PRGX Global's (PRGX) CEO Ronald Stewart on Q3 2017 Results - Earnings Call Transcript

PRGX Global Inc. (NASDAQ:PRGX) Q3 2017 Earnings Conference Call November 2, 2017 5:00 PM ET

Executives

Ronald Stewart - President and Chief Executive Officer

Peter Limeri - Chief Financial Officer

Analysts

Alex Paris - Barrington Research

Zach Cummins - B. Riley

Operator

Good day, ladies and gentlemen and welcome to the PRGX Global Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Later we'll conduct a question-and-answer session and instructions will follow at that time. As a remainder today's conference is being recorded.

I'd now like to introduce your host for today's conference Mr. Limeri, Chief Financial Officer. Sir, please go ahead.

Peter Limeri

Thank you, Liz 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, uncertainties and other factors which could cause actual results of the for 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 to most directly comparable GAAP measure is available under the Investor Relations portion of our website at prgx.com.

I will now turn the call over to Ron.

Ronald Stewart

Thanks, Pete and welcome, everyone, to the third quarter 2017 earnings conference call. It continues to be a solid year for PRGX. Today we announced Q3 revenue growth of 19%, with adjusted EBITDA increasing by 31% on a year-over-year or constant dollar basis, our fifth consecutive quarter of revenue and adjusted EBITDA organic growth.

Our COR Recovery Audit business posted yet another impressive performance as we grew year-over-year in all regions of the world on a constant dollar basis. Organic growth in Global Recovery Audit grew 9% on a year-over-year or constant dollar basis, led by 46% organic growth in our Commercial Recovery Audit business.

And our Adjacent Services business grew 33%, compared to the same period last year on a constant dollar basis, demonstrating continued progress and extending our value proposition to clients through advanced analytics, spin visibility, supplier solutions and Source-To- Pay advisory services.

Highlights at this point in the year include the following; first, we're pleased with our Recovery Audit revenue growth and see further growth ahead, as we continue to invest in new audit concepts, adaptation of new technologies and further expansion of our underlying data processing infrastructure.

Second, the business we acquired from CNCA in February has contributed solid financial performance meeting projections for revenue and earnings. The CNCA team has also favorably impacted service delivery in other areas of our business, particularly in contract compliance.

In our Contract Compliance business, we've seen strong momentum signing nine new engagements with existing and new clients in 2017, with several others in process. Since the beginning of the year the number of contract audits and processes have risen substantially and we expect to see growth in claims and associated revenues in Q4 and into 2018.

Across all service lines, we've signed 25 new clients year-to-date, with at least one new client in every major region around the world. We're also in contract negotiation to several more, which will add to our base of business going into 2018.

Just a couple of weeks ago, we announced the signing of a multi-year SaaS technology services contract with Kroger to provide supplier communications and support services using PRGXs Lavante Supplier Information Management technology platform. This solution is called deduction management and will give Kroger the ability to provide its suppliers with easy access to billing details, thereby enabling resolution of billing and claims enquiries in a more timely, effective and cost efficient manner. This deal represents the largest subscription software contract in the Company's history and provides significant momentum for this solution.

Our Adjacent Services opportunity pipeline increased significantly over the last quarter and we're seeing progression through the pipeline stages from early stage to later stage opportunities. Getting those closed and started remains a high priority and we expect to see significantly improved Adjacent Services performance in 2018.

We're encouraged by the market's reaction and the growing pipeline of opportunities in both or COR Recovery Audit and Adjacent Services businesses. And we continue to be very positive about the future growth prospects at PRGX.

I'll now let Pete walk you through the details of our third quarter financial performance. Pete?

Peter Limeri

Thank you, Ron and we'll begin by reviewing our financial results from continuing operations for the quarter ended September 30, 2017, compared to the same period in 2016. Consolidated revenue from continuing operations for the three months ended September 30, 2017, was 42.5 million, an increase of 7.3 million or 20.8% compared to the third quarter of 2016.

On a constant dollar basis, adjusted for changes in foreign currency exchange rates, consolidated revenue for the third quarter of 2017, increased 6.8 million or 19.42% compared to the same quarter in 2016. These amounts include revenue from the CNCA and Lavante acquired businesses which were not in the prior year amount. Excluding these acquired businesses, on a constant dollar basis, our revenue from continuing operations increased 9%.

Some additional constant dollar revenue highlights for the quarter include, this is our fifth consecutive quarter of year-over-year organic growth. Our global Recovery Audit business had year-over-year growth of 18.9% including CNCA and excluding CNCA, our year-over-year revenue growth was 9.8%.

Within the Global Recovery Audit business, our Global Retail business grew 4.9% and Global Commercial Recovery Audit business had year-over-year growth of over 123%. Excluding CMCA, our Global Commercial RA business recorded growth of over 46%, which for the second consecutive quarter included growth in every region around the world.

Total operating expenses from continuing operations for the quarter ended September 30, 2017, excluding depreciation, amortization, transformation and stock-based compensation expenses, were 36 million or 84.9% of revenue, compared to 30.4 million or 86.5% of revenue for the third quarter of 2016, an increase of 5.6 million compared to the prior year, but an improvement of approximately 1.5% as a percentage of revenue.

Adjusted EBITDA from continuing operations for the three months ended September 30, 2017, was 6.4 million or 15.1% of revenue, which was 1.7 million or 35.3% increase compared to the same period in the prior year. Excluding the Lavante and CMCA acquired businesses, which are not part of our prior year financials, adjusted EBITDA from our continuing operations in the third quarter increased 39.9% on a constant dollar basis compared to the same period in the prior year.

Now I will review our financial results from continuing operations for the three months ended September 30, 2017, at a more detailed level. Revenue from each of our reporting segments was as follows, Recovery Audit Services Americas revenue was 30.7 million compared to revenue of 25.7 million in Q3 2016, an increase of 5 million or 19.4%.

On a constant dollar basis, Q3 2017 Americas RA revenue grew by 18.3% compared to the 2016 third quarter. Our Retail RA Americas business grew by 6.7% and our Commercial RA Americas business posted year-over-year growth of over 91%. This commercial growth included CMCA. Excluding CMCA, our Commercial RA Americas business grew by 16.9%.

Recovery Audit Services Europe/Asia Pacific revenue was 10.8 million compared to revenue of 8.7 million in the third quarter of 2016, representing growth of 2.1 million or 24%. On a constant dollar basis, Q3 2017 revenue for this segment grew by 20.7%, compared to the same quarter of the prior year.

This increase was primarily attributable to our Europe and Asia Pacific Commercial RA businesses, which posted year-over-year constant dollar growth of over 300%. Excluding the revenue from the acquisitions, our Europe/Asia Pacific Commercial RA revenue grew over 200% on a year-over-year constant dollar basis.

Adjacent Services revenue for the quarter ended September 30, 2017, was 926,000 compared to 682,000 for the same period of2016, an increase of 35.7%. Excluding the Lavante SIM revenue, our Adjacent Services revenue decreased by 13.5% compared to the same period of the prior year.

We're pleased with the signing of the Kroger contract and continue to build a solid pipeline of opportunities at our SaaS based solutions, but the sales cycle for these deals is significantly longer than the sales cycles for our traditional project based advisory services.

So our momentum for technology centered solutions continue to grow and we expect to convert additional opportunities to contracts in the coming months. Meaningful revenue from these solutions is not expected until 2018.We expect to continue investing in our emerging businesses, particularly in our sales team and in developing our service offerings.

Our cost of revenue or COR from continuing operations excluding transformation was 26.4 million or 62.2% of revenue in the third quarter of 2017, compared to 2.2 million or 63.1% of revenue in the same period of the prior year, which is an improvement of approximately 1% on a percentage of revenue basis.

Excluding the revenue and expenses associated with the CMCA in Lavante COR businesses, our COR as a percentage of revenue improved by 3.3% on a year-over-year basis. The year-over-year organic improvements were primarily related to the flow through of higher revenue and our continued operational process improvements, partially offset by the cost associated with new regional senior operation leaders and other recovery audit staff that were in place in the prior year.

Total SG&A expenses from continuing operations, excluding transformation and stock-based compensation expenses, were 9.7 million or 22.8% of revenue in the third quarter of 2017, compared to 8.2 million or 23.4% of revenue in the same period of the prior year. The increase in the dollar amount of expenses is primarily a result of the operating expenses associated with the Lavante and CMCA acquired businesses that were not in the prior year amounts.

These increases were partially offset by cost reductions in other areas across the company. Excluding the expenses associated with the CMCA and Lavante acquired businesses, our SG&A was 8.5 million which as a percentage of revenue improved by 1.5% on a year-over-year constant dollar basis.

Depreciation and amortization expenses from continuing operations for the third quarter of 2017 were 1.9 million, which was basically flat when compared to the prior year. In our discontinued operations for the quarter ended September 30, 2017, we incurred a loss of 342,000 compared to 144,000 loss for the same period in 2016.

For the quarter ended September 30, 2017, we had a net income of 733,000 or $0.03 per basic and diluted share compared to a net income of 2.2 million or $0.11 per basic and diluted share for the same period in 2016. The year-over-year change was primarily driven by an increase in income tax expense in 2017 compared to 2016.

Our 2017 income tax expense reflects taxes attributable based on certain foreign earnings to date. In 2016, we had one time tax benefits relating to the release of our valuation allowance in New Zealand and truly offset differed tax items related to foreign currency gains and losses.

With regard to our results as of September 30, 2017, I would note the following constant dollar basis highlights. First, revenue from continuing operations grew 13.4 million or 13% compared to the same period of 2016. Excluding the Lavente and CMCA acquired businesses, our revenue grew 4% on a year-over-year basis.

With regard to COR, excluding expenses associated with the CMCA and Lavante acquired businesses, our COR improved by approximately 1% on a year-over-year basis. Finally, regarding adjusted EBITDA, excluding the impact of the acquired businesses, our adjusted EBITDA for the first nine months improved by 24.5% on a year-over-year basis.

I will now highlight certain balance sheet and cash flow information. As of September 30, 2017, we had net unrestricted cash and cash equivalents of $11.9 million and had $13.6 million of borrowings against our revolving credit facility. $2.1 million of our September 30 cash was in U.S. bank accounts, with the remainder held outside the U.S.

Cash flow from operations for the third quarter of 2017 was 2.2 million compared to 712,000 in the same period last year. Capital expenditures on property and equipment for the quarter ended September 30, 2017, were 2.4 million compared to 2.5 million in Q3 2016.

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

Ronald Stewart

Thanks, Pete. So Howard Schultz started the Recovery Audit industry over 45 years ago. His company Howard Schultz & Associates later became part of PRGX and since then PRGX has forensically audited tens of trillions of dollars of entablatures [ph] and contracts for some of the largest and most complex companies all over the world. Based on our deepest reason for rent regarded experience and expenses, experience and Source-To- Pay process analytics, we've identified over 250 distinct and measurable points of leakage in the Source-To- Pay process.

This leakage represents significant loss in working capital and EBITDA in our clients' financial results; typically 5% to 10% as a percentage of spend on goods and services. The opportunities are huge when you apply these percentages to the trillions of dollars that go through the Source-To- Pay process for our clients and our prospects. The most fundamental challenge many of our clients face in addressing this leakage is the complexity and sheer volume of data that must be aggregated, harmonized and interpreted to feed advanced analytics and visibility tools. Large data aggregation and complex processing is a core competency at PRGX built from our long history of recovery audit services.

Our technology platforms which support our core recovery audit business continue to evolve as we enhance them with AI and advanced analytics tools to perform deeper audit processing and enable new audit concepts. These advanced technologies and audit process are important drivers of our revenue growth in our core recovery audit business. Beyond recovery audit, we are combining this data with advanced analytics algorithms and SaaS solutions to provide the visibility to the entire Source-To-Pay business process. We think of this as an MRI of the Source-To-Pay process, providing deep insights in the leakage leading to improvement opportunities and working capital, cost of goods and services, process efficiencies and risk management.

Our proposition to clients is very simple, provide us access to your data at no initial investment and we will provide you with incremental working capital and EBITDA. Once we have your data we can show you specific areas of leakage or risk in your Source-To-Pay processes and with your suppliers. Now, after we have identified the leakage areas, we can provide point solutions to assist and addressing the leakage in managing risk for the enterprise. Because we already have most of the data through the recovery audit process and we have a sophisticated large data infrastructure which maps data to specific analytics tools and algorithms, we can typically deliver value in a much faster time frame and at a lower cost than others in the recovery audit industry or in the Source-To-Pay technology space.

Our unique and compelling approach to client value creation is working in the market place. The existing clients are expanding their scope of work with PRGX and we are winning new clients typically in competitive bidding situations. Let me share a few examples where we are seeing positive market momentum. Over the past few weeks I participated in introductory meetings with two Fortune 50 prospect companies. In each of these meetings, we were meeting with C-level executives who are hearing our story for the first time. Both companies are struggling with the same issues of massive data complexity and difficulties in getting accurate spend visibility and identifying where they are leaving money on the table.

When we took them through our approach to creating value starting with complex data aggregation, and extending to recovery audit and leading to broader analytics visibility and SaaS based solutions, they were impressed. In both cases we are invited back for additional discussions and preparing to receive data to conduct an initial assessment for one of these companies. We have a growing pipeline of similar opportunities with perspective and existing clients.

At a current Footsie 100 retail client in the UK, we have been performing extremely well, increasing client's recoveries by 8% year-to-date compared to the same period in 2016. Earlier this year, we introduced them to the PRGX OPTIX analytic suite using their data and received a very positive reaction. As a result of our improved audit performance and extended capabilities in the analytic services we have been asked to propose on significant expansion in our audit scope as well as our OPTIX analytic services.

Finally, as we have discussed earlier, we extended our scope of services at Kroger to provide them with self service capabilities for their large base of suppliers to enquire on claims and view supporting information. Deduction management is a direct extension of our Lavante supplier information management platform, which you may recall we acquired in Q4 of 2016. This is a real world example of the power of combining Source-To-Pay data with advanced analytics and functionally relevant application technology to deliver value for our clients.

We believe this integration of our core business and our new technology solutions gives us a competitive advantage to grow and win new clients. As such we are continuing to work very high to revolve our service offerings and capitalize on our growing go to market momentum.

With my comments complete, I will turn it over to Liz for 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

Hi, guys.

Ronald Stewart

Hi, Alex.

Alex Paris

Congratulations on a strong quarter.

Ronald Stewart

Thank you.

Peter Limeri

Thank you.

Alex Paris

Got a couple of follow up questions, I guess first, wondering if you are able to provide us with a little - some additional on the multiyear contract designed with Kroger and you referenced in your prepared remarks. Kroger from the 10-K, I notice is your largest RA customer I believe.

Ronald Stewart

That's correct.

Alex Paris

Yeah, so maybe a little bit color and what the pipeline looks there - is this the primary strategy to cross-sell the successful RA client with Lavente, SIM service?

Ronald Stewart

It is and we obviously work very closely with Kroger. They've been our client for many, many years and through the recovery audit process we access to all their clients data obviously and work through how they allow the interaction they have with clients and we introduce them to the Lavente SIM application last year after an acquisition really began working with them on how to apply that technology in their specific environment. The deduction management application came from that and we expect to go at the things as we announced in early 2018 and - but it's a great example of leveraging powerful technologies such as our Lavente application with the recovery audit data we have with Kroger to deliver a great service to help them with their clients. So this situation is - and this type of capability of something that it leads to many, many retailers well we have in terms of the volumes of the enquiries they get on suppliers and this is definitely something they could be leveraged across a number of our retail clients. In addition in other industries that again have significant transactions with lot of questions coming from suppliers can use it as well. So we are pretty excited about it. We have got a pipeline and we actually are just formally announcing it to the market in the near future and but already we've got a nice pipeline of opportunities and expect several of these to close and then not just in the future.

Alex Paris

So you had said that the sales cycle is much longer and something like this based on your response to my question, it looks like from the time that you introduced this to Kroger for the fourth quarter when you made the Lavente acquisition to October 17, its ten plus months?

Ronald Stewart

Well, no. we didn't begin that process when at the time of acquisition you know it definitely happened more recently but this not that we have been working with and there is much more of a refinement and understanding of what their needs were and incorporate that into the tool and now we are near the end of the change process and get ready to release it in the near future. But all of these types of applications some time because you are introducing new technology in to a process. They want to make sure they understand what it is and how it works. We need to understand what their requirements are and how they currently respond to their supplier base, so there is a little bit of back and forth required to get to the final solution that we feel implement, but no, it does takes some time. I would think that sales process will get less and less if this gives to be better known, but it's something that takes a matter of months for sure.

Alex Paris

All right, obviously this is in a contingency contract like typical RA this would be more SasS and services.

Ronald Stewart

That's correct.

Alex Paris

SaaS and services, yeah?

Ronald Stewart

That's correct.

Alex Paris

And can you give us some sort of idea what is the magnitude and how big this contract is or you're not able to do that.

Ronald Stewart

Yeah, we have not released that information and I am sure client would not care sure that but things that I indicated in my comments it's the largest contract of this type that we have ever done at PRGX, so it's significant.

Alex Paris

Okay, great. Congratulations on that. So, acquisitions have obviously been Lavante and CMCA appear to me as home runs. What does your M&A pipeline look like today, are you still effective?

Ronald Stewart

Alex, we are still - as we've talked in the past, we are looking for two types of acquisitions either companies or industries that have good logos that could fit into our infrastructure and we could, if you will introduce their plans to our broader set of services, if you like that. However, we are continuing to speak with several companies in that category - the others are technologies in the Source-To-Pay space that we can leverage to create more value and deeply it's our mergers and acquisitions activity here at PRGX and we maintain a pretty active discussion pipeline going with companies, so we won't say there is anything eminent or right upon us, something that we are definitely looking at and expect to continue to find companies that get our model in our kind of offerings to clients.

Alex Paris

Great, and then - I have covered the company for a long time as you know and I am just - and I am just amazed to see five consecutive quarters here of really strong growth from the RA business. What are you doing differently Ron that your predecessors weren't? Is that better execution, is it better technology, is it more feed on the street, however how are you doing so much better relative to the past.

Ronald Stewart

Well, as we've discussed previously Alex, we started this transformation of that part of our business four years ago with first of all a commitment to investing in the technology infrastructure and consolidating the data and building what would we think to say next generation big data platform to serve the recovery audit industry and that's proven to be very important to us in terms of being able to grow the scale, the business across plans. Probably the biggest impact in the last couple of years is our focus on audit development and our strategy just going through a very meticulous consistent process and we developed just think our recovery audit maturity model. That really does capture the characteristics of our best performing audits and we take our audits through that maturity model and we developed objectives and extensions to what they do and we have seen audit over audit really improve in terms of their performance and we are continuing to extend that group in other parts of the world. Secondly is the - it's what we are doing to introduce and develop new concepts around innovating in some of the E&P retailing space as well as bringing new audit concepts to non-retail companies and we are seeing revenue sources that [indiscernible] before emerge and new types of claims, new types of auditing. So we feel really good about it. We have got, that and when you are performing better in the core recovery audit, that does two things that's first of all our clients are opening up scope, they are probably bringing more work just because they are seeing us perform better and then we are able to demonstrate against our competitors higher level performance and picking the market share. So that's - so we feel good about, we feel like we are going to be able to grow both organically within our existing client base plus pick up new clients.

Alex Paris

Great and then last question just - on the P&L you have a line item called discontinuing operations. Pete, can you remind what that is and when do we kind of make sure that's no longer effective?

Ronald Stewart

That's the old health care program Alex, that weren't famous, so that's we were secondary in those positions that's going to be there until that program gets shutdown. CMS did post on their website, not too long ago, they are planning on shutting that down in January of '18, so we are monitoring that closely and until that program shut down, that will exist.

Alex Paris

Got you. Alright, well thanks very much. Congratulations again.

Ronald Stewart

Thanks Alex.

Peter Limeri

Thanks Alex.

Operator

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

Zach Cummins

Hi, good afternoon this is actually Zach Cummins on for Kevin today, but I just want start off by saying congrats on a really strong quarter. So just kind of going back to last quarter, you had a little bit of slowdown in year-over-year growth in the RA Americas business, I think that was related to some delays with some claims at the retail clients. I was just wondering if you could give a little bit of an update on that if any of those claims are still outstanding or if all those were actually processed in Q3.

Ronald Stewart

Yeah, it's combination, I think Zach. First we did - we still have some issues with some of those claims going through in the Americas region and then we also had some start-ups that have been delayed through new client, start-ups that have been delayed down in Latin America. So that will come back, its timing and we will get looking forward those back in Q4 and into '18.

Zach Cummins

That's great, thanks for the update. And then it sounds like with your new SaaS technologies, that's really help to kind of expand with and your current client base kind of expand of scope of certain projects, I was wondering is that helping you open the door to new clients that you couldn't get to before especially in the retail out space.

Ronald Stewart

No, I don't think that - is opening the door as we have a pretty good foot print we have a significant progress in the go retail space already, but I think it is opening up new scopes of work that we can get involve within and so we are going to continue to do it and so it's important just to stay connect with what's going on in the retail space.

Zach Cummins

All right, great, thanks for taking my questions.

Ronald Stewart

Thanks.

Operator

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

Ronald Stewart

Okay. Well, thank you very much Liz. And I like to thank everyone for joining us today. And we look forward to getting back together after Q4 and sharing the results there and hope you all do well and we look forward speaking to you there. Thank you.

Operator

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