Resources Connection, Inc. (RGP) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen thank you for standing by and welcome to the Resources Global Professionals First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. It's now pleasure to turn the floor over to Kate Duchene, Chief Legal Officer, Resources Connection. Ms. Duchene, the floor is yours.

Thank you, operator. Good afternoon, everyone, and thank you for participating today. Joining me on this call are Don Murray, our Executive Chairman; Tony Cherbak, our Chief Executive Officer; Tracy Stephens, our Chief Operating Officer; and Nate Franke, our Chief Financial Officer. During this call, we will be providing you with comments on our results for the first quarter of fiscal year 2014. By now, you should have a copy of today's press release. If you need a copy and are unable to access via our website, please call Patricia Marquez at (714) 430-6314, and she'll be happy to fax a copy to you. Before introducing Tony, I'd like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements. In other words, statements regarding future events or future financial performance of the company. We wish to caution you that such statements are just predictions, and actual events or results may differ materially. We refer you to our Form 10-K report for the year ended May 25, 2012, for a discussion of some of the risks, uncertainties and other factors, such as seasonal and economic conditions that may cause our business, results of operations and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call. I'll now turn the call over to Tony Cherbak.

Thanks, Kate. Good afternoon, and welcome to Resources first quarter conference call. I'm going to begin by giving you a brief overview of our first quarter operating results. Total revenue for the first quarter of fiscal 2014 was $131.7 million, a 3.8% decrease from the comparable quarter a year ago and a decrease of 6.1% from our fourth quarter revenue of $140.2 million. First quarter gross margin was 37.7%, representing a decrease of 130 basis points from the comparable quarter a year ago and a sequential decline of 120 basis points. The sequential decrease stems primarily from the impact of 2 national holidays in the U.S. during the quarter, higher-than-anticipated self-insured health care cost and a reduction in bill/pay spreads. During the first quarter, our SG&A cost was $41.6 million, a $500,000 decrease from the comparable quarter a year ago and $700,000 less than last quarter. In Q1, we generated adjusted EBITDA and cash flow from operations of $9.8 million and $5.3 million, respectively. For the quarter, our pretax income was $6.8 million. Our GAAP net income was $3.7 million or approximately $0.09 per share. Our GAAP net income reflects an effective tax rate of 46%, while our cash tax rate remains at approximately 42%, an impact of $0.01 a share. Nate will provide more detail on each of the items later in the call. During the first quarter, we were pleased to announce a 17% increase in our quarterly dividend to $0.07 per share. Now let's talk about revenue trends. As we reported in July, weekly revenues during the first 6 weeks of the first quarter totaled $60.7 million. During this 6-week period, non-holiday weekly revenues averaged $10.8 million. During the final 7 weeks of the quarter, average weekly revenues declined to 10.1% per week, slightly greater than the 5% decline we expected from summer vacations in Europe and the U.S. As Don discussed in last quarter's call, we knew that several large clients have begun the planning to start some larger-scale initiatives that would involve many of our consultants. Following Labor Day, we began to ramp up the deployment of our consultants on some of these engagements. During the churn weeks following Labor Day week, our weekly revenue averaged $11.2 million, up 7.7% from the non-holiday weekly average during the first quarter of 1.8% below the comparable 2 weeks last year. We were encouraged by the recent sequential improvement in weekly revenue level that are hopeful to see further traction as we go forward throughout the balance of the year. With that I will now turn the call over to Nate for a detailed review of our financial results.

Thanks, Tony. As mentioned, revenues for the quarter totaled $131.7 million versus $136.9 million in the first quarter of fiscal 2013, a quarter-over-quarter decrease of 3.8% and a sequential decrease of 6.1%. As anticipated, our first quarter revenues were impacted by summer vacations both in the U.S. and Europe. On a constant currency basis, revenue decreased 3.7% quarter-over-quarter and sequentially by 6%. Now let's discuss revenues geographically. In the first quarter, revenues in the U.S. were $102.2 million, a decline of 2.5% quarter-over-quarter and 5.6% sequentially. For the first quarter, total revenues internationally were $29.5 million versus $32.1 million in the first quarter a year ago, a decrease of 8.1% quarter-over-quarter and 7.5% sequentially. International revenue accounted for approximately 22% of total revenues for the quarter compared to 23% last quarter. Europe's first quarter revenue decreased 6.3% quarter-over-quarter and 12.3% sequentially, while the Asia-Pacific region saw first quarter revenues decrease 7% quarter-over-quarter and increased 1.1% sequentially. On a constant currency basis, total international revenue decreased 7.5% quarter-over-quarter and 7.2% sequentially. On a quarter-over-quarter and sequential basis, the U.S. dollar was weaker against most currencies in Europe but stronger in Asia-Pacific. As a result, on a constant currency basis, Europe's revenue decline quarter-over-quarter would have been 10% and Asia-Pacific's increase would have been 2%. On a sequential basis, Europe's revenue decrease would have been 12.8% and Asia-Pacific's increase would have been 2.2%. Now let me discuss early revenue trends for the second quarter of fiscal 2014. Weekly revenues for the first 4 weeks of the second quarter totaled $42.4 million and were $10.4 million in the first week, $9.6 million during Labor Day week and $11.2 million in the following 2 weeks. As we closed out the summer vacation season, it is encouraging to see our weekly revenue trends exceeding non-holiday summer weekly levels. Given the most recent weekly run rates, both the remaining weeks of the second quarter and adjusting for certain local and international holidays, we would achieve second quarter revenues of approximately $142 million. This computation is purely mathematical and does not consider potential increases or decreases and weekly run rate over the balance of the quarter. Please note that Thanksgiving holidays will fall in our current quarter of this fiscal year. Now the gross margin. Gross margin for the first quarter was 37.7% versus 39% in the year-ago quarter and 38.9% in the fourth quarter of fiscal 2013. The sequential decline of 120 basis points was approximately 40 basis points more than we anticipated and resulted from higher anticipated health care cost and a decrease in bill/pay spreads. The quarter-over-quarter decrease of 130 basis points stems primarily from a decline in bill/pay spreads of 90 basis points and increased health care cost of 40 basis points. Excluding reimbursable expenses, our first quarter gross margin was 38.3%, which compares to 39.7% in the first quarter a year ago. The average bill rate for the quarter was approximately $126 compared to $128 in the fourth quarter and $126 in the year-ago quarter. The average pay rate for the first quarter was approximately $64, the same as in the fourth quarter, and $63 one year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. We would expect gross margin in the second quarter of fiscal 2014 to improve 60 to 70 basis points from first quarter's gross margin. For the first quarter, gross margin in the U.S. is 38.7% and our international gross margin was 34.4%. Now for headcount. For the first quarter, the average consultant FTE count was 2,173. This compares to 2,217 in the previous quarter and 2,270 in the year-ago quarter. Quarter end consultant headcount was 2,237 versus 2,204 a year ago. Total headcount of the company was 2,949 at quarter end. Selling, general and administrative expenses for the first quarter was $41.6 million or 31.6% of revenue, a $700,000 decrease from $42.3 million in the fourth quarter of fiscal 2013. SG&A was $42.1 million or 30.7% of revenue in the first quarter of fiscal 2013. We anticipate that SG&A expenses in the second quarter of fiscal 2014 will increase approximately $1 million from the first quarter level but remain relatively flat with a year ago. Stock compensation expense was $1.7 million or 1.3% of total revenue, similar to amounts recorded in the fourth quarter last year and $100,000 less than in the first quarter of fiscal 2013. We would anticipate quarterly stock compensation expense in the upcoming quarters to approximate the amount recorded in the first quarter. At the end of our first quarter, our office count remains 73, 47 domestic and 26 international. Related to other components of our financial statement. Depreciation and amortization was $1.4 million for the quarter compared to $1.5 million last quarter. We would expect depreciation and amortization expense for the upcoming quarters to approximate $1.4 million. Our adjusted EBITDA, or cash flow margin, which we define as EBITDA before stock compensation and contingent consideration adjustments, was 7.4% in the first quarter, a decrease from 9.6% a year ago and down from 9.9% in the fourth quarter of fiscal 2013. Our pretax income was $6.8 million for the quarter. During the first quarter, we reported a provision for income taxes of $3.1 million, representing an effective tax rate of 46%. Our effective tax rate during the quarter, benefited by a $350,000 or $0.01 per share reversal of accrual for international uncertain tax positions for which the statute of limitations have expired. Our effective tax rate is currently impacted by our inability to offset income and tax jurisdictions, in which we are profitable with losses in several tax jurisdictions, in which we are not. Our GAAP tax rate for each of the upcoming quarters is difficult to predict and could be volatile as the rate will be dependent on several factors, including the operating results of our U.S. and foreign locations, each of which are taxed or benefited at different statutory rates, and the offset of the tax benefit of foreign losses in certain locations by valuation allowances. On a cash basis, our tax rate was about 42%, and we expect that rate to continue over the upcoming quarters. In summary, our GAAP per share income was $0.09 during the first quarter. On a non-GAAP basis, using a cash tax rate of 42%, our per share income would have been $0.10 for the first quarter. Cash and investments at the end of the first quarter were $121.4 million, a $2.4 million increase from the end of fiscal 2013. The increase stems primarily from cash generated from operations of $5.3 million and stock purchases by employees of $5 million, partially offset by share repurchases and dividends, totaling approximately $6.6 million during the quarter. Capital expenditures were $1.4 million during the quarter. We purchased approximately 312,000 shares of our common stock during the first quarter at an aggregate cost of $4.2 million or $13.34 per share. Our current quarter authorization for the stock buyback program has approximately $68.4 million remaining. We will continue to return cash to shareholders through our dividend and share repurchases, while maintaining a balance between the capital requirements of growing our business and fiscal prudence. Our shares outstanding at the end of the first quarter were approximately 39.8 million. Receivables at quarter end were approximately $81.4 million compared to $84.2 million at the end of the fourth quarter. Days of revenue outstanding was approximately 55 days, the same as in the fourth quarter of fiscal 2013. Now I'd like to turn the call over to Don for some closing thoughts.

Thank you, Nate. As Tony mentioned, we are encouraged by the [indiscernible] Weekly run rates following the Labor Day holiday week. While the global economic environment is still unstable, we remain focused on revenue growth. During the past few weeks, we commenced several new engagements to [indiscernible] with new and long-term clients and our service capabilities and these include a major integration initiative for a large technology company, a litigation support project for a large law firm and regulatory compliance initiative for a multinational medical device manufacturer, a financial system transformation initiative for a global financial services company and assistance with contract [indiscernible] compliance. Keep in mind that a lot of these initiatives had a -- part of a long sales cycle [indiscernible]. While we believe that the main environment is improving and our clients remain focused on cost, tightly controlling project turn-arounds and budget. Well, I don't believe this client attribute will diminish over time. But as previously discussed in the previous -- and disclosed in the previous years, we have made significant investments through our G&A in new services such as Resources health care solutions and law -- and legal practices. And we are starting to experience growth in those areas. Our first health care solution was introduced just in June and so far, we have contracts for 7 installations. Based upon recent revenue run rates, our Asia-Pacific offices stabilized and should benefit in the second half of the fiscal year from one of the global projects previously mentioned, which we had just commenced the work on in the U.S.. our asset environment in Europe remains challenging as we find our Fortune 500 clients continually to reduce spend in the region. We remain focused on our efforts to increase our operating performance in Europe but maintain our ability to serve our multinational clients globally. So let me share some additional statistics which we believe respects the continuing health and strength of our core business. Client continuity remains outstanding. During our third[ph] quarter we served all of our top 50 clients for fiscal 2013 and 49 in 2012. In fiscal 2014, we have 221 clients [indiscernible] provide services exceeding $500,000 in fees on a run-rate basis, which is up slightly from 216 in 2013. Our top 50 clients represented 37.7% of total revenues while 50% of our revenues came from 89 clients. Our lower client volume is reflective of our client service approach and the quality of the work performed by our consultants. And our largest client for the quarter was approximately 1.8% of revenue. Through the first quarter, 92% of our top 50 clients have used more than 1 practice area and 74% of those top 50 clients have used 3 or more practice areas. So this practice area penetration reflects the diversity of relationships we have within our client's organization. That concludes our prepared remarks. We would be happy to answer your questions at this time.

[Operator Instructions] And our first question in queue will come from the line of Jeff Silber with BMO Capital Markets.

I wanted to focus first a bit on Europe. You're still seeing obviously some year-over-year decline given that your anniversary-ing pretty striking declines last year. Are there any pockets in Europe doing better or worse than others? If can you give us a little bit more color what's going on there, I'd appreciate it.

The U.K. is doing fairly well right now, Jeff. They're profitable, and they were up in terms of their revenues. Where we're struggling is still in France and in Norway, those markets are pretty tough. I would say in Netherlands, it's kind of bottomed out, they were up a couple of percent in terms of growth, and Sweden is doing okay. But that's kind of a summary of Europe.

And any specific vertical doing better or worse than others, both in Europe and the U.S.?

In the U.S. I would say that Information Management continues to be one of our big growth areas. It was up double digits for the quarter as was legal and human capital. It's really our A&F business that is a little bit soft.

Okay. Great. And then just one quick follow-up. You mentioned Thanksgiving this year is in the current quarter, the fiscal second year quarter. Can you remind us where it fell out last year?

Yes, certainly. Thanksgiving will fall in the third quarter. It fell in the second quarter last year.

Okay, my mistake. Thank you for clarifying that.

That's a great question to make sure that's clear.

Our next questioner in queue will come from the line of Andrew Steinerman with JPMorgan. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: I appreciate you doing the mathematical exercise at the 142 for the second quarter. When you look at that as a litmus test, in my view, that would be up sequentially, approximately average for a second quarter. Is that management's view? In other words, yes, the business is picking up sequentially. Yes, it feels more normal but it doesn't feel kind of above a normal seasonal lift. Second quarter always has a strong sequential.

Yes, Andrew, I would agree based on that mathematical computation that we see the business strengthening but obviously, the slope of the line isn't where we absolutely like it to be. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: Right. But when you look at in the history of the second quarter, I see that the business is being up high single digits sequentially. And so my question is that when you think about the 142, wouldn't you describe that as relatively kind of normal? And my second question is could you call out what [indiscernible] was doing?

Sure. like I said, we're not basing the end, I would say, in terms of that computation for the second quarter. Like I said, sequentially it is up, whether that's a seasonal impact, probably up a little bit above that, because at least on those 2 weeks, we're above the 5% impact that we typically have from vacation. But clearly, it's a step in the right direction, but it's not where we'd like to be. Sitrick Brincko was -- quarter-over-quarter, their business was actually down about 13%.

I'd just add, Andrew, that one of the things that we're encouraged is that we have a lot of these projects that are finally kicking in. And even going into the second quarter, we still got one that's probably one of the larger projects that really hasn't put any meaningful -- any meaningful amount of consultants out in the field but we know it's coming. So those are some of the things that we're encourage by, in addition to what Don mentioned about the first software deployments of police. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: Okay. And when you talk about larger project, what size projects just in general? Not asking to identify a specific project would be a larger projects and number of consultants?

Just -- I would just leave it at multiple consultants on one engagement.

[Operator Instructions] Our next questioner in the phone queue will come from the line of Mark Marcon with R.W. Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I'm wondering, can you talk a little bit about the pay bill spreads, particularly as it relates to the U.S. and how we should think about that going forward?

Mark, during the quarter, we had a little bit of compression. Some of that is a little of the mix with Sitrick Brincko. But my -- our sense is that with the guidance we gave on the gross margin with -- that should probably be relatively stable as we look forward and especially with some of these newer engagements starting up. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And I'm sorry, but it might me just my line but I didn't hear you all that well when you were going through the -- what was the specifics with regards to the gross margin?

[indiscernible] Obviously, in the bill/pay spread, we've seen the last couple of quarters a diminution in that. Some of that is mix from a specific Sitrick Brincko business being down, while that work tends to be at higher bill rates. I do believe that we believe that, that is somewhat the overall bill/pay spread is probably stabilized as we look out in the coming quarter, especially with some of these new engagements that Tony had mentioned that are just starting. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And so when you're saying stabilized, you mean stable on a sequential basis or stable on a year-over-year basis?

Well, the bill pay stabilized sequentially. If you look at the improvement in the gross margin, that is primarily coming from the lack of holidays, with Thanksgiving being out of the quarter. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. And so -- so the gross margin guidance for the coming quarter was for it to be up by how much?

Well, I think what we said is gross margin would improve by about 70 basis points, and the bulk of that is obviously coming from not having -- only having the single holiday. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Right. And so it's going to be up 70 bps relative to a year ago?

Sequential. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. And can you talk a little bit -- Don, I apologize, my connection is bad. Can you talk a little bit about the health care consulting projects that you have coming up? And if I heard you correctly, it was 7?

I think we discussed this in previous calls that we, over the last few years, have invested a substantial amount of money in a health care consulting group we joined almost 2 years ago. And they have developed specific software tools to help health care companies comply with all the new standards and laws, some of it caused by Obamacare, some of it caused by just the evolution in medical oversight. So the first package that we have, she has completed, I think[ph] is completed, we started to market in June, and she's already signed 7 contracts to install the package. And basically, our intention is that we will obtain consulting work to help install and maintain the package for the client as well as become an annuity type of revenue stream for us. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: So there's 2 revenue streams, one would be selling package and the second one will be maintaining it?

Well, one will be the annual cost, licensing cost for the package and maintaining the package, that's the one revenue stream. The second revenue stream will be consulting to help implement the package, and that revenue stream might be a onetime stream for each installation.

But there's also -- there also, Mark, would be some consulting around the fact that this is an incident reporting tool. Once an incident gets reported it then needs to be remediated and we would potentially be able to help the client around the remediation as well. And there's literally -- I don't want to give the right number because I don't know it off the top of my head, but there's literally dozens of potential hospitals lined up to try out the package also. So we anticipate this will be an increasing build revenue stream for us. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. And from your current sense of things, how much incrementally could it end up being? You've talked about this before, but you haven't talked about selling the packages like this before, if I recall correctly.

So we think this is again an ongoing growing business. In my mind there's nothing factual about this. In my mind, this health care certainly going to be a $100 million business over time as we add more packages. And once a medical system takes one of the packages and has a great experience with it, they'll be much more inclined to buy the next package to help them manage all these issues and risks. So we think it's a good investment for us and investment [indiscernible] G&A over the last 20 months without revenue, and now we're starting to see the beginning of growth of the revenue. But it's going to take time because they're going to keep selling these packets -- particularly one that we [indiscernible] to be, which is an incident reporting system, and then [indiscernible] starting to look at the next package that needs to be developed. So one of the goals is to have an annuity stream that will repeat itself year after year after year as we also sell into the same distribution system.

[Operator Instructions] And presenters, there appears to be no additional phone questions in the queue. I'd like to turn the program back over to Mr. Don Murray for any additional or closing remarks.

Well, just thank you for your continued support and interest in Resources, and we look forward to our next update for the second quarter of 2014.

Thank you, Sir. And again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may now all disconnect.