Resources Connection, Inc. Q1 FY2027 earnings call

• Executive Transition: Jen Ryu stepped down as CFO after six and a half years; Jessica Block (formerly Chief AI Officer) assumed the role of interim CFO, and Tricia Jenks was promoted to Chief Accounting Officer.
• Financial Performance: Q1 revenue was $98.1 million (down 18.5% constant currency) and gross margin was 37.4%. Adjusted SG&A expense was $40.3 million, a 9.4% improvement year-over-year and better than outlook.
• Demand Environment: Client decision-making remains cautious with longer sales cycles and delayed project starts. However, pipeline creation increased sequentially in North America, and strategic client accounts performed better than anticipated.
• On-Demand Talent Strategy: Focus is on increasing volume through added sales capacity, regional accountability, and improved talent metrics. Average bill rate increased to $145. New sales hires are at various ramp stages but showing encouraging early results.
• Consulting Segment Challenges: This segment faces the most immediate pressure due to lower project volume and utilization (salary consultant utilization in high 50s). Management is prioritizing faster project staffing, resource management, and aligning capacity with realistic demand.
• Strategic Priorities: The four key priorities are: 1) Refocus and strengthen on-demand talent; 2) Scale consulting with discipline by improving utilization; 3) Advance AI and data as practical business capabilities; 4) Simplify operations and align cost structure with current revenue levels.
• Balance Sheet: The company ended the quarter with $61.2 million in cash and no debt, supported by a $24.1 million available revolver balance.

• On-demand Talent: Revenue was $38.6 million (down 13.2% year-over-year), representing approximately 39.3% of total consolidated revenue. Segment Adjusted EBITDA was $2.1 million with a 5.3% margin.
• Consulting: Revenue was $32.4 million (down 25.8% year-over-year), representing approximately 33.0% of total consolidated revenue. Segment Adjusted EBITDA was $1.7 million with a 5.1% margin.
• Europe and Asia Pacific: Revenue was $17.1 million (down 14% year-over-year), representing approximately 17.4% of total consolidated revenue. Segment Adjusted EBITDA was near break-even.
• Outsourced Services: Revenue was $10.0 million (up 0.2% year-over-year), representing approximately 10.2% of total consolidated revenue. Segment Adjusted EBITDA was $1.5 million with a 15.3% margin.

• Q2 Fiscal 2027 Revenue: Expected to be broadly consistent with Q1 levels, ranging from $95 million to $100 million.
• Q2 Gross Margin: Expected between 36% and 37%, impacted by the Thanksgiving holiday.
• Q2 Run Rate SG&A Expense: Expected to range from $40 million to $42 million, reflecting targeted reinvestments and completed cost reductions.
• Non-run Rate/Non-cash Expenses: Expected to range from $2 million to $3 million, primarily consisting of stock-based compensation and amortization of capitalized system transformation costs.

• Extended Market Downturn: The recovery timeline for professional services demand appears elongated, with multi-year declines in activity and revenue.
• Client Spending Scrutiny: Clients are applying significant scrutiny to discretionary spending, extending approval cycles, dividing programs into smaller phases, and delaying commitments until budget visibility improves.
• Execution Risk in Consulting: The consulting segment requires urgent improvements in conversion rates, project mobilization speed, and utilization to improve economics and profitability.
• Sales Ramp Uncertainty: While new sales hires are performing well, their full impact is expected to materialize over the latter two quarters of fiscal 2027, creating a period of uncertainty regarding revenue growth acceleration.

Q: Analyst asked about the timing of recovery given the prolonged decline and whether new sales hires are outperforming expectations. / A: CEO noted that while the downturn feels elongated, activity appears to be bottoming out with signs of stabilization. He stated that new sales hires are ramping at an expected pace, with some already delivering wins ahead of schedule, though the full impact is projected in the latter half of the fiscal year.

Q: Analyst asked if salary consultant utilization impacts retention of non-salary consultants and how the two models interact. / A: CFO clarified that salary consultant utilization was in the high 50s. CEO explained it is not a juggling act but a complementary model; when securing large consulting projects, the firm supplements its own team with on-demand talent, leveraging the integrated model's flexibility rather than balancing conflicting interests.

Q: Analyst asked if future cost actions aim to maintain current SG&A levels or reduce them further if revenue stays around $100M. / A: CEO responded that the strategy involves both maintaining and lowering SG&A. While go-to-market investments continue, the company is actively identifying opportunities to reduce SG&A and improve gross margins by optimizing the utilization of salary consultants where it does not negatively impact revenue.