Q1 2022 Resources Connection Inc Earnings Call

October 6, 2021

[music].

Good afternoon, ladies and gentlemen, and welcome to the Reposted Connection Inc. Conference call. At this time, all participants are in a listen only mode.

Later, we'll conduct a question and instructions will follow at that time.

If anyone should require assistance during the conference call. Please press the star key followed by the zero, but I know you touched on telephone and.

And you will be connected to an operator, who will assist you.

As a reminder, this call is being recorded.

At this time I'd like to remind everyone that management will be comedy on results for the first quarter ended August.

'twenty one they will also refer to certain non-GAAP financial measures an explanation and reconciliation of the measures to the most comparable GAAP financial measure is included in the press release issued today.

Today's press release can be viewed in the Investor Relations section of RG piece Web site and was also filed today with the SEC.

Also during the call management may make forward looking statements regarding planned initiatives and strategies anticipated financial performance of the company.

Predictions and actual events or results may differ materially.

Please see the risk factors section in the RG piece of court on Form 10-K for the year ended May 28, 2021 for a discussion of risks uncertainties and other factors that may cause the company's business results of operations 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 argue P. T O.

Thank you operator, welcome to our Q1 earnings call and thank you for joining US today I'll cover three topics starting with a quick review of our strong first quarter performance I will then discuss progress against our digital agenda, followed by comments relevant to macro trends and original.

Research, we just completed within our current and target client base.

On our Q4 call, we previewed stronger growth coming in Q1 and it did revenue was the highest achieved in over 10 years during our fiscal first quarter and had $184.0 million exceeded our guidance and represented 25% growth year over year.

We also grew sequentially by eight 5%.

We're pleased by the strength across many markets and industry verticals, driven by sustained improvement and operational execution and delivery and macro trends such as workforce agility and digital transformation.

Revenue in every major market was up double digits and our strategic client accounts delivered 26% growth.

Disciplined account planning and client centricity are paying dividends.

Adjusted EBITDA performance as a further highlight from Q1 result.

As we expected adjusted EBITDA margin improved to 12, 2% up 530 basis points from first quarter last year.

This accomplishment is a result of operating with an improved fixed cost structure and strong gross margin performance.

Worked hard to increase the profitability of the business by achieving top line growth.

Lowering head count and real estate expense and driving efficiency with technology and digital tools.

We'll continue to do so we're also focused on pricing to value and increasing bill rates appropriately consistent with our fiscal year goal. This is the second quarter in a row, we achieved 12% plus adjusted EBITDA margin.

The management team at this trajectory when we began working together three years ago.

While COVID-19 sidetracked, our progress as clients put new projects on hold for a time, we have more than fully recovered to exceed Q1 fiscal 19 levels and remain optimistic about capacity forward.

This optimism is fueled by two fundamental macro trends the first centers on digital transformation, both internally and throughout our client base. The second is a tangible and meaningful shift toward organizational agility and specifically how work gets done this trend equally impacts climb.

<unk> strategy and talent preference.

I have shared many times Rpt's digital transformation is both internal and external.

First we are transforming how we deliver our services to clients and our gig opportunities to consultants through digital transformation initiatives.

Current example of this effort is Hugo or soon to be launched digital engagement platform to allow clients and talent to interact through a self service marketplace for finance and accounting talent.

Our differentiator is launching a technology platform with the trust quality and high touch experience of our G. P and safety net of employment benefits and community, which we believe professional talent wants.

As evidenced by discussion and research shared if the FAA conference on collaboration in the gig economy platforms are coming to all corners of this industry.

While we've seen such marketplaces like I have health care up work and job stack for nursing creative coding light industrial and hospitality gig work, we've not seen a dominant player in the professional gate arena, we intend to be the dominant player for knowledge workers engaging with enterprise business.

I'm very pleased to share that Hugo will go live the week of October 18th and the Tri State market of New York, New Jersey and Connecticut.

We're launching with a pilot for a designated set of clients and finance and accounting rules. The team is ready and the product is ready for MVP launch and we believe the macro environment is now conducive.

Following our launch in Tri State, we will extend the capability to the Dallas market and then northern California within the next fiscal year.

We'd hope to share more about the functionality of the product during an in person Investor day at NASDAQ on October 13th However, given continued restrictions at NASDAQ due to the Covid Delta variant, we've decided to move the Investor day to April 12.2022.

Look forward to engaging in person and sharing client experience with Hugo at that time.

Externally the trend toward digital transformation and our client base continues to accelerate.

We added were asked these capabilities to our suite of services at just the right time two years ago clients continue to fund projects to digitize core processes for automation in collaboration and create digital tools to drive growth.

They need spans our client base from health care providers to technology to big pharma.

We know this concrete shifting corporate priorities as real as veracity grew by an impressive 45% year over year with nice growth in revenue and pipeline coming from our Gpus core client base.

Please review our updated investor deck for New case studies and further color around brass These project work.

As an important tailwind for our business the macro trends, creating today's opportunity rich environment come from both the demand and supply side. These trends have been confirmed by original research. We recently gathered from our current and target client base, we will be releasing the human agility research.

This month prominently on our website as it confirms how post pandemic behavior is favorable to our business model are here to stay on.

On the demand side clients are committed to operating in a different paradigm with agility at the core. This means companies are building more distributed leadership nimble finances, and new workforce strategy centered on agile talent, where.

Were increasingly engaged with clients, who want our G. P formally on the Org chart as a talent provider to match critical project based skill sets to business imperatives.

Decisions can then be made throughout the business to achieve speed and resiliency.

On the talent side, our research confirms that control choice and diversity of experience matter more in a changed world.

Where to work went to work and on what to work are increasingly vital considerations for professionals.

Talent also wants to align with the organization on shared values empathy and flexibility.

Our business model beautifully meet the preferences of today's modern professional.

While other firms are facing the harsh realities of the great resignation, we are increasingly an employer of choice.

In closing I want to express my enthusiasm about our new executive appointment to be announced this week.

The dress Patel has been named our new Chief Digital officer effective immediately.

As the CEO of veracity, but dress shoes has been consulting on our digital and technology transformation efforts informally we're now ready to formalize his role and remit.

During the next year, he will stay close to veracity sales and strategy, while developing his leadership role over our enterprise digital roadmap priorities and alignment.

We are delighted to welcome him into the C suite and further bond veracity NRG P. As we pursue digital transformation work in all corners of the business.

I'll now turn the call over to Tim for an update on operations.

Thank you Kate and good afternoon, everyone. During the first quarter. We saw continued strong progress in our revenue and operating metrics, despite pandemic fleur and vacation effects typical with the summer months.

Larger deal sizes and longer project durations exemplified the commercial environment as clients continue to take on significant and transformational initiatives.

Momentum noted at the end of Q4 relative to revenue and pipeline continues after.

Enterprise revenue increased by 25% over prior year quarter, and a half percent sequentially, while profitable activity was strong leading to increases in qualified opportunity and ultimately to the highest level of closed deals since 2019.

Revenue growth in pipeline strike was consistent across our core business in Asia Pacific Europe, and North America ferocity in country.

Operational effectiveness, a strengthening economy and macroeconomic trends favoring co delivery provide a powerful combination for growth.

Quint noted our first quarter results exceeded the high end of our revenue guidance.

We are seeing growth in both project staffing or professional consulting that was part of a broader market shift away from a fixed for the small workforce to a more liquid workforce that can be Marshall quickly embolden instantly in the fit for purpose solutions.

Companies start new initiatives will resume and accelerate existing ones utilization of agile pool delivery is becoming a potent force <unk>.

Wire for prioritizing flexibility and labor is demanding it.

Elements of this dynamic started before the outset of Covid. The last 18 months have provided a significant and meaningful acceleration leading to a palpable tightening of the traditional labor market and a higher reliance on a more fluid and more fluid workforce solutions.

We continue to see more candidates seeking non traditional employment and have seen declines in attrition rates and increases in hiring in our variable employee base over the last three quarters.

As opportunities rise project durations with them and the ability to work unconstrained by locality becomes more prevalent we are seeing more talent attracted to our platform.

We continue to work seamlessly with <unk>, providing a diverse portfolio of experience for our consultants and demonstrating the durability and employment opportunities for new Apple.

While we recognize that a tight labor market could impact us more broadly in the future. We believe that a more professional software career objectives and offer more flexible work.

Our ability to offer a blue chip client roster career control borderlands delivery and professional communities will continue to be an attractive proposition for more mobile workforce.

As an example, our new West Coast consulted wanted an opportunity to lead strategic projects as a traditional role without providing challenge and growth opportunities.

He chose to come to <unk> as the project lead for one of our Premier Health care clients is.

Positive experience with us proved to be the impetus to refer his sister to RVP.

It was enduring a reorganization, but what's your current employer had little one values from her room after.

After hearing about RVP modeling culture. She came aboard and is now also working remotely and project manager good transformation at another health care clients.

Overtime, we see workforce desire than our ability to meet them, leading to more employment stickiness RVP and an upward trend through our existing tenure of approximately three years, which is a strong statistic given industry trends and our flexible deployment model.

While we feel that general workforce shifts or already favorable to our model. We will continue to focus on operational discipline and providing an excellent consulting experience.

As we've noted in previous quarters, our hybrid returned to work continues with companies embracing distributed employee basis.

Utilizing a blend of onsite and virtual teams to drive project.

Shift is very much in line with our GP value proposition of asking the right compositional skill sets within team to deliver successful outcomes.

In fact, the blend of on slab on from an Offsite resources allows for better matching of supply and demand and improved operational efficiency when responding to client opportunity.

The pandemic has educated the market about the virtues of remote delivery and a tight labor market with distributed Workforces means at hybrid and modular resources is likely a permanent shift.

We see some increased call for on Prem engagements, but significantly less required a full time onsite presence as most companies are utilizing a hybrid workforce themselves and are comfortable engaging with us in the same manner.

As an example, we are currently engaged with a technology company that is working on a number of initiatives concurrently as the rapid growth has begun to strengthen our infrastructure there.

They recognized early on that the scope of work contemplated would require a high reliance on external talent to help deliver the desired outcomes.

Noting the difficulty attracting traditional employees and recognizing the competition for variable resources. They made a significant commitment to reserve RGB talent, knowing they have both immediate and future guests to fill our team will work on Prem remotely as required and will be stopped for both locations.

We are in discussions with other clients were interested in ensuring they have access to cap the talent pool for immediate and future initiatives.

Now, let me turn back to our first quarter operations.

During the quarter, we saw continued strength in pipeline in top of funnel activity.

Average weekly revenue grew by approximately 4% from the first.

First weeks of the quarter for the last in fact average daily revenue rates ended the quarter at the highest they've been since FY 19 and pipeline in booked revenue continued to demonstrate pre pandemic.

The majority of markets demonstrated growth over prior year quarter, while several markets strategic client account healthcare veracity, and Kelsey demonstrated growth both sequentially and over prior year quarter.

Lead generation and opportunity identification continues to be strong into Q2.

Robert with the peso change coupled with a tight labor market.

The early weeks of Q2 have shown a strong continuation of positive trends in both revenue and pipeline in fact, the early quarter revenue trends or some of the highest we've seen since 2019 while.

While the holiday starting this quarter, we don't expect to be inordinately impacted.

Revenue expansion of the core objectives. However, we continue to target profitable growth with increased operational leverage as in prior quarters. In Q1, we've continued to make strides in controlling fixed costs and focusing on efficiency, yielding on over 500 basis point improvement in enterprise EBITDA margin we understand.

The importance of enforcement person meeting and we will not shy away from face to face interaction. However, the lessons learned during the last 18 months stay with us as we transition into a new normal to that end, we will continue to sell deliver and operate in a more hybrid fashion look for opportunities to reduce real estate and utilize technology to extended strengthen the experience of our clients and consoles and our quest to increase.

Shareholder value.

I'll now turn the call over to Jim for a more detailed review of our first quarter results.

Thank you Tim and good afternoon, everyone.

During the first quarter continued rise in demand coupled with successful go to market execution fueled substantial growth in revenue.

Reaching the highest level in any first quarter in the last 10 years.

We also improved average bill rate driving above guidance gross margin.

Furthermore, we remain disciplined in SG&A spend increasing leverage significantly and enabling us to deliver a $26.0 million of adjusted EBITDA or a 12, 2% adjusted EBITDA margin, which is also the highest margin in any first quarter in the last decade.

Now, let me provide more color on our operating results starting with revenue.

With quarterly revenue of $184.0 million, we well exceeded the high end of our revenue guidance of 177 million.

After adjusting for business day, and currency impact Q1 revenue represents growth of 25% year over year, and 5% and 2% over the pre pandemic first quarter periods of fiscal 'twenty and 19, respectively.

In addition, notwithstanding summer vacation impact our performance in Q1 exceeded the sequential quarter by eight 5% on a same day constant currency basis.

Revenue growth in the first quarter was across most of our core markets key client accounts solution areas as well as industry.

Strategic client accounts grew 26% year over year and 9% sequentially.

In addition, macro trends accelerated by the pandemic, including increased use of contingent talent and a shift towards a more agile workforce model continues to be a tailwind in driving topline growth.

Professional staffing revenue grew 36% year over year and 8% sequentially.

In North America revenue improved 28% year over year, and 11% sequentially on a same day constant currency basis.

Core market in North America experienced double digit growth year over year with Tri State and California are leading the growth of 41% and 30%.

In addition, <unk> grew 45% year over year, which continues to evidence increased demand in projects that enhanced employee experience through digitization and automation of processes a trend we believe is likely permanent.

Europe continued to perform well achieving 10% growth compared to the first quarter of fiscal 'twenty. One on a same day constant currency basis.

Excluding revenues from markets, we exited as part of the restructuring initiatives year over year revenue growth was 18%.

Sequentially revenue was down 7% in Europe due to more summer vacation taken in the first fiscal quarter and relatively stable performance in Q1 of last year.

Asia Pac also experienced broad based expansion and revenue across most markets first quarter revenue grew 17% year over year and 8% sequentially on a same day constant currency basis.

Gross margin in the first quarter was essentially flat to prior year, 39% compared to 39, 3% a year ago.

We effectively elevated our average bill rate and help pay bill ratio flat from last year. There was one additional holiday in the U S and the impact of heavier summer vacation.

Covid related restrictions eased in some parts of the world.

Compared to the fourth quarter, we improved our pay bill ratio by 70 basis points as a result of achieving higher average bill rate.

The tight labor market has not yet had a significant impact on our pay rate.

However, we intend to be a step ahead of any impending rise in pay rates by pricing our engagements market appropriately.

We continue to see opportunities to achieve higher bill rate across several solutions that including digital transformation services.

Emerging from our restructuring initiatives and positions with a more nimble cost structure run rate SG&A expenses for the quarter were $53.0 million after excluding noncash stock compensation contingent consideration expense and restructuring charges, representing 27% of revenue of 570 basis point increase.

When compared to the same period a year ago.

Now turning to the other components of our financial statements.

Effective tax rate was 29% compared to 46% in the prior year quarter. The improvement in effective tax rate resulted primarily from better operating results in the European entities, enabling us to utilize the benefit from historical Nols.

We expect the improved profitability in Europe will continue to cause piece your effective tax rate to be more favorable.

Adjusted diluted EPS for Q1 rose significantly to <unk> 43 per share compared to <unk> 14 in Q1 and fiscal 'twenty one.

We generated positive cash flow from operations in the first quarter, which is typically cash flow negative due to our annual bonus payout our balance sheet remains strong and we paid down an additional $10 million of outstanding debt under our credit facility in the first quarter.

As we look ahead, assuming the macro environment remains stable, we plan to invest in new ERP and talent management system that will allow us to achieve more efficiency in our back office operation and position us to scale as we continue to grow our topline as a result, the capex is expected to be elevated beginning in the second half of the fifth.

Full year, we're currently assessing the silicon cost of such investment.

We regularly evaluate our capital allocation strategy, taking a balanced approach between investing in the business and returning value to our shareholders through a combination of dividends and share buybacks.

At the end of Q1.85 million remained available under our share buyback program.

I'll close with our second quarter outlook.

We remain optimistic and anticipate continued growth in the business.

Revenue in Q2 is expected to be in a range of $87.0 million to $190 million, which at the high end of the range would be an estimated 24% increase compared to Q2 of last year, we expect gross margin to be within the range of 38 to 38, 5%, reflecting the impact of Thanksgiving holiday in the U S.

We expect run rate SG&A to be in the range of $50 million to $53 million.

Now we're happy to take questions.

As a reminder to ask a question. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask the question.

Withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Andrew Steinman of Jpmorgan. Your line is open.

Just one quick clarification and then a question.

So Jen what did you just mean, when you said $50 million to $53 million of run rate SG&A do you mean SG&A for the quarter I just didn't know what.

Yesterday run rate My my other question is about your go into launch.

How much is this going to affect our SG&A and when do you feel like Hugo could be contributory to our revenues and profits.

Sure Hi, Andrew.

When I talk about run rate SG&A, I'm really talking about SG&A, excluding stock compensation restructuring costs and contingent consideration. So SG&A that is as part of our run rate business. That's what I meant by that kind of 50 to 50 yeah.

Okay.

And then about Hugo.

Back to Hugo Yeah, with respect to Hugo So after we after we launch Hugo in the next couple of weeks, we do expect level of capitalization.

To decrease so it is going to add additional SG&A.

Two our results if you think about the rest of the year on from a you know I think that we're going to start to see return Oh, it with respect to Hugo, but I think that it's still too early to really predict what that revenue is going to look like until we pilot. This in the in the in the Tri State area.

And just to be clear that $50 million to $53 million of run rate SG&A includes the yoga launch right.

Okay, Yeah, Okay. Thank you.

Thank you. Our next question comes from Mark <unk> of Baird. Your line is open.

Hey, good afternoon.

Everybody I'm wondering first of all nice job on the quarter nice to see can you talk a little bit about ferocity.

It was up quite strongly can you remind us how big ferocity is.

Yeah.

Yeah, Hi, Mark Veracity is is roughly about 5% of our overall enterprise their revenues about 5% of our overall enterprise revenue.

Currently.

Okay.

Great and then.

It sounds like you know across North America, you ended up seeing really strong growth, particularly strong growth in the Tri state area over 40%.

To what extent do you think it's being driven in part by the.

By increased deal flow deal activity.

You know, whether it's ipos box or.

Private equity transactions.

Hey, Mark it's Tim.

I think first of all at Tristate, Yes, we're really excited about Tri state in a number of other markets in our core that grew this quarter.

I think broadly we're seeing some tailwind from transaction deal flow.

Particularly related to M&A, and some backstops and some probably more spec activity at the.

End of the fourth quarter and the early part of the summer and then it sort of tailed off a little bit but that doesn't mean that the transactions themselves are somehow there's all kinds of things going on I trusted participated in that.

We're about as well, but I think a lot of it kind of comes down to the work that's been done over the last.

Three or four quarters, we have a new leader in place and a new team and they've been doing a lot of work relative to penetration generally back within the financial services market and to diversify outside of it. So while I think that some of the some of the transactions contributed to it it wasn't solely due to that.

Great and then can you talk a little bit about what your expectations are with regards to you know to pricing on a go forward basis, you mentioned that youre going to be.

A little bit more proactive and obviously, it's a tight labor market and we're seeing all sorts of signs of wage inflation. So how should we think about bill rates on a go forward basis.

Mark I think the bill rates as a real upside for our business and I've said this the last couple of quarters. When we've made I think some incremental progress relative to our pricing discipline, but it's a real push for us so.

The back half of this year I expect us to be able to extend pricing some of it is.

For incumbent engagement, that's difficult to do that so what we're really focusing on our.

New engagements and also widening back any pricing arrangements that we had put in place for Covid.

But.

I think I've said for a long time.

It's an opportunity for us we need to price to market more and when you think about tight labor market.

The right time for us to be able to push and push through some of those.

Some of those increases and we're doing that proactively.

And how much do you think you could end up pushing through and.

It would seem like almost everybody would be accepting of higher bill rates. So how much can you push through do you think.

I've got a kind of a tricky question I mean, it's hard to speculate on that because these clients are little bit different.

And let me just state for the record that there is no client that's receptive anytime for a price increase that they don't have to dig it up so I think I think what youre driving at is the circumstances I think people understand that it's a tight labor market and that we have a good product and so they're more right.

Than they might otherwise be but theyre not.

Still requires some.

Some delicate negotiations so.

It's hard to give you an order of magnitude, but I think that where we have an opportunity here to push push push our prices up a few percentage points.

Okay and.

John I was.

In terms of the revenue guidance can you talk a little bit about that with regards to for the second quarter.

We take a look at the historical trend between Q1 to Q2.

It seems like.

You know you might be being a little conservative just trying to get a little bit of a feel there just in terms of what the normal sequential pattern as I recognize you are coming off the strongest first quarter that you've had in 10 years and so it might be hard to forecast off of that or maybe you are expecting some normalization not sure exactly what's the what's the drivers.

Yeah, Yeah, well, I mean work compared to sequentially.

There were up about 6%.

I mean, we do have the Thanksgiving holidays in Q2, and given that you know the world has opened up opening up quite a bit right. Now we did build in a little bit of conservatism in there just just not really fully grasping what the.

The holiday impact is going to be that's so that's one area and you know and also given you know we talk a lot about the the the labor market being tight so if it if it continues to get muscle.

Also affected our growth a little bit. So those are those are kind of the two two factors contributing to perhaps maybe not as much of a sequential increase as we have done historically.

Great and then you did a really nice job in terms of managing SG&A you talked about the Capex, but just wondering also.

You took down management compensation. So you had some contribution there wondering how much you could frame as being when we take a look at the expense reductions ex what.

What you talked about in terms of.

You know some increases in SG&A for <unk>.

Your technology initiatives, how much of the rest of the expense structure is permanent versus temporary or what should we expect you know beyond the next quarter.

Yeah, I mean, I think this year.

I think of SG&A as a percentage of revenue.

You can probably think of it anywhere between 28% to 29% for the remainder of the year.

And you know for that for the rest of the year, we do I mean Q1 was very favorable because.

Because we expect travel to to return.

Would you increase a little bit right and but we didn't really see that in Q1. So for the remainder of the year you know as I said as the World opens up would you expect travel to also go up a bit.

And you know and as we as we grow revenue our variable comp has been a growth. So those are something to take into consideration when it comes to SG&A.

Okay and then.

One other question just I mean, we had a pretty big ramp in terms of the number of for.

From a headcount perspective going from 24, 44% to $72.0 over the last 12 months just wondering how much of that is.

To what extent do you expect that that that sort of trajectory how much of it was just a bounce back how did you scale it back quickly.

Yeah, I think hi.

Hi, Mark it's Kate I think most of that it has bounced back and an uptick in consultant.

Engagement and employment, we expect as we've said before the business to continue to grow and we've tried to give you some guidance there. So I would expect that to continue.

But the bounce Mei.

Yeah.

Even out a little bit of peak if you will.

Yes.

Mark I would just add to that I mean.

Okay might talk about this that the hiring trends for us during the quarter were the highest that we've seen in a while.

We think the macro forces are going to continue to push things our way even in a tight labor market, but that is a pretty big bounce back and.

Keep them well.

We think that'll normalize over the latter half of the year.

Okay and then two final questions. One is just you mentioned that the retention of the consultants is picking up can you dimensionalize that a little bit further just in terms of how long how much longer are they sticking around and then the second question is probably related.

What percentage of the of the positions that you are now selling our are being sold.

Where they're being stuffed virtually.

As opposed to on premise.

How do you think that trend unsold.

Things normalize.

Yeah.

The first one is a difficult one to give you exactly because what I would say is like our average tenure is around three years.

Up and down and if you thought of three is kind of a place where you might have a bias to peg.

Peg normalized standard deviation.

You see some flex around that through the year as well what I would say is what we've seen over the last three quarters is that our overall attrition rate of decline usually that happens.

The first year that somebody who joined Bert.

Joined our company kind of really feeling out.

What the models about and if they like.

The culture and the things that that we provide for them from an experience perspective, and we've seen that that is typically the time, where you might experience higher turnover in that particular segment that that attrition levels down significantly so how that will play out from a tenure perspective over time.

Through the year, we'll start to see.

The average tenure of continued to pick up because we have that combination of increased hiring in lower attrition and you start to see tenure increase.

In time.

And the second piece is also something that I'm going to give you more of an order of magnitude to Dimensionalize I mean, I think obviously during the last 18 months almost everything was offline.

Let's call. It 90 patent kind of a thing we're probably closer to $90.0

In that range and like.

I don't.

Because of the pandemic was so unusual I would say that when we come back and it won't be a question of what's our upside on what's onsite it'll be how often are people onsite and how often are people working remote that's that sort of high end. It's the same thing for traditional workforces. The world will sort of mirror that my sense is that that's going to be.

We've got two days on slide three days off or vice versa, depending on the clients.

Yeah, Mark I, just want to add a little more color I was just at the FAA conference, which was the collaboration in the gig economy and at that conference. They shared a Mckinsey report that has just been published that surveyed employment working models pre COVID-19 and desired working mom.

Post Covid and what they've published is that Theres been a 25 percentage point move.

From away from on site.

Work and a 22% growth in hybrid so I think that really reflects pretty nicely. What we're seeing in our client base and as we said in our prepared remarks, we really believe this is a changed world and so we're preparing not only how we engage with consultants and Tam.

Clint.

To prepare them for this kind of flexibility and again, we really believe that our flexible approach will allow us to attract the.

The best talent in the future I think the other thing to keep in mind as we move through fiscal 'twenty two with that.

It's all it's a year if that helps.

And what we mean by that is really upping the care and feeding of our consultants. So they know that this more agile way of working is not only viable, but it's delightful and that's really the experience we want to create in our people.

Terrific. Thank you.

Thank you. Our next question comes from Josh Vogel of Sidoti and company. Please go ahead.

Thanks, Good afternoon, everyone.

Certainly impressive results good to see a lot of you covered a lot of the questions I had but I wanted to kind of build off maybe some of them can you just clarify for me.

Outside of veracity, how much of your business in the quarter was digital transformation related services.

Hey, Josh it's John Yeah, it's about 10%.

Beyond veracity that is in digital and technology.

So, 10% I'm, sorry, beyond velocity or including breaths, yeah beyond beyond veracity. So total we're looking at about 14% to 15% yeah.

Okay. So when we look at that 14, and 15% of the business and then.

The margin profile of the entire enterprise.

How much.

What is the margin profile on digital transformation related services relative to the other 85%.

Yeah.

Well I mean, the bill rates on the digital transformation services is generally a little bit higher than.

Our average bill rate.

Hi, Bill rate is $126 and so if you look at just the digital transformation services is in the mid 50.

So bill rate in general is that a little bit higher I wont say the gross margin profile is probably slightly higher but not drastically different from the other solution families.

Okay great.

And shifting gears I know, there's a bunch of questions on SG&A I was just curious what would you say is the the breakdown today following our restructuring initiatives and operating efficiencies that resulted in you know what's the breakdown between fixed and variable cost structure of the business relative to where you were running prior to the pandemic.

Overall, our variable cost structure and full cost is still roughly about 70%.

Fixed cost was about 30% in variable because when I think variable cost that that include cost of services as well.

Okay great.

And there were no.

Earlier question talking about your guidance and looking at Q1 to Q2.

I just wanted to look a quarter further so should we expect to see a return to more seasonal patterns. For example that typical step down in the third fiscal quarter.

I think it was about 9% sequential in fiscal 'twenty that was before the pandemic is that a similar trend we could expect to see or do you think there's enough pent up demand there.

We should see.

Less pronounced step down given given the pipeline it sounds like what you're seeing today.

Hey, Josh it's Bob.

Well I think as I think I think it's a little bit hard to say, but what I would say is yes, I do expect to see some.

Seasonality because you have in the third quarter you have two holidays.

And hopefully we're all going to have a real Christmas and a real new yards this year.

That's the case, then we likely will see a little bit of a step down that said I do think that the market is very hot right now and so.

We could see an effect similar to summer wear.

We kind of blossomed through people took time off of there was that much work.

I think our pipeline is strong right now.

But it's kind of too early to be able to tell whether or not one is going to blunt the other I feel.

I do feel like.

Every quarter, we talk about people people returning to normalcy and I do think the holidays are a place where people are circling their calendar is a little bit. So I expect to see a little bit of a dip down for everybody and our client base in that quarter, but we're still going to push hard.

Okay, Great I appreciate those insights and last one for me.

I saw the recent announcement with the Qatar Alliance.

I was just curious you know.

When we look at it on alliance like that it should we expect that these types of partnerships going forward. When you want to combine forces with someone or is this another way.

Not necessarily doing any M&A activity or is M&A still on the table.

And then just speaking of M&A, what does that pipeline look like and are in the valuations youre seeing today. Thank you.

Yeah, So I'll take that hi, Josh.

We are interested in M&A I mean, we're really pleased with the progress we've made with our most recent acquisitions I think both.

Task Force in particular and brass we have added some unique capability to hell.

US produce the results that we're showing now in the business and we still feel there are some gaps where we could move faster if we find the right acquisition target and then doing it organically and so think of our pipeline focused on increasing that 10 person.

In technology and digital.

And helping us elevate the kind of project, where we can deliver in our client base.

Another area for opportunity is in the healthcare arena and building more capacity to help payers and providers, especially around revenue integrity initiatives.

We continue to think that's an opportunity.

Valuations.

Fluctuate.

Given them what area, you're focused on I mean digital.

Digital and technology will be more expensive multiples for us and so we'll be looking at those businesses very carefully the multiples go up and the risk goes up so we're going to be careful about that.

And I think the partnership going to the Qatar partnership, which is where you started your question.

We have been bullish around change management.

And the need for change management associated with the kind of transformational work, we're doing in our client base, Qatar has a fabulous reputation we feel.

Very excited that they chose us to be their partner.

Very natural fit and we're going to continue to develop capability together and see if that then build the runway to to continue.

Continue to strengthen that bond.

I appreciate all of those insights and thanks for taking my questions and everyone have a good night. Thank you.

Thanks, Jonathan.

Thank you at this time I would like to turn the call back over to Kate to Shane for closing remarks.

Well I want to thank everyone for listening in today, we really appreciate your support and we look forward to talking to you. After Q2, everyone have a great fall.

Bye bye.

This concludes today's conference call. Thank you for participating you may now disconnect.

Yeah.

Goodbye.

[music].

Yes.

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Yes.

[music].

Good afternoon, ladies and gentlemen, and welcome to the Resources Connection Inc. Conference call. At this time, all participants are in a listen only mode.

Later, we'll conduct a question and instructions will follow at that time.

If any once you acquire this agenda conference call. Please press the Star key Alibaba Group I know you touched on telephone and Hugo.

We connect to an operator, who will assist you.

As a reminder, this call is being recorded.

At this time I'd like to remind everyone that management will be comedy all results for the first quarter ended August 21. They will also refer to certain non-GAAP financial measures an explanation and reconciliation of those measures to the most comparable GAAP financial measure is included in the press release issued today.

Today's press release can be viewed in the Investor Relations section of the RV piece Web site and was also filed today with the SEC.

Also during this call management may make forward looking statements regarding plans and they should.

It is a threat as anticipated financial performance of the company.

Predictions and actual events or results may differ materially please.

Please see the risk factors section in the argue piece of court on Form 10-K for the year and it May 28, 2021 for a discussion of risks uncertainties and other factors that may cause the company's business results of operations or 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 argue P. T O.

Thank you operator, welcome to our Q1 earnings call and thank you for joining US today I'll cover three topics starting with a quick review of our strong first quarter performance. I'll, then discuss progress against our digital agenda, followed by comments relevant to macro trends and original <unk>.

Research, we just completed within our current and target client base.

We also grew sequentially by eight 5%.

Revenue in every major market was up double digits and our strategic client accounts delivered 26% growth.

Disciplined account planning and client centricity are paying dividends.

Adjusted EBITDA performance as a further highlight from Q1 results.

As we expected adjusted EBITDA margin improved to 12, 2% up 530 basis points from first quarter last year.

This accomplishment is a result of operating with an improved fixed cost structure and strong gross margin performance.

We've worked hard to increase the profitability of the business by achieving top line growth lowering head count and real estate expense and driving efficiency with technology and digital tools will continue to do so we're also focused on pricing to value and increasing bill rates appropriately.

Consistent with our fiscal year goal. This is the second quarter in a row, we've achieved 12% plus adjusted EBITDA margin.

The management team at this trajectory when we began working together three years ago.

While COVID-19 sidetracked, our progress as clients put new projects on hold for a time, we have more than fully recovered to exceed Q1 fiscal 19 levels and remain optimistic about capacity forward.

This optimism is fueled by two fundamental macro trends the first centers on digital transformation, both internally and throughout our client base.

Second as a tangible and meaningful shift toward organizational agility and specifically how work gets done this trend equally impacts client strategy and talent preference.

As I've shared many times Rpt's digital transformation is both internal and external.

First we are transforming how we deliver our services to clients and our gig opportunities to consultants through digital transformation initiatives.

Current example of this effort is Hugo or soon to be launched digital engagement platform to allow clients and talent to interact through a self service marketplace for finance and accounting talent.

Our differentiator is launching a technology platform with the trust quality and high touch experience of our GP and safety net of employment benefits and community, which we believe professional talent wants.

As evidenced by discussion and research shared if the FAA conference on collaboration in the gig economy platforms are coming to all corners of this industry.

While we've seen such marketplaces like healthcare up work and job stack for nursing creative coding light industrial and hospitality get work, we've not seen a dominant player in the professional gig arena, we intend to be the dominant player for knowledge workers engaging with enterprise business.

I'm very pleased to share that Hugo will go live the week of October 18th and the Tri State market of New York, New Jersey and Connecticut.

We're launching with a pilot for a designated set of clients and finance and accounting roles. The team is ready and the product is ready for MVP launch and we believe the macro environment is now conducive.

Following our launch in Tri State, we will extend the capability to the Dallas market and then northern California within the next fiscal year.

Look forward to engaging in person and sharing client experience with Hugo at that time.

Externally the trend toward digital transformation and our client base continues to accelerate.

We added brass these capabilities to our suite of services at just the right time two years ago clients continue to fund projects to digitize core processes for automation in collaboration and create digital tools to drive growth.

The need spans our client base from health care providers to technology to big pharma.

We know this concrete shifting corporate priorities as real as veracity grew by an impressive 45% year over year with nice growth in revenue and pipeline coming from our Gpus core client base.

Please review our updated investor deck for New case studies and further color around perhaps these project work.

We'll be releasing the human agility research this month prominently on our website as it confirms how post pandemic behavior is favorable to our business model are here to stay on the demand side clients are committed to operating in a different paradigm with agility at the core. This means companies are building more.

Distributed leadership nimble finances, and new workforce strategy centered on agile talent were increasingly engaged with clients who want our GP formally on the Org chart as a talent provider to match critical project based skill set to business imperatives.

Decisions can then be made throughout the business to achieve speed and resiliency.

On the talent side, our research confirms that control choice and diversity of experience matter more in a changed world.

Where to work went to work and on what to work are increasingly vital considerations for professionals.

Talent also wants to align with organization on shared values empathy and flexibility.

Our business model beautifully meet the preferences of today's modern professional.

While other firms are facing the harsh realities of the great resignation, we are increasingly an employer of choice.

In closing I want to express my enthusiasm about our new executive appointment, we announced this week.

The dress Patel has been named our new Chief Digital officer effective immediately.

As the CEO of veracity, but dress shoes has been consulting on our digital and technology transformation efforts informally we're now ready to formalize his role and remit.

During the next year, he will stay close to veracity sales and strategy, while developing his leadership role over our enterprise digital roadmap priorities and alignment.

We are delighted to welcome him into the C suite and further bond veracity NRG P. As we pursue digital transformation work in all corners of the business.

I'll now turn the call over to Tim for an update on operations.

Thank you Kate and good afternoon, everyone. During the first quarter. We saw continued strong progress in our revenue and operating metrics. Despite the pandemic and vacation effects typical of the summer months.

Larger deal size and longer project durations exemplified the commercial environment.

<unk> continued to take on significant and transformational initiatives.

The momentum noted at the end of Q4 relative to revenue and pipeline continue <unk>.

Enterprise revenue increased by 25% over the prior year quarter, and 5% sequentially, while top of the funnel activity was strong leading to increases in qualified opportunities and ultimately to the highest level of closed deals since 2019.

Revenue growth in pipeline strength was consistent across our core business in Asia Pacific Europe, and North America ferocity accounts.

Operational effectiveness, a strengthening economy and macroeconomic trends favoring co delivery provide a powerful combination for growth.

As Keith noted our first quarter results.

<unk> exceeded the high end of our revenue guidance.

We have seen growth in both project staffing or professional consulting that is part of a broader market shift away from a fixed traditional workforce to a more liquid workforce that can be marshall quickly and molded instantly in the fit for purpose solutions.

Companies start new initiatives will resume and accelerate existing ones utilization of agile total delivery is becoming a potent force <unk>.

Whilst we're prioritizing flexibility and labor as demand again.

Elements of this dynamic started before the outset of Covid. The last 18 months that provided a significant and meaningful acceleration leading to a palpable tightening of the traditional labor market and a higher reliance on a more fluid and more fluid workforce solutions.

We continue to see more candidates seeking non traditional employment and have seen declines in attrition rates and increases in hiring in our variable employee base over the last three quarters as.

As opportunities rise project durations wisdom, and the ability to work unconstrained by locality becomes more prevalent we are seeing more talent attracted to our platform. We continue to work seamlessly with <unk>, providing a diverse portfolio of experience for our consultants and demonstrating the durability and employment opportunities for new Apple.

While we recognize that a tight labor market could impact us more broadly in the future. We believe that a more professional software career objectives and offer more flexible work.

Our ability to offer a blue chip client roster career control border was delivery and professional community will continue to be an attractive proposition for a more mobile workforce.

As an example.

New West Coast consulted wanted an opportunity to lead strategic projects as its traditional role was not providing challenge and growth opportunities.

We chose to come to our GP as a project lead for one of our Premier healthcare clients.

Positive experience with us proved to be the impetus to refer his sister to RVP.

Was enduring a reorganization and bolt electric current employer had litho one values from her room.

After hearing about RVP model and culture. She came aboard and is now also working remotely and project managing the transformation at another health care clients.

Overtime, we see workforce desire than our ability to meet them, leading to more employment stickiness to RVP and an upward trend through our existing tenure of approximately three years, which is a strong statistic given industry trends and our flexible employment model.

While we feel that general workforce shifts are already favorable to our model. We will continue to focus on operational discipline and providing an excellent consulting experience.

As we've noted in previous quarters, our hybrid returned to work continues with companies embracing distributed employee basis, and utilizing a blend of onsite and virtual teams to drive project.

This shift is very much in line with our GP value proposition of asking the right compositional skill sets within team to deliver successful outcomes.

In fact, the blend of on slab on from an Offsite resources allows for better matching of supply and demand and improved operational efficiency when responding to client opportunity.

The pandemic has educated the market about the virtues of remote delivery and a tight labor market with distributed Workforces means that hybrid and modular resources is likely a permanent shift.

As an example, we are currently engaged with a technology company that is working on a number of initiatives concurrently as the rapid growth has begun to strengthen our infrastructure there.

Ignite is early on but the scope of work contemplated would require a high reliance on external talent to help deliver the desired outcomes.

Noting the difficulty attracting traditional employees and recognizing the competition for variable resources. They made a significant commitment to reserve RGB talent, knowing they have both immediate and future gas fulfill our team will work on Prem and remotely as required and will be stopped for multiple locations.

We are in discussions with other clients were interested in ensuring they have access to cap the talent pool for immediate and future initiatives.

Now, let me turn back to our first quarter operations.

During the quarter, we saw continued strength in pipeline on top of the funnel activity.

Average weekly revenue grew by approximately 4% from the first.

A majority of markets demonstrated growth over prior year quarter, while several markets strategic climate accounts healthcare veracity, and Kelsey demonstrated growth both sequentially and over prior year quarter.

Lead generation and opportunity identification continues to be strong into Q2 of client Robert with the pace of change coupled with a tight labor market.

The early weeks of Q2 have shown a strong continuation of positive trends in both revenue and pipeline in fact, the early quarter revenue trends or some of the highest we've seen since 2019 while.

While the holiday starting this quarter, we don't expect to be inordinately impacted.

Revenue expansion is a core objective. However, we continue to target profitable growth with increased operational leverage as in prior quarters. In Q1, we continue to make strides in controlling fixed costs and focusing on efficiency, yielding on over 500 basis point improvement in enterprise EBITDA margin.

We understand the importance of enforcement person meeting and we will not shy away from face to face interaction. However, the lessons learned during the last 18 months there with us as we transition into the new normal to that end, we will continue to sell deliver and operate in a more hybrid fashion look for opportunities to reduce real estate and utilize technology to extended strengthen the experience of our clients and consoles and our <unk>.

To increase shareholder value.

I'll now turn the call over to Jim for a more detailed review of our first quarter results.

Thank you Tim and good afternoon, everyone.

During the first quarter continued rise in demand coupled with successful go to market execution fueled substantial growth in revenue, reaching the highest level in any first quarter in the last 10 years.

We also improved average bill rate driving above guidance gross margin.

Furthermore, we remained disciplined in SG&A spend increasing leverage significantly and enabling us to deliver a $26.0 million of adjusted EBITDA or a 12, 2% adjusted EBITDA margin, which is also the highest margin in any first quarter in the last decade.

Now, let me provide more color on our operating results starting with revenue.

With quarterly revenue of $184.0 million, we well exceeded the high end of our revenue guidance of $177 million.

After adjusting for business day, and currency impact Q1 revenue represents growth of 25% year over year, and 5% and 2% over the pre pandemic first quarter periods of fiscal 2019, respectively.

In addition, notwithstanding summer vacation impact our performance in Q1 exceeded the sequential quarter by eight 5% on a same day constant currency basis.

Revenue growth in the first quarter was across most of our core markets key client accounts solution areas as well as industry.

Strategic client accounts grew 26% year over year and 9% sequentially.

Affectional staffing revenue grew 36% year over year and 8% sequentially.

In North America revenue improved 28% year over year, and 11% sequentially on a same day constant currency basis.

Most core markets in North America experienced double digit growth year over year with Tri State and California are leading the growth of 41% and 30%.

Europe continued to perform well achieving 10% growth compared to the first quarter of fiscal 'twenty. One on a same day constant currency basis.

Excluding revenues from markets, we exited as part of the restructuring initiatives year over year revenue growth was 18% sequentially.

Sequentially revenue was down 7% in Europe due to more summer vacation taken in the first fiscal quarter and relatively stable performance in Q1 of last year.

Asia Pac also experienced broad based expansion and revenue across most markets first quarter revenue grew 17% year over year and 8% sequentially on a same day constant currency basis.

Gross margin in the first quarter was essentially flat to prior year, 39% compared to 39, 3% a year ago.

We effectively elevated our average bill rate and help pay bill ratio flat from last year. There was one additional holiday in the U S and the impact of heavier summer vacation as COVID-19 related restrictions eased in some parts of the world.

Compared to the fourth quarter, we improved our pay bill ratio by 70 basis points as a result of achieving higher average bill rate.

The tight labor market has not yet had a significant impact on our pay rate.

However, we intend to be a step ahead of any impending rising pay rates by pricing our engagements market appropriately.

We continue to see opportunities to achieve higher bill rate across several solutions, including digital transformation services.

Compared to the same period a year ago.

Now turning to the other components of our financial statements.

We expect the improved profitability in Europe will continue to cause future effective tax rate to be more favorable.

Adjusted diluted EPS for Q1 rose significantly to <unk> 43 per share compared to <unk> 14 in Q1 and fiscal 'twenty one.

As we look ahead, assuming the macro environment remains stable, we plan to invest in new ERP and talent management system that will allow us to achieve more efficiency in our back office operations and position us to scale as we continue to grow our topline as a result, the capex is expected to be elevated beginning in the second half of the fifth.

Full year, we're currently assessing the scope and cost of such investment.

At the end of Q$86.0 million remained available under our share buyback program.

I'll close with our second quarter outlook.

We remain optimistic and anticipate continued growth in the business.

Revenue in Q2 is expected to be in a range of $87.0 million to $190 million, which at the high end of the range would be an estimated 24% increase compared to Q2 of last year, we expect gross margin to be within the range of 38% to 38, 5%, reflecting the impact of Thanksgiving holidays in the U S.

We expect run rate SG&A to be in the range of $50 million to $53 million.

Now we're happy to take questions.

As a reminder to ask a question. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Andrew Steinman of Jpmorgan. Your line is open.

Just one quick clarification and then a question.

So Jen what did you just mean like you said $50 million to $53 million of run rate SG&A do you mean SG&A for the quarter I just didn't know what.

<unk> run rate.

My other question is about Hugo into launch.

How much is this going to affect SG&A and when do you feel like Hugo could be contributory to our revenues and profits.

Sure Hi, Andrew.

Okay.

And then about Hugo with respect to Hugo Yes, with respect to Hugo So after we after we launch Hugo.

In the next couple of weeks, we do expect level of capitalization to decrease so it is going to add additional SG&A.

To our to our results. If you think about the rest of the year from a I think that we're going to start to see return.

With respect to Hugo, but I think that it's still too early to really predict what that revenues will look like until we pilot. This in the in the in the Tri State area.

And just to be clear that 50% to $53 million of run rate SG&A includes the yoga launch right.

Correct, yes, okay. Thank you.

Thank you. Our next question comes from Mark Mccall of Baird. Your line is open.

Hey, good afternoon.

Everybody I'm wondering first of all nice job on the quarter nice to see can.

Can you talk a little bit about ferocity, obviously was up quite strongly can you remind us how big ferocity is.

Yeah, Hi, Mark Veracity is is roughly about 5% of our overall enterprise their revenues about 5% of our overall enterprise revenue.

Currently.

Okay.

Great and then.

It sounds like across North America, you ended up seeing really strong growth, particularly strong growth in the Tri state area over 40%.

To what extent do you think it's being driven in part by the.

Bai increased deal flow deal activity.

Whether it's ipos box or.

Private equity transactions.

Hey, Mark it's Tim.

I see.

First of all I tried to say, yes, we're really excited about Tri state in a number of other markets in our core that grew this quarter.

I think broadly we're seeing some tailwind from transaction deal flow.

Particularly related to M&A and some spec stuff, we saw probably more spec activity and the.

And in the fourth quarter and the early part of the summer and then it sort of tailed off a little bit but that doesn't mean that the transaction with.

There's all kinds of things going on attractive participated in that.

A fair amount as well, but I think a lot of it kind of comes down to sort of work that's been done over the last.

Three or four quarters, we have a new leader in place and a new team and they've been doing a lot of work relative to penetration generally and back into the financial services market add to diversify.

So while I think that some of the some of the transactions contributed to it it wasn't solely due to that.

Great and then can you talk a little bit about what your expectations are with regards to.

Pricing on a go forward basis, you mentioned that youre going to be a little bit more proactive and obviously, it's a tight labor market and we're seeing all sorts of signs of wage inflation. So how should we think about bill rates on a go forward basis.

Mark I think the bill rates as real upside for our business I know I've said this the last couple of quarters and we've made I think some incremental progress relative to our pricing discipline, but it's a real push for us so.

In the back half of this year I expect us to be able to extend pricing some of it is.

For incumbent engagement, that's difficult to do that so what we're really focusing on our.

New engagements and also widening back any pricing arrangements that we had put in place for Covid.

But.

I think I've said for a long time.

An opportunity for us we need to price to market more and when you think about.

Tight labor market. It's this is the right time for us to be able to push push through some of those.

Some of those increases and we're doing that proactively.

And how much do you think you could end up pushing through in.

It would seem like almost everybody would be accepting of higher bill rates. So how much can you push through you think.

That's kind of a tricky question I mean, it's hard to speculate on that because these clients are little bit different.

And let me just state for the record.

There is no client that's receptive anytime for a price increase that they don't have to take it.

I think I think what youre driving at is the circumstances I think people understand that it's a tight labor market and that we have a good product and so they're more quickly.

Than they might otherwise be but theyre not.

It still requires.

Some delicate negotiation so.

It's hard to give you an order of magnitude, but I do think that where we have an opportunity here to push the push our prices up a few percentage points.

Okay.

John I was.

In terms of the revenue guidance can you talk a little bit about that with regards to for the second quarter.

We take a look at the historical trend between Q1 to Q2.

It seems like.

You might be being a little conservative just trying to get a little bit of a feel there just in terms of what the normal sequential pattern as I recognize you are coming off the strongest first quarter.

<unk> had in 10 years, and so it might be hard to forecast off of that or maybe you are expecting some normalization not sure exactly what's the what's the drivers.

Yeah, Yeah, I mean work compared to sequentially.

There were up about 6%.

We do have the Thanksgiving holidays in Q2 and given that.

The World has opened up opening up quite a bit right now we did build in a little bit of conservatism in there just just not really fully grasp what the what the holiday impact is going to be so that's one area and also given we've talked a lot about the labor market being tight so.

If it continues to get much worse.

Also our growth a little bit. So those are those are kind of the two key factors contributing to perhaps media.

Not as much of a sequential increase as we have done historically.

Great and then you did a really nice job in terms of managing SG&A you talked about the Capex, but just wondering also.

You took down management compensation. So you had some contribution there wondering how much you could frame as being when we take a look at the expense reductions ex what.

What you talked about in terms of.

Some increases in SG&A for your <unk>.

Technology initiatives.

Much of the rest of the expense structure is is permanent versus temporary or what should we expect beyond the next quarter.

Yeah, I mean, I think this year.

SG&A as a percentage of revenue.

You can probably think of it anywhere between 20% to 29% for the remainder of the year.

And so that for the rest of the year, we do I mean Q1 was very favorable because.

Because we expect that travel to to return.

Would you increase a little bit right and but we didn't really see that in Q1. So for the remainder of the year as I said as the world opens up we do expect travel to also go up a bit.

And you know as.

As we grow revenue our variable comp has been a growth. So those are something to take into consideration when it comes to SG&A.

Okay and then.

One other question just I mean, we had a pretty big ramp in terms of the number of.

From a head count perspective, going from $24, 44% to $72.0

Over the last 12 months, just wondering how much of that is.

To what extent do you expect that.

But that sort of trajectory how much of it was just a bounce back how did you scale it back quickly.

Yes, I think.

Hi, Mark it's Kate I think most of that it is bounce back and an uptick in consultant.

Engagement and employment.

We expect as we've said before the business to continue to grow and we've tried to give you some guidance there. So I would expect that to continue.

But the balance may.

Even out a little bit of peak if you will.

Yes.

Mark I would just add to that.

Okay, and I talked about this that the hiring trends for us during the quarter were the highest that we've seen in a while.

We think the macro forces are going to continue to push things our way even in a tight labor market.

That is a pretty big bounce back in <unk>.

They said well.

We think that will normalize over the latter half of the year.

What percentage of the of the positions that you are now selling are being sold.

Where theyre being staffed virtually.

Opposed to on premise and.

How do you think that trend unfolds as things normalize.

Yes.

The first one is a difficult one to give you exactly because what I would say our average tenure is around three years.

Picks up and down and if you thought of three is kind of a place where you might have.

Peg normalized standard deviation up over it.

See some flex around that through the year is what I would say is what we've seen over the last three quarters is that our overall attrition rate of decline usually that happens.

The first year that somebody joins our.

Joined our company the kind of really feeling out.

What the models about and if they like.

Culture, and the things that.

We provide for them from an experience perspective, and we've seen that that is typically the time, where you might experience higher turnover in that particular segment that that attrition levels down.

Inefficiently, so how that will play out from a tenure perspective over time.

Through the year, and we will start to see.

The average tenure continue to pick up because we have that combination of increased hiring in lower attrition and you start to see tenure increase.

In time.

And the second piece is also something that I'm going to give you more of an order of magnitude to Dimensionalize I mean, I think obviously during the last 18 months almost everything was offline.

Let's call. It 90 patent kind of a thing would probably closer to $90.0

In that range and like.

I don't.

Because of the pandemic was so unusual I would say that when we come back it won't be a question of what's upside on what's onsite it'll be how often are people onsite and how often are people working remote.

It's the same thing for traditional Workforces in the world.

We'll sort of mirror that my sense is that that's going to be.

Two days on slide three days off or vice versa, depending on the clients.

Yeah.

Mark I, just want to add a little more color I was just at the FIA conference, which was the collaboration in the gig economy and at that conference. They shared a Mckinsey report that has just been published that.

Surveyed employment working models pre COVID-19 and desired working models post COVID-19 and what they've published is that Theres been a 25 percentage point move.

From away from on site.

Work and at 22% growth in hybrid so I think that really reflects pretty nicely, what we're seeing in our client base and as we said in our prepared remarks, we really believe this is a changed world and so we're preparing not only how we engage with consultants and Tam.

<unk>.

To prepare them for this kind of flexibility and again, we really believe that our flexible approach will allow us to attract them.

The best talent in the future I think the other thing to keep in mind as we move through fiscal 'twenty two with that.

It's all it's the year of that.

Terrific. Thank you.

Thank you. Our next question comes from Josh Vogel of Sidoti and company. Please go ahead.

Thanks, Good afternoon, everyone.

Certainly impressive results good to see a lot of you covered a lot of the questions I had but I wanted to kind of build off maybe some of them can you just clarify for me.

Outside of veracity, how much of your business in the quarter was digital transformation related services.

Hey, Josh it's John Yeah, it's about 10%.

Beyond veracity that is in digital and technology.

So, 10% I'm, sorry, beyond veracity or including Brexit beyond beyond veracity. So total we're looking at about 14% to 15% yeah.

Okay. So when we look at that 14, and 15% of the business and then the the.

The margin profile of the entire enterprise.

How much.

What is the margin profile on digital transformation related services relative to the other 85%.

Well I mean, the bill rates on the digital transformation services is generally a little bit higher than.

Our average bill rate.

Enterprise Bill rate is $126 and so if you look at just the digital transformation services is in the mid 50.

So bill rate in general or is it a little bit higher I wanted to the gross margin profile is probably slightly higher but not drastically different from the other solution families.

Okay great.

And shifting gears I know, there's a bunch of questions on SG&A I was just curious what would you say is the breakdown today following the restructuring initiatives and operating efficiencies that resulted you know whats the breakdown between fixed and variable cost structure of the business relative to where you were running prior to the pandemic.

Overall, our variable cost structure and full cost is still roughly about 70%.

Fixed cost is about 30% and variable, but when I say variable cost that that include cost of service as well.

Okay great.

And there were no.

Earlier question talking about your guidance and looking at Q1 to Q2.

I just wanted to look a quarter further so should we expect to see a return to more seasonal patterns. For example that typical step down in the third fiscal quarter.

I think it was about 9% sequential in fiscal 'twenty that was before the pandemic.

Is that a similar trend we can expect to see or do you think there's enough pent up demand there.

We should see a less pronounced step down given given the pipeline it sounds like what you're seeing today.

Hey, Josh.

Well I think I think I think it's a little hard to say, but what I would say is yes, I do expect to see some.

Seasonality because you have in the third quarter you have two holidays.

And hopefully we're all going to have a real Christmas and a real new years. This year and if that's the case then we likely will see a little bit of a step down that said I do think that the market is very hot right now and so.

We could see an effect similar to summer wear.

We kind of blasted through people took time off of there was that much work.

I think our pipeline is strong right now.

But it's kind of too early to be able to tell whether or not one is going to blunt the other I feel.

I do feel like.

Every quarter, we talk about people people returning to normalcy and I do think the holidays are a place where people are circling their calendar is a little bit so I expect to see a little bit of a dip down for everybody.

Hyatt base in that quarter.

We're still going to push hard.

Okay, Great I appreciate those insights and last one for me.

I saw the recent announcement with the Qatar Alliance.

I was just curious.

When we look at it on alliance like that should we expect these types of partnerships going forward. When you want to combine forces with someone or is this another way.

Not necessarily doing any M&A activity or is M&A still on the table.

And then just speaking of M&A, what does that pipeline look like and are in the valuations youre seeing today. Thank you.

Yeah, So I'll take that hi, Josh.

We are interested in M&A I mean, we're really pleased with the progress we've made with our most recent acquisitions I think both.

Task Force in particular and brass we have added some unique capability to help us produce the results that we're showing now in the business and we still feel there are some gaps where we could move faster if we find the right acquisition target.

Been doing it organically and so think of our pipeline focused on increasing that 10% in technology and digital.

And helping us elevate the kind of.

We can deliver in our client base.

Other area for opportunity is in the healthcare arena and building more capacity to help payers and providers, especially around revenue integrity initiatives.

We continue to think that's an opportunity.

Valuations are.

Fluctuate given what.

What area you're focused on I mean.

And I think the partnership going to the Qatar partnership, which is where you started your question.

We have been bullish around change management.

And the need for change management associated with the kind of transformational work, we're doing in our client base, Qatar has a fabulous reputation we feel.

Very excited that they chose us to be their partner.

It's a very natural fit and.

We're going to continue to develop capability together and see if that then build the runway to to continue.

Continue to strengthen that bond.

I appreciate all of those insights and thanks for taking my questions and everyone have a good night. Thank you.

Thanks, Josh.

Thank you at this time I would like to turn the call back over to Kate to Shane for closing remarks.

Well I want to thank everyone for listening in today, we really appreciate your support and we look forward to talking to you. After Q2, everyone have a great fall.

Bye bye.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 Resources Connection Inc Earnings Call

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