufacturers as well as it continues to be very significant uptick year over year and.
So so we watch that closely we know that will be auditing or greater volume of spend we know that supply chains or.
I've been there out of whack with the increased demand and some of the challenges that companies are pacing. So.
No we're not no right now predicting it in terms of both a massive lift and our revenue as a result, uncoated, but we are watching that carefully and we expect to deliver solid results for Q3 Q4.
Got you.
And.
Also within recovery audit I think you've noted in the past.
Some changes in the seasonal promotional pattern within retail.
I believe you said she you've seen it short of return to normal and any further comment or color on promotional patterns and.
And say I think.
Yeah, I think a as Weve talked before we think for the most parts return.
Generally to normal and.
So nothing else demand patterns are pretty.
Pretty much stabilize now and have an increased level would you never know what the future is going to hold but right now we see things pretty much no back to normal.
Great and then a client bankruptcy, which I think you guys did a lot of work going into this year kind of assessing the exposure there we've seen a few retail bankruptcies like JC Penney tier one GNC modelo.
Any exposure there.
Yeah, I'll, let Kurt answer that one can see tracks that very closely Kirk.
Yeah, Alex you, you're right going into the year as part of our forecast process. We would have made an assessment of bankruptcy risk across our client base to that already was baked into any of our planning process at the beginning of year and we've been tracking it very closely.
Through the these two quarters since covered 19 hit and.
As a testament to really our client base. We are generally are doing business with clients that provides essential goods and services. So we're highly represented over represented by those high quality customers and underrepresented by the retailers.
Out there that are risk not one of the clients that you just mentioned I should say not any of the companies that you mentioned that filed for bankruptcy our clients of ours.
So we've been very fortunate that we have been very solid customer base and very low exposure at this points of bankruptcy risk.
Good to hear thank you a just a couple last ones I think on the last call you talked about a small number of clients the late audits.
Given the covert situation.
I guess my question is why and what what has happened since.
Yeah, we had.
Several times that asked us either specifically to not audit certain suppliers because they were concerned about the suppliers, we're getting through this pandemic Erie.
And for the most part.
Most of those situations have gone back to the auditing, so we kind of gotten through that.
Now, let's say the probably the biggest impact we've had is on starting up a new clients.
You know, especially in our commercial business Onboarding and getting revenue was started per per new clients are an important part of our.
Of our revenue stream and we've had certain places where either we'd been delayed.
Those of you know just wanted to take a take it slow as the initial or they want to start with a smaller and scope of services. Initially so I'd say that's that's another area. This that's impacted us that we don't see these as long term losses of revenue opportunity, but more of a of the delay and pushing it out but.
But we do see that to some degree.
Okay and then the last one for now I guess is shop or can you give us a little color on new business development in this environment I know historically relied on trade shows and conferences.
Right now you got to do other things I know Q1 bookings were ahead of plan Where'd you shake out in Q2.
So Q2 was a where we're coming in a pretty close to plan. Some of the things that we expected to close in Q2 got pushed out to Q3, but looking ahead. We're very pleased with the outlook for Q3 in Q4 drums or the pipeline we have in the level of.
Commitments, we have for new business, both in and retail clients in the commercial so we feel good and I'll tell you what I'm really pleased about is coming into the year as we've talked before you mentioned, we relied on going to various industry shows and conferences to Joe.
In a rate leads and we've really had to take a step back and put a lot more emphasis on webinars snow white papers and generating interest from intellectual property that we that we publish through where we get a articles published and.
At this point the year, our actual leads generated from our BD our team and our sales team is actually higher year to date than we were last year. So I think we've made a solid transition.
And our sales teams are.
Learning to sell the.
You know Microsoft teams are assume very effectively so it's it's it's we're pleased with how we've made that transition and feel like Rhonda good trajectory for up or bookings for the 2020 year.
Great well, it's your signs that way again, three big quarters in a row, you raise guidance I know your small but.
The seems to be sort of a perfect stock.
Cobot experience and you can buy it at less than five times EBITDA. So we're very encouraged thank you.
Thank you very much appreciate it thanks.
Thanks, though.
Thank you next question will come from line of Zach Cummins from B. Riley SPR may begin.
Yeah, Hi, good afternoon, Ron incurred congratulations again on the strong Q2 results.
Yeah, I just want to focus on the gross margin line in the corridor.
By far the best Q2 gross margin we've seen in the business in a long time. So I'm. Just wondering are there any onetime benefits our reclassifications that need to be called out and then I guess, what sort of a margin of assumption should we make going forward for those businesses. This type of gross margin really sustainable going forward.
And.
And the Kirk definitely should take this one's go ahead.
[laughter] yeah.
Yes, there were no one time benefits any kind of material onetime benefits during the quarter.
I think that this is really due mostly to all of the hard work that our team has done to try to take costs out of the business that we think we're redundant not necessary and they've done a great job, calling it out of the business and.
We think that we can perform at this level and even improve upon it going forward, especially as we get some of our new platforms really helped me and can approach or business from a different perspective.
Got it kinda that's helpful. And then Ron I know what are the big or strategies going forward is rolling out a subscription offering I believe you may have a beta test out in the commercial segment. It was just curious if you could reach or provide any kind of feedback you've received thus far or from kind of some of the early adopters.
And so you know where we are let me just clarify for years. So we're we're in the midst of.
Rolling out our global audit platform, we're right in the early days are rolling it out to clients and no started to operate in a different environment, but in terms of new clients move into subscription based on services that still something that we were looking down the road to start Uh huh.
We do have.
Yeah, you may be thinking about our preventive audit pilot that we've secured because this quarter that we're pretty excited about where we're starting to get out in front of the promotional event and or being during the promotional event identify.
Discrepancies that but that would actually preventive recovery and no. That's much appreciated by both the retailer and the supplier and we have our first.
We have a significant pilots underway.
That would just secured and that will start to lead towards getting to this kind of the subscription service and recovery audit services.
And I would point out in and our contract compliance services, which we've talked about in the past that we continue to have good success and converting clients from contingency based to a flat rate or at least a hybrid where there was a partial flat rate and partial up contingency. So we are.
Starting to move into right direction, but we're going to let technology leaders down that path.
Understood. That's helpful. And then a final question for me I mean, it it's really great to see the meaningful progress that we've seen with both adjusted EBITDA margin expansion and free cash flow generation over the past three quarters I'm just curious what do you view some of the key aspects of getting this business back to organic revenue growth.
My 21.
Yes, that's a that's.
That's a great great question, and you know and I'll just.
Tell you that when we.
I had this Q2 discussion last year, where our commitment was to get our our business performing at a significantly higher level and we put the brakes on some of the.
Adjacent services.
Business segments that were not particularly profitable or you know.
That lumpy and really focus on getting our core business.
In a and high performance mode, and focusing on our technology platform to get that finished and to start getting it rolled out and I and I can tell you that that we feel very good about where we are see by these results and we're going to lead to revenue growth.
From a higher performance Oh audit business plus the technology Foundation that we're building that we can start to really deliver no technology.
ER offerings that are repeatable that our scalable.
With the appropriate level margins and we're just starting to get get that are moving again, but we still are.
And the and the rollout stage and the and the development stage of that platform, but let's say that and as we look ahead, we're getting some very good response to the market will yeah, we're winning some new clients and largely because of the technology platform.
And up and that'll continue to be the case a lot of interest in some of the next generation Arctic concepts that we're.
Building into our platform for many of our clients and that's going to generate some some some new business that will turn into new revenues and then we'll continue to move our clients into the new platform over the next year or so so we expect things to.
Start moving into right direction, and 2021, and a 2022, but on a on a much more profitable and scalable base then we had in the past.
Great. That's helpful. Thanks, again for taking my questions and congrats again on really strong results.
Okay. Thank you.
Thanks, Eric.
Thank you once again that star one for questions or one.
And I'm not showing any questions at this time I would now like to turn the call back over to Ron Stewart for any closing remarks.
Thank you very much stricter and thanks to all of you for joining our call.
Again, we're very pleased with the quarter. We are working hard to continue this momentum for the rest of the year. So we look forward to our next call. When we talk about our Q3 results take care and everyone stay safe. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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