Good afternoon, ladies and gentlemen, and welcome to the Resources Connection Incorporated 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. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to your host for today's call, Ms. Alice Washington, General Counsel of Resources Connection. Ms. Washington, you may now begin.

Thank you, Operator. Good afternoon, everyone, and thank you for participating on this call. Joining me here today are Kate Duchene, our Chief Executive Officer; Tim Brackney, our Chief Operating Officer; and Jennifer Ryu, our Interim Chief Financial officer. During this call, we will be commenting on our results for the second quarter ended November 23, 2019. By now, you should have a copy of today's press release. If you need a copy and are unable to access it on our website, please call Shannon McPhee at (714) 430-6363. During this call, we may make forward-looking statements regarding future events or future financial performance of the Company. Such statements are predictions and actual events or results may differ materially. Please see our report on the Form 10-K for the year ended May 25, 2019 for a discussion of risks, uncertainties and other factors such as seasonal and economic conditions, such factors 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 this call. I'll now turn the call over to our CEO, Kate Duchene.

Thanks, Alice. Good afternoon, and welcome to RGP's 2020 second quarter conference call. Happy New Year everyone. I will start with a brief overview of our operating results for the second quarter. Second, I will update you on our progress to become a more digital business both in how we serve our client base and how we operate. Third, I will discuss certain macro trends we believe will be beneficial to our business in the second half of this fiscal year and beyond and fourth, I will preview a project we are initiating in Q3 to optimize our core operations and create more business agility. Our total revenues for the second quarter of fiscal 2020 were $184.5 million, which represents a slight decrease of about 2% over the second quarter a year ago. The sequential increase in revenue was 7.1%. The increase in revenue came from North America and Europe, aided by the addition of Veracity, the digital transformation firm we acquired in late July. Our Asia-Pacific revenue is down slightly which is unusual in the second quarter, but mainly because of two different week long holiday periods during the quarter in our largest markets. One holiday week was in China to celebrate the 70th anniversary of the People’s Republic and the other holiday week occurred in Japan to honor the new Emperor’s reigns. Without those significant holiday events, Asia-Pacific would have grown in Q2. We were also pleased by the improvement in gross margin to 40.3% in the quarter. This increase was led in North America by higher bill rates and higher value mix of business. Finally, SG&A was below plan as we’ve been working to trim cost to deliver more profit. We achieved $22.7 million in adjusted EBITDA or 12.3% of revenue, compared to $20 million or 10.6%…

Thank you, Kate, and happy New Year everyone. I will highlight trends and initiatives that directly impacted our results from operations through the second quarter, provide an update on our fiscal 2020 operational priorities and discuss early trends in the third quarter. We saw increased velocity in pipeline throughout the second quarter and into the first few weeks of the third quarter. Despite some client uncertainty posted by a lack of clarity in the global economic environment, we have working very hard to control our own performance intelligently increasing activity levels, building pipelines and converting leads to win. As I mentioned last quarter, we believe there is continued opportunity for upward momentum as many clients and targets are engaging in crucial projects and transformation efforts. Transformation activities in an economic environment favoring agile solutioning and value, combined with a clear market shift towards gig-oriented employment model is the ideal environment for our business to thrive. We continue to make positive strides in authorizing our core business platforms with a key focus on sales productivity, cost containment, delivery effectiveness and the efficient matching of supply and demand. I will briefly touch on each of these key operational objectives. While global revenue decreased approximately 2% from the prior year quarter due to declines in North America and Europe, offset by an increase in Asia-Pac and revenue from Veracity, we did see nice productivity gains in terms of outreach and meetings and a significant increase in total pipeline when compared to the prior year quarter. Additionally, we saw a 140 basis point increase in gross margins for Q2 fiscal 2019 due to a better bill pay ratio reflective of ongoing pricing initiative and governance, as well as the timing of holidays. The U.S. business margin gains flowed by a nearly 2% increase in…

Thank you, Tim, and good afternoon everyone. I will start by giving detail on our second fiscal quarter financial results and will then discuss the trends we are seeing in the third quarter of fiscal 2020 starting with an overview of our second quarter results of our second quarter results. Total revenues for the second quarter of fiscal 2020 was $184.5 million, a 2.3% decrease from the comparable quarter as year ago and a 7.1% increase sequentially. On a constant currency basis, revenue decreased 1.9% year-over-year and increased 7.3% sequentially. Excluding the impact of the acquisition and divestiture that took place in fiscal 2020, total revenue for the second quarter was $178.4 million compared to $184.8 million a year ago representing a 3.4% decrease or a 3.1% decrease on a constant currency basis. Our second quarter gross margin was 40.3%, up 100 basis points from the second quarter of fiscal 2019 and up 110 basis points sequentially. SG&A expenses for the quarter were $53.8 million or 29.1% of revenue, compared to $55 million also 29.1% of revenue last year. Despite lower year-over-year revenue, our net income for the second quarter was $12.2 million or $0.38 per diluted share, up from $10.6 million or $0.33 per diluted share in the prior year quarter. In Q2, adjusted EBITDA, which we define as EBITDA before stock compensation and contingent consideration adjustments was $22.7 million or 12.3% of revenue, up from $20 million or 10.6% of revenue in the prior year quarter. Now let me provide some color around our second quarter revenues geographically. Our North America revenue, excluding Veracity decreased 4.7% year-over-year and increased 5.5% sequentially. Veracity contributed $5.8 million of revenue in the second quarter. Comparing to the prior year, the decline in North America’s organic revenue reflects the impact of lease…

Thank you, Jen. Looking ahead, the second half of the fiscal year is strengthening. While Q3 will be impacted by the holiday season, both number of holidays and the timing during mid-week, we like the trend we are seeing in non-holiday weeks during the first month of the quarter. We see strong interest coming from RGP's client base for Veracity services, and our pipeline overall is much improved year-over-year. Before turning to any questions, as well we do our client continuity statistics for Q2 in fiscal 2020. Client continuity remained strong. During our second quarter, we served 49 of our top 50 clients from fiscal 2019, and 48 of the top 50 from 2018. In the quarter, we had 294 clients for whom we provide services at a runrate exceeding $500,000 in fees, and that's up from 281 in fiscal 2019. In addition, our top 50 clients for the quarter represented 39% of total revenues, while 50% of our revenues came from 93 clients. Our largest client for the quarter was approximately 3.4% of revenue. At the end of the second quarter, 86% of our top 50 clients have used more than one type of solution category. This penetration reflects the diversity of relationships we have within our client organizations, and reinforces the opportunity for growth that we continue to execute, improved account planning, and penetration. That concludes our prepared remarks and we are now happy to answer any questions.

[Operator Instructions] Our first question comes from the line of Andrew Steinerman of JP Morgan. Your line is open.

Hi team. This might be a kind of a bold question here. But I am listening to the various digital and strategic initiatives going on at Resources, and I surely understand the puts and takes in the revenues currently. I just wanted to know what level of organic revenue growth Resources is targeting, kind of over the medium-term?

Andrew, that is a bold question. As you know, because our revenue is cyclical, we have ups and downs. As I look at our revenue year-over-year in particular, you can definitely see the ending of the lease accounting work that we delivered with the compliance date of last year. We are targeting that mid-single digits, I think is the reality of it. But keep in mind, we've had some exit activities in Europe. We are going to continue to work actively at our geographic footprint. So, at the end of the day, we can deliver better profitability in the business and when you take actions like that, they are a bit disruptive.

That's fair. And could you mention just how significant the lease accounting in the U.S. is? I definitely realize you've anniversaried it and it's a tougher comp. But just could you give us a magnitude of how much success you had in doing that type of work in the past year?

Yes, I am going to ask Jen to give you the detail.

Yes. So, the revenue from lease accounting project peaked last year in Q3 of fiscal 2019 at close to about $9 million and in Q3 of last year as well, and we enjoyed a pretty good lift from the lease accounting revenue. So in the range of about $8 million.

I understand. Thank you again.

Thanks Andrew.

Thank you. Our next question comes from the line of Mark Marcon of Baird. Your question, please.

Good afternoon. I was wondering if you could just give us a little bit more feedback with regards to AB5, you mentioned that as a potential positive. But just what are you hearing from your clients at this early stage, where it seems like there is a little bit of confusion out there, in terms of how to react to it?

Yes. We already know and it was reported today by SIA that two organizations have already filed suit, they filed suit Monday against this law. So we are going to see active litigation. The challenge here is that, especially in the staff aug arena, I think clients are going to be more hesitant to engage independent contractors, because of heightened liability risk that – and that comes in the form of wage and hour complaints and penalties, which as you know, is substantial, but also from tax obligations. So, the more careful approach and we are starting to see clients, our largest clients for the company is already actively moving toward using vendors that operate with an employed model and afford not only to derisk their own position, but also because they believe in professional development and commitment to talent and I think that client in particular recognizes that, they want to work with vendors that attract the best talent, and in order to attract the best talent, you have to care for your people broadly. And that means providing a full suite of benefits and professional development that comes with it. So, we are starting to have more active dialog with several large clients in California and looking at their needs and hopefully concentrating some of that need with us going forward.

Okay, great. And then, you gave us the lease accounting for the third quarter of last year. How much would you anticipate that it would – that it will drop off to, by the time we get out to, say the fourth quarter?

Well, I can tell you that the delta for Q – for this quarter – this year compared to last year is about $3 million to $4 million.

Okay, great. And then, just, as you are thinking about – there is lots of different puts and takes when it comes to the revenue guidance for this current quarter. When we think about it on a non-holiday affected, so same billing date basis, stripping out Veracity, what's that organic revenue growth rate coming out to, when you peel through the onion?

Hey Mark, it's Tim Brackney and Happy New Year.

Happy New Year.

I don't know that we'll give you that exact growth rate. What I can tell you is that that when we look at the non-holiday – when we look at them non-holiday daily revenue runrate, it's the highest it’s been this fiscal year and it's higher than it was last fiscal year. So, I think that – its order of magnitude is tough, because we have there, so many different factors, including the timing of holidays and when they pop out. But I can tell you, when I look at the inputs into what goes into our revenue velocity, which is what does our pipeline growth look like, what does our win rate look like? What does our activity rate look like, all those are well north of where we were, both sequentially and in prior year.

Got it. I was just trying to figure out like, if we just took the midpoint of the range and then stripped out expected drags from the holidays. I just didn't know if Jen had gone through that or not?

Yes, I think she tried to take you through that, Mark, with our disclosure and if you want to get talk with her more about that and walk through it again, just give her a call offline.

Okay.

Yes. This quarter, while we are – as I said, more optimistic about the pipeline and the opportunities we see, and certainly about the sentiment I was reading more about that the economy today for example and preparing and the mood today versus a year ago was quite different. And one of the things that we saw coming out of the holiday last year was a more depressed mood. Now, we are seeing a more optimistic mood in our client base, and I think it does impact the pipeline we are seeing, the willingness and readiness of clients to still engage in transformation projects and other initiatives that obviously are food for our business.

Great. And then, just with regards to the Tri-states, I was a little confused. Are things getting better in the Tri-states? Or are they still anticipated to be a bit of a drag?

They are getting better. I mean I would say, I would definitely say they are getting better. Like I said, we hired a new leader. We have – when I look at the – when I look at them sequentially and when I look at them from a velocity perspective, we are moving in the right direction. Just really being in that market, as Kate was saying, there is a lot of optimism still in that market in terms of usage of our services. And so, whatever uncertainty there is around the economy, we believe there is still upside for us there. So we're cautiously optimistic about Tri-states.

Great. And then I know it's early, but as it relates to Europe, specifically, London and Brexit, what do you see?

I'm sorry, what are we seeing?

Yes.

Was the question? Yes, so, I think we're all relieved. I think we'd say – for the Brexit discussion to be resolving. It is early days though and I'm not sure that we've seen any real positive or negative fallout from the results from the results -- the decisions in England. And as you know, we have new leadership in Europe overall and so we are still transitioning getting that new leader up to speed on our business. We have a new leader, as you know in The Netherlands business. So while, I think the trends there are strengthening, as I said in my earlier remarks and these are early days for us and so we need to keep that moving in the right direction. We are starting to see a lot more program management and project management work. We are starting to see change management work with some high profile clients that give us reason for optimism in that business. But again, these are early days and with new leadership, you have to see how that all plays out.

Appreciate the response. I'll follow up offline. Thank you.

Thank you, Mark.

[Operator Instructions]. And as there are no questions in queue, I'd like to turn the call back over to Chief Executive Officer, Kate Duchene for closing remarks. Ma'am?

Yes. Thank you, operator and again, thank you everyone for attending this call and your interest in RGP. We'll look forward to talking to you again on our next earnings call following the third quarter of fiscal '20. Thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.