Resources Connection, Inc. (RGP) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. Conference Call. At this time, 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 third quarter ended February 27th, 2021. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures is included in the press release issued today. Today's press release can be viewed in the Investor Relations section of RGP's website and was also filed today with the SEC.
Kate Duchene: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Tim Brackney, our Chief Operating Officer; and Jennifer Ryu, our Chief Financial Officer. I'll start with an overview of the third quarter, which I am pleased to report showed continued improvement. I will then discuss opportunities that are building as we execute on our defined strategy. Next, I'll provide an update on our digital initiative HUGO and close my remarks with insights on the macro environment that we believe bode well for fiscal 2022 and beyond. Then I will turn the call over to Tim and Jenn for further color and details. From a revenue perspective, we delivered $156.6 million in Q3, representing a sequential improvement of 3.4% same-day constant currency, despite the seasonal holiday impact. This performance continues to narrow the year-over-year decline caused by the global pandemic. Fourth quarter trends continue to show improvement. Another highlight from our financials this quarter is the 200 basis point improvement in adjusted EBITDA margin from prior-year performance, driven by sequential revenue improvement and cost improvement of 12% year-over-year, excluding contingent consideration and restructuring cost. We remain focused on improving our margin performance as we continue to drive top line growth, extract operational efficiencies and lower costs, including real estate expenses. I want to now make a few remarks about our strategies and how they align with opportunities that have been building throughout this fiscal year. Results achieved during this quarter reinforce more so than in any other prior quarter our strategy to build more capability in the digital and technology and healthcare practice areas. Both practice areas are delivering growth despite COVID impact. Specifically, Veracity's revenue was up 20% year-over-year and we believe the pipeline of opportunity is near pre-COVID levels. Healthcare opportunities across the client set of payer provider, medical device and pharma are all increasing as projects that were delayed due to COVID reemerge or new needs created by COVID arise.
Tim Brackney: Thank you, Kate, and good afternoon, everyone. During the quarter, we saw progress in our revenue and operating metrics as clients embraced the start of a return to normalcy. Top of the funnel activity is approaching pre-pandemic levels as new and existing buyers have become more eager to discuss current and future initiatives. Opportunities identified through our enhanced outreach led to an appreciable increase in pipeline and closed engagements. As the overall macro environment continues to improve, our revenue has also gained strength. As Kate touched on, sequential quarterly revenue trended up 3.4% on a same-day constant currency basis, despite seasonality buoyed by the positive dynamic of clients resuming engagements that have been paused, starting projects that were delayed and generally committing to larger spend on initiatives, including initiatives that have been driven by the changes to the workforce paradigm as a result of the pandemic.
Jenn Ryu: Thank you, Tim, and good afternoon everyone. Starting with an overview of our third quarter results. Revenue continued to improve sequentially despite the typical holiday impact. Gross margin was in line with our expectation given this typical seasonality. SG&A continues to benefit from our restructuring initiatives, as well as our increasingly virtual operating model.
Operator: Thank you. Our first question comes from Josh Vogel with Sidoti. You may proceed with your question.
Josh Vogel: Thank you. Good afternoon, everyone. Thanks for taking my questions. Jenn, I appreciate the guidance that you gave for Q4. I know it's still early, but I was wondering if you could frame how to start thinking about the gross margin profile of the business once we get into mid-year, specifically fiscal 2022 thinking about mix, search revenue increasing but also perhaps an increase in client reimbursements. Could the gross margin get back to an above 39% on a full-year - full fiscal year basis?
Jenn Ryu: Yes. Hi, Josh. Yes, I mean, as we think about gross margin, I think of it in really three components. One is obviously the bill and pay ratio and the second one is exactly what you said, which is the mix of our revenues, search conversion revenue, which is 100% gross margin versus the client reimbursement and revenue. And the third one is really what I consider to be the fixed cost - consultant fixed benefit costs as revenue increases in fiscal 2022 and that leverage is really going to - it's going to increase. So from a bill/pay standpoint, we do expect that we have some kind of room to increase our bill rate, particularly in the areas of digital, as well as healthcare solution. And so, yes, I mean, we expect the bill/pay to get better. And remember too this year because of COVID we did have to make some concessions on pricing where it's appropriate to our clients - and clients in order to balance our top line and our gross margin. So we do expect to get some of that back as we head into mid fiscal 2022.
Josh Vogel: Great. And when we look to the future, we think about the upgrades in digital and healthcare and looking to operate I guess a blended delivery model. Do you think that's going to have any impact on the bill rate side of the business?
Tim Brackney: Hi, Josh. It's Tim.
Josh Vogel: Hi, Tim, can you guys break that down a little bit better. When I think about the blended build remodel, whether it's on premise versus virtual or remote, is there any notable changes or deviations in the bill rates that we should expect to see longer-term?
Tim Brackney: Yes, I don't - like, I think - let me answer this in this way that, I mean, we will still price relative to the work that we're doing sort of irrespective of where the delivery assets lie. So to the extent that we have - that we can match a better resource as part of the delivery team that's off-site that allows us a better delivery outcome. But the pricing - the pay and pricing will be sort of split, right? So if you - if it gives us an opportunity for actually margin uplift depending on kind of where the delivery asset sits relative to the outcome of the project and the pricing associated with it. So I don't - I think it will have more impact on margin than it will on billing, in short, if I were to answer your - kind of get back to your original question. But it does provide real opportunities for us when you think about profitable growth.
Josh Vogel: Sure. No, that's helpful. Thank you. And shifting gears a little bit, you had a comment around clients committing to larger spend on certain initiatives. Can you just quantify what this larger spend is? How it looks versus pre-pandemic levels?
Tim Brackney: Yes, I mean it's hard to give you - I'll give you a couple of ways to look at it. I mean, our average deal size right now is larger than it's been in well over a year. So that's one way to look at it. The other way to look at it is just the outcome or the types of projects that we're being asked to come in for their large initiatives where we're asking for dozens of people. That's quite different than towards the beginning of the pandemic and certainly when we are in the middle of it where with very much more smaller projects and the commitments, both in terms of timing, number of - and number of people and certainly bill rates were lower.
Josh Vogel: All right, great. And two more quick ones, if I may, and I'll hop back in the queue. It sounds like Veracity is doing very well. I'm just curious how, given the contingent consideration payout, how are they performing relative to your minimum or max to get you to put on that business?
Jenn Ryu: I'm sorry, Josh. I lost the very end of your question.
Josh Vogel: I'm sorry. So I'm sorry, I am Veracity's performance. How are they performing relative to the mid-term of the max target that you set for it?
Jenn Ryu: Yes. Josh, I'll take that one. They're performing - Veracity is performing very well. And as you can see, we had contingent consideration of $2.7 million during the quarter. And right now, they are exceeding the minimum threshold to make their earn-out. So we do expect it to exceed the minimum threshold when we get through their earn-out period, which is July.
Josh Vogel: Great. And lastly, can you just talk a little bit about the recent investment in APAC, the collaboration with ServiceNow? What it immediately brings to the table for you? And is this something we could see you do in potentially other regions?
Kate Duchene: Yes, I think the answer - hey, Josh, it's Kate. I think the answer is yes. I mean, Veracity, when we purchased them, we knew was a largely domestic business, but the need for collaboration, streamlining workflow and automation is a global problem or issue. So our start in expansion is in Asia Pac, specifically in Singapore, where we hired a leader out of the Big 4 to lead our digital practice there and he brought with him a small team. And we hope to do the same thing in Europe when the time is right. For Europe, we needed to get through project strength first though and stabilize that business and then we'll focus I think in fiscal 2022 on how do we add to the global platform for Veracity.
Josh Vogel: That's great. And I'm so sorry, I just want to sneak in one more quick one. Based on your , any other additional structuring type to Europe that's baked into those numbers?
Jenn Ryu: No, we're substantially complete with our restructuring in Europe and there are a couple of real estate locations that we're still working on, so we're there.
Josh Vogel: Okay, great. Well, my questions. It's great to see the increase in the business and looking forward to seeing a .
Jenn Ryu: Thank you, Josh.
Operator: Thank you. Our next question comes from Andre Childress with Baird. You may proceed with your question.
Andre Childress: This is Andre Childress calling in for Mark Marcon. Thank you for taking our questions. So my first question is on the HUGO implementation. I know you provided some detail that the New York tri-state area is going to be the first market that you're implementing it to. But what does the timeline look like beyond that, from the initial rollout to that dedicated market to the complete rollout to the all markets? Just walking through kind of what that roadmap looks like would be very helpful?
Kate Duchene: Sure. Hi, Andre. Nice to meet you. It's Kate. So we will start in the start of the fiscal year, fiscal '22, with our rollout in the tri-state area. That'll be a soft launch. And I imagine we'll continue to iterate the product a bit. Our plan for fiscal '22 is to be able to roll out fully in three major markets. We next intend to move to the Texas region and then move to the West Coast in Northern California. And from there we believe that the adoption will be more rapid across the country. So we'll cover those three markets in fiscal '22 and then move to accelerate in fiscal '23 across the domestic market.
Andre Childress: Okay. That is very helpful. And so within fiscal quarter three results and kind of looking forward, how much of a contribution did you guys see from assisting with kind of the spec business and kind of how much of that activity has been going on?
Tim Brackney: Yes. Andre, hi. It's Tim. To quantify that I think is a little - it's difficult for me to give you sort of a percentage of business. What I will tell you from - what I will tell you is that prior to this quarter, we were doing transaction support and IPO readiness more sort of in the traditional arena. And it feels like in this quarter, I think much like a lot of others the genie is out of the bottle on specs and so our pipeline is very full. And we expect that barring something happening from a macro perspective that we'll have more of these types of projects that we're working on in the Q4 probably in the Q1 as well.
Andre Childress: Great. And so looking forward, particularly like what you saw in March and going forward, can you dive into some details that you saw with the trend in North America and so like for example how performed since they really opened up, the tri-states region and California. Any detail there will be very helpful.
Tim Brackney: Okay. I think - Andre, I think you broke up a little bit. So let me just - I'll take you on sort of a quick tour of North America, let's start with tri-state, which I could hear you ask about. Tri-state got hit hard early with COVID and they've come out really swinging in the second half of the year. Their Q3 was very strong. I mean, they had year-over-year growth sequentially - excuse me, year-over-year growth - year-over-year growth and sequential, I should say. I think Texas had been having a very strong year. But they were hit by some of the inclement weather and other things that happened in this quarter. So, the Midwest and Southeast were probably the - are probably our slowest recoverers. But we've got some real signs of life there now when I look at sort of leading indicators. Midwest even with sort of manufacturing coming back. Detroit had a very good quarter. And then on the West Coast, the West Coast has been strong. I think when I look at their pipeline and I look at the trend line level and sort of top of the funnel and I think about the progression relative to deal size and velocity, we're expecting them to continue to have a strong fourth quarter and into Q1 - into the summer.
Andre Childress: And so just on that, just with some economies reopening, has that driven stronger pipeline activity, at least people reengaging in certain conversations and thinking about bringing certain projects back?
Tim Brackney: I mean, definitely, I mean it's sort of like a double-edged sword. So I mean - but the answer to that is yes. I'll get to the double-edged sword in a second. But just the idea of having some certainty around what has been very uncertain times, a lot of our clients, particularly the larger ones are moving more quickly relative to projects that were either shelved or paused or they sequence differently. What we see is that they are stacking their projects and trying to move them - move quickly on them. So the answer to that is yes. Relative to - it's not really relative, I would say, to and economy opening faster than the other, it's more about certainty in uncertain times. The double-edged sword piece I would just say is that I think there is a lot of people who feel - I mean we see a little bit of an exaggerated holiday and vacation effect because of people who have been cooked up for months at a time, who now also have that sense of optimism and want to utilize the opportunity to spend time with people that they haven't been able to spend time with before. So I feel bad calling that a double-edged sword, because that's a very positive thing for all of us. But it's a mild blending effect to the upside of the economy opening up again.
Andre Childress: Yes. That's very encouraging and great to hear. Thank you for answering the questions.
Operator: Our next question comes from Andrew Steinerman with JPMorgan. You may proceed with your question.
Andrew Steinerman: Two questions. One on days, one on SG&A. So, Jenn, just a quick one on days. the quarter, the third quarter just reported, were days different year-over-year? And then again for the fourth quarter, which we're in now, are days different year-over-year? Then my question about SG&A, obviously, thank you for guiding the fourth quarter with SG&A and overall. My question is as we move past the fourth quarter, is this a period of higher SG&A? I'm thinking about discretionary costs coming back and then of course the launch of HUGO.
Jenn Ryu: So with respect to days, Q2, I'll just talk about North America because that's what drives majority of our business. So in Q2 - I'm sorry, in Q3 we had 62 days - I'm sorry, 61 days versus Q4 we're expecting to have 65 days, business days.
Andrew Steinerman: Okay. And I asked year-over-year?
Jenn Ryu: And SG&A - yes. And with respect to SG&A, I mean I think beginning in FY '22 some of the SG&A favorability this year was really attributable to - expected to be $6 million to be attributable to the reduced travel cost and I expect that going forward in FY '22 as the economy and the world opens up, we would give back some of that savings. I would expect to get back maybe in the range of 50% of that savings that you're seeing in this fiscal year. And then with respect to HUGO too as we launch HUGO in fiscal '22, we will add additional SG&A in the next year just because - roughly about 75% of the cost today has been capitalized.
Andrew Steinerman: Right. And did you give days year-over-year? I think you just gave it for the current quarter. I meant, year-over-year.
Jenn Ryu: I'm sorry. Q3 of '20 is the 59 days.
Andrew Steinerman: And Q4 of '20?
Jenn Ryu: Q4 of '20 is 69.
Operator: Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Kate Duchene for any further remarks.
Kate Duchene: Thank you everyone for your interest in RGP and we look forward to talking to you again at the end of our fiscal year. Thanks very much.
Operator: Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
