The high cost of Sarbanes-Oxley (SOX) compliance is causing a lot of frustration in the business world, but not at Resources Connection (NASDAQ:RECN). SOX compliance is one of the professional-services firm's areas of expertise.
Resources Connection has more than 3,000 employees in over 60 offices around the world. Its consultants are well-versed in areas such as financial reporting, budgeting/forecasting, Securities and Exchange Commission reports, and internal audits, and the company offers services for due diligence and integration for M&A transactions. It's even developed its own Web-based solutions, such as policyIQ, which helps clients manage compliance programs. Thanks in part to SOX, the company is growing quickly as it picks up more customers.
Even so, there are signs that its growth may be ebbing. In an earnings report released yesterday, the company announced that revenues for its third quarter of fiscal 2005 increased 54% to $135.2 million year-over-year. Net income increased from $5.8 million, or $0.12 per diluted share, to $13.2 million, or $0.26 per diluted share. In comparison, revenues increased 75% to $387.6 million over the past nine months. The relative slowdown of late might well be a blip on the radar screen, but it could also be a sign of some legitimate changes in its business.
That SOX has made Resources Connection better known is something of a vice and virtue, since it's uncertain whether clients will need the company's services when they reach the level of compliance that regulatory authorities require. So far this year, the company has landed 21 new Fortune 500 clients. Moreover, in the past year, it had 80 clients with $1 million or more in revenues, up from 28 in the same period a year ago.
Such clients should lead to new types of business. The recent uptick in M&A activity -- Sprint's (NYSE:FON) deal with Nextel (NASDAQ:NXTL) and Procter & Gamble's acquisition of (NYSE:PG) Gillette (NYSE:G) being two recent blockbusters -- will create a need for integration services, and that's where Resources Connection can make its mark.
But can M&A provide the sort of explosive growth seen in previous quarters? It seems unlikely. The company's long-term prospects hinge on its own ability to consult -- and the more effective it is, the less help consulting clients will need in the future, at least in the case of SOX and other issues similar in scope.
Fool contributor Tom Taulli does not own shares of any companies mentioned in this article.
