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. Joining from management are Kate Duchene, Chief Executive Officer; Tim Brackney, President and Chief Operating Officer; and Jim Ryu -- Jennifer Ryu, Chief Financial Officer. As a reminder, today's conference call is being recorded. At this time, I would like to remind everyone that management will be commenting on results for the third quarter ending February 25, 2023. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today. Today’s press release can be viewed in the 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 anticipated financial performance of the company. Such statements are predictions, and actual event or result may differ materially. Please see the Risk Factors section in RGP’s report on Form 10-K for the year ended May 28, 2022, for a discussion of risks, uncertainties and other factors that may cause the company’s business, results or operation and financial conditions to differ materially from what is expressed or implied by forward-looking statements made during this call. I would now like to turn the call over to RGP’s CEO, Kate Duchene.

Thank you, operator. Good afternoon, everyone. Thanks for being with us. We're pleased to report solid financial performance in Q3 despite the macro environment. We exceeded the high-end of our guidance on top line revenue and gross margin was towards the high-end of our guidance range and at more than a 10-year high for the third quarter. Our SG&A cost containment efforts surpassed guidance expectations as well as we remain focused on delivering value for our shareholders. Taking a closer look. Q3 revenue was almost $187 million with our digital consulting business Veracity, delivering year-over-year and sequential growth. Gross margin improved 80 basis points over prior year to 38.3% as we continue to roll out our value based pricing initiative. This improvement represents our strongest third quarter performance since 2010. Given that the talent crisis, especially in the professional arena remains acute, we see this pricing initiative as a continuing opportunity to improve both the top line and gross margin. With respect to run rate SG&A, we spent less than our guidance anticipated as we remain disciplined on cost control. Adjusted EBITDA margin was nearly 9% this quarter, which is strong performance in the typical seasonally impacted third quarter. As we enter Q4, our revenue pipeline remains sizable. This leading indicator means that we have earned the seat at the table as a value partner for mission critical work. We are keenly focused on execution and confident in our relevance and value to the market. We will be all the more ready to execute when the macro environment strengthens and buyers we gain a sense of economic stability. As we shared on our last call, we are not experiencing project cancellations, but rather project delays. And while the start of net new projects softened somewhat in the quarter, clients are…

Thank you, Kate, and good afternoon, everyone. During the third quarter, we saw a solid revenue performance and operational metrics, and we're able to exceed top line expectations. The overall demand profile for the business continue to be healthy. However, client uncertainty related to the overall macro environment made it more challenging for new business. Total pipeline remained strong throughout the quarter, indicating endurance of opportunity yet converting opportunities to project starts was slower related to myriad factors, including tightened approval levels and delays in supposed initiative timeline. These opportunities are intact but require increased patients in care and we believe they represent real prospects for growth as clients rapidly adjust to the new environment. Regional performance was mixed, reflecting increased vacation impact over prior year and the increased choppiness in client demand. Despite these two factors, Veracity and Countsy in the Central U.S. demonstrated solid growth over prior year quarter. Additionally, our international business showed resilience as Europe generated sequential growth on a constant currency basis and Asia Pacific posted strong results despite the first fully celebrated Chinese New Year since the outset of the pandemic. Our strategic client accounts program was also affected by the border trends but has performed well overall on the year-to-date basis got approximately 4% over the prior year. Overall, we have performed solidly through the first three quarters of the year, growing by about 6%, exclusive of the divested task force business on a same-day constant currency basis, and our growth pipeline continues to be sizable. Client hesitation requires more patience and persistence with respect to top of the funnel activity as well as extra vigilance, communication and consideration while shepherding opportunities through the sales cycle to deal closure. The overall market opportunity remains as companies continue to transform and build workforce plans…

Thank you, Tim, and good afternoon, everyone. This quarter, we achieved revenue performance exceeding the high end of our outlook range. We achieved the highest third quarter gross margin in over a decade and we remain disciplined with our costs performing better than the favorable end of our run rate SG&A outlook range. While we outperformed our top line outlook range provided in January, compared to the prior fiscal year, which had elevated revenues as clients emerge from pandemic, revenue of $186.8 million for the third quarter was down 4% year-over-year on a same-day constant currency basis and excluding taskforce. However, year-to-date revenues grew 6% year-over-year on the same basis. As Tim mentioned, our pipeline remains strong throughout the quarter, and we've experienced cancellations. We continue to make good progress on improving bill rates to align our pricing with the value we deliver. Our U.S. average bill rate rose 4.7% compared to the third quarter of fiscal 2022, with Europe and Asia Pac driving 8.4% and 6.3% improvement on a constant currency basis. Regionally, on a same-day and constant-currency basis, North America revenue decreased 5.7% compared to an extraordinarily strong prior fiscal quarter, while APAC grew 9.8% and Europe excluding taskforce grew by 4.3%. Bright spots in North America included Veracity and Countsy, both growing year-over-year. APAC as a region grew primarily due to strong demand from our strategic client accounts in Southeast Asia as well as excellent revenue performance in Japan. Europe after experiencing a softer first half of this fiscal year, exhibited better stability following the onset of the Russia-Ukraine conflict a year ago. Gross margin in the quarter was 38.3%, an expansion of 80 basis points over the same quarter a year ago, driven by an improvement in the pay bill ratio of 190 basis points, partially…

Thank you. [Operator Instructions] Our first question comes from the line of Mark Marcon of Baird. Your line is open.

Hi. Good afternoon. Thanks for all the details on the call today. I'm wondering, can you talk a little bit about what you're seeing just in terms of the client delays and to what extent do you feel like they're either concentrated on the coast partially due to what we're seeing on the credit side? Wondering if your -- if you have any commentary there.

Hi, Mark. It's Tim. Yes, I would say, there's been some concentration related to delays on the coast because the costs are our largest businesses generally. Also on the West Coast, we want to work with the tech sector. We've seen probably more delays there this year than we've seen historically. But I would say that just broadly speaking, we delayed projects for a number of reasons, where include ones we enumerated in the script are not just in the coast. We're seeing it more broadly. But because of the -- like I said, because of the concentration of work that we have on the coast, we probably do see a little bit heavier concentration there.

And Tim, what's the commentary from the clients? Just with regards to their uncertainty in terms of financing levels, particularly, I'd be interested just in terms of like what percentage of the business is currently being done with relatively younger tech companies that might have been funded by SVB as an example.

Yeah. I mean, most of our business carry concentration of our business is with bigger clients in the Fortune 500. So what we do, do work with some earlier stages. We didn't have a lot of impact. The delays weren't really impacted by SVB other than, I think, some periods of uncertainty when everybody was concerned about the broader economy. I think the reason for delay is myriad. But I think I would put it in a couple of different camps. One is, there's just increased scrutiny on all projects right now generally. And number two, there were a lot of companies who are figuring out their own -- trying to support their own workforce plans right now. Many of them I alluded to this in the script, had over hired and they're now trying to figure out what they're going to do with some of their traditional employees who either who have been reorganized or with priorities that have shifted. So that's really causing a lot of the delay not really -- it doesn't have a lot to do with the credit prices related to SVB.

I really appreciate that color. And in terms of the delays, how long -- I mean, base -- it's obviously fluid and hard to say. But do you think it's maybe a three to six-month process in terms of working through those delays? What are you hearing from clients just in general from that perspective in terms of when they feel like they'd be confident about proceeding with some of the many useful projects that you could help them with?

It's kind of mixed and I think there's a little bit of -- just to be honest, some stop and starts relative to approval processes. I would say that the opportunities that kind of stay within our pipeline where we're really ensuring that these are projects that are going to start -- that we think we are going to start first and get counseled and we've seen very few get counseled at all. I would expect that we would be able to start in that time frame that you're talking about. We don't have very many that have aged out to the latter end of that range.

Great. And then great job with regards to the bill pay spread. How much more room do you think you have there? It sounds pretty encouraging in terms of thinking about how it could end up being for the fourth quarter, although, if I -- Jenn, did I hear you correctly, 40% to 41% is kind of the guide for gross margin?

Yeah, that's right. 40% to 41%, correct.

Okay. So maybe slightly down relative to Q4 of 2022?

Yeah. That's right. And that's -- look, I mean, the pay bill spread we still expect it to be strong in Q4, but compared to last year, if you look at our indirect costs just because top line is down compared to last year. So it's less -- just unfavorable leverage there. That's what's bringing down the overall gross margin.

Got it. But the bill rates still expanding at a sustained rate or higher?

Yes. I mean we believe we have more upside on our pricing and bill rates. So yeah, I expect that our pay bills should be -- we should be able to sustain that not improve it.

Terrific. And then Kate, you spoke about multiple growth levers, obviously, within the staffing industry, there's a lot of discussion with regards to these talent platforms and what you're doing with HUGO would fit within that. Can you give us a little bit of a sense for like how material you think it could end up being over the next two to three years in terms of potential revenue? I know it's early days, but just how are you thinking about it? How is the Board thinking about it in terms of the investment?

Yeah. So with these platforms, there's a hockey stick effect. So if you look at -- the most successful platform in the marketplace today in staffing is in health care staffing. And so on the health care is one that we all looking [Multiple Speakers]. Yeah. But if you look at their growth, I mean, they started small, and now they're over $11 billion. So you do see that hockey stick effect once you get critical mass and you've driven behavioral change and that's what I think is just ahead of us. So this next fiscal year will be focused on critical mass, economies of scale, really delivering in the three markets where we're already focused. And that's important, Mark, because we're all reading about the return to the office for some roles. And we do believe it's important to have more localized talent pools for some of this work if on-site delivery is required. But overall, going to your question, what we're modeling is modest growth in the year ahead, but then continuing to scale more like a hockey stick approach, especially as we invest more in digital marketing and sales support.

And how many markets -- you're currently in three markets, how many market could you be in by the end of the next fiscal year, so fiscal '24?

Well, I really -- like I said, I think we're going to concentrate first on getting the critical mass in the markets we're operating in now, it takes about three months to build a quality talent pool in a new market. I will share that with you. We're doing it both with dedicated onshore talent, but also with an offshore partner. So we can scale pretty quickly once we establish that we've achieved critical mass in the markets we're in right now.

Great. And then obviously, there's all sorts of macro questions that are out there. If we were to go into a mild recession, what do you think the downside would basically be with regards to EBITDA margins? You've done a nice job of getting them up over the last couple of years. How should we think about what your flexibility is from a cost perspective if things get a little bit worse?

Right. Well, I mean, our model that's what we love about this model in times of transition is that it is very agile and that 80% of our -- 70% of our cost structure is variable so keep that in mind. Now the part that is not variable, we'll continue to look at very critically if we see revenue continue to decline or decline more quickly because of a recession. But keep in mind, if you ask me overall how I think about the business, I think it's a matter of timing right now. I think we are so well positioned with our clients to deliver what they need. It's a matter of timing because even in a deeper recession, and we saw this coming out of past recessions, clients cut too deep and then they need to turn to us before full recovery in order to get work done that is non-discretionary. So to me that the challenge in the business right now is timing that opportunity.

Appreciate that. Thank you.

You’re welcome, Mark. Thank you, Mark.

Thank you. One moment please. Our next question comes from the line of Stephanie Yee of JPMorgan. Your line is open.

Hi. Good afternoon. I was wondering, if you can help us with what the implied revenue decline is in the fourth quarter guide versus the 4.1% decline in the just reported third quarter?

Yeah. Sure. Hi, Stephanie. The fourth quarter at the top end of the guidance range at $183 million. We are looking at about 12% year-over-year decline. And compared to the third quarter, we're looking at about an 8% decline. But let me just -- again, we're going to -- if you think back to Q4 of last year, it was an extraordinary quarter and our revenue cadence over the two fiscal years, it flipped a little bit. Last year was -- we were accelerating throughout the entire year. And -- but on a year-to-date basis, if you look at what we're guiding, we're essentially flat to last year on -- if you were to exclude taskforce.

Okay. Great. That's super helpful. And I know, Kate, you just gave a bunch of color on HUGO. But we were wondering if you have any preliminary information to share on how many active user candidates are already on the platform?

Yeah. So we have strong adoption from the talent base. We have -- we're not disclosing that level of detail yet, Stephanie, because it's still a growing platform. So I don't want to set expectations while we're still learning, but we have captive pools in each of the three markets that I would say are approaching critical mass and have proven to be very sticky. And our turnaround times are really improving in terms of matching opportunity with talent. So we'll continue to monitor this. And then as the platform becomes more successful and stable, we'll be sharing more detail.

Okay. Great. Thank you.

You’re welcome.

Thank you. One moment please. Our next question comes from the line of Marc Riddick of Sidoti. Mr. Riddick, your line is open.

Hi. Good afternoon. So I was sort of want to follow up on the last question around HUGO as far as you made mention on some early learnings. So I was sort of curious as to maybe could you talk a little bit about what some of those learnings are, as well as if there's much in the way of differentiation between the three markets, is what you're experiencing in these early days similar across the board? Are you seeing any differences that are somewhat regionally based or how should we think about that?

Well, I think we're really focused on technology targets, say, in the dry state area and financial services and private equity. So the needs from a role and skill set perspective are a little bit different than what we'll see in Texas, for example, or Southern California. I can tell you the most sought after kind of title that we're seeing on HUGO so far is staff accountant, which shouldn't surprise anyone, especially given the fact that, that skill set is in demand in the marketplace. But in New York, for example, we've seen a lot more around fund accounting, and that's just function of financial services and the kind of client we're targeting there. I think there's still -- in terms of the learnings, Marc, it's really about tracking usage on the platform, like when are the inflection points where someone might drop out of engagement and trying to understand why so we draw them back in. You'll see at the start of the calendar year, we'll be launching some new landing pages that are designed to engage with more information so we don't lose people at different stages. This learnings we've got from clients has been really favorable, I would say, very efficient. They like the functionality. They love the 24/7 access to be able to move forward on their project engagement. We've gotten some feedback on the scheduling component of the app. I mean, it's all sorts of elements of the experience that we're continuing to improve.

That's really helpful. And then I wanted to go back to the prepared remarks, one of the things you made mention in the prepared remarks is around having a seat at the table with your customers. And I was sort of curious as to whether or not the feedback and some of the areas of concern have changed much maybe over -- maybe since the beginning of the year or over the last six months or so as far as, we can understand obviously the delays of and longer cycles and the like. But I was sort of curious as to whether things like the pace of returning to office in person or anything like that has made them make adjustments to maybe where they thought things would be maybe a few months ago?

Hey, Marc. I don't -- first of all, to talk about seat at the table, which Kate alluded to in her remarks. I mean, I would say that what that has meant for us in the places where we have strong relationships across our client base and they know us, we're actually being able to ladder up for opportunities to be able to do more in the consulting role. And I talked a little bit about that. In terms of return to work and some of those types of things, I don't think that's really impacted the demand environment for us and hasn't necessarily been delays. There are certain industries and certain geographies where that's been more prevalent and we had to react to that. But the kind of the big overwhelming factor that has led to delays and those types of things or positives has come just from the general uncertainty in the macro and it's had less to do with some of the specific things around things that came out of COVID.

Okay. And then last one for me, and I know this is a little squishy, so I apologize in advance. We've seen various thoughts around the workforce and changes in the workforce over the last couple of years. Have you seen much in the way of changing demographics or changing age ranges or is there anything meaningfully different in the -- in sort of bigger picture demo type of use with your client pool today than it was maybe a couple of years now? Thanks.

I would say, let me just offer something that's different from, say, the last recession in 2008. We're seeing, I think, a younger generation of talent wanting to work in this project-based or agile model, whereas 10 or 15 years ago, there was too much uncertainty or viewed as too much uncertainty or in security in the model. And I think that's completely changed today. I mean I shared a little bit of a survey result from MBO Partner in my prepared remarks. But we're really seeing more of the rise of part time working and also people who want to work in a more flexible way, and that's across all demographics. Marc, there was a recent article, I think it was just this week in or maybe Friday in the Wall Street Journal about the rise of part-time work at all levels of professional talent and that matches our experience.

Excellent. Thank you very much.

You’re welcome, Marc. Thank you.

Thank you. One moment please. Our next question comes from the line of Mark Marcon of RW Baird. Your line is open. One moment, please. I'm showing no further questions at this time. Let's turn the call back over to Kate Duchene for any closing remarks.

Thank you, operator. Thank you, everyone for joining us today. We'll look forward to giving you a further update on the business at the close of Q4. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.