Q2 2024 Resources Connection Inc Earnings Call

January 3, 2024

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 and answer session and instructions.

Actions will follow at that time.

As a reminder, this conference call is being recorded.

Speaker Change: At this time I would like to remind everyone that management will be commenting on results for the second quarter ended November 25, 2023. They will also refer to certain non-GAAP financial measures an explanation and reconciliation of these measures to the most comparable.

Speaker Change: GAAP financial measures are included in the press release issued today today's press release can be viewed in the Investor Relations section of <unk> website and filed today with the SEC.

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

Such statements are predictions and actual events or results may differ materially.

Speaker Change: Please see risk factors section in <unk> report on Form 10-K for the year ended May 27, 2023 for a discussion of risks uncertainties and other factors that may cause the company's business results of operation and financial condition.

For materially from what is expressed or implied by forward looking statements made during this call.

Speaker Change: I'll now turn the call over to RGB CEO Kt Shane.

Kt Shane: Thank you operator, good afternoon, and happy New year. Thank you all for joining US today in Q2, we delivered solid performance across the enterprise. Despite a macro environment that continues to be sluggish and uncertain. This quarter can be characterized by green shoots and continued tenacity.

Kt Shane: We have shown well with respect to engagement extensions and client retention and our pipeline finished the quarter strong.

Kt Shane: As we shared last quarter, New project initiation has been slower to materialize and opportunities are pushed to the new calendar year.

Kt Shane: On revenue, we performed in the stronger half of our guidance range. While also continuing to deliver strong cash flow this fiscal year.

Kt Shane: On SG&A and therefore, adjusted EBITDA, we have well exceeded our expectations as we continue to remain disciplined on costs in this environment.

Kt Shane: Our balance sheet remains pristine.

Kt Shane: During Q2 veracity delivered sequential revenue growth, earning new business from the sustained appetite for digital transformation services and capabilities.

Kt Shane: We also expanded <unk> digital presence across the Asia Pac region through the acquisition of cloud go a digital transformation firm and elite service now partner. We're excited about this acquisition the exceptional talent. This adds to our company and we are already beginning to see sooner.

Kt Shane: <unk> between <unk> and cloud go.

Kt Shane: The northern California market, which I had mentioned last quarter also grew sequentially again, showing positive movement in the tech sector after more than a year of decline.

Kt Shane: Regional performance in the rest of North America reflected the overall choppy operating environment with clients remaining cautious about new spend until there is greater clarity around interest rates and economic direction.

Kt Shane: Our Mexico, India, Philippines, and Switzerland practices, all grew both sequentially and year over year as we delivered major projects for large strategic clients.

Kt Shane: Our pricing initiative in the U S is progressing well with a one 3% increase in bill rate year over year.

As you'll hear more from John in a moment Europe showed even stronger improvement in pricing.

Kt Shane: Turning to our operational metrics, we're pleased that the pipeline remains steady through the quarter and in post quarter December more extension opportunities in the pipe were converted into closed one engagements.

Kt Shane: In Europe pipeline grew throughout Q2 with clients engaged in planning discussions for 2024, and pent up demand around technology transformation and transaction support moved to the forefront.

Kt Shane: Our Asia Pacific business, particularly in India, and the Philippines continued to show demand strength from our large global clients as they increasingly move more activity to offshore global business service centers.

Kt Shane: Across all geographies, we're experiencing an uptick in in person client meetings, which is a positive indicator that clients are engaging in planning for projects to get underway in the new calendar year.

Kt Shane: Given the areas in which we're seeing consistent and rising demand for professional services, especially digital transformation and cloud technology support. We believe we are well positioned to capture market share in 2024 and beyond as mentioned last quarter, we closed more business related to cloud ERP.

Kt Shane: Patients and optimizations, our pipeline is heavy with opportunity at large and middle market companies to implement and unlock the value of technology and prepare for the implementation of AI with improve data governance and business process. Standardization. This is exactly the type of work for which RGB.

Kt Shane: Shines and can deliver significant value.

In our financial services practice, we see rising demand for regulatory remediation another area of strength for our GP.

In healthcare, we built an offering to support revenue cycle optimization and claims reimbursement capture and our large provider client base. These opportunities are significant longer term and allow us to get deeper into our eight plus client set which creates cautious optimism net revenue conversion.

Kt Shane: <unk> will improve in 2024.

Kt Shane: During Q2, we completed additional research around client decision, making to help us prepare for what's next we pulled a 1000 plus leaders from companies with at least $1 billion in revenue to understand what's on the agenda and how our capabilities line up to that need.

Kt Shane: We found that transformation initiatives are a priority as large organizations are taking on an average of $21 million plus transformation initiatives. This year alone.

Kt Shane: They also report finding the right skill sets for critical transformation initiatives has become more complicated in an ever more disrupted world.

Kt Shane: Our research further uncovered that a hybrid workforce strategy that blends internal talent with skilled outsiders enables company to realize competitive advantages by building constant transformation in their core DNA.

Kt Shane: We refer to this approach as the dynamic workforce model and we believe it is becoming increasingly more prevalent in business today.

Adoption of the dynamic workforce model is being accelerated by transformation overload as our research uncovered that only for internal organizations reported they had enough internal talent to staff all of their planned initiatives.

Kt Shane: This research matches, what the manpower group employment outlook survey reported in December in that survey, which included an even bigger pool of 40000, plus employers across 41 countries, 75% of respondents reported they are struggling to find the skill sets they need.

These skills shortages have wide ranging impact on transformation initiatives ranging from project delays missed critical goals and more difficulty in achieving operational change.

Kt Shane: Thus based on our research the proportion of the outside talent on transformation teams grew to 45% in 2022 and is expected to reach 48% this calendar year.

Kt Shane: Connecting this research to our business model, we are highly encouraged the global pandemic proved once and for all that highly skilled talent.

Kt Shane: Collaborate effectively regardless of location or FTE status.

Kt Shane: C suite leaders recognize the power of hybrid talent models, and we're seeing more Ceos and Cfos work with HR leaders to adjust talent strategy Accordingly.

The talent side of the equation is equally embracing these shifts expert talent is actively choosing to pursue their professional passions and a more independent way in fact, we've consistently seen our retention rates increase in recent years now even exceeding those reported by the traditional partnership models the <unk>.

Speaker Change: Joyce transparency and control and client engagements we offer our consultants is a key differentiator. These attributes also serve to create a client experience that is differentiated for the good expert who choose their projects feel more empowered engaged and committed to the client success.

Speaker Change: In short we May have been ahead of our time when we launched the first agile professional services business model 20, plus years ago, when we spun off from Deloitte.

Speaker Change: We are now emboldened to see that today's clients and talent alike are eager to embrace what we have built and perfected.

Speaker Change: Our focus for the rest of the fiscal year is on the execution of three strategies.

First we will continue our diversification path expanding consulting services, especially in digital and technology transformation.

Speaker Change: As we have earn trust with our clients. They have asked us to deliver more strategic advice, including assessments tools methodologies and expert talent, we acquired veracity in 2019 as the start of this strategy and it has been a successful combination. We most recently added cloud go to continue the expansion.

Speaker Change: This strategy globally.

Speaker Change: We will also continue to scale such targeted consulting services with our agile expert business.

Speaker Change: Second we will execute our talent strategies to build in demand pools of talent around the world that can be used to quickly assemble blended delivery teams. These teams can be built to grow our consulting assets faster and will improve our win rates by offering clients blended rates and intellectual arbitrage we've.

Speaker Change: Two centers of excellence this year in Manila in India and have made good progress in growing these talent hubs.

Speaker Change: Finally, we will continue to push forward, our technology transformation initiative to drive even greater operational efficiency and financial performance as one global enterprise.

Speaker Change: We will soon launch the first wave of the technology transformation initiatives benefiting our global talent function.

Speaker Change: We're excited that this enhanced software will improve our supply and demand match and enhance our global service to our clients Jen will share more detail in her remarks.

In sum, we're working hard throughout our organization to close every business opportunity with creativity and grid at the same time, we are retaining the best consultants in improving operation.

With streamlined process improved technology and global connectivity the.

Speaker Change: The macro environment is not easy and far from standing still we are aggressively optimizing our business to quickly capitalize when conditions improve and to deliver long term value, we have with business needs today.

I'll now turn the call over to Jen.

Jen: Thank you Kate and good afternoon, everyone. This quarter, we achieved a $163 $1 million of revenue, which was in the upper half of our outlook range provided in October our run rate SG&A of $47 4 million was significantly better than the favorable end of our run rate SG&A outlook of 50.

Jen: 3% to $55 million, notwithstanding an uncertain macro environment, we produced solid adjusted EBITDA of $16 1 million.

Jen: Or nine 8% adjusted EBITDA margin and have delivered $54 million of free cash flow in the last 12 months.

On a same day constant currency basis revenue declined by 19% year over year as our clients continue to be cautious with the pace of spending in the face of the uncertain macro condition.

Jen: Regional performance is reflective of the overall environment.

Jen: In North America, although certain pockets, such as northern California, Atlanta, and velocity have started to show signs of recovery compared to the beginning of the fiscal year. Many major markets were still affected by the broader economic environment.

Jen: Our Europe and Asia Pacific regions performed relatively better with more modest decline of 9% and 10% year over year on a same day constant currency basis.

Jen: Markets, such as Switzerland, India, and the Philippines grew over the prior year quarter as well as sequentially, primarily attributable to project opportunities with our large strategic clients.

Jen: Operationally, our gross pipeline remained resilient during the quarter, while the velocity of converting new opportunities in the pipeline to actual engagements for me well extensions on existing engagements have been healthy our solid pipeline suggests that demand in fact exist and it's a matter of when not if clients will move forward.

Jen: With the execution of the initiatives these opportunities represent a real upside for our business as macro conditions improve.

Jen: Gross margin in the quarter was 38, 9%, reflecting a heavier mix of business in Europe, and Asia Pacific, which typically carry higher pay bill ratio compared to North America.

Gross margin in the second quarter also reflected a 90 basis point adverse impact from a spike in healthcare cost.

Jen: As a sponsor of our self insured medical program. We know the number of medical claims can spike from time to time, but in general we do not believe the trend. This quarter is indicative of our health care costs in the foreseeable future.

Jen: Next I want to provide an update on our pricing initiatives were seeing more competitive pricing pressure in the current environment even against this backdrop, our U S average bill rate rose, one 1% compared to the second quarter of fiscal 2023, and Europe was up 5% on a constant currency basis.

Jen: Average bill rate in both regions also improved on a sequential basis from Q1. However.

Jen: However, due to the shift in revenue mix to regions with lower Bill and pay rate enterprise average bill rate for the quarter was $121 constant currency down from $1 28, a year ago, while the average pay rate was $58 down from $60 a year ago.

Strategic pricing will be a continued point of emphasis and expansion for the rest of fiscal 'twenty four and beyond.

Jen: Turning to SG&A, our run rate SG&A expense for the quarter was $47 4 million.

Jen: Which as I noted was significantly better than our outlook range.

Jen: Compensation expense was favorable in the second quarter aligning with the company's overall financial performance this fiscal year.

Jen: In addition, the reduction enforced we executed at the start of the second quarter contributed approximately $2 million of SG&A savings in the quarter restructuring.

Jen: Restructuring costs associated with this effort was $2 $3 million and we expect $10 million to $12 million of annual savings on a go forward basis.

Jen: Effective tax rate this quarter was 43% largely attributable to an outsized amount of stock option expirations and capitalization of acquisition costs for tax purposes.

Turning to liquidity, we're proud of our ability to continue to generate robust free cash flow. Despite the macro environment, we distributed $4 $7 million of dividends during the quarter and repurchased $5 million worth of common stock at a weighted average price of $14 13 per share, leaving $45 million avail.

<unk> and our share repurchase program at quarter end.

Jen: Pursuant to our stated strategy to expand our digital consulting business, both organically and Inorganically on November 15th we closed the acquisition of cloud go a digital transformation firm and an elite service now a partner in the Asia Pacific region.

Jen: Cargo strategic capabilities and regional positioning will play a key role in our growth plan together with veracity. This combination will position us better to support our clients globally initial cash consideration of $7 7 million was paid during the quarter, while remaining consideration of up to $12 million will be determined by <unk>.

<unk> performance against a set of target performance metrics over a two year earn out period cargo did not contribute significant revenue or EBITDA to our second quarter results.

Jen: We ended the fiscal quarter with $95 $8 million of cash and cash equivalents and zero outstanding debt with total available financial liquidity the $269 million at the end of the second quarter, our capital allocation will be focused on investing in the most impactful areas of the business, including completing.

Jen: Our technology transformation project and continuing to pursue a disciplined M&A strategy to accelerate long term growth and profitability, while continuing to return cash to shareholders through dividends and by Opportunistically repurchasing shares.

Jen: Now let me provide an update on our technology transformation project, we have made tremendous progress and plan to go live with a set of new talent management and contract management systems in North America. During the third fiscal quarter, followed by our financial systems go live planned for later in the calendar year.

Jen: The new platform will not only improve the efficiency of our business processes and enhanced data visibility for better decision, making they will also provide a much more favorable experience for our clients consultants and employees, we incurred $4 $4 million of implementation costs in the quarter of which $2 8 million was capitalized with it.

Jen: Remaining $1 6 million included as non run rate operating expense.

I'll now close without third quarter outlook, while it has certainly been a challenging year. We are encouraged that our weekly revenue has been stable over the last 13 weeks, we expect the pace of revenue conversion from opportunity to close to remain sluggish in the third quarter after giving effect to the holiday impacting Q3 and including cargo.

We project revenue to be in the range of $150 million to $155 million.

Gross margin in Q3 will be compressed by the typical seasonality during the holidays, including the reset of employer payroll taxes at the start of the new calendar year as well as the current global revenue mix with a higher proportion of revenue coming from Europe, and Asia Pacific We estimate gross margin in Q3 to be in the range of 35 five.

Jen: 5% to 36%.

We expect our run rate SG&A expense to be in the range of 51% to $53 million, which includes cargos SG&A expense and again reflects the increase in employer payroll taxes at the beginning of the calendar year.

Jen: Non run rate and noncash expenses for the third quarter will consist of approximately $2 million of technology transformation costs and $3 million of stock compensation expense.

Jen: In closing, while we acknowledge the headwinds presented by the prolonged market uncertainty. We also see compelling opportunities ahead as macro conditions start to recover and we're ready to execute and excited about our business model and long term outlook.

Jen: 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 creation for our shareholders.

Jen: This concludes our prepared remarks, and we now will open the call for Q&A.

Thank you 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.

Jen: Oh.

Jen: Okay.

Okay.

Jen: Our first question comes from Stephen <unk> with J P. Morgan you May proceed.

Jen: Yeah.

Stephen: Hi, good afternoon.

Stephen: Can I ask for the revenue guide that you gave for third quarter.

Stephen: What was the implied revenue decline on a constant currency same day basis.

Speaker Change: Hi, Hi, Stephanie.

Speaker Change: The full year guidance at the top of the range at $155 million is approximately 17% year over year decline on a same day constant currency basis.

Speaker Change: Okay great.

Speaker Change: And then could you help us understand how much of cloud go was included in the third quarter outlook and I guess, how much on an annual basis cloud goes expected to contribute to RGB.

Speaker Change: We don't expect very material immediate impact on our financial from this acquisition. This acquisition is more strategic in nature. We believe that this is going to.

Speaker Change: Enhanced our capabilities to serve more clients and there is a lot of tremendous amount of synergy to drive future value. So given the size of the acquisition, we're not disclosing their financials.

Speaker Change: Okay sounds good thank you.

Speaker Change: Thank you.

Speaker Change: One moment for questions.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Mark Marcon with Baird You May proceed.

Speaker Change: Hey, this is Andre Childress on for Mark I. Appreciate you, taking the questions and happy new year, everyone. So K last quarter, you talked about some green shoots and you talked about the same green shoots as well this quarter.

Speaker Change: With regards to the pipeline as we get to the end of the year, we ended the year.

Speaker Change: What are you seeing and hearing from your clients with regards to their expectations for calendar 2024, now that budgets are set.

Speaker Change: Yes, I still think that we're seeing more opportunity around digital transformation as I said in our prepared remarks and continued optimization of cloud ERP opportunity in fact today Andrew.

Speaker Change: Andrea I got another request from our clients to introduce our services around cloud ERP, both system selection and implementation services and Theres a lot of wrap around work tied to that which is around data governance data cleanup.

Speaker Change: And process improvement, so that's really where we're still seeing opportunity.

Speaker Change: In our conversations with clients I do expect in Europe that we might see some uptick.

Speaker Change: Around transaction work, especially around decision decisions to divest business.

Speaker Change: And we're in conversation with a couple of large clients about how we can support some divestiture strategy.

Speaker Change: That makes sense and last quarter, you also laid out expectations in terms of a softer first half for the calendar 2024 year and in the back half stronger.

Speaker Change: Things have progressed over the past three months, how have those expectations changed or how should we think about that.

Speaker Change: Yeah, I think unfortunately.

The close of 2023 calendar 2023 has still been sluggish and you know, it's a crystal ball to say exactly when we'll see that shift occur.

Speaker Change: I think every client is looking for a little more macro.

Speaker Change: Certain T and getting more clarity around economic conditions, especially around interest rate decision, making.

Speaker Change: So that continues to be a little sluggish as Jen said in her prepared remarks, we believe it's a matter of when not if and so we stay very ready to support these initiatives that our clients are talking to us about.

It's just getting them to pull the trigger and that is all business decision makers getting a little more comfort in a little more optimism about where the economy is headed.

Speaker Change: That makes a lot of sense and then one more for me and then I'll hop back in the queue sure. Jen you had some commentary about competitive pricing dynamics could you just explain a little bit more about what youre seeing.

Speaker Change: In the market from a pricing perspective, particularly in the U S. Thank you.

Yeah sure I mean, the pricing environment has gotten tougher and like all of the professional services firms are competing for in general a smaller pool of work.

Speaker Change: When we compete against the big four they'll often have offshore operations and blended team.

Speaker Change: Averages down the rates and making it tougher to win the work and that is another reason I think Kate.

Speaker Change: <unk> alluded to or talked about in her remarks is just another reason why we're building our offshore talent pool to stay competitive and on the other side when we're competing against staffing firms and they've been racing to the bottom on pricing to win work, so that's where kind of the competitive pressures coming from.

Speaker Change: With that said I think you know.

New work is getting more challenging on pricing, but we are still working through to catch up on pricing on our existing msas.

Speaker Change: So far we haven't really had much pushback from your clients with this regard.

Speaker Change: So I think I think we've done a really great job over the last.

Speaker Change: Multiple quarters six to eight quarters to raise our pricing and I think theres still probably some room to go there.

Sorry, just one more follow up just given you touched on it so the center of the centers of excellence that you're building out internationally could you just talk a little bit more about that strategy and how you think about that building out over the next few quarters and integrating that and blending that with your other talent pools as we think about that going forward. Thank you.

Speaker Change: Andre I'll jump in here.

Andre Childress: I talked about a little bit in my prepared remarks. We for example, just one a big piece of work with ferocity for our financial services client that's continuing their digital transformation and the reason we won the work is because we are.

Andre Childress: Blending not only rates, but we have tapped into a very strong talent pool in India around service now capability. So it's not just being able to bring labor arbitrage and the cost of labor down. It's also finding the talent that the world.

Andre Childress: <unk> today.

Andre Childress: I mentioned, our own research and the manpower outlook from December still highlight that finding the right skill sets as one of the biggest challenges as every company is continually continuing to digitize and.

Andre Childress: Introduce more and more technology and AI into what we do and so it's not just about cost anymore. It's about finding.

Andre Childress: The right talent pools that can offer.

Andre Childress: Our clients and especially on these consulting engagements what they need so were.

We're very excited about what we're building.

Andre Childress: In India, and we're doing the same thing around.

Andre Childress: Finance talent finance and accounting talent in the Philippines, I mean, we're all reading.

Andre Childress: The stories about finance and accounting talent exiting their profession in North America for a variety of reasons and so meeting to find these talent pools that exist in other parts of the world I think will be increasingly important to remain not only competitive financially but.

Andre Childress: But also competitive in terms of winning the work.

Speaker Change: Great. Thank you so much for all that color.

Youre welcome Thank you and happy new year.

Thank you.

Speaker Change: One moment for questions.

Speaker Change: Our next question comes from Marc Riddick with Sidoti You May proceed.

Marc Riddick: Hi, good evening.

Marc Riddick: Hi, Mark Hi, Mark.

Marc Riddick: So I wanted to start with thanks for all the color that you've already provided I wanted to start with.

Marc Riddick: Yeah.

Marc Riddick: Some thoughts on commentary around sort of where you finished.

Marc Riddick: The quarter on the head count and kind of where you.

Marc Riddick: Current level as to maybe what you are seeing maybe for the next couple of quarters, if youre kind of where you want to be or if you feel as though there are other adjustments that need to be made there are some areas that you would.

Marc Riddick: Need to shore up or how should we think about.

Marc Riddick: Sort of where we ended the quarter versus where you might want to be six months to 12 months ago.

Speaker Change: Mark are you referring to consultant head count I would just want to make sure.

Mark: Yeah, Yeah, so our consultant headcount at the end of the quarter.

Mark: It didn't really decrease all that much from the end of last year around the same time.

Mark: One reason is because we added we added a pool of consultative or talent from from cargo from this acquisition and then the other do you remember the consultant consultant count that Youre looking at the end of the period is as a one point in time and.

So it depends on the talent that we're adding to serve our for example.

Mark: Large clients in our in the Philippines that we had some kind of a onetime add there are a group of independent consultants that's working on that so overall, if you look at the average Arkansas.

Mark: I would say decreased about anywhere between three to 400, if you look at the average on a year over year.

Speaker Change: Okay, and then I was wondering if you could shifting gears.

I appreciate the commentary on <unk>.

Speaker Change: On cloud goes what if you could talk a little bit about.

You did briefly touch on uses of cash and certainly theres, another $5 million or so.

Speaker Change: On share repurchase during the quarter I Wonder if you talk a little bit about the acquisition pipeline that you're currently seeing whether that.

Speaker Change: Look has changed evaluation has changed or maybe how you are you looking at the current pipeline today versus maybe three or six months ago.

Speaker Change: So let me just comment on M&A and pipeline activity and then I'll hand, it to Jan to talk about our uses of cash and capital structure, but.

We continue as I've talked about we are building more diversification in our business to follow higher margin and higher growth businesses, we see consulting as an opportunity for us to also scale with our agile business and.

Speaker Change: But the veracity in cloud go business is exactly a testament to that strategy.

Speaker Change: And so as we continue to do that we're going to look at additional consulting assets that can drive that strategy forward. We're also in the process of analyzing and mapping what our consulting capabilities have been in our PCM business and bringing them closer.

Speaker Change: Together with what veracity does in their strategy practice, especially around user experience. So we bring both user experience and functional expertise closer together again that is a part of strengthening the consulting part of our business and then being a.

<unk> to scale those practices with our agile talent and M&A will play a role in that Jan now I'll hand, it to Hugh Yeah. So from a capital allocation standpoint, Mark we have a number of areas in the business as we want to continue to invest in to drive long term growth.

Hugh: So one area as I said in my remarks is to complete our digital transformation project and for the remainder of the year, we're still looking at about anywhere between $8 million to $10 million of spend in that area.

Hugh: And as I also said, we're going to we're looking at our acquisition pipeline and.

And continue to assess.

Hugh: The deals in the pipeline and that's an area we could deploy some cash.

<unk>.

Speaker Change: Just as a reminder, right on a year to date basis, we have spent around $15 million our shareholder return.

Speaker Change: The dividend and share buyback, so far I think given the uncertain environment and just overall lower expected earnings in this fiscal year.

Speaker Change: We're going to remain prudent on our capital allocation strategy.

Great and then the last one for me.

Speaker Change: In your prepared remarks, you made mentioned around a couple of client verticals.

Services margin.

You mentioned some of the geographic footprints.

Speaker Change: Thanks, Al and versus the rest of the murder that kind of thing just wanted to talk a little bit where there any other sort of.

Speaker Change: Areas that might be a bit Jason.

Speaker Change: Pharma and health care.

Is that kind of stood out in any particular, either positive or negative as far as leasing activity.

Speaker Change: Yeah, I'd say and this isn't new but I'd say as we've talked about before you know the health care industry overall is behind in terms of their <unk>.

Digital transformation and so we continue to see opportunity there.

Speaker Change: As and there have been some big transactions in our client base that we're hoping to get a work from in the pharma space. So.

Speaker Change: That is as some green shoots coming up financial services still around.

Speaker Change: Regulatory remediation as there are.

Our focus on consent orders and cleaning up I think both compliance reporting but also a lot of data issues in financial services.

Speaker Change: Especially as you connect the front of the house to the back of the house and there is still a lot of work to do because in these huge financial banking.

Speaker Change: Environments. The systems are often very desperate and theres still a lot of work ahead for these organizations to address some of the problems. So we're staying very close to this client set.

And our financial services practice I've been very pleased with their performance and I see that that's continuing to.

Speaker Change: To strengthen a bit as we move through the rest of the fiscal year.

Speaker Change: Excellent. Thank you very much thank you mark.

Speaker Change: Thank you I would now like to turn the call back over to <unk> for any closing remarks.

Speaker Change: Well again I want to thank everyone for continuing your interest in our GP, we're working hard and we'll look forward to talking with you. After the end of our third quarter. Thank you again and happy new year.

Speaker Change: Okay.

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Speaker Change: Thank you for your participation you may now disconnect.

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Speaker Change: 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 and answer session and instructions will follow at that time as a reminder, this conference call is being recorded.

Speaker Change: During this call management may make forward looking statements regarding plans initiatives and strategies and anticipated financial performance of the company.

Speaker Change: Such statements are predictions and actual events or results may differ materially.

Speaker Change: Please see 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 operation and financial condition to differ materially from what is expressed or implied by forward looking.

<unk> made during this call.

Speaker Change: I'll now turn the call over to <unk> CEO J P J.

Speaker Change: Thank you operator, good afternoon, and happy New year. Thank you all for joining US today in Q2, we delivered solid performance across the enterprise. Despite a macro environment that continues to be sluggish and uncertain. This quarter can be characterized by green shoots and continued tenacity again.

Speaker Change: When we have shown well with respect to engagement extensions and client retention and our pipeline finished the quarter strong.

Speaker Change: As we shared last quarter, New project initiation has been slower to materialize and opportunities have pushed to the new calendar year.

Speaker Change: On revenue, we performed in the stronger half of our guidance range. While also continuing to deliver strong cash flow this fiscal year.

Speaker Change: On SG&A and therefore, adjusted EBITDA, we well exceeded our expectations as we continue to remain disciplined on costs in this environment our balance sheet remains pristine during.

Speaker Change: During Q2 veracity delivered sequential revenue growth, earning new business from the sustained appetite for digital transformation services and capabilities. We also expanded brass. These digital presence across the Asia Pac region through the acquisition of cloud go a digital transformation first.

Speaker Change: <unk> and elite service now partner.

Speaker Change: We're excited about this acquisition the exceptional talent. This adds to our company and we are already beginning to see synergies between <unk> and cloud.

Speaker Change: The northern California market, which I had mentioned last quarter also grew sequentially again, showing positive movement in the tech sector after more than a year of decline.

Speaker Change: Regional performance in the rest of North America reflected the overall choppy operating environment with clients remaining cautious about new spend until there is greater clarity around interest rates and economic direction.

Speaker Change: Our Mexico, India, Philippines, and Switzerland practices, all grew both sequentially and year over year as we delivered major projects for large strategic clients.

Speaker Change: Our pricing initiative in the U S is progressing well with a one 3% increase in bill rate year over year.

Speaker Change: As Youll hear more from Gen. In a moment Europe showed even stronger improvement in pricing.

Speaker Change: Turning to our operational metrics, we're pleased that the pipeline remains steady through the quarter and in post quarter December more extension opportunities in the pipe were converted into closed one engagements.

In Europe pipeline grew throughout Q2 is clients engaged in planning discussions for 2024, and pent up demand around technology transformation and transaction support moved to the forefront.

Speaker Change: Our Asia Pacific business, particularly in India, and the Philippines continued to show demand strength from our large global clients as they increasingly move more activity to offshore global business service centers.

Speaker Change: Across all geographies, we're experiencing an uptick in in person client meetings, which is a positive indicator that clients are engaging in planning for projects to get underway in the new calendar year.

Speaker Change: Given the areas in which we're seeing consistent and rising demand for professional services, especially digital transformation and cloud technology support. We believe we are well positioned to capture market share in 2024 and beyond.

Speaker Change: As mentioned last quarter, we closed more business related to cloud ERP implementation and optimization, our pipeline is heavy with opportunity at large and middle market companies to implement and unlock the value of technology and prepare for the implementation of AI with improve data governance and business process.

Speaker Change: Standardization. This is exactly the type of work for which our GP shines and can deliver significant value.

In our financial services practice, we see rising demand for regulatory remediation another area of strength for our GP.

Speaker Change: In healthcare, we built an offering to support revenue cycle optimization and claims reimbursement capture and our large provider client base. These opportunities are significant longer term and allow us to get deeper into our eight plus client set which creates cautious optimism that revenue conversion.

Speaker Change: <unk> will improve in 2024.

Speaker Change: During Q2, we completed additional research around client decision, making to help us prepare for what's next we pulled a thousand plus leaders from companies with at least 1 billion in revenue to understand what's on the agenda and how our capabilities line up to that need.

Speaker Change: We found that transformation initiatives are a priority as large organizations are taking on an average of $21 million plus transformation initiatives. This year alone.

Speaker Change: They also report finding the right skill sets for critical transformation initiatives has become more complicated in an ever more disrupted world.

Speaker Change: Our research further uncovered that a hybrid workforce strategy that blends internal talent with skilled outsiders enables company to realize competitive advantages by building constant transformation in their core DNA.

Speaker Change: We refer to this approach as the dynamic workforce model and we believe it is becoming increasingly more prevalent in business today.

Speaker Change: Adoption of the dynamic workforce model is being accelerated by transformation overload as our research uncovered that only for internal organizations reported they had enough internal talent to staff all their planned initiatives.

Speaker Change: This research matches, what the manpower group employment outlook survey reported in December in that survey, which included an even bigger pool of 40000, plus employers across 41 countries, 75% of respondents reported they are struggling to find the skill sets they need.

Speaker Change: These skills shortages have wide ranging impacts on transformation initiatives ranging from project delays missed critical goals and more difficulty in achieving operational change.

Speaker Change: Thus based on our research the proportion of outside talent on transformation teams grew to 45% in 2022 and is expected to reach 48% this calendar year.

Connecting this research to our business model, we are highly encouraged the global pandemic proved once and for all that highly skilled talent can collaborate effectively regardless of location or FTE status.

Speaker Change: Sweet leaders recognize the power of hybrid talent models, and we're seeing more Ceos and Cfos work with HR leaders to adjust talent strategy accordingly the.

Speaker Change: The talent side of the equation is equally embracing these shifts expert talent is actively choosing to pursue their professional passions and a more independent way in fact, we've consistently seen our retention rates increase in recent years now even exceeding those reported by the traditional partnership models the <unk>.

Speaker Change: Joyce transparency and control and client engagement, we offer our consultants is a key differentiator. These attributes also serve to create a client experience that is differentiated for the good expert who choose their projects feel more empowered engaged and committed to the client success.

Speaker Change: In short we May have been ahead of our time when we launched the first agile professional services business model 20, plus years ago, when we spun off from Deloitte.

Speaker Change: We are now emboldened to see that today's clients and talent alike are eager to embrace what we have built and perfected.

Speaker Change: Our focus for the rest of the fiscal year is on the execution of three strategies.

Speaker Change: First we will continue our diversification path expanding consulting services, especially in digital and technology transformation.

Speaker Change: As we have earned trust with our clients. They have asked us to deliver more strategic advice, including assessments tools methodologies and expert talent, we acquired veracity in 2019 as the start of this strategy and it has been a successful combination. We most recently added cloud go to continue the expansion.

Speaker Change: This strategy globally.

Speaker Change: We will also continue to scale such targeted consulting services with our agile expert business.

Speaker Change: <unk> two centers of excellence this year in Manila in India and have made good progress in growing these talent hubs.

Finally, we will continue to push forward, our technology transformation initiative to drive even greater operational efficiency and financial performance as one global enterprise.

Speaker Change: We will soon launch the first wave of the technology transformation initiative benefiting our global talent function.

We're excited that this enhanced software will improve our supply and demand match and enhance our global service to our clients Jen will share more detail in her remarks.

Speaker Change: In sum, we're working hard throughout our organization to close every business opportunity with creativity and grid at the same time, we are retaining the best consultants in improving operation with.

Speaker Change: With streamlined process improved technology and global connectivity the.

Speaker Change: I'll now turn the call over to Jen.

Jen: Thank you Kate and good afternoon, everyone. This quarter, we achieved $163 $1 million of revenue, which was in the upper half of our outlook range provided in October our run rate SG&A of $47 4 million was significantly better than the favorable end of our run rate SG&A outlook of $53.

Jen: The $55 million notwithstanding an uncertain macro environment, we produced solid adjusted EBITDA of $16 1 million or nine 8% adjusted EBITDA margin and have delivered $54 million of free cash flow in the last 12 months.

On a same day constant currency basis revenue declined by 19% year over year as our clients continue to be cautious with the pace of spending in the face of the uncertainty macro condition.

Jen: Regional performance was reflective of the overall environment.

Jen: In North America, although certain pockets, such as northern California, Atlanta, and veracity have started to show signs of recovery compared to the beginning of the fiscal year. Many major markets were still affected by the broader economic environment.

Jen: Our Europe and Asia Pacific regions performed relatively better with more modest decline of 9% and 10% year over year on a same day constant currency basis.

Jen: Operationally, our gross pipeline remained resilient during the quarter, while the velocity of converting new opportunities in the pipeline to actual engagements who may slow extensions on existing engagements have been healthy.

Jen: Our solid pipeline suggests that demand in fact exist and it's a matter of when not if clients will move forward with the execution of the initiatives. These opportunities represent real upside for our business as macro conditions improve.

Jen: Gross margin in the quarter was 38, 9%, reflecting a heavier mix of business in Europe, and Asia Pacific, which typically carry higher pay bill ratio compared to North America.

Jen: Gross margin in the second quarter also reflected a 90 basis point adverse impact from a spike in healthcare cost.

Next I want to provide an update on our pricing initiatives were seeing more competitive pricing pressure in the current environment even against this backdrop, our U S average still Rey rose one 1% compared to the second quarter of fiscal 2023, and Europe was up 5% on a constant currency basis.

Jen: Average bill rate in both regions also improved on a sequential basis from Q1. However.

However, due to the shift in revenue mix to regions with lower Bill and pay rate enterprise average bill rate for the quarter was 121 constant currency down from $1 28, a year ago, while the average pay rate was $58 down from $60 a year ago.

Jen: Strategic pricing will be a continued point of emphasis and expansion for the rest of fiscal 'twenty four and beyond.

Turning to SG&A, our run rate SG&A expense for the quarter was $47 $4 million, which as I noted was significantly better than our outlook range variable compensation expense was favorable in the second quarter aligning with the company's overall financial performance this fiscal year in.

Jen: In addition, the reduction enforced we executed at the start of the second quarter contributed approximately $2 million of SG&A savings in the quarter restructuring.

Jen: Restructuring costs associated with this effort with $2 $3 million, and we expect $10 million to $12 million of annual savings on a go forward basis.

Jen: Effective tax rate this quarter was 43% largely attributable to an outsized amount of stock option expiration and capitalization of acquisition costs for tax purposes.

Turning to liquidity, we're proud of our ability to continue to generate robust free cash flow. Despite the macro environment, we distributed $4 7 million of dividends during the quarter and repurchased $5 million worth of common stock at a weighted average price of $14 13 per share, leaving $45 million avail.

Jen: <unk> and our share repurchase program at quarter end.

Jen: Cargo's performance against a set of target performance metrics over a two year earn out period cargo did not contribute significant revenue or EBITDA to our second quarter results.

Jen: We incurred $4 $4 million of implementation costs in the quarter of which $2 8 million was capitalized with the remaining $1 6 million included as non run rate operating expense.

Speaker Change: I will now close with our third quarter outlook, while it has certainly been a challenging year. We are encouraged that our weekly revenue has been stable over the last 13 weeks, we expect the pace of revenue conversion from opportunity to close to remain sluggish in the third quarter after giving effect to the holiday impact in Q3 and including cargo.

Speaker Change: We project revenue to be in the range of $150 million to $155 million.

Speaker Change: Gross margin in Q3 will be compressed by the typical seasonality during the holidays, including the reset of employer payroll taxes at the start of the new calendar year as well as the current global revenue mix with a higher proportion of revenue coming from Europe, and Asia Pacific We estimate gross margin in Q3 to be in the range of 35 five.

Speaker Change: Percent to 36%.

Speaker Change: We expect our run rate SG&A expense to be in the range of 51% to $53 million, which includes cargos SG&A spend and again reflects the increase in employer payroll taxes at the beginning of the calendar year.

Speaker Change: Non run rate and noncash expenses for the third quarter will consist of approximately $2 million of technology transformation costs and $3 million of stock compensation expense.

Speaker Change: In closing, while we acknowledge the headwinds presented by the prolonged market uncertainty. We also see compelling opportunities ahead as macro conditions start to recover and we're ready to execute and excited about our business model and long 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 creation for our shareholders.

Speaker Change: This concludes our prepared remarks, and we now will open the call for Q&A.

Speaker Change: Thank you 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.

Speaker Change: Okay.

Yes.

Speaker Change: Yeah.

Okay.

Speaker Change: Oh.

Speaker Change: Our first question comes from Stephanie with Jpmorgan you May proceed.

Stephanie: Hi, good afternoon.

Stephanie: Can I ask for the revenue guide that you gave for third quarter.

What was the implied revenue decline on a constant currency same day basis.

Speaker Change: Hi, Hi, Stephanie.

Speaker Change: The full year guidance at the top of the range at $155 million is approximately 17% year over year decline on a same day constant currency basis.

Speaker Change: Okay great.

And then could you help us understand how much of cloud go was included in the third quarter outlook and I guess, how much on an annual basis cloud goes expected to contribute to RGB.

Speaker Change: We don't expect very material immediate impact on our financial from this acquisition. This acquisition is more strategic in nature. We believe that this is going to.

Speaker Change: Enhanced our capabilities to serve more clients and there is a lot of tremendous amount of synergy to drive future value. So given the size of the acquisition were not disclosed in their financials.

Speaker Change: Okay sounds good thank you.

Thank you.

Speaker Change: One moment for questions.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Mark Marcon with Baird You May proceed.

Hey, this is Andre Childress on for Mark I. Appreciate you, taking the questions and happy new year, everyone. So K last.

Andre Childress: Last quarter, you talked about some green shoots and you talked about the same green shoots as well this quarter.

With regards to the pipeline as we get to the end of the year, we ended the year.

Andre Childress: What are you seeing and hearing from your clients with regards to their expectations for calendar 2024, now that budgets are set.

Speaker Change: Yes, I still think that we're seeing more opportunity around digital transformation as I said in our prepared remarks and <unk>.

Speaker Change: And continued optimization of cloud ERP opportunity in fact today Andrew Andrew.

Speaker Change: Andrew.

Speaker Change: I got another request from a client to introduce our services around cloud ERP both system selection.

Speaker Change: Implementation services and Theres a lot of wrap around work tied to that which is around data governance data cleanup.

And process improvement, so that's really where we're still seeing opportunity.

Speaker Change: In our conversations with clients I do expect in Europe that we might see some uptick.

Speaker Change: Around transaction work, especially around decision decisions to divest business and we're in conversation with a couple of large clients about how we could support some divestiture strategy.

Speaker Change: That makes sense and last quarter, you also laid out expectations in terms of a softer first half for the calendar 2024 year and then the back half stronger.

As things have progressed over the past three months, how have those expectations changed or how should we think about that.

Speaker Change: Yeah, I think unfortunately.

Speaker Change: The close of 2023 calendar 2023 has still been sluggish and it.

Speaker Change: It's a crystal ball to say exactly when we'll see the shift occur.

Speaker Change: I think every client is looking for a little more macro uncertainty.

And getting more clarity around economic conditions, especially around interest rate.

Speaker Change: Decision, making.

Speaker Change: So that continues to be a little sluggish as Jan said in her prepared remarks, we believe it's a matter of when not if and so we stay very ready to support these initiatives that our clients are talking to us about.

Speaker Change: It's just getting them to pull the trigger and that is all business decision makers getting a little more comfort in a little more optimism about where the economy is headed.

Jen: In the market from a pricing perspective, particularly in the U S. Thank you yes.

Yes sure.

Jen: The environment has gotten tougher as like all of the professional services firms are competing for in general a smaller pool of work.

Jen: When we compete against the big four they'll often have offshore operations and blended team now.

Jen: And our average is down the rates and making it tougher to win the work and that is another reason I think Kate talked.

Jen: Alluded to or talked about in her in her remarks is just another reason why we're building our offshore talent pool.

Jen: <unk> competitive and on the other side when we're competing against staffing firms and they've been racing to the bottom on pricing to win work, so that's where kind of competitive pressures coming from.

With that said I think.

Jen: New work is getting more challenging on pricing, but we are still working through to catch up on pricing on our existing msas.

Jen: So far we haven't really had much pushback from our clients with this regard.

I think I think we've done a really great job over the last.

Multiple quarter six to eight quarters to raise our pricing and I think theres still probably some room to go there.

Speaker Change: Sorry, just one more follow up just given you touched on it so the center of the centers of excellence that Youre building out internationally could you just talk a little bit more about that strategy and how you think about that building out over the next few quarters and integrating that and blending that with your other talent pools as we think about that going forward. Thank you.

Speaker Change: Andre I will jump in here.

Andre Childress: I talked about a little bit in my prepared remarks. We for example, just one a big piece of work.

With ferocity for our financial services client, that's continuing their digital transformation and the reason we won the work is because we are.

Andre Childress: Blending not only right, but we have tapped into a very strong talent pool in India around service now capability. So it's not just being able to bring labor arbitrage and the cost of labor down. It's also finding the talent that the world.

<unk> today, I mean, as I mentioned, our own research and the manpower outlook from December still highlight that finding the right skill sets as one of the biggest challenges as every company is continually continuing to digitize and.

Andre Childress: Introduce more and more technology and AI into what we do and so it's not just about cost anymore. It's about finding.

Andre Childress: The right talent pools that can offer.

Andre Childress: Our clients and especially on these consulting engagements what they need so we're.

We're very excited about what we're building in.

Andre Childress: In India, and we're doing the same thing around.

Andre Childress: Finance talent finance and accounting talent in the Philippines, I mean, we're all reading.

Andre Childress: Also competitive in terms of winning work.

Speaker Change: Great. Thank you so much for all that color.

Speaker Change: Youre welcome Thank you and happy new year.

Speaker Change: Thank you.

Speaker Change: One moment for questions.

Speaker Change: Our next question comes from Marc Riddick with Sidoti You May proceed.

Hi, good evening.

Marc Riddick: Hi, Mark Hi, Mark.

Marc Riddick: So I wanted to start with thanks for all the color that you've already provided I wanted to start with.

Marc Riddick: If you could just shipments.

Marc Riddick: Some thoughts on commentary around sort of where you finished.

Marc Riddick: The quarter on the head count and kind of where you.

Marc Riddick: Comfort level as to maybe what Youre seeing maybe for the next couple of quarters, if youre kind of where you want to be or if you feel as though there are other adjustments that need to be made there are some areas that you would need.

Marc Riddick: Need to shore up or how should we think about.

Marc Riddick: Sort of where we ended the quarter versus where you might want to be six months to 12 months from now.

Speaker Change: Mark are you referring to consultant head count I would just want to make sure.

Mark: Yes, yes, so our consulting head count at the end of the quarter.

Mark: It didn't really decrease all that much from the end of last year around the same time.

Mark: One reason is because we added we added a pool of consult paver talent from from cargo from this acquisition and then the other do you remember the consulting consultant count that Youre looking at the end of the periods as one point in time so.

Mark: So it depends on the talent that we're adding to serve our for example.

Mark: Clients in.

Mark: In the Philippines that we had some kind of a onetime add there are a group of independent consultants that's working on that so overall, if you look at the average Arkansas.

Mark: I would say decreased about anywhere between three to 400, if you look at the average on the year over year, yes.

Speaker Change: Okay, and then I was wondering if you could shifting gears.

Speaker Change: I appreciate the commentary on.

Speaker Change: Cloud goes what if you could talk a little bit about.

You did briefly touch on uses of cash and certainly theres, another $5 million or so.

Speaker Change: On share repurchase during the quarter I was wondering if you talk a little bit about the acquisition pipeline that you are currently seeing whether that.

Speaker Change: Look has changed evaluation has changed or maybe how youre looking at the current pipeline today versus maybe three or six months ago.

So let me just comment on M&A and pipeline activity and then I'll hand, it to Jan to talk about our uses of cash and capital structure, but.

Jan: We continue as I've talked about we are building more diversification in our business to follow higher margin and higher growth businesses, we see consulting as an opportunity for us to also scale with our agile business and.

That the veracity in cloud <unk> business is.

Jan: <unk>, a testament to that strategy.

Jan: And so as we continue to do that we're going to look at additional consulting assets that can drive that strategy forward. We're also in the process of analyzing and mapping what our consulting capabilities have been in our PCM business and bringing them closer.

Jan: Together with what veracity does in their strategy practice, especially around user experience. So we bring both user experience and functional expertise closer together again that is a part of strengthening the consulting part of our business and then being a.

Speaker Change: Well to scale those practices with our agile talent and M&A will play a role in that Jan now I'll hand, it to you, yes, so from a capital allocation standpoint, Mark we have a number of areas in the business as we want to continue to invest in to drive long term growth. So why area as I said in my remarks.

Jan: <unk> to complete our digital transformation project and for the remainder of the year, we're still looking at about anywhere between $8 million to $10 million of spend in that area.

Jan: And as I also said, we're going to we're looking at our acquisition pipeline and and continue to assess.

Jan: The deals in the pipeline and that's an area, we could deploy some cash and.

Speaker Change: Just as a reminder, on a year to date basis, we have spent around $15 million of shareholder return via dividend and share buyback. So far I think given the uncertain environment and just overall lower expected earnings in this fiscal year.

Speaker Change: We are going to remain prudent on our capital allocation strategy.

Speaker Change: Great and then the last one for me.

Speaker Change: In your prepared remarks, you made mentioned around a couple of client verticals.

Speaker Change: Services was mentioned I believe.

Speaker Change: You mentioned some of the geographic footprints around some more.

Speaker Change: Thanks, Al and versus the rest of the murder that kind of thing just wanted to talk a little bit where there any other sort of.

Areas that might be a benches.

Speaker Change: Pharma and health care.

Speaker Change: Is that kind of stood out in any particular, either positive or negative as far as.

Speaker Change: Activity.

Speaker Change: Yes, I would say and this isn't new but I'd say as we've talked about before the healthcare industry overall is behind in terms of their.

Speaker Change: Digital transformation and so we continue to see opportunity there.

As and there have been some big transactions in our client base that we're hoping to get work from in the pharma space. So.

Sure.

Speaker Change: IC that is as some green shoots coming up financial services still around.

Regulatory remediation as there are.

Speaker Change: Our focus on consent orders and cleaning up I think both compliance reporting but also a lot of data issues in financial services.

Speaker Change: Especially as you connect the front of the house to the back of the house and Theres still a lot of work to do because in these huge financial banking environments. The systems are often very desperate and theres still a lot of work ahead for these organizations to address some of the problems.

Speaker Change: So we're staying very close to this client set.

Speaker Change: Our financial services practice I've been very pleased with their performance and I see that that's continuing to.

Speaker Change: To strengthen a bit as we move through the rest of the fiscal year.

Speaker Change: Thanks, a lot. Thank you very much thank you mark.

Speaker Change: Thank you I would now like to turn the call back over to <unk> for any closing remarks.

Speaker Change: Okay.

Speaker Change: Yes.

Thank you for your participation you may now disconnect.

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