GP Strategies Corporation
Q4 2017 Earnings Call Transcript

Published: 1 Mar 2018

[Operator:]

Good morning. My name is Chris and I will be your conference operator today for the GP Strategies Fourth Quarter 2017 Earnings Conference Call. All lines will be placed on mute, preventing any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Ann Blank, Director of Investor Relations. Please go ahead.

[Ann M. Blank:]

Thank you. Good morning and welcome to GP Strategies Fourth Quarter 2017 Earnings Call. On the call today are Scott Greenberg, Chief Executive Officer; Adam Stedham, President; and Mike Dugan, Chief Financial Officer. Before we begin, I would like to remind you that today's comments will include forward-looking statements which are subject to certain risks and uncertainties that could cause our actual results to be materially different from expectations. For a complete discussion of these risks, we encourage you to read our documents on file with the SEC, which are posted on the Investors section of our Web-site at gpstrategies.com. A replay of this call will also be available on our Web-site later today. At this time, I'd like to turn the call over to Scott.

[Scott N. Greenberg:]

Thank you, Ann. Good morning and welcome to our fourth quarter 2017 conference call. Today we will follow our usual quarterly format. To initiate the call, I'll provide a brief overview of the results of the fourth quarter of 2017. Then, Mike, our CFO, will present an in-depth financial analysis. Adam, our President, will then give key updates on our global initiatives. After Adam's presentation, I'll provide a financial summary, including an acquisition update. And then we'll conclude with a Q&A session. This morning before the market opened, GP Strategies announced revenue and earnings for the fourth quarter of 2017. Revenue increased to $131.5 million in the fourth quarter of 2017 from $127.3 million in the corresponding quarter in 2016. This revenue increase was due to growth in three of our four operating segments. We achieved these results despite the negative impact from the termination of a large foreign oil and gas product which impacted the current quarter revenue by approximately $1.3 million from expectations. While we are disappointed with this project, the revenue from this client represented less than 1% of our total revenue for the trailing 12 months. We achieved this record revenue in 2017, while concurrently undertaking some substantial initiatives that we believe will result in long-term growth and increased shareholder value. We are pleased to report that our master services agreement with our largest financial service customer has been extended for one year to July 2019. We are currently negotiating with the customer the terms of a multiyear agreement. We believe this is big news for the Company. We are proud of the value we have delivered and the trust and confidence we have received from this major financial institution. While we had restructuring costs, investment in a new ERP system, and a large unusual contract write-off in the oil and gas industry in 2017, the adjusted results and cash flow generated from operations clearly demonstrate our potential. In addition, with our renewed emphasis on acquisitions and our recently announced organizational and management team changes, we look forward to the future. The Company's adjusted EBITDA for the fourth quarter of 2017 was $11.6 million, and for the full year of 2017 was $47.1 million, compared to $44.2 million for 2016. These adjusted results of $47.1 million were complicated and included the add-back of the $4.4 million loss on the terminated oil and gas contract, approximately $4.9 million of investments in our new ERP system implementation, approximately $3.3 million of restructuring charges, and $6.3 million of non-cash stock compensation expense, which was offset by a gain in the change of fair value consideration of $1.6 million. The Company continues to finalize its cost reduction plan announced in December 2017. Over the last few months, the Company has undertaken various cost-cutting measures to enable to invest in key priorities and to reduce operating costs. When completed, the Company anticipates savings net of investments to be in excess of $4 million on an annual basis and we'll see the impact of these reductions predominantly in the second half of 2018. After some transitioning costs, these savings could approach $5 million on an annual basis in 2019. As part of this change, the Company will combine four segments into two. As far as share buyback, the Company repurchased approximately 182,000 for approximately $4.3 million in 2017 of GP Strategies stock in the open market. The buyback activity in the trailing 12 months have kept the shares fairly consistent on a fully diluted basis with approximately 16.9 million and 16.8 million shares outstanding for the years 2017 and 2016. It should be noted however that the Company has continued its buyback in the first quarter and has already purchased approximately 245,000 shares for approximately $5.8 million. I believe that clearly demonstrates the long-term goals of the Company and the support of the Company by buying back shares. In the fourth quarter, after an extensive process, the Company appointed Adam Stedham as President, succeeding Doug Sharp, who previously announced his intention to retire and is now President Emeritus. Additionally, Mike Dugan has been appointed Chief Financial Officer, succeeding Sharon Esposito-Mayer who has transitioned her role. The appointment of Adam reflects the focus on organic growth. Adam has demonstrated the ability to drive growth and performance in his various roles in GP Strategies, including international operations. Mike Dugan has been a high performer and has led our financial organization for many years. His promotion is well deserved. While I'm very excited about these new appointments, I'd like to thank Doug and Sharon for all their contributions in making GP Strategies successful and a leading company in the global training and performance improvement arena. In addition, in January 2018 the Company named Russell Becker as Chief Sales Officer. Russ will be responsible for developing strategic plans that promote sales growth, including establish a structure and more centralized business development capability that will align the Company's diverse market sector expertise with its service offerings. Russ joins GP Strategies with extensive leadership experience helping organizations establish the right organizational strategy and sales discipline to achieve their aggressive growth goals. The addition of Russ to our leadership team brings a wealth of knowledge and experience to enable us to build a world-class business development organization. I will now turn the call over to Mike for an in-depth financial review.

[Michael R. Dugan:]

Thanks, Scott, and good morning everyone. We reported fourth quarter revenue of $131.5 million, which represented a $4.2 million increase or 3% increase over the fourth quarter of 2016 revenue of $127.3 million. Revenue from acquisitions in Q4 was $2.7 million, or 2% of the overall 3% increase. Organic revenue growth was $1.5 million in the fourth quarter. Revenue in the Learning Solutions segment increased by $1.9 million or 3% over the fourth quarter of 2016. The acquisitions completed in 2017 that are in this segment, which are Emantras and YouTrain, contributed $1.2 million of revenue in the quarter. The remaining $700,000 of the revenue increase was due to a net increase in training content development and outsourcing services revenue. Professional & Technical Services revenue increased $700,000, or 2.8%. This increase was primarily due to a $2.1 million increase in energy, and engineering and technical services, offset by a net decrease of $1.4 million, primarily in alternative fuels and oil and gas services. Sandy's fourth quarter revenue of $25.4 million represented a $500,000 or a 2% decrease over the fourth quarter of 2016. This decrease was largely due to a $1 million decrease in magazine publications, offset by a $500,000 increase in automotive training services. We are projecting a total of $5.4 million of publication revenue in the first quarter of 2018, which compares to $5.5 million of publication revenue in the first quarter of 2017 and $5.9 million in the recently completed quarter. The Performance Readiness Solutions segment revenue increased by $2.2 million or 10% in the quarter. The acquisitions completed in 2017 that are in this segment, which are McKinney Rogers and CLS, contributed $1.5 million of revenue in the quarter. In addition, there was also a net $700,000 increase, primarily in technical training services. This segment recently successfully negotiated the renewal of one of their large contracts with a manufacturing client. Under the old contract terms, certain elements of costs like travel, shipping materials, were recognized as revenue with no margin. Under the new agreement, the client decided to take on these expenses internally. Going forward in 2018, the revenue run rate will be down by $5 million annually, but there should be no impact on gross margin. Full-year 2017 revenue was $509.2 million, which represents an $18.6 million or 4% increase over 2016 revenue of $490.6 million. Acquisitions made up $15.2 million or 3% of the revenue growth. Organic revenue growth was up $3.5 million or 1%. We continue to have strong recurring client base. Over 90% of our 2017 total revenue was derived from clients that existed in the prior year, and over 90% of our top 25 clients have used our services for five or more years. The automotive sector was our largest sector in 2017 and comprised 22% of revenue, which is consistent with 2016. The financial and insurance sector comprised 20% of 2017 revenue, down from 21% in 2016. We have a revenue concentration from a single financial services customer, which accounted for 14% of our 2017 revenue, and a revenue concentration with an automotive customer which comprised 13% of our 2017 revenue. Revenue earned from operations outside the United States represented 31% of revenue, which was consistent with 2016. Gross profit decreased in the fourth quarter by $300,000 or 1.5%. We received formal notification of termination of a contract with a foreign oil and gas client in November of 2017. In the fourth quarter, we incurred a pre-tax loss related to this contract of $1.8 million, or $0.06 per share. This loss was comprised of a $500,000 reduction to gross profit and a $1.3 million increase to bad debt expense related to the outstanding accounts receivable from this client. Aside from the gross profit decline due to the oil and gas contract, we had a net $200,000 increase in gross profit across all four reporting segments. No single reporting segment had a materially significant change in gross profit compared to Q4 of 2016. SG&A expense increased by $4.3 million in the quarter. The primary drivers are as follows; a net $1.7 million increase in SG&A due to ERP implementation costs or a $0.06 reduction to EPS. This was comprised of a $1.3 million increase due to incremental ERP system implementation cost in Q4, plus an additional $400,000 increase to SG&A resulting from internal labor and benefits charges to create ERP training and process documentation. In addition, there was a $1.4 million increase to SG&A bad debt expense, primarily relating to the accounts receivable on the terminated oil and gas contract just discussed. There was an $800,000 increase in SG&A labor and expenses over Q4 of 2016. And lastly, there was a $300,000 increase in SG&A primarily due to fees associated with the reorganization for talent searches for executives and Board member. We incurred restructuring charges of $3.3 million in the fourth quarter of 2017, consisting primarily of severance expense in connection with the organizational changes announced in December of 2017, which had a $0.12 reduction to EPS in the quarter. As a result of this restructuring, we anticipate to realize a net $4 million of savings on an annualized basis. This savings will start in Q1 and Q2, but the majority will be realized in Q3 and Q4, when compared to prior year results. In Q4 2017, we recognized a $1.3 million gain on a change in fair value of contingent consideration compared to a loss of $0.1 million in the fourth quarter of 2016. This nonrecurring item contributed a $0.07 increase to EPS in the quarter. Interest expense increased $1.1 million in the fourth quarter of 2017 due to a contingent interest expense accrual associated with unremitted VAT from invoices raised in the fourth quarter of 2017 related to undercharged VAT from prior year client billings. This nonrecurring item had a $0.04 reduction to EPS in the quarter. Other expense decreased by $400,000 in Q4 of 2017, primarily due to a decrease in foreign currency transaction losses compared to the fourth quarter of 2016. Income tax expense was $1.6 million or 128% effective income tax rate for the fourth quarter of 2017, compared to $1.7 million or a 20% effective income tax rate for the fourth quarter of 2016. On December 22, 2017, the Tax Cuts and Jobs Act was enacted, making significant changes to the U.S. Internal Revenue Code. As a result, we recorded an additional income tax expense of $3.2 million in the fourth quarter of 2017 to reflect the estimated effect of this U.S. tax reform on our income tax provision. This provisional income tax expense included a one-time transition tax of $4.6 million on the mandatory deemed repatriation of cumulative foreign earnings, which was offset by a $1.4 million income tax benefit related to the re-measurement of certain deferred tax assets and liabilities based on the lower tax rate at which they are expected to be realized. This additional income tax expense resulted in a decrease to diluted earnings per share of $0.19 in the fourth quarter. For the year, the 2017 tax rate was 34.5% compared to 32.6% in 2016. Our best estimate of our projected tax rate for 2018 is in the range of 24% to 26%. This projection does not include the income tax effect of certain elements of the new tax law, like global intangible low-taxed income or base erosion and anti-abuse tax, as we have not yet completed our analysis in these areas due to the complexity of these new tax rules. Net loss was $0.3 million or negative $0.02 per diluted share for the fourth quarter of 2017, compared to a net income of $6.7 million or $0.40 per diluted share for the fourth quarter of 2016. The special items previously discussed have the effect of reducing earnings by a total of $0.40 per share. Net income for fiscal year ended December 31, 2017 was $12.9 million or $0.76 diluted earnings per share, compared to $20.2 million or $1.21 diluted earnings per share in 2016. On January 1, 2018, we adopted the new revenue accounting standard. The primary impact of this new standard on GP Strategies is a change in revenue recognition on a small portion of our contracts from a percentage-of-completion method, where revenue was recognized over contract performance, to a point-in-time method where revenue is now recognized upon completion of our deliverables. While we don't believe the adoption of this accounting standard will materially impact our overall financial statements, the change in timing of revenue recognition on certain contracts could result in quarter to quarter fluctuations in revenue. For an ERP system update, we initiated our User Acceptance Testing at the end of January 2018 that continued into the first two weeks of February. During this testing, we experienced issues with data conversions and we were unable to complete full end-to-end testing of this system. Due to these issues, we can't be assured of a successful launch on April 1 and have decided to delay the go-live date. While we currently don't have an exact date for when we will take the system live, we expect it will be sometime in the second half of 2018. One added factor that we are considering as we look to target a new go-live date is the fact that the ERP vendor has a new version of their cloud software, R13, that GP would be required to upgrade to as early as October 1 if we were to go live prior to that on our current version of the software which is R13. We are in the process of assessing the trade-off associated with delaying the go-live a few months from when it would be possible to go live on R12, if it means that we can go live directly on R13 and avoid both the added expense of the upgrade and the business disruption of an R12 go-live and then within a matter of months an upgrade to R13. It is important to note that R13 is considered a major upgrade with significantly different functionality and end user interfaces. As this is a very recent development, we don't yet have a firm estimate on the cost impact associated with this delay. However, after preliminary discussions with our implementation partners, we would estimate that the additional ERP implementation cost will be somewhere in the range of $1.2 million to $1.6 million. This would be in addition to the $1.7 million that was previously projected for 2018, when we were targeting an April go-live date. Moving on to the balance sheet, our cash balances were $23.6 million at December 31, 2017, compared to $16.3 million on hand at the end of 2016. These cash balances were on deposit in jurisdictions outside of the U.S. In 2017, we spent $3.8 million on share repurchases, $5.1 million on contingent consideration payments for previously completed acquisitions, and $11.1 million on acquisitions completed in 2017. We generated $5.1 million of cash flow from operations in the fourth quarter of – and a total of $26.3 million of cash flow in 2017, compared to $18.1 million of cash provided from operations in 2016. 2017 fixed asset additions were $2.7 million, which is up $1.3 million from 2016. We generated free cash flow of $23.5 million in 2017, compared to $16.7 million in 2016. We had total borrowings and term loan debt outstanding of $65.7 million at December 31, 2017 and had $57 million of available borrowings under our revolving credit facility at the end of 2017. Finally, at the end of December 2017, backlog was $269 million, in comparison to $285 million at the end of December 2016 and $265 million at the end of Q3 of 2017. December 2017 backlog has been reduced by $26 million as a result of the termination of a contract with an international oil and gas customer. Approximately 95% of the backlog will be recognized as revenue within the next 12 months. At this time, I'll turn the call over to Adam.

[Adam H. Stedham:]

Thank you, Mike. We continue to be enthusiastic about the changes we are putting in place. I'm very pleased that our largest customers are reacting very positively to these changes. Over the last few months, we have undertaken various cost-cutting measures to enable us to invest in key priorities. These measures were enabled by reducing investments in less fruitful areas, combining organizations to reduce the overhead cost, and restructuring our global G&A support model. We anticipate the rest of this year we'll continue to focus on aligning our costs to our priorities. All of our costs, investment cost cuts, investment and restructuring efforts, are designed to support our top five strategic priorities. These priorities are, developing a culture of sales growth, creating M&A value, deepening our service line and industry expertise, building a culture of continuous improvement, and establishing high-performing teams. We have leaders focused on each of these five priorities. The creation of our Chief Sales Officer role and hiring of Russ Becker into that role has been a very positive shift for GP Strategies. The role not only supports our culture of sales growth but it also strengthens our priority on creating M&A value. Our ability to cross-sell between our existing operations and new acquisitions is a key component of creating value through those acquisitions. The combination of a more structured sales process and our efforts to deepen our service line and industry expertise are critical to driving revenue growth and increasing our operating margins. Combining these efforts with the high-performing teams model and the continuous improvement efforts enables our implementation plan and our plans for improving the overall margins. The demand associated with renewing our large long-term managed learning service contract, implementing a more efficient and effective ERP system, and establishing a structured sales process are very significant, but these efforts lay the foundation for significant growth for GP Strategies. We're facing challenges in some aspects of the business but other areas are revealing significant opportunities. Our U.K. business is still adapting to some changes to the U.K. government funding model for job skills training, which requires us to shift our customer engagement model. These changes had impacted our margins during the quarter and will likely continue to impact the operating unit for the first half of 2018, but they should have no long-term impact on our business. Within our U.S. operations, we are encouraged by the prospect of our customers evaluating various capital projects. Historically, these projects typically involve investments in many of GP Strategies services. We continue to see significant long-term opportunities in Asia Pacific. We are particularly focused on expanding the value we bring to our automotive and banking industry customers in that region. Overall, I am confident we are on track. We have the right plans in place. Our highly fragmented industry provides us the opportunity to achieve exciting growth through a combination of acquisitions and organic growth strategies. We are experiencing significant activity related to opportunities in both of those areas. So, at this point I'll turn the call back over to Scott.

[Scott N. Greenberg:]

Thank you, Adam, and thank you, Mike, and congratulations on your first call. I hope it's start of many good ones. When you look at our business, and Adam mentioned acquisitions, the Company was highly acquisitive from 2009 to 2014 when we were able to more than double our business, both by organic growth and by acquisitions. When we won a large financial service contract, we took a hiatus on making acquisitions so we could get that contract right and open up our offices all over the world. In 2017, we announced we were resuming our acquisition strategy and we made some nice niche acquisitions during the year. Going into 2018, and you look at our results, we were able to generate $26.3 million of cash flow from operations, and that's after paying for some of the one-time items like a loss on the contract and some of the restructuring items as well. So, our cash flow was really strong in 2017. Based upon that, we'll go into 2018 with acquisitions as a priority again. Our target for acquisitions is at least a 10% run rate acquisitions by year-end in revenue. So, if you look at our revenue in 2017 of $509 million, we would hope to run rate basis get over $50 million in acquisitions during the year. We started the year with our first closing right in the month of January, where we bought Hula Consulting. Hula did about $7 million in revenue and they are involved in our human capital component of SAP SuccessFactors work, and we are glad to have them onboard. We are currently working on a transaction in both the pharmaceutical and the automotive space and we'll update the Board at the next call, at the next quarter on where we stand on those. Other key acquisitions that we are looking at would include leadership, sales training, and expanding our global reach, particularly in Asia Pac. So, acquisitions will be a key part of the results and the improvement in 2017, consistent with what Adam was stating. Before I turn it over for questions, I would like to say, this is our season where we have a lot of our investor conferences. All three firms that do research coverage on GP Strategies, ROTH Capital, B. Riley, and Barrington Research, all have their conferences within the next three-month period, and Adam and Mike will be accompanying me so the investors and the analysts could meet them, and I'm sure you'll be impressed once you meet with them. With that being said, thanks for joining on the call. And moderator, I'd now like to turn it over to the Q&A session.

[Operator:]

[Operator Instructions] Our first question comes from the line of Alex Paris with Barrington Research. Please go ahead.

[Alexander Paris:]

So, I got a few questions. Obviously this was a noisy quarter. We knew it was going to be noisy based on comments made on the last quarter. I'm assuming now they are going to be pretty clean in 2018, other than that you got to carry at least a couple of million dollars more of ERP implementation costs. Is that correct?

[Scott N. Greenberg:]

That is correct, Alex. When we came out with our statement though, you will see that in Q4 there was about $400,000 of transitional cost that we did not add back to our pro forma results. There will be some transitional cost predominantly in the first half of the year, but those are the type of dollars you are dealing with. We will be talking about major items that we anticipate other than the ongoing system implementation. And the only other thing, again, while we achieved most of it, there will be some restructuring in Q1 as well. So, I think once you are done with Q1, it will be pretty clean, but nowhere near the level of the Q4 restructuring charge.

[Alexander Paris:]

Okay. So, I was anticipating based on your guidance $1.5 million or so of ERP implementation cost in the first quarter. And you now say, in addition to that, it might be another $1.2 million to $1.6 million. And in fact the real number that you gave was $1.7 million, I carry $1.5 million. But how does that roll in? Do we get $1.5 million-plus or so of expense in the first quarter and then the balance is heavily Q2 weighted?

[Michael R. Dugan:]

Yes. So, you got to realize it's a very new development and it's a preliminary number, but I would say it's rolling in $1.3 million, $1.4 million in Q4, and then – just a second, let me just pull my sheet here – let's see, around $700,000 in Q2, another $800,000 in Q3. And these are very preliminary numbers. We haven't finalized it. We are just talking to our implementation partner there. We also have to look at expenses that can be capitalized that if we are dealing with creating on-prem tools that allow us to capitalize in this environment, whereas the software capitalization and the cloud environment is not.

[Scott N. Greenberg:]

But roughly, if you had to throw in a number, let's say somewhere in the neighborhood of $1.6 million you have for Q1 and then $700,000 in Q2 and $700,000 in Q3, would probably be of that shot of that $3 million now, roughly now.

[Alexander Paris:]

Okay. And then I noticed there continues to be a $3.7 million receivable from the – is this from the Kuwaiti client or is this something else?

[Scott N. Greenberg:]

Yes. As we mentioned on the call or as we mentioned in our press release, we have billed that client when the contract was terminated over $10 million. We evaluated it internally, we evaluated with our auditors, we got outside legal advice, and it was determined to leave on approximately $3.7 million of that receivable on our books, which represents less than 40% of the amount of our claim.

[Alexander Paris:]

Okay. But because they continue to be on your balance sheet, there must be a reasonable level of confidence that you will collect on that?

[Scott N. Greenberg:]

That's I mean the reasonable level that we are going to at least collect that 40% of what we billed the customer. We obviously think we are entitled to 100%. So we are not saying we are not entitled to the rest. But when we evaluated the receivable, we left it on our books for a little less than 40%.

[Alexander Paris:]

Got you. And then a question on the large financial services contract extension that you announced this morning, is that the way it typically goes? And first of all, how does that process go? Is there a RFP out there that GP had to rebid on, and I guess that's my first question?

[Scott N. Greenberg:]

The way it will work when you're dealing with very large contracts to the size of large companies, a lot of companies have a process that requires them to put out the bid every five years. So in this case, we were hitting our five-year in July of this year. We've been working on this rebid for quite some time, and just recently in the last week or two we finalized an extension for a year, which takes us to July of 2019. But this extension is really done so we could immediately start working on a new long-term agreement. We would obviously hope to have the new agreement in place in a much faster time period, but in order to be conservative, the bank wanted to have this one year extension.

[Alexander Paris:]

And then it'd be reasonable to assume a duration of the long-term contract similar to the last one, you've talked to three years plus?

[Scott N. Greenberg:]

Hopefully correct, yes. So that's big development for us because it represents 12% to 14% of our revenue, depending on which quarter you look at.

[Alexander Paris:]

Good. So, the important is, as you've won the contract, step one is to extend it for a year, but step two is to negotiate the terms on a longer-term contract?

[Scott N. Greenberg:]

Yes and we're pretty excited about that. So it's good news.

[Alexander Paris:]

Good relief. So, I want to ask you one or two more questions and I'll go back into the queue. I guess they are little questions. Just starting in Q1, you are going to report in the two business segments rather than the four business segments.

[Scott N. Greenberg:]

That's correct.

[Alexander Paris:]

So, will an 8-K be filed with some historical information? And if that's not part of the plan, I urge you to do that that we can get historical segments for the quarters of 2017 and maybe a couple of years of annual data. Is that what you are planning on doing?

[Michael R. Dugan:]

Yes, Alex, we should be able to do that. I've already been working on the restatement back three years and more. So, that way you will have that data.

[Alexander Paris:]

Yes, that would be helpful, because it's not simply – it's not as simple as putting two of the segments together and then two of the other segments together. There is a little bit of other stuff involved there, okay.

[Michael R. Dugan:]

Correct, yes.

[Alexander Paris:]

And then, let's see, lastly, organic growth, what was organic growth in the full-year 2017? Was it what you referred to, $3.5 million year-over-year?

[Michael R. Dugan:]

Yes.

[Alexander Paris:]

Okay. So, roughly 1% was organic growth in 2017 then?

[Michael R. Dugan:]

That's correct.

[Alexander Paris:]

So now with all this focus on sales organization, you got from $0 to $500 million without a formal sales effort. To get from $500 million to $1 billion we have this sales initiative now. So I would assume then we are going to get back into that historical range of 6% to 8% at some point? I don't know if you'll get there this year but is it reasonable to assume an accelerating organic growth rate throughout the quarters of 2018?

[Scott N. Greenberg:]

We are obviously disappointed with our levels of organic growth. We have always said that long-term organic growth we would like it above 6%. I think based upon this year it is more of a transition, so we have to see where we are going. Back I do believe it should ramp up and that is the long-term objective, and it's part of our objective for the next five year period. So you are 100% correct.

[Alexander Paris:]

Okay, good. So accelerating organic growth, and then based on your prepared comments, an accelerating pace of acquisition, I think you made acquisitions in 2017 with run rate revenue of $30 million-ish, and now you are talking about this year being more like $50 million run rate.

[Scott N. Greenberg:]

That's correct. I think the $30 million might have included the one we did in January. I'd have to go back, but that's correct.

[Alexander Paris:]

Okay, good. Thank you very much for that additional information. That's it for me for now.

[Operator:]

Our next question comes from the line of Jeff Martin with ROTH Capital Partners. Please go ahead.

[Jeff Martin:]

I was wondering if you could outline the high-level strategy. You are specifically going after business development strategically. How the sales process should evolve and how you see that differing over the next several years versus what you have done historically?

[Scott N. Greenberg:]

Sure, no problem. Really the sale strategy right now consist of three components. We are simply referring to them simplistically as find-win-grow for the common terminology within the organization. So, historically our account management strategy, which is the grow component of this, has really been contingent upon the thought process, 'if you execute flawlessly, it will grow'. And we've done a really good job of flawless execution and executing at a very low error rate, high quality, we are known for that. But it hasn't materialized into account growth. So we are putting together a deliberate account management strategy to say that not only do we need to continue to execute on a flawless basis, but those operational-minded individuals need to be supported by account managers who are looking at a growth mindset. But year-over-year the expectation is that if we are delivering value to the customer this year, we should be able to deliver more value to the customer next year. So that's the growth component. On the 'find' component, we have never really had a demand generation function, demand generation being outbound sales, folks trying to really uncover possible leads for us and initiate meetings. So, we are setting up a demand generation function. Russ is working on that plan right now. We are getting that put in place to give us more opportunities. So, we are really focusing on the 'find' component. As for the 'win', we actually have a very good close rate. One of the reasons we have been able to get to the size that we are without having a rationalized sales process is because we are very good at winning the work. So, I would say we are focusing less effort on the 'win' component, because historically we have achieved higher results or high percentages of wins and we are more focused on, let's find more opportunities so we can win them. And then for the customers we have, it's not enough just to flawlessly execute, we actually need to have a growth strategy. So we are putting in together – put together account management plans for that. Does that answer your question?

[Jeff Martin:]

Yes, that's helpful. I think also help in understanding how internally you are going to alter the structure, if you are setting up business development teams by industry, by sector, and how those teams are structured? And what the reaction is internally to this?

[Scott N. Greenberg:]

So, this year is a transitional year. We will fully transition into this model going into next year. But you are spot on. Really what we are looking for is our operations are going to be centered around service lines and different services we provide across multiple industries, multiple geographies. Our business development is primarily going to be focused on market sectors and geographies. So, in other words, if we take something like content development, which is a service line, so we have people who have expertise in running and effectively executing a content development organization. Our business development is going to be focused on industries and geographies, so that when we are talking to a customer in life sciences versus a customer in bank, we are able to help them conceptualize how our service line is directly applicable to their industry. And then if we are working in Asia versus Europe versus North America versus South America, we're able to once again explain to the customer how our service line capabilities are directly applicable to their region. So the matrix is going to fit along those lines. I would say, so far the organization is reacting to this in a very exciting manner. I mean it's been a long debate for us, the concept of should we be a market sector or an industry organization or should we be a service line organization, and this matrix model is allowing people to naturally follow their passion and accomplish both of those two things simultaneously.

[Jeff Martin:]

Okay, great. And then my last question is for Scott. On the pharmaceutical sector, six months ago that was – or maybe going back a little further than that, that was a major initiative, that was an industry you were very, very excited about thinking you can grow it similarly to the buildout of financial services. I was just curious if you could give us an update there? I know it's been a little bit slower start than expected, but wanted to know your current view on it.

[Scott N. Greenberg:]

So, when I talked about our acquisition strategy, one of the areas I did mention earlier today was pharmaceutical. So it is still a major initiative in the Company. I can break it out into two-fold. One is the large pharmaceutical award or a potential award that we announced, and that's been going much slower than anticipated. We are still working on it, but the rollout has been slower. So we are still expecting that to be a multi-million dollar account and a good account to GP but potentially not as large as originally expected. But we are winning a lot of work with other pharmaceutical companies as well in leadership and content development. So I still believe it's a major initiative of the Company and we'll pursue, but the large one that we won or a potential large one we won has been going slower than anticipated and it's probably smaller than we originally anticipated as well. But that should not diminish our feeling about the potential in the industry and what we are going to do.

[Jeff Martin:]

Okay, that's helpful. Thank you.

[Operator:]

Our next question comes from the line of Kevin Liu with B. Riley FBR. Please go ahead.

[Kevin Liu:]

Just one quick follow-up question on the HSBC extension, is there any change in terms of the scope of work that you are doing or the margin profile for this one-year extension, and then would you anticipate anything to change as you kind of negotiate the multi-year agreement?

[Scott N. Greenberg:]

Right now the one-year extension is pretty much as is for the main part. So, through July of 2019 we expect to have limited amount of changes. We will be working on a new agreement with them, and so there will be a negotiation between the Company and the financial institution and there might be some slight changes, but nothing at this stage that we know of that would materially impact the work we are doing for them.

[Kevin Liu:]

Okay. And then, Adam, I think you mentioned that there has been some changes on the job skills council side. Can you talk about some of those changes, how that impacted the business maybe in kind of the fourth quarter of 2017 and how you see that moving forward?

[Adam H. Stedham:]

Yes. Right now, Kevin, if you look at the Skills Funding job skills, they've changed their approach and that approach change came in April of last year, where the companies have to pay, small companies have to pay 10% of the fee, where before it was free, and large companies pay a tax and they get a voucher which they are able to use. So, at the beginning of the year, last year, we were under the old system, but through April and December we were under the new system. And I think it's a little too early to tell, but the first quarter probably – or the fourth quarter – but we have the breakout of this corresponding revenue in Q4 – we'll give you Q4 fourth quarter-to-fourth quarter. The fourth quarter-to-fourth quarter, when we talked about it, it was relatively – if you look at it, it was actually relatively maybe down by a few hundred thousand, but we made an acquisition that we didn't have in the prior year, which will also pertain to the first quarter of this year. If you are looking at the core business quarter-to-quarter, fourth quarter-to-fourth quarter, without the acquisition, it was down about $600,000.

[Kevin Liu:]

Got it. And I'm not sure if this is tied into kind of the job skills side, but just looking at the gross margin profile for Learning Solutions in the fourth quarter, and I know it was I think kind of the lowest levels for the whole year despite revenues being up, curious if there was anything within the cost side to call out there?

[Scott N. Greenberg:]

No, we always think it probably has somewhat to do with as we reorganize the job skills. A lot of the cost was fixed in the fourth quarter and probably a significant amount of that $600,000 change went to the margin.

[Kevin Liu:]

Got it. All right, it's helpful. So, beyond that as we kind of think about organic growth for this year, you talked a little bit about $5 million impact on Performance Readiness that doesn't really touch the margins. Just wondering if there is anything else on the revenue side that we should be aware of that might be kind of a headwind to organic growth this year?

[Scott N. Greenberg:]

I think we tried disclosing all the items that we know of. Just a little bit of a summary is, in the first six months of the last year we had the oil and gas contract, which we didn't have this year. Mike mentioned one contract that doesn't impact our margin, but there is a revenue change as well. So, I think we talked about the major items as we know of. There could be quarterly fluctuations, as Mike discussed as well, but as far as the full year, we don't know of any other major items at this point.

[Kevin Liu:]

Got it. And just lastly for me, as you have made some of these organizational changes, has there been any sort of impact on the pipeline of work that you had kind of going into Q4 before all the changes were made?

[Scott N. Greenberg:]

I actually think that if you look at it, we've had a lot of organizational meetings, a lot of work done. We used our own firm, McKinney Rogers, to develop higher achievers to meet to develop the plan, and I think if anything, the type of meetings we had has spurred on more cross-selling abilities, more ability to do work in the global organization that we actually had before. So, right now we are working on – again, we usually don't like commenting until later on, but we are working on a few larger opportunities in the pipeline. We are working on a license agreement that could bring in new products. Adam and Mike talked about the backlog, the backlog being up if you excluded the work from the Korean contract. So, again, I think if anything, we strengthened our ability and pipeline by the changes that were made.

[Michael R. Dugan:]

Just a correction, of the oil and gas contract, not the Korean contract.

[Scott N. Greenberg:]

Yes, same. We discussed the results. I mean Kuwaiti contract, sorry.

[Kevin Liu:]

All right, sounds good. Thanks for taking the questions and good luck in 2018.

[Operator:]

There are no further questions on the phone lines at this time.

[Scott N. Greenberg:]

Thank you, moderator. Thanks for joining us on the call. We'll see a lot of you in the upcoming conferences with the new team in place and we really look forward to the future. So thanks for joining us.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.