Twice in the past year, Motley Fool Stock Advisor has recommended SOX-darner Resources Global (NASDAQ:RECN) to its subscribers. We've investigated the company thoroughly, prepared two detailed write-ups of why we think it's a buy, and even interviewed the CEO (read an excerpt here or, if you're a subscriber, read the full interview here). Yet despite all this effort to understand the firm, we're forced to admit that the stock remains a two-time loser for our subscribers -- declining in price each time we recommended it.
Which is precisely why I'm so intrigued by what happened at Resources Global last week. After reporting numbers that appear to have fallen short of Wall Street's expectations, and predicted weaker sales in fiscal Q2 (now under way) than the analysts were hoping to see, the stock rocketed nearly 14%.
Why? Apparently, because a pair of research houses, JMP Securities and Robert W. Baird, issued twin "analyst upgrades" for the stock the day after the earnings release. Interestingly, both of these firms had analysts present on the post-earnings conference call that Resources Global held after releasing its numbers. Apparently, they liked what they heard.
Acting on the suspicion that you might like to hear it too, I've taken the liberty of combing through the conference transcript for the tastiest tidbits of earnings news -- served up for you here, courtesy of Fool on Call.
Go east (and west), young Fool
Longtime followers of Resources Global will know that the firm aims to grow into its name -- to become a truly "global" player in the market for business services (accounting and finance, human capital, information management, internal audit, supply chain management, and legal). To that end, Resources Global (let's abbreviate that to "RG" for the duration of this column) continues to open new offices at a rapid pace. With 75 offices up and running by the end of last year, management reported that RG opened four offices in fiscal Q1, three of which were international; RG aims to open one or two more this quarter, and to close out the fiscal year somewhere in the low 80s.
Opening new offices does a few things to RG's numbers, some good and some -- not so much. On the good side, locating services close to potential new clients helps with signing those clients on as paying customers. As evidence of which, RG grew its "client count" 15% last quarter. Total revenues grew only 10% (about half of which was attributable to raised billing rates). But the new international offices helped the international side of the business grow even faster, and RG expects the new offices to "ramp up and grow" as they mature.
Marginal profits
Unfortunately, international margins do lag those of RG's domestic operations. This quarter, gross margins hit 40.2% in the U.S., 37.1% abroad, and averaged 39.5% firmwide. Trend-wise, that means margins rose domestically, declined internationally, and overall grew a bare 10 basis points. Even that small improvement was wiped out by rising selling, general, and administrative costs (SG&A), however, which were up 150 basis points year over year, even before the expensing of stock options. Add the worsened SG&A margin to the improved gross margin, and RG was left with a 140 basis point decline in operating profits before options were expensed.
Importantly, RG is no longer issuing incentive stock options to its employees, so this is a problem that will work itself out over time. But until then, expect to see stock options siphon off as much as $0.08 per share in after-tax profits in each of the three remaining quarters of this year. To help alleviate this dilution, in fiscal Q1, RG spent $14.1 million to repurchase 600,000 shares, taking it past the halfway mark on its authorized three million share-buyback program.
Time to change the SOX?
Addressing the knock most commonly leveled at RG -- that its recent success is an unsustainable, Sarbanes-Oxley Act-inspired flash in the pan -- CEO Don Murray offered both reassurance and hope of even greater success in the future, saying: "We still see demand from clients in the SOX area, including international companies who have filing requirements with the SEC," and elaborating that "I don't think that we're going to see a major change in U.S. company spending. It might be a slight decline." He added that "There are also pending international regulatory efforts similar to SOX like J-SOX that could drive demand in the future."
With the catalyst for its recent success intact and future catalysts visible on the horizon, RG believes it will exceed this quarter's modest sales growth later in the year, and end the year with revenues 15% to 18% higher than last year. The analysts may have been focusing on this "unofficial target" when upgrading the firm to "buy" last week. Moreover, CFO Steve Giusto described some encouraging trends that suggest progress toward achieving these lofty goals. Running down the revenue numbers for the first four weeks of this year, he called week 1 "strong," week 2 the "fifth highest ever," and week 4 "by far our highest ever." (As for week 3, it was cut short a day by Labor Day, and so its revenues were, well, weak.)
All this sounds unambiguously good. And yet, I still have my doubts. Here's why: RG made a firm projection of about $175 million for the current quarter's sales. If that proves out, it will make for 10% sales growth in Q1, and 11% in Q2. Seems to me that RG is setting the bar a bit high for itself in aiming to achieve annual growth in the teens.
Have you been waiting on hold for this kind of conference call insight? Wait no more. In recent columns, we've reviewed calls from:
- .pdf specialist Adobe (NASDAQ:ADBE)
- Shipper FedEx (NYSE:FDX)
- Shoer Nike (NYSE:NKE)
- Retailers Circuit City (NYSE:CC) andBest Buy (NYSE:BBY) andPier 1 (NYSE:PIR)
FedEx, Best Buy, and Resources Global are Stock Advisor recommendations. To see what other companies David and Tom Gardner have recommended to investors since 2002, click here for a 30-day free trial.
Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that.
