Resources Connection - Earnings Call - Q3 2025

Executive Summary

• Q3 FY25 revenue of $129.4M declined 14.5% YoY; gross margin was 35.1% as holiday timing hurt utilization, while pricing and mix improved bill rates; a non-cash goodwill impairment ($42.0M) drove GAAP diluted EPS to $(1.34), with adjusted diluted EPS of $(0.08).
• Versus S&P Global consensus, revenue was essentially in line ($129.4M vs $130.0M*) and adjusted EPS beat (−$0.08 vs −$0.22*), reflecting cost discipline and stronger enterprise bill rates despite volume headwinds (fewer business days, project delays).
• Management guided Q4 FY25 revenue to $132–$137M, gross margin to 36–37%, and SG&A run-rate to $45–$47M; early Q4 weekly revenue decelerated amid U.S. policy/tariff uncertainty and a 14-week quarter (69 business days).
• Portfolio catalysts: (1) non-cash goodwill impairment ($42.0M) and continued U.S. macro/policy uncertainty delaying decisions; (2) dividend reset to $0.07/Share (from $0.14) to preserve ~$9M+ annual cash for growth/repurchases; (3) pipeline quality improving—larger deals, higher win ratios, rising bill rates—positioning RGP for operating leverage on recovery.

What Went Well and What Went Wrong

• What Went Well

  • Enterprise pricing power and mix improved: consolidated average bill rate rose to $123 ($124 constant currency) vs $119 YoY; Consulting bill rate +12.8% YoY (13.5% cc); stronger pay/bill ratio supported margins despite holidays.
  • Pipeline quality and deal size improved: doubled the number of $1M+ engagements won YoY; $5M+ opportunities increasing; Europe showed KPIs improvement and return of $1B+ pursuits.
  • Cost actions took hold: run-rate SG&A improved YoY; management lowered run-rate SG&A 8% since Q1 and continues to optimize real estate and discretionary spend.

• What Went Wrong

  • Volume-driven pressure: revenue down 14.5% YoY; billable hours down 17.0%; On-Demand revenue −26.6% YoY on lower talent churn; Consulting hours −18.8% YoY (partially offset by pricing).
  • Holidays and utilization: mid-week Christmas/New Year’s and Thanksgiving in Q3 reduced utilization and gross margin to 35.1% (vs 37.0% LY) despite improved pay/bill.
  • Non-cash impairments: $42.0M goodwill impairment (On-Demand $12.4M; Consulting $29.6M) reflecting slow recovery; Q&A highlighted ongoing U.S. uncertainty (tariffs, policy) causing delays, not cancellations.

Transcript

Speaker 3

Good afternoon, ladies and gentlemen, and welcome to the Resources Connection conference call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. At this time, I would like to remind everyone that management will be commenting on results for the third quarter ended February 22, 2025. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today. Today's press release can be viewed in the Investor Relations section of RGP's website and filed today with the SEC. Also, during this call, management may make forward-looking statements regarding plans, initiatives, and strategies, and the anticipated financial performance of the company.

Such statements are predictions, and actual events or results may differ materially. Please see the risk factors section in RGP's report on Form 10-K for the year ended May 25, 2024, for a discussion of risk, uncertainties, and other factors that may cause the company's business, results of operation, and financial condition to differ materially from what is expressed or implied by forward-looking statements made during this call. I'll now turn the call over to RGP CEO, Kate Duchene.

Speaker 4

Thank you, Operator. Thank you all for joining us today. In Q3, our results were in line or better than expected. Our total revenue was $129.4 million, consistent with expectations and reflecting macroeconomic uncertainty, client budget constraints, and slower project ramp-ups. Our gross margin and SG&A both beat the favorable end of our outlook ranges. Post-election, the operating environment has remained sluggish this calendar year, given increased uncertainty and decreased consumer confidence in the United States. The news is not all about uncertainty, however. We saw strengthening across our practices in Europe, Japan, and the Philippines in Q3. Europe improved with several key performance indicators, including bill rate increases, sizable pipeline expansion, and the return of $1 million-plus project pursuits. Our consulting segment also achieved material double-digit bill rate improvement in Q3. The size of enterprise-wide engagements increased on average by more than 20%, and we improved our win ratio.

We doubled the number of $1 million-plus engagements we won this quarter over a year ago, and our pipeline of opportunities at the $5 million-plus level has grown significantly, reflecting a quality improvement in pipeline over last year. We did not see this size and scope of opportunity a year ago. These indicators show we're moving in the right direction, but we need to increase volume as we execute our diversified services strategy. In this environment, many clients are moving work to the international stage, and we are strategically located to support them. Here, too, we're focused on increasing scale in our key markets in Southeast Asia and India. Our outsourced services business, Kelsey, delivered solid results in the third quarter, and our overall client retention in our top 100 accounts remained solid.

During this relatively slower stretch for our industry, we've accelerated RGP's evolution by focusing on three key initiatives that position us for market share expansion. First, we have enhanced client offerings. We've built a diversified services platform to meet clients where they need us. Whether they require both strategy and execution support, or they need our execution specialists working with in-house teams, we deliver both with excellence. Our flexible engagement models are proving an important competitive differentiator as clients seek agility, price-to-value, and blended delivery teams. It used to be that the traditional consulting firms owned domain expertise and would deploy an army of consultants using their leveraged model. Times have changed, and we believe in RGP's favor. Clients now know and own their strategy and need high-quality, flexible, value-based execution support, a niche that RGP created and which we uniquely provide.

We've also focused our services catalog across our diversified offerings in areas where the market has the highest demand, utilizing our core CFO relationships to expand into new buying centers like the Chief Technology Officer, Chief HR Officer, Chief Procurement Officer, and senior supply chain leaders. Our core pillars of service capability are CFO services, digital technology and data, and strategy and operational performance. Most of the services are currently delivered to the office of the CFO across these pillars, but the natural extensions are in risk and compliance, technology modernization, supply chain optimization, and employee experience. We are leveraging the strategy of CFO plus one to enhance growth and client value creation.

As Bhadresh will share, we've experienced positive momentum with cloud migration support for SAP and Oracle Finance transformations, as well as ServiceNow optimizations to improve user experience around automation of process workflows in IT, HR, and risk and compliance. While industry-wide, M&A and IPO readiness initiatives have been slow to pick up this calendar year, we have the right capabilities to jump in and respond quickly when this event cycle turns. For example, the Reference Point acquisition allows us to accelerate and broaden what we can do for clients around M&A integration, operating model assessments and design, data architecture and governance, and application modernization to help clients optimize enterprise performance and enable the adoption of AI. We have worked diligently to ensure we have the sales readiness and delivery skills to capitalize as the business environment improves, client budgets strengthen, and decision-making accelerates.

Last week, we closed a significant project in finance optimization by combining skills and building a delivery team of management consulting and agile execution specialists who know the client's industry. Second, we have improved operational efficiency. We've lowered our cost structure, and you can see the progress we've made. We're driving cost savings with optimized headcount, reduced real estate spend, and lower discretionary spending. We've lowered our run rate SG&A by 8% since the first fiscal quarter and will continue to drive efficiencies across the enterprise through technology, AI, and automation. Jen will offer additional commentary on our successful efforts around operating efficiency. Third, we made targeted investments to enhance value creation over the long term. We've made most of the investment needed to replace our technology infrastructure for the North America business.

These enhancements allow us to implement AI and automation to our advantage in both client service and talent recruitment and management. This modern technology will allow us to streamline process and accelerate opportunity through our pipeline. We have also enhanced our sales and delivery teams to ensure we have the right approach for both consulting and on-demand solutioning when the buying environment improves. We're proud of the sales team we have and the relationships they nurture and our exceptional client base, and we're adding a new archetype to the team to drive growth. We had some go-to-market team attrition in Q3, much of it planned, which allows us to accelerate certain enhancements. Specifically, we've added consultative sales expertise, especially in the digital and technology areas, and strategy and operations to support growth.

For example, a new joiner in our New York practice was a senior finance executive at a top-10 financial services firm who was a key buyer of CFO services across the professional services continuum. Another recent senior hire in our New York office brings solution sales experience from a top-tier digital consultancy. According to Kennedy Research, the two highest growth opportunities for consulting in the next three years will be strategy and operations and digital transformation. Benefiting from our inherent competitive advantages, including strength of CFO relationships, diversified engagement models, agility, price-to-value, and cross-border collaboration, we are improving our positioning to earn this work as clients increasingly seek value and seamless global delivery areas in which we excel. Finally, I want to highlight the progress we've made this fiscal year in building more delivery capability in India.

Our global delivery centers there are supporting work for the CFO's office across risk and compliance, finance and accounting, and digital development services. This work creates greater stickiness, as evidenced by our solid client retention rates, and we're focused on building volume across our Fortune 500 clients. We just closed work in India for a long-time New York-based financial services firm who has previously only engaged with RGP in the US. This close also enabled us to expand our buying centers in this client. We now have strong delivery capability in Mumbai, Bangalore, Pune, and Hyderabad. I'll close with this reminder. While we always act with urgency, our pristine balance sheet allows us to take a long-term view of value creation. We're busy laying groundwork for growth and improving profitability when the client buying environment improves.

We understand that the near-term outlook across professional services in the U.S. is uncertain and disrupted, but we're resolute in nurturing our key relationships, standing at the ready, and focusing our services so clients know to call us with utmost confidence. Most importantly, we are committed to delivering long-term value for our shareholders, driven by our team's unwavering strategic focus. I'll now turn the call over to Bhadresh for detail on operational trends and key performance indicators.

Speaker 0

Thank you, Kate, and good afternoon, everyone. I'm excited to share our quarterly update and highlight the progress we continue to make in executing our strategy. As Kate mentioned, our industry is evolving, and recent geopolitical events and actions have only served to create greater uncertainty in the marketplace. As a result, our position as a challenger brand is becoming increasingly relevant in reshaping professional services, breaking away from traditional engagement and operating models, and offering clients a differentiated experience. Our strategy is designed to empower clients by offering flexibility in how they engage with us throughout their transformation and operational journey. Removing the rigid structures traditional firms impose, we offer our clients the ability to access experts, solution teams, and core finance and HR outsourcing services in a way that best meets their needs in a more client-centric, flexible approach our competitors struggle to provide.

Our revised approach of offering on-demand, consulting, and outsourced services under a single umbrella is setting the stage for our business to be more resilient and less cyclical. Our Q3 results show our top-line revenue performance tracking in line with expectations while delivering better-than-expected gross margin and bottom-line results. While overall pipeline softened, we're seeing a positive shift in our win ratio and pipeline of new opportunities moving us up the value chain with our clients, and we know these opportunities take longer to move through the sales cycle, especially given the current instability of the U.S. market. We are gaining traction with solutions that remain central to our clients' transformation agendas. These areas of high client priority, both within the CFO's office and CFO plus one, align closely with our core capabilities, cross-sales strategy, and market demand.

At the same time, we remain focused on maximizing our on-demand professional staffing services in the US, where we benefit from long-term solid client relationships, particularly in the office of the CFO. Once the market dynamics improve, we are well-positioned as we continue refining our operating model and optimizing our sales infrastructure to drive efficiency, break down silos, and better align our solutions with revenue generation. This is leading to larger contract sizes with a stronger economic profile driven by our strategic shift in the business. Now I'll provide an update on our quarterly performance by segment. Our consulting segment performance was slightly down from prior year quarter but continues to validate our strategy as we're seeing steady bill rate improvements, 13% higher than same quarter last year, and a 4% improvement sequentially.

It is worth noting that given recent shifts in the policy landscape, our federal government work represents only 1.5% of our overall revenue. Most importantly, we have nearly doubled the number of $1 million-plus opportunities won and doubled the number of opportunities greater than $1 million in our pipeline compared to the same quarter last year. We are actively pursuing multiple opportunities, each exceeding $5 million in value, driven by the expanded capabilities from our acquisition of Reference Point and the increased digital scale gained through CloudGo, now fully integrated into our consulting segment. This growth was driven by our expansion into new buying centers within existing clients and higher-level conversations around client transformation initiatives. Some notable wins include the Australia and Singapore governments, a Fortune 250 integrated healthcare delivery system, a Fortune 200 life sciences company, a large medical device company, and a Fortune 500 bank.

Notable large pipeline opportunities include a Fortune 50 financial services company, preferred supplier status for a Fortune 50 financial services client, and a large federal agency. I want to emphasize this time last year, we were not engaged in opportunities of this magnitude in our client base. As our strategy continues to show results, we remain focused on building skill through our transformation, recognizing it will take time to expand to drive growth. As I mentioned earlier, and as is typical with solution selling, these opportunities take time to generate and materialize, especially given our current environment and ongoing uncertainties. Turning to on-demand, while revenue was down from the prior year, we're seeing early traction from our cross-selling initiatives benefiting from our long-term strong client relationships in the office of the CFO and our CFO plus one strategy.

While we continue to add new logos, we're also intensely focused on keeping our current experts engaged with clients, making extension management a key priority for our revenue and talent teams, which did increase by 5.4% sequentially. RGP is poised as an attractive option for organizations needing on-demand, specialized support without the need for long-term commitments or additional hires, especially as companies continue to tighten their belts in the current economic landscape and strive to do more with less. While revenue backlog in our Europe and Asia segment was higher sequentially, we did see a slowdown in growth compared to the previous quarter. Europe was impacted by a larger-than-usual consultant holiday, while APAC growth was hindered by ongoing macroeconomic challenges in our China business. However, we remain cautiously optimistic about accelerating growth as project extensions improved for the first time in three quarters.

This trend should provide greater stability and a foundation for future growth, particularly in the United Kingdom, Philippines, and Japan, where we are seeing stronger momentum compared to other regions. Our outsourced services segment continues to achieve top-line revenue growth both prior year quarter and sequential quarter, driven by our efforts to acquire new venture-backed clients and expanding our focus on spinouts. In summary, since launching our refreshed brand positioning and service segmentation, client feedback has been overwhelmingly positive. They recognize our capabilities and appreciate the flexibility our various engagement models offer, reinforcing their desire to partner with us. While we all understand the uncertainties in our current environment, we remain excited by the progress we're making in executing our strategy and remaining focused on delivering value to our clients. I'll now hand the call over to Jen.

Speaker 5

Thank you, Bhadresh, and good afternoon, everyone. Our third-quarter performance was in line or better than our expectations. Revenue of $129.4 million was in the middle of our outlook range, while both gross margin and run rate SG&A expense were better than the favorable end of our outlook range. We delivered adjusted EBITDA of $1.7 million, or a 1.3% adjusted EBITDA margin, reflecting the holiday seasonality during the third fiscal quarter. The year-over-year revenue gap continued to moderate in the third quarter to 11% on a same-day constant currency basis, which is an improvement over last quarter's 13%. We are encouraged to see continued stabilization in our Europe and Asia Pac segment and a year-over-year growth in our outsourced services segment.

Our on-demand and consulting segment, which are both predominantly U.S.-based, were impacted by the increased level of uncertainty in the macro environment, driven by a number of domestic government policy changes. Gross margin for the quarter was 35.1%, again better than expected and off by 190 basis points from the prior year quarter, reflecting unique holiday timing, including Thanksgiving, which is typically in Q2, as well as midweek timing of Christmas and New Year's Day. We're pleased that the pay-bill ratio for the third quarter strengthened as a result of a notable improvement in the enterprise average bill rate. Despite the competitive pricing environment across the globe, we improved enterprise-wide average bill rate to $124 constant currency from $119 a year ago, led by our consulting segment with a 13% increase over the prior year quarter, as well as a 4% sequential increase over the second quarter.

Average bill rate in the Europe and Asia Pac segments also increased by 5% over the prior year and sequentially on a constant currency basis. The improvements within these segments are the result of our efforts to drive value-based pricing and are reflective of a favorable mix shift we are starting to achieve in winning higher value and larger consulting projects. The addition of Reference Point's project portfolio and joint project involving Reference Point's solution capabilities also boosted average bill rate. In our on-demand and outsourced services segments, average bill rates were both down slightly from the prior year quarter. Pricing in these segments remains competitive, which requires us to balance between rate and volume to optimize revenue as well as margin.

As we strive to drive higher bill rates in all business segments and geographic regions, revenue mix will continue to be reflected in our total company average bill rate, especially as we increasingly leverage our global delivery center for offshore delivery teams. Importantly, while the use of offshore teams will typically blend down our average bill rate, we expect it will enable us to enhance gross margin and to compete more effectively. Now on to SG&A. Our enterprise run rate SG&A expense for the quarter was $43.7 million, an improvement from $45.2 million a year ago, primarily driven by lower management compensation expense as a result of actions taken in December to reduce headcount, as well as an elevated level of attrition in our sales force during the quarter.

While we fight to improve top line in the persistently choppy environment, we are working diligently to pull the levers we can control to protect profitability in the near term, but ultimately to create a lighter cost structure for the future. We've been consistently implementing initiatives to reduce fixed costs in areas such as real estate and to increase operating efficiencies through our newly implemented technology platform. Next, I'll provide some additional color on segment performance. All year-over-year % comparisons for revenue are adjusted for business days and currency impact. As a reminder, segment-adjusted EBITDA excludes certain share corporate costs. Revenue for our consulting segment was $52.6 million, a decline of 2% from the prior year. Third quarter segment-adjusted EBITDA was $5.9 million, or an 11% margin compared to $8.8 million, or a 16% margin in the prior year quarter.

Revenue for our on-demand segment was $47.1 million, a decline of 24% versus prior year. Segment-adjusted EBITDA was $2.6 million, or a margin of 5% compared to $7.3 million, or an 11% margin in the prior year quarter. Adjusted EBITDA margins in both segments reflect negative operating leverage on the softer top line. While our on-demand business has been more impacted by the macroeconomic conditions, we're pleased with the role it has played in supporting the talent needs of our consulting segment. Our strategy is to continue driving opportunities for such blended delivery teams to mitigate utilization exposure. Turning to our Europe and Asia Pac segment, revenue was $18.6 million, a decline of 2%. Segment-adjusted EBITDA was $0.8 million, or a 5% margin compared to $1.3 million and a 7% margin in the prior year quarter.

Finally, our outsource services segment revenue was $9.4 million, similar to the prior year quarter, but with an implied growth of 3% on an adjusted basis. Segment-adjusted EBITDA was $1.5 million, or a 16% margin, which is approximately the same as the prior year quarter. I also want to note we recorded a non-cash goodwill impairment charge of $42 million in the third quarter in response to the continued sluggish demand environment in both our on-demand and consulting segments. $12.4 million was recorded for our on-demand segment, and $29.6 million was recorded for our consulting segment. Turning to liquidity, our balance sheet remained strong with $73 million of cash and cash equivalents and zero outstanding debt. We distributed $4.6 million worth of dividends in the quarter and repurchased $3 million worth of shares at an average price of $8.46 per share.

With our cash on hand combined with available borrowing capacity under our credit facility, we will continue to take a balanced approach to capital allocation between investing in the business to drive growth and returning cash to shareholders through dividends and opportunistic share repurchases under our share repurchase program, with $79 million remaining at the end of the quarter. I'll now close with our fourth quarter outlook. As mentioned earlier, recent government policies in the U.S. have introduced additional uncertainty as our clients sort through the potential impact on their own business as tariffs and DOJ actions unfold. While we're encouraged to see improving quality in the pipeline with larger deal opportunities, we experienced lighter volume of activities starting in the second half of Q3 and expect delays in client decision-making to continue in the near term.

As a result, early fourth quarter weekly revenue run rate has shown some deceleration from the third quarter. Thus, our outlook calls for revenue of $132 million-$137 million. On the gross margin front, we anticipate maintaining the improved pay-bill ratio we achieved through Q3. With the holiday season now behind us, we expect a stronger and a more normalized gross margin in the range of 36%-37%. For SG&A expense, we expect our fourth quarter run rate SG&A to be in a range of $45-$47 million, reflecting a 14-week quarter as opposed to the typical 13 weeks. Non-run rate and non-cash expenses for the fourth quarter will be around $2-$3 million, consisting mostly of non-cash stock compensation expense. In closing, during the current operating environment, we continue to refine our strategy and improve our execution to drive long-term value creation.

With improving economic clarity over time, we will be well-positioned for a return to growth. This concludes our prepared remarks, and we will now open the call for Q&A.

Speaker 3

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for questions. Our first question comes from Joe Gomes with Noble Capital. You may proceed.

Speaker 1

Good afternoon. Thank you for taking my questions.

Speaker 5

Hi, Joe.

Speaker 0

Hello, Joe.

Speaker 1

I wanted to start out, we talk about for the clients, these are high-priority transformational activities, but obviously, we're seeing the ongoing delays and push-out of start date. I mean, how high priority are these? How long, I guess, can the clients go or hold off without starting some of these activities?

Speaker 5

Yeah. I wish I had an answer for you across the board, Joe. I do believe it's one of the reasons Europe has started to bounce back because the pent-up demand has started to open up. We're seeing some of those projects move forward, whether it's M&A activity or technology transformation, like moves to a global payroll system or a cloud migration on ERP. That's one of the reasons you're hitting it that Europe has started to improve. The U.S. is a little bit different story. I mean, it's liberation today, we all hear, and what's happening with the tariffs. I think people are hesitant to make firm, expensive decisions in an uncertain landscape. That's what we saw happen in the second half of Q3, which guides us to be careful as we think about what's happening in Q4.

I mean, if you ask any professional services folks, everybody thought M&A would really open up in the first half of calendar 2025. In fact, the opposite has happened. You can look at a graph of what is happening in the S&P or the Russell and see how negative sentiment has become. That does cause more conservative decision-making. As we look at our reports on opportunities opened in the pipe by week, as we have shared, consulting is really growing, but the time to close is longer, and budget constraints are always noted. When we lose work, generally, it has been because of budget or delayed decision-making. That is the reality of the U.S. marketplace right now.

Speaker 1

Okay. Thank you for that. Given where the marketplace is, I mean, how is the retention of the consultants, or what are you doing to retain the consultants given the challenging times in getting work?

Speaker 5

Yeah. That's obviously one of the most important parts of our business is the care and feeding of great consultants. We are working very hard to get consultants in front of prior clients. We are working hard at the right pricing in our on-demand business. You see the progress we've made in our consulting bill rates and financial metrics so that we can make some of those investment decisions we need to to get consultants busy. We stay close to them. Even if they roll off our active roster, we stay engaged through alumni activity. Consultants really feel, I think, the care and feeding of our talent team, and that matters and will matter more as the environment turns more positive.

Speaker 1

Okay. One more for me, if I may. You've talked again about looking at ways for efficiencies. How much more is there, I guess, available that could be cut before you're starting to really cut into muscle in the business?

Speaker 5

Yeah. Hi, Joe. This is Jen. I can answer that question. Yeah. We're looking across the board within the company, different areas to continue to reduce our fixed costs. It is not just reducing fixed costs. It is also leveraging the technology that we just implemented in order to become more efficient. We have seen some efficiencies from the technology, but I think that is going to take a little bit of time. Different areas that we are looking at, Kate mentioned, I did too in our remarks, real estate is another area that we are going to continue to look at to optimize. Then discretionary spending. I mean, we are getting tighter and tighter every quarter so that we can control our costs.

I think for the near term, right, we are doing everything we can to protect our profitability, but we also obviously need to manage the business for the long term as well. As we think about investing in key areas of the business, there is going to be a lot of puts and takes so that we can retain all of the cost savings that we have already generated so far.

Speaker 1

Thank you for that. I'll get back in queue.

Speaker 5

Thanks, Joe.

Speaker 3

Thank you. Our next question comes from Mark Marcon with Baird. You may proceed.

Speaker 2

Good afternoon, and thanks for taking my questions. Obviously, it's a tough environment, and there is a lot of uncertainty. Can you describe what you've been seeing since the second half of the third quarter just in terms of are the clients characterizing potential projects as things that they have to push back? How much have you seen in terms of cancellations? It sounds like you're not seeing early terminations of existing projects. I want to make sure I heard that correctly as well.

Speaker 5

Yeah. We aren't, Mark. In fact, extensions are growing. It is one of the reasons that Europe has really strengthened too because not only are they adding projects, but they are extending. That has always been a little bit of a balance for them was on extensions, and we are seeing those extensions pull through, which is a good thing. It is not so much project cancellations, although it happens occasionally because of budget approval, but we are just seeing more delay. I will give you a real-world example. We were just chosen on a significant RFP to be a preferred provider. Now, that does not guarantee us a level of revenue, but it sure guarantees us that we are one of the first to get the opportunity and grow this account, which is a significant financial services account.

We thought that RFP would be decided early in our Q3, and instead, we just learned the outcome in Q4. We've had a proposal at a major technology company, one of the top five, that we thought would be decided in late October, and we still have not gotten a decision. It is just delaying. It is not cancellations, but delay. I think it is really tied to what is happening in government and what will the fallout be. Once we know what the fallout is, then people start making decisions.

Speaker 2

Can you describe a little bit about how the magnitude of uncertainty that your clients are expressing, how pronounced or how much more pronounced has that become in recent weeks? I'm talking about the last two to three relative to towards the back end of the third quarter.

Speaker 5

I'd say the back end of the third quarter and the most recent weeks have been probably the most disrupted. Bhadresh might want to share another point of view. Now that we have the announcements from today, I think that will provide some clarity. It's going to create a more expensive business environment for all. As I understand, he announced that there's virtually a 10% tariff on almost everything, and they go up to 30%. We all read the articles about how many cars were purchased over the weekend in anticipation of today. People will make plans once they know that the dust has settled a bit. We're all following. I saw a headline that said, "Has DOJ's time come to an end?" We need some of that to settle down and move forward because I do believe there's pent-up opportunity.

We felt this way coming out of COVID too, that people delayed things for so long that you can't delay any longer. We are in this period of being squeezed. As we said in our prepared remarks, we've done everything we can to, and we will continue to do. The only thing we haven't done fully is our cost savings. We continue to look at that hard, whether it's looking at personnel offshore too. We have positioned with respect to client offerings what the marketplace needs in recovery. I think we've done some really good work internally.

Speaker 2

Right. Can you just talk a little bit about what's embedded with regards to the revenue guide for the fourth quarter, just in terms of the split between on-demand versus consulting? I want to make sure I heard things right. Did you mention that the fourth quarter is a 14-week quarter?

Speaker 5

Yeah.

Speaker 2

If so, what is the implication with regards to, on a same-day basis, what the revenue decline would end up being for the fourth quarter?

Speaker 5

Yeah. Hi, Mark. So the guide for revenue for the fourth quarter, we're expecting Europe and Asia-Pac as well as outsourced services segments to stay relatively stable. I don't think that they're going to create much variability there. The variability is really going to come from North America within the on-demand as well as consulting segments. The consulting segments, really, as you heard, we're working on larger deals. How fast and how fast we can close those deals, as well as how fast we can push the project to start, is going to kind of determine, right, where on the range we fall. Q4 has 69 days. It is four more business days compared to last year. On a year-over-year basis, you're looking at a decline of comparing Q4 to Q4, you'll see a decline of about 14%.

Speaker 2

Right. That's helpful. Lastly, just when we take a look at the cash flow from operations for the first nine months, can you just describe what were some of the unusual cash outflows so that we can normalize that a little bit? While your balance sheet is quite strong and pristine, I'm wondering, are there any thoughts with regards to the sustainability of the dividend? The dividend yield's obviously quite high. I am getting questions with regards to whether or not that might potentially change.

Speaker 5

Yeah. Mark, as you know, we've been going through our technology transformation. The last few years, couple of years, our cash flow really has been impacted by the amount that we're spending on the implementation. Starting in fiscal, now that the transformation is behind us, starting in fiscal 2026, we should see a pickup of about anywhere between $5 million-$7 million in operating cash flow. The point about dividend, dividend is set by the board each quarter. It is our intention to drive down the payout ratio with a higher stock price over time as we begin to benefit from the strategic plan, and especially as the market condition improves. We know our investors have come to appreciate the consistent dividend. As I mentioned in the prepared remarks, we are taking a measured and balanced approach towards capital allocation.

We want to consider what's best for the business long term. That includes investing in organic growth or dividend and share repurchases.

Speaker 2

Right. Just going back to the cash flow and maybe margins from a sustainable basis, obviously, it's an unusual time period. Things have changed. I mean, things have been rough for multiple years. When you think about if we ended up having some stability in revenue, potentially a little bit of growth, where would you target EBITDA margins and operating margins? What sort of free cash flow conversion would you hope to be able to achieve?

Speaker 5

Yeah. I think as the broader environment normalizes, we're full year. With the full year guidance now, we're going to be in the mid to high $500 million. As the broader environment normalizes, as we get back into the $600 million, even get into $700 million, I do think that given our lower cost structure now, we should be able to get back into kind of where we used to be, which is high single digit. Now, if we go above $700 million and we can get into the double digit, and I do expect that our cost structure over time, especially as I mentioned with the tech investment, we should be able to realize more efficiency in how we operate. I'm sorry, what was your other question? The cash flow? Oh, yeah. Free cash flow conversion.

Look, our historical trend has been around 75-85% of free cash flow conversion from EBITDA. As we recover and improve, I expect that that obviously requires working capital. That may be a little bit lower, but I'm not concerned that we're going to be able to get back to, I think, normalized, get back to that level of free cash flow conversion.

Speaker 2

Great. Thank you.

Speaker 3

Thank you. Our next question comes from Andrew Steinerman with JPMorgan Chase & Co. You may proceed.

Speaker 0

Hi, Jen. I heard your answer before about the 14% decline in the fourth quarter revenue guide. I think that was on a dollar basis adjusted for days. I wasn't sure if that was at the midpoint or not. My question's a little bit different. I would like to know in the midpoint of the fourth quarter revenue guide, what's the organic constant currency revenue growth on a same-day basis? I ask because I know the Reference Point acquisition hasn't anniversaried yet.

Speaker 5

Yeah. At the midpoint, excluding Reference Point, Q4 would be down 17% year over year.

Speaker 0

Is that constant currency?

Speaker 5

Correct. I mean, look, currency is going to, it's moving around a lot, Andrew, and especially, right, given all the tariffs, and it's really hard to kind of predict currency. Yeah, I mean, I expect that Q4's currency movement is probably going to be neutral. This is on an organic same-day basis.

Speaker 0

Okay. Great. Let me just ask one more question. I haven't heard much about Hugo in a while. I wanted to get a short update there. Is there any revenue traction that's moving the total revenue needle for the company or anything that talks about kind of the volume of work that's going on assignment through Hugo?

Speaker 5

Yeah. We've seen a pickup of Hugo revenue this year. We've really folded that offering into our on-demand segment, so we won't be reporting it separately. I'll tell you the experience we've learned, Andrew, is that it's been adopted on the talent side, and it's really helped us learn some new behaviors on how to operate faster on the on-demand talent side. We have not seen clients yet adopt a self-serve environment. I think part of it's because they're so used to our white glove service at RGP, but we have not seen that adopt yet. In turn, we've taken some cost out of the Hugo business so that we can make money, and we are driving new opportunities in our client base.

This is an offering we're really pushing in our existing client base for the kind of roles that are, as we've said before, accretive to us a level or two down, and we are driving growth there.

Speaker 0

Got it. Yeah. That makes a lot of sense. Thank you.

Speaker 5

You're welcome.

Speaker 3

Thank you. I would now like to turn the call back over to Kate Duchene for any closing remarks.

Speaker 5

I thank you all for listening in and supporting RGP. We look forward to updating you on our progress after Q4. Thanks very much, everyone.

Speaker 3

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.