Resources Connection, Inc. (RGP) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Resources Global Professionals’ Q3 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Alice Washington., General Counsel of Resources Connections. Ma’am, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you, for participating today. Joining me on this call today are, Kate Duchene, our Chief Executive Officer and Herb Mueller, our Chief Financial Officer. During this call, we will be commenting on our results for the third quarter of 2017. By now, you should have a copy of today’s press release. If you need a copy and are unable to access the copy on our Web site, please call Patricia Marquez at 714-430-6314 and she will assist you. Before introducing Kate, I would like to remind you that we may make forward-looking statements during this call. Such statements regarding future events or future financial performance of the Company are just predictions and actual events or results may differ materially. Please see our Form 10-K report for the year-ended May 28, 2016 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 conditions to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during the call. I'll now turn the call over to Kate Duchene.

Thank you, Alice. Good afternoon, and welcome to Resource's third quarter conference call for fiscal year 2017. I will start the call with a few introductory remarks and we’ll then give a brief overview of our third quarter operating results. Next, I will outline the strategic initiatives we have launched to improve our profitability and revenue generation. I will close by reflecting on our RGP’s vision and the relevance of our business model in today's economy. I want to begin by noting that our 20th anniversary as a Company happens this month. We are very respectful of the strength of our core business and the exceptional client base we've built over these 20 years. It is a strong Company with great people; we've been profitable every quarter, but one; we have consistently created value for our shareholders. During our 16 years as a public company, we have returned over $645 million to our shareholders through our stock buyback and dividend program. We have a strong base of business and excellent client list and access to powerful decision makers in our clients. We will continue to build on these strengths. Currently, we are facing adverse revenue trends in the financial services and energy verticals. This is impactful because three of our larger geographic practices, Tristate, Chicago and Houston, are down. I will let Herb review the quarter in detail, but I want to acknowledge our performance against three key metrics now; our total revenues for the third quarter of fiscal 2017 were $143.8 million, which is down 2% compared to the third quarter a year ago; second, net income was $2.9 million or $0.09 per diluted share compared to $6 million or $0.16 per diluted share a year ago; third, SG&A was $45.3 million in the third quarter compared to $43.3 million in the third quarter a year ago. This financial performance reflects what we have experienced since the start of fiscal 2017. We have seen limited growth while making investments in our service capabilities for our clients. As a management team, we know we must break through these challenges and therefore we have three priority initiatives underway to help us improve performance. I will outline those activities individually now. First, we have announced a companywide plan to reduce our SG&A by approximately $7 million on an annualized basis. This cost reduction plan eliminates approximately 6.5% of management headcount. This initiative includes the closure of two offices, one in the United States and one in Europe and the elimination of some positions in our field offices and back office to better match the revenue levels of certain practices in our core business. In addition, we have taken $1.7 million annually out of our cost structure in the Pavisse business, beginning in the third quarter. We have right-sized the team developing this healthcare related asset and are starting to uncover some additional opportunities for this software product. In formulating the cost reduction plan, we carefully reviewed our client base, existing revenue and team size by market. We then identified where we had excess headcount, given practice size and market focus. We sought to make decisions that would balance our existing revenue, while also planning for the future state of our operating model. We know that we cannot ignore our infrastructure posture transformation, which I will discuss further in a moment. And this initiative is an important step for us in reinforcing our culture of responsibility and driving improved accountability. I want to pause here and acknowledge what a strong partner Herb has been for me and the Company in working through this plan. Herb brings excellent insight and judgment to the CFO role, having led one of our fastest growing offices prior to moving in to the corporate role. Herb has partnered with Tim O'Rourke, our Executive Vice President of Operational Excellence to immediately improve our leverage and efficiency. The initiative has been communicated within the Company and we will see the transition activities completed by the end of the fourth quarter. We will take a restructuring charge tied to this cost reduction plan in our fourth quarter results. We love to see the headcount reduction fully complete in the fourth quarter numbers. Herb will provide additional financial details related to our SG&A costs and actions later in the call. Our second priority initiative focus is on sales transformation. We are in the process of improving our sales culture and business development skills. Our foundation was built on our ability to provide high level professional services and counsel. And while we've been extremely well in the actual work, we have not kept pace with our skills in developing client opportunities and new business. We must improve the size of the funnel. During our January call, we shared our plans regarding the implementation of sales force with our global CRM tool. The project underway now is broader than just the technology implementation. Our sales transformation includes strategy, process, structure, computation plan design, management and technology. This initiative has been led by our new sales leader, Executive Vice President of Revenue, Tim Brackney who took on this role in late January 2017. Tim comes to the role having led some of our largest accounts and our Pacific Northwest region, including Silicon Valley, which has been a strong performing market for RGP. This is a new function in the executive team and one which help us move from primarily geographically focused client service delivery model to an operating model that will drive certain sales function centrally. This new model will drive the sales engine on an enterprise level to support and supplement the critical account development and management activities happening in the local market. This initiative will also enable us to engage with client targets more productively as different go-to-market channels will be focused on operating in targeted and relevant ways. This will also help us execute a more productive middle market strategy where we see opportunity for strong growth. The sales transformation effort is a multi-step process that we believe will take approximately 12 to 18 months to complete fully. We are building a rigorous sales culture. We will also be building a sales function that has focused roles, including sales operations and inside sales functions. We have engaged an independent consulting firm to assist us with this sales transformation effort. This firm has deep experience in working with companies to improve revenue drivers, especially portfolio companies owned by private equities where speed is essential. They began their work with us this month. The first four critical activities are; first, the completion of our sales process alignment and sales force implementation; second, the establishment of an enterprise wide business development function, team and clear responsibility; third, the establishment of a strategic client program dedicated to serving and listing revenue in our highest level clients who know and love our business model; and fourth, the evolution of our incentive compensation plans to prioritize growth as fundamental with clear accountabilities by role. As a result of this investment, we expect to see revenue upside by the second half of fiscal year '18. We will report on the results of this initiative as we progress. We are balancing rapid change with the need to optimize the core business. Our teams will not be overly distracted from delivering everyday for our clients as we work through these changes. As we mentioned earlier, we will progress this initiative in stages and report on results accordingly. Our third priority initiative is dedicated to building our integrated solutions capabilities with a central team and a standard deployment model. This will enable us to deliver offerings to our clients that are multi-disciplinary and bring improved structure tools, points of view and quality assurance. In the consulting business, there are traditionally been two primary buckets; thinkers or the strategy consultants and doers in the staffing and project execution space. We have always been in the doers bucket. Since inception, our value proposition has been to bring uniquely better talent to solve our client’s execution problems. That brand promise comes to life because we deliver experienced talents who have operated from both side of the desk, usually within the same industry and functional background. This model ensures that our project execution solves our client's problems with practical insights and wiser perspective at a faster pace with a flatter learning curve. We work with clients who have developed their strategy but lack the capacity and/or expertise to executive on their important projects alone. Project execution is our sweet spot. Given market dynamics, competition and technology disruption, what our clients want today is expanded and we need to response to their needs. Clients want us to bring accomplished talent that can translate strategy to successful execution and who are enabled by supporting programs, points of view, best practice knowledge, technology accelerators and tool kits. Increasingly, clients are requesting tools, templates and methodologies that can jumpstart their projects for success. So we won’t decelerate our value proposition as doers, but we will add a solution strategy as a market differentiator and revenue driver for certain offerings. Based upon this and what we are hearing from clients, we’ve established an executive team position to develop our integrated solutions practice in a careful way. Tracey Figurelli, our Executive Vice President, Integrated Solutions, is leading its effort. She too assumed the position in January 2017, having led our global information management practice for five years, achieving consisting growth in that practice area. Right now, our solutions work is focused on M&A transaction services and data solution, which includes data governance, data management, data security and privacy and data analytics. Both of these solutions initiatives have been driving strong double digit growth this fiscal year. She will also continue to build our change management services, which are increasingly in-demand in every change related project as more and more of our client base understands that you have to address the people side of transformation too. Our longer term strategy is to identify those projects in the field that can be developed into deeper solutions practices and distributed to more clients through our existing geographic channels, especially in the middle market. Before handing the call to Herb, I would like to share the one other executive team position that is new for the Company this fiscal year. Executive Vice President, Talent. Tanja Cebula jas assumed this role and will lead our talent transformation effort. Most recently, Tanja has redesigned our talent acquisition, bringing talent in from many well respected companies and competitors who will have a positive impact on our business. We designated talent with the C2C executive tables because it is so core to everything else we do. A human capital business must care about people, how to attract the best people, how to retain them and how best to match them to great client work. We also need to ensure we have a scalable platform to support where the business is headed. Tanja will start with an extensive review of our talent function as geographically deployed. We know that we can only deliver on our strategies if we attract and retain more than our fair share of great talent everywhere we operate. The talent marketplace is changing, and we have to change with it. We are excited about the possibilities of acquiring and mobilizing talent in new ways and with an aligned approach to support our reignited sales engine and our integrated solutions business. This approach will strengthen our ability to deliver on the circle of quality philosophy. Great talent is attracted by great clients and great projects. As we improve our offerings in our solutions business, the way in which we retain and mobilize our talent, will change reflexes. Tanja’s 20 years of experience with RGP, including 17 years in the field, well qualifies here to lead this critical role. To close this portion of my remarks, I just want to recap quickly our priority initiatives; number one, complete a cost reduction plan by the end of fiscal 2017 to take approximately $7 million out of our SG&A on an annualized basis; number two, continue and accelerate our sales transformation project to improve our revenue engine and the size of the funnel in all of segments of our business; and number three, build our integrated solutions practice to enhance our client offerings. In summary, as we celebrate our 20th anniversary, we are reigniting our fundamental vision as a Company, helping the world work differently. This is important to the critical elements of our business, our clients and our talent; clients want better solutions to accelerate project results; experienced talent wants to work in more liberating and empowering ways. Innovative companies are making strategic decisions to outsource the defined portion of their talent needs. They recognize that they don’t need to buy every specialized skill-set year-around via the permanent employee model. They are recognizing that a better work force planning model exists. They can lease that intellectual capital for when they need it and for how long they need it. We continue to educate the market on the benefits of the sharing economy as it relates to professional work and the agile work force. We are excited about the opportunities ahead as we engage in serious change to draw longer term value. I will now turn the call over to Herb for a review of our third quarter.

Thank you, Kate and good afternoon everyone. I'll start by giving detail on our fiscal third quarter financial results. Then we’ll discuss the trends we're seeing in Q4. I will also give further detail on the financial impact to the strategic initial line a little earlier. Starting with an overview of our third quarter results, total revenue for the third quarter of fiscal 2017 was $143.8 million, a 2% decrease from the comparable quarter a year ago. Sequentially, revenue was down 2.5%. On a constant currency basis, revenue decreased 1.2% quarter-over-quarter and decreased 1.8% sequentially. Our third quarter gross margin was 36.3%, representing a 110 basis point decrease from the prior year. SG&A expenses were $45.4 million compared to $43.3 million in the third fiscal quarter a year ago. Our net income was $2.9 million or $0.09 per diluted share. In Q3, adjusted EBITDA was $8.4 million or 5.8% of revenue compared to $13.1 million or 8.9% of revenue in the year ago quarter. First -- so next at revenue trends, as we reported in January, weekly revenues during the first five weeks of the third quarter totaled $51.9 million. During this five-week period, weekly revenues averaged $10.4 million. However, two of those weeks were impacted by the holiday season, including Christmas and New Years. Absent those weeks, our average revenue was $12 million. During the final eight weeks of the quarter, average weekly revenues were $11.5 million per week, including Chinese New Years and President’s Day. Without those impacts, the average was $11.9 million. Now, let me discuss some of the highlights of our revenues geographically. As Kate mentioned, we’ve seen some improving trends across our international businesses with revenues in Europe and Asia Pacific increasing during the quarter. However, our U.S. performance continues to be below our expectations through the softness in financial services and energy areas. For the third quarter, revenues in the U.S. were $116.9 million, a decrease of 3.4% quarter-over-quarter and a decrease of 0.6% sequentially. Our total revenues were moderately impacted by the seasonal impact of Christmas, New Year and Chinese New Year. For the third quarter, total revenues, internationally, were $26.9 million versus $25.8 million in the third quarter a year ago, an increase of 4.5% quarter-over-quarter, 8.8% constant currency and a decrease of 10% sequentially, 6.7% constant currency. International revenue accounted for approximately 18.7% of total revenues for the quarter compared to 20.3% in the second quarter. Europe’s third quarter increased 4.7% quarter-over-quarter and decreased 9.8% sequentially, which is a normal result of the holiday season. While the Asia-Pacific region saw third quarter revenues increase 5% quarter-over-quarter and decrease 10.6% sequentially, again, as a result of holidays. On a constant currency basis, total international revenue increased 4.5% quarter-over-quarter and decreased 10% sequentially. On a quarter-over-quarter basis, the U.S. dollar was stronger against most currencies in Europe and Asia Pacific and countries where we do business. As a result, on a constant currency basis, Europe’s revenue would have increased quarter-over-quarter by 11.1% and Asia-Pacific’s revenue would have been up 5.5%. Turning to the early revenue trends for the fourth quarter of fiscal 2017, weekly revenues continue to trend 2% to 3% below a year ago. The actual numbers are misleading as a result of Easter following in the first five weeks last year but not this year. We continue to face challenges in the financial services area and in the energy sector. While interest rates and restrictions on proprietary trading, among other things, continue to pressure financial services. The potential of deregulation is also encouraging and could provide a significant opportunity for our financial services business. We continue to make strong gains in both revenue recognition and lease accounting, showing 15% to 20% every quarter. However, it's still less than 5% of our overall business. Turning to gross margins, gross margin for the third quarter was 36.3% versus 37.4% a year ago quarter and 38.3% in the second quarter of fiscal 2017. The quarter-over-quarter decrease of 110 basis points results from reduced bill pay spreads and an increase in medical cost of our self insured program. The sequential decrease of 200 basis points results from higher employer payroll taxes at the beginning of the calendar year and medical costs. Excluding reimbursable expenses, our third quarter gross margin was 37%, which compares to 38.1% in the third quarter a year ago. For the third quarter, our gross margin in U.S. was 36.9% and our international gross margin was 33.8%. The average bill rate for the quarter was approximately $118, the same as the second quarter and compared to $121 in the year ago quarter. The average pay rate for the third quarter was approximately $59, the same as the second quarter and compared to $60 one year ago. As a reminder, these hourly rates are derived based upon prevailing exchange rates during each given period. About one third of the bill rate and pay rate changes from the year ago are influenced by currency impact. Now, to headcount. For the third quarter, the average consultant FTE count was 2,503. This compares to 2,530 in previous quarter and 2,480 in the year ago quarter. Quarter end consultant headcount was 2,611 versus 2,584 a year ago. The total headcount of the Company was 3,394 at quarter end. We expect management headcount to reduce from the fourth quarter as we remove some positions in our field offices and back offices in line with our cost reduction initiatives. Now, looking at other components of our third quarter financial results. Selling, general and administrative expenses were $45.4 million or 31.5% of revenue. This compares to SG&A of $43.3 million or 29.5% of revenue in the third quarter of fiscal 2016. The increase relates to the additional investments we made in business development professionals and management consultants and potential growth markets, as well as in Salesforce.com. We have made these investments in dedicated business development professionals and subject matter experts as we focus on building our M&A transaction services, change management and data solution teams. The investment is delivering results. We're up 20% year-to-date in the solution areas over the first three quarters in fiscal year ‘16. Stock compensation expense was $1.5 million or 1% of total revenue. We would anticipate quarterly stock compensation expense in the upcoming quarters to approximate $1.5 million. At the end of the third quarter, our office count was 67, 44 domestic and 23 international. As Kate, mentioned we’re closing two offices in the fourth quarter of fiscal 2017, one in the U.S. and one in Europe, while adding one office in another location in Europe, which is already up and running that we've been servicing in temporary office space. Related to other components of our financial statements, depreciation was $900,000 for the quarter, up slightly from the second quarter as a result of office relocations. We would expect depreciation expense to approximate this amount for the next couple of quarters. Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation, was 5.8% in the third quarter, down from 8.9% a year ago and down from 8.3% in the second quarter of fiscal 2017. This was a result of the factors mentioned above, lower gross margins and higher SG&A. Our pre-tax income was $5.6 million in the third quarter. During the quarter, we recorded a provision for income taxes of $2.7 million, representing an effective tax rate of almost 49%. 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 next couple of quarters. For the fourth quarter of fiscal 2017, we anticipate a statutory tax rate of approximately 46%. Our effective tax rate is impacted by our current inability to offset income and tax jurisdictions in which we're profitable with losses in several tax jurisdictions in which we're not profitable. Finally, our GAAP net income was $2.9 million or $0.09 per share during the quarter. Now, let me turn to our balance sheet. Cash investments at the end of the third quarter were $44.6 million, a $14 million decrease from the end of the second quarter of fiscal 2017. The decrease stems primarily from repayment of $10 million on the credit facility. In addition, cash used in operations was $1.2 million in the quarter. Additional share repurchases and dividends during the quarter totaled approximately $10.2 million, offset in part by stock purchases by employees of $3.8 million. Capital expenditures were $1.7 million during the quarter, net of landlord reimbursements. We expect that to be in the $1.5 million range in Q4. During the third quarter, we repurchased about 400,000 shares of our common stock at an aggregate cost of $6.9 million or $17.31 per share. Our stock buyback program has approximately $125.1 million remaining. We will continue to return cash to shareholders through our quarterly dividend, while balancing debt repayment, the capital requirements of growing our business organically and inorganically and fiscal prudence. Our shares outstanding at the end of the third quarter were approximately $29.6 million. Receivables at quarter end were approximately $96.9 million compared to $97 million at the end of the second quarter. Days of revenue outstanding were approximately 61 days compared to 60 days at the end of the second quarter of fiscal 2017. Now, turning to the financial impact of the strategic initiatives we announced today. As Kate outlined, we have three priority initiatives; to reduce cost; enhance our revenue; and improve our operating model. On cost reduction, we expect the transition activities to incur a restructuring charge of approximately $2 million to $2.5 million, which will be fully reflected in our fourth quarter numbers. This includes severance costs as well as lease costs that we do not expect to recover due to closing offices. On revenue enhancement, the initiatives we have outlined will put us in a stronger position, going forward. Our SG&A will reflect our spent on implementing Salesforce.com and costs associated with hiring independent consulting firm. We are offsetting these costs by reducing our marketing spent during the year. As Kate outlined, there're multi-step changes, so there're maybe various costs coming through at different times. We're making significant changes to the business, and there may be a transition period, we believe we'll see real benefits to our operational and financial performance. We expect to see revenue upside and cost savings begin to have positive impact on our numbers in fiscal year '18. At this point, I'd like to turn the call back over to Kate for some closing comments.

Thank you, Herb. As set forth in my opening remarks, we are not sitting still. We've embarked on a number of important initiatives that we believe will make the Company more productive and drive more profitable growth in the future. We are extremely focused on driving growth and working hard to accelerate the return on investments we are making in the sales and solutions space. Before opening the call to questions, I will review as is customary, our client continuity statistics. Client continuity remains outstanding. During our third quarter, we served all of our top 50 clients from fiscal 2016, and 48 of the 50 from 2015. In fiscal 2017, we have 253 clients for whom we provide services exceeding $500,000 on a run rate basis and that's up from 239 through the third quarter of fiscal 2016. In addition, our top 50 clients represented 37.3% of total revenue, while 50% of our revenues came from 97 clients. Our largest client for the quarter was approximately 2.2% of revenues. During the third quarter, 94% of our top 50 clients have used more than one practice area and 80% of the top 50 clients have used three or more practice areas. This practice area penetration reflects the diversity of relationships we have within our client organization, and supports the opportunity for growth in other significant clients. As discussed earlier, we believe an enterprise wide aligned sales process and global sales tool and team, will help us improve such results going forward. In closing, as I mentioned on the last call, we are very pleased by the revenue trends related to our key solutions practices; technical accounting, M&A transaction services and data solutions; all of the key initiatives of strong double-digit growth sequentially and compared to prior year; the initiatives are key elements of our strategic plan and priorities for our focus in the near term. That concludes our prepared remarks, and we're happy to answer any questions at this time.

[Operator Instructions] And our first question comes from Kevin McVeigh from Deutsche Bank. Your line is now open.

I wonder if you could just, in terms of the strategic actions you've taken, just wanted to understand, because we thought of Resources as kind of supplemental staff as opposed to doing the implementations and things like that. So are you doing more of a subscripted model and if you're kind of take the lead on the implementations, does that change the type of risk you're willing to incur? And as a result of that do you need to change insurance across the business and things like that? That was my first question.

I think that's a good question Kevin and thank you for that. So, we are changing the business a little bit, but -- and going deeper in some solutions practices where it make sense, both to follow what our clients are asking for from us and also to follow the spending trends in our clients. So, let's talk about data solutions for a minute. The reason we’re so deep in data solutions is because everything tells you that companies are obsessed with moving into the digital world. That’s an opportunity for our classic project support activities, but certain clients, and I think more and more in the middle market, are asking us for some of the strategy and point of view works too. So we can bring a fuller complement of solutions work to that set of clients. And that’s the group of clients that have been largely ignored by our larger competitors. So we’re excited about the opportunities there. We have been careful and certainly working with our general counsel to look at how we contract with these clients and that we appropriately allocate the risk model, especially for the price point we’re charging for these services. And we’ve also been very careful to make sure that our insurance products cover how and where our business is moving.

And I would add that still the very powerful majority of those divisions are still tied to material base. So we will, in some cases had to fix the engagements. But traditionally, it's still been time and materials.

And then in terms of the office closures, I mean -- can you give us a little more context in the Tri-State Chicago and Houston, Tri-State wasn’t one of those three. But are you scaling back those offices just given -- I‘m surprised that the continued weakness given oil has been firm and financials -- the market still is a little bit better. Is there anything or is it just kind of the type of services that were been offered and that’s part of the reason for the kind of part of the strategic shift, or just any context on, again the office closures and then where they kind of reset to smaller scale? And how will those practices -- how do they sit today in terms of percentage of revenue?

So let me uncouple your question a little bit. So, first of all, the office closures were in smaller markets. And I want to be clear that while we’re closing our geographic office, we’re not stopping serving those clients; they’re really more ancillary markets that can served by offices in close geographic proximity, and it's not one of the big tree that I talked about, Tri-State, Chicago or Houston. I think the challenge with those three is that in those markets we had a couple of really large, very deep clients that, for various reasons, stopped spending with consultants. And weren’t the only firm hit, but that can leave a big revenue delta that you have to pick up in other ways. Tri-State, for example in financial services, I don’t think we moved quickly enough into the compliance space. Now, we’re moving very quickly into the data space where we’re seeing a lot of those clients and institution spend money; it's one of the reasons that’s driving that solutions trend for us. So, it's a combination, there is just not one easy answer. And I can tell you, we’re very dedicated to those practices. Those geographies are very important to us. We have outstanding clients in those areas, and we’re making changes. So, we’ve either made some leadership changes or some structure changes in all of those practices in order to drive different results.

And then, if I could one more. Herb, are you comfortable providing any type of range on revenue, because obviously Q4 is always a big quarter. Is there any way to just think about, just directionally, range of revenue we can think about just given you know there is a fair amount of strategic initiatives and you know kind of things going on? Just to kind of help from a modeling perspective.

I think as I said in my comments, we continue -- we’re trending about 2% to 3% below last year that’s what we are seeing in this quarter. And I think that’s going to be a fair range, so things are dynamic. One of the fascinating things that we have in this business, and I had talked three months ago about where we’re seeing some improvements, and we still are. I want to point out that in the past two weeks we’ve seen office record revenue over the history of our Company in three different offices; one in the southeast; one is central geography; and one in the southwest. And in all of these, these are places where we’ve undergone management changes and procedural changes that are paying off. And that’s we’re excited. We’re seeing where we’ve made some important moves in several markets that it's making a difference, and they continue do that across the Board, is going to be really key. But in all of those, it takes time to work through those.

And our next question comes from Andrew Steinerman from J. P. Morgan. Your line is now open.

I wanted to jump further into that question of, are other consultants getting -- expected here in terms of those verticals that you called out. When you think about the big four accounting firms, don’t you think that there continue to grow quickly. I know we always hear their revenue growth once a year. But don’t you think they’d be -- and last we heard they were growing quickly. Don’t you think the big four accounting firms are growing even though they are exposed to banking and energy also?

I think they are. Andrew, I think that’s there. I think their brands are much older and much more powerful, and may have a much larger partner and employee footprint. So they can whether some of these storms, probably easier than we can. But I think the premise of your question is accurate.

Then my other question is, as you get more into the advice business, do you feel like the average number of resources professionals on assignment at a typical client will go up?

Yes, I think that that will happen. I think there are a couple of beneficial things that will happen in our business that will drive long term value for our shareholders; number one, these project team should get bigger; number two, our pricing position with these clients, because we’re delivering higher value work and bringing stock leadership to the work, should remain higher. So we won’t be and subject to some of the commoditization pressures we’ve seen or the BMF pressures we’ve seen in some of our larger clients. So, yes I think both of those points are strong ones Andrew that we take into consideration when we’re setting the future strategy for the business.

And I’d add that one of the key things that we're working on, and especially our larger strategic accounts, is expanding our sales across our service lines. Where, in some cases, we’ve typically been strong in ANF, and that’s been our focus. We've seen great opportunity to bridge over to information management, supply chain. And then in addition to that, having a more global structure, especially in the United States where we can come in and help these very large clients in their remote offices. So we’ve made a conscious effort to come in and drive a leadership by account. And which has also helped us, as I mentioned, the two to three offices that just set record highs were the benefit of that strategy through Fortune 100 Company. We’ve expanded our relationship and drove results in different market. So there is really I think a lot of opportunity for us there to better leverage and elevate the relationships we have with our large clients.

Last question, Herb, again it's about the gross margin and the drop of pricing pressure. Is there actually placing pressure in the marketplace for high end F&A professionals, or is it more that resources has been less disciplined on price as you're trying to get revenues up, you’re kind willing to concede?

The pressures on the low end of the business with the large companies putting in BMF systems, and really pressing that which is again part of our movement towards the higher end; also, what you have on our overall pricing, the impact of the growth that we have in Asia is those resources are lower price point; and then the map that’s just driving our overall business down, but when it come down, I don’t have it right in front of me right now. But the U.S. is solid there. But we are seeing it on the bottom end. What we have is a great value play on those higher services is where we become really attractive where we're competing against the big four versus some of the lower level staffing firms on the bottom end.

[Operator Instructions] And our next question comes from Mark Marcon from Robert W. Baird. Your line is now open.

First, just wanted to understand a little more about the demand environment; outside of the third big offices that you mentioned in the U.S., to what extent, and it sounds like may be some of the smaller offices that are growing, some client specific initiatives. But just from a broad perspective, ex-energy ex-financial services, do you think the economy is better or worse off from a client demand perspective in the U. S.?

I think it’s a little bit better. Right now, we're optimistic. The activity levels are very high. The discussions that we're having, especially in the middle market, we're seeing a lot of potential there as some of the CFOs have adjusted off their project plans and are getting into discussions. There’s still, I’d say optimism, but cautious optimism.

Yes, I would echo that. I would also say that one of the reasons we're very bullish about building a true business development function in the Company is that those folks are the kind of professionals that we’ll call on any type of business leader. So while the historic foundation of RGP has been a lot of finance and accounting professionals who are very comfortable calling in those functional areas in a client, our business development folks are trained and educated to follow the money. And in an improving economy that can have a much more positive impact in our business, and that's why, Mark, we're very excited about adding this element to our management team.

And then can you talk a little bit more about two areas where you’re seeing growth, specifically if we take a look at rev/rec and lease accounting. It seems like we should, particularly on rev/rec, should start picking-in in a more material way. What's the sense, just from a timing perspective in terms of getting in people who are get it implemented?

We're encouraged by I mentioned that we've got 20% sequential quarter-over-quarter growth. So year-over-year for the first three quarters we're up in the 75% to 80% range, so we're certainly doing better. It's not as big of a number as we would like. The proposal activity is significantly higher. I report on some of those numbers last quarter. We're seeing -- continuing to see the interest is there. But we're also seeing two things happen as; one is, in some cases it's been a substitute for other spending. They come in and they realign their outsize spend towards that and then still a lot of companies trying to do it internally, but it's starting to blow up. So I still -- personally, I'm optimistic that that can be a much bigger chunk, it's just move slower than we would have wanted.

And it's currently between rev/rec and lease accounting that's the 5% of the business now?

It's a little bit of other than that, yes, just a little bit under that. And the majority of that's rev/rec lease accounting is starting to kick in, but I'd say 80% of it roughly is on the rev/rec side.

And then with regards to the solutions, how big is that right now?

That is almost about 10% of our business and growing. And we’re excited Tracey Figurelli has done a phenomenal job equipping that, that’s where some of the investment in headcount was over the past year as we brought in the subject matter experts to support that. And we're very excited about the opportunity there.

Then when we think about the flow-through in terms of initiative number one relative to what manned up being absorbed by initiatives two and three. How do we think about the net increase or I mean reduction with regards to annualized spend?

Yes, it's going to vary over the quarters as we have this initial time period. We obviously have the Salesforce.com ongoing license cost, which is under million dollars a year. You've got the consulting related to the implementation that the bulk of that spend will be complete by about half way through Q1 of FY '18. But then you’ve got the additional initiative that we’ve started-on on the sales; planning that is going to probably be between $1.5 million and $2 million. So you’ve got some -- and that will roll out over roughly a 12-month period starting now. And then you may have different phases; other little things that will come and go during that as we see opportunities. But those are the big buckets.

I mean, do you have a sense with regards to like on -- if we were to hold revenue constant and to implement these initiatives, on an annualized basis where the SG&A would end up coming out if we were just to assume constant run rate, obviously with seasonal adjustments?

At this point, that's about as much as I'm going to say on it.

I will say, Mark, we're going to be very careful about spend. I believe we need to invest in certain activities, which we've laid out to make the Company stronger in the future. And I feel very optimistic and very strong and confident about that. But at the same time, and I told the team here, expect me to say no most of the time when you come to me with headcount, because we got to be very careful. We have to make the right investments to make it stronger, and we have to be very careful. So I think, Herb, he doesn't want to overpromise and under-deliver, none of us do. We can tell you, we're going to be extremely cautious. But we also understand that we have to be building this firm for long term value, and we're putting some new strategies in place to do that. We're listening more and more aggressively to what our clients say they want from us. We had a client the other day that said why don't we spend more money with you; this is a huge financial services client, and believe me we're going to solve that question. But what that tells me as the leader of this organization is that our clients that know us, love us. And so we have to listen more to them and be providing what they want to buy, because we really have a unique value proposition in how we serve our clients in the project space; and in particular, how we are very committed to the knowledge transfer back into their environment, so clients are left better off than when we started. That's a pretty remarkable statement and that's a brand promise that we want to make in all of our clients.

But I do want to come back to just understand I mean should we anticipate that there will be some -- of that $7.5 million will at least half of that flow through to the bottom, if we assume revenue stays flattish or…

Yes, I think that's definitely a fair assumption. So, my only hesitancy, Mark is as we work through our sales plans and we're working through the new strategy, try a new side if we have other short term investments that could add that or potentially even some reduction as we find more efficient ways to do, because that's what we're trying to accomplish is are both of those. But we may come into some areas where we realize we've got a shortage of the right talent. So I'll have better clarity on that as we get through probably the next three or four months as we further develop our plans.

And then can you just give some color with regards to the change in the incentive comp in terms of the structure there, because I think that's really important. And then if you have any guidance to as we think about the current quarter in terms of gross margin, SG&A that would be appreciated.

I think on the incentive comp, great question. The way I'll describe that right now is, currently we had a linear line that; you do a little bit better; you make a little bit more; you do a little bit worse; you make a little bit less, on the incentive comp. We're going to be doing more of an S-curve, so it will be a more dramatic follow up as markets -- people start generating double-digit growth, they’re going to be rewarded. At the same time if they're not growing then there's going to be a drop in compensation. So there's going to be more risk but -- and we're really excited about that. We're working through the final phases, so I don't have the exact definition of that. But this is going to impact all levels of the organization.

Then on the gross margin and SG&A for the current quarter…

Gross margin, right now, we expect an uptick there, I'd say in that 38%, 38.5% range. And SG&A, I think we're going to be somewhere in that $45 million to $45.5 million. And then plus on top of that though you still going to have the restructuring charge. And then you'll start seeing the benefit of these reductions and we'll be wrapping up with the consulting spend on the Salesforce.com probably see a little better impact on Q1.

And then I was wondering, question for Kate. What's the communication strategy? What's been communicated to a leadership in terms of various offices so far? And what's the receptivity then to the extent that the message has been fully absorbed?

Thank you, because changed management, it's important to us, it's important to our clients. So part of my taking over the role, I wanted to have a more dedicated communication plan, not only with the management team but with our consultants. And I think we're doing that with the number of different vehicles. We’ve started to roll out this strategy and refine the strategy and change is hard for people, but I think they're very receptive. And we will have a global management meeting in early May where we'll all be together and confirming our commitment to the strategy and moving the Company forward.

And at this time I'm showing no further questions. I would now like to turn the call back over to Kate Duchene for any closing remarks.

Thank you, Operator. And thank you, everyone for listening into our third quarter report. We thank you for your continued support and interest in Resources, and we'll look forward to updating you at the end of our fiscal year in July. Thanks again.