Resources Connection, Inc.

quarter we saw good revenue growth and operational metrics as well as strong margin performance pipeline build and closed deals were strong and we were able to maintain the revenue momentum we noted at the end of the first quarter despite increasing macroeconomic uncertainty same day constant currency revenue excluding task force increased by nearly six percent and the overall demand profile for our services demonstrated continued strength throughout the quarter Geographic performance was solid across our core business, with strategic accounts, Asia Pacific, North America, healthcare, county, and veracity all performing well, with Europe the one area of weakness. Overall, we have performed well through the first half of the year, but are, of course, wary of recessionary trends impacting our clients. We will continue to work hard at top-of-the-file activity, as well as ensuring great care and shepherding opportunities from prospecting to deal closures. While our growth pipeline has now reached one of its highest levels in three years, the sales cycle requires more attention and more effort than it did a year ago. But a lot of opportunity remains as companies continue to shift their focus to co-delivery of important initiatives. Clients increasingly recognize the value of owning their own intellectual property and working with firms to help them execute on key projects. This allows them to run day-to-day operations and change for the future, which has always been our value proposition. As clients work through their workforce plans for the coming year, there is an enduring reality that the pace of change will continue to be relentless. The flexibility and speed required to meet that pace are hallmarks of RGP, and as such, we see real opportunity through the remainder of the year and beyond. One of the fast-moving trends we are currently seeing with our clients in the technology sector is a rapid shift in focus to profitability expressed via reduction in force, division closure, and a focus on only the initiatives that are a priority for the enterprise. However, many of these clients are seeing attrition beyond their desires and are quickly recognizing the value we can provide as a flexible solution versus the more rigid approaches of larger firms. As a result, we are getting the opportunity to increase our presence in key projects, and in several cases, entrees into new projects to replace incumbent firms. As an example, at one Fortune 500 technology client, two of the large projects we were to begin working on were initially paused as the company went through significant restructuring and layout. But we stayed close to our clients through the uncertainty, as many of them were concerned not just about the condition of their projects, but perhaps even the status of their own employment. As circumstances played out, we got more clarity on the timing of the existing projects, which we began to help with shortly thereafter, and we are currently in discussions with them on other projects brought about by the restructuring. Some of these projects are to help provide on-demand talent for gaps caused by attrition, and others relate to providing expertise and execution around important enterprise initiatives. Another way that we've been able to differentiate ourselves is by leveraging our international delivery capability. As an example, a large multinational conglomerate is undertaking several major initiatives related to a global restructuring. We have deployed over 200 consultants around the world to help with these overlapping priority projects. A primary reason that we were selected as a key partner was our ability to support their data cleansing and compliance efforts in Manila. an important center of excellence for our clients. Half of the consultants we have deployed are domiciled in the Philippines. Similarly, a global financial services client is undertaking myriad initiatives, including finance transformation and divestitures. We have nearly 100 consultants supporting these efforts with a large contingent working out of Mexico. Our ability to execute internationally, along with our presence and capability in Mexico, was the determining factor in our ability to win this work, which is already leading us to additional opportunity to take share from larger competitors. On the candidate side of our business in the second quarter, we continue to attract and retain exceptional talent to our platform. As I noted earlier, many clients have reacted to macro uncertainty with restructuring, layoffs, and reductions in benefits as they seek to buffer their bottom line. We have seen in this cycle in particular that talent really values the importance of control and community. Many begin to realize that in traditional employment, particularly during turbulent times, there truly is a lack of control and a dilution of community. For groups impacted by restructuring and their colleagues who are not directly impacted but affected, RGP becomes an even more attractive alternative to traditional employment. We have numerous examples of this contemplation in the workforce, as alumni, newcomers, and even former employees of existing clients have decided to work with us versus traditional alternatives. As the labor market remains tight, our talent team, which essentially manages the human capital supply chain, is performing exceptionally. Attrition is in line sequentially and year over year, and strong hiring trends persist as we become the premier destination for talent that is daring to work differently. The average tenure of our Agile employees approaches five years, and we have learned over time that the highest risk of attrition typically occurs in the first year of employment with us. This continues to be an area of focus for us, and we work very hard to provide transparency regarding the portfolio of opportunity that awaits each consultant. Additionally, our team envelops new joiners in our culture. as we understand that this community experience is a key differentiator for us and helps to underpin the trust that consultants have in our GP. Over the Thanksgiving holiday, I asked the talent team if there were any consultants who were struggling and if there was anything more we could do to support them. Our Southeast talent team informed me of a consultant who was dealing with a confluence of circumstances, including seriously ill family members and damage from Hurricane Ian. The team had stayed very close to our consultant, and when I spoke to her, she let me know she was fearful that her need for time off to care for her family would hurt her chances to work with us in the future. Nothing could be further from the truth. The team and I reiterated our support and decided that she actually needed a few extra days of time off given the burden she was shouldering. She shared with me that the outpouring of support she received was unmatched in her career and that while she is new to RGP, she had found her professional home. We are proud to be human first at RGP. Now let me turn back to our second quarter operations. In addition to our gross pipeline nearing a multi-year high, we continue to make progress with respect to pricing as well, increasing billing rates, excluding tax force, by 4% on a constant currency basis compared to prior year quarters. Pricing leverage will be an opportunity across the enterprise regardless of economic direction. While we were mindful of potentially broader impacts based on economic conditions, early non-holiday third quarter revenue and operational trends are in line with a solid Q2 trend. Finally, let me touch on operational leverage. In Q2, we continue to focus on controlling fixed costs and operating efficiently, resulting in significant adjusted EBITDA margin improvement over prior year quarters. We will remain especially vigilant about discretionary spend through the balance of the year. I will now turn the call over to Jen for a more detailed review of our second quarter results.

Thank you, Tim, and good afternoon, everyone. We achieved another quarter of strong performance, one of the best second fiscal quarters in more than a decade. Coming in near the high end of our guidance range for revenue, exceeding guidance range for growth margin percentage, and coming in better than the favorable end of the SG&A guidance range. Revenue for the quarter was $200.4 million, up 6% over the prior year quarter on a same-day constant currency basis, and excluding the impact of the task force divestiture. And our revenue for the first half of the fiscal year was up 11% on the same basis. In addition to strong top line growth, we also achieved record second quarter adjusted EBITDA margin of 14.8% and record second quarter adjusted EBITDA of 29.6 million, representing 19% growth over the same period a year ago. GAAP diluted EPS with 51 cents per share for the quarter, an improvement of 9 cents or 21% over the prior year quarter. Overall, demand remains stable despite uncertainties in the macro environment. While certain client segments have become more deliberate in their spending pattern as they wait for more macro certainty, mission-critical initiatives and projects are still being executed, particularly in our large global clientele, which tends to be more resilient. Revenue from our strategic global accounts grew 6% year over year on a constant currency basis. Our core solution areas in finance and accounting and technology and digital also continued to perform well with 9% and 17% year-over-year growth, offsetting certain other areas that were softer. Despite the Federal Reserve's effort to address elevated inflation, the labor market remained tight and continued to support our top-line performance. Also contributing to the solid revenue growth in the quarter was a continuous improvement in our bill rates with our ongoing effort to align pricing with the value delivered to our clients, yielding positive results. U.S. average bill rate rose to $156 from $148 in the second quarter of fiscal 2022, an increase of 5.4%, with both Europe and Asia PAC driving similar improvements. Our ability to improve pricing has and will continue to play a significant role in sustaining our top-line performance while also improving our overall operating leverage and profitability. Geographically, North America and Asia-Pacific both performed well with 6% and 16% year-over-year growth on a same-day constant currency basis, while Europe declined by 5% on the same basis and also excluding task force. largely because of delayed client buying patterns due to growing recessionary pressure. The tremendous growth in Asia Pacific was attributable to strong demand from our SCA clients as large global companies continue to shift their service centers to the Asia-Pac region. Growth margin in the first quarter was 41.1%, up 180 basis points over the same quarter a year ago, and just beating the high end of our guidance range. primarily driven by an improvement in the bill pay ratio of 270 basis points. Enterprise average bill rate for the quarter was 130, constant currency, up from 127 a year ago. Average pay rate was also favorable at $62, constant currency, an improvement from 63 in the prior year quarter. Now turning to SG&A. We remain disciplined with cost management and investment oversight in the business in light of ambiguity in the macro environment. Our run rate SG&A expense for the quarter was $52.7 million, or 26.3% of revenue, a 70 basis point improvement compared to the same period a year ago, and better than the favorable end of the guidance range of $54 to $58 million. As a reminder, run rate SG&A expense includes non-cash compensation, restructuring charges, contingent consideration, and technology transformation costs. Technology transformation costs associated with our system implementation was $2.7 million for the quarter, of which $1 million was capitalized with the remaining $1.7 million included as non-run rate operating expenses for the quarter. We expect these costs to ramp up in the second half of the fiscal year as we progress through the implementation. Estimated cash outlay in the third quarter is expected to be in the range of $5 to $7 million, of which approximately $3 to $4 million would be capitalized. Our implementation is on track, and we anticipate completing the project over the next 18 months. Turning to our liquidity, we generated $23.7 million of cash from operations during the first half of the fiscal year as a result of strong business performance. our debt level remained low with a leverage ratio of only 0.2x. And we ended the fiscal quarter with $89.4 million of cash and cash equivalents after distributing $4.7 million of dividends and repurchasing approximately 318,000 shares during the quarter at an average per share price of $1,680. We plan to continue to return cash to shareholders through dividends and through our share repurchase program, which has $60 million available at the end of the quarter. I'll now close with our third quarter outlook. The early third quarter revenue trend has been steady compared to Q2. While clients are evaluating their spending decisions more carefully as the macro economy continues to adjust, our sales metrics remain robust and the pipeline remains healthy, reflecting the favorable secular workforce trends Kate and Tim both mentioned. The long-term prospect of our business remains strong. In the short term, We expect a typical seasonal revenue pattern in the third quarter due to holidays across the globe. In addition, the strength in the US dollar will continue to impact the translation of financial results from our foreign entities. We estimate our third quarter revenue to be in the range of 181 to 186 million, which would be the second highest Q3 revenue in the last decade, despite the sale of task force earlier this fiscal year. As with every year, Gross margin will also be affected by the holidays, along with the reset of employer payroll taxes at the beginning of the calendar year. Nevertheless, we expect our sustained improvement in pay bill ratio to partially offset the seasonal impact, yielding a gross margin range of 37.5% to 38.5%, which would be the highest third quarter gross margin over the last 10 years. Finally, we expect our run rate SG&A expense to be in the range of 56 to 58 million, reflecting higher employer payroll tax expense at the beginning of calendar 2023. Non-run rate and non-cash expenses for the third quarter consist of two to three million of technology transformation costs and approximately three million of stock compensation expense. With that, our Q3 adjusted EBITDA margin is expected to return to the typical single digit percentage range, reflecting the normal seasonality factors I just pointed out versus prior year Q3's exceptionally strong adjusted EBITDA margin. I would also note that while we have a robust pipeline and will continue to work to outperform as we always do, the pause in stronger activity that is reflected in our third quarter outlook could potentially continue as we move through calendar 2023. depending on the broader macroeconomic trends that we obviously do not control. That concludes our prepared remarks. We will now open up the call for Q&A.

Thank you. As a reminder, to ask a question, you will need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Andrew Steinerman with JPMorgan Chase. You may proceed.