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Resources Connection Inc (NASDAQ:RGP)
Q2 2020 Earnings Call
Jan 2, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon, ladies and gentlemen, and welcome to the Resources Connection Inc. Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [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.

Alice Washington -- General Counsel

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 the call, we will be commenting on our results for the second quarter ended November 23rd, 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, 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 25th, 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 condition 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.

Kate Duchene -- President and Chief Executive Officer

Thanks Alex. Good afternoon and welcome to RGPs 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 the 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 was down slightly, which is unusual in the second quarter, but mainly because of two different week-long holiday periods during the quarter in our largest markets. One holiday week was in China to celebrate 70th the 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 profits.

We achieved $22.7 million and adjusted EBITDA or 12.3% of revenue compared to $20 million or 10.6% of revenue in the year-ago quarter. Despite revenue decline 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 three years, we've been focused on building capabilities beyond staff augmentation, and into 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 three months. These opportunities will take additional time to close as Veracity 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 two 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 pilot 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 a 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 inputs 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 two 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, we are 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 -- 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 consulting 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. Overhearing from clients of the resulting workload is substantial, it involves many work streams and most impacted firms have now 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 the projects we're initiating in Q3 to optimize our core operations and improve our cost structure. This project also aligned with our continued digital transformation and the impact of automation in how we operate. Also, as news about potential recession looms 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 will 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.

Tim Brackney -- Chief Operating Officer

Thank you, Kate, and Happy New Year, everyone. I will highlight trends and initiatives that directly impacted our results and 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 and pipeline throughout the second quarter and into the first two 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 pipelines, and converting on [Indecipherable].

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 solutions and value, combined with the clear market shift toward 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 keen 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% in 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 meeting, and a significant increase in total pipeline when compared to the prior year quarter. Additionally, we saw a 140 basis point increase in gross margin 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 US business led the way our margin gains, buoyed by a nearly 3% increase in average bill rates.

We are pleased with the continued effort and discipline around lead generation, sustained sales motion and deal pricing. but we know that we still have more upside and are committed to putting in the requisite work to attain 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 we saw some 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-state, and are starting to see positive momentum with these changes.

In the new markets, we will continue to augment existing teams of investments and 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 accounting [Phonetic] and executive search businesses.

Taskforce continues 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 the 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 quarter, we continue to place strong emphasis on managing controllable expenses and leveraging existing assets and a more centralized operating model to gain scale to 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 market that have a highest lucrative opportunity, while leveraging our agile platform to serve our client base, with headquarters and operations outside of the [Indecipherable].

Now onto 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 make subject matter expertise 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 pursuit with APS and our consulting inventory, to increase our win rate and ensure efficient delivery. Our [Indecipherable] provides an impetus for targeted second half sales campaigns, localized sales players, 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 few other operational priorities, better serving our clients globally and improving alignment of our supply and demand curves. Our strategic client program or SCP, continues to forge a path for the company, as we improved 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, as a direct result of strongly aligned cross border pursuits. We know this is an opportunity in this 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 experts at attracting imitating talent to our platform on an employed gig basis. We have achieved this by allowing our consultants to 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 scheme of gig in the professional arena has allowed RGP to maintain an average consultant tenure nearing three years. While we've certainly developed a strong competitive advantage in this space, we know that directly aligning client needs with the preferences of an agile talent base, requires strong core process and data transparency. We are working on optimizing important aspects of our business, and are making solid strides.

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

Before I conclude my remarks, I want to provide some insight about early third quarter trends; recognizing that third quarter results could be adversely impacted by both the timing and number of holidays. Nonetheless, we are pleased with operational trends to-date. Through the first few non-holiday weeks of the quarter, trailing average enterprise run rates are the highest they've been 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 also see 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.

Jennifer Ryu -- Interim Chief Financial Officer

Thank you, Tim, and good afternoon everyone. I will start by giving detail on our second fiscal quarter financial results, and we'll 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 2Q, adjusted EBITDA, which we define as EBITDA before stock compensation and contingent consideration adjustments or $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, reflect 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 reflect active pipeline management and business development efforts, coupled with the impact of fewer holidays in the US, as well as favorable seasonal impact. Second quarter of fiscal '20 included only Labor Day; while the first quarter included Memorial Day and July 4th holiday, as well as summer holiday breaks 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 the Carolinas, Dallas, Seattle and Philadelphia, and notable gains in our accountancy 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 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 SVP [Phonetic] program; the sequential decrease from the first quarter, as Kate mentioned earlier, is due to week long holidays during the second quarter in both Japan and China, two 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 two 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 mid-week timing of both Christmas Day and New Year's Day further stifles 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 when 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 US 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 the closing of 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 margins in 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 increased bill-to-pay ratio, as well as a decrease in holiday pay for consultants in the US, due to the timing of the Thanksgiving holidays. The sequential increase is primarily due to a decrease in holiday pay for consultants in the US due to fewer holidays, as well as lower payroll taxes. Bill pay ratio remains relatively flat between the two periods.

For the second quarter, our gross margin in the US with 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 US 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 rates, 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, mainly Thanksgiving and mid week 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 headcount 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 increased 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 on higher payroll taxes at the beginning of the calendar year.

Turning to other components of our financial statements; we delivered pre-tax 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 operating quarters is difficult to predict and could be volatile, as the rates will be dependent upon several factors, including the operating results of our US 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 are valuation allowances and potential US tax deductions related to the exit activity in Europe.

Now let me turn to our balance sheet; cash and cash equivalents at the end of the second quarter was $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 dividends, 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 would like to turn the call back to Kate for some closing comments.

Kate Duchene -- President and Chief Executive Officer

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 mid-week, we like the trend we're seeing in non-holiday week 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 as well we do our client continuity statistics for Q2 in fiscal '20. Client continuity remained 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 [Indecipherable] 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 one type of solution category. This penetration reflects the diversity of relationships we have within our client organizations, and reinforces the opportunity for growth that we continue to execute, improved account planning, and penetration.

That concludes our prepared remarks and we're now happy to answer any questions.

Questions and Answers:


[Operator Instructions]. Our first question comes from the line of Andrew Steinerman of JP Morgan. Your line is open.

Andrew Steinerman -- JPMorgan -- Analyst

Hi team. 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?

Kate Duchene -- President and Chief Executive Officer

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 that 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 work 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.

Andrew Steinerman -- JPMorgan -- Analyst

That's fair. And could you mention just how significant the lease accounting in the US 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?

Kate Duchene -- President and Chief Executive Officer

Yeah, I'd going to ask Jen to give you the detail.

Jennifer Ryu -- Interim Chief Financial Officer

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

Andrew Steinerman -- JPMorgan -- Analyst

I understand. Thank you again.

Kate Duchene -- President and Chief Executive Officer

Thanks Andrew.


Thank you. Our next question comes from the line of Mark Marcon of Baird. Your question, please.

Mark Marcon -- Baird -- Analyst

Good afternoon. 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?

Kate Duchene -- President and Chief Executive Officer

Yeah. We already know and it was reported today by SIA that two organizations have already filed suit, they filed suit Monday against this law. So we are going to see active litigation. The challenge here is that, especially in the staff aug 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 as you know, is substantial, but also from tax obligations. So the more careful approach and we're starting to see clients, our largest clients for the company is already actively moving toward using vendors that operate with an employed 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 dialog with several large clients in California, and looking at their needs and hopefully concentrating some of that need with us going forward.

Mark Marcon -- Baird -- Analyst

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?

Jennifer Ryu -- Interim Chief Financial Officer

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.

Mark Marcon -- Baird -- Analyst

Okay, great. And then just, as you're thinking about -- 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 non-holiday 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?

Tim Brackney -- Chief Operating Officer

Hey Mark, it's Tim Brackney and Happy New Year.

Mark Marcon -- Baird -- Analyst

Happy New Year.

Kate Duchene -- President and Chief Executive Officer

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 non-holiday -- when we look at them non-holiday daily revenue run rate, it's the highest it has 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, 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.

Mark Marcon -- Baird -- Analyst

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

Kate Duchene -- President and Chief Executive Officer

Yeah, 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 offline.

Mark Marcon -- Baird -- Analyst


Kate Duchene -- President and Chief Executive Officer

Yeah. This quarter, while we are -- as I said, more optimistic about the pipeline and the opportunities we see, and certainly about the sentiment. I was reading more about that the economy today for example and preparing and the mood today versus a year ago was 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 are seeing, the willingness and readiness of clients to still engage in transformation projects and other initiatives that obviously are food for our business.

Mark Marcon -- Baird -- Analyst

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

Tim Brackney -- Chief Operating Officer

They're getting better, I mean I would say I would -- 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 really being in that market, as Kate was saying, there is a lot of optimism still in that market in terms of 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-state.

Mark Marcon -- Baird -- Analyst

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

Kate Duchene -- President and Chief Executive Officer

I'm sorry, what are we seeing?

Mark Marcon -- Baird -- Analyst


Kate Duchene -- President and Chief Executive Officer

Was the question? Yeah, 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 from the results -- the decisions in England. And as you know, we have new leadership in Europe overall, and so we're still transitioning 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 and with new leadership, you have to see how that all plays out.

Mark Marcon -- Baird -- Analyst

Appreciate the response. I'll follow up offline. Thank you.

Kate Duchene -- President and Chief Executive Officer

Thank you, Mark.


[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?

Kate Duchene -- President and Chief Executive Officer

Yeah. 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.


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

Duration: 43 minutes

Call participants:

Alice Washington -- General Counsel

Kate Duchene -- President and Chief Executive Officer

Tim Brackney -- Chief Operating Officer

Jennifer Ryu -- Interim Chief Financial Officer

Andrew Steinerman -- JPMorgan -- Analyst

Mark Marcon -- Baird -- Analyst

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