Resources Connection, Inc.

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. At this time, I would like to remind everyone that management will be commenting on results for the first quarter ended August 26, 2023. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today. Today's press release can be viewed in the investor relations section of RGP's website and also 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. Please see the Risk Factors section in RGP's report on Form 10-K for the year ended May 27, 2023, for a discussion of risk, uncertainties, and other factors that may cause the company's business results of operations and financial condition to differ materially from what is expressed or implied by forward-looking statements made during this call. I'll now turn the call over to RGP CEO, Kate Duchesne.

Thank you, operator. Good afternoon, everyone, and thanks for being with us. We delivered solid performance during Q1 despite the continued uncertainty in the macro environment and despite Q1 traditionally being our most seasonally impacted quarter given summer holidays and consultant vacations. On both revenue and SG&A expense, we performed in the stronger half of our guidance range while also continuing to deliver strong free cash flow. During Q1, county delivered solid growth over prior year quarters. The northern California market grew sequentially, showing movement in the tech sector after 12 months of a quiet buying environment. Regional performance in the rest of North America reflected the overall choppy operating environment, with clients remaining cautious about new spend while extending current engagements. Our pricing initiative is progressing as planned with over a 2% increase in bill rate in the U.S. quarter over quarter and 4% in Europe constant currency. Turning to our operational metrics, pipeline remains resilient. Engagement extension showed an uptick from the prior sequential quarter, continuing to demonstrate the stickiness of our consultants within the client environment. In recent weeks, we are seeing numerous new opportunities being added to the growth pipeline in certain pockets of North America. In Europe, we're growing the pipeline again as 2024 client budgets are being finalized and pent-up demand around technology transformation and transaction support are moving to the forefront. The Asia Pacific region, particularly in India and the Philippines, continues to show demand strength from our large global clients as they optimize their offshore service centers. In Q2, we're highly focused on revenue capture across all markets, and following the summer holidays, we have seen healthy meeting activity with in-person client connectivity on the rise globally. Based on many discussions with clients, we believe patterns are starting to break for the better. One of our largest clients reports that 10 months of uncertainty is coming to an end. Budget discussions have been renewed with recognition that there's too much pain in the system that needs to be addressed. Business resiliency is critical. Many organizations are now reaching out for support to unlock the value of prior technology implementations. For example, we have clients, large and middle markets, in need of support implementing additional modules of S4 HANA, SAP's modular cloud-based ERP. We're also assisting in optimizing performance of previous S4 HANA implementations with business process redesign, project, and change management. All capabilities in RGP's sweet spot. For such work, clients do not want to hire full-time, but rather in-source talent to deliver the expertise with flexibility and agility. In addition, we see increasing demand for our expert solution offerings, including expansion of global shared services workflows, IT audit and compliance, as well as operational accounting and finance. In our financial services practice, we see increasing needs in regulatory remediation. With these client conversations as the foundation, we're cautiously optimistic that the buying environment will approve late this calendar year and into 2024. In the near term, we will continue to expand our capabilities and engagement models, agile consulting and managed services. This strategy will improve our ability to weather market cycles and dynamics to react more quickly to varying pockets of need. For example, tax and treasury services are non-discretionary, even in a challenged macro cycle, while PMO services related to a client's market expansion are greenlit with improving market cycles. In addition to our core agile expert business, we're also extending our total addressable market on both ends of the human capital and consulting continuum. Hugo is an engagement channel for an adjacent segment of the F&A market requiring more role-based support and lesser scoped and team delivery. Digital transformation consulting expands the right side of the continuum with strategy to execution, UX to digital product development. Looking further ahead, our business model is well aligned to the future of work. We support clients in more agile and flexible ways in the areas of finance transformation, operational excellence, and digital transformation. We have the exceptional talent that clients want and need to execute critical project initiatives. We also know how to attract and retain that talent who is migrating toward our model. As the Wall Street Journal reported two weeks ago, the labor crisis is here to stay. Retirement trends, lower birth rates, and restrictive immigration policies around skilled talent suggest no improvement anytime soon. Thus, demand for agile talent, experts who can work on project teams, and plug critical skill set gaps will increase opportunity for RGP over the long term. Increasingly, Talent itself is looking to lend its expertise to platforms like RGP who offer a different compelling career experience. RGP's attractive proposition to this talent is especially apparent in the finance and accounting field where the profession faces an existential crisis. There are too few CPAs for market demand with many of them exiting the profession because they do not want the partnership model. RGP provides a career that values their skill set in a more dynamic model built on choice, flexibility, and control. Especially given current market conditions, RGP is proud of the strong cash flow that so well reflects the underlying strength of our business model. As a result, we have a clean balance sheet and no debt. We have consistently paid a quarterly dividend for over 10 years with six annual increases during that period. And as much as ever, we're staying disciplined on cost structure to ensure we continue to deliver value to shareholders. Before I hand it over to Jen, I want to leave you with my thoughts on how the new fiscal year will likely progress. We expect the current year's annual revenue trends to reflect the opposite of fiscal 23, meaning last year the first and second quarters were the strongest, reflecting the continued post-pandemic bounce back. This year, we believe the second half of the fiscal year will be stronger, given the nature of our solid pipeline and as the economy and buyer sentiment improves. As noted in the CFO survey conducted by Duke University's Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta, which was released last week, CFO optimism around revenue, hiring outlook, and the economy in general has increased for 2024, which adds to our cautious optimism for this current fiscal year. In closing, I'm pleased to share that Harvard Business Review published an article last week co-authored by me and business strategist Antonio Nieto Rodriguez titled Creating a Cohesive Team for Corporate Transformation Projects. This piece, based on our recent research, reinforces the benefits of building a blended team to deliver transformation work with the highest impact and most successful outcomes. Please visit our website for a link to the article and the insights shared. I'll now turn the call over to Jen.

Thank you, Kate, and good afternoon, everyone. This quarter, our revenue of $170.2 million and growth margin of 39.4%, were both within our outlook range provided in July, while run rate SG&A of $55.5 million was better than the favorable end of our run rate SG&A outlook. Notwithstanding an uncertain macro environment, we produced solid adjusted EBITDA of $11.5 million with a 6.8% margin, and we continued to generate strong free cash flow. On a same-day constant currency basis, revenue declined by 17% year over year, as our clients continue to work through challenges in their own business and hold back the pace of investments. Regional performance was reflective of the overall environment. North America, specifically in the U.S. market, was most impacted by clients' hesitancy to spend as they managed their earnings through the elevated inflationary and interest rate environment, resulting in a year-over-year decline of 19% in revenue. Our international business showed resiliency with a modest decline of 4% year-over-year on a same-day constant currency basis. While many international markets experienced similar macro and client trends as the US, albeit less severe, they were buoyed by growing markets such as Switzerland, India, and the Philippines. Operationally, as Kate mentioned earlier, our growth pipeline remains resilient, illustrating healthy appetite from our clients to execute operational improvements and our strong client retention. However, conversion into engagements remains slower than normal in Q1, driven by more cautious budget planning on the part of our clients. While extensions on existing engagements have been healthy, new opportunities in the pipeline require more persistence and time to close. These opportunities represent real upside for our business as macro conditions improve. Gross margin in the quarter was 39.4%, reflecting a heavier mix of business in Europe and Asia packs, which typically carry higher pay bill ratio compared to North America. Gross margin in the first quarter was also impacted by less favorable leverage of indirect cost of services on lower top line revenue. Next, I will provide an update on our pricing initiative, through which we've made good progress raising bill rates across the majority of our regions. Our US average bill rate rose 2% compared to the first quarter of fiscal 2023, and Europe was up 4% on a constant currency basis. However, due to the shift in revenue mix to regions with lower bill and pay rates, enterprise average bill rate for the quarter was $124 constant currency, down from $128 a year ago, while average pay rate declined to $59 from $61 a year ago. Strategic pricing will be a continued point of emphasis and expansion for the rest of fiscal 24 and beyond. Turning to SG&A, while we always approach cost management with discipline, we have been even more judicious given the current environment. Our run rate SG&A expense for the quarter was $55.5 million, more favorable than our outlook range. We continue to identify opportunities to streamline our cost structure, including aligning resource levels to the demand environment reducing travel, occupancy costs, and other discretionary spend. Earlier this week, we commenced a reduction of our US management and administrative workforce intended to reduce costs and streamline operations. We expect approximately $10 to $12 million of reduction in our annual SG&A run rate. Turning to liquidity, we're proud of our ability to continue to generate robust free cash flows despite the macro environment, which came in at $81 million or 130% of EBITDA over the last 12 months period. We ended the fiscal quarter with $112.6 million of cash and cash equivalents and zero outstanding debt. We distributed 4.7 million of dividends during the quarter with total available financial liquidity of $287 million. We plan to invest in the most critical areas in the business to drive long-term growth and profitability. while continuing to return cash to shareholders through dividends and by opportunistically buying back stocks through our share repurchase program, which has $50 million available at the end of the quarter. We continue to push forward our multi-year technology transformation project. We incurred $5 million of cost in the quarter, of which $3.1 million was capitalized, with the remaining $1.9 million included as non-run rate operating expense. Post Go Live, we anticipate the new technology platform will drive long-term value by improving our operating efficiency, enabling scale, and enhancing even further the stickiness of our talent platform. I'll now close with our second quarter outlook. The early second quarter revenue trend has been stable compared to the end of the first quarter. We anticipate timing challenges related to deal closes and project starts to continue through the second quarter. With early Q2 daily revenue trending slightly below the first quarter daily run rate, And after giving effect to less business days in Q2, we project revenue to be in the range of $160 to $165 million. We anticipate Q2 gross margin to be similar to Q1, currently estimated to be in the range of 39.2% to 39.7%, reflecting the global revenue mix and the lower top line projection. We expect our run rate SG&A to improve to a range of $53 to $55 million, Non-run rate and non-cash expenses for the second quarter will consist of $1.5 to $2.5 million of technology transformation costs, $2 to $2.5 million of restructuring costs, and $1 to $2 million of stock compensation expense. Fully capitalized costs related to the technology implementation in the second quarter is estimated to be around $3 million. In closing, I want to reiterate what Kate stated earlier. As we navigate through a changing economic environment during the first half of this fiscal year, quarterly comparisons over the prior year may not be indicative of our underlying annual performance. Based on the opportunities we're seeing in the pipeline, we believe the pace of revenue conversion will improve as the macro conditions start to recover. And we're ready to execute and excited about our business model and longer term outlook. With a durable variable cost model, a pristine balance sheet and ample liquidity, we believe we are well positioned to continue driving long-term value for our shareholders. This concludes our prepared remarks, and we will now open the call for Q&A.