PRGX Global's (PRGX) Ron Stewart on Q1 2016 Results - Earnings Call Transcript

| About: PRGX Global, (PRGX)

PRGX Global, Inc. (NASDAQ:PRGX)

Q1 2016 Earnings Conference Call

April 28, 2016 8:30 AM ET

Executives

Ron Stewart – President and Chief Executive Officer

Pete Limeri – Chief Financial Officer

Analysts

Alex Paris – Barrington Research

Zach Cummins – B. Riley & Co

Gregg Hillman – First Wilshire Securities Management

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2016 PRGX Global Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Ron Stewart. Sir, you may begin.

Ron Stewart

Thanks, Eric, and welcome to our first-quarter 2016 earnings conference call. I'm happy to report that we got off to a solid start in 2016, led by meaningful progress in our Global Recovery Audit business, which showed year-over-year growth when adjusted for changes in foreign exchange rates and the 2015 bankruptcy of a large U.S. client. This quarter represents the first period of year-over-year growth for our Recovery Audit business in over three years.

In the first quarter, we also continued to gain momentum in adjacent services. Our Supplier Information Management business recorded year-over-year growth in revenue, and we launched several new Spend Analytics engagements during the quarter. However, our first-quarter Spend Analytics revenue was impacted by delays in the contracting process related to a few engagements.

As these engagements ramp up and new engagements come online, we anticipate improved Spend Analytics revenue in the second quarter and beyond. While I'm pleased with our continued progress in executing our transformation strategy, we still have a lot of work ahead of us in order to accomplish our long-term objectives.

I will now ask Pete Limeri to provide you with specific details on our first-quarter financial results. Pete?

Pete Limeri

Thank you, Ron, and good morning, afternoon, or evening to each of you around the world. Let us note at the outset that certain statements in this conference call may be considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act.

These statements include statements relating to management's views with respect to future events and financial performance that are based on management's current expectations and beliefs, and are subject to risks and uncertainties, and other factors, which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements.

For additional information on these factors, please refer to PRGX Global Inc.'s filings with the Securities and Exchange Commission, including, but not limited to, its reports on Form 10-K and 10-Q. PRGX undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

This presentation also contains references to certain non-GAAP financial measures such as EBIT, EBITDA, and adjusted EBITDA, metrics that we use internally to measure our operating performance. A reconciliation between these non-GAAP measures and net income loss, the most directly comparable GAAP measure, is available under the Investor Relations portion of our website at PRGX.com.

I will begin by reviewing our financial results from continuing operations for the quarter ended March 31, 2016 compared to the same period in 2015. After review of these results, I will provide a short update on our discontinued operations.

Consolidated revenue from continuing operations for the three months ended March 31, 2016 was $31.2 million, a decrease of $1.8 million compared to the first quarter of 2015. On a constant dollar basis adjusted for changes in foreign currency exchange rates, consolidated revenue for the first quarter of 2016 decreased $895,000 or 2.8% compared to the same quarter in 2015.

The constant dollar decrease included $454,000 from a large US client that filed bankruptcy in 2015, and $373,000 of revenues from the Document Services business we sold in August 2015. So, adjusting for those two transactions on a constant dollar basis, revenue from continuing operations was essentially flat compared to Q1 2015.

As Ron stated earlier, some additional constant dollar revenue highlights, excluding the 2015 revenue from the previously mentioned client bankruptcy, include our Global Retail Recovery Audit business had year-over-year growth. The Global Retail Recovery Audit growth was driven by revenue increases in our Americas and Asia-Pacific businesses.

Our Global Commercial Recovery Audit business had year-over-year revenue growth, which was driven by our Americas and Europe businesses. And our Supplier Information Management business had a year-over-year revenue increase. Our total operating expenses from continuing operations, excluding depreciation, amortization, transformation, and stock-based compensation expenses for the quarter ended March 31, 2016, were $29.2 million or 93.5% of revenue compared to $29.8 million or 90.4% of revenue for the first quarter of 2015, a decrease of $630,000.

On a constant dollar basis, adjusted for changes in foreign currency exchange rate, these operating expenses for the quarter ended March 31, 2016 increased $298,000 compared to the same period in 2015. The increase was primarily driven by the costs associated with new sales and operational personnel who were not in place in the first-quarter 2015, and an increase in our US healthcare benefit costs. The increase was partially offset by our continued operational process improvements and other cost reductions throughout the Company.

Adjusted EBITDA from continuing operations for the three months ended March 31, 2016 was $2 million or 6.5% of revenue compared to adjusted EBITDA of $3.2 million or 9.6% of revenue for the same period in the prior-year. On a constant dollar basis, adjusted for changes in foreign currency exchange rates, adjusted EBITDA for the first-quarter 2016 decreased approximately $1.2 million compared to the same period in 2015. The variance was primarily attributable to the decrease in year-over-year revenue and the increase in the previously discussed operating expenses.

Now we will review our financial results from continuing operations for the three months ended March 31, 2016 at a more detailed level. Revenue from each of our reporting segments was as follows.

Recovery Audit Services Americas revenue was $21.6 million compared to revenue of $22.4 million in the first quarter of 2015. On a constant dollar basis, adjusted for changes in foreign exchange rates, Recovery Audit Services Americas' first-quarter revenue decreased by $464,000 compared to the same period in 2015. As mentioned previously, the prior-year results include revenue from a large US client who filed bankruptcy in Q3 2015. Excluding that amount from the Q1 2015 revenue, RA Americas was essentially flat compared to the prior-year.

Recovery Audit Services Europe Asia-Pacific revenue was $9.2 million compared to revenue of $9.3 million in the first quarter of 2015. On a constant dollar basis, adjusted for changes in foreign exchange rates, Q1 2016 revenue from this segment had growth of 3.2% compared to the first-quarter 2015. The growth was driven by the Asia-Pacific region, which had double-digit revenue increase, which was partially offset by a low-single-digit decrease in Europe.

In Europe, we experienced some positive traction as the commercial recovery audit business had year-over-year growth, and the retail business made progress in converting some of the age claims backlogs. Adjacent Services revenue for the quarter ended March 31, 2016 was $417,000 compared to $1.3 million for the same period in 2015. On a constant dollar basis, adjusted for changes in foreign exchange rates, our Adjacent Services revenue in the first-quarter 2016 decreased approximately $723,000 compared to Q1 2015.

Included in the decrease was $373,000 of revenue from the Document Services business we sold in August 2015, so adjusted for this transaction, our comparable revenue decrease was $350,000. As mentioned earlier, our Supplier Information Management Services business posted another quarterly increase in year-over-year revenue.

In our Spend Analytic business, we started work on multiple new projects during the quarter, although contracting delays and billing approvals delayed recognition of certain revenue, which we expect to recognize over the next few quarters. Our Cost of Revenue, or COR, from continuing operations, excluding transformation, was $21.5 million or 68.8% of revenue in the first quarter of 2016 compared to $23 million or 69.9% of revenue in the same period of the prior year, an improvement of 1.1% as a percent of revenue.

The improvement was primarily related to our continued operational process improvements, partially offset by the costs associated with new regional senior operational leaders that were not in place in the first quarter of 2015.

Total SG&A expenses from continuing operations, excluding transformation of stock-based compensation expenses, were $7.7 million or 24.7% of revenue in the first quarter of 2016 compared to $6.8 million or 20.6% of revenue in the same period of the prior-year. On a constant dollar basis, excluding the previously mentioned adjustments, SG&A expenses from continuing operations for the first quarter of 2016 were $7.8 million compared to $6.7 million in the prior-year period.

The increase was primarily driven by the costs associated with new sales personnel who were not in place in the first quarter of 2015, and an increase in the US healthcare benefit costs. These increases were partially offset by reductions in other general and administrative costs.

Depreciation and amortization expenses from continuing operations for the first quarter of 2016 were $1.6 million compared to $2 million in the same period of the prior-year. For the three months ended March 31, 2016, continuing operations had a net loss of $65,000 or essentially breakeven on a basic and diluted share perspective, compared to a net loss of $2.3 million or negative $0.09 per basic and diluted share for the same period in 2015.

As announced on the Q4 earnings call, during the fourth quarter of 2015, we discontinued the Healthcare Recovery Audit segment. In the quarter ended March 31, 2016, we had a $487,000 loss in our discontinued operations compared to a $701,000 loss for the same period in 2015. Including discontinued operations, our consolidated net loss for the three months ended March 31, 2016 was $552,000 or a negative $0.02 per basic and diluted share compared to a loss of $3 million or negative $0.11 per basic and diluted share for the same period in 2015.

I will now highlight certain balance sheet and cash flow information. As of March 31, 2016, we had net unrestricted cash and cash equivalents of $15.7 million, no borrowings against our revolving credit facility, and no debt outstanding. $4.9 million of our March 31 cash was in US bank accounts with the remainder held outside the US.

Net cash provided by operating activities for the quarter ended March 31, 2016 was $4.9 million compared to $5.4 million for the same period in the prior-year. Capital expenditures on property and equipment for the quarter ended March 31, 2016 were $1 million compared to $1.1 million in 2015.

And now for an update on our stock repurchase program. Since the February 2014 announcement of the Company's stock repurchase program, as of March 31, 2016, the Company had repurchased 8.4 million shares or 27.9% of its common stock outstanding on the date of the announcement. As previously announced, in October 2015, the Company's Board of Directors approved a $10 million increase in the program and extended the duration of the program to December 31, 2016.

We repurchased approximately 700,000 shares of outstanding common stock for an aggregate cost of approximately $2.6 million in the quarter ended March 31, 2016. As of April 22, 2016, the Company had approximately 21.9 million shares of common stock outstanding.

With the completion of the financial review, I'll now turn it back over to Ron.

Ron Stewart

Thanks, Pete. So we are encouraged by the performance of our Global Recovery Audit business during the first quarter. After a disappointing fourth quarter in 2015, our Recovery Audit business in Europe improved substantially, declining only slightly year-over-year on a constant dollar basis.

As I mentioned on last quarter's call, we made a number of important leadership changes in Europe during the fourth quarter of 2015. And in the first quarter of 2016, we added a senior-level manager focused on core audit operations. These management changes are already having a meaningful impact, and we expect this momentum to continue into future quarters.

We're also pleased with the continued progress in our Commercial Recovery Audit business, which, as you may recall, includes our clients in non-retail industries. First-quarter commercial accounts payable Recovery Audit revenue on a constant dollar basis grew year-over-year, and we were awarded a number of new engagements at new clients, and expanded our scope of services in several other clients, including a significant global resources client.

Our primary area of focus in 2016 are improved audit performance, service offering development, and revenue growth. In our Global Retail Recovery Audit business, we are seeing positive results from our audit acceleration initiatives as well as audit maturity model implementation.

Our hybrid technology platform continues to benefit our audit operations as we achieve a meaningful increase in days available to audit for the clients converted. This should result in more claims generated for our clients and increase revenues for PRGX. We expect to convert all of our major audits to our new hyper platform over the next two years.

So we continue to make meaningful progress in our commercial audit processes and supporting technologies. During the second quarter of 2016, we will introduce our new self-audit capabilities and client portal, including AP analytics tools, which will significantly elevate our service offerings and enhance our competitive position. As evidence of potential impact, we recently were selected by two new commercial clients that required this self-audit capability.

In addition to our audit processes and technology platforms, we are investing heavily in building the adjacent services platforms supporting Spend Analytics and Supplier Information Management. Development of tools and underlying Software-as-a-Service platform to deliver our Spend Analytics capabilities is progressing, and we expect to generate subscription revenues in the second-half of 2016. The integration of the Global EDGE Technology platform with our internally-developed supplier information management system is also progressing nicely, and we are seeing strong evidence in the market as we accelerate the sales process around the world.

In order to achieve our goal of consistent and sustainable revenue growth, we continue to build an industry-leading global go-to-market organization. We have added senior-level market and client development resources in Q1 and Q2, with the clear expectation of seeing meaningful increases in revenues from existing and new clients as these resources get up to speed and begin developing their opportunity pipelines.

I remain bullish that we will see revenue growth in the second-half of 2016, although continued investing in our offering development on sales and marketing resources is expected to result in a near-term drag on EBITDA.

With those comments complete, I will now turn the call back over to Eric, who will facilitate questions. Eric?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Alex Paris, from Barrington Research. Your line is now open.

Alex Paris

Good morning guys.

Ron Stewart

Good morning Alex.

Pete Limeri

Good morning Alex.

Alex Paris

Got a couple questions, really points of clarification. First off - and a small one. On your last comments, Ron, I missed what you said. You are increasingly bullish that you will see revenue growth in the second-half, but you were under a little bit of pressure on adjusted EBITDA. What was that? I just didn't quite hear it. I apologize.

Ron Stewart

That's correct. We will see - we feel like we will see growth in the second-half, and - but our investment in sales and marketing resources and our platform development will have an impact on EBITDA as we invest in growth.

Alex Paris

Okay. Thank you. And then can you give us a little bit more color on the new self-audit product that you are introducing in the second quarter? Sounds like a product that makes sense and a product that the market is demanding. But just a little more color there would be helpful.

Ron Stewart

Sure. Sure. And this capability would allow clients to perform the initial audit reviews without us doing the actual auditing. So we prepare the data. We provide the tools that they use to find duplicate payments and to process early-stage audits. And then what we'll typically do is come in behind and do the more - the larger post-audit operations.

So, it's a way for clients to take on certain amounts of the responsibilities for the less complex auditing. And then the market is definitely, for a number of our clients, looking for these kinds of tools. And it's important for us to be competitive

Alex Paris

Well, it sounds like something they've been doing for years anyway. There's always a first internal pass before they hand it off to folks like PRG. You are just helping them do that more efficiently with the tools that you can sell. How is that - how do you charge for that? Is it a subscription basis? Or is it a one-time fee?

Ron Stewart

It is a - you know, there will be an initial setup fee and then a subscription basis that will vary based on the amount of spend that goes through it.

Alex Paris

Got you. And this is going to be offered to existing AP recovery clients?

Ron Stewart

To - on the - in the commercial segment. So that's where we are targeting the initial - it's on - in the commercial segment.

Alex Paris

Okay, but this would be again be existing clients, not clients that are - or not commercial enterprises that are not clients at all? Or is it sort of like a way to get into a client?

Ron Stewart

It's being offered to both, where a client wants to take on more of that upfront responsibility, that's where we provide it, whether they are new clients or existing clients.

Alex Paris

So you are starting with commercial, then there's the potential, with success in commercial, to roll that out to retail in the future?

Ron Stewart

We anticipate continuing to add audit capabilities on the retail side. And it's definitely the - as far as market demand, heavier on the commercial side than what we see in retail. But yes, it's something that we'll look to expanding in other segments.

Alex Paris

Okay, good. Then moving on, the Adjacent Services platform, you said that obviously revenues were down in the quarter - year-over-year, I'm just jumping to that page here. And that was primarily due to Spend Analytics being down. Can I have some - can I get some more color there?

Ron Stewart

Sure. And I think, as we talked about Q4 results, that we had won a significant engagement in Q4, were selected. And the contracting process was underway. And we have since finalized that contract, but we couldn't recognize revenues in Q1 because we did not have everything ticked and tied. But that's now resolved.

We had another outstanding statement of work that had to be finalized to recognize revenue that did not get completed in Q1 that will be completed this quarter. You know we had several other engagements that were starting out that were in the contracting phase right now.

So we feel good about the momentum. We're seeing good activity and winning on these engagements, but the contracting process is lagging a little bit as we go through it. And that's typically just getting statement of works finalized, getting approvals from up the chain at the clients and it's not significant, no particular issue. It's just timing.

Alex Paris

Okay, got you. And then lastly for me, M&A. During the first quarter, you made an acquisition. You said the integration is going along as planned. What does the M&A pipeline look like? And what role will M&A play in building out PRGX for the future?

Ron Stewart

Sure. And you know we made that acquisition in Q4 of 2015, the Global EDGE. And - but we continue to view M&A opportunistically in two general areas. One would be technology assets that could accelerate our platform development and what we are taking to market around our spend data. And then the second is we can look at other recovery audit companies that offer good access to large clients where we can leverage our platform into new clients that we are not in today.

So - but we are looking opportunistically at both of those as they come up. We look at them and that's kind of the guardrails for M&A for us right now.

Alex Paris

Got you. That's helpful. Well, thank you very much. That's it for me.

Ron Stewart

All right, Alex. See you soon.

Alex Paris

Yes.

Operator

[Operator Instructions] Our next question comes from the line of Kevin Liu from B. Riley. Your line is now open.

Ron Stewart

Hi, Kevin

Zach Cummins

This is Zach Cummins. I'm subbing in for Kevin today. But - so my first question - I know you've touched on this a little bit, but could you provide some more color on what drove the strength in the Europe and APAC Recovery Audit segment? And do you believe it's sustainable going forward?

Ron Stewart

Pete, can you take that one?

Pete Limeri

Sure. So the strength came from the Asia-Pacific region. I'll start there. On the retail and commercial front, both businesses were able to convert. We had some scope expansion going on in there.

Asia-Pacific has grown in 16 out of 17 quarters. And so that region has continued to perform and overperform. It should continue through 2016 as we continue to grow that region. A lot of focus - we have a very large market share on the retail side of that region. Our growth is really coming in the commercial side of that region. But even on the retail side, we continue to expand scope, introduce innovative ways to convert claims. And that's how we also have growth on the retail side.

On the Europe side, in Europe, we had a good quarter. We said that with Europe, commercial grew. And we had a very good quarter in Europe commercial. We had some clients there, existing clients that now we were able to convert some clients' backlog that came through. So we made some good traction there.

And on the retail side, we talked about over the last couple of calls, around the problem we had with converting some of the claims in the backlog. And we were able to do that on the retail side as well. So blended, Europe had a low-single-digit decrease. Will that continue? If we continue to convert that claims backlog, we should continue to see those same results. We are optimistic. We've got some new leadership, as Ron mentioned, and they are making an impact already operationally.

So, again, that kind of single-digit decrease in Europe could fluctuate in this business. As you know, some quarters, depending on clients' approvals as they come through, are very good; and other times, they miss that quarter and they spill into the next quarter. So we'll continue to manage that very closely. We've got a lot of focus on that, a lot of contact with our clients. And we are making progress.

Zach Cummins

Great. Thank you. That's very helpful. And my next question is - what's the total value of Adjacent Services awards that you've received but have yet to recognize under revenues?

Pete Limeri

Last quarter, Ron had mentioned a pipeline of about $5 million that we were out there finalizing and proposing, and we're still about that same number for the full-year, around that $5 million. That pipeline remains about $5 million as we are continuing to either close on that or get in the final stages of closing those deals.

Zach Cummins

All right. Great. Thank you. And my last question is, is the magnitude of the headwind from the client bankruptcy in the Americas segment expected to be similar in Q2?

Pete Limeri

Yes.

Zach Cummins

All right. Great, thank you.

Ron Stewart

Appreciate it.

Operator

Your next question comes from the line of Gregg Hillman from First Wilshire Securities Management. Your line is now open.

Gregg Hillman

Hey, yeah, good morning.

Ron Stewart

Hi, Gregg.

Gregg Hillman

Ron, can you talk about – for your new product, your self-audit product, how that product is positioned relative to Epic?

Ron Stewart

Oh, okay. How is it positioned?

Gregg Hillman

Yes.

Ron Stewart

No, I'll take the - and, by the way, we've had self-audit capabilities in certain areas, but we formalized it and really enhanced the capability. But I know that some of our competitors have self-audit tools. And so we're - our intention is to meet and exceed the capabilities that they provide. And there are a number of clients that that is an expectation of at least part of their audit program.

And we haven't had it as a strength in our portfolio of capabilities that now we will. And that, in addition to, I mentioned the portal with analytics tools and other access for the clients that give them views to new services and different views of their data that perhaps they don't have available in internal systems. So, those two together just give a much more powerful set of capabilities, and then a different user interface and experience with PRGX.

Gregg Hillman

And then, was the development of this portal - these software tools, was that a drag on earnings in past quarters?

Ron Stewart

We've invested in it for a few quarters, but I wouldn't say it was a significant drag.

Gregg Hillman

So you only spent like in the hundreds of thousands of dollars to develop it, not in the millions?

Ron Stewart

Well, we are spending - Gregg, it depends on the quarter, right? And the flow of it. But, yes, we spent in the hundreds of thousands, but it could be millions in another quarter, depending on the acceleration we put on it and the opportunities we see. But we talked about - about a $6 million CapEx spend. It's an important part of that $6 million for this year.

Gregg Hillman

Okay. And do you have a guy that's head of it?

Ron Stewart

We have both a product manager as well as obviously someone that leads the commercial segment for us to - that oversees everything.

Gregg Hillman

Okay. Great. And is this a domestic product or is this an international product?

Ron Stewart

International.

Gregg Hillman

Okay. Well, that's encouraging. And can you just talk about some of the other pieces of Adjacent Services? You know, the vendor -?

Ron Stewart

Supplier Information Management?

Gregg Hillman

Yes.

Ron Stewart

Yes. We acquired, as we mentioned before, Global EDGE in Q4, and we have an existing platform that primarily served UK and European region. So we are converging those platforms and building the next generation platform. But we still offer services in those existing platforms of Supplier Information Management and Global EDGE.

So - but we are bringing those two platforms together with some additional functionality and capability that we are very bullish on. We are actively marketing the solution and feel very good about the response that we are seeing in the market.

These - this Supplier Information Management is, when you sign up a new client, you've got to onboard the suppliers. And it's typically, revenues are built around the onboarding of suppliers. And so it takes a little while to build up revenue, but it's - good news is it's constant, sustainable, predictable revenues, which we surely like, compared to a - you know, the contingency business, which, as we all know, is a bit lumpy from time to time.

Gregg Hillman

Right. And then, Ron, in terms of your clients, how many like pure online retailers do you have as clients?

Ron Stewart

Well, we have several. I don't have the number right off the top of my head, but it's definitely a segment that we are active in and have a significant presence in.

Gregg Hillman

And does your business for online retailing, does not match the percentage of online retailing in the external economy?

Ron Stewart

Do you mean in terms of volume of claims and revenue share?

Gregg Hillman

Yes. Yes, the business that you do with online, does that match what online retailing is doing in the economy either domestically or internationally?

Ron Stewart

Yes, I think it both matches the - we find similar types of claims, and there is some - obviously, some nuances about online that present claim opportunities. But it's also in a lot of our clients growing significantly. And so we are seeing increased revenues just as our clients' revenues increase.

Gregg Hillman

Right. But I mean just for it - with the growth of online retailing in the United States, would you benefit from that proportionately with the growth that's going on?

Ron Stewart

Absolutely. Absolutely. We're - many of our clients - most of our clients have an online presence, and so we both cover them and their conventional brick outlets as well as the online portions. But in the fast-growing, pure play online retailers are - as they grow, we grow. And we're seeing significant growth there and opportunities for expanded presence.

Gregg Hillman

Yes, so there is nothing about their business model to begin with that requires less auditing, because they have a better computer system to begin with, and they keep better track of kind of what's going on with their vendors, that you find that they are in equal need of audit services as the traditional brick and mortar retailers?

Ron Stewart

Yes. And I think there are some differences that when you look at claim category by claim category, you are going to see some differences. But overall, there is absolutely no degradation in the need for Recovery Audit, and the opportunity to find pricing errors and adherence to deal terms that we typically find with other retailers.

Gregg Hillman

Okay, great. Thank you.

Ron Stewart

Good. Thank you.

Pete Limeri

Thanks, Gregg.

Operator

And I'm showing no further questions at this time. I would like to turn the call back to Ron Stewart for any closing remarks.

Ron Stewart

Thanks, Eric. And let me thank everybody for your interest and your questions today. We appreciate your attendance on the call and look forward to speaking to you next quarter. Thanks.

Operator

Ladies and gentlemen, thank you for participating in today's call. This does conclude the program. You may all disconnect. Everyone have a great day

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