Resources Connection, Inc., a global consulting firm, today announced financial results for its fiscal third quarter ended February 24, 2024.
Third Quarter Fiscal 2024 Highlights Compared to the Prior Year Quarter:
- Revenue of $151.3 million compared to $186.8 million
- Same-day constant currency revenue, a non-GAAP measure, declined 19.6%
- Gross margin of 37.0% compared to 38.3%
- SG&A expenses of $49.6 million compared to $59.4 million, an improvement of 16.5%
- Net income of $2.6 million (net income margin of 1.7%), compared to $7.0 million (net income margin of 3.8%)
- Diluted earnings per common share of $0.08 compared to $0.21
- Adjusted EBITDA, a non-GAAP measure, of $10.8 million (Adjusted EBITDA margin of 7.1%) compared to $16.6 million (Adjusted EBITDA margin of 8.9%)
- Cash dividends declared of $0.14 per share
- Cash and cash equivalents plus borrowings available under our senior secured revolving loan facility total of $287.4 million, up from $278.1 million
Management Commentary
“We delivered solid Adjusted EBITDA and free cash flow conversion in the third quarter. Revenue performance was consistent with expectations, recognizing the client buying environment continues to be sluggish and we have the usual holiday impact during this quarter,” said Kate Duchene, Chief Executive Officer. “We successfully launched the first wave of our technology transformation in North America during the quarter, including a new talent management system. This new platform will empower more efficient Go To Market execution and position us well for an improved buying environment. Furthermore, we continue to focus on enhancing and expanding our consulting capabilities, including our recent announcement to acquire Reference Point, a strategic advisory firm focused on specialized solutions for the financial services industry in the technology, data and risk management space. We expect this acquisition to bolster our ability to better serve our clients in this vertical and be accretive to our financial performance. Finally, our pipeline remains resilient and we are pleased to see more momentum in the sales cycle in recent weeks. We believe we are well positioned to get back to growth and improve our financial metrics as clients give the green light to transformation work, including ERP cloud migration, automation and AI related initiatives.”
Third Quarter Fiscal 2024 Results
Revenue was $151.3 million compared to $186.8 million in the third quarter of fiscal 2023. On a same-day constant currency basis, revenue decreased by 19.6% reflecting the overall choppy macro environment as clients want more certainty in lower interest rates and improving economic indicators before moving ahead with many major initiatives. Gross pipeline remained relatively resilient, however, the time to close opportunities in the pipeline continued to be protracted. Compared to the prior year quarter, billable hours decreased by 12.3% due to reduced client spending and the average bill rate declined by 7.8% (also 7.8% on a constant currency basis) due to a shift in revenue mix to the Asia Pacific region which carries lower average bill rate. The United States (U.S.) average bill rates increased by 0.9%, compared to the prior year as a result of pricing actions taken to implement our value-based pricing model, while average bill rates in the Asia Pacific region declined by 10.1% (or 6.3% on a constant currency basis), also largely attributable to a shift in revenue mix across the countries within this region.
Gross margin was 37.0% compared to 38.3% in the third quarter of fiscal 2023 due to a higher pay/bill ratio and reduced leverage of indirect cost of service on lower revenue. While the pay/bill ratio in the U.S. remained relatively consistent with the prior year, the enterprise wide pay/bill ratio was negatively impacted by an increased proportion of revenue in regions with a higher pay/bill ratio.
SG&A expenses for the third quarter of fiscal 2024 were $49.6 million, or 32.8% of revenue, compared to $59.4 million, or 31.8% of revenue, for the third quarter of fiscal 2023. The improvement in SG&A year over year was primarily due to the reduction in bonuses and commissions by $7.3 million as a result of lower revenue and profitability achievement compared to incentive compensation targets in the current fiscal year, lower management compensation expense of $2.6 million partially attributable to the cost reduction plan (the “U.S. Restructuring Plan”) initiated in October 2023, and a decrease of $1.4 million in stock compensation expense as a result of forfeitures and remeasurement of achievement associated with performance based equity awards, partially offset by one-time costs of $1.6 million of employee termination benefits in connection with further actions taken under the U.S. Restructuring Plan during the third quarter of fiscal 2024.
Income tax expense was $1.9 million (an effective tax rate of 43.2%), compared to an income tax benefit of nearly zero (an effective tax benefit rate of less than 0.1%) in the prior year quarter. The income tax benefit in the three months ended February 25, 2023 resulted largely from a one-time tax benefit recognized on the release of valuation allowance in our Europe region. The higher effective tax rate in the three months ended February 24, 2024 resulted largely from a lower pretax income base increasing the tax expense ratio.
Net income was $2.6 million (net income margin of 1.7%), compared to $7.0 million (net income margin of 3.8%) in the prior year quarter, due primarily to lower revenue and gross profit, partially offset by lower SG&A for the current year quarter. The Company delivered an Adjusted EBITDA margin of 7.1% in the third quarter of fiscal 2024 compared to 8.9% in the prior year comparable quarter primarily due to lower gross margin and expense deleveraging on the lower revenue base.
