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. [Operator Instructions]. As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to your host for today's call Ms. Alice Washington, General Counsel of Resources Connection. Ms. Washington, you may now begin.

Thank you, operator. Good afternoon, everyone, and thank you for participating on this call. Joining me here today are Kate Duchene, our Chief Executive Officer; Tim Brackney, our Chief Operating Officer; and Jennifer Ryu, our Chief Financial Officer. During this call, we will be commenting on our results for the third quarter ended February 22, 2020. By now you should have a copy of today's press release. If you need a copy and are unable to access it on our website, please call Shannon McPhee 714-430-6363. During this call, we may make forward-looking statements regarding future events or future financial performance of the company. Such statements are predictions and actual events or results may differ materially. Please see our report on Form 10-K for the year ended May 25, 2019 and our report on Form 10-Q for the quarter ended February 22, 2020 which we are filing today for a discussion of risks, uncertainties and other factors such as seasonal and economic conditions as well as epidemic diseases such as the recent outbreak of the COVID-19 illness. Such factors may cause our business, results of operations and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call. I'll now turn the call over to our CEO, Kate Duchene.

Thank you, Alice. Welcome to our Q3 fiscal '20 earnings call. This is the first time in company history where all participants are delivering remotely and we will be answering our Q&A virtually. This is the new normal for us as it is for many companies. Thank you very much for attending the call today during such unprecedented times. RGP is a human-first company, so I will begin my remarks with a human perspective on our current circumstances amid the COVID-19 pandemic. First, we're grateful that to-date we only have a few cases of COVID in our employee population. We have other personnel practicing self-quarantine activities, and still others facing health challenges of loved ones. Our priority during these challenging times is the safety and health and mental wellbeing of our people. Our limited direct impact to-date is good news, we don't take it lightly and for which we are immensely grateful. We will continue to monitor our workforce actively to ensure we're providing the right support, including regular communications, access to knowledge, access to resources, including telemedicine and employee assistance programs and access to virtual learning, training programs and IT support. We are also proud we already offer paid time off and sick leave benefits to those coping with this current situation. Second, we have implemented aggressive work-from-home plans for both consultants and internal management. Given our restructuring activities in early March, which I'll talk more about in a moment, we were ahead of the curve in preparing for a transition. Over the past three months as part of the project strength initiative, we developed a specific roadmap for virtual work arrangements, including designating the right leaders and organizational structure, processes and technology tools. We established and communicated virtual work policies to the whole population. We've implemented something we…

Thank you, Kate, and good afternoon, everyone. I will highlight operating trends and initiatives that impacted our results and operations for the third quarter, provide more color on the reorganization of our go-to-market operations, and the discuss early fourth quarter trends. Let me start by touching on operations in a world afflicted by a global pandemic. I am extremely proud of the way our company has responded and adjusted to this new temporary normal. In a matter of days, we shifted course from a prominently on premise world to a whole new virtual RGP. This forced the sudden merging of the personal and professional which is unprecedented in our company's history but one which our people embraced seamlessly. Without skipping a beat, we have continued to engage directly with our clients and each other, moving past the discomfort and novelty of our surroundings and embracing a new way of doing business. The early returns have been mostly positive with only some project interruptions, scope modification or delays. And today, we have had very few engagement terminations. Additionally, we have had some opportunity to support clients in new albeit virtual way. We are currently base planning and tracking both existing business and pipeline in order to better comprehend the direct effects of the pandemic. This is a fluid and rapidly changing environment so management remains vigilant and communicates frequently to ensure the safety of our people, buoyancy and morale and preservation of our financial fundamentals. We're grateful at a time like this for the inherent resilience embedded in our business model. As Kate noted our agile employment model is purpose built for the flexibility demands of both clients and talent, which makes it especially relevant in a time of great uncertainty. We have the ability to serve our client base by…

Thank you, Tim, and good afternoon, everyone. I will start by giving detail on our third fiscal quarter financial results. I will then discuss the trends we're seeing in the fourth quarter of fiscal '20 as well as the financial impact of our restructuring plan. Starting with an overview of our third quarter results, total revenue for the third quarter of fiscal '20 was $168.1 million, a 6.4% decrease from the comparable quarter a year ago and 8.9% decrease sequentially. On a constant currency basis, revenue decreased 6.2% year-over-year and 9.1% sequentially. Our third quarter gross margin was 36.5%, down 130 basis points from the third quarter of fiscal '19 and 380 basis points sequentially. As expected, third quarter revenue and gross margin were both significantly impacted by additional holidays. Further, revenue was adversely impacted by the COVID-19 outbreak in China at the beginning of the calendar year. I will provide more color on revenues by geography as each geography was impacted by different set of circumstances. SG&A expenses for the quarter were $55.3 million or 32.9% of revenue, compared to $55.6 million, or 31% of revenue last year. Our net income for the third quarter was $6.9 million or $0.21 per diluted share, up from $5.8 million or $0.18 per diluted share in the prior year quarter. Third quarter net income benefited from a U.S. tax deduction of $6.6 million relating to the exit from the Nordics and Belgium markets earlier in the fiscal year. In Q3, adjusted EBITDA, which we define as EBITDA before stock compensation and contingent consideration adjustments, was $6.8 million or 4% of revenue, down from $13.9 million or 7.8% of revenue in the prior year quarter, reflecting the impact of lower revenue and gross margin. Now, let me provide some color around our third…

Thank you, Jen. Before we turn to questions, as usual, I'll review our client continuity for Q3. Our client continuity does remain strong. We served 48 of our top 50 clients from fiscal 2019 and 47 of the top 50 from 2018. In the quarter we had 274 clients for whom we provide services at a run rate exceeding $500,000 in fees down from 281 in fiscal 2019. In addition, our top 50 clients for the quarter represented 40% of total revenues, while 50% of our revenues came from 85 clients. Our largest client for the quarter was approximately 3.6% of revenue. At the end of the third quarter, 90% of our top 50 clients had used more than one type of solution. This penetration reflects the diversity of relationships we have within our client organizations, our shift toward client centricity and this reinforces the opportunity for growth as we improve account planning and penetration. This concludes our prepared remarks and we're now happy to answer any questions.

[Operator Instructions]. I show our first question comes from Andrew Steinerman from JP Morgan. Please go ahead.

I have two questions. The first one, I know you spoke a multiple times about some of your work for your billable associates has been able to be delivered remotely. So my question is, what percentage of your billables have been able to continue their work remotely meaning, the work is getting done and they continue to bill? That's my first question. And my second question is, I realize it's uncertain, you're not giving potential revenue guidance for the fourth quarter. But my question is more just about decremental margins, in the sense that when revenue is down in the fourth quarter, at what margin is that revenue likely to be associated with?

Okay, Andrew, I'll take the first part of the question, then I'll turn it over probably to Tim. I would say almost 100% of our consultants who are billable are delivering remotely. So we've pivoted and been able to do that fairly seamlessly. And they continue to bill, they continue to issue their weekly status reports to clients and we're really following our clients’ lead. With respect to the margin question, Tim, I'll turn that to you or to Jen.

I can take that. Andrew, could you repeat that question? I'm sorry. I'm on a cell phone and broke up a little bit.

Sure. So the question is, in the fourth quarter what might be decremental margins? Just to define it for you. It means when revenues are down in the fourth quarter, what margin will be associated with that revenue decline?

Well, it's hard for me to give you an answer that isn't speculative. What I would say is that what we're trying to do from both a revenue preservation standpoint and to be flexible for our clients is that we are going to -- we will make -- we will have some downward pressure on our margins for -- as an investment and making sure that we are doing the right thing. But in terms of -- as you can see from our trends to-date through the first bit of the quarter, our revenue has been strong and our margins have been strong. So it's difficult to put an absolute number on that because if tomorrow -- I mean the situation is so fluid, it feels like we have to kind of deal with these situations day by day, week by week.

Thank you. Our next question comes from Mark Marcon from Baird. Please go ahead.

Good afternoon. Hope you guys are all staying safe. Just wondering with regards to the office reductions that you've done in place, what percentage of your revenue is associated with the practices that you're terminating?

Tim, do you want to take that? Do you have [indiscernible] the eight offices?

I do. Mark, nice to hear you. Hope you're staying safe as well. The eight offices that we're closing is a very small percentage. It's actually less than 1%. What we were trying to do is make sure that -- we didn't have either a direct market personnel or -- and certainly real estate commitments where we have such a small locus of revenue.

Less than 1% cumulatively?

Less than 1% in terms of where we expect our year to end up and also less than 1% when we look at them in historical perspective, particularly thinking about last year.

Okay. Great. And then with regards to what you're seeing in terms of just current weeks. I think you were describing the revenue trends that you were seeing. Can you talk a little bit about the top of the pipeline just what you're seeing in terms of orders, ability to generate new engagements, how is that being impacted? And the question is both broadly and then specifically in Tri-State area.

Andrew, thanks for the question. I'll let Tim take that as he is closest to our operational reports.

Sure. Mark, I will tell you that -- I'll give you both, right? With respect to velocity, as we mentioned, our velocity is still strong. What I will tell you is that, as we started to look at pipeline, our pipeline when you consider that year-over-year going into the third quarter has been very strong, over the last couple of weeks we started to see some degradation with respect to pipeline. And what I will tell you is that, while it's down, it's still higher than where we were in the similar period the last year. But I definitely think that it’s impacted by obviously the overall situation that we have with the pandemic, but also our transition both from clients and ourselves, having to be able to sort of adjust to this new normal of communicating to each other through different means and modalities. So, I think that part of that decline is expected. I was actually on a pipeline call earlier today, where we looked by region, I talked certain times looking at the Tri-State practice. Obviously, they're impacted a little bit more. Given that there is a - center of the pandemic, which is the hottest of hot spots right now appears to be in New York City. And so what -- I mean more there than in other situations when we attempt to do reach out to clients and targets, there are more people who either can't take a call or caring for somebody who is ill. And so it's a different kind of experience than we have in other parts of the country.

And how big is New York, the Tri-State area now?

It’s -- I don't know if we have it, I mean I’ll have to ask Jen if we actually disclose that information.

No, we don’t.

But just anecdotally, what I would tell you is that in terms of North America, it's our second largest regional practice. So it's a significant piece of our business.

And then can you talk a little bit about what you're seeing in China just in terms of the pace of things getting a little bit better and how you would extrapolate that?

Yes, Andrew, in talking to the team, I had one of our client service directors say he feels like Shanghai….

Kate, this is Mark.

Oh! I'm sorry. I’m sorry, Mark. I am managing a lot of screens here. I apologize. So one of our directors of client service said in Shanghai it feels like the business is about 80% back in terms of how clients are feeling about their business, and getting into the regular cadence of our business activity. And as Tim and Jen said, we've seen some degradation, but our revenue stream there is really starting to normalize as it is in Japan. I think the impact going forward in Asia-Pac will be in India, which is in real lockdown, which is bad news. But it also is creating some opportunity for us as clients who have offshored some of their accounting and finance work and can't get it done now, because of the infrastructure in India not supporting as much work-from-home activity, so we're starting to talk to clients about some opportunity.

[Operator Instructions]. I show no further questions in the queue at this time, I would like to turn the call over to Kate Duchene, CEO, for closing remarks.

Thank you, operator. We send our support and good health wishes to all of those facing COVID-19 challenges. And we sure hope that the world’s health and economy starts to heal soon. Again, we thank you for attending the call today and your interest in RGP. And we'll look forward to talking with you about our results of operations after the end of the fiscal year. Thanks again, everyone, and stay healthy.

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