Q1 2024 Resources Connection Inc Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to the Resources Connection Inc. Conference call. Currently all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will follow at that time as a reminder, this.
Conference call is being recorded.
At this time I would like to remind everyone that management will be commenting on results for the first quarter ended August 26, 2023. They will also refer to certain non-GAAP financial measures an explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today.
Today's press release can be viewed in the Investor Relations section of our G. P's website and also filed today with the SEC.
So during this call management may make forward looking statements regarding plans initiatives and strategies and anticipated financial performance of the company such statements are predictions and actual events or results may differ materially.
Please see the risk factors section in <unk> report on Form 10-K for the year ended may 27th 2023 for a discussion of risks uncertainties and other factors that may cause the company's business results of operations and financial condition to differ materially from what is expressed or implied by forward looking statements made there.
During this call.
Now I'll turn the call over to our G. P C L K T Shane.
Yeah.
Thank you operator, good afternoon, everyone and thanks for being with us.
We delivered solid performance during Q1, despite the continued uncertainty in the macro environment and despite Q1 traditionally being our most seasonally impacted quarter, given the summer holidays and consultant vacations.
In both revenue and SG&A expense, we performed in the stronger half of our guidance range. While also continuing to deliver strong free cash flow during.
During Q1 county delivered solid growth over prior year quarter, the northern California.
Grew sequentially showing movement in the tech sector. After 12 months of a quiet buying environment.
Regional performance in the rest of North America reflected the overall choppy operating environment with clients remaining cautious about newsstand, while extending current engagements.
Our pricing initiative is progressing as planned with over a 2% increase in bill rate in the U S quarter over quarter and 4% in Europe constant currency.
Turning to our operational metrics pipeline remains resilient engagement extension showed an uptick from the prior sequential quarter continuing to demonstrate the stickiness of our consultants within the client environments.
In recent weeks, we are seeing numerous new opportunities being added to the gross pipeline in certain pockets of North America, and Europe were growing the pipeline again F. 'twenty 'twenty four client budgets are being finalized and pent up demand around technology transformation and transaction support are moving.
To the forefront.
The Asia Pacific region, particularly in India, and the Philippines continues to show demand strength from our large global clients as they optimize their offshore service centers.
In Q2, we're highly focused on revenue capture across all markets and following the summer holidays, we have seen healthy meeting activity with in person client connectivity on the rise globally.
Based on many discussions with clients. We believe patterns are starting to break for the better one of our largest clients reports that 10 months of uncertainty is coming to an end budget discussions have been renewed with recognition that there's too much pain in the system that needs to be addressed business resiliency is critical.
Many organizations are now reaching out for support to unlock the value of prior technology implementations. For example, we have clients large and middle market in need of support implementing additional modules of S. For Hana Sap's modular cloud based ERP. We're also.
Testing and optimizing performance of previous as for Hana implementation with business process redesign project and change management.
All capabilities and RGB sweet spot for such work clients do not want to hire full time, but rather in source talent to deliver the expertise with flexibility and agility.
In addition, we see increasing demand for our expert solution offerings, including expansion of global shared services workflows, I T audit and compliance as well as the operational accounting and finance.
In our financial services practice, we see increasing needs in regulatory remediation.
With these client conversations at the foundation, we're cautiously optimistic that the buying environment will approve late this calendar year and into 2024.
In the near term, we will continue to expand our capabilities and engagement model agile consulting and managed services. This strategy will improve our ability to weather market cycles and dynamics to react more quickly to varying pockets of need.
For example tax and Treasury services are non discretionary even in a challenged macro cycle, while PMO services related to our clients market expansion, our green lit with improving market cycles.
In addition to our core agile expert business. We're also extending our total addressable market on both ends of the human capital and consulting continuum.
You go with an engagement channel for an adjacent segment of the SMA market, requiring more role based support and lesser scoped and team delivery.
Digital transformation consulting expands the right side of the continuum with strategy to execution UX to digital product development.
Looking further ahead, our business model is well aligned to the future of work, we support clients and more agile and flexible ways in the areas of finance transformation operational excellence and digital transformation.
We have the exceptional talent, our clients want and need to execute critical project initiatives.
We also know how to attract and retain that talent, who is migrating toward our model.
As the Wall Street Journal reported two weeks ago. The labor crisis is here to stay retirement trends lower birth rates and restrictive immigration policies around skilled talent.
Just no improvement anytime soon.
Thus demand for our agile talent experts, who can work on project teams and well I'm critical skill set gaps will increase opportunity for our G. P over the long term.
Increasingly talent itself is looking to lend its expertise to platforms like our GP, who offer a different compelling career experience our GPS attractive proposition to this talent is especially apparent in the finance and accounting field, where the profession faces an X.
Essential crisis.
There are too few CPA for market demand with many of them exiting the profession, because they do not want the partnership model.
<unk> provides a career that values their skill set in a more dynamic model built on choice flexibility and control.
Especially.
Given current market conditions, our GP is proud of the strong cash flow that so well reflects the underlying strength of our business model.
As a result, we have a clean balance sheet and no debt, we have consistently paid a quarterly dividend for over 10 years with fixed annual increases during that period.
And as much as ever we're staying disciplined on cost structure to ensure we continue to deliver value to shareholders.
Before I hand, it over to Jan I want to leave you with my thoughts on how the new fiscal year will likely progress. We expect the current year's annual revenue trends to reflect the opposite of fiscal 'twenty three meaning last year, the first and second quarters, where the strongest reflecting the continued post pandemic bounce back there.
This year, we believe the second half of the fiscal year will be stronger given the nature of our solid pipeline and as the economy and buyer sentiment improves.
As noted in the CFO survey conducted by Duke University's New Clos School of business and the Federal Reserve banks of Richmond, and Atlanta, which was released last week CFO optimism around revenue hiring outlook and the economy in general has increased for 2024, which al.
Adds to our cautious optimism for this current fiscal year.
In closing I am pleased to share that Harvard business Review published an article last week co authored by me and business strategist Antonio and yet Joe Rodriguez titled creating a cohesive team for corporate transformation projects.
This piece based on our recent research reinforces the benefits of building a blended team to deliver transformation work with the highest impact and most successful outcomes.
Please visit our website for a link to the article and the insights shared I'll now turn the call over to Jan.
Thank you Kate and good afternoon, everyone. This quarter, our revenue of $172 million and gross margin of 39, 4% were both within our outlook range provided in July well run rate SG&A of $55 $5 million with better than the favorable end of our run rate SG&A outlook.
Okay.
Notwithstanding an uncertain macro environment, we produced solid adjusted EBITDA of 11 $5 million with a six 8% margin and we continue to generate strong free cash flow.
On a same day constant currency basis revenue declined by 17% year over year as our clients continue to work through challenges in their own business and hold back the pace of investment.
Regional performance is reflective of the overall environment.
North America, specifically in the U S market was the most impacted by clients hesitancy to spend as they manage their earnings through the elevated inflationary and interest rate environment.
Resulting in a year over year decline of 19% in revenue.
Our international business showed resiliency with a modest decline of 4% year over year on a same day constant currency basis.
While many international markets experienced similar macro and client trends as the U S, albeit less severe.
Buoyed by growing markets, such as Switzerland, India and the Philippines.
Operationally as Keith mentioned earlier, our growth pipeline remains resilient illustrating healthy appetite from our clients to execute operational improvement and our strong client retention. However conversion into engagement remains slower than normal in Q1, driven by more cautious budget planning on the part of our clients.
While extensions on existing engagements have been healthy new opportunities in the pipeline require more persistent and time to close.
These opportunities represent real upside for our business as macro conditions improve.
Gross margin in the quarter was 39, 4%, reflecting a heavier mix of business in Europe , and Asia, Pac, which typically carry higher PCL ratio compared to North America.
Margin in the first quarter was also impacted by less favorable leverage of indirect cost of services on lower topline revenue.
Next I will provide an update on our pricing initiative through which we have made good progress raising bill rates across the majority of our regions.
Our U S average bill rate rose, 2% compared to the first quarter of fiscal 2023, and Europe was up 4% on a constant currency basis.
However, due to the shift in revenue mix to regions with lower Bill and pay rate enterprise average bill rate for the quarter was $124 constant currency down from 128, a year ago, while average pay rate declined to $59 from $61 a year ago.
Strategic pricing will be a continued point of emphasis and expansion for the rest of fiscal 'twenty four and beyond.
Turning to SG&A, while we always approach cost management discipline, we have been even more judicious given the current environment.
Our run rate SG&A expense for the quarter was $55 5 million more.
More favorable than our outlook range, we continue to identify opportunities to streamline our cost structure, including aligning resource levels to the demand environment, reducing travel occupancy costs and other discretionary spend.
Earlier. This week, we commenced a reduction of our U S management and administrative workforce intended to reduce costs and streamline operations, we expect approximately $10 million to $12 million a reduction in our annual SG&A run rate.
Turning to liquidity, we are proud of our ability to continue to generate robust free cash flow. Despite the macro environment, which came in at $81 million.
130% of EBITDA over the last 12 month period, we ended the fiscal quarter with $112 $6 million of cash and cash equivalents and zero outstanding debt.
We distributed $4 7 million of dividends during the quarter with total available financial liquidity of $287 million, we plan to invest in the most critical areas in the business to drive long term growth and profitability, while continuing to return cash to shareholders through dividends and by Opportunistically buying back stock through our <unk>.
Share repurchase program, which has $50 million available at the end of the quarter.
We continue to push forward, our multiyear technology transformation project.
We incurred $5 million of costs in the quarter of which $3 1 million was capitalized with the remaining $1 9 million included as non run rate operating expense.
Post go live we anticipate the new technology platform will drive long term value by improving our operating efficiency, enabling scale and enhancing even further the stickiness of our talent platform.
Let me I'll close with our second quarter outlook.
The early second quarter revenue trend has been stable compared to the end of the first quarter, we anticipate timing challenges related to deal closes and project starts to continue through the second quarter with early Q2 daily revenue trending slightly below the first quarter daily run rate and after giving effect two less business days in Q2, we.
Project revenue to be in the range of $160 million to $165 million.
We anticipate Q2 gross margin to be similar to Q1 currently estimated to be in the range of 39, 2% to 39, 7%, reflecting the global revenue mix and the lower top line projections.
We expect our run rate SG&A to improve to a range of $53 million to $55 million.
Non run rate and non cash expenses for the second quarter will consist of one five to $2 5 million of technology transformation costs shoot a cheap and a $5 million of restructuring costs and $1 million to $2 million of stock compensation expense.
We capitalized costs related to the technology implementation in the second quarter is estimated to be around $3 million.
In closing I want to reiterate what <unk> stated earlier as.
As we navigate through changing economic environment. During the first half of this fiscal year quarterly comparisons over the prior year. It may not be indicative of our underlying annual performance based.
Based on the opportunities we're seeing in the pipeline. We believe the pace of revenue conversion will improve as the macro conditions start to recover and we're ready to execute and excited about our business model and longer term outlook with a durable variable cost model, a pristine balance sheet and ample liquidity. We believe we are well positioned to continue driving long.
Term value to our for our shareholders.
This concludes our prepared remarks, and we will now open the call for Q&A.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for questions.
Yeah.
Our first question comes from Andrew Steinman with Jpmorgan you May proceed.
Hi, I have two questions. The second one is it could probably be harder than the first but I'll give it to drive on Hugo could you give us any sense of scale and success like how many active users you have in your database or anything.
<unk>.
The second one is you talk about the current uncertain macro and client's hesitancy to spend but economists tell us that we're not in a recession currently.
Do you feel like that labor might be misappropriated.
Maybe your belief is we are in a mild recession that we're going to recover from and obviously that you're you're also suggesting that the recovery of the macro will help your second half is that really coming from your economists view, you mean views that economists have said or your clients.
Yeah. Thank you Andrew Let me, let me take both of those and then Jan can add some color so on Hugo.
This year is about our commercialization efforts in three markets and we're very pleased with the talent inflow into the platform and we've exceeded our goals there and we are working to increase client registration and offerings.
We presented Hugo as an option for some larger enterprise clients too.
So we are optimistic about the reception. We have received we're not prepared at this stage given how small Hugo is to give you more specifics than that but we are on track with respect to the broader question and that is a hard one.
You know I think I've read Jamie Diamond interview yesterday in terms of his comment I don't think we're in a recession.
I think that his comments about.
Just a.
A muted economic environment stagflation.
Is probably more likely right now and that means that we're all going to have to work harder and pursue every opportunity I'll tell you. We are very focused on sales motion right now and ensuring that our people spend time with clients talking about.
The initiatives, they havent, where our capabilities measure up our comments about the second half of the year are not so much based on what the economists are saying because that has been a.
I would say a bumpy road, but more on the conversations that we're having with clients.
And what we're hearing them tell us about their budgeting process and what they expect in 2024.
Perfect. Thank you.
Youre welcome.
Thank you one moment for questions.
Yeah.
Our next question comes from Andre Childress with Baird You May proceed.
Andre Your line is now open.
One moment for our next question.
Our next question comes from Marc Riddick with Sidoti You May proceed.
Hi, good evening.
I wanted to ask maybe a couple of questions that are more along the lines of sort of controlling the controllable. If I guess I was wanted to talk a little bit about.
Are you finished with.
Holton count.
At the end of the quarter, maybe you could sort of talk a little bit about some of the.
That's just sort of.
Your own.
Needs going forward, whether we are looking to do to maintain that level that level kind of how we feel about that and then also maybe if you could give us a bit of an update I know that.
So I mentioned this to sort of really looking at the.
The organizational structure of floor.
Announcements since resignation, maybe you could talk a little bit about maybe where you are with that or maybe some of them are.
The hiring trends or anything like that that we should be aware.
Hey, Mark this is John I can take the first question and maybe Keith can comment on the second one our consulting counts at the end of the quarter. It did decrease as you can.
And imagine due to the demand environment.
We do have for our bench consultants, we are doing everything we can to deploy them and keep them engaged we're putting in a number of measures to share available consultants with our entire sales team and talent team globally and also proactively.
You know approach clients to see if there is a need there.
<unk>.
I think I think our consultant count as you know fluctuate based on our demand environment and that's also a part of our overall variable cost model.
Unique to our business.
Okay.
Yeah, So I'll jump in I think March yeah.
Correct me, because you've got a little soft so I hope I heard all of your question. If I didn't just please ask it again I think you asked about organizational structure and how we're continuing to build the business going forward.
As we've talked about we really have three components of our business currently we have our agile.
Model, which is the core of our GTE, meaning we provide expert talent to work on project initiatives in our client environments or to still roll our skill set gaps at a professional level in our client base. We also have certain assets in our portfolio that are consulting.
Soup to nuts <unk> is the perfect example.
We want to do more of this year and setting up CFO advisory that true consulting unit and this is all about making it easier to buy and easier to sell and our client base and then the third component is county, which is our managed services business.
Yes.
Yeah.
An outsource solution for finance and HR services more in the start up environment.
And we're also looking at how we can provide services to divested assets.
Businesses that don't want to stand up their own you know full financial.
Function, especially in light of today's lack of accounting and finance talent. So those are kind of the three segments, we see continuing to pursue that as we grow and again, it's about making us easier to buy and easier to sell and our client base.
Okay, and then I was just sort of wanted to also follow up then on the.
I think there were some of the commentary in the press release.
A couple of months ago.
Were considering.
Adding a couple of people to replace 10 of them or maybe some things might be we'd rather just wasn't sure. If there's an update available there as to.
As to adding <unk>, adding to the leadership bench there.
Yeah. So I think that we will through the balance of this fiscal year recondition, what we need and.
Senior leadership positions I think that that.
The future of the CFO role will look different than it has in the past for good reason as we build real leadership of the segment that we're talking about.
And we continue to improve what are.
Role and function that CLO position can deliver across the enterprise you know one of our initiatives. This year to Jen talked about pricing that's important.
But also to do a better job of cross selling.
Cross our assets into this client base.
And as we determine what we need in that regard, we'll be sharing more about the their roles.
That will put in place and I don't necessarily think Mark beat Youre going to be new roles. We have some really talented people that are ready to step up and so it may be repurposing or repositioning some of the existing talent we have.
Excellent. Thank you.
Youre welcome.
Thank you and as a reminder to ask a question. Please press star one on your telephone.
Moment for our questions.
Our next question comes from Andre Childress with Baird.
You May proceed.
Andre you may be on mute your line is now open.
And I'd now like to turn it back to Kate Duchenne for any closing remarks.
Thank you operator, and Andre if you have a question please feel free to give us a call.
Offline, but I want to thank everyone for attending this call I can assure you we are focused and motivated to serve clients with excellence and value as we all learned to work differently in today's environment. We look forward to reporting again after Q2, and we will talk with you in January .
Thank you very much.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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