Q3 2024 Resources Connection Inc Earnings Call

Yeah.

Good afternoon, ladies and gentlemen, and welcome to resources connections in 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.

This time I would like to remind everyone that management will it be commenting on results for the third quarter ended February 24th 2024.

I 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 reviewed in the Investor relations sections of our G P's website and filed.

Today with the SEC Also 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 sections in our G. P's 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.

The business results of operations and financial condition to differ materially from what is expressed or implied by forward looking statements made during this call.

Now I'll turn the call over to Archie piece C E O K to Chin.

Yeah.

Thank you operator, good afternoon, everyone and thank you for joining us today in Q3, we delivered solid performance across the enterprise. Despite a macro environment that continues to be sluggish and uncertain in the quarter client engagement extensions and client retention have been robust.

With new projects start still taking longer to convert and previous cycles.

On revenue, we performed consistent with expectations, while also continuing to deliver strong cash flow conversion. This fiscal year on SG&A and therefore, adjusted EBITDA, we well exceeded our expectations remaining disciplined on cost in this environment and driving efficiencies in head count.

Our balance sheet remains pristine.

During Q3, we saw a positive momentum in certain regions Asia Pacific returned to growth from earlier quarters in the fiscal year, Our Mexico, India, and Switzerland practices, all grew year over year as we delivered long term projects for large strategic clients north.

America reflected the overall choppy operating environment as clients want more confidence and lower interest rates and improving economic indicators before moving ahead with many major it initiatives.

County, which is our business units, delivering outsourced finance and accounting and HR services for startups scale ups and spin out.

Also grew in the quarter in fact county is seeing the strongest demand for services since the pandemic.

Our pricing initiative in the U S has progressed with a 1% increase in bill rate year over year.

Overall this quarter reflects success with what we can control, including superb customer service and client retention, improving operating efficiencies and maintaining a very strong balance sheet.

This success will allow us to be fast I'm ready as soon as the broader buying environment improves.

Turning to our operational metrics, we're pleased with that our pipeline remained resilient and steady through the quarter.

<unk> does not created equal as we see growth in both health care and financial services opportunities well other sectors are still cautious.

Veracity, our full service digital transformation business added almost 100, new opportunities in our pipeline during Q3.

We are laser focused on all the opportunities involving technology digital and portfolio change such deals are non discretionary longer term and require a larger teams for example, ERP cloud migration opportunities are on the rise and we built consult.

In delivery and a talent pipeline ready to respond.

We're also building thought leadership around S AP as for Hana migration, including hosting events like the webinar held last week, which drew over 600 registered attendees.

The largest close deal one this quarter. The majority involved S E T and Oracle cloud migration services digital and finance transformation.

During the quarter. We also continued to focus on enhancing our consulting capabilities, which we first outlined strategically during our last investor day.

Last week, we entered into a definitive agreement to acquire management consulting firm in reference point is.

This accretive acquisition is expected to close by early summer subject to customary closing conditions.

Reference point is an advisory firm, serving the financial services sector across four areas of focus strat.

Strategy and management risk and regulatory compliance digital and technology and data and analytics.

Under the leadership of its managing partner, Scott Gordon reference point employees, a differentiated consulting delivery model, where engagements are led by former industry executives with exceptional backgrounds in technology digital and data and risk management.

Our G P. The company builds delivery teams using a combination of experience bench and on demand talent.

We believe this acquisition offers clear benefits to both organizations, allowing us to provide an integrated value proposition to accelerate the growth of our financial services business.

With the largest consulting service that span the financial services industry was one of the first sectors, we invested in and it's been a top three industry vertical for our G P sense, except inception.

This highly strategic acquisition will expand our portfolio of high value Advisory services, particularly in the technology data and risk management Arena.

We offer a reference point instant access to our G. P is expansive financial services client base and an expert sales team that knows how to effectively sell into this space.

Our G p's robust talent and Jim will help scale its delivery teams with expert on demand talent.

We very much look forward to welcoming the reference point team into the <unk> family, we feel fortunate to have once again found a business, whose culture is well aligned with our G. P values and our focus on client centricity and client relationships and which expands our growth prospects moving forward.

Next I'm delighted to announce that the dress could tell will serve as our new chief operating officer, but dress join our G. P. In 2019 as the CEO of veracity.

He is an engineer by background and started his professional career at Anderson.

He has more than 25 years of experience spanning top tier consulting firms and boutique specialized consulting firms.

A successful entrepreneur, but dress shoes helped build to high growth digital transformation businesses over the last 10 years.

Enjoining RG piece he has proven to be a critical member of our executive leadership team, serving as our Chief Digital officer, and leading project Phoenix, which as you know is our G. P's technology transformation initiative he.

He is perfectly positioned for this role as we continue to evolve our business to lead with strategic advice and follow with season consultant to execute with excellence.

He knows our enterprise well, while also bringing innovative ideas to improve execution to drive sustainable growth.

This evolution requires effective coordination across people process and technology domains that address understand well as we bring our core consulting capabilities together under a single umbrella experience delivering with the bench plus on demand model is critical.

In addition in today's World, where every client problem has an element of digital automation use of AI and or UX. The dress his background and experience will be invaluable for the future of the firm.

The address will assume his position later this month.

In his new role as C O L. But you actually will continue to lead project Phoenix, We completed wave one of the project in February with the implementation of our new talent acquisition software our contract management software and the optimization of sales force, but to go to market team our project team comprised of.

Internal employees and our own expert consultants did a fantastic job in delivering wave one.

From my Vantage point on the steering Committee for project Phoenix I've seen our on demand talent model worked brilliantly our consultants have taken a lead roles in program management change management data migration testing cut over.

And functional expertise.

For any company undergoing system transformation, having the right combination of insiders and on demand expert is critical most companies do not have the muscle they need solely in house.

We offer clients on demand experts, who deliver with excellence speed and efficiency. It is also a very differentiated client outcome when the on demand talent has experienced.

Has judgment and has been to the rodeo many times before.

Finally, I'm pleased to share the results of a recent survey, we commissioned with yoga to discover what priorities financial decision makers are ready to fund when interest rates start to decline.

We learned that more than 80% of the 200 financial decision makers, who participated in the survey plan to increase investment in workforce development.

Specifically most are prioritizing reskilling upskilling current employees and utilizing new engagement strategies to blend fulltime employees with external on demand resources, they desire knowledge transfer independent perspective and financial flexibility.

So more than half said, they would invest new capital in digital transformation and AI.

In discussions last week with a global pharmaceutical and medical device client I learned they are following this pattern exactly they are funding a total talent initiative to inventory incumbent employee skill sets and development desires.

And capturing this data with new digital tools.

They're also building execution team, it's related to strategic initiatives with a blend of internal employees and on demand experts to target exactly the skill sets needed for specific projects for specific periods of time.

They are adamant about not caring fulltime employees for skill sets needed only on a fractional basis.

In sum, we're working hard to close every business opportunity with creativity and grit, we are improving our operating model to align our consulting capabilities with more focus and under one leadership structure to also deliver scale with the on demand talent platform, we're improving brand positioning.

Training for all accounts development teams to enable more cross sell to drive growth.

Far from standing still we are aggressively optimizing our business to quickly capitalize on improving conditions to deliver long term shareholder value I will now turn the call over to Jen.

Thank you Kate and good afternoon, everyone. This quarter, we achieved 151 $3 million of revenue, which was consistent with our outlook range provided in January.

Both our gross margin of 37% and our run rate SG&A of $45 $2 million were significantly better than the favorable end of the outlook ranges provided.

We produced solid adjusted EBITDA of $10 $8 million or seven 1% adjusted EBITDA margin and have delivered $34 $9 million of free cash flow in the last 12 months.

On a same day constant currency basis revenue declined by 20% year over year as our clients continue to be cautious with the pace of spending in the face of uncertain macro conditions, particularly in North America and Europe.

Our Asia Pacific region performed relatively better with a decline of 4% year over year on a same day constant currency basis.

Markets, such as India, and the Philippines continued to perform well primarily attributable to project opportunities with our large strategic clients as they continue to shift their spend to lower cost markets in an effort to advance transformation initiatives, while containing cost.

In addition, Singapore and Australia grew over the prior year from the expansion of our digital business with cloud go.

Operationally as Kate mentioned.

Growth pipeline remains resilient during the quarter.

While the velocity of converting new opportunities in the pipeline to actual engagements remains slow extensions on existing engagements were strong. We also saw an uptick in average deal size on closed deal during the third quarter.

While the current economic environment is still lost a bit of direction. We do believe we are starting to see more movement in the sales cycle in recent weeks.

Consistent with our survey results that Kate highlighted earlier conversations with our own clients suggest that budget do exist and targeted investment are highly concentrated in technology upgrades and transformation. We have been laser focused on building our pipeline in this key area to grow our topline.

Gross margin in the third quarter was 37% once again exceeding our 35, 5% to 36% outlook range and reflecting a more normalized level of health care costs than we anticipated.

Gross margin in the quarter also reflect the usual holiday seasonality and a heavier mix of business in Europe, and Asia Pacific, where we tend to see higher pay bill ratios than in North America.

As mentioned during our January call the pricing environment across the globe has become increasingly competitive and this trend continued in the third quarter.

Furthermore, a large multinational clients shifting work to lower cost markets, such as India, and the Philippines has shifted our global revenue mix and therefore weighted average bill rate and.

Enterprise average bill rate for the quarter was $119 constant currency down from $1 29, a year ago.

Despite the pricing pressure our U S. Standalone average bill rate was up 1% compared to the third quarter of fiscal 2023.

We will continue to optimize our overall operating results by effectively balancing pricing and volume growth.

Now on SG&A run rate SG&A expense for the quarter was $45 $2 million, which as I noted was also significantly better than our outlook range.

We have remained disciplined with cost management and a reduction enforce we executed in late calendar 2023 contributed approximately $3 million of SG&A savings over the prior year quarter.

Variable compensation expense was also favorable in the third quarter, reflecting a true up in bonus expense to align with the company's overall financial performance this fiscal year.

Turning to liquidity, we continue to generate healthy free cash flow. Despite the macro environment. We ended the fiscal quarter with $114 million of cash and cash equivalents and zero outstanding debt. After distributing $4 7 million of dividends and after $3 7 million of continued investments in our technology implementation.

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With total available financial liquidity of $287 million at the end of the quarter. We will continue to focus on investing in the most impactful areas of the business, including completing our technology transformation project and pursuing 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 under our share repurchase program, which had 45 million remaining at the end of the third quarter.

Now, let me provide an update on our key areas of investment and capital deployment, our technology transformation project and strategic acquisition.

We have made tremendous progress and launched our new talent management and contract management system in North America during the quarter. Our financial system go live is planned for later in the calendar year.

We're already seeing immediate benefits, including enhanced speed and accuracy in talent matching ease of talent marketing campaign and improved visibility into consultant and contract status.

We will continue to extract value from the new platform as we optimize system functionalities and user adoption and we believe this technology will enable us to achieve higher operating leverage and positions us perfectly to scale for growth.

On the acquisition front of Kate Spade, we signed a definitive agreement to acquire reference point of strategic advisory firm, serving the financial services industry, which is an important vertical for RG <unk>. We expect this acquisition to be accretive to our financial performance.

I will now close with our fourth quarter outlook.

As we anticipated the pace of revenue conversion for new opportunities in the pipeline remained sluggish in the third quarter, putting pressure on early fourth quarter revenue trends, coupled with the timing of completion for certain large engagement early fourth quarter weekly revenue run rate has been modest compared to the third quarter, We project fourth quarter.

Revenue to be in the range of $137 million to a $142 million.

Gross margin in Q4, it will continue to reflect the competitive pricing environment and the current global revenue mix with a higher proportion of revenue coming from Europe and Asia Pacific.

We estimate gross margin in Q4 to be in a range of 37.5% to 38%.

We expect our fourth quarter run rate SG&A expense to be in a range of $50 million to $52 million with more normalized variable compensation expense.

Non run rate and noncash expenses for the fourth quarter will consist of technology transformation costs and stock compensation expense, both of which will be approximately $2 million.

Okay.

In closing despite headwinds presented by the prolonged market uncertainty, we see compelling opportunities ahead as 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 ample liquidity and impending accrete.

<unk> acquisition, a reference point, we believe we are well positioned to continue driving long term value creation for our shareholders.

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

So much and as a reminder to participate on the Q&A you must press star one want to get into queue and wait for your name to be announced to withdraw your question simply press Star one one again.

Yeah.

Again that is star one one if you have a question my mom and for her first person is.

It is from Mark Marcon with Baird. Please proceed.

Good afternoon, and thanks for taking my questions.

Can you give us a little more detail with regards to reference point like how large is it.

What's the growth rate how much did you are you anticipating spending.

Okay.

Okay and Jim Please check your mute button.

Sure Hi, Mark I'll start and then James can jump in we did have one correction them in our prepared earning script that we want to clarify, which Jen will do in just a moment with.

With respect to reference point, we're not disclosing the size at this time it is a boutique consulting firm.

And we expect to close this within the next 60 days what this enables us to really do with bringing together their strategic advisory work and then more fulsome execution. They have left opportunity on the table given that they.

Don't have as much execution scale that we do especially from a global perspective. For example, there is an opportunity that's already are in front of us with an existing client actually of both firms, but our competitive bid will be stronger together because we allow <unk>.

<unk> point access to our centre of excellence talent pool in Mumbai. For example, so we really are excited about bringing our capabilities together very synergistically to serve what you know has been a long term industry.

Vertical for us.

Where we have a very strong sales team.

Is there something that you wanted to correct from the transcript.

Yes, Jens trying to jump in I can't hear you Jen.

None: Operator, yeah sure.

Again.

At.

Okay I'll jump in and correct. This are we at with the disclosure we made about APAC being down constant currency, 4% that stat is actually much better and it's really a 1.8% decline constant currency. So.

We just wanted to call that out it's not again, a 4% decline of one 8%.

Okay, great. Thanks.

Welcome.

Can you can you talk a little bit about what youre seeing in North America, both in terms of.

The ability to close deals.

So I'll start there and then I wanted to ask about pricing and then and then the markets.

Specifically.

Sure.

Youre close to your clients.

What exactly do they need to see because GDP has been healthy employment growth has been healthy obviously interest rates are still high.

But what exactly are they waiting for.

Think broadly are there waiting for the first interest rate decline that is going to show you know, it's going to be a firm line in the sand that you are moving in the right direction. So I do think the fed's decision will unlock more capital and we are I would say I would characterize my outlook.

As more bullish on opportunity right now while remaining cautious on timing.

So we are starting to see these green shoots, especially around technology migration boost just reviewing prior to the call. Both are closed one for Q3 and our biggest pipeline opportunities in Q4.

Most involve technology change most require project management change management and then the wrap around services services that I already talked about in my prepared remarks.

We are starting to feel more bullish about opportunity, it's really timing. That's the challenge I would say the other thing Mark about you know revenue and we're.

Conservative about that is that we do have a couple of major projects.

Or in the energy sector.

That will roll or conclude in Q4, and so we've taken that into account now we've already identified new opportunities at those clients.

There may be a gap between the prior projects ending and the ramp up of the new projects that we have to take into consideration.

Really appreciate that.

Kate can you talk a little bit about like some of your major markets, whether it's you know them.

The Tri cities, New York area, where if we think about northern or Southern California, Chicago, What are you seeing in those markets.

Just trying to.

Factor in like Okay, you gave us the north North America numbers, but like how are those biggest office is doing.

How would you compare and contrast that to some of your.

Small offices, but smaller offices within the U S.

Yeah, I think the smaller offices, which serve more middle market clients have been a little bit slower.

Because that buying base has been more conservative.

I really look at it not as much territories, Mark but industries like where are we starting to see momentum in industries. So we talked about financial services pipeline is definitely growing in financial services in health care, you know our longest standing client has you know we have.

Three big proposals into that client right now I I feel bullish on our opportunities to continue to serve them, but it's just when when those projects will start the next category that we're starting to see spending again as in the retail or consumer goods space.

That's particularly true because that's an important concentration of clients in Europe, and then last I would say manufacturing is starting to come back a little bit so.

That impacts more of the Chicago area.

That central of the country base.

Probably impacts the Atlanta, a little bit more too.

So that's really how we think about how we're gaining momentum. Let me also talk about technology, because we mentioned on our.

Our earnings call a couple of quarters ago that we were starting to see some movement in technology, which has also been a very strong sector for us.

And I'd say that we're seeing kind of fits and starts we will see some momentum then we will see more layoffs.

We'll see you know things get put on hold because nobody wants to start a big project with on demand talent when they've just done layoffs. So that's been a little bit I'd say hurricane jerky.

But we're starting to see more momentum in the media and entertainment space, which is pretty exciting and that will have some positive impact in southern California, where we've had some leadership in turnover changes. So you know we're addressing those actively as we get ready for more.

Our opportunity there so I hope this color its been helpful for you.

Absolutely and then can you just talk a little bit more about the pricing within.

Within North America.

What are you seeing from the big four and other competitors.

You've been reading about.

Some of the things that they've been doing but just wondering when youre competing with them.

How does that come through <unk>.

Would you anticipate that pricing would actually continued to stay up year over year in North America.

How are you thinking about that.

Yeah, So John Yeah.

Yes, I'm, so sorry, I was having some technical difficulty I think I heard it.

Mark I think I heard Kate correct.

One of the stat, but I said you know in Asia Pac instead of a decline of 4% is actually an increase of one 8% on a constant currency basis. Yeah. So so I want to make sure that we clear that up and and then maybe I'll take a stab at the type of a question Mark and then case feel free to jump.

None: Jump in I mean, what we're seeing from the big four we talked about this at the last in the last call you know obviously, the big bore they deploy bench resources and when.

When they have some bench resources, they can kind of deploy.

Deploy for free they are certainly doing that and they also have deployed offshore resources. Therefore, they can blend the rates down.

And there's a lot of competition when we compete with the boutique staffing firms to for sure. We are in they tend to want to race to the bottom in terms of pricing.

You know to combat this new where we're actively we talked about this last quarter active actively building our own kind of offshore <unk>.

Delivery hubs and then using them as much as we can in order to blend down the rate while protecting our margin.

You know, obviously, we got to strike a balance between volume and pricing to maintain our market share, but the good news is you know given our predominantly variable cost model.

Even with lower bill rates were still able to maintain our margin.

So that's what we're seeing hopefully that helps.

Hopefully that answered your question.

Just let me add that we remain very focused on value based pricing mark that is not changing but when you have the big four giving their bench resources away for free it puts your rationale pressure in the short term not the long term.

Understood really appreciate all the comments thank you.

Youre welcome. Thank you one moment for our next question. Please.

Alright any comes from the line of Andrew Steinman with J P. Morgan. Please proceed.

Hi, John Thanks for the revenue guide for the fourth quarter could you just go over what that would be on an organic constant currency basis year over year in terms of a percentage change on a same day basis and if you could mention if there is a difference in days in this fourth quarter versus the year ago fourth.

Yes.

Sure the full quarter guidance at the top $142 million, which is the top end of the range. It's.

It's about a 23%.

Down compared to year over year on a same day constant currency basis.

And there is no <unk> in there.

The U S. There is no business day different.

Okay. Thank you very much.

Thank you one moment for our next question is a reminder that is star one one if you do have a question one moment.

And it comes from the line of Marc Riddick with Sidoti. Please proceed.

Hey, good evening.

Hi, Martin.

Thank you mentioned in your prepared remarks financial services and healthcare I was wanted to touch a little bit.

Those.

Maybe starting with financial services, maybe what maybe some of those drivers or is that.

It's more a driver is that maybe are you seeing a little bit of a pick up from improved M&A out there, which seems to be off to a decent start so far this year.

Yeah, I'd say, primarily it's tied to regulatory requirements, some technology investment and change in financial services that have grown with a lot of consolidation.

System alignment is something that we're starting to see those large organizations address.

And I think there is some activity related to M&A and we're starting to see an uptick in request for project management type resources Mark.

Okay, Great and then it was very encouraging to see the the launch in North America around the talent management system, just wonder if you could I think you mentioned.

John I think you mentioned in your prepared remarks that the financial system.

I wasn't sure if you said calendar year or fiscal year is there sort of a ballpark timeframe, we should be thinking of alphabet. Yeah. Yeah. The financial systems will go live later this calendar year.

Okay.

Okay excellent.

Then I was sort of thinking about it I guess, maybe sort of circling back to the M&A question, but in a different way.

No.

I appreciate the commentary around the reference point, so theres not been a couple of.

Transactions during the year could you maybe sort of give your thoughts and views as to.

Alright things getting to be more attractive out there as far as potential acquisition targets and maybe the volume of what's out there the quality of what's out there.

Sure.

Yeah. So we're very much focused on continuing to invest in our digital capabilities and I'm looking at companies that bring I would say a more forward looking capabilities to bear.

Because we're so strong in functional expertise here and so investing in in more of the veracity type platform is something that we're looking at and looking globally.

Did cloud go which is now part of the veracity brand in late calendar 'twenty three we've been looking to add to that platform as well and valuations are getting more reasonable so our pipeline of companies that we're looking at has grown.

We're also though looking very in a very targeted way yet at capability to add to what we might have so think about the procurement.

Why chain space that seems to be gaining some momentum in terms of project attention and budget in our client base and we'd like to grow our capabilities there.

Okay, Great and then the last thing I know you had made comment commentary around that.

<unk> fits and starts around technology.

Technology.

Activity.

And I was wondering do you get any sense that some.

That is maybe tied to some of the.

The regulatory pressures, whether they'd be all more abroad, or whether or not the tax.

Customers are more.

Sort of tied to the interest rate discussion.

And earlier.

Yeah, I think its tied to interest rate and I and I think head count decisions that those firms are making I don't know that I would say, it's so tied to regulatory I don't feel qualified mark to answer that question up fully.

But you know I do think that at our largest account for example that is a technology company. We had been worried about some roles that we knew were coming in and those folks have all been extended and we see now growing opportunity in that account again so.

You know I think it's it's a matter of you.

Those firms tended to over hire more coming out of the pandemic.

And now that they're right sizing or justifying more of that head count, it's really a matter of timing again more than I think opportunity.

Gotcha.

That's great. Thank you very much.

Youre welcome Mark Thank you.

Thank you and I see no further questions in the queue I will turn it back to Kate for final comments.

Thank you operator, well. Thank you everyone for attending the call. We will look forward to adding the dress them to our earnings call. Following the end of our fiscal year and talking to you. All again then thank you very much.

And with that I conclude the conference. Thank you all for participating you may now disconnect.

Okay.

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