Earnings Transcript for RGP - Q1 Fiscal Year 2025

Operator: Good afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. At this time, I would like to remind everyone that management will be commenting on results for the first quarter ended August 24, 2024. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today. Today's press release can be viewed in the Investors Relations section of RGP's website and filed today with the SEC. Also during this call, management may make forward-looking statements regarding plans, initiatives and strategies and the anticipated financial performance of the company. Such statements are predictions and actual events or results may differ materially. Please see the Risk Factors section in RGP's report on Form 10-K for the year ended May 25, 2024, for a discussion of risks, uncertainties and other factors that may cause the company's business, results of operations and financial condition to differ materially from what is expressed or implied by forward-looking statements made during this call. I'll now turn the call over to RGP's CEO, Kate Duchene.

Kate Duchene: Thank you, operator. Good afternoon, everyone, and thank you for joining. Bhadresh Patel, our Chief Operating Officer, and Jenn Ryu, our Chief Financial Officer, are with me today to discuss Q1 results, operating updates and trends and exciting strategic initiatives. I'll focus on what we have accomplished in Q1 to evolve our operating model and brand architecture to provide greater transparency and clarity regarding our capabilities to unlock growth and cross-sell across our enterprise. While the past 12 months have been a challenging operating environment in professional services, we've embraced the opportunity to create a stronger platform for the future, broaden our addressable market, deepen our client relationships and improve efficiency. We made two significant moves in Q1. First, we evolved our operating model to align strategy and execution with accountable business segments driving performance. Second, we rebuilt our brand architecture and positioning to clearly articulate our new operating model and the competitive advantage we bring to the marketplace. We launched our new brand positioning today. We will post a new investor presentation later this week available at www.rgp.com. This digital asset lays out our refreshed brand architecture and capabilities, what differentiates our brands and the opportunities ahead. We are a global professional services firm bringing solutions to clients in three ways

Bhadresh Patel: Thank you, Kate, and good afternoon, everyone. I'm thrilled about the promise of our new structure, brand positioning and today's launch, all of which support the strategic direction we shared during our last call. As a challenger brand, we are now better positioned to meet our clients' needs based on the preferred way of engaging with us throughout their transformational and operational journeys without facing internal organizational barriers. This flexibility allows us to deliver our On-Demand Talent, Consulting and Outsourced Services offerings whether individually or in combination seamlessly. This past quarter, our focus has been on leadership integration and reinforcing our full range of service offerings with our sales teams with an emphasis on cross-selling. While the macroeconomic environment remains uncertain, we are starting to hit stride in executing our cross-sell strategy. We're empowering our sales organization to fully understand the breadth of our services across all segments of the business and leverage our existing client relationships to expand into new buying centers. These training efforts also include an even sharper focus on sales pipeline management and a robust account planning process jointly carried out by our sales and consulting practice leaders. I'm pleased to share that our clients are proving to be quite receptive to our new approach. They're excited about our ability to deliver tailored solutions, as Kate mentioned, all in ways that meet their specific needs and our ability to deliver them in multiple engagement models. Following the strategic shifts we've made over the last few months, we're seeing a significant quarter-over-quarter increase in our gross pipeline and project size increase in our cross-sell opportunities. This growth is no coincidence, but rather largely driven by a stronger focus on go-to-market execution, tight alignment between our segments, and an increased emphasis on cross-border sales within our multinational client base. With a solid global infrastructure in place, we're also unifying our offshore delivery center, which we now call global delivery centers in India and the Philippines to better serve our clients across the organization. Our business segments are rapidly evolving. Our On-Demand Talent segment is increasingly relevant in the professional staffing space, though it faces intense competition and rate pressures in the current environment. Despite this, our clients continue to utilize our experts at scale, extending beyond traditional finance and accounting roles. As the macroeconomic conditions improve, we expect client demand for outside expert talent to further expand and we're fully prepared to respond. Our newly formed Consulting segment positions us higher up the professional services value chain, enabling us to play a key role in transformation strategy and execution initiatives. A dedicated consulting business positions us to engage in earlier stage discussions with clients, particularly around business and digital transformation, which creates opportunity for us to win larger pieces of work across the enterprise. The acquisition of Reference Point and its deep advisory capabilities are further strengthening our position with financial services clients, even those we've served for over 10 years. Our Outsourced Services segment is expanding its client base, especially among venture-backed AI startups, while also exploring cross-selling opportunities within our existing client base, including carveouts, spinouts and scaleups. Our Europe and APAC segment performance is getting better positioned for future growth. We were impacted by typical summer seasonality combined with elongated client decision-making cycles and contract negotiations in Europe, while APAC continues to be resilient and deliver strong results. We remain cautiously optimistic for the remainder of the fiscal year given our client environments remain turbulent as they progress with their internal business restructuring. Most importantly, all segments are proving highly relevant in differentiating us from our traditional staffing and consulting firms, allowing us to secure our larger engagements than we have in the past few years, in large part driven by cross-selling activities. Some examples include

Jenn Ryu: Thank you, Bhadresh, and good afternoon, everyone. For the first quarter of fiscal '25, our total revenue was $136.9 million, down 19% from the prior-year quarter on a same-day constant-currency basis. Gross margin for the quarter was 36.5%. And with run rate SG&A improving to $47.7 million, we delivered $2.3 million of adjusted EBITDA on a total enterprise basis, which represents a 1.7% adjusted EBITDA margin. During the quarter, top of the funnel sales activity picked up more momentum and we saw a notable rebound in growth pipeline, which is an encouraging early indicator for recovery. However, client caution continues to impact the speed at which opportunities move through the sales pipeline. Gross margin this quarter was compressed compared to the prior-year quarter, predominantly due to lower utilization of salary consultants as well as less favorable leverage on indirect cost of service as a result of a softer top-line. The pricing environment across the globe remains competitive. Enterprise-wide average bill rate was $119 constant currency, down from $125 a year ago. Revenue mix shift to Asia Pacific continues to impact our total company average bill rates, driven by lower relative bill rates compared to other geographies and the significant volume of hours built in this region. Our US and Europe average bill rates continue to demonstrate strength even in the competitive pricing landscape and increased 2% and 5%, respectively, from the first quarter of fiscal 2024. Now, on SG&A. Our enterprise run rate SG&A expense for the quarter was $47.7 million, a 14% improvement from Q1 of the prior fiscal year, primarily driven by lower management compensation expense as a result of actions taken in the previous year to reduce fixed costs. We continue to remain laser-focused on improving our operating efficiency and cost leverage. We completed the sale of our building in Irvine, California during the quarter, unlocking $12.3 million of cash. A $3.4 million gain was recognized in connection with the sale, which was excluded from the aforementioned total run rate SG&A. As previewed in our July call and outlined by Kate and Bhadresh, we began operating in multiple business segments in the first quarter. These segments are

Operator: Thank you. [Operator Instructions] Our first question comes from Joe Gomes with Noble Capital. You may proceed.

Joe Gomes: Good afternoon. Thanks for taking my question.

Kate Duchene: Hi, Joe.

Joe Gomes: Thank you for the segment information, much detail there. I was wondering if you could give us a little more color on the 33% year-over-year revenue decline in the On-Demand segment?

Kate Duchene: Yeah, I think, Joe, where we've seen the most challenge is in our operational accounting group. In that, we're not alone in that. I think that's just a reflection of the difficulty in the marketplace and the fact that talent is not moving around right now and so many clients are just trying to get by with incumbent employees in their seats. Where we're seeing more opportunity as we've talked is really on the consulting side, especially around tech and digital and significant project work around ERP system implementation and supply chain consulting type projects. So, we're trying to position ourselves where the work is, and we do expect this to be just a cycle and that, that will also be the part of our business that I think recovers the fastest when we see the economic environment improve.

Joe Gomes: Okay. And then, on the call, you mentioned a couple of things. One that you were seeing significant quarter-over-quarter growth in the pipeline and larger engagements than historically. And I was wondering if you might be able to kind of quantify those to some extent, so we get an idea of what kind of growth you're seeing on both of those.

Jenn Ryu: Yeah, sure. Hi, Joe. Yeah, so our growth pipeline has increased significantly. So, if we look at just this week growth pipeline compared to the end of the first quarter, we're up about 15%. And if you look at it compared to the end of the fourth quarter, at the end of our fiscal, it's up almost 20%. So, we definitely are seeing more opportunities come through the pipeline. And some of this is also due to the cross-selling efforts that we have been executing internally.

Joe Gomes: Okay, great. Thanks for that. And one more, if I may. I know it's very, very early days, but we did see the first rate cut. Are you seeing any kind of loosening or positive momentum from clients about starting projects? That was one of our hope for kind of benchmarks is that when rates were cut, we're going to start to see some of this stuff open up. And again, I understand it's early days, but just trying to get your impression of what you've seen here over the past week to 10 days?

Kate Duchene: Yeah. So, Joe, we both know this, it's all about confidence in the marketplace. I think this will start to give clients more confidence. Where we're seeing it the most, I would say, is all of a sudden Europe is starting to see the closes actually happen and projects starting. They had a very slow August, for example, and I think it wasn't just because the interest rate environment had not settled yet, but we had elections in the European marketplace and I think just confidence hadn't built. We had clients who engaged in significant layoffs in the early part of the summer, and clients don't want to bring outsiders in too quickly after that kind of event. So, we've seen, I would say, the dust settle a bit. And now, we're starting to see decision making happen, just as we hoped. I think there, the pipeline has increased materially as well, which means we're getting to the right people. It's just a matter of timing. And when we get the verbal that we're the choice of provider, it's how soon can we start work. So, the other thing I'd say about interest rates, it's not interest rate decline all by itself that gives clients more confidence, but I do think it will open up more transactional work, and transactional work usually equates to project opportunities for us.

Joe Gomes: Great. Thanks for taking my questions. I'll get back in queue.

Kate Duchene: You're welcome, Joe. Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Marc Riddick with Sidoti. You may proceed.

Marc Riddick: Hi, good afternoon, everyone.

Kate Duchene: Hi, Marc.

Marc Riddick: So, I know it's certainly early as far as some of the commentary that you made regarding initial opportunities and client reception to the segmentation updates and changes and go-to-market changes. I was wondering if you could talk a little bit about maybe as far as initial thoughts or initial reality, some of the areas or maybe client types or client industry segments that are maybe most responsive to this. It seems as though from your prepared remarks that, it's touching on the larger clients. I was wondering if you could talk a little bit about maybe if there are any particular types of clients that have been particularly receptive.

Bhadresh Patel: Hi, this is Bhadresh. I think, overall, what we're seeing, it's not just any particular industry or sector, it is our ability to now expand beyond finance and accounting conversations that's actually driving the cross-sell, and we're seeing that across all of our sectors. So, it's not any one particular one that's actually steaming ahead of the other. So, we've just unlocked our what we've been building over the past few years to further expand into additional buying centers, and that's where we're starting to see more momentum come.

Marc Riddick: And then, can you talk a little bit about maybe some of the internal planning and maybe either conversations with staff, training, things like that, that might have gone along with this and maybe sort of the direction of [sort of where you are going] (ph)?

Kate Duchene: Yeah. Marc, we lost you at the very end. So, if my answer and maybe Bhadresh's answer in combination is not what you wanted, let us know. But you're absolutely right. I mean, we are positioning our sales force now to have a broader portfolio of solutions and capabilities to bring forth. We are not expecting them to do it all by themselves. I think this organizational design and operating model evolution clarifies who they turn to for support to talk shop and really going to market together. This model for our sales people is not to create lots of different sales individuals calling on the same client. We really view our sales team as a concierge-type partner to our clients to bring forth the capabilities of our enterprise no matter where they sit. And clients are reacting very positively to that. They don't want lots of people calling on them. They want a trusted partner who can help understand their problem and then plug the client into us in the right way. So with that, Bhadresh, would you have anything to add?

Bhadresh Patel: I think internally, we've also done significant amount of work that started last fiscal, and really getting organized around our capabilities and practices as well as definition of personas that we target, what their buying behaviors are and patterns are, how to kind of approach those conversations and bringing the right expertise to the table. We also vetted in-depth the capabilities in the Consulting business, really aligned to the fact that we have depth, repeatability, methodology, bench, not just the fact that we can rely on the On-Demand business to bring the experts in time. So, this is what's allowing us to move up the food chain in these conversations, and then we're able to leverage our On-Demand capabilities to start to scale on those projects that we're landing.

Marc Riddick: Great. And then, the last question for me is more along the lines of use of cash, particularly around the acquisition opportunity [Technical Difficulty] Reference Point. But I was wondering if you could talk a little bit about maybe what you're seeing as far as the potential acquisition pipeline target [Technical Difficulty]?

Kate Duchene: Yeah, I think right now, Marc, we're very focused on completing the integration of Reference Point, continuing to complete the integration of CloudGo to support more of our digital business and especially bringing those capabilities together globally. So, we're heads down in execution right now. And as Bhadresh just shared, we've done a lot to add some account planning tools, to add training material to our go-to-market team's toolkit so that we're doing a better job of representing what we already have and getting the return on the investments that we've made. So, that's where we're very focused. That's not to say we are looking at the marketplace as we see assets coming to market that could be interesting, but right now, as a team, we're focused on execution.

Jenn Ryu: Yeah, Marc, I couldn't hear you completely. If your question was also from a capital allocation standpoint, with us focusing more internally on execution and pursuing deals more opportunistically, we do expect to shift the capital allocation priority in this coming quarter to focus a little bit more on share buybacks.

Marc Riddick: Great. Thank you very much.

Kate Duchene: You're welcome.

Operator: Thank you. I would now like to turn the call back over to Kate Duchene for any closing remarks.

Kate Duchene: Well, I want to thank everyone for joining us today and we look forward to updating you after the close of our second quarter. Thanks very much, and please check out our new website.

Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.