Resources Connection Poised to Capitalize on a New Paradigm PDF Free Download
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May 29, 2024
Financial Services
RGP
NASDAQ
Rating
Outperform
Initiation
Current Price
$11.14
Target Price
$15.00
Market Capitalization
376.6M
Shares Outstanding
33.8M
Float
31.3M
Institutional Holdings
94%
12-Month Low/High
$10.59/$17.24
Average 90-Day Volume
317590
Fiscal Year End
05/31/2024
Revenues ($ MIL)
Period 2023A 2024E 2025E
Q1 204.1A 170.2A 145.0E
Q2 200.4A 163.1A 150.0E
Q3 186.8A 151.3A 165.0E
Q4 184.4A 140.0E 180.0E
775.6A 624.6E 640.0E
EPS ($)
Period 2023A 2024E 2025E
Q1 0.60A 0.20A 0.10E
Q2 0.59A 0.25A 0.14E
Q3 0.37A 0.17A 0.19E
Q4 0.44A 0.07E 0.30E
2.00A 0.70E 0.73E
Resources Connection
Poised to Capitalize on a New Paradigm
Initiating Research Coverage. We are initiating research coverage of Resources Connection,
Inc. (RGP) with an Outperform rating and a $15 price target. We view RGP as a disruptor in the
rapidly evolving management consulting field focused on improving outcomes for both its
consulting clients as well as staff, be it internal or external.
Who Is Resources Connection? Resources Connection is a global consulting firm focused on
project execution services that power clients’ operational needs and change initiatives utilizing
on-demand, experienced, and diverse talent. As a next-generation human capital partner, RGP
specializes in co-delivery of enterprise initiatives typically precipitated by business
transformation, strategic transactions, or regulatory change.
An Evolving Workplace. Partly pushed by the COVID pandemic, the workplace is undergoing
an evolution, with employers outsourcing more internal functions to focus on core
competencies, while employees are seeking a more balanced work/life proposition, including
flexibility in places of work, as well as when work is accomplished. RGP helps solve these
challenges.
Pristine Capital Structure. With no debt and $113.8 million of cash as of February 24, 2024,
RGP is well capitalized to fund growth, both organic and inorganic, and make necessary
investments in the business. At the same time, RGP has a history of returning excess capital to
shareholders, with RGP shares sporting a 4.8% dividend yield and $45 million remaining under
a share repurchase authorization.
Projections. Economic uncertainty is expected to persist until interest rates begin to decline,
likely further delaying client "go forward" moves on projects. For the fiscal 2024 fourth quarter,
we project RGP will generate revenue of $140 million and adjusted EPS of $0.07. For fiscal
2025, we are projecting revenue of $640 million and adjusted EPS of $0.73.
Equity Research
Joe Gomes, CFA, Managing Director, Equity Research Analyst, Generalist
561-999-2262, jgomes@noblecapitalmarkets.com
Joshua Zoepfel, Research Associate - jzoepfel@noblecapitalmarkets.com
Noble Capital Markets, Inc.
Trading: (561) 998-5489 Sales: (561) 998-5491
www.noblecapitalmarkets.com
Refer to the last two pages for
Analyst Certification & Disclosures
Initiation of Coverage
We are initiating research coverage of Resources Connection, Inc. (NASDAQ:RGP) with an Outperform rating and a $15 price
target. We believe Resources Connection is a disruptor in the professional services industry with a differentiated delivery
model. The Company's evolved client engagement and talent delivery model take advantage of trends in the marketplace that
are placing increasing emphasis on flexibility and agility, both from clients and talent. With favorable industry tailwinds, strong
cash flow generation, and a pristine balance sheet, we believe RGP shares present a favorable risk/reward at the current price
level.
Company Overview
Resources Connection (RGP) is a professional services firm focused on clients’ operational and transformative initiatives.
Through its expert consultants, RGP specializes in helping clients solve business problems across the enterprise in the areas of
transactions, regulations, and transformations. Through its global footprint, RGP serves over 2,000 clients, including 88% of the
Fortune 100 and 77% of the Fortune 500.
RGP's service offerings include:
Project Consulting. RGP partners with people and clients to deliver value and impact, bringing depth of experience and a
“sleeves up” approach to project execution. RGP brings fresh ideas to drive any project to a successful conclusion. RGP
capitalizes on the client's internal employees’ lack of time, experience, or skills for projects. Project Consulting accounted
for 62% of the revenue over the last twelve months.
On-demand Talent. With nearly 3,000 consultants, RGP is able to mobilize the right resources to support an organization
in today’s rapidly changing business environment. RGP's workforce strategy provides flexible, collaborative resources to
meet clients’ needs. On-demand Talent services accounted for 33% of LTM revenue.
Other Services. From digital workflows to back-office functions, RGP supports vital business processes, freeing clients to
focus on transformation. In addition, through its recruiters, RGP is able to quickly find and assess top talent for business-
critical positions for a wide range of clients. Other Services represented 5% of revenue over the last twelve months.
From the 10,000-foot perspective, RGP's support for clients can be broken into two themes, as seen in the following table:
Source: Company reports
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Investment Overview
Capitalizing on a Marketplace Shift
RGP is benefitting from some key trends in the workplace. From the client side, RGP assists firms dealing with a worldwide
skills gap due to the accelerated pace of change in the business place and an ever-increasing amount of transformation
mandates. At the same time, employee preferences are shifting from engagement to experience. Employees are increasingly
seeking to align themselves with firms that can provide an engaging work environment but on the employee's terms. While
these trends have been maturing over time, the COVID 19 pandemic accelerated these trends into what we believe will be a
more permanent shift.
A recent article in the May-June 2024 Harvard Business Review entitled "Highly Skilled Professionals Want Your Work But Not
Your Job" by Diane Gherson and Lynda Gratton puts the current dilemma succinctly:
"Companies today are facing a big talent-management challenge. They simply do not have the capabilities they need in-
house to transform their offerings, processes, and infrastructures—and they’re increasingly unable to persuade highly
skilled professionals to come on board full-time, despite making attractive offers. In many fields—particularly technology,
data sciences, and machine learning—the people with the most sought-after skills are freelancers. Integrating and
managing a new “blended workforce” will be one of the main managerial challenges in the years ahead."
This is the challenge Resources Connection is helping client navigate.
But first some relevant statistics from the HBR article:
According to a 2022 McKinsey study, some 36% of the U.S. workforce has chosen to work as contract, freelance,
temporary, or gig workers.
According to a December 2023 study of 3,000 professionals by Upwork, this number is now 38%, or 64 million workers.
Of these, one-third were earning more than $150,000 annually, with just over 50% providing knowledge services, such
as computer programming, marketing, IT, and business consulting.
52% of GenZ workers and 43% of Millennials were freelancers in 2023.
From a labor force perspective, only about 3% of people wish to be full-time at the office, and 86% of employees want to work
from home at least twice a week. Employers’ reaction to this change can be seen in the increasing availability of hybrid work
models-a mix of in-person and remote work that provides flexibility and allows for collaboration. According to Omdia, 58% of
organizations encourage a hybrid model—and flexible schedules. According to LinkedIn, 75% of Fortune 100 companies have
adopted a hybrid schedule, which allows for face time in the office while also allowing workers to save time on their commute.
In its own review of labor market dynamics and discussions with its consultants, RGP has noted the number of professionals
seeking to work on an agile basis has been increasing due to a desire for:
More flexible hours and work arrangements, including working-from-home options, coupled with an evolving professional
culture that offers competitive wages and benefits;
The ability to learn and contribute to different environments and collaborate with diverse team members;
Challenging engagements that advance their careers, develop their skills and add to their portfolio of experience;
A work environment that provides a diversity of, and more control over, client engagements; and
Alternative employment opportunities throughout the world.
For RGP internally, these changes in what consultants are seeking has resulted in more flexible hours and work arrangements
for its consultants, including working-from-home options, coupled with an evolving professional culture that offers competitive
wages and benefits.
From a client perspective, partly due to the COVID changes to the workforce, many organizations are increasingly choosing to
address their workforce needs in more flexible ways. Permanent professional personnel positions are being reduced as
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
organizations engage agile talent for project initiatives and transformation work.
Organizations use a mix of alternative resources to execute projects. Some companies rely solely on their own employees who
may lack the requisite time, experience, or skills for specific projects. Other companies may outsource entire projects to
consulting firms, which provides them access to the expertise of the firm but at a cost, insufficient management control of the
project, and a lack of ultimate ownership at project completion. As a more cost-efficient alternative, companies sometimes use
temporary employees from traditional and internet-based staffing firms, although these employees may be less experienced or
less qualified than employees from professional services firms. Finally, companies can supplement their internal resources with
employees from agile consulting or other traditional professional services firms, like RGP. The use of project consultants as a
viable alternative to traditional accounting, consulting, and law firms allows companies to:
Strategically access specialized skills and expertise for projects of set durations;
Engage the very best expert talent across regions and geographies;
Be nimble and mobilize quickly;
Blend independent and fresh points of view;
Effectively supplement internal resources;
Increase labor flexibility; and
Reduce overall hiring, training and termination costs.
Supplying What Clients Seek
RGP is ideally positioned to capitalize on the confluence of the industry shifts described above. We believe RGP provides the
agility companies desire in the current business environment, while at the same time providing consultants with the type of
operating environment they desire.
RGP's client base is broad and deep. In fiscal 2023, the Company served over 2,000 clients across a diverse range of
industries in 37 countries. Notably, revenues are not concentrated with any particular client, with no single client accounting for
more than 10% of revenue for the 2023, 2022 or 2021 fiscal years. In fiscal 2023, the 10 largest clients accounted for
approximately 22% of revenue.
Clients are generally serviced at the local level, with oversight of market or account leaders with the corporate management
team. The market or account leaders and client development directors in each market are responsible for new client acquisition,
expanding client relationships, ensuring client satisfaction throughout engagements, coordinating services for clients on a
national and international level and maintaining client relationships post-engagement. While the majority of client relationships
are driven at a local market level, RGP's Strategic Client Accounts, which comprise 106 accounts, are led by account leaders
responsible for relationships across markets and who are specifically tasked with growing global relationships in these key
accounts.
RGP's efforts are focused on six key verticals:
Finance & Accounting — RGP's finance and accounting consulting and professional staffing engagements range from
day-to-day operational support and process expertise to implementing advanced automation and data analytics. RGP
consultants assist clients in areas ranging from technical accounting support, to assisting with accounting standards
implementations to tax services to financial reporting, planning and analysis, to name some of RGP's expertise.
Risk & Compliance — With expertise in risk assessment and compliance program assessments, operationalizing
compliance, controllership, and internal and external audits, RGP works with leading companies all over the world to
mitigate risk and ensure compliance while improving agility and productivity. With issues such as cybersecurity and data
privacy expected to only increase in importance over time, we expect this vertical to continue to see growth.
Technology & Digital — RGP assists clients in choosing between various technologies and collaborates with clients
throughout the technology lifecycle to maximize value. Services provided range from running full data and analytics
transformational strategy to overseeing a system integrator’s ERP implementation.
Supply Chain — Having completed hundreds of supply chain transformation initiatives, including vendor management
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
and optimization, strategic planning and sourcing, cross-functional supply chain assessments, process improvement,
and supply chain transformations, RGP helps supply chain managers adapt to change by incorporating supply chain
management into the fabric of corporate strategy and operations, with a focus on risk and cost reduction.
Business Transformation — With todays near constant state of business and technology disruption, RGP helps
companies reinvent the way they do business. From mergers and acquisitions to cloud migration to digital transformation
to international regulation, RGP consultants help companies cut costs, streamline operations, and build operational
excellence.
Professional Search — RGP has a 35-year track record in executive search. The Company has helped clients, from
high-growth and start-up companies to Fortune 100 organizations, find and secure top talent. With established
relationships with many of the best and brightest professionals in the industry, RGP is able to draw on a deep talent
network to uncover and engage the right professionals for permanent positions.
Growth Strategy
RGP has followed parallel paths to drive growth. Historically, growth has been primarily organic with certain strategic
acquisitions that augmented the Company's physical presence or solution offerings. Given the shifts in the workplace paradigm
outlined above, we believe significant opportunity exists for continued organic growth in RGP's core business while there
remains opportunity to bolster growth through strategic and highly targeted acquisitions. Key elements of RGP's growth
strategy include:
Strategic Brand Marketing. RGP's focused business on project execution and business model of utilizing experienced
talent to flatten the traditional consulting delivery pyramid fits in with what the market is currently seeking, in our view.
While most clients are capable of formulating business strategy organically or with the help of a strategy firm, where
RGP's expertise shines is in assisting clients in the ownership of executing the strategy. As the Company states, project
management is a distinct space on the continuum between strategy consulting and interim deployment. We expect
RGP's brand marketing to continue to emphasize and accentuate the Company's unique qualifications in this arena. The
following chart highlights the Company's current portfolio of brands, which will be augmented by the recently announced
intent to acquire Reference Point.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Source: Company reports
Increase Penetration of Existing Client Base. A key element of growth is to increase penetration of existing clients. It
is typically easier, and more profitable, to increase business with a current client than to bring another client into the fold.
According to management, significant potential exists here as discussions with clients indicate the amount of revenue
RGP currently generates from many clients represents a relatively small percentage of the total amount spent on
professional services. In addition, we would anticipate the overall amount spent by firms on consulting services to
expand over time, consistent with current industry trends.
Grow The Client Base. Given RGP's differentiated approach and focus on the "sweet spot" of current demand, we
believe the Company can increase its market share by attracting new clients. RGP's global, regional, and local marketing
efforts are focused on identifying strategic target accounts especially in the large and middle-market client segments and
within certain focus industries, such as healthcare, technology, and financial services where the Company already
enjoys a strong reputation.
Focus On Digital Capabilities. The digital transformation of the business place is ongoing with the need for automation
and self-service, an increasing trend. RGP has been and continues to expand and deepen its offerings in the digital
space. The Company’s Veracity Consulting Group subsidiary offers valuable digital consulting services, particularly
related to experience and automation. We anticipate an ongoing focus by RGP on expanding its digital consulting
capabilities and geographic reach to drive growth in the business by capturing the market demand and opportunities.
Expand The Sales Channel. With consumer buying habits dictating a more self-serve frictionless experience, the use
of technology platforms to match clients and talent is the future of professional staffing. RGP's HUGO by RGP (“HUGO”)
is the Company's digital engagement platform, allowing clients and talent in the professional staffing space to connect,
engage and even transact directly. By expanding the sales channel, RGP opens a greater total addressable market for
its services, in our view.
Pursue Targeted Mergers and Acquisitions – RGP has pursued targeted mergers and acquisitions in the past, mostly
to drive additional scale or expand and complement existing core capabilities. The M&A strategy is focused on
expanding RGP's consulting capabilities, with a special interest in financial advisory firms as well as digital
transformation firms. Past acquisitions have included:
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
1. Veracity Consulting — In August 2019, RGP announced the purchase of Veracity for $30.6 million, plus earnouts. At the
time of the purchase, Veracity added a business-led digital strategy and design prowess with deep technology expertise,
serving clients across four core capability areas – Strategy & Roadmap, Brand Experience, Workforce Experience, and
Customer Experience. The acquisition enhanced RGP's digital capabilities as well as enabled RGP to offer
comprehensive end-to-end solutions.
2. CloudGo — In November 2023, RGP acquired CloudGo Pte Ltd. for approximately $7.7 million, net of cash acquired.
Headquartered in Singapore, CloudGo is a digital transformation firm and a fast-growing Elite ServiceNow Partner. We
believe that CloudGo’s strategic capabilities and regional positioning will play a key role in growing RGP's digital
consulting business in the Asia-Pacific region.
3. Reference Point — Most recently, RGP entered into a definitive agreement in March 2024 to acquire Reference Point
LLC, a strategy, management, and technology consulting firm serving the financial services sector across four areas of
focus: Strategy & Management, Risk & Regulatory Compliance, Digital & Technology and Data & Analytics. Expected to
close this summer, Reference Point should accelerate RGP's growth in the key financial services sector. Terms of the
deal were not disclosed.
Technology Initiative
In fiscal 2022, RGP launched a multi-year global technology transformation project which includes replacing its core financial
and talent software systems and optimizing existing systems including Salesforce and Workday Human Capital Management.
The amount of the investments required for this multi-year initiative was estimated to be in the range of $30 million to $33
million, primarily for software licensing fees, third-party implementation and consulting fees, incremental costs associated with
additional internal resources needed on the project, and other costs in areas including change management and training. In
fiscal 2023, RGP capitalized $6 million of investments and recorded $6.5 million of expenses relating to these investments. We
expect the majority of the remaining planned investments to take place in fiscal 2024.
As part of the initiative, RGP launched a new talent management system in North America in February 2024. The new talent
management system should enhance the experience for core constituents and drive improved finance metrics through
automation, better data analytics, and faster global collaboration, in our opinion.
With the use of technology platforms to match clients and talent the future of professional staffing, RGP developed and is
implementing HUGO by RGP, which provides temporary accounting staffing. HUGO, a digital engagement platform, should be
attractive to the more than 300,000 accountants in the United States that left their jobs over the last two years. HUGO enables
clients and talent in the professional staffing space to connect, engage, and even transact directly. To date, the service has
been piloted in three primary markets – New York/New Jersey, Southern California, and Texas – receiving positive feedback
from clients and talent alike. We expect RGP to now pursue a more aggressive digital marketing plan to accelerate
commercialization and achieve broader adoption. With the accounting profession losing talent in unprecedented numbers, we
believe HUGO offers these professionals a viable alternative to the traditional accounting firm career path. Over time, we
expect RGP to be able to drive volume through the HUGO platform by attracting more small- and medium-sized businesses
looking for interim support as HUGO will facilitate the process and make it less hands-on in terms of client acquisition.
Industry Trends
There are more than one million management consulting firms in the United States, all collectively expected to generate about
$370 billion in revenue this year, according to IBISWorld. Across dozens of industries, consultants throughout the country help
companies navigate challenges in areas such as IT strategy, risk management, digital transformation, accounting, and much
more.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Source: IBISWorld, January 2024
The Global Business Process Outsourcing (BPO) market size is expected to be worth around $739.4 billion by 2033 from
$315.2 billion in 2023, growing at a CAGR of 8.9% during the forecast period from 2024 to 2033, according to Market.US. In
layman's terms, BPO is essentially using outside resources, be they people or programs, to perform functions that have
historically been performed by in-house employees. The outsourcing of various functions allows organizations to focus on their
core competencies while leveraging the expertise and resources of specialized BPO firms. In addition to superior outcomes,
organizations seek out cost savings, access to more skilled talent, and increased operational efficiency when making
outsourcing decisions.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Source: Market.US
Functions such as IT, healthcare, finance, and Human Resources historically have been the most outsourced processes. And
while outsourcing is often thought to be something done by large companies, over 90% of small businesses across all
industries planned to outsource at least one function in 2023. Technological advancements such as artificial intelligence (AI),
cloud-based computing, and robotic process automation are significantly shaping the outsourcing industry and driving expected
future growth.
Cash Flows
Cash flow generation has been a strength of Resources Connection from the start. In fact, on an annual basis, Resources
Connection has generated positive cash flows from operations since Company inception in 1996. The following chart highlights
key cash flow sources and uses over the past five years.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
In fiscal 2023, operating activities provided cash of $81.6 million, up from $49.4 million in fiscal 2022. The cash flow generation
resulted from net income of $54.4 million and non-cash adjustments of $12.8 million. Net favorable working capital adjustments
added $14.5 million. In the first nine months of fiscal 2024, the Company generated $18.7 million of cash flow from operations,
down from $63.9 million in the same period last year. The biggest driver of the change was a decline in net income from $42.6
million to $10.6 million. Capital expenditures totaled $1.0 million, resulting in free cash flow of $17.8 million. RGP used $7.4
million of cash for the CloudGo acquisition and used $14.1 million of cash in dividend payments.
Return of Capital
As mentioned, one of the three pillars of the Company's operating strategy is the return of excess capital to shareholders
through both dividends and share repurchases.
In July 2010, Resources Connection's Board authorized the establishment of a regular quarterly dividend at an initial payment
of $0.04 per share. The dividend has regularly increased since then and now stands at $0.14 per share on a quarterly basis.
Over the past five years, Resources Connection has returned over $90 million to shareholders through dividend payments. At
the current share price, the dividend yield is an attractive 4.8%.
In July 2015, the Board approved a stock repurchase program authorizing the repurchase of up to $150 million. During the year
ended May 27, 2023, the Company repurchased 914,809 shares of the Company’s common stock on the open market at an
average price of $16.62 per share for an aggregate total purchase price of approximately $15.2 million. During the nine months
ended February 24, 2024, the Company purchased an additional 353,858 shares at an average price of $14.13 per share, or an
aggregate total purchase price of approximately $5.0 million. As of February 24, 2024, approximately $45.2 million remained
available for future repurchases.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Capital Structure
In addition to strong cash flow generation, a strength of the Company is a pristine balance sheet. As of February 24, 2024, RGP
has cash and cash equivalents on the balance sheet of $113.8 million. Working capital was $167.2 million. The Company had
no outstanding balance under its credit facility. Shareholder equity totaled $414.9 million as of February 24th, or a book value of
$12.27 per share.
The Company has a $175 million senior secured revolver with an option to increase the revolver by up to an additional $75
million. As of February 24, 2024, there was $173.6 million remaining capacity under the facility. The credit facility matures on
November 12, 2026.
Resources Connection recently entered into an agreement to sell its corporate headquarters building for $13.5 million. We
anticipate the after-tax proceeds to further increase the M&A war chest.
Operating Overview and Forecasts
For the fiscal third quarter (ended February 24th), Resources Connection delivered solid performance despite an uncertain
environment and a sluggish macro environment. Revenue was in line with expectations while gross margin and SG&A came in
better than expected. While client engagement extensions and client retention remain robust, new project starts continue to
take longer than previous cycles. During the quarter, the Asia-Pacific region returned to growth and the Mexico, India, and
Switzerland practices all grew year-over-year. The key North America market continued to reflect the overall choppy operating
environment.
Revenue was $151.3 million compared to $186.8 million in the third quarter of fiscal 2023. On a same-day constant currency
basis, revenue decreased by 19.6% reflecting the overall choppy macro environment. Gross pipeline remained relatively
resilient, however, the time to close opportunities in the pipeline continued to be protracted. North America revenue declined to
$129.7 million from $163.8 million a year ago, Europe revenue fell to $8.7 million from $10.2 million, while Asia Pacific revenue
was essentially flat at $12.9 million.
Revenue declined in the North America and Europe regions reflecting reduced client spending across a majority of end
markets, client segments and solution offerings as a result of the continued challenging global macroeconomic environment.
North America experienced a revenue decline of 20.8%, or 21.1% on a same-day constant currency basis, from the third
quarter of fiscal 2023. Europe revenue decreased 14.8%, or 22.5% on a same-day constant currency basis, compared to the
third quarter of fiscal 2023. Asia Pacific revenue increased 0.6%, or 1.8% on a same-day constant currency basis, compared to
the third quarter of fiscal 2023. On the positive side of the ledger, large multinational clients continue to shift work to lower cost
markets such as India and the Philippines, creating demand in the Company's Asia Pacific region. Recent acquisition CloudGo
contributed $1.9 million of revenue to the Asia pacific region.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Quarter-end consultant headcount was 2,765, down from 3,164 a year ago. Compared to the prior year quarter, billable hours
decreased by 12.3% due to reduced client spending and the average bill rate declined by 7.8% (also 7.8% on a constant
currency basis) to $119 due to a shift in revenue mix to the Asia Pacific region which carries lower average bill rate. The United
States average bill rates increased by 0.9%, compared to the prior year as a result of pricing actions taken, while average bill
rates in the Asia Pacific region declined by 10.1% (or 6.3% on a constant currency basis), also largely attributable to a shift in
revenue mix across the countries within this region.
Gross margin for the fiscal third quarter was 37.0% compared to 38.3% in the year ago quarter and management's 35.5%-36%
guidance due to a higher pay/bill ratio and reduced leverage of indirect cost of service on lower revenue. While the pay/bill ratio
in the U.S. remained relatively consistent with the prior year, the enterprise-wide pay/bill ratio was negatively impacted by an
increased proportion of revenue in regions with a higher pay/bill ratio.
SG&A expenses for the third quarter of fiscal 2024 were $49.6 million, or 32.8% of revenue, compared to $59.4 million, or
31.8% of revenue, for the third quarter of fiscal 2023. The improvement in SG&A year-over-year was primarily due to the
reduction in bonuses and commissions by $7.3 million as a result of lower revenue and profitability achievement and lower
management compensation expense of $2.6 million partially attributable to the October 2023 cost reduction plan, and a
decrease of $1.4 million in stock compensation expense, partially offset by one-time costs of $1.6 million of employee
termination benefits in connection with further actions taken under the U.S. Restructuring Plan during the third quarter of fiscal
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
2024.
Resources Connection reported net income of $2.6 million (a net income margin of 1.7%), or EPS of $0.08, compared to $7
million (a net income margin of 3.8%), or EPS of $0.21, in the prior year quarter, due primarily to lower revenue and gross
profit, partially offset by lower SG&A for the current year quarter. Adjusted EPS was $0.17 in the third quarter of fiscal 2024,
compared to $0.37 in the same period last year. Adjusted EBITDA for the fiscal third quarter was $10.8 million (a margin of
7.1%), compared to $16.6 million (a margin of 8.9%) in the prior year comparable quarter primarily due to lower gross margin
and expense deleveraging on the lower revenue base.
Projections
For the fiscal fourth quarter of 2024, we are projecting revenue of $140 million, adjusted EBITDA of $5.5 million, and adjusted
EPS of $0.07. Full year fiscal 2024 comes in at revenue of $624.6 million, adjusted EBITDA of $43.9 million, and adjusted EPS
of $0.70.
The uncertain economic environment and reluctance of C-suite decision makers to begin new projects in such an environment
is likely to persist until we begin to see interest rates decline. Expectations for the Federal Reserve to begin to cut key interest
rates continue to be pushed to the right as inflation persists at higher-than-expected levels. And with the Federal reserve
traditionally reluctant to lower rates just prior to a Presidential election, it would not surprise us that the first cuts do not occur
until after the election.
In such a scenario, we would anticipate the improvement in Resources Connection financial results to be weighted to the
second half of the Company's fiscal 2025. We would note, in fiscal 2025, the Company should experience some $10 million -
$12 million of benefit from the reduction in force that occurred in fiscal 2024. This will be offset, however, by a return to a more
normal incentive compensation level and recognizing some of the deferred costs from the technology upgrade.
For the fiscal 2025, we expect to see a reversal of the fiscal 2024 trends, with the second half of the year projected to be
stronger than the first half. Revenue is projected at $640 million, adjusted EBITDA of $46.9 million, and adjusted EPS of $0.73.
Key Officers and Directors
Kate Duchene — President and Chief Executive Officer — Ms. Duchene was named President and Chief Executive Officer of
Resources Connection in December 2016. Between 1999 and 2016, Ms. Duchene was RGP's Chief Legal Officer, Secretary,
and Executive Vice President of Human Resources. From 2012 to 2016, Ms. Duchene also assumed leadership of RGP Legal,
the Company's legal and regulatory consulting practice. Prior to joining the Company, Ms. Duchene practiced law with
O’Melveny & Myers LLP, an international law firm, specializing in labor and employment matters. Ms. Duchene was with
O’Melveny & Myers LLP from October 1990 through December 1999, most recently as a Special Counsel.
Jennifer Y. Ryu — Chief Financial Officer — Ms. Ryu was named Executive Vice President and CFO in February 2020. Prior to
her appointment, Ms. Ryu served as the Interim CFO beginning in August 2019. Previously, Ms. Ryu served as the Company’s
Senior Vice President of Finance and Accounting, a position Ms. Ryu held since April 2019. From February 2014 to April 2019,
Ms. Ryu was the Chief Accounting Officer of Young’s Holdings, a holding company for wine and spirits sales and marketing
companies.
Bhadresh Patel — Chief Operating Officer — Mr. Patel was named COO in April 2024. Mr. Patel joined RGP in July 2019 as
part of the company’s acquisition of digital transformation firm Veracity Consulting Group, LLC. Mr. Patel served as CEO of
Veracity since its founding in 2015, driving the strategy, growth, delivery, and operations of the business since it became a
wholly owned subsidiary of RGP. Mr. Patel also has served as RGP’s Chief Digital Officer since September 2021, responsible
for technology, infrastructure, and digital modernization of the firm. Prior to co-founding Veracity, Mr. Patel served as Senior
Vice President at ICF, a global consulting and technology services company.
Anthony Cherbak — Director — In 2016, Mr. Cherbak retired as the CEO of the Company, but has continued to serve as a
member of the Board, a position he has held since 2009. Mr. Cherbak served as the Company’s CEO and President from 2013
to 2016 and was the Company’s President and COO from 2009 to 2013. He previously held the positions of Executive Vice
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
President of Operations from July 2005 to August 2009. He joined the Company in July 2005 from Deloitte & Touche LLP.
Robert Kistinger — Director — Mr. Kistinger was named to Resources Connection's Board in August 2006. Mr. Kistinger was
the COO of Bonita Banana Company from 2009 to 2014. Mr. Kistinger was formerly President and COO of the Fresh Group of
Chiquita Brands International, Inc. Mr. Kistinger was employed at Chiquita for more than 27 years and held numerous senior
management positions in accounting, financial analysis, and strategic planning roles. Prior to joining Chiquita, Mr. Kistinger was
with the accounting firm of Arthur Young & Company.
Marco Maltzan — Director — A Board member since July 2018, Mr. von Maltzan served as the Chairman of the Supervisory
Board of taskforce — Management on Demand AG and served as the Chairman of the Supervisory Board of industrial holding
company Greiffenberger AG from 2016 through June 2021. In addition, he currently serves as Chairman of the Advisory Board
of UKM Holding, GMBH, and of Walter Klein GmbH & Co. KG, and as Chairman of the Supervisory Board of WKW Automotive
AG, all automotive suppliers. Mr. von Maltzan started his professional career in 1983 with the management consulting firm
Roland Berger. In 1987, he joined BMW Group where he held various senior management positions, acting lastly as CEO of
BMW Motorrad, BMW’s motorcycle division from 1999 to 2002. From 2003 to 2007, Mr. von Maltzan served as CEO and CFO
of automotive supplier BERU AG. From 2008 to 2011, Mr. von Maltzan acted as CEO of Profine Group, a leading manufacturer
of windows construction systems.
Donald Murray — Director — Mr. Murray founded Resources Connection, Inc. in June 1996 and served as Managing Director
from inception until April 1999. From April 1999 through May 2008, Mr. Murray served as Chairman, President and CEO and as
a Director. On June 1, 2008, Mr. Murray resigned as President and CEO but remained as Executive Chairman of the Board. Mr.
Murray reassumed the CEO position in July 2009. In May 2013, Mr. Murray resigned from the position of CEO, continuing as
Chairman of the Board. Prior to founding the Company, Mr. Murray was Partner in Charge of Accounting and Assurance
Services for the Orange County, California office of Deloitte & Touche LLP from 1988 to 1996. From 1984 to 1987, Mr. Murray
was the Partner in Charge of the Woodland Hills office of Touche Ross & Co.
David White — Director — Mr. White is currently an Executive Coach and Strategic Advisor with Ulu Ventures, a venture capital
firm that invests in early-stage companies. He previously served as the CEO and Chief Negotiator of the Screen Actors Guild-
American Federation of Television and Radio Artists from 2009 to June 2021. Mr. White was Co-Founder and CEO of Los
Angeles-based Entertainment Strategies Group LLC from 2006 to 2009, providing consulting services to the entertainment
industry. He also was previously a labor and employment attorney at O’Melveny & Myers LLP.
Ownership
The following table provides information on Resources Connection's top institutional and insider ownership.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Company Profile
Founded in 1996, Resources Connection is a global consulting firm focused on project execution services that power clients’
operational needs and change initiatives utilizing on-demand, experienced, and diverse talent. RGP sees itself as a next-
generation human capital partner for clients, specializing in co-delivery of enterprise initiatives typically precipitated by business
transformation, strategic transactions or regulatory change.
Serving over 2,000 clients in 37 countries in 2023, RGP's human capital model attracts top-caliber professionals with in-
demand skillsets who seek a workplace environment that embraces flexibility, collaboration, and human connection. The
Company's professional services model allows RGP to quickly align the right resources for the work at hand with speed and
efficiency in ways that bring value to both clients and talent.
The Company’s operating segments consist of the following:
RGP – a global business consulting firm focused on project execution services that power clients’ operational needs and
change initiatives with experienced and diverse talent; and
Sitrick – a crisis communications and public relations firm which operates under the Sitrick brand, providing corporate,
financial, transactional and crisis communication and management services.
In fiscal 2023 (ended May 27, 2023), the RGP segment accounted for more than 90% of consolidated revenue and segment
total adjusted EBITDA.
Fundamental Analysis 4.0/5.0 checks
Our fundamental assessment rating, separate from our investment rating and valuation, is based on five attributes. We assign
4.0 checks out of 5.0 checks, which falls within our "Above Average" range. In terms of Governance, nine of the ten Directors
independent, although this is offset somewhat by a staggered Board, with members serving three-year terms. The Company's
Bylaws contain a number of provisions that could be considered anti-takeover. The Chairman and CEO positions are
separated, with an independent Chairman. There are limits on directors' service on other public company boards and audit
committees. Executive compensation is driven by a pay-for-performance philosophy and there is a clawback policy applicable
to any equity awards issued under compensation plans. There are stock ownership guidelines for executive officers and
Directors.
From a business perspective, we believe the ongoing changes in both the workforce and the working environment provides a
significant growth opportunity for the service provided by Resources Connection. While recent results have been constrained,
we believe there is substantial margin improvement available. The pristine balance sheet provides a stable source of capital to
implement the Company's strategy, including the return of excess capital to shareholders in the form of dividends and share
repurchases. On the negative side, Resources Connection operates in a highly competitive sector, with some competitors with
much larger financial resources and capabilities.
Valuation Summary
We are initiating research coverage of Resources Connection with an Outperform rating and a $15 price target. We believe the
shares are an attractive risk/reward opportunity at the current price. RGP shares are trading at nearly 14-year lows, excluding
the COVID induced sell off in 2020. At the current price, RGP shares trade at 15x fiscal 2025 estimated earnings, 5.5x fiscal
2025 estimated adjusted EBITDA, and 0.4x fiscal 2025 estimated revenue. These multiples compare to a peer group average
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
of 16.1x forward earnings, 10x forward adjusted EBITDA, and 1.2x forward revenue, as seen in the table below. At our price
target, RGP shares would trade at 20.5x forward adjusted earnings, 8.4x adjusted EBITDA, and 0.6x revenue.
Management has expressed a long-term goal of high single digit annual revenue growth, with a mid-teens adjusted EBITDA
margin. The Company has hit or exceeded these goals previously, so we are confident the goals are achievable. Key to
achieving these goals will be a return to a more normalized market environment. Currently, we believe the most important factor
is rate cuts from the Federal Reserve. Unfortunately, the ongoing above expected inflation level is holding off rate cuts for now.
As seen in the following table, expectations of Fed rate cuts have declined, from a hoped for six in 2024 to two now.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
We will note, we believe RGP operating results could bounce back nicely as rate cuts are implemented and clients come back
into the market. The underlying trends in the employee/employer relationship will continue to evolve and accelerate, in our
opinion, creating additional demand for the services supplied by Resources Connection.
Risks include, but are not limited to:
The professional services industry is highly competitive with low barriers of entry
The inability to attract and retain consultants could result in a decrease in the Company's results
Failure to secure new contracts and renew expired contracts could adverse affect the Company
May not be able to realize expected anticipated benefits of restructuring initiatives
Digital expansion and transformation of technology systems may not return anticipated ROI
Operates internationally which carries international risks
Acquisition made in the past and/or future may not be successful
A downturn on macroeconomic conditions can affect the Company's global operations
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
GENERAL DISCLAIMERS
All statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Capital Markets, Inc. ("Noble") and
do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed
herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable,
but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described
herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should
be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.
This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security
mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions
contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not
indicative of future results.
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judgement. Noble may have published, and may in the future publish, other research reports that are inconsistent with, and reach different conclusions from,
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should only consider this report as single factor in making an investment decision.
IMPORTANT DISCLOSURES
This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to
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strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report.
The majority of companies that Noble follows are emerging growth companies. Securities in these companies involve a higher degree of risk and more volatility
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investors must take extra care and make their own determination of the appropriateness of an investment based upon risk tolerance, investment objectives and
financial status.
Company Specific Disclosures
The following disclosures relate to relationships between Noble and the company (the "Company") covered by the Noble Research Division and referred to in
this research report.
The Company in this report is a participant in the Company Sponsored Research Program ("CSRP"); Noble receives compensation from the Company for such
participation. No part of the CSRP compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed by the
analyst in this research report.
Noble intends to seek compensation for investment banking services and non-investment banking services (securities and non-securities related) within the
next 3 months.
Noble is not a market maker in the Company.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
FUNDAMENTAL ASSESSMENT
The fundamental assessment rating system is designed to provide insights on the company's fundamentals both on a macro level, which incorporates a
company's market opportunity and competitive position, and on a micro/company specific level. The micro/company specific attributes include operating &
financial leverage, and corporate governance/management. The number of check marks that a company receives is designed to provide a quick reference and
easy determination of the company's fundamentals based upon the following five attributes of the company (weighting reflects the importance of each attribute
in the overall scoring of company’s fundamental analysis):
Attribute Weighting
Corporate Governance/Management 20%
Market Opportunity Analysis 20%
Competitive Position 20%
Operating Leverage 20%
Financial Leverage 20%
For each attribute, the analysts score the company from a low of zero to a high of ten based upon the analysis described below. The final rating and resulting
check marks is a result of dividing the overall score (out of 100%) by ten.
Rating Score Checks
Superior 9.1 to 10 Five Checks
Superior 8.1 to 9 Four & A Half Checks
Above Average 7.1 to 8 Four Checks
Above Average 6.1 to 7 Three & A Half Checks
Average 5.1 to 6 Three Checks
Average 4 to 5 Two & A Half Checks
Below Average 3 to 3.9 Two Checks
Below Average 2 to 2.9 One & A Half Checks
Low Quality 0 to 1.9 One Check
While these are the attributes currently used for the analyst's fundamental analysis, the attributes and weighting may be reviewed, updated with additional
attributes, and/or changed in the future based on discussions with the analysts and recommendations from the Director of Research.
Following is the description of each attribute in the fundamental analysis.
Corporate Governance/Management
We believe that a review of corporate governance and assessment of the senior management are important tools to determine investment merit. Good
corporate governance aligns management with the interests of stakeholders. As such, analysts are to rank the company on the basis of good corporate
governance principles that may include rules and procedures, board composition and staggered term limits, rights and responsibilities, corporate objectives,
monitoring of actions and policies, and accountability. In addition, analysts will assess issues with controlling shareholders and whether decisions have been
made in the past that were in the interests of all shareholders. In addition, management will be assessed based on industry experience, expertise, and/or track
record.
High ranking example: Board and management that is aligned with the interests of shareholders with incentives based on stock price appreciation and with an
experienced management team known for exceptional shareholder returns.
Low ranking example: Concentrated ownership without independent directors that do not necessarily align with all shareholders' interests.
The Market Opportunity Analysis
In this review, the analyst assesses the company's macro environment as a measure of understanding the industry. Factors considered include the size and
growth potential of the industry under various economic conditions, the emerging demands in the market, technological benefits/disruptions, competition,
geographical opportunities, and customer demands/needs, and an assessment of supply and distribution channels. In addition, the analyst will review legal and
regulatory trends, as well as potential shifts in consumer or social behavior and natural environment changes.
High rank example: A company in an industry that is growing revenues well above GDP rates (which are on average 2% plus) and/or may have unmet or under-
served needs in a rapidly growing market opportunity.
Low rank example: A mature industry that is in secular decline and likely to grow below GDP rates.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
Competitive Position
The evaluation of the company's competitive position is another macro environment attribute designed to measure the relevance, market share, position and
value proposition, and sustainable differentiations of the company and its products/services within its industry. Ease of entry into the industry and the ability of
other well-funded players to potentially enter the market would be determined. As such, the assessment would consider the company's strengths and
advantages of its products/services against weaknesses and limitations. This may include the company's current brand awareness, pricing and cost structure,
current market strategies and geographic penetration that may affect demand for its products/services. In addition, the company's competitors would be
evaluated.
High rank example: An analyst would consider the company's product to be superior to its competitors and that should allow the company to gain market share.
Low rank example: A company with a "me-too" product that does not have any significant technology advantages in an industry that has low barriers to entry.
Operating Leverage
Simplistically, operating leverage is determined by the operating income relative to changes in revenue. The analyst will calculate the impact on sensitivity on
gross margins and variable costs to determine operating leverage. The analyst will take into account the ability of the company to cut fixed and variable costs in
a challenged revenue environment and technological changes that may impact operating expenses. In addition, the analyst is to assess corporate strategies
that include capital investment, which may be required for sustainable revenue growth, marketing expenses, and the company's ability to attract and retain
talent and/or employees. The analyst should focus on the revenue opportunity and determine the price elasticity of demand for the company's products or
services. In other words, the analyst is to rank the company based on improved operating margins going forward on an absolute and relative basis.
High rank example: A company that has improving margins for the foreseeable future, with significant price elasticity.
Low rank example: A company that is in a challenged revenue environment with a fixed cost structure and limited ability to cut costs, indicating an outlook for
declining margins.
Financial Leverage
A strict definition of financial leverage is total debt divided by total shareholder's equity. Financial leverage analysis is to determine the company's ability to
improve shareholder value by means of utilizing its balance sheet to grow organically or to acquire assets. Analysts may look at the company's debt to cash
flow leverage ratio, interest coverage ratios, or debt to equity ratios. In addition, the interest rate environment and the outlook for interest rates are a factor in
determining the company's ability to manage financial leverage. Finally, the analyst is expected to determine the ability to service the debt given the industry
and/or company profile, such as cyclicality, barriers to entry, history of bankruptcy, consistency in revenue and profit growth, or predictability in sales and profits
and large cash reserves. The analyst is expected to take into account capital intensity of the company and the anticipated of capital allocation decisions.
High rank example: A company with predictable and growing revenue and cash flow with modest debt levels. This may indicate that the company could improve
shareholder value through growth investments, including acquisitions, using debt financing.
Low rank example: A company in a cyclical industry in a late stage economic cycle that has above average debt leverage and is in an industry that has a history
of financial challenges, including bankruptcies.
ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Generalist Equity Analyst. Chartered Financial Analyst©. Over 25 years experience as a Generalist Analyst focused in the small to mid-cap space. MBA
in Finance from Pace University and a BS in Agricultural Economics from Cornell University.
FINRA licenses 6, 7, 24, 63, 86, 87.
CONTINUING COVERAGE
Unless otherwise noted through the dropping of coverage or change in analyst, the analyst who wrote this research report will provide continuing coverage on
this company through the publishing of research available through Noble Capital Market's distribution lists, website, third party distribution partners, and through
Noble’s affiliated website, channelchek.com.
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
WARNING
This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for
any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek
advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to by an
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regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might
impede achievement of the target can be found in its initial report issued by . This report may not be reproduced, distributed or published for any purpose
unless authorized by .
RESEARCH ANALYST CERTIFICATION
Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.
Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public appearance and/or
research report.
Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.
NOBLE RATINGS DEFINITIONS % OF SECURITIES COVERED % IB CLIENTS
Outperform: potential return is >15% above the current price 82% 21%
Market Perform: potential return is -15% to 15% of the current price 18% 4%
Underperform: potential return is >15% below the current price 0% 0%
NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from "Buy" to "Outperform", from "Hold" to
"Market Perform" and from "Sell" to "Underperform." The percentage relationships, as compared to current price (definitions), have remained the same.
Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure
information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.
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Member - SIPC (Securities Investor Protection Corporation)
Report ID: 26634
Resources Connection (RGP) | Current Price: $11.14 | Outperform | May 29, 2024
