Q3 2020 PRGX Global Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
After the speaker's presentation, there will be a question and answer session to EPS.
Good question during the session you will need to press star one on your telephone please be advised that todays conference is being recorded.
If you require any further assistance. Please press star zero I would not only to hand the conference over to your Speaker Mr., Kurt Abkemeier Chief Financial Officer. Please go ahead Sir.
Thank you Shirley and good afternoon to all of those on the call.
Let us note at the outset that certain statements in this conference call may be considered forward looking statements under the safe Harbor provisions of the private Securities Litigation Reform Act.
These statements include statements relating to managements views with respect to future International.
In financial performance that are based on management's current expectations and beliefs and are.
Are subject to risks uncertainties, and other factors, which could cause actual results to differ materially from historical experience support from future results expressed or implied by such forward looking.
For additional information on these factors please refer to PR Gx global sales.
Lngs with the Securities and Exchange Commission, including but not limited to its reports on forms 10-K and 10-Q.
PR Gtx undertakes no duty to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
This presentation also contains references to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA metrics that we use internally to measure our operating performance.
Reconciliation between these non-GAAP measures and net income or loss. The most directly comparable GAAP measure is available in the Investor relations portion of our website at PR Gx dotcom.
I will now turn the call over to Ron.
Kurt Thank you very much and welcome to everyone on the call Q3 was another great quarter continuing to deliver on our promises of fiscal discipline improved productivity and expanded operating leverage.
We also achieved some important milestones delivering our highest third quarter adjusted EBITDA in seven years.
As well as our highest third quarter adjusted EBITDA margin as a percentage of revenue in over 10 years.
With our Q3 results, we've exceeded analysts' revenue and adjusted EBITDA expectation for four straight quarters, which demonstrates consistency in our business performance and fulfillment of our commitment to improve profitability and cash flow that we laid out in the street over a year ago.
Establishing a consistent track record of strong operating and financial performance has been.
Our Rob our primary objective is we work work to deliver improved client and shareholder value.
It's also significant to note that we accomplished these results during the Cobi, Mike King Global pandemic.
So let me give you some a bit of overview for the quarter.
A few notable highlights, which curt will discuss in greater detail in a few minutes.
First of all revenue came in at $41.5 million, 2.9% below the same period in 2019 on a currency adjusted basis. The Mark the majority of this modest year over year decrease is related to our decision in 2019.
To de prioritize the unprofitable parts of our adjacent services business in order to focus on profitability and free cash generation, while building, our scalable and high performance technology infrastructure to enable our next generation solutions and future revenue growth.
Well, we achieved $9.3 million of adjusted EBITDA, which was primarily driven by our focus on continued productivity enhancements over the last year, improving adjusted EBITDA margins dramatically during the past 12 months.
We had net income of $3 million versus a net loss of 1.5 million for the same period last year, which demonstrate meaningful improvement in how we're operating the business.
At the end of Q3, our net debt was $8.4 million to 65% improvement over the past 12 months, bringing the net debt balance to the lowest level since Q4 of 2018.
This improvement was achieved through our strong free cash flow generation, driven by improved operating performance and disciplined cash management.
Gonna commend, Kurt and our senior leadership team for our solid performance in this area.
As you can see Q3 was an outstanding quarter for the company.
I want to recognize our outstanding employee teams around the world for once again delivering strong results in the midst of the challenging times we're experiencing.
I'm extremely proud of their dedication to serving our clients and maintaining productivity.
So looking ahead, we feel good about our ability to continue delivering strong financial results, while building and Operationalizing. Our next generation recovery audit compliance and advanced analytic solutions.
I'd like to now share five important point, which we believe will enable continued positive results.
First we have strong and sustainable client base.
Exists to serve our clients around the world and all our clients are dealing with the challenges of Cobiz tea.
With over 75% of our revenues coming from clients, providing essential goods and services. The majority of our clients have maintained or grown their revenues. During this pandemic Korea, some by very significant levels.
For the portion of our revenue coming from clients, not primarily providing essential goods and services, we have seen minimal exposure to bankruptcy or sustain business in a rut interruption, resulting from the global pandemic or otherwise.
All of our clients are seeking increased EBITDA. During this challenging time, so our services are broadly valued and appreciated.
Looking ahead, we continue to work through the global pandemic, we have a high degree of confidence in both the continued financial health of our client base and ongoing demand for our services.
Number two is the shift in consumer behavior to more online shopping.
Of the many social in lifestyle changes associated with the global Pandemics consumer buying behavior has been one of the major areas of change in most countries right.
Rather than shopping in traditional excuse me bricks and mortar establishment.
Consumers have rapidly shifted more of their shopping to online channels. We serve many of the world's largest and most successful traditionally store based retailers and the large majority of these companies have benefitted from expanding your online presence two of our large U.S. based store.
Based retail clients recently reported double digit same store sales growth and triple digit increase in their year to date online sales.
We also serve the largest pure E retailing companies in the world.
And so as it relates to the impact of the shift to more online shopping on our business, we audit all sales and merchandise transactions for our retail clients, including E. Commerce in many of these E commerce transactions utilize the same supplier funding mechanisms as in store deals. However, we are seeing a growing number.
E Commerce specific promotional funding mechanisms emerge.
Urge which opens up new claim types and new sources of recovery.
Number three is our employees ability to productively work from home since moving to a global work from home policy in March of this year claims production and conversions statistics have consistently performed at or above prior year levels. This has been a relatively easy transition for us.
As much of our workforce has always been mobile and working from multiple locations, which many in many cases includes home occasions.
We feel very good about our current work from home capabilities and see no issue in continuing these policies as long as necessary in the future.
You ever for efficient cost structure with opportunities to improve margins in the future through.
Through intensive focus on productivity and cost improvement, we reached the highest third quarter.
The highest third quarter adjusted EBITDA margin percentage in over 10 years.
The business is operating at a very healthy and sustainable productivity level and we are confident that we can maintain and improve this problem positive level of profitability going forward.
There are several factors, which contributed to this improved level of efficiency with technology, playing an important and growing role.
We are in the early stages of barbaric of our Varagon solution suite rollout and expect to see further levels of productivity achieved as we further implement the solutions.
And number five is our continued progress in development and rollout of our Varagon solution suite we.
We have spoken about the importance and significance about varagon solution suite on previous calls as you may recall. This platform consists of three primary elements.
The Epiphany high performance data infrastructure.
The Panoptix intelligent audio platform.
And the woman advanced analytics solutions.
It definitely is now fully implemented and processing all of our client data with impressive throughput and deficiency.
Panoptix is currently being rolled out in our commercial recovery audit business and we expect to complete development and began rollouts for our retail recovery audit and contract compliance audits in early 2021.
Finally, our initial lumen advanced analytic solutions are operational and showing early results.
We expect to expand lumen solutions and 2021 in a controlled and very profitable manner.
So varagon will be the key driver for our continued margin improvement and revenue growth for the future of our company.
So lastly, before handing the call off to Curt I'm pleased to share with you that we are increasing our guidance for 2020 adjusted EBITDA to approximately $32 million. This is the second increase to guidance that we've made this year.
I think a sign of our confidence in our ability to deliver this level of operating profitability for 2020.
We look forward to delivering on this commitment for 2020 and to delivering consistent and improved operating performance in 2021.
Now I'd like to turn the call over to Curt to go over the strong results of the quarter in more detail Kurt.
Thank you Ron I'm pleased to report that the third quarter was our fourth straight quarter of strong performance very strong and significantly improved adjusted EBITDA solidly positive net income and earnings per share.
Improved cash flow generation, which I think is much more impressive considering the challenging business environment. The company's space. These days, so let's go into a little bit deeper into the quarterly results.
Consolidated revenue was 41.5 million a decrease of 1.8% from the third quarter of 2019 on an as reported basis and a decrease of 2.9% on a constant dollar basis adjusted for changes in foreign currency exchange rates well.
Well. This is a modest decrease in revenue of $758000 I think it's important to note two points. One that this decrease is significantly less than it has been over the last few quarters and two that the vast majority of the decline related to a pullback from the unprofitable parts.
Upper adjacent services segment.
We have experienced good stability in the retail part of our business, which highlights the resilience of our business model, especially admits the COVID-19 pandemic operating environment and this sort of in a moment, we believe the contingency fee based nature of our business.
He plays to our advantage as it poses no obligation to our clients other than to share their data with us. So we can find discrepancies that yield cash for clients and revenue for PR Gx.
Of the 758000 dollar decline in year over year.
645000 was due to a decline in it Jason services at a 113000 of the decline was attributable to our core recovery audit business. The core recovery audit part of our business was effectively flat year after year.
As for some color on quarterly revenue performance in the service lines and regions recovery audit Americas decreased 6.5% year over year on an as reported basis and 5.9% on a constant dollar basis.
The retail part of the business was up modestly while the commercial and contract compliance side experienced a 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 a relatively stronger one which made for a more challenging comp this year.
Notably one of our larger clients tends to have an every other year cycle and 2020 is the off cycle year.
Overall this part of the business continues to be developing as expected right.
Recovery Audit Europe Asia Pacific increased 17.1% on an as reported basis and by 10.4% on a constant dollar basis.
The retail part of the business increased by double digits year over year on an as reported basis, while the commercial part of the business was up significantly and has been the case for the last three quarters.
As for services revenue was down $645000 year over year. The decline was primarily due to the de emphasis on the project based advisory part of our business, which was not producing the profitability we desired.
Revenue from the more recurring revenue base analytics solutions part of our business grew year over year and we're optimistic that we can scale. This in a profitable but measured fashion as we ramp up our next generation technology platform.
As for adjusted EBITDA in the third quarter. It came in at 9.3 million compared to $5.6 million in the third quarter of 2019.
And the adjusted EBITDA margin was 22.5% of revenue in the third quarter of 2020 versus 13.2% in the third quarter of 2019, an increase of over 900 bips year over year.
This is due to the efforts of our entire team to deliver on our commitment to improved efficiency and profitability, which we began since mid 2019.
This is the fourth straight quarter of strong financial performance, reflecting the benefits of our efficiency initiatives as Ron noted. This is our best third quarter adjusted EBITDA and seven years, which is a follow up to our three prior quarters that were similarly, the best quarterly EBITDA.
EBITDA results in a number of years I.
I hope, it's clear to investors now that we're operating at a completely different level of profitability than we have in quite some time.
The PG PR Gx team has done a tremendous job in driving efficiencies and improving productivity and I look forward to us not only sustaining the gains we've already made but also building on this progress by driving further productivity enhancements in the future.
Moving onto our discussion of net income net income for the third quarter of 2020 was $3 million or 13 cents per share a significant improvement from a loss last year and was largely driven by the same factors impacting revenue and adjusted EBITDA performance. This.
As the second quarter in a row of positive net income since we embarked on the productivity initiative and I'm very pleased to see the hard work of the entire pure gx team coming to fruition and delivering these results for investors.
I think it's really important to point out that these are real economic earnings here fully loaded burdened with interest expense a healthy income tax provision fraternisation et cetera, while we've typically focused on adjusted EBITDA as an important metric and we clearly had to address the improvement in Batman.
Eric over the last year or so you should expect us to discuss net income and earnings per share as also being a key performance metric going forward.
We're committed to delivering through sustainable and impressive economic earnings in the future.
Moving onto the balance sheet, we ended the third quarter with 22.6 million in cash and cash equivalents and 31 million in gross debt.
Resulting in a net debt balance at the end of the quarter defined as our total groups borrowings less cash balances of 8.4 billion down from 15.9 million in the second quarter of 2020 and down from a peak of 24.9 million at the end of Q3 last year.
Turning to capital expenditures, they were $2.7 million for the third quarter of 2020 down from $4 million in the third quarter of 2019.
We're focused on the roll out 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 2019 and specifics it to come in around $11 million.
Turning to adjusted EBITDA guidance for 2020.
We are increasing our guidance again to approximately 32 million.
We're confident with this.
Revised guidance based on our performance year to date and with our pipeline of claims for Q4 as it stands now.
As you've heard from us over the last few quarters. Despite a business environment in a COVID-19 world that tends to be challenging for many companies. We actually have experienced stable revenues due to the strength of our client base in which over 75% of our revenue comes from clients, who provide essential goods and services.
As Ron noted earlier this revised guidance would represent a 19% plus adjusted EBITDA margin for 2020 defined as adjusted EBITDA as a percent of revenue.
Increase of more than 600 basis points compared to 13% in 2019, and an improvement of around 50% in adjusted EBITDA margin year over year.
With respect to one of our strategic objectives of being the highest performing and 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 achieve the 20% plus margin goal.
Goal earlier than expected frankly, it's even possible that we achieved that goal this year.
Quite a bit ahead of schedule.
We are working to reengineer, both audit processes in the field as well as the information we use to manage our business and make resource allocations 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 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.
The combination of expected 2020, adjusted EBITDA of approximately $32 million less the combination of the following capex of around 11 million interest expenses income taxes of around $5 million and transformation related expenses of around $3 million should enable us to generate free cash.
Flow near the.
The mid teens during 2020.
Achieving this level of free cash flow in 2020 reflects an increase of more than a 100% and our average annual free cash flow over the last six years.
We believe this is one of the primary drivers of shareholder value in our business and we intend to maintain our keen focus on free cash flow generation going forward.
Before moving on to today I want to remind investors of the strategic priorities set out earlier this year and how we're tracking about.
The first objective is to be the highest performing and most efficient recovery audit firm in the industry. While I believe we've been the highest performing recovery audit firm from the perspective of our core clients for quite a long time as evidenced by our dominant position in the industry.
I think it's becoming much more evident to investors is that we can be the most efficient recovery audit firm too.
We believe the consistent delivery of these newly elevated levels of profitability year end and year out will be the proof of being the most efficient recovery audit firm.
We will incessantly focus on productivity gains and to build on the progress we've made over the last year.
The second objective is to evolve our core business from a contingency fee oriented post audit recovery provider to a prepayment error prevention subscription oriented business partner to our clients in the future. While I believe it's clear that we've been delivering on the first strategic objective we've been.
Working very hard on the second one to many of the foundational elements to this strategic objective continue to go into place such that we believe this will position us advantageous Lee in the future.
By executing on the strategic objectives, we believe will be that will we will best be able to drive shareholder value for our investors so stay tuned.
With that I'll turn it back over to Sharif for acuity.
Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please stand by while we compile the Q and a roster.
Our first question will come from Alex Paris with Barrington Research. Please go ahead.
Hi, guys congratulations on a great quarter.
Hi, Alex Thanks, I'll back you.
Not only a beat but a raise I like it.
So let me just ask some big picture taking questions.
First off I have you started to audit purchasing data that occurred during cold and yet I think on the second quarter call. You said you were just beginning to see.
Some of that data and given that 75% of your customers are essential goods and services and given that they have maintained their revenue or in fact have grown their revenue in many cases, so I would think that you're going to have more claims opportunities and revenue opportunities in the back half of this year and.
Into 2021 so.
The question is have you started to do it and what do you see.
Sure and we you know as.
As you know we the audit period behind the transaction is it varies from client to client. So we're on the outside of the front end of our more accelerated audits right now starting to get into those transactions and I think the you know the earlier part of the pandemic.
We did see some reduction in the promotional investment coming from CPG companies and other types of.
You know promotional mechanisms.
And but thats settled down.
So that you know we had increased volumes, but we had some decrease in promotion so those kind of balanced out and what we're seeing now is that most of the promotional activity has has gotten back to normal and we're not seeing that no extreme.
Ryan on certain types of commodities like paper products and that we saw before.
And.
So we're we're hanging in there we're not we're not seeing it go through the roof, but we're also not seeing a decline either it's it's.
Trending in a positive direction with.
With regards to commercial where we would deal with manufacturing companies and CPG companies and pharmaceutical companies.
Again, we're you know we're we're seeing a.
I have a higher level of.
Spend those for you, especially in the CPG companies.
And we've seen some.
Increase in claims for certain clients that that we think could be due to the early stages of this disruption in supply chain that seems to be.
Moderating and settling down.
And we're also seeing clients that.
Have a stronger interest in increasing the number of contracts that we review you know wanting to make sure they're staying on top of their spend and Stan.
Staying close to.
Compliant so we're seeing positive activity there but.
It's still early days for us because again from most of our clients were six to nine months plus after the transaction so.
No, we'll probably have a much better view of that coming into the fourth quarter.
Great.
Helpful in terms of existing business, how about new business in this environment.
Bringing on new clients.
I would assume that have to be a challenge, but you had the contingency element to make it more attractive I suppose.
I think also in the second quarter Conference call. You noted some hesitation on the part of new accounts to get started or they want smaller scope of services or anything that has that kind of work its way out or what are you seeing there.
Well we are.
No I think thats still exist signing up new clients, but you know first of all we got to.
Really commend, our marketing and our sales team for making the adjustments they had to make going into the year.
We just weren't sure how we're going to generate leads and we knew we had to go through some different mechanisms to do that.
But I've been very impressed our marketing team has been very resilient throughout this pandemic period with average.
Finally.
The the business development team doing the lead generation activities are up 82% over 2019.
And the average number of meetings that were having per month is up a similar number over 2019 and then the number of new sales qualified opportunities is up 50% over last year. So we feel very good about our ability to utilize webinars and using.
Other parts of.
Publishing white papers and outreach calls to get.
Good people interested in what we do and you know as we look at our bookings.
Were we went through it again this morning, we look in.
We feel very good that we're going to be able to.
You know we are starting at when things started to go into the pandemic period, we were very concerned.
So that is.
That's very positive we've got some great logos coming in what we've got we booked and the point you made about the question you had about bringing those clients online there's still a little slow.
In terms of getting all the data required and getting all that.
The teams are.
Aligned on what has to be done to get started so we're a little bit behind that again, we see that as a.
Coming through next year, or maybe maybe starting a little bit later, but we think we'll have good momentum going into the into the next year with that.
But but all in all we're we've been Super pleased with how our marketing sales team did operator.
That's great well, thanks, very much Concord appreciate it congratulations and good luck going forward.
Thanks, Alex Thanks, as always good to hear from.
Thank you. Our next question will come from Zach Cummins from B. Riley Securities. Please go ahead.
Yeah, Hi, good afternoon, Ron incurred yeah. Congrats again on the strong quarter, it's nice to see the consistent execution through throughout all of 2020.
I guess just following up on bookings question I mean, even though it's taking a little bit longer for some of these clients to kind of get off the ground and get started.
Are you thinking that business can potentially return to growth in 2021 or kind of how are you thinking about that.
As you start to see that the business exiting this year.
Great Great question, we were.
We're looking at that right now in terms of what next year holds but you know we have had to come through a lot. This year from you know from the putting a pause on some certain elements of adjusted EBITDA. The slow start up from some of these new clients and no question. We've had some decline in revenue this year a year old.
A year.
What we what we think we are hitting a pivot point here and and that we're starting to see things kind of you know.
Get to a new level of.
What I'll pay a normalized direction.
And what we're really working on is.
As you know to first of all we feel very very positive about where we are in our operating performance our financial delivery.
EBITDA free cash flow net income all super positive and we're absolutely committed to continuing that going forward.
This is a great position to be in and really gives us strength to do a lot of things going forward Secondly, we're continuing to get.
We're continuing to work through the development and the rollout of the Varagon solution suite.
That is a key part of our continued.
Work on efficiency as well as how we're gonna grow revenues going forward. Both in terms of our recovery audit delivery as well as other solutions through our advanced analytics, so that super important and we've got a lot of focus going there next year.
In terms of growth we have had.
As you know headwinds in 2019, we'll get some of those behind US. We're we're going through the process right now of look.
Looking at next year, we think there are some really favorable things happening. Some other things that we're we're still sorting through but we feel good about our ability to you know to at least get to.
<unk> revenues with some level of incremental growth, we'd like to do more but surely don't want to over commit we're going through that process right now of the planning next year and looking at what it looks like we've also got some of the unknown. So cold it and you know the extension of that so there are many factors that are going in but but we feel like we are.
We know how to pivot point start to go win back up to the in the right direction on revenues I will give you a lot better color on that next quarter. After we get a little further into our planning process.
Got it kind of that's helpful. Thanks for that and in terms of gross margin I mean really strong once again here in a corner.
I mean, what do you view as a sustainable level of gross margin as we continue to go forward from here. It sounds like there's even room for improvement as you start to really roll out more of this paragon technology platform.
Yes, Kirk do you want to give them some.
Our view on yes.
Yeah.
As Weve stated in the past, we think that over the longer terms, we can get kind of solidly into the mid 20% adjusted EBITDA margin of territory and some of that's going to be gained through efficiencies at the cost of revenue line some through rest DNA.
So I I might encourage you to think of both of those together.
And you know maybe half of that is going to come from core and we'll hit gross margin and the other half SGN <unk>.
But we definitely believe that with the infusion of technology into our processes that just enables us to find more with the same level of resources that we have today.
Understood that's helpful.
And then I guess just looking at the adjusted EBITDA number I mean for the implied Q4 range I think it's slightly down year over year I just want to make sure are there any costs that need to be caught up in Q4 or are exactly how you're thinking about the final quarter of 2020.
Yes.
Keep in mind is that approximately $32 million, that's kind of an implied range. There would we expect something thats kind of similar to last year yeah.
Yeah.
2019 was a little bit different than 2020, and that we really underperformed and there were things like bonus accruals that were relatively low last year, whereas this year been pretty high.
Because weve been very profitable and have cut a lot of costs out that I would expect we would have even heavier accruals in Q4 of 20 versus 19 that if you were to adjust out for that I would feel pretty comfortable that we would be outperforming last year. So it's a little bit of those kinds of headwinds that are but.
Good good headwinds its because were successful that we have those kinds of bonus accruals and that's important.
If you want to have an employee base, that's that's energized and engaged in getting rewarded for the strong performance, so probably flattish compared to last year, but keep in mind that last year was also that was our first time that we really had strong quarterly performance after having taken out so.
Much of the cost with our efficiency initiatives.
And speakers I'm showing no further questions in the queue at this time I would like to turn the call back over to you for any further remarks.
Thank you very much operator, and thanks to all of you for joining us today for our Q3 earnings call.
We are working hard on wrapping.
Wrapping up this year, we got plenty plenty of work ahead of us between now and the ended the year. So we're we're looking forward to a great Q4, and we'll look forward to a to have you on our next quarterly earnings call in early 220 21.
Thanks, a lot and everyone take care and stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].