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Resources Connection, Inc. (RGP) Q2 2024 Earnings Call Transcript

Resources Connection, Inc. (RGP)

Q2 2024 Earnings Conference Call

Company Participants

Kate Duchene - CEO

Jennifer Ryu - CFO

Conference Call Participants

Stephanie Yee - JPMorgan

Andre Childress - Baird

Marc Riddick - Sidoti

Presentation

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 second quarter ended November 25, 2023. 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 Investor 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 Risk Factors section in RGP's report on Form 10-K for the year ended May 27, 2023, 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 and Happy New Year. Thank you all for joining us today. In Q2, we delivered solid performance across the enterprise despite a macro environment that continues to be sluggish and uncertain. This quarter can be characterized by green shoots and continued tenacity.

Again, we have shown well with respect to engagement extensions and client retention, and our pipeline finished the quarter strong. As we shared last quarter, new project initiation has been slower to materialize and opportunities have pushed to the new calendar year. On revenue, we performed in the stronger half of our guidance range while also continuing to deliver strong cash flow this fiscal year.

On SG&A and therefore, adjusted EBITDA, we've well exceeded our expectations as we continue to remain disciplined on cost in this environment. Our balance sheet remains pristine. During Q2, Veracity delivered sequential revenue growth, earning new business from the sustained appetite for digital transformation services and capabilities. We also expanded Veracity's digital presence across the Asia-Pac region through the acquisition of CloudGo, a digital transformation firm and elite ServiceNow partner.

We're excited about this acquisition, the exceptional talent this adds to our company and we are already beginning to see synergies between Veracity and CloudGo. The Northern California market, which I had mentioned last quarter, also grew sequentially. And again showing positive movement in the tech sector after more than a year of decline. Regional performance in rest of North America reflected the overall choppy operating environment with clients remaining cautious about new spend until there is greater clarity around interest rates and economic direction.

Our Mexico, India, Philippines and Switzerland practices all grew both sequentially and year-over-year as we delivered major projects for large strategic clients. Our pricing initiative in the U.S. is progressing well with a 1.3% increase in bill rate year-over-year. As you'll hear more from Jen in a moment, Europe showed even stronger improvement in pricing.

Turning to our operational metrics. We're pleased that the pipeline remains steady through the quarter. And in post quarter December, more extension opportunities in the pipe were converted into close one engagements. In Europe, pipeline grew throughout Q2 as clients engaged in planning discussions for 2024 and pent-up demand around technology transformation and transaction support moved to the forefront.

Our Asia-Pacific business, particularly in India and the Philippines continue to show demand strength from our large global clients as they increasingly move more activity to offshore global business service centers. Across all geographies, we're experiencing an uptick in in-person client meetings, which is a positive indicator that clients are engaging and planning for projects to get underway in the new calendar year.

Given the areas in which we're seeing consistent and rising demand for professional services, especially digital transformation and cloud technology support we believe we are well positioned to capture market share in 2024 and beyond. As mentioned last quarter, we closed more business related to cloud ERP implementations and optimization.

Our pipeline is heavy with opportunity at large and middle market companies to implement and unlock the value of technology and prepare for the implementation of AI with improved data governance and business process standardization. This is exactly the type of work for which RGP shines and can deliver significant value. In our financial services practice, we see rising demand for regulatory remediation, another area of strength for RGP.

In health care, we've built an offering to support revenue cycle optimization and claims reimbursement capture and our large provider client base. These opportunities are significant longer term and allow us to get deeper into our A+ client set, which creates cautious optimism that revenue conversion will improve in 2024.

During Q2, we completed additional research around client decision-making to help us prepare for what's next. We pulled 1,000-plus leaders from companies with at least $1 billion in revenue to understand what's on the agenda and how our capabilities line up to that need. We found that transformation initiatives are a priority as large organizations are taking on an average of $21 million-plus transformation initiatives this year alone. They also report finding the right skill sets for critical transformation initiatives has become more complicated in an ever more disrupted world.

Our research further uncovered that a hybrid workforce strategy that blends internal talent with skilled outsiders enables company to realize competitive advantages by building constant transformation into their core DNA. We refer to this approach as the dynamic workforce model, and we believe it is becoming increasingly more prevalent in business today.

Adoption of the dynamic workforce model is being accelerated by transformation overload as our research uncovered that only four in 10 organizations reported they had enough internal talent to staff all their planned initiatives. This research matches with the Manpower Group Employment Outlook Survey reported in December. In that survey, which included an even bigger pool of 40,000 plus employers across 41 countries 75% of respondents reported they're struggling to find the skill sets they need.

These skills shortages have wide-ranging impacts on transformation initiatives, ranging from project delays, missed critical goals and more difficulty in achieving operational change. Thus, based on our research, the proportion of outside talent on transformation teams grew to 45% in 2022 and is expected to reach 48% this calendar year.

Connecting this research to our business model, we are highly encouraged. The global pandemic proved once and for all that highly skilled talent can collaborate effectively regardless of location or FTE status. C-suite leaders recognize the power of hybrid talent models, and we're seeing more CEOs and CFOs work with HR leaders to adjust talent strategy accordingly. The talent side of the equation is equally embracing these ships.

Expert talent is actively choosing to pursue their professional passions in a more independent way. In fact, we've consistently seen our retention rates increase in recent years, now even exceeding those reported by the traditional partnership models. The choice, transparency and control and client engagements, we offer our consultants is a key differentiator. These attributes also serve to create a client experience that is differentiated for the good....

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