PRGX Global, Inc. (NASDAQ:PRGX) Q1 2018 Earnings Conference Call May 1, 2018 5:00 PM ET
Ron Stewart - President and Chief Executive Officer
Peter Limeri - Chief Financial Officer
Kevin Liu - B. Riley FBR
Good day, ladies and gentlemen. And welcome to the First Quarter 2018 PRGX Global, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will be given at that time [Operator Instructions]. As a reminder, this conference may be recorded.
I would like to introduce your host for today’s call, Ron Stewart, President and CEO and Pete Limeri, CFO. I will now turn the conference over to Peter Limeri. Sir, you may begin.
Thank you, Ashley, 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 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 to the 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.
Thanks, Pete, and welcome everyone to the first quarter 2018 earnings conference call. So we kicked off 2018 with a strong quarter. Revenue grew over 9% and adjusted EBITDA from continuing operations grew over 52% on a year-over-year basis. This is our seventh consecutive quarter of revenue and adjusted EBITDA growth and a great way to start the year.
Our recovery audit business continues to execute at a high level with year-over-year growth in each region and each service line. We are benefiting from the prior investments in our data delivery platform and enhancements to our proprietary technology tools, along with continued productivity improvement from our audit acceleration programs and our global maturity model. We have a very talented and highly experienced group of audit professionals working for PRGX across our global organization. Their commitment to consistent results and constant innovation is key to our continued revenue growth and strong profitability.
After a slow start in Adjacent Services revenues this year, we expect to close several significant new deals in the near future, with the majority of the revenue recognized in the second half of 2018. Our pipeline of new engagements is growing, and we’re encouraged by the activity, increased time interest in our offerings. On our last Investor Call, we discussed the launch of our new service offering in the U.K. called Duty to Report in response to U.K. Legislation requiring companies over a certain size to report on their payment practices and performance.
While we are just getting underway with this offering, we have already signed contracts with major companies in the U.K. and have a growing pipeline of new opportunities. Also on our Q4 Investor Call, I described plans to significantly expand our go-to-market team and create a SaaS digital solutions organization. I'm pleased to report that we are making excellent progress bringing in impressive talent and experience from well-known professional services and technology firms.
We've also added additional talent into our recovery audit and contract compliance teams to accommodate growth around the globe. Even with the additional investment and new talent ahead of revenue, we delivered an impressive year-over-year increase and adjusted EBITDA and cash flow from operations. This solid performance continues to support our growth investments in people, process and technology. We also continue to look for strategic acquisitions and partnerships to accelerate our value proposition to our clients.
Our strategy to focus on the core business, investing in market-leading technologies and audit process reengineering and to extend our services to include technology led Source-To-Pay visibility and process improvement solutions is bearing fruit and gaining momentum. We have a compelling proposition: helping our clients realize incremental value from their Source-To-Pay data. I am encouraged by our continued success in the market as well as our consistent financial results.
I will now turn the call over to Pete to provide more financial and operational detail on the quarter.
Thank you, Ron. I will begin by reviewing our financial results from continuing operations for the quarter ended March 31, 2018, compared to the same period in 2017. Consolidated revenue from continuing operations for the 3 months ended March 31, 2018, was $36.7 million, an increase of $3.2 million or 9.4% compared to the first quarter of 2017. On a constant dollar basis, adjusted for changes in foreign currency exchange rates, consolidated revenue for the first quarter 2018 increased $2.2 million or 5.7% compared to the same quarter in 2017.
Some additional cost and dollar revenue highlights for the quarter include, this is our seventh consecutive quarter of year-over-year revenue growth. Our global recovery audit business had year-over-year growth of 8.1%, with growth in each region and service line. Our global commercial RA business led the way, posting year-over-year growth of over 38%.
Our adjacent service segment has sequential quarterly growth of 8.9% when compared to Q4 2017. We have signed contracts for our Duty to Report solution, and we'll see revenue from these agreements starting in Q2. Total operating expenses from continuing operations for the quarter ended March 31, 2018, excluding depreciation, amortization, transformation and stock-based compensation expenses, was $33.4 million or 91% of revenue compared to $31.4 million or 93.6% of revenue for the first quarter of 2017, an increase of $2 million compared to the prior year but an improvement of approximately 2.6% as a percentage of revenue. Adjusted EBITDA from continuing operations for the 3 months ended March 31, 2018, was $3.3 million or 9% of revenue, which is a $1.1 million or a 52% increase compared to the same period in the prior year.
Now, I will review our financial results from continuing operations for the 3 month ended March 31, 2018, at a more detailed level. Revenue from each of our reporting segments was as follows. Recovery Audit Services Americas revenue was $26 million compared to revenue of $24.4 million in Q1 2017, an increase of $1.6 million or 6.5%. On a constant dollar basis, Q1 2018 Americas RA revenue grew by 5.5% compared to the prior year quarter. The increase was led by our commercial business, which had year-over-year constant dollar growth of over 29%.
Recovery Audit Services - Europe/Asia-Pacific revenue was $10 million compared to revenue of $7.8 million in the first quarter of 2017, representing growth of $2.2 million or 28%. On a constant dollar basis, Q1, 2018 revenue for this segment grew by 15.5% compared to the same quarter of the prior year. The growth was led by our commercial RA business, which posted year-over-year constant dollar growth of over 114%.
Adjacent Services revenue for the quarter ended March 31, 2018, was $736,000 compared to $1.4 million in the same period of 2017. The reduction was due to our completing a large advisory project in 2017 that was not repeated in Q1, 2018. As Ron mentioned earlier, while momentum for our technology-centered solutions continues to grow and we expect to convert additional opportunities to contracts in the coming months, revenue growth from these solutions is not expected until the second half of 2018. We expect to continue investing in our emerging businesses, particularly in our sales team and in developing our service offerings.
Our gross margin from continuing operations, excluding transformation was $12.6 million or 34.3% of revenue in the first quarter of 2018 compared to $10.8 million or 32.1% of revenue in the same period of the prior year, which is an improvement of 2.2% on a percentage of revenue basis. The year-over-year improvements were primarily related to the flow-through of the higher revenue and our continued operational process improvements, partially offset by the cost associated with new leadership and other recovery audit staff that were not in place in the prior year.
Total SG&A expenses from continuing operations, excluding transformation and stock-based compensation expenses, were $9.3 million or 25.3% of revenue in the first quarter of 2018 compared to $8.6 million or 25.6% of revenue in the same period of the prior year, which is a slight improvement on a percentage of revenue basis.
The dollar amount increase includes the sales, marketing and product development team investments discussed on our last investor call. These increases were partially offset by cost reductions and other areas across the company. Depreciation and amortization expenses from continuing operations for the first quarter 2018 were $2 million compared to $1.9 million in the prior year. In our discontinued operations for the quarter ended March 31, 2018, we incurred a loss of $333,000 which was basically flat compared to the same period in 2017.
For the quarter ended March 31, 2018, we had a net loss of $2.7 million or a negative $0.11 per basic and diluted share compared to a net loss of $2.2 million or negative $0.10 per basic and diluted share for the same period in 2017. The current quarter loss includes relatively higher expenses relating to equity-based compensation, FX revaluation on short-term and our company balances, interest expense and income tax expense compared to the same period in 2017.
I will now highlight certain balance sheet and cash flow information. As of March 31, 2018, we had net unrestricted cash and cash equivalents of $15 million and had $13.6 million of borrowings against our credit facility. Net cash used in operating activities for the first quarter of 2018 was $3 million compared to net cash used of $3.3 million in the first quarter of the prior year.
The 2018 use of operating cash included $5.4 million related to the payout of performance-based restricted stock units granted in 2016. Excluding this payout, cash flow from operating activities was $2.4 million, an improvement of $5.8 million compared to the prior year. Capital expenditures on property and equipment for the quarter ended March 31, 2018, were $2.5 million compared to $1.5 million in Q1 2017.
With the completion of the financial review, I'll now turn it back over to Ron.
Thank you, Pete. So based on Q1 results and our current outlook for the rest of the year, we believe that 2018 is going to be another solid year for the company. We continue to execute with excellence in our recovery audit business, while our pipeline and both the core business and Adjacent Services is strong and growing.
Our growth has being driven primarily from our recovery audit business, both from expanding scope and claims results in our core audit programs as well as from extending our service offerings to include services directly related to recovery audit data and findings. As I've said before, we believe that Recovery Audit Services, along with the underlying enterprise data aggregation and advanced analytics insights are underutilized and underappreciated by most companies.
Our business strategy is built on the power of data-led value realization across the Source-To-Pay process, starting with recovery audit and extending into other areas where spend leakage occurs in an enterprise. As a percentage of stent, we believe there is 5% to 10% margin improvement opportunity available in Source-To-Pay through smart sourcing, improved management of supplier performance and more efficient and accurate payment process.
Perhaps the most impressive story for PRGX in the last few years has been our consistent growth in core Recovery Audit Services. I often get asked by investors, what are the underlying reasons for this growth? And is it sustainable? The primary explanation for our growth in Recovery Audit Services is directly related to our strategic investments.
Since 2014, we have invested over $23 million in technology-based capital expenditures, most of which has been focused on recovery audit. These investments include major enhancements to our proprietary recovery audit tools and our data security infrastructure as well as to our data aggregation and enrichment platform. We also invested over $13 million to establish an advanced audit strategy and development organization focused on creating new audit concepts, building improved audit tools and implementing audit improvements across our client base.
In addition, we acquired C&CA in 2017 to expand our global audit and contract compliance capabilities. Today, we have a far deeper set of tools to serve our clients, and these tools have real business impacts for them, allowing them to strengthen their Source-To-Pay processes and recoup lost money faster. While we have made major headway in growing this part of our business, we continue to make progress towards an integrated recovery audit delivery platform, which will prevent leakage and report the root cause of the leakage.
We believe our growth is sustainable, but we must continue to invest. In our retail services business, we see significant upside opportunities and expanded audit scope, incremental acceleration, new service offerings as well as increased market share opportunities. I am also excited about our growth prospects in a non-retail part of our business, which we refer to as commercial. We have seen impressive growth in this business, with the addition of C&CA and our increased focus on expanding scope into all levels of Source-To-Pay auditing and analytics.
There is a lot of opportunity both in terms of new logos across all regions as well as expanded scope in existing clients. As you can tell, I remain very bullish about the future prospects for PRGX. And I’m confident in our 2018 guidance of year-over-year revenue growth in the range of 8% to 10% and adjusted EBITDA growth in the range of 17% to 22%.
Now, I would like to turn the call back over to Ashley for questions.
Thank you [Operator Instructions]. Our first question comes from Kevin Liu of B. Riley. Your line is open.
Ron, I just wanted to ask a little bit more about the opportunities you’re seeing in the SaaS pipeline and discuss the deals you expect to close in fairly near-term. How large are these deals? And do these deals get you to, kind of, that gross margin breakeven point for Adjacent Services? Any color there would be helpful.
Sure. So we have, as I mentioned, we signed several SaaS deals already this year. And primarily, those are focused around the Duty to Report offering that we announced in the last call. Those are not as large as the Kroger deal we presented earlier in 2017, but they are significant, and we think we can generate a lot of opportunities through them. The, I mentioned several other engagements that are coming to pass here.
We’ve got one fairly large one that hopefully will be closed out this week. That will be in the ZIP Code of the Kroger deal, and then we have a number of medium-sized deals that are coming through that look very promising. And hopefully, we can get those closed over the next couple or three weeks. Those are revenues that we don’t expect to see come through in Q2, but should start -- we’ll have some coming through Q2. But for the most part, you’ll see those in Q3 and Q4.
And along those lines, if you could just comment on when you expect to hit that inflection point in gross profit for Adjacent Services side? Is this fiscal 2018 event once these contracts ramp? Or is it beyond this current year?
We don’t expect to see positive EBITDA in 2018. We’re looking at 2019 continuing to invest in this area. And so we’ll take a closer look later in the year, but it should push out to 2019.
And then just quickly on the recovery audit side, last quarter you guys highlighted one of your competitors exiting the U.K. market. Curious if you’ve seen any sort of added opportunity there? And whether there have been some opportunities for you to further accelerate your already strong growth in EAP?
Well, we -- like, I think I mentioned, we had several new clients and those are being signed up as we speak. So beyond what we had mentioned there, there are no additional new clients coming out of that. But our focus is on building our staff and recruiting the right talent to take that on. And as I mentioned, we'll see that revenue starting to impact in the second half of 2018 and should be full on in 2019 and beyond.
Congrats on a strong start to the year and thanks for taking the questions.
Thanks, Kevin. We’ll see you soon.
[Operator Instructions] And I'm showing no further questions in queue. I'd like to turn the call back to Ron Stewart for any closing remarks.
Thank you, Ashley, and thanks to all of you for joining us for the first quarter earnings call, and we'll look forward to seeing you next quarter. And hope you're all well, and I look forward to talking then.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.