Q4 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, thank you for your patience and please standby.
[music] good day, ladies and gentlemen, and welcome to the resources Global professionals fourth quarter 2019 earnings Conference call.
At this time all participants are no listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your touched on telephone as a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Ms., Alice Washington generally.
We began.
Thank you operator.
Good afternoon, everyone and thank you for participating on this call. Joining me here today are Kate to Shane our Chief Executive Officer, Herb Mueller, our Chief Financial Officer, and Tim Brackney, Our Chief operating officer.
During this call we will be commenting on our results for the fourth quarter and the year and that ended May 25, 2019 by now you should have a copy of today's press release.
You need a copy and are unable to access it on our web site. Please call Shannon fee at seven one for.
For 306363.
I would like to remind you that we may make forward looking statements during this call.
Such statements regarding future events or future financial performance of the company are just predictions and actual events or results may differ materially.
Please see our report on Form 10-K for the year ended May 26, 2018 for a discussion of risks uncertainties and other factors such as seasonal and economic conditions.
Such factors may cause our business results of operations and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward looking statements made during this call.
I'll now turn the call over to our CEO Kate to Shane.
Thank you, Alex Hello, everyone and welcome to our GPS 2019 fourth quarter Conference call.
To begin.
We delivered a very strong financial year in fiscal 19, I am pleased by the headway. We made this year in driving growth, but also improving gross margin and bottom line profitability.
Tim and Herv will provide specific color and detail around revenue and gross margin during their remarks in a few moments.
They will also discuss operational priorities for fiscal 20.
And trends we are experiencing in the first quarter of the current fiscal year.
I want to focus my opening remarks on two broader topics. These topics are core to our GP strategic plan over the next three years.
First I will discuss our plan to become a more digital business.
Second I will discuss recent investments in brand refreshment and brand development and why we believe they are vital for the future of our GP.
The first important element of our strategic plan centers on digital innovation.
In June we consolidated our digital innovation efforts within our GP to be led by Tracy figure Rally Executive Vice President digital innovation.
This function will be focused on three core priorities.
First building commercialize a digital engagement platform for our GP.
Second enhance our consulting capabilities to serve clients in the digital transformation and user experience category.
And third building commercialize digital product offerings for our clients and for use within our GP.
The critical objectives of this group are fourfold to drive volume.
Improve profitability by lowering cost of sales metrics and driving product revenue.
Elevate customer experience.
And enable us to support our clients on their own digital transformation journeys.
I will now address each of those digital priorities with more specificity.
The digital engagement platform initiative is underway and the team is on track to deliver a minimum viable product or MVP using development vernacular by the second half of fiscal 20.
This human cloud platform is an online digital marketplace, where talent and those looking to hire talent can find engage one another in a work arrangements.
Our vision is to create a human cloud tool in the professional services space.
To allow our devoted client base to self serve staff augmentation needs with greater transparency speed and control.
We also expect this tool to attract new clients looking for a reputable reliable staffing tool given that the growth in business to business human cloud platform adoption is up 19% year over year. According to a 2018 update from staffing industry analysts in their report.
The human cloud the gig economy and the transformation of work.
We believe we can be successful with this new engagement model because clients Trust us.
And they are asking us for more speed seamless connectivity and efficiency.
In addition in todays tightening labor market early career and more seasoned talent, both want more control and transparency in their career progression and development.
This platform will deliver for both critical constituencies.
Initially the plan is to launch the platform to drive our own talent match process for the internal team using AI built into the matching algorithm. The next step will be to commercialize the product in limited markets with specific job competency, but or rolls to optimize further the matching algorithms and onboard clients with high touch.
Eventually, we envision digital engagement, becoming an important part of all client and talent interactions.
Throughout the year.
We commit to providing updates on our digital engagement deployment progress and plans.
The second priority I want to talk about is adding consulting capability to serve our clients needs around digital transformation and user experience.
We're looking to build this both organically and through a targeted acquisition strategy, which will accelerate pace.
In its recent research Gardner found that 87% of senior business leaders say digitalization is a company priority.
Further 62% of Ceos say, they have a management initiative or transformation program, a new underway to make their business more digital.
So at our GP, we're not alone.
We know that client need exists and we know that client budgets exists to support consulting work in this arena.
We therefore are committed to building a new element within our solutions business to serve the growing market demand.
We are particularly excited about the opportunities we are already uncovering in the health care and financial services client business.
The third priority of the digital innovation group is to build products as part of our service offerings to automate both front office and back office functions.
We intend these products to be repeatable and drive improved profitability.
One of the products for example is a robotic process automation tool to drive account reconciliation faster and more efficiently.
In Gartners 2018, 19 annual report on top insights for the C suite. They assert that robotics is key to any finance organization success.
They also report that only 19% of corporate controllers operate RPH today.
This figure is expected to quadruple over the next several years with more than 220 potential use cases for RP in a typical back office.
We also intend to deploy relevant products in our own front and back offices to increase efficiency and productivity without adding headcount for a growing business.
As referenced previously we are currently working with several clients on automation projects.
And this work serves as the initial foundation for our digital product development.
Next I'd like to spend a few minutes talking about brand in mid June we launched a refreshed our GP brand to celebrate the humans and humanity of how we serve our clients and engage with our consultants.
From our 20 plus years of helping clients solve problems.
We know that technology alone cannot address today's complex business challenges.
Human experience and ingenuity remain critical elements of successful transformation and today's top talent wants to work differently.
Discrete projects not roles impact without bureaucracy of portfolio driven career.
Driving companies know that the future of work is still about people.
This brand launch pad to six month research project with a boutique brand consulting firms visits to discern the exclusive and desirable idea embedded in our GP.
We believe our refresh brand has the power to change perception influence preference in command royalty and that's what this work was about the brand launch included the debut of our new website at our GP, dotcom, which articulate to our brand promise and better reflects the firm's capabilities given our evolution and acquisitions.
This website represents our new digital home, our GP to the power of human.
If you've not visited the site yet I encourage you to do so we help clients everyday with technology digital and other initiatives by putting the right people on the project team to drive execution.
Like the power hydrogen th, we have the unique ability to bind attracting elements together to deliver transformation and our elements are people that is what our GP means by ph to the power of human.
Coupling, our GPS power of human with the migration of clients buying patterns toward project based talent and not rollbase talent the opportunities for our business model remain robust.
We are perfectly positioned to become the preferred future work partner for our clients global and local alike.
We have client buyers and the talent base, who actively seek expertise.
Agility and flexibility our GP was built to deliver all three.
We will continue to activate this brand throughout fiscal 20 and beyond through strategic investments in research public relations and targeted marketing.
In wrapping up my opening remarks, I leave you with a research reference on one perspective about the market opportunity ahead.
In its most recent July report staffing industry analysts estimate that the gig economy totaled 1.3 trillion in the us in 2018.
Including 53 million good workers.
The figure is roughly 3.7 trillion in the global gig economy.
Their definition of gig includes all contingent workers.
Temporary workers assigned by a staffing agency people working via the human cloud.
Other independent contractors temporary employees sourced directly by companies and salaried employees of consulting firms on engagement with clients.
This market opportunity is large and mushrooms, we aspire to own a greater share of the gig economy related to professional services everywhere, we operate in the world.
We are actively evolving our business to better align and deliver on this opportunity.
I'll now turn the call over to Tim for more color around our operational achievements in fiscal 19, and the priorities for the current fiscal year.
Thank you Kate and good afternoon, everyone I will highlight three operating initiatives that impacted our results from operations.
For the fourth quarter in the fiscal year as well as provide a view into our fiscal 20 priorities.
As noted by two previous calls we have been embarking on operational improvements in sales productivity.
Cost containment and delivery efficiency.
We are proud of the results we've achieved to date from our initiatives around sales productivity.
Global revenue increased 11.4% to $729 million on an annual basis.
In North America, there are increases in average outreach average pipeline and revenue per salesperson year over year. This was largely accomplished through a combination of efforts improved sales leadership and discipline.
Good focus on pricing governance.
And aligned incentives.
No, but Europe and Asia Pacific only began their sales transformation efforts in earnest during fiscal 19 and progress is nascent.
We recognize that our transformation into a true sales organization is not yet complete.
And there is more work to be done.
But we are certainly pleased with the progress we've made to date.
Late or Herb will provide more detailed color around bill rate and gross margin in his remarks.
With respect to cost containment, we're committed to unlocking operational leverage by doing more with the same.
Global adjusted EBITDA increased by more than 50% on a full year comparative basis. This gain was led by North America, and Asia Pacific offset by a decline in Europe .
Largely this increase was accomplished through productivity gains.
But also through a commitment to disciplined hiring coupled with improved transparency and governance around discretionary spend.
We remain committed to prudent investment and cost containment and all three theaters of operation.
Finally, this quarter, we reorganized our advisory and project services function.
The team of seller doers, whose primary responsibility is to separate sales pursuits and engagement delivery on our more complex projects. This group is tasked with providing improved scoping an opportunity identification of the point of sale.
Clients stakeholder management throughout the course of the project and ultimate accountability for engagement deliverables and results.
They will principally sell and deliver within our four main solution group.
Technology and digital.
Business strategy, and transformation risk and compliance and finance and accounting.
This was another step in our stated goal of becoming more client centric and providing a more seamless customer experience.
In fiscal 2000, and we remain focused on five main priorities.
The first is a global commitment to operating a world class sales organization, and making meaningful strides on the relentless continuum of demand generation and pipeline management.
Next in Europe , we will focus on go to market productivity profitable growth and cross border pursuits.
Let me quickly share a few other points on Europe , we are actively recruiting a new senior leader in Europe . When we expect to have in place in Q2.
Mark Campbell, SVP and head of Europe for the past five years will retire in October .
We have also hired a new revenue leader for the Dutch business, who will join in Q2.
In addition, we are currently working to refresh our German practice under the leadership of Yens Christopher's one of the founders of task Force, who will harmonize our existing practice was out of our fast growing customers business, which grew nearly 40% 46% quarter over quarter.
Returning to our upward 20 operational priorities for third as increased focus on improving the alignment of our supply and demand curves, which is paramount for operational efficiencies.
The fourth is to continue to better serve our clients around the world a truly global remit starting with our strategic client program.
Finally delivery excellence remains a top priority as we continue our efforts to increase our mix of project and advisory work.
I will now turn the call over to Herb for a more detailed review of our fourth quarter and year end results.
Thanks.
Thank you Tim and good afternoon, everyone I'll start by giving detail on our fiscal fourth quarter financial results and we will then discuss the trends we're seeing in the first quarter fiscal 2020, starting with an overview of our fourth quarter results total revenue for the quarter official month in 2019 was 182.1 million, 8.9% decrease from the comparable quarter, a year ago, but increased 1.5% sequentially on a constant currency basis revenue increased 2.4% year over year and increased 1.5% sequentially.
Our fourth quarter gross margin was 40.1% of 180 basis points from the prior year fourth quarter, primarily due to the improvement in our pay rate to bill rate ratio as a result of the impact of internal pricing initiatives slightly lower payroll taxes and business expenses.
This unique expenses for the quarter were $56.9 million or 31.2% of revenue compared to 58.9 million, 32% of revenue last year, an improvement as a percentage of revenue of 80 basis points. Our net income improved to $9.4 million or 29 cents per diluted share compared to $4 million or 12 cents per diluted share in the prior year quarter.
In Q4, adjusted EBITDA was $17.5 million or 9.6% of revenue compared to $13.1 million or 7.1% of revenue in the year ago quarter.
Now, let me discuss some of the fourth quarter highlights of our revenues geographically.
Our us revenue decreased 8.6% year over year increase 0.5% sequentially.
We had significant improvements in the southeast Chicago, and the northwest offset by drops in Tristate in southern California. During the quarter Tristate results continued to be impacted by the trend of financial services companies moving work out of the area.
For the fourth quarter total revenues internationally were $39 million versus $39.8 million in the fourth quarter, a year ago, a decrease of 1.8% year over year.
On a constant currency basis international revenues increased by 4.3%.
Sequentially revenues increased 5.3%, 5.5% constant currency.
Europe's fourth quarter revenue decreased 7.9% year over year, but increased 3.3% sequentially.
However, on a constant currency basis, europes revenue decreased 2.6% year over year and increased 4% sequentially.
Turning to early revenue trends for the first quarter fiscal 2020.
Revenue weekly revenues in Q1 are trimming down 3% to 4% compared to last year with the current trend continues revenue would be in the range of $170 million to $175 million compared to 178.5 million last year as Kate mentioned earlier, we're positive about our forward prospects. However, there is some uncertainty in the market short term, especially in Europe .
Lease accounting work is slowing Q4 was down just under $3 million compared to our peak in quarter. Two however, private companies are required to be in compliance beginning in 2020. So we still expect significant business for the next year. So at reduced levels from our Q2 peak, we expect to offset this decline with other finance and accounting projects. However, those have been slower to materialize than anticipated.
North Americas continue to grow in many markets, though at a slower rate than the last several quarters, we have seen excellent growth in Atlanta, Chicago, Denver, and Seattle to name a few standouts Northern California slowed after the Christmas holidays. After several years of strong growth. However is currently rebounding.
Southern California, However continues to lag.
Europe continues to struggle, though task force has been a bright spot as Tim highlighted earlier.
Asia Pacs growth is being driven by nice progress in China and Japan.
Turning to gross margins gross margin for the fourth quarter was 40.1%, increasing 180 basis points from the prior year equivalent period, an increasing 230 basis points sequentially.
The year over year progress is related primarily to improved bill pay ratio driven by internal initiatives to improve pricing as well as lower payroll taxes and business expenses. The sequential increase was primarily due to improved bill pay ratio and lower costs in the company self insured medical program.
For the fourth quarter, our gross margin in the US was 41.7% compared to 39.7% last year and our international gross margin was 33.9% compared to 33.2% a year ago.
For the first quarter, we expect our gross margin to be in the 38.4% to 39% range compared to 38.2% a year ago.
We've been making significant strides in improving bill rates gross margin in new deals sold as expected we are seeing the impact now.
The average hourly bill rate for the quarter was consistent at approximately $124 in the third and fourth quarter of fiscal 2019, as well as fourth quarter fiscal 2018, Bill rates are improving however, the overall average is staying constant as a result of mix Europe , which has the highest bill rates had a decline in revenue, whereas Asia Pac which has the lowest rates had increased revenue.
The North America alone Bill rates in Q4 increased 5.5% year over year.
The average pay rate for the third and fourth quarter was approximately $62 and $64 last year.
As a reminder, these hourly rates are derived based on prevailing exchange rates during each given period.
Now looking at other components of our fourth quarter financial results.
Yes, you know expenses were $56.9 million or 31.2% of revenue.
This compares SNA of $58.9 million or 32% of revenue in the fourth quarter of fiscal 2018, and $55.6 million or 31% of revenue in the third quarter fiscal 2019.
The year over year percentage improvement from last year's fourth quarter relates to lower severance acquisition transformation integration costs in the quarter, partially offset by slightly higher payroll and benefits due to increase in head count to support revenue growth, including approximately $500000 of comp benefits related to the loan forgiveness of our recently appointed Chief operating officer.
The sequential increase of 1.3 million is related to these factors.
Stock compensation expense was $1.6 million or <unk>, 0.9% of total revenue.
In the first quarter of fiscal 2020, we expect as she need to be in the range of $57 million to $57.8 million.
We will incur onetime costs of approximately 800000 related severance and a management retention bonus.
At the end of the fourth quarter, our office Count was 70 348 domestic and 25 international.
Turning to the other components of our financial statements depreciation was just under $1.3 million and amortization was just under $1 million as a result of the improvements noted above our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation and contingent consideration adjustments was 9.6% in the fourth quarter up from 7.1% a year ago.
Our pre tax income was $13.4 million in the fourth quarter up from $8.9 million in the year ago quarter.
During the quarter, we recorded a provision for income taxes of $4 million, representing an effective tax rate of 30%.
Our GAAP tax rate for each of the upcoming quarters is difficult to predict and could be volatile as the rate will be dependent on several factors, including the operating results of our us and foreign locations each of which are tax or benefited at different statutory rates and the offset of the tax benefit of foreign losses in certain locations by valuation allowances.
On a cash basis, our tax rate was about 31%.
Finally, our GAAP net income was $9.4 million or 29 cents per share during the fourth quarter.
Now, let me turn to the balance sheet.
Cash and short term investments at the end of the fourth quarter were $49 million receivables at quarter end were approximately $133.3 million compared to $138.5 million at the end of the third quarter.
Days of revenue outstanding were approximately 66 days compared to 63 days in the prior year and 66 days in the third quarter fiscal 2019.
Dividends for the quarter were approximately 4.1 million capital expenditures were $1 million and $6.9 million during the fourth quarter and fiscal year respectively.
Three of our largest offices moved during the past year, including two in the New York Tristate area as well as our San Francisco Office.
As mentioned in our earnings call last quarter, we are transitioning to an open office footprint to increase the collaboration of our teams and the change in concept requires investment in new office furniture, we expect capex to be in one to 2 million range in Q1.
We repurchased $7.6 million and $29.9 million in stock during the fourth quarter and fiscal year ended 2019, we are continually evaluating uses of cash to reduce debt and or facilitate our growth both organically and strategically.
During fiscal 2019, we paid down our revolver by $20 million.
Our stock buyback program has $90.1 million remain.
We will continue to return cash to shareholders through our quarterly dividend, while balancing debt repayment the capital requirements of growing our business organically and strategically and fiscal prudence.
Our shares outstanding at the end of the fourth quarter were approximately $31.6 million.
Now I'd like to turn the call back to Kate for some closing comments. Thank you herb in closing, while we made tangible progress in improving our financial fundamentals. We recognize that there is more work to do our strategies to evolve the mix of business from staff augmentation moving into project execution and advisory services are making a positive difference. In addition, the evolution of our sales organization and delivery model and our approach to incentive compensation are paying off.
While these are ongoing initiatives I am pleased to see they're already making an impact.
We have operational changes we are implementing in Europe , which we just discussed.
And in certain markets in North America, including Tristate, Southern California, and Houston, We will have new leadership in Europe over the next 60 days and we're optimistic about the impact that Yens Christopher's leadership can have in the German market place.
He is a proven builder and a disciplined leader.
In certain other markets, we are making management changes in fiscal 20, and refocusing, our sales and delivery capabilities to better align with client needs.
We believe these changes will lead to improved performance and we'll be updating you during our next call regarding progress.
Pardon me before turning to questions as always I'll share our client retention and continuity statistics for the fourth quarter of 19 as they do reinforce the trusted relationships, we have with our great clients.
Our client continuity does remain strong during our fourth quarter. We served 49 of our top 50 clients from fiscal 18.
In the quarter, we have 278, or we had 278 clients for whom we provide services at a run rate exceeding 500000 in fees. This was down from 316 and fiscal fourth quarter of 18.
However on a year to date basis that comparison is to 81 in fiscal 19 versus 266 in fiscal 18.
In addition, our top 50 clients for the quarter represented 37.3% of total revenues, while 50% of our revenues came from 99 clients.
Our largest client for the quarter was approximately 2.9% of revenue.
At the end of the fourth quarter, 92% of our top 50 clients have used more than one type of service or functional expertise.
This penetration reflects the diversity of relationships, we continue to build within our clients organizations and reinforces our opportunity for growth.
We look forward to growing and more profitable business in fiscal 20, as we evolve our offerings in the digital space and in how we engage with our clients and talent.
We're excited about the initiatives Weve shared on this call and the impact we believe they will have on our financial performance throughout the year.
Okay. So that concludes our prepared remarks and were now happy to answer any questions.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered I wish to remove yourself from the queue. Please press the pound key.
Again, that's star then one to ask a question to prevent any background noise. We ask that you. Please. Please your line. Once your question has been stated.
And our first question comes from the line of Michael Cho with JP Morgan. Your line is now open.
Hi, Thanks for taking my question just one my first question I wanted to start with some of the digital initiatives that you laid out.
Earlier in your in your prepared commentary I guess you threw out some.
Thanks market statistics.
Or size of market.
Around why you're going.
Approaching that digital innovation finishes, but I guess.
Is there a few revenue opportunity that resources is specifically going after in terms of the commercial products that you're thinking of specifically interested in your commentary about the external human cloud platform.
Yes. So in recent research from the same study that I referenced getting that marketplace is.
Paid right now to be about 63 billion in revenue and while there is competition already in the freelancer marketplace and for what I would call non professional services.
There is a real opportunity for a company to step forward that can drive a human cloud platform broadly across professional services and that's what we believe we can do so if you think about the Zappos model for example, with regard to selling shoes. They developed a very robust digital marketplace, but they wrapped.
Hi, touch in client service around that and that was their secret sauce to become successful and Thats. The vision, we have for our product.
In the global marketplace, and I think what really sets our opportunity apart.
Michael is the fact that we have trusted client relationships already and that's going to matter in terms of developing a new.
As a new way of engaging.
For talent on projects that matter to an organization.
Thanks.
And I appreciate that.
Follow up to that Jade I mean did you get the sense today from.
Your clients that Theres, a notable segment of.
Bruce versus existing clients that want to self service.
Yes, I can tell you that directly I pad.
One on one conversations with clients about in the research phase.
Regarding the development of this tool and part of that Michael is when you think about the shifting client buyer and the demographic of client buyer.
Well, we are selling to many more millennials today than we ever did and they are much more inclined to want to engage with us in super efficient ways that don't involve waiting until nine o'clock in the morning or eight o'clock in the morning, and placing a telephone call if they're up at two am they want to send their need and they want to know that somebody is responding to it as quickly as possible and we all know that the drivers today in the marketplace or speed and efficiency and so we have to keep up with that and that's really why these initiatives are I think critical and we will be impactful for our business over the next three to five years.
Okay, great. Thanks.
Just one more from me and I'll hop off.
I think last quarter.
You had mentioned some some slower client decision, making or putting off project I think it's both in the us and in Europe I'm just curious has that.
Tone of conversation with your clients changed at all through this quarter.
Yes, Michael Thanks for the question.
I would still say there.
As cautious purchasing out there.
I think at the end of the last quarter, what we were seeing was.
Definitely some of the macro trends were.
With that with the trade war trade word Brexit some of the other things that are still out there, but people sort of push through them a little bit of recognize that.
They can delay some of their critical initiative.
Some of the things that got re sequenced.
You know from Big Bang into something that's more modular they're going now and we feel a little bit more optimistic about how they're buying the buying patterns will be in future quarters.
Okay, great. Thank you.
Thank you and as a reminder, ladies and gentlemen that Star then one to ask a question and our next question comes from the line of Mark Marcon with Baird. Your line is now open.
Hi, Good afternoon, everybody I was wondering if you could talk just a little bit more about just the digital transformation strategy and just wondering if you could give some commentary with regards to.
How thats being received internally because it does.
You've always been a solution company, but it seems like culturally it's a bit of a transformation as well.
Both in terms of.
The interface as well as also some of the projects that you're working on where it's more.
It appears more IP centric versus M&A slash.
Audit.
Centric.
Could you talk a little bit about that.
Sure and and Mark. Thank you for the question and I will also start by saying this is a purposeful move.
And strategically as we talk about the future and how we need to be able to compete more effectively and really grow. This platform, we have to get more capability and technology in the digital space.
You're absolutely right that the kind of talent, we are bringing in now to provide digital transformation support is more design thinking talent.
Which clients really want in the innovation space more.
Solution architecture, and and programming support so it is a different talent base, but we've done a lot of change management work with our existing employee group.
And to get them ready for this and to understand the why behind the importance of this and I would say in the early days I think there was some hesitancy about will are we really at the core.
Finance and accounting and operations support shop, and the answer is no we can be more and the other answer ill comment I would give to you is that we're being.
Asked by many clients to help them in the digital space Theres, One particular large health care clients and if that's out of Europe , and we're helping them with one of their most strategic digital transformation projects because they trust.
Our way of client service they trust the humanity, we bring which for US means are listening skills.
Going elbow to elbow with our clients to problem solve with them and our approach to give the client credit for the successful results.
We've always said and Mark I think you know this because you know us well our GP operates with a lot of humility.
And we are motivated everyday to make our clients look better.
So when we have a client base that is asking us to help in this arena in my opinion, we have an obligation to start broadening our perspective getting the right talent in our organization. So we can deliver.
That's great and then can you talk a little bit about the timeline that you're envisioning disk.
With regards to the various initiatives because it seems like there is multiple facets to the transformation.
Yes, I think this is honestly a three to five year transformation at snacking, and we're not going to be talking about lots of impact next quarter, but as you know when you're building. This and I think your initial question suggested this it takes time to transform.
So.
I laid out three.
Specific priorities of the group.
The.
Digital engagement platform is well underway.
So I think we'll see.
That product.
Coming to market by the end of this fiscal year.
Excuse me.
Our product development in the RPK space, we'll see impact this year, we already have.
I would say to really viable product.
In the automation space and that group is targeting to develop three to five more during the calendar year.
I think in terms of really building out a consulting team that can have more immediate impact in the next 12 to 24 months. It will take targeted M&A to and we're engaged in a specific strategy to do that so.
And we'll be reporting further on that as we make progress.
That's great with regard to the digital engagement platform.
How close are you to launching it internally because it sounds like thats with respect.
Yes.
Next quarter I mean.
I'd Love to say Tomorrow, Mark and my colleagues would step on my foot right now, but I've seen the product.
Our development team is hard at work, we're continuing to perfect. It I mean to get this right. There is a there is.
Art in the matching algorithms.
So we are actively testing it as we speak right now and I'm excited that in the next quarter, we'll be using it internally.
Great and then with regards PRP products.
What are the two viable products specifically do.
So the first is is reconciliation tool for calling it recon bought.
And we sold it to some.
Marquee brand name clients and so now we're in the process of marketing it to several other large clients and and it's about the efficiency of the reconciliation project for our process for large organizations.
The second one.
Specific to one area for Rick reconciliation is there some specific areas.
Good to talk to me as it were.
It's mostly in the finance area.
And is it mostly I mean.
If you think about the number of.
Reconciliations that fight large, especially large finance that organizations have to do using human.
And also using sort of what we would call our pay light there there are.
Software packages out there that help health and aid in that process.
What we've done is.
Develop develop a product that will help reduce the that is the need for human intervention in the reconciliation process, but also can work in harmony.
Both with.
Sort of a reduced human contingent as well as an RP a light platform. So its.
It's a bit the flexible tool depending on what kind of how mature the or the finance organization is and kind of what their desired efficiency outcome is.
Great and then sorry Kate.
You were mentioning another one.
Yes, I think the other product that and I don't want to I don't want to get ahead of our skis on this one is more in the internal audit and compliance arena. So stay tuned we'll be talking more about that is we're ready to speak publicly.
Okay.
Great and then with regards to this the numbers.
Can you talk a little bit about some of the trends like specifically.
What are you seeing you mentioned Europe was a little bit softer as we're looking out to the first fiscal quarter of 20.
Is it specific to any geography is there an impact from Brexit that you're seeing we're starting to hear a little more chatter on that so I was just wondering if you're seeing the same.
Yes, I think let me make a couple of comments about Europe , just broadly and then maybe Tim or her I want to add to this to Mark I'd say the first thing that we're seeing in Europe and this is going to hit in the UK is it started in the government sector and now it's coming to the commercial sector is a change in labor and tax regulation that is negatively impacting our business a little bit with respect to the use of independent contractor.
And.
So we are.
Developing and then we will be implementing a strategy that.
Try to lessen that negative impact I think it's.
The legislation is something 35 I can't remember the.
Sorry, IR Theres five thank you Alex.
Our general councils in the room, so she's she's helping me.
And that legislation passed about 24 months ago, I think in the Netherlands, and so we talked about that a little bit so.
Those European countries are starting to try and claw back.
Certain taxes that they've lost by allowing the independent contractor marketplace to get so robust. So thats, one thing and that that doesn't have anything to do with that but it does impact our business.
With respect to Brexit there continues to be some chatter, but I actually I'm starting to hear perhaps about some opportunities related to Brexit they havent totally materialized, but.
I don't think that gives us a path to think we can't continue to pursue especially work for our largest clients that.
Yes, the good news Mark in Europe is that our largest client which is our second largest client for the firm that comes out of Europe .
It's very much embracing this future of work philosophy and understanding that they want work to get done and what Theyre, calling me open talent economy, and so we're developing a bigger and bigger relationship with them in order to deliver and this is a global diversified consumer products business.
Now I don't want to do you all have led to stellar sorry.
Yes, hi.
I think thats it.
Great and then with regards to the US you mentioned that lease accounting.
And was running around $3 million, where do the peaker.
No, it's running 3 million less than.
What it was in Q2. It was just under 10 million in Q2, So we had a pretty high run rate and then it's.
Slow down we're still seeing pretty good activity as I mentioned the.
Private companies that have to be compliant beginning in next year for fiscal years. After December 15 2019.
Our working on it the other thing that's interesting is with some of the larger companies some that decided not to automate their processes.
Hey are really struggling right now to get it done as a just gone through their Q2 and now Q3. After adoption. So we still think there's going to be a fair amount of work in both the public and private but.
Certainly.
Q2 was a huge peak for us.
As a point of reference we are still up year over year in Q4. Despite the decline that we had over the last couple of quarters.
Okay, Great and then you mentioned both.
Tri States as well so Cal and then you also mentioned Houston.
Which one of the prospects there.
I think the prospects are I mean look our our our large markets are our most important markets and if I think about this year.
We had sort of mixed results there and so we're I think what we've decided to do is have renewed focus from a sales leadership perspective in those markets. So.
Some of our some of the sales leadership team who are managing the larger reasons are going to spend a fair amount of time in market and some of those what we call our big muscle to try to make sure that we can get those things virus.
So we still feel very positive about the prospects there, but we know that we need to have renewed focus there from especially from a leadership perspective.
Okay, and then it sounds like you did a great job with regards to managing.
The pay bill spreads.
In terms of the gross margins how much of it was just.
I was also just a factor of medical costs and what are the prospects of.
In terms of looking forward for that.
Yes looking forward on it is difficult to do because you can see some fluctuations there, though we've done.
A lot of initiatives to try to control that as best we can but you never know what you can you can run into.
But.
It's probably roughly about 25% of the improvement was related to that.
Okay, I mean was it just unusually lower.
A number of incidents and severity or is it because of plan design changes.
It was both.
And is.
The amount I would say a little bit less on the plan design, but certainly that had an impact but.
And it's hard to equate on some of the things with the plan design, how that affects actually know your participation rates and other things so it's hard to actually.
Quantify that exactly.
I'll just say one other thing about.
Medical and I agree with her completely that.
You know, it's just hard to know in any given period, when youre going to get a big claim or get a.
A group of claims that you don't anticipate but I will say since I joined the firm 20 years ago, where we had a demographic that was almost all.
Older.
Personnel.
And experienced higher we now mark our blending in more millennial talent and more junior talent and the demographic of our workforce across the board.
It's growing younger.
And that will have an impact on our.
Health experience.
All right I appreciate that and then.
And then with regards to the investments in terms of all the initiatives.
You gave us the SGN a for this coming quarter, how should we think about it as the year unfolds.
No the specific number guidance, but just you know.
Directionally, how should how we should think about it because you did a really nice job in terms of increasing the margins just wondering if were right.
And we will be continuing to focus on that but one of the key things is that part on the development costs for the automation tools.
Much of that is capitalized so even with that expect my overall capex to still be under $10 million and but but roughly thats a good number to think about in total.
What we are doing digital on an annual basis, but great talking about SGN a overall mark.
We still have a goal to drive at below 30%. So while Q1 is going to be a little tough because we have some.
Retention and severance obligations, we know are coming up that will talk more about next quarter.
That's our goal is to still say very disciplined on the expense line.
Great terrific follow up offline. Thank you.
You're welcome thank you.
And thank you ladies and gentlemen, this conclude today's Q and a session I would now like to turn the call back over to Kate Mcshane CEO for any closing remarks.
Well. Thank you operator and again, thank you everyone for attending the call and for your continued interest in our GP, we'll look forward to talking with you next after the close of our first quarter of fiscal 2000 and have a good day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may all disconnect everyone have a wonderful day.
And then.
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