Kate W. Duchene - Chief Legal Officer, Executive Vice President of Human Resources and Secretary Anthony Cherbak - Chief Executive Officer, President and Director Nathan W. Franke - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Donald B. Murray - Co-Founder and Executive Chairman.

Jeffrey M. Silber - BMO Capital Markets U.S. Kevin D. McVeigh - Macquarie Research Molly R. McGarrett - JP Morgan Chase & Co, Research Division Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division.

Good day, ladies and gentlemen, and welcome to Resources Global Professionals Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Kate Duchene, Chief Legal Officer. Ma'am, you may begin..

Thank you, operator. Good afternoon, everyone, and thank you for participating today. Joining me on this call are Don Murray, Executive Chairman; Tony Cherbak, Chief Executive Officer; Tracy Stephens, Chief Operating Officer; and Nate Franke, our Chief Financial Officer.

During this call, we will be providing you with comments on our results for the second quarter of fiscal year 2014. By now, you should have a copy of today's press release. If you need a copy and are unable to access via our website, please call Patricia Marquez at (714) 430-6314 and she'll be happy to fax a copy to you.

Before introducing Tony, I would like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements, in other words, statements regarding future events or future financial performance of the company.

We wish to caution you that such statements are just predictions, and actual events or results may differ materially.

We refer you to our Form 10-K report from year ended May 25, 2013, for a discussion of some of the risks, uncertainties and other factors, such as seasonal and economic conditions that may cause our business results of operations and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

I'll now turn the call over to Tony Cherbak..

Thanks, Kate. Good afternoon, and welcome to the Resources' second quarter conference call. I'm going to start by giving you a brief overview of our second quarter operating results. Total revenue for the second quarter of fiscal 2014 was $146 million, our highest quarterly revenue since the third quarter of fiscal 2009.

Our second quarter revenue represents a 10.9% increase sequentially and a 3.4% increase from the second quarter a year ago. It is important to remember that quarter-over-quarter comparisons are impacted by the fact that the Thanksgiving holiday fell in our third quarter this year, but was included in the second quarter a year ago.

Second quarter gross margin was 39.3%, representing an increase of 160 basis points sequentially and 20 basis points from the comparable quarter a year ago. During the second quarter, our SG&A costs were $43.1 million, an $800,000 increase from the comparable quarter a year ago and $1.5 million higher than last quarter.

In Q2, we generated adjusted EBITDA and cash flow from operations of $15.9 million and $3.1 million, respectively. For the quarter, our pretax income was $13 million. Our GAAP net income was $7.1 million or $0.18 a share.

Our GAAP net income reflects an effective tax rate of 45.4% while our cash tax rate remains at approximately 42%, an impact of $0.01 per share.

During the second quarter, we returned $12.9 million to shareholders as we repurchased approximately 807,000 shares of our common stock at an aggregate cost of $10.1 million and paid our quarterly dividend totaling $2.8 million or $0.07 per share. Now let's talk about revenue trends.

As we reported in October, weekly revenues during the first 4 weeks of the second quarter totaled $42.4 million. During this period, non-holiday weekly revenues averaged approximately $10.9 million. During the following 9 weeks of the quarter, average weekly revenues increased to $11.5 million per week.

We were pleased to see the momentum we experienced early in the weeks of the second quarter continue and accelerate during the balance of the quarter. As we discussed in our Q1 earnings call, we commenced work on a handful of larger scale initiatives during the second quarter.

We expect some of these initiatives to continue throughout much of calendar 2014. Additionally, as you're probably all aware, in late 2013, U.S. regulatory agencies passed the Volcker rule and issued a number of interpretations from earlier Dodd-Frank regulations.

While we have been working with several financial institutions during 2013 to help them with their compliance efforts, we believe the level of assistance that they will require in 2014 will increase.

While our third quarter will be impacted by the Thanksgiving and winter holidays, we're optimistic about the opportunities in front of us as we enter the 2014 calendar year. With that, I'll now turn the call over to Nate for a detailed review our financial results..

Thanks, Tony. As mentioned, revenues for the quarter were $146 million, representing a sequential increase of 10.9% and a quarter-over-quarter increase of 3.4% from revenue of $141.2 million in the second quarter of fiscal 2013.

As Tony said, our second quarter revenues are not directly comparable, as the prior year quarter included the Thanksgiving holiday. We estimate the revenue impact of the Thanksgiving holiday in the second quarter last year was approximately $3.3 million.

Adjusting for this impact on a pro forma basis, our quarter-over-quarter revenue increase would be approximately 1%. On a constant currency basis, revenue increased sequentially by 10.5% and 3.8% quarter-over-quarter. I'll now discuss some highlights of our revenue geographically. For the second quarter, revenues in the U.S.

were $112.9 million, an increase of 10.5% sequentially and 6.6% quarter-over-quarter. For the second quarter, total revenues internationally were $33.1 million, up 12.2% sequentially but down 6.2% quarter-over-quarter. International revenues were $35.3 million in the second quarter a year ago.

International revenue accounted for approximately 23% of total revenues for the quarter compared to 22% last quarter. Europe's second quarter revenues increased 20.2% sequentially and decreased 5.7% quarter-over-quarter, while the Asia Pacific region saw second quarter revenue increased 2.2% sequentially and 4.2% quarter-over-quarter.

On a constant currency basis, total international revenue increased 10.5% sequentially and decreased 4.8% quarter-over-quarter. On a quarter-over-quarter and sequential basis, the U.S. dollar was weaker against most currencies in Europe. In Asia Pacific, the dollar was stronger on a quarter-over-quarter basis, but weaker on a sequential basis.

As a result, on a constant currency basis, Europe's revenue decline quarter-over-quarter would have been 8.4%, while Asia Pacific's revenue would have increased 6.3% versus the decline of 4.2% on a GAAP basis. On a sequential basis, Europe's revenue increase would have been 17.4% and Asia Pacific's decrease would've been the same at 2.2%.

Let me now discuss early revenue trends for the third quarter of fiscal 2014. Weekly revenues for the first 5 weeks of the third quarter totaled $47.7 million and were $8.2 million during Thanksgiving week; $11.7 million; $11.8 million; $11.2 million; and $4.8 million, which was during Christmas week last week.

Using the most recent weekly run rate, over the remaining weeks of the third quarter and adjusting for the New Year's holiday impact this week and the winter holidays in February, we will achieve third quarter revenues of approximately $135 million.

This computation is purely mathematical and does not consider potential increases or decreases in weekly run rates over the balance of the quarter. Additionally, looking forward to the fourth quarter of fiscal 2014, it is important to remember that this period will consist of 14 weeks versus our traditional 13-week quarter.

Now we'll discuss gross margins. Gross margin for the second quarter was 39.3% versus 39.1% in the year ago quarter and 37.7% in the first quarter of fiscal 2014. The sequential improvement of 160 basis points was approximately 90 basis points more than anticipated and primarily resulted from the lower health care costs and lower payroll taxes.

The quarter-over-quarter increase of 20 basis points stems primarily from the Thanksgiving holiday occurring in the third quarter this year and a decrease in 0 margin reimbursable expenses, offset in part by a decrease in the bill/pay ratio.

Excluding reimbursable expenses, our second quarter gross margin was 39.9%, the same as the second quarter a year ago. The average billing rate for the quarter was approximately 160 -- $126 compared to $126 in the first quarter and $127 in the year ago quarter.

The average pay rate for the second quarter was approximately $63 compared to $64 in the first quarter and $63 one year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each period.

We expect gross margin in the third quarter of fiscal 2014 to decline approximately 270 basis points from the second quarter's gross margin due to the impact of 3 paid holidays during the quarter and the reset of payroll taxes on January 1. For the second quarter, gross margin in the U.S. was 41.1%, and our international gross margin was 33.2%.

Relating to headcount. For the second quarter, the average consultant FTE count was 2,293 compared to 2,173 in the previous quarter and 2,295 in the year ago quarter. Quarter-end consultant headcount was 2,402 versus 2,358 a year ago. The total headcount of the company was 3,119 at quarter end.

Selling, general and administration expenses for the second quarter were $43.1 million or 29.5% of revenue, a $1.5 million increase from $41.6 million in the first quarter of fiscal 2014. SG&A was $42.3 million or 30% of revenue in the second quarter of fiscal 2013.

Our SG&A expenses were slightly higher than anticipated, primarily due to performance compensation related to the increased revenue, severance costs and other minor SG&A categories. We anticipate SG&A expenses in the third quarter of fiscal 2014 to increase approximately $700,000 from the second quarter level.

This increase is primarily due to the reset of payroll taxes and higher marketing expenses. Stock compensation expense was $1.6 million or 1.1% of total revenue, similar to amounts reported in the first quarter, and $200,000 less than in the second quarter of fiscal 2013.

We would anticipate quarterly stock compensation expense in the upcoming quarter to approximate the amount reported in the second quarter. At the end of the second quarter, our office count was 71, 46 domestic and 25 international. Related to other components of our financial statements.

Depreciation and amortization was $1.3 million for the quarter compared to $1.4 million last quarter. We would expect depreciation and amortization expense for the upcoming quarter to approximate $1.3 million.

Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation and considered -- and contingent consideration adjustment, was 10.9% in the second quarter, up from 7.4% from the first quarter and 10.4% in the second quarter of fiscal 2013. Our pretax income was $13 million for the quarter.

During the second quarter, we recorded a provision for income taxes of $5.9 million, representing an effective tax rate of 45.4%. Our effective tax rate during the quarter benefited by a $300,000 or $0.01 per share reversal of accruals for international uncertain tax position for which the statute of limitations has expired.

As a consequence of anticipated lower pretax earnings, we believe our effective tax rate in the third quarter will approximate 60% [ph]. Our effective tax rate is impacted by our current inability to offset income in tax jurisdictions in which we are profitable with losses in several tax jurisdictions in which we are not profitable.

Our GAAP tax rate for 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 at different statutory rates and the offset of the tax benefit of foreign losses in certain locations by valuation allowances. On a cash tax basis, our tax rate continues to be 42% and we expect that rate to continue over the next couple of quarters.

In summary, our GAAP per-share income was $0.18 during the second quarter. On a non-GAAP basis, utilizing a cash tax rate of 42%, our per-share income would have been $0.19 for the second quarter. Related to our balance sheet.

Cash and investments at the end of the second quarter were $110.5 million, a $10.9 million decrease from the end of the first quarter. The decrease stems primarily from cash generated from operations of $3.1 million, offset by share repurchases and dividends totaling approximately $12.9 million during the quarter.

Capital expenditures were $1.2 million during the quarter. During the second quarter, we repurchased approximately 807,000 shares of our common stock at an aggregate cost of $10.1 million or $12.50 per share. On a year-to-date basis, we have repurchased approximately 2.8% of our outstanding shares as of the beginning of the fiscal year.

Our current board authorization for a stock buyback program has approximately $58.3 million remaining. We will continue to return cash to shareholders through our dividend and share repurchases while maintaining a balance between the capital requirements of growing our business and fiscal prudence.

Our shares outstanding at the end of the second quarter were approximately 39 million. Receivables at quarter end were approximately $93.1 million compared to $81.4 million at the end of the first quarter. Days of revenue outstanding were approximately 61 days versus 55 days in the first quarter of fiscal 2014.

The increase stems from increasing weekly revenues during the quarter and is not a result of deterioration in our aging. With that, I'll turn the call over to Don for some closing thoughts..

Thank you, Nate. Well, we are pleased with our operating results for the second quarter. As we discussed a quarter ago, we continue to believe the demand environment is improving, evidenced by our second quarter revenues being the highest of any quarter for the past several years.

While our third quarter revenue will be impacted by Thanksgiving and the Christmas, New Year's holiday falling midweek, I am very encouraged by the weekly revenue improvement experienced in the second quarter and the early non-holiday weeks of our third quarter. We will continue to focus on revenue growth in 2014.

As the level of uncertainty facing our Fortune 500 client base continues to recede, I am certain our focus on preserving this client base will pay significant dividends to us as we enter 2014 and beyond.

As Tony mentioned, our financial services clients continue to assess the impact of new Dodd-Frank regulations and revised interpretations of previously issued regulations. We believe many of our financial services clients are in the early stages of their efforts -- compliance efforts with respect to many of these regulations.

We are currently assisting clients with their compliance efforts related to Basel II, Basel III, the Foreign Account Tax Compliance Act, the Internal Capital Adequacy Assessment Process and other regulatory reporting requirements.

Additionally, we continue to work with many non-financial services clients with their conflict minerals compliance efforts. And during the second quarter, we were pleased to enter into a master services agreement for consulting services with a new global financial services firm.

We believe this firm has traditionally used the Big Four and other branded consulting firms and was looking for an alternative. It's nice to add another large scale financial institution to our significant financial services client list.

Now let me share some additional statistics, which we believe reflect the continuing health and strength of our core business. Client continuity remains outstanding. During our second quarter, we served all of our top 50 clients from fiscal 2013 and 49 from 2012.

In fiscal 2014, we have 233 clients for whom we provide services exceeding $500,000 in fees on a run rate basis. That's up 7.9% from 216 in 2013. In addition, our top 50 clients represented 38% of total revenues while 50% of our revenues came from 86 clients.

So our loyal client following is reflective of our client service approach and the quality of the work performed by our consultants. Our largest client for the quarter was approximately 1.8% of revenues. Through the second quarter, 94% of our top 50 clients have used more than 1 practice area and 76% of those top 50 clients have used 3 or more.

This practice area penetration reflects the diversity of relationships we have within our clients' organizations. So this concludes our prepared remarks, and we'll be happy to answer your questions at this time. Thank you..

[Operator Instructions] And our first question comes from Jeff Silber from BMO Capital Markets..

Wanted to start the focus on Europe. First of all, can you just repeat what was the change in constant currency in Europe? I missed that number..

Sure. Let me just find that, Jeff..

And I guess while you're looking for that, my question is if you can give us a little bit more color in terms of the trends in the different regions you're operating in, in Europe..

Yes, Europe is still a work-in-process. We're working very hard on it. We've tasked our Chief Operating Officer to devote significant time to getting their operations back going the right way.

But I would just tell you -- I'd start by telling you that really the only regions that we've had good, solid growth with over there have been the U.K., which has been a work-in-process which we've, finally, I think, got turned around. And of all other markets, Italy has performed quite well.

The other markets, our big markets, the Netherlands and Sweden, were struggling to get the growth, but we're working hard on trying to get them going in the right direction just in terms of both revenue growth and their cost structures..

Then, Jeff, in terms of the constant currency amounts in Europe, the sequential revenue increase was 17.4%. Quarter-over-quarter, the decline was 8.4%..

I appreciate that. Shifting back to the discussion on gross margin, you mentioned health care insurance-related costs. I'm just wondering, going forward into the current calendar year, I know the employer mandate with Obamacare had been deferred for a year.

But a lot of the other companies that we're speaking to have seen some pretty sizable increases in their health care insurance premiums.

First of all, do you provide any type of subsidies for your consultants? And if so, what do you think the increase will be for your health care insurance-related costs next year?.

So Jeff, the answer to the first question is we do provide health care insurance to all of our employees, including the consultants. And -- however, we are self-insured, so we don't necessarily contractually, like maybe other companies, sign up for premiums, we are hearing the same thing that many of the companies are faced with large increases.

Our variability really stems from usage in the plan and the fact that we're self-insured..

Great. And then just on taxes, you mentioned the effective tax rate increasing in the current quarter.

If I look out to your fiscal fourth quarter, should that go back to more normalized levels?.

Yes, very much so, especially with the extra week..

Got it. And then just one final question, I'll jump back in the queue.

What are you budgeting for capital spending this year?.

For the final 6 months, it'll be about $1 million and probably about 2/3 of that will come in Q3, with the remainder in Q4..

And our next question comes from Kevin McVeigh from Macquarie..

Okay.

Tony or Nate, can you give us a sense of how much the Volcker-related work contributed to revenue in the quarter, if that's quantifiable? And then as you think about that opportunity in '14, I mean, it doesn't sound like it should be like a Sarbanes or anything like that, but any sense of the type of ramp we should see from that? And is it primarily U.S.? Or should we expect some benefit in Europe as well?.

Kevin, I would just answer that question just from the perspective of regulatory compliance that we're seeing in all of our financial institutions. In Europe, there are similar things to the Dodd-Frank Act, but not specific to Dodd-Frank because it's just a U.S. regulation. But we never break out specific revenue contribution by initiative.

I can just tell you that given the fact that approximately 20-plus percent of our revenues are related to financial institutions and regulatory compliance is front and center at all of these financial institutions, it's going to be relatively significant for us. As to the Volcker rule, the Volcker rule is really not effective until July of 2015.

But we suspect that with immediacy, companies will have to start working on this rule to appropriately comply..

Got it. And then as we think about the types of projects, it sounds like they're scaling up in terms of size.

What do you think -- is this just kind of that finally people getting more confident in the cycle? Or is it the M&A starting to firm up a little bit, the IPO market? What's really driving the size? And is that primarily in the financial services or is that across all verticals?.

Kevin, I guess the way I would answer that is it's somewhat all of the above.

And if you look at financial services, I think the regulatory environment and we kind of saw during the last quarter and I think as we look forward, a lot of our financial institution clients are -- and mainly, a lot of it stems from the fact that there a lot of new interpretations that came out of some of the older rules in December and so they're just starting to I think realize that some of this is going to be more work than they thought.

We are seeing a little bit of an increase in other regions with M&A-type integration services, capital formation. So it varies, obviously, by vertical..

Got it.

And then, Nate, can you just, last question, remind us, of the cash on the balance sheet, how much of that is onshore versus off? And are there any restrictions in terms of what you can do with the buyback relative to that cash?.

We're not -- there's no real contractual limitations. And I would tell you, about 75% of that is in the U.S..

And our next question comes from Andrew Steinerman from JPMorgan..

It's Molly McGarrett for Andrew.

First, can you just give Sitrick Brincko revenue for the quarter?.

Excuse me, Molly, I didn't understand that..

Sorry, can you give Sitrick Brincko revenues?.

Oh, Sitrick....

It's $4.3 million..

That's correct. $4.3 million and that was up sequentially about 16%, but down quarter-over-quarter about 8.5%..

Got it. And then you said that you would have 3 paid holidays in the third quarter. Is that normal or....

No..

So historically the more normalized number is 2?.

Two. And as we had commented, historically Thanksgiving occurs in the prior quarter. And this year, because it occurred very late in November and the way the calendar worked, it occurred in our third quarter in that first week..

Got it. And then can you just talk about pipeline and backlog now that clients have their account of '14 budgets? Do you feel like that momentum is coming from concentrated projects? Or kind of broadly, just any sort of pipeline comments you could give..

Well, we don't want to -- all of our contracts are basically time and materials, so we don't really have a pipeline. I think what Tony described in his early remarks, when you look at the sequential weekly revenue during the quarter, we saw kind of a continual ramp-up.

Obviously, it slowed down as we entered the holiday weeks here in the third quarter. So the -- and going back to how I answered Kevin's question, we're seeing it in obviously financial services.

But then in the West Coast, in some of our more tech -- high technology-type clients, that's where you're seeing some of the M&A stuff and some of the capital formation stuff. So the stuff we're seeing is what I'd say fairly broad-based..

Yes, I'd say in the U.S., particularly on the West Coast and the East Coast, pipeline is very strong, and then probably a little bit less so in our Central region. We already talked a little bit about Europe. In the Asia Pac region, Japan has been affected by currency. The volume of the work has been pretty consistent quarter-to-quarter there.

And in China, our business is going very well. It's up in the double digits -- double-digit growth rate just relative to the strength of all the businesses in China..

Okay.

And then do you feel like the Big Four firms are also seeing kind of a rising momentum in some of these areas? Or do you have stepped up competitive wins?.

I would think that they're seeing exactly the same thing that we are, a lot of clients just trying to get ahead of the game a little bit, investing back into their own businesses. We're certainly not seeing it from an employment perspective. But we are seeing it in terms of like positive business initiatives around IT and supply chain..

And our next question comes from Mark Marcon from RW Baird..

Was wondering if you could talk a little bit about the Thanksgiving impact on the gross margins and how we should think about just the bill/pay rate spread on a go-forward basis?.

Well, Mark, if you -- in the prepared remarks, I think what we said is for the third quarter, we would anticipate about a 270 basis point decline. And what I would tell you is that about 150 basis points of that is the reset of the payroll taxes and the other 120 is the impact of the holidays..

120 bps from the holidays and....

Yes..

And so no impact from normalized pay/bill?.

Yes, in that, we believe, on a sequential basis, from what we see now is that we don't necessarily forecast a movement in that bill/pay ratio..

Okay.

And then as it relates to the quarter that you just reported, the second quarter, how much of a benefit did you get from the shift in the timing of Thanksgiving?.

About 60 [ph] basis points..

Great.

And then can you talk a little bit more about the commentary about being put on the master vendor list for large institution? Are you going to be one of a few? Or how should we think about that?.

As clients rationalize the total amount of vendors that they use, Mark, you can't play unless you're on that list. So getting on that -- all that -- all getting on that list does is allow us to play.

But it's really important because, like I said, if you're not on the list, you can't even -- they won't even listen to you in terms of being able to propose on some of their initiatives. So it's a significant event, but it's just one event that leads to trying to sell work to a large institution.

So like I said, we have to go through this all the time. We're generally pretty successful at getting on these lists, but we thought that this was particularly important because it's a very large financial institution and we have a very strong practice in the financial institution area.

And with regulatory compliance becoming much more important, I think that a lot of these companies are looking for an alternative to the high rates of the Big Four..

Great. And then can you talk a little bit about the -- you kind of gave us $135 million in terms of the math of this coming quarter.

What are you assuming for the week that includes the first of the year? And then how -- what are you thinking about beyond that?.

Sure, Mark. If you did the math, the first 5 weeks that we disclosed were the $47.7 million. And then if you look at just kind of the history and when the holidays fall in the middle of the week like New Year's yesterday, we anticipate that we'll probably be about 50% of where we were leading into the holidays.

So that's 50% of about $11.7 million, $11.8 million, so I just used $6 million. And then the weeks remaining, I just -- it's 7 weeks x the $11.7 million that we had running into the holidays and then removed about $600,000 for Martin Luther King and President's Day, which tends to impact us with our financial institution clients..

We also have things like Chinese New Year and a bunch of different miscellaneous holidays as well in the foreign venues..

So it sounds like relative to -- on a like-for-like basis, it sounds like you're -- seems like the trend should actually continue based on what you just ended up seeing in terms of some improvement on a year-over-year basis. It sounds like you're just -- you're basically giving us the math..

Yes, that's what I said. It's just purely a mathematical computation based on run rates, and we didn't forecast any -- the momentum-type things that we've described. It's all we historically have done, as you remember..

Okay, great. And then can you talk a little bit about the health care initiative? You had 7 wins last quarter. Sounded like things were ramping up there.

Can you talk a little bit about what you're seeing there?.

Yes, that continues to be something that we are showing and demo-ing to a lot of hospitals. I think we now have 8 installations. It kind of slowed down, obviously, during the holiday time. But there's a, I would say, quite a bit of activity in terms of the demo and different levels of negotiations with various entities.

So that's something that we continue to pursue and over the long term think that will be a very good business for us..

And I'm showing no further questions at this time. I'd like to hand the conference back over for closing remarks..

Well, thank you very much for joining us today, and look forward to discussing our third quarter results with you in a couple of months..

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day..