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Edited Transcript of RECN earnings conference call or presentation 2-Jan-20 10:00pm GMT

Q2 2020 Resources Connection Inc Earnings Call

IRVINE Jan 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Resources Connection Inc earnings conference call or presentation Thursday, January 2, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alice J. Washington

Resources Connection, Inc. - General Counsel

* Jennifer Y. Ryu

Resources Connection, Inc. - Interim CFO

* Kate W. Duchene

Resources Connection, Inc. - CEO & Director

* Timothy L. Brackney

Resources Connection, Inc. - President & COO

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Conference Call Participants

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* Andrew Charles Steinerman

JP Morgan Chase & Co, Research Division - MD

* Mark Steven Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. conference call. (Operator Instructions) As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to your host for today's call, Ms. Alice Washington, General Counsel of Resources Connection. Ms. Washington, you may now begin.

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Alice J. Washington, Resources Connection, Inc. - General Counsel [2]

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Thank you, operator. Good afternoon, everyone, and thank you for participating on this call. Joining me here today are Kate Duchene, our Chief Executive Officer; Tim Brackney, our Chief Operating Officer; and Jennifer Ryu, our Interim Chief Financial Officer.

During this call, we will be commenting on our results for the second quarter ended November 23, 2019. By now, you should have a copy of today's press release. If you need a copy and are unable to access it on our website, please call Shannon McPhee at (714) 430-6363.

During this call, we may make forward-looking statements regarding future events or future financial performance of the company. Such statements are predictions, and actual events or results may differ materially. Please see our report on Form 10-K for the year ended May 25, 2019, for a discussion of risks, uncertainties and other factors, such as seasonal and economic conditions. Such factors may cause our business, results of operations and financial conditions to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call. I'll now turn the call over to our CEO, Kate Duchene.

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [3]

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Thanks, Alice. Good afternoon, and welcome to RGP's 2020 Second Quarter Conference Call. Happy New Year, everyone.

I will start with a brief overview of our operating results for the second quarter. Second, I will update you on our progress to become a more digital business, both in how we serve our client base and how we operate. Third, I will discuss certain macro trends we believe will be beneficial to our business in the second half of the fiscal year and beyond. And fourth, I will preview a project we are initiating in Q3 to optimize our core operations and create more business agility.

Our total revenues for second quarter of fiscal 2020 were $184.5 million, which represents a slight decrease of about 2% over the second quarter a year ago. The sequential increase in revenue was 7.1%. The increase in revenue came from North America and Europe, aided by the addition of Veracity, the digital transformation firm we acquired in late July.

Our Asia Pacific revenue is down slightly, which is unusual in the second quarter, but mainly because of 2 different weeklong holiday periods during the quarter in our largest markets. One holiday week was in China to celebrate the 70th anniversary of the People's Republic and the other holiday week occurred in Japan to honor the new emperor's reign. Without those significant holiday events, Asia Pacific would have grown in Q2.

We were also pleased by the improvement in gross margin to 40.3% in the quarter. This increase was led in North America by higher bill rates and higher value mix of business.

Finally, SG&A was below plan as we've been working to trim costs to deliver more profit. We achieved $22.7 million in adjusted EBITDA or 12.3% of revenue compared to $20 million or 10.6% of revenue in the year ago quarter. Despite revenue declining slightly in the second quarter, we were able to deliver improved profit.

As stated previously, we intend to deliver more profit to the bottom line over the long-term through a combination of headcount efficiency, real estate spend reduction, expense management, improved pricing and expanding our mix of business to higher value services.

Over the past 3 years, we've been focused on building capabilities beyond staff augmentation and in the program and project management and solutions deployment. We will continue to make progress with our mix of business as clients continue to value us as a disruptor in professional services and an attractive alternative to the Big 4.

Another important strategic initiative this fiscal year is the development of our digital capabilities, driven principally through our digital innovation function. During Q2, we kicked off a phased go-to-market plan with our newly acquired Veracity Consulting Group. Veracity, as just mentioned, is an advisory and consulting business based in Richmond, Virginia, with approximately 110 employees focused on helping companies with digital transformation.

Veracity's capabilities include strategy and roadmap, design and brand and client and employee experience. They also bring deep technical expertise and best-in-class technology partnerships including ServiceNow, SiteCore, Akumina and MuleSoft. We are encouraged by the quick ramp of pipeline opportunities within the first 3 months. These opportunities will take additional time to close as Veracity's sales cycle is longer than for our traditional staff augmentation and project work.

As I updated in the last earnings call, the Digital Innovation group is also focused on building products to be delivered with our finance transformation, project management and risk and compliance services. This team currently has multiple products in various stages of development.

The 2 products closest to market include an internal audit automation tool and a digitalized end-to-end project management framework. We expect to release these on a limited basis in Q3, including potential client pilots, followed by wider sales in Q4. We also are applying this methodology as we modernize our internal platform, starting with the redesign of our knowledge management system.

With further products in consideration for research and development within our portfolio through the next 12 months, we remain committed to enhancing our services delivery and pricing through digital innovation to drive better outcomes in our client projects with speed and value.

The third area of focus for our Digital Innovation team is the build of our digital engagement platform or human cloud product. Since we reported last quarter, we have released a more powerful version of our match algorithm across North America, and will continue to enhance it as we progress toward the completion and full release of our platform to the market. As part of this progress, we have also completed the first iteration of our digital consultant profile tool, which will empower and incentivize our consultants to directly manage their profile information, contributing valuable input such as video introductions that can enhance marketability and likelihood of rapid selection.

As a reminder, a main differentiator for this product is our focus on employees, not independent contractors. We are working through the commercial aspects of the platform and anticipate launch to a select group of markets by end of Q4.

Turning to the macro environment, there are 2 regulatory developments occurring that we believe will favorably impact opportunities in the new calendar year. The first is a renewed regulatory scrutiny on independent contractors in the professional services arena. With the passage of AB5 in California and other pending legislation around the world, we believe clients will turn to our model more frequently. Especially in the staff augmentation arena, we compete against individual contractors and small boutiques that run contractor models. Given that the legislation now imposes heightened financial risk to companies who engage talent via an independent contractor structure, we believe our model will benefit from this regulatory shift and is well positioned to gain market share.

We deliver agile talent to our client base, which we also refer to as our form of gig. But we do so with the protections and benefits of traditional employment. This, we believe, is the best of both worlds and unique in the global professional services space, given our commitment to mitigate client risk and invest in consultant professional development. Second, we're seeing an increase in client requests for support with our IFRS 17 compliance in both Europe and Asia Pacific. IFRS 17 is a new standard that impacts the accounting treatment for insurance contracts. Issued by the International Accounting Standards Board, the compliance date is currently January 2021.

We're hearing from clients that the resulting workload is substantial, it involves many work streams, and most impacted firms have not begun the serious work. We expect this regulatory event will provide us with increased market opportunity in Europe and Asia Pac at the start of the calendar year and continue throughout 2020.

We're also developing a partnership with one of the Big 4 firms to assist with this compliance effort. We expect there to be a meaningful talent shortage in the Big 4 and the impact to client base, which we can address with our core finance and accounting and technology consultants. We are also actively increasing our talent pipeline in these regions to align supply and demand.

Before I turn the call over to Tim and then Jen, I want to close my remarks by previewing a project we're initiating in Q3 to optimize our core operations and improve our cost structure. This project also aligns with our continued digital transformation and the impact of automation in how we operate. Also, as news about potential recession leans over the economy, we want to ensure that our infrastructure is well prepared to weather a downturn. We're conducting a thorough review of the business to trim costs ahead of any negative trend in client buying patterns. We'll have an update on this project in advance of the next earnings call.

I'll now turn the call over to Tim for a more detailed review of operations in the second quarter.

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Timothy L. Brackney, Resources Connection, Inc. - President & COO [4]

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Thank you, Kate, and Happy New Year, everyone. I will highlight trends and initiatives that directly impacted our results from operations for the second quarter, provide an update on our fiscal '20 operational priorities and discuss early trends in the third quarter.

We saw increased velocity in pipeline throughout the second quarter and into the first few weeks of the third quarter. Despite some client uncertainty prompted by a lack of clarity in the global economic environment, we have worked very hard to control our own performance, diligently increasing activity levels, building pipeline and converting leads to wins.

As I mentioned last quarter, we believe there is continued opportunity for upward momentum as many clients and targets are engaging in crucial projects and transformation efforts. Transformation activities in an economic environment favoring agile solution and value, combined with a clear market shift towards gig-oriented employment model, is the ideal environment for our business to thrive. We continue to make positive strides in authorizing our core business platform with a key focus on sales productivity, cost containment, delivery effectiveness and the efficient matching of supply and demand.

I will briefly touch on each of these key operational objectives. While global revenue decreased approximately 2% from the prior year quarter due to declines in North America and Europe, offset by an increase in Asia Pac and revenue from Veracity, we did see nice productivity gains in terms of outreach and meetings and a significant increase in total pipeline when compared to the prior year quarter. Additionally, we saw a 140 basis point increase in gross margins for Q2 fiscal '19 due to a better bill/pay ratio, reflective of ongoing pricing initiatives and governance as well as the timing of holidays. The U.S. business led the way on margin gains buoyed by a nearly 3% increase in average bill rate.

We are pleased with the continued effort and discipline around lead generation, sustained sales motion and real pricing, but we know that we still have more upside and are committed to putting in the requisite work to obtain it.

In her discussion, Jen will provide more detail around revenue, gross margin and bill rates. We are encouraged by the productivity strides but we recognize the urgency to increase revenue results. And while with the profit lift in our largest markets, the group as a whole has not performed to desired levels. We have adjusted leadership personnel and focus, including recently hiring a new leader in Tri-States and are starting to see positive momentum from these changes.

In these markets, we will continue to augment existing teams and investments in strategic hires that can make rapid impact. To date, we have seen good results in certain parts of North America: Dallas, Atlanta, Detroit, Carolinas and Seattle, to name a few markets, and also in our county and executive search businesses.

Taskforce continued its strong performance along with Asia Pac as a whole. We appreciate these bright spots, but continue to be laser-focused on revenue replacement, performance consistency and velocity in our global sales efforts as we ultimately strive to become a world-class sales organization.

Next, let's discuss cost containment where we've made positive gains again this quarter. As an enterprise, we increased operating margin and reduced SG&A in North America and Europe, both sequentially and compared to prior year quarter. As I noted above and in previous quarters, we continue to place strong emphasis on managing controllable expenses and leveraging existing assets and a more centralized operating model against sales and productivity.

To that end, we will continue to evaluate our core operations and geographic presence to ensure that we are maximizing returns relative to fixed costs. For example, we believe that we can gain revenue velocity with a footprint that is more concentrated in the markets that have the highest locus of opportunity while leveraging our agile platform to serve our client base with headquarters and operations outside of these locales.

Now on to our progress around delivery excellence. Last quarter, we noted the early success of our Advisory and Project Services organization or APS whose mission is to bring subject matter expertise to support the sales process on complex deals and deliver excellence once engaged. APS continues to demonstrate strong positive impact. And our objective in the second half of this fiscal year is to narrow the focus of our sales team and better align our proceeds with APS and our consultant inventories to increase our win rate and ensure efficient delivery. Now this seat map provides an impetus for targeted second half sales campaigns, localized sales plays and allows for a renewed push around high opportunity offerings with the greatest delivery capacity. APS will continue to provide both operational and pricing leverage as we gain altitude and breadth, selling into clients and prospects.

Now let me provide an update on 2 other operational priorities: better serving our clients globally and improving alignment of our supply and demand curve. Our Strategic Client Program or SCP continues to forge a path of the company as we improve serving our largest clients on a global basis. The program grew approximately 12% overall and 8% internationally over the first half of prior year. SCP's existing growth trajectory, coupled with the appropriate alignment of priorities and incentives articulated in a client-centric global enterprise plan, will help us achieve a more seamless client experience and provide more lead generation for our international operations.

We continue to see key wins in Asia Pac and Europe that were direct results of strongly aligned cross-border pursuits. We know this is an opportunity-rich arena for us and when combined with our flexible platform, significantly distinguishes us from our competition.

Finally, let me discuss the alignment of supply and demand, which is the fulcrum of our business. We have become expert at attracting and retaining talent to our platform on an employed-gig basis. We have achieved this by allowing our consultants to main control over their -- maintain control over their career and portfolio of experience while offering access to learning, professional community, market wages and benefits and a rich client base, all while keeping them as busy as they would like to be.

This derisking of gig in the professional arena has allowed RGP to maintain an average consultant tenure nearing 3 years. While we certainly developed a strong competitive advantage in this space, we know that directly aligning client need with the preferences of an agile talent base requires strong core process and data transparency. We are working on optimizing this important aspect of our business and are making solid strides.

This quarter, when compared both sequentially and with prior year quarter, we saw improvements in consultant retention, time to fill, win rates and overall yield statistics. We are fiercely committed to continuous improvement in this area. And we know that better supply chain management, stronger sales and operations planning and enhanced communication and decision-making will create optimized performance.

Before I conclude my remarks, I want to provide some insight about early third quarter trends. Recognizing that third quarter results will be adversely impacted by both the timing and number of holidays, nonetheless, we are pleased with operational trends to date. Through the first 3 nonholiday weeks of the quarter, trailing average enterprise run rates are highest within this fiscal year and the highest in several months. Additionally, we are seeing upward momentum in some of our key North American markets, including Tri-State, Northern California, Los Angeles, Dallas and Detroit. Some of the lift we see is seasonal, but we are also seeing gains from pipeline growth and pull through.

We are encouraged by these early trends and strengthening of our overall pipeline, but we know that we must remain hyper-focused to push velocity through the holiday effect in the third quarter and build pipeline for Q4 and Q1 fiscal '21. I will now turn the call over to Jen for a more detailed review of our first quarter results.

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Jennifer Y. Ryu, Resources Connection, Inc. - Interim CFO [5]

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Thank you, Tim, and good afternoon, everyone. I will start by giving detail on our second fiscal quarter financial results and will then discuss the trends we're seeing in the third quarter of fiscal 2020.

Starting with an overview of our second quarter results. Total revenue for the second quarter of fiscal '20 was $184.5 million, a 2.3% decrease from the comparable quarter a year ago and a 7.1% increase sequentially.

On a constant currency basis, revenue decreased 1.9% year-over-year and increased 7.3% sequentially. Excluding the impact of the acquisition and divestitures that took place in fiscal '20, total revenue for the second quarter was $178.4 million compared to $184.8 million a year ago, representing a 3.4% decrease or a 3.1% decrease on a constant currency basis.

Our second quarter gross margin was 40.3%, up 140 basis points from the second quarter of fiscal '19 and up 110 basis points sequentially. SG&A expenses for the quarter were $53.8 million or 29.1% of revenue compared to $55 million, also 29.1% of revenue last year. Despite lower year-over-year revenue, our net income for the second quarter was $12.3 million or $0.38 per diluted share, up from $10.6 million or $0.33 per diluted share in the prior year quarter.

In Q2, adjusted EBITDA, which we define as EBITDA before stock compensation and contingent consideration adjustments, was $22.7 million or 12.3% of revenue, up from $20 million or 10.6% of revenue in the prior year quarter.

Now let me provide some color around our second quarter revenues geographically. Our North America revenue, excluding Veracity, decreased 4.7% year-over-year and increased 5.5% sequentially. Veracity contributed $5.8 million of revenue in the second quarter. Comparing to the prior year, the decline in North America's organic revenue reflects the impact of lease accounting project revenue being at its peak in Q2 of fiscal '19. Sequentially, compared to Q1 of fiscal '20, the rebound in organic revenue reflects active pipeline management and business development efforts, coupled with the impact of fewer holidays in the U.S. as well as favorable seasonal impact.

Second quarter fiscal '20 included only Labor Day while the first quarter included Memorial Day and July 4th holiday as well as summer holiday break taken by our consultants. While revenue momentum improved in the second quarter, we are still experiencing a lag in our Tri-State, Northern and Southern California markets compared to the prior year. Nonetheless, we are seeing significant improvement in markets such as the Carolinas, Dallas, Seattle and Philadelphia and notable gains in our county business.

Europe's second quarter revenue decreased 16.4% year-over-year and increased 3.2% sequentially. Our exit from the Nordics and Belgium resulted in a $3.7 million decrease in revenue compared to Q2 of fiscal '19. Excluding this impact, Europe's second quarter revenue showed a modest decline of 0.4% compared to a year ago, but an increase of 3.4% on a constant currency basis. Taskforce continues to show strong performance over last year.

Asia Pac second quarter revenue increased 7.6% year-over-year but decreased 2.8% sequentially. On a constant currency basis, Asia Pac's revenue increased 7.1% year-over-year and decreased 1.9% sequentially. The growth over last year is primarily led by Japan and India, as our international operations continue to benefit from our global SCP programs.

The sequential decrease from the first quarter, as Kate mentioned earlier, is due to weeklong holidays during the second quarter in both Japan and China, 2 of our largest markets in Asia Pac. Absent these extensive holiday periods, Asia Pac would have seen growth this quarter.

Turning to early revenue trends for the third quarter of fiscal '20. Based on early revenue trends and assuming they persist, we expect revenue for the third quarter of fiscal '20 to fall in the range of $164 million to $169 million compared to $179.5 million in Q3 of fiscal '19. There are a number of factors significantly impacting the revenue forecast for Q3 compared to the previous fiscal year. First, Q3 fiscal '20 includes 2 additional holidays due to the timing of Thanksgiving when compared to the previous year. We estimate the impact to be in the $4 million to $5 million range. Again, please be mindful that these estimates are based on early revenue trends in Q3.

Second, the midweek timing of both Christmas Day and New Year's Day further cycles revenue momentum. The estimated impact is in the $7 million to $8 million range. Third, the loss of revenue from the Nordics and Belgium is expected to be approximately $2.4 million compared to the third quarter of fiscal '19. Offsetting the adverse factors I just mentioned, Veracity is expected to add approximately $5 million to our revenue in Q3.

Thus far, the U.S. daily revenue run rate in Q3 has been trending ahead of the first half of fiscal '20. However, comparing to the daily run rate of Q3 fiscal '19, we are still seeing a slight gap, principally due to the lift from lease accounting project revenue in the prior year. We believe our efforts in replacing the revenue stream from lease accounting projects with other opportunities are starting to pay off due to pipeline growth and pull through. We are narrowing the year-over-year revenue gap.

Turning to gross margins. Gross margin for the second quarter was 40.3%, increasing 140 basis points from the prior year equivalent period and increasing 110 basis points sequentially. The year-over-year increase is related primarily to an improved bill-to-pay ratio as well as a decrease in holiday pay for consultants in the U.S. due to the timing of the Thanksgiving holiday. The sequential increase is primarily due to a decrease in holiday pay for consultants in the U.S. due to fewer holidays as well as lower payroll taxes. Bill/pay ratio remains relatively flat between the 2 periods.

For the second quarter, our gross margin in the U.S. was 41.7% compared to 39.7% last year, and our international gross margin was 34.3% compared to 35.9% a year ago. The average hourly bill rate for the quarter was approximately $123 compared to $124 in the prior year quarter and $122 sequentially. The U.S. average bill rate increased by 2.8% compared to prior year quarter. However, the consolidated average bill rate showed a slight decrease as a result of mix.

Europe, which has the highest bill rate, experienced a decline in revenue, whereas Asia Pac, which has the lowest bill rate, showed increased revenue. The average pay rate for the second quarter of fiscal '20 was $61 compared to $62 in the second quarter of fiscal '19 and $61 in the first quarter of fiscal '20.

For the third quarter, we expect our gross margin to be adversely impacted by the additional holidays related to Thanksgiving and the midweek timing of both Christmas Day and New Year's Day. We estimate gross margin to be in the 36.7% to 37% range compared to 37.8% a year ago. As a reminder, these hourly rates are derived based on prevailing exchange rates during each given period.

Now looking at other components of our second quarter financial results. SG&A expenses were $53.8 million or 29.1% of revenue. This compares to SG&A of $55 million or 29.1% of revenue in the second quarter of fiscal '19 and $57 million or 33.1% of revenue in the first quarter of fiscal '20. The year-over-year dollar decrease is primarily attributable to a decrease in incentive compensation as a result of lower revenue in the second quarter, lower costs associated with business expenses as we continue to closely manage discretionary spend and lower severance expense, partially offset by an increase in payroll and benefit costs due to additional head count related to project delivery and digital transformation efforts, including Veracity.

Sequentially, SG&A as a percentage of revenue decreased by 400 basis points from the first quarter of fiscal '20. SG&A improved significantly, primarily due to tighter management expense, lower payroll taxes as well as a number of onetime costs incurred in the first quarter, including acquisition costs related to Veracity, severance and other costs related to the exit activities in Europe.

Looking ahead to the third quarter of fiscal '20, we expect SG&A to be in the range of $54 million to $54.5 million. SG&A expense in Q3 is impacted by higher payroll taxes at the beginning of the calendar year.

Turning to other components of our financial statement. We delivered pretax income of $17.7 million in the second quarter, up from $15.7 million in the prior year quarter. Our income tax provision for the second quarter was $5.3 million, representing an effective tax rate of 30%. Our effective tax rate is primarily impacted by valuation allowances on our foreign NOLs. On a cash basis, our tax rate was approximately 29%. Our GAAP tax rate for each of the upcoming quarters is difficult to predict and could be volatile as the rate will be dependent upon several factors, including the operating results of our U.S. and foreign locations, each of which are taxed or benefited at different statutory rates; the offset of the tax benefit of foreign losses on certain locations by valuation allowances; and potential U.S. tax deductions related to the exit activities in Europe.

Now let me turn to our balance sheet. Cash and cash equivalents at the end of the second quarter were $42 million. Receivables at quarter end were $137.4 million compared to $133.3 million at the end of the fourth quarter of fiscal '19. Days of revenue outstanding were approximately 68 days compared to 71 days in prior year and 67 days in the first quarter of fiscal '20.

We paid $4.5 million in dividends during the quarter. Capital expenditures were $1.3 million through the first half of fiscal '20. We expect CapEx to be in the $1 million to $2 million range in Q3. We did not repurchase stock during the quarter. Our stock buyback program has $90.1 million remaining.

During the first half of fiscal '20, we borrowed $35 million to finance the acquisition of Veracity and we repaid $24 million under our revolving credit facility. We will continue to return cash to shareholders through our quarterly dividend while balancing debt repayment and capital required into growing our business, both organically and strategically. Our shares outstanding at the end of the second quarter were approximately 32.1 million. Now I'd like to turn the call back to Kate for some closing comments.

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [6]

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Thank you, Jen. Looking ahead, the second half of the fiscal year is strengthening. While Q3 will be impacted by the holiday season, both number of holidays and the timing during midweek, we like the trend we're seeing in nonholiday weeks during the first month of the quarter. We see strong interest coming from RGP's client base for Veracity services, and our pipeline overall is much improved year-over-year.

Before turning to any questions, I will review our client continuity statistics for Q2 and fiscal '20. Client continuity remains strong. During our second quarter, we served 49 of our top 50 clients from fiscal 2019 and 48 of the top 50 from 2018.

In the quarter, we had 294 clients for whom we provide services at a run rate exceeding $500,000 in fees, and that's up from 281 in fiscal 2019. In addition, our top 50 clients for the quarter represented 39% of total revenues while 50% of our revenues came from 93 clients.

Our largest client for the quarter was approximately 3.4% of revenue. At the end of the second quarter, 86% of our top 50 clients have used more than 1 type of solution category. This penetration reflects the diversity of relationships we have within our clients' organizations and reinforces the opportunity for growth as we continue to execute improved account planning and penetration. That concludes our prepared remarks, and we're now happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Andrew Steinerman of JPMorgan.

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Andrew Charles Steinerman, JP Morgan Chase & Co, Research Division - MD [2]

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This might be kind of a bold question here, but I'm listening to the various digital and strategic initiatives going on at Resources. And I surely understand the puts and takes in the revenue currently. I just wanted to know what level of organic revenue growth Resources is targeting kind of over the medium term?

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [3]

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Andrew, that is a bold question. As you know, because our revenue is cyclical, we have ups and downs. As I look at our revenue year-over-year, in particular, you can definitely see the ending of the lease accounting work that we delivered with the compliance date of last year. We're targeting the mid-single-digits, I think is the reality of it. But keep in mind, we've had some exit activities in Europe. We're going to continue to look actively at our geographic footprint. So at the end of the day, we can deliver better profitability in the business. And when you take actions like that, they are a bit disruptive.

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Andrew Charles Steinerman, JP Morgan Chase & Co, Research Division - MD [4]

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That's fair. And could you mention just how significant the lease accounting in the U.S. is? I definitely realize you've anniversaried it and it's a tougher comp, but just -- could you give us a magnitude of how much success you had in doing that type of work in the past year?

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [5]

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Yes. I'm going to ask Jen to give you the detail.

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Jennifer Y. Ryu, Resources Connection, Inc. - Interim CFO [6]

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Yes. Our revenue from lease accounting project peaked last year in Q3 of fiscal '19 at close to about $9 million. And in Q3 -- Q3 of last year as well, we enjoyed a pretty good lift from the lease accounting revenue. So in the range of about $8 million.

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Operator [7]

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Our next question comes from the line of Mark Marcon of Baird.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8]

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I was wondering if you could just give us a little bit more feedback with regards to AB5. You mentioned that as a potential positive. But just what are you hearing from your clients at this early stage, where it seems like there's a little bit of confusion out there in terms of how to react to it?

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [9]

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Yes. We already know and it was reported today by SIA that 2 organizations have already filed suit. They filed suit on Monday against this law. So we are going to see active litigation. The challenge here is that, especially in the staff org arena, I think clients are going to be more hesitant to engage independent contractors because of heightened liability risk that -- and that comes in the form of wage and hour complaints and penalties, which is substantial but also from tax obligations.

So the more careful approach -- and we're starting to see clients. Our largest client for the company is already actively moving toward using vendors that operate with an employee model and afford not only to derisk their own position but also because they believe in professional development and commitment to talent. And I think that client in particular recognizes that they want to work with vendors that attract the best talent. And in order to attract the best talent, you have to care for your people broadly. And that means providing a full suite of benefits and professional development that comes with it. So we are starting to have more active dialogue with several large clients in California, and looking at their needs and hopefully concentrating some of that need with us going forward.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10]

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Okay. Great. And then you gave us the lease accounting for the third quarter of last year. How much would you anticipate that it would -- it will drop off to by the time we get out to, say, the fourth quarter?

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Jennifer Y. Ryu, Resources Connection, Inc. - Interim CFO [11]

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Well, I can tell you that the delta for Q -- for this quarter -- this year compared to last year is about $3 million to $4 million.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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Okay. Great. And then just as you're thinking about the -- when we -- there's lots of different puts and takes when it comes to the revenue guidance for this current quarter. When we think about it on a nonholiday-affected, so same billing date basis, stripping out Veracity, what's that organic revenue growth rate coming out to when you peel through the onion?

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Timothy L. Brackney, Resources Connection, Inc. - President & COO [13]

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Mark, it's Tim Brackney, and Happy New Year. I don't know that we'll give you that exact growth rate. What I can tell you is that when we look at the nonholiday daily revenue run rate, it's the highest it's been this fiscal year, and it's higher than it was last fiscal year. So I think that -- order of magnitude is tough because we have -- there's so many different factors, including the timing of holidays and when they pop out. But I can tell you when I look at the inputs into what goes into our revenue velocity, which is what does our pipeline growth look like, what does our win rate look like, what does our activity rate look like, all those are well north of where we were both sequentially and in prior year.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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Got it. I was just trying to figure out like if we just took the midpoint of the range and then stripped out the expected drags from the holidays. I just didn't know if Jen had gone through that or not?

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [15]

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Yes, I think she tried to take you through that, Mark, with our disclosure. And if you want to get -- talk with her more about that and walk through it again, just give her a call off-line. Yes. This quarter, while we're, as I said, more optimistic about the pipeline and the opportunities we see and certainly about the sentiment -- I was reading more about the economy today, for example and preparing and -- the mood today versus a year ago is quite different. And one of the things that we saw coming out of the holiday last year was a more depressed mood. Now we're seeing a more optimistic mood in our client base. And I think it does impact the pipeline we're seeing, the willingness and readiness of clients to still engage in transformation projects and other initiatives that obviously are food for our business.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Great. And then just with regards to the Tri-States, I was a little confused. Are things getting better in the Tri-States? Or are they still anticipated to be a bit of a drag?

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Timothy L. Brackney, Resources Connection, Inc. - President & COO [17]

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They're getting better. I mean, I would say, I would definitely say they're getting better. Like I said, we hired a new leader. We have -- when I look at the -- when I look at them sequentially, and when I look at them from a velocity perspective, we are moving in the right direction. Just viscerally being in that market, as Kate was saying, there's a lot of optimism still in that market in terms of the usage of our services. And so whatever uncertainty there is around the economy, we believe there's still upside for us there. So we're cautiously optimistic about Tri-States.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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Great. And then I know it's early, but as it relates to Europe specifically, London and Brexit, what do you see?

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [19]

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I'm sorry, what are we seeing? Was that the question?

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Yes.

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [21]

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Yes. So I think we're all relieved I think we'd say for the Brexit discussion to be resolving. It is early days though, and I'm not sure that we've seen any real positive or negative fallout from the results of the decisions in England. And as you know, we have new leadership in Europe overall. And so we're still transitioning and getting that new leader up to speed on our business. We have a new leader, as you know, in the Netherlands business. So while I think the trends there are strengthening, as I said in my earlier remarks, and these are early days for us, and so we need to keep that moving in the right direction. We're starting to see a lot more program management and project management work. We're starting to see change management work with some high-profile clients that give us reason for optimism in that business. But again, these are early days and with new leadership, you have to see how that all plays out.

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Operator [22]

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(Operator Instructions) And as there are no questions in queue, I'd like to turn the call back over to Chief Executive Officer, Kate Duchene, for closing remarks. Ma'am?

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Kate W. Duchene, Resources Connection, Inc. - CEO & Director [23]

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Yes. Thank you, operator. And again, thank you, everyone, for attending this call and your interest in RGP. We'll look forward to talking to you again on our next earnings call following the third quarter of fiscal '20. Thanks again.

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Operator [24]

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