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Edited Transcript of PRGX earnings conference call or presentation 30-Apr-19 9:00pm GMT

Q1 2019 PRGX Global Inc Earnings Call

ATLANTA May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of PRGX Global Inc earnings conference call or presentation Tuesday, April 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kurt J. Abkemeier

PRGX Global, Inc. - CFO & Treasurer

* Ronald E. Stewart

PRGX Global, Inc. - President, CEO & Director

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Conference Call Participants

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* Alexander Peter Paris

Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst

* Zachary Cummins

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the First Quarter 2019 PRGX Global Earnings Conference Call. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Kurt Abkemeier, CFO. You may begin.

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [2]

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Thank you, Katherine, and good afternoon to all of you on the call.

Let us note at the outset that certain statements in this conference call may be considered forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These statements include statements relating to management's views with respect to future events and financial performance that are based on management's current expectations and beliefs and are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements. For additional information on these factors, please refer to PRGX Global, Inc.'s filings with the Securities and Exchange Commission, including, but not limited to, its reports on Forms 10-K and 10-Q. PRGX undertakes no duty to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

This presentation also contains references to certain non-GAAP financial measures, such as EBIT, EBITDA and adjusted EBITDA, metrics that we use internally to measure our operating performance. A reconciliation between these non-GAAP measures and net income or loss to the most directly comparable GAAP measure is available under the Investor Relations portions of our website at prgx.com.

I will now turn the call over to Ron.

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [3]

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Thanks, Kurt, and welcome, everybody, to the first quarter 2019 earnings conference call. Overall, we were pleased with Q1, achieving solid revenue performance and further positioning the business for continued growth and profitability for 2019 and beyond. Revenues for the quarters were 3 -- $38.8 million, an increase of 8.6% compared to Q1 2018 on a constant dollar basis. This increase was led by strong performance in several parts of our business, including continued growth in our U.K. retail Recovery Audit business, building from our significant wins in late 2017 and early 2018; solid momentum in [Iberia], primarily driven by scope expansions in several large retail clients; excellent performance in Australia in both of our retail and our commercial businesses; nice growth in our U.S. commercial business, primarily driven by new audit clients won in 2018, which are starting to produce results in 2019; and finally, excellent growth in both Adjacent Services and U.S. Contract Compliance, although both from relatively small revenue basis.

We're also pleased with our continued sales success both in terms of new engagements signed and new opportunities initiated. In the first quarter, we closed 34 new engagements and exceeded our quarterly sales goals. The U.K. was our highest-performing sales country, and retail Recovery Audit and Advisory Services were the highest-performing service lines in terms of new contracts signed. Our sales opportunity pipeline remained robust and growing. Adjusted EBITDA was impacted this quarter as we invested in client engagements ahead of revenue, training our global sales and operations managers on new audit and analytics solutions as well as building leadership talent in critical areas of our business.

We had a number of nonrecurring expenses in the quarter along with increased recurring expenses, which were not incurred in Q1 of 2018. We are continually making adjustments in our cost base as we improve efficiencies and restructure our teams to drive costs out of the operations. We are confident that we will regain year-over-year EBITDA growth momentum and achieve our guidance for the year.

As I mentioned previously, Adjacent Services Q1 revenue grew significantly over Q1 of 2018. While we have seen impressive year-over-year growth in this segment over the past few quarters, this segment is still evolving, and revenues will ebb and flow until we can build a consistent and growing base of subscription and longer-term managed services revenues. This segment is made up of 3 components. First, we include over SaaS subscription-based revenues, which include our OPTIX analytics offerings, SIM and deduction management. We have approximately 20 clients using our SaaS solutions today with a number of new opportunities in the pipeline. While we continue to market and sell these solutions, we won't expect to see significant scale until these solutions are fully integrated into our next-generation data infrastructure, which we expect to see later this year and into 2020.

The next component of Adjacent Services is our advisory project-based services, which use our analytics tools to deliver Source-To-Pay analysis and process improvement engagements for our clients. These engagements typically have attractive margins but are lumpy in terms of consistent revenue. We see these projects as important to our broader value delivery proposition for our clients and very important in defining analytics solutions for our broader market.

The last component of Adjacent Services today is data-led category spend analysis and sourcing. We launched this service offering in Q4 of 2018 with 3 clients and are working to convert these clients into revenue. We are focused on turning the current business to EBITDA positive in the near term, which is challenging given the nature of the current revenue streams.

Q1 EBITDA was negatively impacted by delays in contingency-based revenues, and we are adjusting resource levels to better align costs and revenues. The conversion and activation of the next-generation data infrastructure and integrated analytics will make a substantial difference in both the scale of growth and consistency of revenue in this segment, which we expect to come in late 2019 and 2020.

So 2019 is a very important year as we continue to grow revenue and EBITDA in our core business, while we begin our transition to new technology base and business models to support our future growth and enhanced profitability. I am particularly pleased with our positioning going into Q2 and beyond. I say this for 4 primary reasons. First, our strong growing and profitable core business with an outstanding and growing list of attractive clients. Toward that end, we have a number of important objectives in our core business for 2019, and we are focused on delivering these objectives, which include: first, to drive incremental revenues in our core Recovery Audit business through audit acceleration and increased claims volume; next, to cross-sell additional services into existing clients and broaden the conversation at higher levels, we are particularly focused on expanding contract compliance in Adjacent Services in a broader base of clients; next is to expand our market share, acquiring new clients with our differentiated capabilities and broader Source-To-Pay leakage capabilities; and finally, to drive costs out of the business consistent with our objectives to be the highest-performing and most efficient provider in the marketplace. We made solid inroads in each of these objectives in Q1 and expect to continue this momentum into Q2 and the remainder of 2019.

Our second reason for being pleased with our positioning is realization of our next-generation data infrastructure and Source-To-Pay analytics platform. Several years ago, we established the vision and strategy to transform how we deliver recovery audit and contract compliance services and expand our value proposition with broader analytics and solutions targeted at Source-To-Pay leakage improvement. We set out on a multiyear journey, leveraging our deep knowledge and experience to truly transform where we play within the Source-To-Pay ecosystem. We are positioned to begin realizing this vision later in 2019. As we said last quarter, enabling these exciting services and capabilities for our clients start with building the data engine and converting the data. The platform is built and being enhanced month by month with new releases. We are very pleased with performance of this engine.

As I noted on our last call, we expect to migrate all of our existing client data into the platform during 2019. We are currently about 1/3 -- have about 1/3 of our clients in the process of converting their data, and we are on track to meet our objective for 2019.

We also are building integrated audit and analytics tools to utilize the powerful data engine. Along with the obvious benefits to our clients, the net effect for PRGX will be lower delivery cost enabled through technology and expanded scope of services both in audit and Source-To-Pay spend management. Together, these will drive higher-margin revenues and a truly differentiated capability relative to other players in our industry as well as ERP and large consulting firms.

Next, we are changing the conversation with our clients and how PRGX is perceived in the marketplace. We have traditionally had a strong reputation as a large and global provider of recovery audit and contract compliance services. Due our significant improvements in recovery audit processes and tools as well as our expanding base of Source-To-Pay services, we are having a different level of discussion at executive levels in our clients.

Our market positioning and data-led Source-To-Pay leakage visibility, recovery and prevention is unique and meaningful. Our strong performance track record along with our proven ability to aggregate, enrich and align their very complex data allows us to expand this conversation. For example, you may recall last quarter, when we announced a post-audit outsource arrangement with a large U.S. retailer. This arrangement is noteworthy in the retail audit industry in that we have been entrusted with both the primary and the secondary audit responsibilities. This work is going very well, and we recently met with a senior-level executive at this company to review our progress under this new arrangement and discuss how we might be of additional assistance, assistance in other related Source-To-Pay initiatives. This executive was very pleased with our audit results, far surpassing results from prior years. This led to a broader conversation around how we could use the same data to provide broader insights into other areas of Source-To-Pay leakage, using our analytics capabilities.

We also discussed our path toward real-time and integrated audit and analytic services using our new data platform. It was a very productive discussion, and we are working on follow-up meetings and working sessions to move these discussions forward. At another large global client, we've leveraged a successful contract compliance engagement into a broader discussion around indirect sourcing and where our client may have opportunities for improvement. This discussion led to a half-day workshop with senior management on indirect sourcing best practices, which went deep into complex business challenges for this client. The workshop was a success, and we jointly developed a project road map for process improvement and data-led insights in several specific areas of Source-To-Pay. We expect this road map to result in additional Adjacent Services work as well as Contract Compliance expansion. We have workshops planned with several other clients in the near future. The quality and frequency of these client discussions are increasing on a global basis. Because we are in the unique position to aggregate, enrich and analyze their Source-To-Pay data at speed along with our deep knowledge of Source-To-Pay data and processes, we can have discussions with our clients that our competitors can't.

The other reason we feel we're well positioned is that we have assembled the strongest leadership time in my time here at PRGX. Last year, we added Mark Morel, our Chief Product Officer; Jim Fisher, our Chief Information Officer; and Scott McClellan, our Chief Technology Officer, to our team.

In addition, we added senior-level product management and technology development talent as we built our Technology Solutions Group to transform our technology development and integration capabilities.

In January, we announced Kurt Abkemeier as our new CFO and Carol O’Kelley as our Chief Marketing Officer. Both Carol and Kurt are off to fast start with aggressive plans for impact in the near term.

Recently, we announced Jim Madden as Senior Vice President of Global Sales for the company. Jim has extensive sales experience across services and technology, both on-premise and software-as-a-service solutions. His experience scaling, high-growth businesses, building winning teams and opening new markets makes him an ideal lead for the stage at PRGX's current growth.

We also brought in Tony Massanelli as Senior Vice President Global Commercial Operations. He will be responsible for growing our Recovery Audit business in the commercial sector. He came to us from Cotiviti, where he served as the head of global retail. He actually is returning back to his roots at PRGX. He started with us as a software developer, pioneering some of our first Recovery Audit technology solutions. We will soon be announcing a new Senior Vice President of human resources, which will complete our leadership team. All great success starts with leadership, and I am pleased with our team across the board.

Longer term, we remain committed to reaching our goal of becoming the most value-added and globally scaled Source-To-Pay leakage solution provider in the industry with the lowest cost to serve. In the near term, we are highly focused on building the industry's best and most efficient technology platform, while continuing to reduce our cost structure and growing our base of business. We look forward to delivering on this promise in 2019.

With what we have in committed engagements and the pipeline along with continued operating margins improvements, we are confident in our ability to hit our 2019 revenue and EBITDA guidance.

With my comments complete, I will now turn it over to Kurt to provide more detailed comments on our financial performance for the quarter.

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [4]

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Thank you, Ron. And I'll start with a review of the quarter and then conclude with some of my thoughts on my first 100 days at the company and my agenda for the company going forward.

With that said, consolidated revenue from continuing operations for the first quarter of 2019 was $38.8 million, an increase of 5.7% compared to the first quarter of 2018 on a reported basis and an increase of 8.6% on a constant currency basis, adjusted for changes in foreign currency exchange rates. On a year-over-year basis, the U.S. dollar strengthened against all of the currencies of our foreign operations, which results in lower as-reported figures for our foreign operations when translated from local currencies back in the U.S. dollars. Much of this swing in currency exchange rates occurred in the second quarter of 2018. And this is reflected through year-over-year constant currency calculations until the impact washes through a year later.

This is why there is a 290 basis point difference in growth rates in total revenue when comparing results year-over-year even when the bulk of the currency moves occurred in the second quarter of 2018. Due to the general strengthening of the dollar relative to the currencies of our international operations, revenues were adversely impacted by approximately $1.1 million on a year-over-year basis, meaning if Q1 '18 revenues were revalued at March 2019 exchange rates, our reported figure for Q1 '18 would be $1.1 million lower than what we actually reported a year ago.

As for some color on the regions. Recovery Audit - Americas growth was mostly influenced by revenue from Contract Compliance in commercial during the quarter compared to last year. New customer wins in 2018 resulting in 2019 revenues in a maturing Contract Compliance business model are providing for the underpinning of growth in this part of our business. Also, I would note that because of currency swings in the non-U. S. operations of the Americas, growth rates on as-reported basis would've been about 100 bps higher if foreign currency rates had not moved primarily in Canada.

As for Recovery Audit - Europe/Asia Pacific, while growth was down 2.7% on a reported basis, it actually delivered positive growth of about 5% on a constant currency basis. From a country performance perspective, Australia and Spain influenced year-over-year growth the most in this segment. The U.K, which accounts for over half of the revenue within this segment, exhibited nice growth in the retail part of the business but had a relatively lighter quarter in commercial in Contract Compliance, which can ebb and flow. We expect growth in this segment, particularly in the U.K. retail space, building on customer wins over the last few years as well as broad-based growth across all of our countries served.

As for Adjacent Services, it was up about $900,000 year-over-year. As Ron noted, this is a developing business with some portion recurring in nature and some more project oriented and not necessarily recurring in nature. Currently, roughly half of revenue in this segment is recurring with the other half being either project oriented or contingency based. As we build a more consistent and growing base of recurring revenue streams, this business line should develop a more linear and upward sloping trajectory. We are making material investments in capabilities, tools, products, people that we believe will enable us to achieve that goal, all while focusing on making this segment adjusted EBITDA positive in the near term.

Moving on from revenue commentary. Gross profit and gross margin from continuing operations continued to improve, margins continuing a multiyear streak of expansion. Gross profit for the first quarter was $13.6 million, an increase of about 14% compared to the first quarter of 2018, and gross margin for the first quarter was 35.0%, an expansion of about 250 basis points compared to the first quarter 2018. As part of our strategy, we are striving to keep pushing process improvements that will enable us to keep doing the recovery audits we've done for decades more efficiently. We believe there is more for us to realize as we continue to implement additional technologies, standardize and push best practices across client engagements and better manage resources on client engagements. Suffice to say, we aim to be the most efficient competitor in the space bar none. And we won't stop as we see that is crucial to maximizing our financial performance and enabling us to invest in our future while making it more challenging for our competition to do so.

As for adjusted EBITDA. Adjusted EBITDA for the first quarter of 2019 was $1.7 million, and the adjusted EBITDA margin was 4.5% of revenue. The most notable impact on adjusted EBITDA during the quarter was an increase in SG&A in the first quarter of 2019 compared to 2018. This is due to a variety of factors, some recurring, some nonrecurring and some due to currency changes. As for the recurring items, we've generally added to staffing in areas that are forward focused in SG&A, such as product and innovation, sales and expanding more aggressively into the commercial space and management to transform the company. Many of these additions occurred prior to the first quarter of 2019 but after the first quarter of 2018 and have generally ramped up since. As for the generally nonrecurring items, we had some elevated expenses with recruiting fees for added staff, for people such as me. With more of a focus on transforming the company, we've had some elevated expenses with events to bring together teams to work on transformation and sales training. Also bad debt provision, which is based on an algorithm of the aging of receivables for a small handful of customers with high credit, they have unfortunately stretched out paying us. Furthermore, I would note that last year this provision was a credit, which exacerbates the year-over-year swing. Suffice to say, we fully expect to receive payment, which means not only will it not reoccur but also would be a benefit in the subsequent period. In the aggregate, these nonrecurring items totaled about $1 million.

As for currency swings, the impact of weaker foreign currencies shaved off about $300,000 off of gross profit on an as-reported basis.

To discuss Adjacent Services a little bit, the adjusted EBITDA losses hit the highest level in 6 quarters with a loss of about $1.5 million. While we've built up recurring revenues with subscription services and have decent project work for some of our clients, the one area which has been more of a struggle, as Ron had noted, is the contingency-based sourcing business. While we began work on some of these sourcing projects during the fourth quarter of 2018, the revenue from those projects has been coming in a little bit later and lower than anticipated. As a result, we've borne the full cost of the projects but with lower-than-expected revenue as a path for the work. Sourcing is a new area in which we are building our expertise and has just proven to be tougher than expected. So suffice to say, we have been adjusting our spending in this area to better align with the revenue potential on these types of sourcing projects and are committed to getting Adjacent Services to profitability.

As for net income. The net loss from continuing operations for the first quarter of 2019 was $4.4 million and was largely driven by revenue and adjusted EBITDA performance as all other expenses and income -- [well,] adjusted EBITDA were consistent with levels from prior quarters.

Moving on to the balance sheet and cash flow statement. We ended the quarter with $12.2 million of cash and cash equivalents, $30 million in debt and $43.1 million of net accounts receivable. As for the debt, it increased by $8.4 million during the quarter and was driven by various items, some of which are nonrecurring in nature, some of which are unusual in magnitude, some of which recur annually and some of which are related to the ebbs and flows of working.

As for the nonrecurring items, $2.2 million was related to stock buybacks during the quarter, and approximately $800,000 was a nonrecurring earn-out payment and fees related to the new credit facility that we've put in place during the quarter. This totals $300 million in items nonrecurring in nature.

As for the items of unusual magnitude, approximately $2 million of CapEx-related payments carried over from the fourth quarter of 2018. This resulted in a relatively high $4.4 million in CapEx for the first quarter of 2019 because of this carryover of $2 million. The cumulative total of the nonrecurring items plus this elevated CapEx carryover totals $5 million of that $8.4 million. As for the items that recur annually, we had over $3 million in compensation payments related to annual bonuses, which generally occurs during the first quarter of every year. This is always a net drag on the cash flow in the first quarter of every year.

As for working capital-related items. Accounts receivables stretched out a bit during the quarter, resulting in approximately $2 million of funding needs, and accounts payable contracted by approximately $1 million due to bringing accounts payable more current. These can and will flex from period to period and will likely reverse in subsequent periods but the -- but for the need to fund longer-term growth of the company. So I would expect the roughly $3 million that was consumed by working capital in the first quarter will reverse in the future.

All of these items total more than the $8.4 million increase in debt. So clearly, there are other items that offset some of this. But I think it's important to note that there are a variety of items that can influence the levels of debt and cash at any

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Turning to capital expenditures. They were $4.4 million for the first quarter of 2019, and about $2 million of that was due to the carryover of CapEx incurred during 2018 but paid in the first quarter of 2019, as I just noted in my debt commentary. There's one housekeeping item related to operating lease assets and liabilities on the balance sheet that I'd like to briefly address as they just showed up for the

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due to recent accounting rule changes ASC 842, for all you accounting geeks out there, all companies are now required to move operating leases to the balance sheet from off the balance sheet. As a result, an asset is created with an almost offsetting amount of liabilities that reflects our obligation to pay rent during the lifetime of our office leases we have in the field.

Our expenses for rent remain the same as before and flow through the income statement, which is what would be of primary relevance to investors and analysts on the call. Net-net, this is a nonevent, but I wanted to make sure this was addressed so as to avoid any confusion.

As for guidance for 2019, we are maintaining ranges we provided on the last earnings call: for revenue, growth of 8% to 10% over reported revenue of $171.8 million in 2018; and for adjusted EBITDA, growth of 14% to 18% over a reported adjusted EBITDA of $24.7 million in 2018. As for the impact of foreign currency exchange rates during the quarter, there were some relatively minor movement but nothing that would cause us to adjust guidance due to it.

To dimension the potential impact, the changes in foreign currency exchange rates during the first quarter of 2019 can impact revenues as a headwind of only a few thousand dollars, not millions. So nothing to be alarmed about at all. Just following up on my promise to provide color on the potential impact of currency swings on our guidance.

Now the last topic I'd like to address on the call today would be the agenda I'd like to set out now that I've had my first 100 days on the job. Let me start by saying PRGX has a lot of opportunity. It's been a long-standing leader in recovery audit, has lots of great clients that any other competitor would salivate to have, has lots of data that we've been processing for decades that has provided us the institutional knowledge to understand probably better than anyone else where Source-To-Pay transactions go awry.

So PRGX is well positioned to address the myriad of areas within the Source-To-Pay space that just don't work as well as they should. As Ron has shared numerous times, this is a huge market for us. So to that end, I view us as having 2 primary priorities and objectives.

The first priority is to push operational efficiency throughout the entire organization, so we have the lowest cost to serve possible.

Provide context. The company has had adjusted EBITDA margins in the low to mid-teens over the last decade. And that is largely attributable to the dynamics of this being a largely manual and people-intensive business as well as historically competitive business. We look to change and improve those dynamics. The first dynamic to change of being a largely manual business is to further drive efficiency throughout the entire company by helping our employees make better resourcing and pricing decisions, largely based on leveraging better information and metrics. We already have a very strong team that has been driving operational efficiencies and have invested in improving our recovery platform. But we're only part of the way to where we need to get to. We need to arm our people with better tools and information. And more importantly, we need to measure them with similar information so that we can drive better

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Also systems like DX3, our next-generation data process and platform, and applications and processes that leverage DX3 will play a major part of this, too. The great news here is that there's only upside from here with these improvements. But it is necessary for us to materially improve margins in our existing business.

The second dynamic to change of our competition is that I want to make sure that we are clearly head and shoulders better than all of our competition. With an even higher level of operating efficiencies coming from our business, we provide a better experience for our clients that should result in either more revenue or profitability. I want us to capture that share instead of our competitors. The less they have, the more we have to invest in our future. And they won't be able to invest in their future. And we can lengthen our lead against them. This is all consistent with Ron's comments about changing the conversation with our clients. We want to make sure that we lengthen our lead over our competitors. It's not that complex really. So what does this look like? As a goal, I want us to achieve 20% plus adjusted EBITDA margin for existing Recovery Audit business by 2021. That would be a material lift of over 400 basis points from today's approximately 16% of revenue. This is an initial target to get the organization focused on this as a specific and achievable goal and is by no means a limit. Time will tell how far we can push margins over the short term.

I would like to note while this is a longer-term goal to change how we fundamentally drive cash flow from our Recovery Audit business, it no way changes our shorter-term focus on squeezing as much free cash flow as possible from our Recovery Audit business. We will be very judicious in how we approach our costs and seek to invest in ways that provide the highest return on capital invested.

The second of the 2 priorities is to leverage the gains from the first priority of driving operational efficiency throughout the organization that I just shared with you to pivot the company from a traditional recovery audit business to a more contemporary data aggregation-driven Source-To-Pay leader. This is -- again, this is no different from what Ron's vision has been, to be clear, as this is all about evolving the company as we change the conversation with our clients. We already have so much information from our customers in order to fill our Recovery Audit business that this pivot is simply a natural extension of what we do today, but with a fuller set of data and analytics. It's simply the next generation of what we've been doing all along, and we can't let this opportunity pass us by. We will invest some excess free cash flow to fund some of this pivot but, like I said, judiciously. So we need to be the ones leading and driving that conversation, which is why both priorities are so important.

In summary, the priorities are twofold: one, to drive operational efficiencies to achieve 20% plus adjusted EBITDA margins by 2021; and two, to leverage these improved adjusted EBITDA margins to pivot the company as the data aggregation Source-To-Pay leader. We have a lot of work to do to change the trajectory of our business and achieve this, and I look forward to sharing progress on this in the future.

And with that, I'd like to hand the call back to the operator for Q&A. Katherine?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Alex Paris with Barrington Research.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [2]

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It's Alex Paris. I just wanted to -- first of all, thank you for the longer-term adjusted EBITDA goal. I'm wondering to what -- what are the assumptions that underlie that? For example, M&A may play a role here in the future particularly, I think, on the adjusted -- on the Adjacent Services side, more new clients, et cetera. Maybe just a little bit of additional color there? I'd appreciate it.

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [3]

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Well, yes, sure, Alex. Just to clarify. My commentary on the 20% plus EBITDA margins is for the existing Recovery Audit business. So it wouldn't really be the Adjacent Services part. So this is the work that we do on a contingency basis. We believe that with implementation of DX3, we not only can lower our cost to serve there, but we can get better information in the hands of our people in the field and that we can just more efficiently operate what we're doing. So it's really more the straight-up doing what we do better, armed with better information. Is it possible that there could be some kind of acquisition that could possibly enhance that? Yes. But that's not -- not really part of the core assumption of achieving that. It's really just doing what we do better when armed with better information, better systems, better tools and being able to get those best practices leveraged across all of our client engagements.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [4]

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Okay. Then a follow-up. What revenue assumption would you have in RA to get to those 20% margins? I'm assuming mid-single digits.

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [5]

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Alex, when we look at this -- we think we're going to continue in the mid- to high single digits in the core recovery audit business of revenue growth, and we're going to pick that up from increased scope. As you know, we've got a significant presence in retail, but there are opportunities to expand scope of Recovery Audit in retail and pick up additional logos and move into mid-market or smaller retailers with better technology and more efficient processes. The big growth is going to come in the commercial space, where we have less overall penetration today than we have in retail. A lot of significant logos, a lot of significant clients around the world that either we're not serving today as our clients or don't have active recovery audit programs. So we think that's going to be a nice area for growth for Recovery Audit as well.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [6]

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So orders of magnitude, putting Adjacent Services aside, what's the breakdown in RA between retail and commercial today in revenue or number of clients? Or however you wish to answer the question.

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [7]

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Yes. I think from -- and we do not provide the breakout of commercial versus retail, and we haven't done that in the past. From a client base, I think what you'd see there is a -- on a global basis, a fairly even split between number of clients in commercial versus retail, but retail significantly higher revenue base today because most of the scope of audit and retail has more evolved and has more scope than what you would typically see in a non-retail audit. But we are working hard to expand the scope of our non-retail audit.

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [8]

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Yes, the bread and butter historically has been in retail. I believe that statistically we have 14 of the 20 top retailers as our customers. So that's clearly something where -- we've dominated that. And the greenfield is in the commercial space, which is why Ron has been always so eager to be getting into that space because there's so much more that we think we can do.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [9]

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Great. That's very helpful. I appreciate that additional color. The M&A pipeline. How does that look? Where would you be focused? Do you anticipate being aggressive there over the next few years?

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [10]

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So we are actively looking for opportunities as -- looking at opportunities as they arise. And I think as we've talked in the past that we like healthy recovery audit businesses with strong client bases or capabilities that we can leverage and scale in our broader Recovery Audit business. We felt like the C&CA acquisition that we did in 2017 was -- is a great example of an accretive -- immediately accretive acquisition and continue to do well with it. There are not a lot out there of that ilk, but we are constantly looking for those as they come available. And then secondly would be technologies that would allow us to scale our platform, allowing analytics services or data-type services or perhaps Source-To-Pay applications that we could integrate into our platform to drive more value for our clients. So we keep an eye up for those, and -- but we do have expectations for M&A activity. And I won't give you a time frame, but we are actively looking at several of them right now.

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Operator [11]

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And our next question comes from Zach Cummins with B. Riley FBR.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [12]

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First off, could you provide some additional color around some of those staffing investments that you made in the first quarter?

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [13]

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You're referring to my SG&A commentary?

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [14]

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Yes. That's correct.

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [15]

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Yes. Now keep in mind that, that really refers to additions that were over the last 12 months, so it wasn't necessarily just in the first quarter, just to be clear. And we would have been adding a lot of those people throughout the second quarter, third quarter and fourth quarter of 2018 and some of them in 2019. I would say, roughly half of it would have been in Q2 or Q3. And a lot of the ramping was really done during those 2 quarters with really less of it done later in the year or in Q1. And then -- so that's the staffing part. Did you have any other question related to that?

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [16]

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I was just trying to get some additional color. I think you did a pretty nice job of going through all the impacts to adjusted EBITDA. I was wondering if it was more so just hiring ahead of winning some new engagements. Or is it more so along the line of just some onetime costs that really impacted that line in the quarter?

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [17]

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Sure. Well, I'd say for the people part, starting in the second quarter of last year, there was more of a focus on product and innovation to be able to get DX3 right in the right kind of data processing platform. There was significant beefing up of the expertise in that area, then a little bit more in sales and marketing probably more in the third quarter of last year. Just bear with me a second here, while I can look at my notes. And then later in the year, bulking up more in the commercial space. And then in the first quarter of this year, perhaps, more on the management side.

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [18]

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Now just to...

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [19]

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To also refresh your memory, just want to make sure that you caught it. Of -- within the SG&A spend in the first quarter, roughly $1 million of it was nonrecurring items, which would relate to some of the recruiting fees related to people added in the first quarter, some of the sales and marketing events and training and transformation in the bad debt provision. And I think it's really worth noting that while there was that swing of bad debt during the quarter, because our customers are generally very high credit quality customers, we expect that to actually reverse in subsequent period.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [20]

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Understood. And just building on top of this. Can you talk about some of the things that provide you with the confidence in achieving your full year adjusted EBITDA guidance?

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [21]

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Well, I think -- first of all, I think we've got a strong revenue plan. We've got good momentum in our sales and converting sales to revenues coming out of 2018 going into '19 and early 2019. So I would say that's going to be the first factor in achieving adjusted EBITDA. There is a nice pull-through as you know from -- on incremental revenues that go right through it. We're also constantly making adjustments to our organization structure to get to more efficiency. We've got some recent visibility added that gives us much better metrics on audits that need some additional focus and -- that are either trending costs -- too high on the cost or not generating enough revenue, so our audit development team has got some better tools to identify where we need to focus our efforts. Those are a couple of them. But I think we feel pretty good about both the cost, the operating margins heading in the right direction, our revenues heading in the right direction and constantly looking at where we can take costs out of the business where it makes sense.

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Kurt J. Abkemeier, PRGX Global, Inc. - CFO & Treasurer [22]

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And to follow on Ron's comments. Coming in with a fresh set of eyes, there will be different and I would say more detailed perspectives that I will take in how we pull our metrics together. I think that we can take things to the next level here, and as we do that, we'll find places where we cannot take costs out of the business.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [23]

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Understood. And then final question from me. It seems like it was a pretty strong performance from the sales team during the quarter. Can you talk about the anticipated timing as to when you'll start to recognize revenues from some of these new wins?

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [24]

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The -- for some of the commercial clients, we can get to revenues within a matter of months. And it's all about when we can get data and get the client really engaged giving it to us. So that's pretty quick to revenue. The Adjacent Services projects are pretty quick to revenue, or very quick to revenue for that matter. The more complex Recovery Audit scope in merchandising and then Contract Compliance can take a bit longer. So what we really think about is working very hard to get Q1 and Q2 sales up and running, so we can get revenues this year then

(technical difficulty)

the year you start running out of time unless it's the commercial AP business or some of the Adjacent Services projects.

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Operator [25]

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(Operator Instructions) And I'm showing no further questions. I'd like to turn the call back to Mr. Ron Stewart for any closing remarks.

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Ronald E. Stewart, PRGX Global, Inc. - President, CEO & Director [26]

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Great. Katherine, thank you very much. Thanks to all of you for joining our call today to review Q1. We'll be back together at the conclusion of Q2, and we'll let you know when that call is going to occur, but thanks a lot for your interest, and talk to you soon.

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Operator [27]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.