Resources Connection, Inc. Q2 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. 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. As a reminder, this conference call is being recorded. At this time, I’d like to remind everyone that management will be commenting on results for the Second Quarter ended November 27, 2021. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of the measures to the most comparable GAAP financial measures is included in the press release issued today. Today’s press release can be viewed in Investor Relations section of RGP’s website and also filed today with the SEC. Also during this call, management may make forward-looking statements regarding plans, initiatives, and strategies, and the anticipated financial performance of the Company. Such statements are predictions and actual events or results may differ materially. Please see the Risk Factors section in RGP’s report on Form 10-K for the year ended May 28, 2021 for a discussion of risks, uncertainties, and other factors that may cause the Company’s business, results of operations, and financial condition to differ materially from what is expressed or implied by forward-looking statements made during this call. I’ll now turn the call over to RGP’s CEO, Kate Duchene.

Thank you, operator, and welcome everyone to our second quarter earnings call. Thank you for joining today. I’ll cover four topics, starting with a quick review of our outstanding second quarter results. I’ll then discuss market trends supporting our sustained performance, what we’ve done to capitalize on the trends, and our favorable outlook for the balance of the fiscal year. I’ll also provide an update on our HUGO initiative and close with the introduction of our newly established Advisory Board. During our Q1 call, we guided towards 24% growth year-over-year, and I’m very pleased to say that our results were even stronger. Revenue was again the highest achieved in over 10 years with 31% growth year-over-year. The growth was delivered in both professional staffing and project consulting and was delivered across nearly all geographies. Our healthcare business grew by 21% year-over-year, and the strategic client account programs grew 27% over the prior year quarter, and both have strong deal flow in the pipeline. Our adjusted EBITDA doubled versus the prior year quarter to nearly $25 million, and our adjusted EBITDA margin improved to 12.5%. This accomplishment is a result of driving sustained revenue growth, creating an improved fixed cost structure and expanding our gross margin. We’ve worked hard to increase the profitability of the business by driving greater sales productivity and operating efficiency. Our focus on shareholder return includes delivering low- to mid-teen adjusted EBITDA margins, while also making the appropriate investments in the business to drive top line growth over the long term. We remain optimistic about the balance of the fiscal year. At present, two tailwinds are providing more business opportunity than we have experienced in over a decade. First, the Great Resignation or talent reassessment has caused many of our clients to experience skill gaps or temporary openings in critical operational roles that we can help fill to allow them to bridge the gap to permanent hires. RGP’s model is increasingly attractive to professional talent who want more choice, transparency, and flexibility in their work. This business model is absolutely built for today’s knowledge worker. The second tailwind is the growth of project initiatives in our client base. Emerging from COVID lockdowns, many companies have accelerated transformation projects, which provide growing opportunity for our agile talent model. We are staffing and co-executing change projects related to finance, technology and digital, supply chain, and compliance transformation. Often, these projects also require program project management expertise and change management support, which are core competencies of our consultant base. Our client base, largely the Fortune 1000, rely on us for agile talent support to run the place and change the place. Neither business challenge shows signs of slowing down, and because we are a trusted partner with a reputation for quality, talent, and outstanding client service, our pipeline is stronger than ever. We’re not, however, simply relying on evolving favorable trends. We’ve recently executed the following initiatives to be ready for these favorable market conditions. We’ve reengineered our sales process, organization, and account strategy; we’ve revolutionized our delivery strategy to be borderless to ensure our clients have access to the best talent and our talent has access to the best projects regardless of geography. We’ve redesigned incentive compensation with a focus on employee return aligned with shareholder value; we’ve developed technology and digital consulting capabilities to address our clients’ most pressing needs; and we’ve built a new digital pathway for stakeholder engagement. The secular tailwinds coupled with the operational improvements we have made create a fertile operating environment for RGP. Next, I’m happy to provide an update on HUGO, the digital engagement platform we launched in October in the tri-state market to allow finance and accounting professionals to find gig work in a digital world. We’ve launched with a pilot approach for a designated set of clients in finance and accounting roles. The functionality of the platform is working as planned, our engagement with both talent and clients is growing as planned, and the early feedback from engagement with HUGO is very positive with all stakeholders from clients to talent, to RGP users, describing the ease and fluidity of the designs and interactions. So far, this early feedback is a good indication that our investment in patience in building an enterprise-grade architecture built to scale is the right strategy in this rapidly-evolving competitive landscape. Currently, we are building more inventory in terms of registered talent on the platform, and we will be driving additional client engagement during the second half of the fiscal year with targeted go-to-market and marketing activities. This is a new pathway for engagement with our clients that will deliver results and returns for the business for years to come as technology disruption in the human capital industry marches forward. We believe we are first to market with a fully self-service platform for professional knowledge workers who want the benefits of gig as well as the safety net in community of an employee-employer relationship. Our team continues to plan for our Investor Day at the NASDAQ market site on April 12th, during which we’ll share and demonstrate the powerful functionality and client and consultant experience of HUGO. While we eagerly look forward to in-person engagement with the investment community that day, we’ll leave open the possibility of a virtual event, depending on the COVID restrictions in place at the time. In closing, I’m pleased to introduce RGP’s Inaugural Advisory Board. This Board was created with the purpose of gathering valuable strategic insights from senior level executives within the business and professional services industry. These influential executives will provide RGP with independent guidance and advice on market strategies and trends that are defining today’s changing workplace and workforce. The Advisory Board will also support our highest-level global business development efforts with broader access to new clients and prospects by leveraging the deep professional networks of the five well-connected executives who have joined us. We welcome Jeff Gelfand, John Malfettone, Vic Petri, and Craig Schaffer to the RGP family, along with Ruth Hughes, who will continue to support us in this new role in Europe. Their impressive and diverse backgrounds can be accessed via our website. We believe this group will help us expand our brand awareness at the C-level and will attract new clients who are increasingly looking for an alternative high-value partner. I’ll now turn the call over to Tim for an update on operations.

Thank you, Kate, and good afternoon, everyone. During the second quarter, we saw continued strong revenue and margin growth as well as fortitude in operating metrics. We saw larger deal sizes, continued penetration into existing accounts, as well as heightened success with new logos. The momentum noted at the end of Q1 relative to revenue and pipeline continued. Enterprise revenue increased by 31% over the prior year quarter and 9% sequentially, while top-of-the-funnel activity demonstrated continued strength, despite the Thanksgiving holiday, leading to significant increases in qualified opportunities, and ultimately to the highest level of closed deals in several years. Strong performance was consistent across our core business in Asia-Pacific, Europe, North America, Veracity and Countsy. While the rising economy and macro trends germane to our business have provided some economic tailwinds, our operational focus and tenacity have led to increased opportunity, bigger wins, and growing foundational strength. The growth we are seeing reflects the speed with which companies are picking on change, but also a broader and more permanent shift in the way workforce plans are built. Both delivery and the use of an agile workforce are here to stay as much for the fact that companies recognize the benefits of access to talent that can be rapidly deployed for discrete purposes as the realization that labor trends have changed and a broader swath of people are choosing to work differently. This desire for flexibility is symbiotic and is a powerful economic force that continues to accelerate. We see more candidates seeking flexible employment with more control and have seen declines in attrition rates and increases in hiring in our variable employee base over the last four quarters. The stigma of non-traditional employment, which was prevalent when RGP was founded, has not dissipated. Stability of opportunity, variety of choice, remote delivery optionality, and also the control over one’s portfolio of experience is a desirable value proposition to an increasingly larger segment of the workforce that simply wants to work differently. We will continue to work tirelessly to provide broad opportunity and depth of choice for our existing consultants, and those considering joining our platform. We are confident that our demonstrated ability to give people career control, access to professional community and our strong roster of clients will continue to be an attractive home for the modern worker, despite a tightening labor market, which has more immediately impacted traditional employment. As an example, a new consultant in our taxes practice was considering two traditional employment opportunities, one in the consulting and one in the financial services industry. He turned down both opportunities to work for us on a long-term project at a premier client that offered him the ability to make immediate impact without being restricted to a singular industry. Another recent hire joined for the opportunity to work on a large scale finance transformation at a well-known technology client. She loves her job in the industry for the opportunity to learn new things, work with different colleagues, and to gain experience in novel environments. These examples demonstrate a rising desire for our employment model and a durability in the personal environment to sustainment. Over time, we expect to continue to compete with traditional employers for talent and to win at increasing rates. We are focused on enhancing overall consultant experience and are remaining closely attuned to workforce desires, leading to more employment stickiness to RGP. A hybrid return to work with companies embracing distributed employee bases and utilizing a blend of onsite and virtual teams is the dominant operating model. This allows for flexibility and resilience in the wake of current and future variants impacting the way we all live and work. The ability to tap into a wider array of talent undeterred by geography allows us to improve operational efficiency and our own success rate in matching supply and demand. A good example of this is a client in the southeast that is a pre-IPO technology unicorn. Our client service team persistently nurtured relationships through the pandemic, and when the opportunity arose, was able to rapidly deploy a team to effectively stand up finance functions and help with system implementation. Today, that team is close to being geographically dispersed and working across the enterprise, supporting day-to-day operations with professional staffing, and via project consulting on larger initiatives. Our advisory and project services group has had a large footprint with the client since day one and is currently leading a cross-functional program office coupled with change management. This demonstrates how operational tenacity coupled with strong delivery intersects with today’s macro trends to provide excellent commercial opportunities for RGP. Now, let me turn back to our second quarter operations. During the quarter, we saw continued strength in the pipeline and top-of-the-funnel activity. Average weekly revenue grew by approximately 11% in the first weeks of the quarter to the last. In fact, average daily revenue rate ended the quarter at the highest they’ve been in over a decade, and pipeline and booked revenue are the strongest they’ve been in several years. Pricing continues to be a big opportunity across all sectors, and we will continue to be very focused on pricing as we know there is upside and leverage to begin. Lead generation and opportunity identification continue to be strong into Q3, and the early weeks of the quarter have shown strong positive trends in revenue pipeline and closed deals. In fact, the early quarter weekly revenue trends have built on the last weeks of Q2, which were very strong. With the holiday season falling in the quarter, we will be impacted but expect to return strong in early January. Finally, let me touch on operating leverage. As in prior quarters, in Q2, we focused on making strides in controlling fixed costs and focusing on efficiency. Adjusted EBITDA margin improved both sequentially and from the prior year quarter. We will continue to sell, deliver and operate in a more hybrid fashion, looking for opportunities to reduce our fixed real estate footprint and utilize technology to improve the way we operate and provide a better experience for our stakeholders. I will now turn the call over to Jenn for a more detailed review of our second quarter results.

Thanks, Tim, and good afternoon, everyone. During our second fiscal quarter, sustained change in demand coupled with successful go-to-market execution enabled us to attain the strongest top line revenue in the last 10 years. We improved enterprise average bill rates and achieved a better pay/bill ratio. Additionally, higher leverage and indirect costs of service further contributed to above-guidance gross margin. With persistent focus on reducing fixed costs and improving operating efficiency, SG&A leverage continued to be favorable. We delivered $24.9 million of adjusted EBITDA or a 12.5% adjusted EBITDA margin, which is the highest margin in any quarter in the last decade. Now, let me provide more color on our operating results, starting with revenue. With quarterly revenue of $200.2 million, we well exceeded the high end of our revenue guidance of $190 million. After adjusting for business day and currency impact, Q2 revenue represents growth of 31% year-over-year, and 11% and 6% over the pre-pandemic second quarter periods of fiscal '20 and '19, respectively. In addition, our revenue was up 11% sequentially on a same-day constant currency basis. Revenue growth in the second quarter was broad-based across most of our core markets, key client accounts, solution areas, as well as industries. Macro trends including the shift toward a more agile workforce model, increase in the use of contingent labor to fill workforce gaps, and companies embracing and executing more transformational initiatives all continue to be meaningful secular tailwinds in driving our top line growth. Professional staffing revenue increased 41% year-over-year while project consulting revenue increased 26%. Strategic client accounts grew 27% year-over-year and 7% sequentially. Our solution offering and business transformation grew 37% year-over-year and digital transformation service revenue continued to expand with Veracity leading the way at a growth rate of 36% year-over-year. In North America, revenue improved 36% year-over-year and 12% sequentially on a same-day constant currency basis. Most core markets in North America experienced double-digit growth year-over-year with tri-state and California leading the growth at 51% and 36%. In Europe, excluding revenues from markets we exited as part of our recent restructuring initiatives, same-day constant currency revenue grew 10% year-over-year and 8% sequentially. Our focus on large Tier 1 clients, particularly in the United Kingdom, continues to pay dividends. Revenue in the UK almost doubled the prior year quarter, while our German market experienced a modest decline due to the impact of the COVID-related lockdown on middle-market clients in the region. Asia-Pacific also experienced broad-based expansion and revenue across most markets, led by Japan and India. Second quarter revenue grew 18% year-over-year and 11% sequentially on a same-day constant currency basis. Gross margin in the second quarter was up 130 basis points over the prior year to 39.3%. We raised our average bill rate by 1.7% and improved pay/bill ratio by 80 basis points. Higher leverage on indirect benefit costs drove the remaining improvement of 50 basis points in gross margin. Compared to the first quarter, gross margin was up 30 basis points, which was primarily a result of lower payroll taxes toward the end of the calendar year. The tight labor market and wage inflation have not had broad impact on our consultant pay rates, as the inherent nature of our agile talent platform involves continuous evaluation of market pay rates and appropriate adjustments. Our continued focus on value-based pricing has yielded higher enterprise-wide average bill rate, which has more than covered the nominal increase in average pay rates. Average bill rate for the second quarter was $127 compared to $124 in the prior year quarter and $126 in Q1. Looking ahead, we see opportunities to achieve higher bill rates across our solution offerings. Building on the structural improvement in our SG&A, run rate SG&A expenses for the quarter were $54.1 million after excluding non-cash stock compensation, contingent consideration expense, restructuring charges, and technology transformation costs, representing 27% of revenue, a 320 basis-point improvement compared to the same period a year ago. The increase in SG&A dollars from the prior year quarter was primarily driven by higher variable compensation as a direct result of our strong business performance in the current fiscal year. Fixed costs remained modest and similar to prior year as a result of our streamlined real estate footprint, continued adoption of a hybrid work model, and our disciplined approach in managing and allocating our internal resources. Now, turning to the other components of our financial statements. The effective tax rate was 28% for the quarter. This more normalized effective tax rate was a result of better operating results in Europe, enabling us to utilize the benefits from historical net operating losses. With sustained profitability in our foreign entity, we expect to begin releasing certain valuation allowances as early as the second half of fiscal '22, which could result in material favorable impact on our effective tax rate in the current fiscal year. Adjusted diluted EPS for Q2 rose significantly to $0.47 per share, compared to $0.21 in Q2 of fiscal '21. We continue to generate positive cash flow from operations in the first half of fiscal '22. We finished the quarter with $71 million of cash and cash equivalents after paying $7 million in contingent consideration in the second quarter, relating to the acquisition of Veracity. In November, we completed the financing of a new multi-bank credit facility. We increased the borrowing capacity from $120 million to $175 million and improved the overall pricing, as well as the flexibility of the financial covenants. With increased liquidity and financial flexibility, we are now even better positioned to execute on our future growth strategies while continuing to return capital to our shareholders. We maintained our $0.14 per share quarterly dividend in Q2, reflecting approximately 3% dividend yield. We expect to continue to engage in share repurchases opportunistically under our existing share buyback program, which has $65 million available as of today. Now, let me provide an update on our technology upgrade project. During Q2, we continued to refine the cost and scope of investing in a set of new ERP and talent management systems as discussed last quarter. These will enable us to optimize efficiency, scale our operations, and enhance the stickiness of our platform by providing our stakeholders a seamless and digital experience. Total investment in this initiative is expected to be in the range of $20 million to $25 million over the next 18 to 24 months. A significant portion of the investment is expected to be capitalized beginning in early calendar 2022 as we formally kick off implementation. Non-capitalizable costs associated with this project will be included in SG&A and reported as technology transformation cost, which will be an adjustment in deriving adjusted EBITDA until the implementation is complete. Now, I’ll close with our third quarter outlook. While we continue to monitor the impact of Omicron and evolving dynamics in the labor market, we’re very pleased with the overall momentum in the business. We expect to see the typical seasonality in the third quarter in our revenue, gross margin, and SG&A, including the impact of holidays across the globe, and in certain cases, extended holiday shutdowns as some of our large clients, as well as a reset of payroll taxes at the beginning of the calendar year. Taking into account these factors, we expect revenue in Q3 to be in the range of $192 million to $197 million, gross margin to be in the range of 37% to 37.8%, and run rate SG&A to be in the range of $53 million to $56 million. Now, we’re happy to take questions.

Thank you. Our first question comes from Josh Vogel with Sidoti & Company. You may proceed with your question.

Thank you. Good afternoon, everyone, and happy New Year.

Happy New Year, Josh.

Thank you. My first question is for Kate. You mentioned the early successes and positive feedback regarding HUGO in the tri-state area. When do you expect the transition from pilot to full rollout? Additionally, which markets are next for the introduction of HUGO? Will the expansion be targeted toward specific regions, or are you planning for a national launch? Will this be done as a pilot or a full rollout? I realize this encompasses a lot, but I'm interested in how you foresee HUGO entering the market in the upcoming quarters.

Right. So, right now in our pilot stage and this early stage, we’re focused on feedback and engagement more than revenue, and we’re really focused, as I said in my prepared remarks on filling the vending machine, so to speak. So, it’s a lot about inventory right now. We’re working toward a six-month timeframe for moving beyond pilot. And I think it’s too early to tell Josh, whether that would be to the next select markets that we’re going to focus on, which is Texas and Northern California, but given the way the world is working now, that may well bleed quickly into more of a national pursuit. We just have to learn as we go a little bit, but I’d say within the next six months, we’re going to move beyond pilot.

That’s helpful. Thank you. Transitioning a bit, I find it surprising that in the current environment, with the competition for talent and overall shortages, the pay-to-bill ratio is performing so well. I'm curious, and it seems like this is sustainable. Jenn, could you elaborate on the current wage environment and wage inflation? Why does it seem to be so straightforward for you to pass these costs onto clients? I know you've mentioned value-based pricing and the goal to stay ahead of the expected rise in pay rates, but do you foresee any resistance from clients or prospects when this matter arises, or do you believe it will still be a relatively easy discussion considering the ongoing supportive trends?

Hi, Josh. Yes, sure. Let me talk about pay rates first and just talk about a few factors that impact our overall average pay rate. It really hasn’t moved that much. This quarter’s pay rate compared to last year same quarter as well as Q1, it really only moved by about roughly $0.10. It did move up a little bit, but not a whole lot. One of the things that’s impacting our overall average pay rate is mix, right, not only mix by geography, but also mix by our solution. So, we are seeing more impact in certain solution areas, such as tech and digital. We are seeing pay rates go up a bit more. But in the finance and accounting areas, we have not really seen that much of a significant increase. And given that finance and accounting is still more than 40% of our business, and that’s why you’re seeing a mixed impact there from an average pay rate standpoint. And the other factor is that, I commented in my remarks, which is, given our agile talent model, and because of the fluidity of our talent supply, I would argue that our pay rate is already reflective or very close to how the market is moving, because of the fluidity of our talent supply, and we’re constantly and continuously evaluating market pay rates and making those adjustments. So, I think, while we are impacted by overall wage inflation, what you’re going to see is more of a gradual movement as opposed to any sharp rises in our future, in terms of setting expectations for our future pay rates. And in terms of bill rate, we’ve been focused on working on raising bill rates for a number of quarters now, right? There is anticipated movement in the pay rate. So, this is the perfect time to have these conversations with our clients, because wage inflation is really happening to everybody broad-based. So, I think at a time like this and because of the labor shortage, I think our clients are really starting to appreciate more of the value that we bring to them because we can supply the talent to them at a time when they really need it to fill that gap.

I believe that the tightness in the labor market makes it easier to discuss rate changes because the rate of change remains consistent. As clients lose employees to alternative job opportunities, they become more aware of the overall economic situation we are facing. This creates a more favorable environment for discussing rates. Additionally, as I mentioned in the previous call, I believe we are already priced below market, giving us room for potential increases. On the topic of wages, it's important to note that many individuals are seeking this type of employment not just for higher pay, but also for the control it provides and the chance to gain a wider range of experiences.

Those are really helpful insights. Thank you. Just a couple of quick housekeeping type questions. Obviously, really strong and impressive performance all around. You’ve consistently been a strong generator of cash, and we saw that announcement in early December. I was just curious, are there other instances or opportunities where you could buy back a slug of stock from a shareholder connected to any prior acquisition? And I was just curious about that first and then just building off of that after.

Yes. Sure, Josh. We did buy back about $20 million worth of shares in early December in a privately negotiated transaction with the seller related to a prior acquisition. And from a share buyback perspective, I think it’s safe to say, probably for the rest of the fiscal year, I don’t foresee us being back in the market and buying a significant amount more in share buyback. But going forward in fiscal '23, we’ll continue to, as I said, engage in share buybacks possibly to offset some of our dilutions, right, but more opportunistically when we feel that the valuation is right.

Okay. And then, just given the event, which is pretty early in the quarter, what’s a good share count we should be thinking about for Q3?

I think $33 million. We bought back about $1.1 million. So, I would say, probably somewhere in the mid-32 million range.

Okay, great. And just lastly, and you had the comments on this, given the opportunity to utilize benefits from the historical net operating losses in foreign regions, is 28% a good tax rate to use going forward?

That’s right. That’s about right. And if we are to reverse some of the valuation allowances in the second half of the fiscal year, obviously that’s going to give us a huge benefit in Q3 or Q4 of fiscal '22. But going forward, I think 28% is a good way to look at our think about our effective tax rate.

All right. Great. Well, thank you for taking all my questions and very impressive results. And again, happy New Year, everyone.

Thank you. Our next question comes from Mark Marcon with Baird. You may proceed with your question.

Hey. Good afternoon and happy New Year, and congratulations. Really nice quarter. Wondering, can you talk a little bit more about HUGO just in terms of what the experience was in tri-states, just in terms of the roles that were being filled? How quickly were you able to get people into the system? How you envision it impacting the economics within the tri-state region as it matures, because I’m assuming that as that unfolds then that would roll out across the country.

Yes. So early days, the positions we’ve been focused on are accounting positions, staff accountant kind of positions, fund accountant positions, and payroll positions, especially as it relates to some of the recent news around the payroll firm that was hit by a cybersecurity incident. But right now, as I said before, Mark, we are very focused on feedback and engagement with the platform. So, it’s more about that than revenue at this moment. While we do have revenue goals for the platform this year, we want to make sure the experience is right before we roll out the functionality and access to the platform more broadly. But so far, everything is going according to plan. We’re excited about the early feedback and the interest from existing clients who want to get their hands on the platform and start using it. So, it’s really we have been constricting more of the flow, just to ensure that all the functionality is performing the way we want it before we go live. Because you only get one first impression, and we want to make sure that is an excellent experience for both client and consultant alike.

Great. What’s the process for basically getting some of the consultants set up in the system? How difficult is that? What are the barriers or hurdles to that?

Yes, it’s really not hard, but we do have an element of quality control. So, we have uploaded a lot of data from our core RGP system. So, all of our talent is really loaded into HUGO and accessible there if we have the right client opportunities. But remember, we started, and our early focus in HUGO is a level or two down. So, I wouldn’t expect a ton of overlap yet in our core RGP consultant base. But then, we do have a level of quality control that is still a human touch element to ensure that those who want to be published on the HUGO platform will represent the brand and the quality of RGP the way we want them to.

And then, can you talk a little bit more about some of the changes that you’re seeing just in terms of the types of people that are coming onto the platform? You mentioned a couple of examples, but I’m wondering, are these people who are at very senior levels? What qualifications are they? Are they former big four with 7 to 12 years of experience, or are they MD levels? What are you seeing just from a demographic perspective?

Yes. I want to ensure I'm answering your question. Are you specifically referring to HUGO?

No, no. Now, I’m shifting over to what Tim was talking about with regard…

Okay. Then I’m going to give Tim this question, if you don’t mind, Mark. I think he’s perfect for this one.

What I would say is that for those of us who have been here a long time, the demographic we've typically seen has been around 15 years of experience. While we still see that demographic, we're also noticing a wider range. We're definitely encountering individuals who are earlier in their careers and are choosing to pursue different paths. Additionally, we're seeing more senior professionals considering whether they want to engage in just one or two projects a year, really focusing on adding value to specific client experiences or problems. The key takeaway is that we're witnessing a broad spectrum around that 15-year experience mark, particularly among those with five to ten years of experience, which is more pronounced than in the past. Furthermore, we are observing an increasing number of individuals interested in working differently, leading to a significantly higher willingness to spend among those who are curious. This trend has been growing and has been accelerated by our experiences over the last few years.

Tim, can you quantify that a little bit, just in terms of like number of applicants or number of resumes that you’re getting, or people that you’ve loaded onto the database? Any way to quantify how much more interest you’re getting just in terms of people that are interested in this more flexible career?

I don’t have the actual applicant information, but Mark, I can follow up with you to provide an estimate on that. What I can share regarding the number of hires, when we look back to the early parts of 2020, our levels are up about 10% to 15%. This gives you an idea of the volumes, but to assess the level of experience within that, I would need to refer to the slides. However, from the monthly updated data, it's clear that the average years of experience among the workforce has significantly decreased. If it was 15 years before, it’s now several years lower on average.

And then with regards to the tri-state and California, how much of the increase that you’re seeing there is just due to some of the capital markets activity that’s been occurring, both in terms of venture funding as well as IPOs? Any sense for that?

That’s definitely a contributing factor, but I wouldn’t say it’s the driving force. I mean, really, what you’re seeing is, I mean, you’ve got sort of these macro forces where companies are recognizing that they need to tap into firms like ours to help them just with the regular changes and transformations that they have in day-to-day business. And then, there are also the transactions that are spin-offs and some of the IPOs. So, that that is a component of it. I’d say, what’s probably, I think a bigger force driving is just the pace of change that companies have to go through today to make sure, just to ensure that they’re staying with the herd, let alone try to get stuff ahead. And then when you couple that with both the workforce’s desire to not be tethered to traditional employment, but also company management’s desire to have more flexible resources, sort of the intersection of those three points is really what’s driving us ahead.

Great. And then, digital transformation, obviously, that’s picking up. Can you give us a sense again for the size of that practice, and how much stronger it is now than it was say, six months ago or a year ago?

Hi, Mark. Tech and digital, it’s roughly about just below 15% of our overall business. And, it’s fluctuated. It’s really increased over the last few quarters. But as you know, the remainder of the business is growing as well. So, I think it’s still definitely about 15% right now, but certainly growing at the same pace, if not faster than some of our other solution family.

And then, on the bill rates and the opportunity for lift and being under market, can you talk about how quickly you might be able to do that and kind of what the magnitude is say in finance and accounting relative to tech and digital?

The answer to your first question is not quickly enough. There is a certain element regarding our existing rate cards, and as we extend those, we'll have discussions about renegotiating. It will be faster for new clients or existing clients where we can be more confident in our pricing. I believe there is generally an opportunity to raise prices across the board, but the potential in finance and accounting is likely much smaller compared to tech and digital. This is due to the tighter supply in tech and digital, which is at a higher level than in other areas. Additionally, companies are heavily focused on digital transformation and are willing to invest more immediately to enhance their stakeholder experience.

Great. What about the length of assignments and the ability to retain consultants from the contractor's perspective? Given the Great Resignation and reshuffle, are you facing any challenges, or are you observing steady completion percentages?

That's a great question. I would say that our average length of assignment hasn’t changed much. The challenge arises from the increasing opportunities available for consultants, leading to some being taken by other projects at inconvenient times. This has happened several times and has caused concern for our client service team. However, despite this frustration, it hasn't diminished our ability to secure work. One of our key strengths is our resilience in such situations, allowing us to effectively manage these challenges. In comparison to the shift away from traditional methods that many of our clients are experiencing, I believe we are not as severely impacted as they are.

Great. And then, I mean, obviously you have really nice turnaround. How are you thinking about longer-term what the margin profile should look like, as we kind of go through this evolution in the business?

Yes, this year, year-to-date, our margins are around 12% to 12.3%. Longer term, we believe we can reach the low to mid-teens in terms of margin. In the near to mid-term, I think a margin of about 12% is sustainable. However, as we work on our technology transformation project, we expect to achieve better automation and efficiency, which will help us scale and improve our SG&A leverage. Once that project is complete and we go live, I believe there is potential for us to reach mid-teen margins.

Yes. Let me just add to that just a little bit, Mark. It’s a combination of the things that we’re working on now, certainly the technology that Jenn talked about, and the fact that we’re moving from really end-of-life core systems to state-of-the-art systems. And we do believe that will matter in the business and will matter to our financial results. But also, as HUGO gains adoption in that self-service platform, and continuing to build that kind of digital experience and everything we do at RGP will drive efficiencies that can help us think of our margin in ways that we wouldn’t have 10 years ago. And we’re all committed to that to delivering shareholder return and really driving everything we do to improve that.

And our next question comes from Andrew Steinerman with JP Morgan. You may proceed with your question.

Jenn, my question is about your comment towards the end of your prepared remarks, where you were talking about the outlook for the third quarter. You mentioned extended shutdowns around the holidays. And sort of in the same breadth, you said expecting kind of typical seasonality. And I definitely concur with you that kind of at the middle of the range for revenues of minus 3% sequentially for third quarter compared to second quarter is typical seasonality. So, my question is a little more nuanced. The question is, were you trying to call out unusual negative seasonality around the holidays in December, and then made up for kind of in a faster start, kind of January, February. So just kind of break down for us when you say kind of a typical seasonality and you also said extended shutdown, was December kind of a normal December, or have you started counting on kind of January, February, to make up for any kind of shortfalls around kind of people taking holidays?

Yes. In the early weeks of the third quarter, we are continuing to build on the momentum from the end of the second quarter. In early December, prior to the holidays, we observed approximately a 1% increase in weekly revenue compared to the end of Q2. While we are ahead of where we were, we anticipate the challenges of the holiday season. Over the past few years, some of our larger clients have experienced extended shutdowns. For instance, since COVID, we also decided to give our staff a week off during the holidays, which will contribute to a bit more seasonal impact than in previous years. We are accounting for this seasonality as well as the holiday effects. Additionally, we have considered the ongoing presence of Omicron, which may have a potential impact. Therefore, we expect to see some acceleration in January and February.

Right. Regarding the last point on Omicron, it's prudent that you've included that in your projections. Shouldn't the impact of Omicron be minimal for your business? Isn't your service delivery just as feasible remotely as it is in person? I understand that the recent developments around Omicron have caused some concern for everyone. However, when you assess your delivery method, do you really anticipate any significant impact from Omicron, even if the national workforce leans more towards remote work in January and February?

Yes. Let me just say, make a comment, and Kate if you want to jump in. I mean, yes, we are more resilient in terms of delivering remotely, but it’s also about project starts, right? It could push back. Omicron could have an impact on our clients’ business and it could push back project starts. So, that’s kind of what we’re baking into in terms of potential Omicron impact.

Yes. I believe we are preparing to publish the mandatory policy we need to release by the 10th or 11th of this month, which will detail the requirements for our clients. This will subsequently affect the scheduling of start dates and is the only concern we have.

Right. But just to be clear, it’s good that you’ve built that into your assumptions. You haven’t seen any delayed project starts because of Omicron yet, right?

No, not yet, nothing material. But we’re really starting to see places and some of the major markets where you’re starting to see some larger incidences of breakout. So, you just want to be careful about that. Because of that you get in all kinds of logistical things around starting consultants and screenings and things like that.

No, I appreciate the sensitivity. And I think you’re taking a sensible approach. Thank you.

Thanks, Andrew.

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Kate Duchene for any further remarks.

Thank you, everyone. We’re proud of this quarter’s results, and we look forward to delivering good news at the end of our Q3. Happy New Year, everyone.

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.