PRGX Global's (PRGX) Ron Stewart on Q2 2016 Results - Earnings Call Transcript

| About: PRGX Global, (PRGX)

PRGX Global, Inc. (NASDAQ:PRGX)

Q2 2016 Earnings Conference Call

July 26, 2016 08:30 AM ET

Executives

Ron Stewart - President & CEO

Pete Limeri - CFO

Analysts

Alex Paris - Barrington Research

Kevin Liu - B.Riley & Company

Eric Ward - Northern Right

Operator

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

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

Ron Stewart

Thank you, Liz, and welcome to our second quarter 2016 earnings conference call. The highlight of our second quarter, the performance of our largest business retail recovery audit which grew revenue of about 4.4% in the Americas and 1.5% globally compared to the same period last year on a constant dollar basis. From a borrowed company perspective, we continue to see meaningful contributions from our investments in people, technology and our emerging growth platforms, which we believe position us for year-over-year revenue growth in the second half of 2016 and beyond.

I will let Pete take you through the details of our second quarter financial results. When I return, we will discuss the market we serve, our strategy for growth, and why we think the revenue traction over the last couple of quarters is just the beginning of things to come. 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 the 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, 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 Forms 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 June 30, 2016, compared to the same period in 2015. Consolidated revenue from continuing operations for the three months ending June 30, 2016, was $35.3 million, a decrease of $1.7 million compared to the second quarter of 2015. On a constant dollar basis adjusted for changes in foreign currency exchange rates, consolidated revenue for the second quarter of 2016 decreased $653,000 or 1.8%, compared to the same quarter in 2015. Included in the prior year's period is approximately $290,000 from a large U.S. client that filed bankruptcy in 2015, and $342,000 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 Q2 2015.

Some additional constant dollar revenue highlights, excluding 2015 revenue from the previously mentioned client bankruptcy and Document Services business we sold, include our Americas Recovery Audit business had year-over-year growth of 1.3%. Our global Retail Recovery Audit business had year-over-year growth of 2.5%. The global Retail RA business increase was led by Americas Retail Recovery Audit business, which includes the U.S., Canada and Latin American regions, with each posting year-over-year revenue growth. Our Adjacent Services business had year-over-year revenue growth of 30.2%, while our Advisory and Analytics and SIM Service offerings both had a year-over-year increase in revenue.

Our total operating expenses from continuing operations, excluding depreciation, amortization, transformation, stock-based compensation expenses for the quarter ending June 30, 2016, were $31.8 million, or 90.1% of revenue, compared to $30.9 million, or 83.6% of revenue for the second quarter of 2015, an increase of $862,000. On a constant dollar basis, adjusted for changes in foreign currency exchange rate, these operating expenses for the quarter ended June 30, 2016, increased $1.7 million, compared to the same period in 2015. This increase was primarily driven by increases in compensation costs, including investments associated with new sales and operational personnel who were not in place in the second quarter of 2015, and an increase in legal costs related to potential acquisition activity, and an increase in our U.S. 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 June 30, 2016, was $3.5 million or 9.9% of revenue, compared to adjusted EBITDA of $6.1 million or 16.4% 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 second quarter of 2016 decreased approximately $2.3 million compared to the same period in 2015. The year-over-year variance was primarily attributable to the following: a slight decrease in revenue, increases in compensation expenses related to new sales, operational and development personnel of $1.2 million, increase in legal costs related to acquisition activity, and U.S. healthcare benefit costs of approximately $1.1 million.

Now, I will review our financial results from continuing operations for the three months ended June 30, 2016, at a more detailed level. Revenue from each of our reporting segments was as follows. Recovery Audit Services Americas revenue was $25.1 million, compared to revenue of $25.4 million in the second quarter of 2015. On a constant dollar basis, adjusted for changes in foreign exchange rates, Recovery Audit Services Americas' second quarter revenue was essential unchanged compared to the same period in 2015. As mentioned previously, the prior-year results include revenue from a large U.S. client who filed bankruptcy in Q3 2015. Excluding that amount from the Q2 2015 revenue, RA Americas had constant dollar growth of 1.3%, compared to the prior year, led by our Retail Americas business, which had year-over-year constant dollar growth of 5.7%.

Recovery Audit Services Europe Asia-Pacific revenue was $8.7 million, compared to revenue of $10 million in the second quarter of 2015. On a constant dollar basis, adjusted for changes in foreign exchange rates, Q2 2016 revenue from this segment was lower by 7.5%, compared to the second quarter of 2015. As I mentioned earlier, we continue to invest and are making progress in our European operations.

Adjacent Services revenue for the quarter ended June 30, 2016, was $1.5 million, compared to $1.7 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 second quarter of 2016 was essential flat, compared to Q2 2015. Included in the prior year results was $342,000 of revenue from the Document Services business we sold in August 2015, so adjusted for this transaction, we had revenue growth of $339,000, or 30.2%. As mentioned earlier, we had growth in some of our Advisory and Analytics and SIM business. In our Advisory and Analytics business, we had a strong quarter after working through the contracting delays we experienced in Q1 and in our Supplier Information Management Services we posted its third consecutive quarterly increase in year-over-year revenue.

Our Cost of Revenue, or COR, from continuing operations, excluding transformation, was $23.1 million or 65.6% of revenue in the second quarter of 2016, compared to $23.8 million or 64.3% of revenue in the same period of the prior year. The lower cost was primarily related to our continued operational process improvements, partially offset by costs associated with new regional senior operational leaders that were not in place in the second quarter of 2015.

Total SG&A expenses from continuing operations, excluding transformation of stock-based compensation expenses, were $8.6 million or 24.5% of revenue in the second quarter of 2016, compared to $7.2 million or 19.4% of revenue in the same period of the prior year. The increase was primarily driven by increases in compensation costs, including investments associated with new sales personnel who were not in place in the second quarter of 2015, and an increase in legal costs related to potential acquisition activity, and an increase in our U.S. healthcare benefit costs. These increases were partially offset by cost reductions in other areas across the Company.

Depreciation and amortization expenses from continuing operations for the second quarter of 2016 were $1.6 million compared to $2 million for the same period in the prior year. For the three months ended June 30, 2016, continuing operations had a net loss of $33,000 or essentially breakeven on a basic and diluted share perspective, compared to net income of $1.8 million or $0.07 per basic and diluted share for the same period in 2015.

In the quarter ended June 30, 2016, we had a $559,000 loss in our discontinued operations, compared to a $727,000 loss for the same period in 2015. Including discontinued operations, our consolidated net loss for the three months ended June 30, 2016, was $592,000 or a negative $0.03 per basic and diluted share, compared to income of $1.1 million or negative $0.04 per basic and diluted share for the same period in 2015.

I will now highlight certain balance sheet and cash flow information. As of June 30, 2016, we had net unrestricted cash and cash equivalents of $15.2 million, no borrowings against our revolving credit facility, and no debt outstanding; $5.4 million of our March 3 -- of our June 30 cash was U.S. bank accounts with the remainder held outside of the U.S.

Net cash provided by operating activities for the quarter ended June 30, 2016 was $544,000 compared to $2.1 million for the same period of the prior year. Capital expenditures on property and equipment for the quarter ending June 30, 2016 were $1.1 million compared to the same amount in 2015. And now for an update on our stock repurchase program.

Since the February 2014 announcement, the Company's stock repurchase program as of June 30, 2016, the Company had repurchased 8.6 million shares or 28.6% of its common stock outstanding of the date of the announcement. As previously announced in October 2015, the Company's Board of Directors approved a $10 million increase to $50 million in the program and extended the duration of the program to December 31, 2016. We repurchased approximately 218,000 shares of outstanding common stocks for an aggregate cost of approximately $1 million in the quarter ended June 30, 2016. As of July 20, 2016, the company had approximately 21.8 million shares of common stock outstanding.

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

Ron Stewart

Okay. Thank you, Pete. I want to take a few minutes this morning to offer an overview of the market reserve and discuss how we're positioning our business to provide a truly unique and differentiated value proposition for our clients. We will then drill down into the company's strategy which is driving the current momentum in the business and the opportunities ahead.

First, from a macro perspective, we fit squarely in the Procure to Pay or P2P to service this market space. Our traditional services have focused on the payment side of P2P where we process over $2 trillion to spend on behalf of our clients around the world and provide them between $1 billion and $2 billion in cash flow improvement each year based on our historical 0.1% to 0.5% recovery rates. However, the entire global P2P service market is far larger considering the global economy at $78 trillion GDP with every dollar of suppliers spend going through the P2P process.

As we all are fully aware, the global economy is highly dependent on the global supply chain and the effectiveness of relationships between buyers and sellers. Due to incredible advances in technology and communications over the past 30 years, the supply chain for almost every company has expanded dramatically both in terms of geographic reach, capability and associated complexity. For example, over 50% of all supply chain transactions are global in scope with buyers often having limited information or knowledge about suppliers around the world. Combine this with the fact that the supply chain complexity and efficiency are further increased by organization complexity, lack of integration and information systems, large scale mergers and acquisitions and inherent risks and interruptions of worldwide events, as well as ever-expanding regulatory requirements.

Based on our 40 plus years of experience in P2P spend analysis, reinforced by countless examples of supply chain improvements across industry, we believe that somewhere between 5% and 10% plus of every dollar spent on products and services in the global supply chain is wasted due to inherent complexities and risks in supply chain processes. This is where our expanded value proposition comes into play. Our growth strategy is based on expanding our scope of services in the payment side of P2P as well as moving upstream with procurement-related services where we can positively impact the 5% to 10% value leakage inherent and supply chains of our clients.

We believe that our RA business platform uniquely positions us to create enormous value for clients and gives us a significant and sustainable competitive advantage over other players in the broader P2P market space for four fundamental reasons; number one, we already have the data. We serve a large and impressive list, very large multinational companies in our core recovery audit business which requires access and processing of their detailed P2P data on the daily, weekly, or at least periodic basis. We maintain and process over 7 petabytes of data in our systems. To give you a comparison, 7 petabytes of data will be equivalent to 140 million four-drawer filing cabinets filled with documents.

Number two, we know the data and underlying processes. The work we do in recovery audit requires that we fully understand our clients' systems, fine practices, receiving and payment procedures, as well as the suppliers, contracting, performance and billing practices. For many of our largest clients, we've been performing these services for decades. Number three; we take a very different perspective in analyzing the data. We look horizontally across our client's processes and organization structures versus vertically, which is how most companies are organized and ERP systems designed. And finally, number four, our contingency RA value-proposition minimizes our cost of entry and truly aligns us with our clients.

In order for us to fully capitalize on this opportunity, we must build and integrate the tools and capabilities to deliver valuable insights and assist companies in managing their supply chain complexity. This is the opportunity and the journey we've been pursuing since I became CEO two and-a-half years ago and I believe we've made great strides along that journey. Initially, we focused on accessing on profitable and non-strategic parts of the business and clearly defining our long-term growth strategy.

Next, we turned our attention to our core recovery audit business, transforming audit engagements to incorporate best practices based on our proprietary recovery audit maturity model and we developed a state-of-the-art technology infrastructure that is capable of processing the huge amounts of data we received from our customers much faster. But it isn't just about speed. This innovative platform is also capable of manipulating and processing data in different ways than we were able to do in the past, further setting us apart from the rest of the market.

I am pleased to say that we are already seeing the benefits of this initial efforts as is evidence in the financial results over the past several quarters and highlighted by our retail RA business performance this quarter. As we look to move upstream into P2P process, we have been building our expanded service platforms around spend analytics and supplier information management; provide greater insight into spend and efficiencies and P2P process and expanded capabilities to manage complex and dynamic supplier relationships, risks and compliance requirements. We announced two new service and capabilities earlier this year and we will be announcing additional service offerings and capabilities later in 2016.

Due to our expanded services and improved performance in our core RA business, we have expanded our presence within our current client base and have added an impressive list of new clients. In closing, our long-term success will be determined by our ability to further deliver a superior level of execution in our core recovery audit business to accelerate, access to and processing of key client transactional data, develop platforms to deliver insights and services to improve P2P efficiency and risk and finally to secure new clients with large spend to scale and deliver our expanded value proposition.

That's our journey and how we will deliver on the growth potential of this massive global market opportunity in front of us. Our journey is not a straight line and we've had bumps along the way. While we are very pleased to see growth in the largest business, America's retail recover audit, we are continuing our investment in Europe and our adjacent services business segment. We continue to be bullish on revenue growth in the second half of the year.

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

Question-and-Answer Session

Operator

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

Alex Paris

Good morning, guys.

Ron Stewart

Good morning.

Pete Limeri

Good morning, Alex.

Alex Paris

Congratulations on the quarter. You beat my estimates on both Recovery Audit Americas and Analytics, and a backing up which you said there -- your initial focus. Where you came up short was of course Europe, Asia Pacific in the Recovery Audit business versus my estimate, both on revenue and then operating and adjusted EBITDA. Obviously, the business been struggling for a long time -- at least in Europe, you made some changes in leadership there; Asia Pacific has been the strength within that segment. Can we just dive a little bit more into what's going on there and what we can expect going forward?

Ron Stewart

Pete, why don't you respond to that along with the financial side?

Pete Limeri

Sure. So Alex, you're correct -- and we make progress, we did make leadership changes there. And in Q1 we got a pretty strong commercial showing in the European operations. And retail, we continue to make progress with both productivity in our web, we monitor that very closely. Our web continues to increase and our conversion percentage which is still our main focus, which obviously drives revenue, saw it being up where we want it to be. So we continue to focus on those productivity improvement and again, make progress in Q2 and looking out towards Q3 and Q4, we get to where we think we should be, we'll have a good second half in Europe. And regarding the Asia-Pac, as you know it has been the strength in that segment and I think we talked about last quarter, and I think 15 out of 17 quarters growth that are up against sales from that regard. And fairly good quarter this quarter, but it didn't have the same growth it had historically, again just being up against its own performance but still strong there, and still growing just not growing at same rate we've been growing previously over historical quarters.

Ron Stewart

Yes, just to add to that with Europe -- it is a journey we're on there with the transformation of that team and we've made a number of changes as you know. We are seeing and in our -- the first few clients were really put a shoulder to the wheel, significant improvements, and we are going client-by-client, audit-by-audit, and really addressing some of the historic challenges and we're seeing progress, it's just taking a little bit of time I think. I am a very bullish on where we are in Europe and where we can go. Asia Pacific is solid, I think we have a little bit a quarter-to-quarter of ups and downs but the market's not huge, there are not a large number of retailers, we're working in all of the major ones but relationships are strong, the workers expanding, and we feel good about what our longer term prospects are.

Alex Paris

Great. Just wanted a clarification, what is the hold up in terms of conversion in Europe? It is that always been an issue there versus the U.S. -- is it getting -- had it been getting worse?

Ron Stewart

Well, we've talked about the G-Scott [ph] legislation in the UK which was passed a couple years ago. So it has been -- and this is legislation that really protects the suppliers from practices of supply of retailers in terms of forcing them to different pricing or different types of behavior. And so -- there is -- and there are buys associated with it, there is a governing body. So the retailers are definitely looking more seriously at all of the claims and reviewing them more closely with more scrutiny. And so we've seen that slow things down, that doesn't mean that claims go away or that the types of errors that are found or issues that are found are not valid. But it has slowed things down and companies are not auto-deducting like -- perhaps, they were few years ago. But again, that just means we've got to educate retailers and suppliers in terms of the process and be more aggressive than defending the claims and position the claims, it just takes a little bit longer.

Alex Paris

Good, I recall that, thanks for that refresher. And then Pete maybe one last question on Europe before we move on. What's your exposure -- just remind me, what's your exposure to UK? What percent of your revenue comes from their percentages, EBITDA -- how are you going to provide it?

Pete Limeri

From revenue perspective Alex, there about -- between 25% and 30%.

Alex Paris

25% to 30% of PRG is consolidated revenue?

Pete Limeri

Correct.

Alex Paris

And then despite -- despite that exposure, I knew that something in that neighborhood -- despite that exposure you still expect you got a shot at higher consolidated revenue in the second half year-over-year? Is it you're going to have some pressure obviously from FX?

Pete Limeri

Correct, on an FX neutral basis.

Alex Paris

That's correct. All right, thanks. And then a couple little ones and I'll let somebody else ask a question. The bankruptcy of the large client that occurred in the third quarter of last year, has that been anniversaried now or is that going to continue to be a drag on the third quarter?

Pete Limeri

It won't be a significant drag in Q3.

Alex Paris

Okay. So the significant negative comps are behind us there?

Pete Limeri

Yes.

Alex Paris

And then also the Document Services business, you said you sold that in August, so that comp will be less of an issue in Q3 and no impact in Q4?

Pete Limeri

Correct.

Alex Paris

I think that's good for me, I'll jump back in the queue.

Pete Limeri

Thanks, Alex.

Operator

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

Kevin Liu

Good morning. You talked about a number of strategic initiatives that you guys have, certainly in Q2 there are fair amount of investments that made in those -- the cost of revenue line and SG&A. Were these to support programs that you've already secured or is this more of just kind of an investment to pursue as in the initiatives you talk about that? And then related to that, how long do you expect to take the leverage -- the investment that you've already made?

Ron Stewart

No, it's actually a little of both. We have -- some of those costs are just inherent in the business as increased healthcare for example, and -- but we have increased our sales teams around the world and that's a year-over-year change, and we're -- obviously have an investment in the future and we're again, very pleased with those investment to stand good momentum. So I expect that to be something that will pay-off in future quarters. In terms of Europe, again, we continue to invest on that -- if this -- on the operating line. But Europe is an investment in the future, we're seeing good momentum but again, we should see positive results of that in future quarters, recovery -- excuse me, the adjacent services, we're both building platforms which -- obviously there is some portion of that that's capitalized but we are building capability and investing in teams so that we can scale it and again, those are more future oriented. So I think most of what we're seeing are investments in the future although we do have things are outside of our control relative to health costs and some of the legal costs that are due to other things we doing.

Kevin Liu

Got it. And on the adjacent services side, obviously kind of a nice view down from where you guys started the year. Can we talk about kind of the duration of these projects you have? Going on are there any significant projects that either kind of wind up in terms of the overall project or just stays there? I mean how confident are you that you can sustain this level of revenue going forward?

Ron Stewart

Right, you know in this business the advisory portion of the business is engagements, typically are three to six months in duration, so they do have to -- we do have to build next phases and close next phases of these. But just to give you a perspective, in Q1 we really were starting up on a couple of clients and building from there. Going into Q3, we're actively working in eight clients and we have good prospects of continuing in all eight of those with future phases. So we are seeing an expansion in the client base and we're again adding teams and capabilities to support that growth, but yet we're still bullish that we're going to continue to see improvements in the adjacent services side, especially in spend analytics in the near term. I think the supplier information management will be a longer term, you'll see that much more of a longer term investment than a shorter term.

Kevin Liu

Great. And just one last one on the expense side; for the legal costs within the quarter, are you guys still evaluating that deal? Can you talk a little bit about where that would have impacted the business and what was kind of the amount of spend you would consider non-recurring there?

Pete Limeri

Kevin, I can't talk too much about the deal itself. You know, we're always looking at opportunities to expand in our Growth Service lines, and this is one of those that's within the Growth platforms. And from that perspective, the cost of that in the quarter was approximately about $400,000 to $500,000. That would be non-recurring in the future quarters.

Kevin Liu

Okay, that's all I have for now. Thank you very much.

Operator

Our next question comes from the line of Eric Ward with Northern Right. Your line is now open.

Eric Ward

Hi guys, can you provide just a little bit more color on how the revenue within Adjacent Services broke down, obviously, a lot of growth there, curious exactly where that's coming from. And just more broadly, how you think about the ramp up in spend and whether you have some more information from the back half of this year and into next year?

Pete Limeri

Eric, so on the breakdown of the revenue between the Advisory and Analytics versus the SIM, the Advisory and Analytics is the majority of the growth; however, SIM did have growth. It's our third consecutive quarter of growth there, but the majority of the growth came from the Advisory and Analytics piece. I'll let Ron handle the second part of your question.

Ron Stewart

Yes, and the second part, just to clear -- what can I explain further on that?

Eric Ward

Just curious how you think about how those two businesses ought to grow? It's nice to hear the comments a minute ago about the number of projects that you're working on there, but I guess in the context of your statements about revenue growth in the back half of this year; how big of a sort of contributing factor do you expect Adjacent Services to be and, more broadly, as you look in the next year, what sort of growth do you expect?

Ron Stewart

I would characterize the Spend Analytics Services are as much of -- we expect that to be more of a steady growth, and we sell engagements, we execute engagements, and hopefully expand engagements. So that's going to be more of a slow growth quarter-over-quarter model. And, again, the revenues are not that far off from signing of the engagement. You sign the engagement, you execute the work, and you get -- you recognize the revenue. The Supplier Information Management is a bit of a different model, both in terms of the sales cycle, which is longer, because these are typically more infrastructure and longer-term decisions that companies are making around this platform. And then the ramp up: Once you start, you've got to ramp up supplier by supplier. And our business model is primarily supplier-funded, so that means that our revenues are first going to be achieved as we ramp up the supplier base which, again, is opted in by the suppliers at the request of the sellers, typically -- excuse me, the buyers, typically.

And then the recognition of the revenue is also spread out because we're providing an annual service to those suppliers. We're going to recognize revenue as value is received, so that's -- it's a very different revenue model in the Supplier Information Management. We don't expect to see, from a volume standpoint, a big impact in 2016 in the second half. We expect to see progress and expansion in 2016, but again, this is going to be much more of a 2017 and beyond story as we build up that base of annuity clients.

Eric Ward

Great. Thank you, guys.

Operator

Our next question comes from the line of Jeff Bernstein [ph] from Jeff Bernstein, Kalum Prime Advisors. Your line is now open.

Unidentified Analyst

Hi, guys. Thanks for taking my question. Can you talk a little bit about Commercial Recovery Audit? I think you said it grew. And can we talk about Contract Compliance within that, and what's going on there?

Pete Limeri

So, Jeff, I don't think we said that in context to the Commercial group. What we said was Recovery Audit Americas, and that includes Commercial Contract Compliance in retail, and that's accurate.

Unidentified Analyst

Got you.

Ron Stewart

Yes, and the commercial business, as we told you at the end of 2014 -- 2015, rather, and last quarter, we have added a number of new clients and a number of new large clients in that group. And we are looking for growth this year in Commercial. I think this Q2, the ramp up was a little slower in some of these new clients. Getting the data's taking a little bit longer, which is not unusual. It typically takes us between six to nine months to ramp up a new client in this space. And that's where we are. We expect to see a strong performance in the second half of the year in Commercial. We did not see the expansion in the first half of the year we would have liked, but again, this is a matter of timing and ramping up those clients and bringing them up to full production. With Contract Compliance, we're still seeing that business expand. The conversion cycles are longer and Contract Compliance is a bit of a different business than our AP Audit, where we are able to deduct claims much more quickly, and is much more a fabric of the retail industry at least, and to some degree, the commercial industry.

So we continue to see that as a real opportunity. We're expanding the client base that we're building on. No question, we are not as far along in Contract Compliance as we would like, but again, we feel like the opportunities are there. And when we go in -- our story with a client -- what we tell clients is that we want to support them in all areas of their spend, whether it be in the AP Audit, the Merchandise Audit, the Contract Compliance Audit, all of them provide opportunities for leakage reduction. And we want all the spend and we need all the data to give them those deeper insights into spend in areas where, perhaps, they're leaving money on the table.

Unidentified Analyst

Can you give a little bit of color about verticals within Commercial Recovery Audit? I think, obviously, there were things like oil and gas or mining that were going through their own issues, in the last year or so. But could -- just any color about where you're sort of getting traction. Do you have a base of different customers on board now and are looking to get those guys ramped up before we add anybody new, etc.?

Ron Stewart

Yes, I think, as we've said in the past, the Commercial business has been painted with a pretty broad brush, traditionally, where we kind of lump a lot of companies -- like non-retail, non-healthcare goes into commercial. And we've started to pull those apart, and that's still absolutely our focus and intention. You know, as we go into a segment and focus on a segment, there's investment required. There are people that you have to bring in, subject matter experts and industry experts that know that particular play so, we're not going across all industries at the same time. We're doing it based on priorities.

As you know, we really focused initially with oil and gas and mining and what we call the resources sector. And again, that is proving to be positive, and we're making progress and having good success in getting into some of the larger players in those industries. It's a lot more white space there for us in those industries. But we also are looking at what would be logically next, whether it be financial services -- you know, we've got a significant history in manufacturing, industrial equipment and the like, that we're continuing to examine as what would be the right next segment to really focus on and invest in. I think we're looking at it, want to see oil and gas and resources flourish, and we'll pick off the next ones as the opportunities present themselves.

Unidentified Analyst

Great, thanks.

Ron Stewart

Sure.

Operator

I'm showing no further questions in queue at this time. I'd like to turn the call back to Ron Stewart for closing remarks.

Ron Stewart

Great. Thank you very much, and thanks, everyone, for joining us on the call this morning. I appreciate your attendance, and we look forward to seeing you or hearing from you on the next quarterly call.

Operator

Ladies and gentlemen, thank for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.

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