PRGX Global (PRGX) engages in data-mining processes in order to provide client companies with actionable insights on how they can become more profitable. The company's motto is: "Discover Your Hidden Profits." After reaching a 52-week high price of $8.85, the company currently trades for $5.85 per share, which gives it a market cap of $169 million. Can the company's share price recover back to levels above $8? This article will seek an answer to that question.
PRGX conducts business in more than 40 countries but the majority of the company's revenues come from the U.S. Some of the services provided by the company are Recovery Audit Services, Healthcare Claims Recovery Audit Services and Profit Optimization Services. Recovery audit services look at a company's vendor contracts to see if it is overpaying for any products or services offered by the vendors. The healthcare claims recovery audit services examine the payments made to the providers of the healthcare benefits to see if companies can cut costs in this particular area, which happens to be one of the biggest (and fastest growing) expense items for many large companies. Finally, the profit optimization services provide consulting to companies to help them maximize their financial functions and corporate performance through optimizing working capital and reducing enterprise costs.
The company's business contracts are on-going; which means it will continue to analyze the client's data for as long as the contract goes, rather than offering a one-time service. This allows for the company to have revenue visibility and stability in the short and medium term. The company also engages in "software as a service" practice, where its software is being licensed to clients. These software products analyze the client data automatically and generate periodical reports to the client. The clients can pay extra in order to receive more frequent and more detailed reports.
The company currently trades for 34 times its annual earnings (against an industry average of 28), 1.9 times its book ratio (against an industry average of 4.4), 0.8 times its annual sales (against an industry average of 1.8) and 8.9 times its annual cash flow (against an industry average of 13.6). In most metrics, the company is somewhat below the industry average. The company currently enjoys $37.9 million in cash and $5 million in total debt, which gives it a lot of cushion in case things take a time to play out.
Long Term Catalysts
The last quarter didn't go so well for the company as it reported a small loss of $500,000 when it was expecting to post a profit. After reporting an EBITDA of $21 million in 2010, the company's target was to double this number by 2014. PRGX was able to increase the number to $24 million in 2011 and $31 million in 2012. The company's goal for 2013 is mid $30s (in million) and the goal for 2014 is $45-48 million. Last quarter, the company's audit rate was not as high as hoped and its contingency-based revenues fell as a result. This was something the company wasn't expecting. The company had a delivery issue on top of some delayed payments from some large clients, and the management claimed that both issues were dealt with towards the end of the quarter during the conference call. PRGX also lost some clients in Europe due to the economic conditions in the continent. It may sound ironic that while PRGX's goal is to maximize client profitability through data-mining the company failed to post a profit in the quarter, but these things do happen. Much of the revenue that was supposed to be recognized in the first quarter was recognized in the second quarter, which is no big deal for the long term investors and things seem to be improving at the company.
This is a unique time in history that many companies are looking to maximize their profits by expanding their margins. Many companies are enjoying all-time high margins. After laying-off thousands of employees during the great recession, many companies have learned to do more with less, and they are looking for more ways to cut their costs. In addition, the "big data movement" is gaining momentum as companies learn the value of mining their data to maximize their benefits. This will be the biggest catalyst for PRGX as we move forward.
Furthermore, healthcare costs for companies have skyrocketed in the last decade. As the populations in the developed nations get older, the healthcare demand increases and there is a huge shortage of supply, which increases the cost of healthcare services. Many companies would benefit greatly from analyzing and possibly cutting their healthcare costs. This is another area where PRGX can be of great help.
During the conference call of the first quarter, the company's management insisted that the bad results were temporary and that they wouldn't repeat themselves. The company has been working on a transition plan that will intensify in certain geographies such as Europe, Asia and Pacific in the coming quarters, which may result some recovery. The company will be increasing the number of service centers and sales representatives in these regions in order to accelerate stimulate things.
The company is offering new services on top of the services it has been offering for a long time. These services are gaining a lot of attention and they are likely to fuel revenue growth for PRGX. Some of these services include spend optimization, merchandise optimization and data confirmation. In the future, as current and prospective clients get more comfortable with using these services, the company may see strong revenue growth. Furthermore, the company may introduce even more services to the market in order to capture a larger market share.
Just like the company helps its clients by the use of data mining, it is also attempting to help itself with the same means. Using data mining techniques, the company is hoping to identify the key services that are valued most by the clients and increase investment in those services. Also, as mentioned in the last few earnings calls, PRGX is actively looking for an acquisition in order to improve its footprint in the industry.
Profit optimization has a market size of $32 billion, which offers this new product with a lot of room to grow. In comparison, the company's other two products Next Generation Recovery Audit (NGRA) enjoy a market size of $2.3 billion and Healthcare Claims Recovery Audit enjoys a market size of $1.9 billion. This shows the size of the opportunity that exists in the company's profit optimization products.
Currently, the company mostly serves clients in the retail industry and it has a strong footprint as it enjoys long-term relationships with 200 clients and it offers services to 75% of the top 30 retailers in the world. Moving forward, the company will expand its products to other industries such as manufacturing, transportation and energy. Any industry that has complex purchasing processes (pretty much any industry in the world) is a candidate to enjoy products of PRGX.
Biggest Risk Items
Wal-Mart (WMT) is PRGX' biggest client and it accounts for slightly more than 10% of the company's total revenues. This is one of the biggest risk items for the company because if Wal-Mart decided to find another vendor and stopped using PRGX, the company would use a significant portion of its revenues and income. Wal-Mart is known to be a company that is always looking to cut its costs, which is good for PRGX, but at the same time, if the company found another vendor that can offer the same services at a cheaper price the company would have to either cut its prices or lose Wal-Mart as a costumer.
The company continues to struggle big time in Europe. In the last few quarters, its performance in the continent went from bad to worse as the management continued to blame the European recession which is a common theme with American companies lately. Eventually the European recession will come to an end and growth will return to the continent, but until it does, the company may continue to perform badly in the continent, which is a big risk factor for the investors. Until Europe gets back into growth mode, PRGX will have to grow in the US fast enough to offset the troubles in Europe, which is a very challenging task.
In this industry, pricing of the bids are done very aggressively and the companies are seeing lower margins as new entrants join the competition. For example, when we look at the bidding to offer services to Centers of Medicare and Medicaid Services (CMS) the contingency rate fell from 27-29% range to 10-12% range between two biddings. If the rates fall any lower in the next bidding, the project might not be profitable at all for the company. Of course this was just one example and there are many bidding sessions for many different client projects that are in the company's agenda as we move forward.
Given the company's bad performance in the first quarter, I would wait until the end of the month to see how the company performed in the second quarter to make a better decision about the company. Currently, I would rate the company as "hold" because while it enjoys a lot of opportunities, it also goes through some risky times as its American business is not growing fast enough to offset its declining European business.