Volt Information Sciences, Inc.
Q2 2021 Earnings Call Transcript

Published: 15 Jun 2021

[Operator:]

Greetings and welcome to the Volt Information Sciences, Inc. second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Noyons with Investor Relations. Thank you Joe. You may begin.

[Joe Noyons:]

Thank you Paul and good afternoon everyone. Thank you for joining us today for Volt Information Sciences second quarter fiscal year 2021 earnings conference call. On the call today are Linda Perneau, President and Chief Executive Officer and Herb Mueller, Senior Vice President and Chief Financial Officer.

[Linda Perneau:]

Thank you Joe and welcome everyone to today's call. We are pleased to report continued momentum in fiscal Q2 despite the first seven weeks of operations in the prior-year quarter being pre-COVID and the weather related impacts in February of this year, especially across Texas and Tennessee. Thanks to a combination of new wins and expansion within existing customers, we recorded our strongest quarterly revenue growth in a decade. Gross margin improved primarily due to the continued performance of our retail branch network and accelerated results within our direct hire segment. We also successfully maintained our cost discipline within SG&A. In all, we reported positive GAAP net income for the first time in 14 quarters. Our performance in the second quarter provides further evidence that the strategy and investments we have made over the prior 18 to 24 months are working. We made significant progress on our path to profitability. Over the past 15 months, the pandemic has and continues to present a number of challenges for our business, yet our teams have persevered and have found ways to overcome adversity and emerge as a stronger organization overall.

[Herb Mueller:]

Thank you Linda. Revenue for the second quarter of 2021 on a GAAP basis was $221.1 million compared to $207.3 million in the prior year comparable quarter, a $14.8 million or 7.1% increase. After adjusting for favorable currency translations, overall company revenue increased $12.4 million or 5.9% due to continued improvement in our North American staffing and international segments. During Q2 2021, our domestic and international direct hire line of business continued to show improvement. For the quarter, we were up 37% from the prior year and up 27% sequentially from Q1 2021. Looking at Q2 2021 adjusted revenue for each segment. Our North American staffing segment reported adjusted revenue of $184.3 million, an increase of 6.3% from the prior year. Adjusted revenue for our international staffing segment was $27.9 million up $4.3 million from the prior year. And our North American MSP segment reported adjusted revenue of $9.8 million, a slight increase from the prior year. Our North American staffing segment posted positive year-over-year revenue growth for the second consecutive quarter. The 6.3% increase is primarily attributable to new business wins and a combination of retail and mid-market clients combined with the expansion of business within existing clients. Direct hire revenue increased 37.4% year-over-year and exceeded second quarter 2019 by 7.5%. Our international staffing segment increased $3.6 million or 14.7%, primarily due to increased managed service business, headcount improvement in branch and increased direct hire revenue partially offset by results within our U. K. staffing business. Revenue in our North American MSP segment was slightly higher versus the prior year. Increased demand in our payroll service business was partially offset by declines in managed service revenue. Gross margin for Q2 2021 was 16.4% compared to 15.6% in the prior year comparable quarter, primarily due to improved margins in our North American staffing and international segments. Our North American staffing segment increased 100 basis points due to a mix of higher margin business, lower employee related cost and a 70 basis point benefit from government wage subsidies. Our international segment increased 210 basis points due to a shift away from the lower margin business and an increase in direct hire business. North American MSP decreased 380 basis points, primarily due to business mix.

[Linda Perneau:]

Thank you Herb. The performance of our North American staffing segment continues to lead the way. Our strategic initiatives are showing progress and becoming increasingly impactful. We maintained our momentum coming out of first quarter with new logo wins, recovery of some existing customers and expansion within others. Across the organization, we have fallen into a nice rhythm of work model. Some colleagues are working full time, either in an office or onsite at the client's location. A portion of our branches are working on a hybrid model, three days in and two days remote. And the remainder continue to work remotely on a full-time basis. Revenue from retail for our branch network grew over three times the rate of our enterprise clients during the quarter, the first time this has occurred since we implemented the model in 2019. We made headcount investments in several branches throughout the country and have held three retail bootcamps already this calendar year. Retail continues to represent approximately 20% of revenue on a higher overall base this quarter. Our direct hire discipline continues to mature and produce strong results, surpassing pre-COVID levels as well as same quarter results in 2019 and 2018. We are seeing direct hire revenue from every region across the country with every branch having generated fees during fiscal Q2. As this discipline is a critical component of our gross margin improvement strategy, we have a multi-pronged approach and intend to continue to invest in this area to capitalize on current market conditions and fuel ongoing growth. During Q2 specifically, we hired a tenured industry veteran as our National Director of Professional Search. He brings over 30 years of professional search experience including several decades as the Head of Direct Hire for a global professional staffing organization. His charter is to expand our executive search capabilities across the disciplines of accounting and finance, HR, IT and engineering. The fees in this discipline for the scope of the roles we will pursue are typically four to five times higher than fees on general staffing disciplines.

[Operator:]

. Our first question comes from Josh Vogel with Sidoti & Company. Please proceed with your question.

[Josh Vogel:]

Thank you. Good afternoon, Linda and Herb. Hope you both are doing well.

[Herb Mueller:]

Yes.

[Josh Vogel:]

Great. So my first question, obviously the big theme remains around the lack of workers or the supply constraints, especially more on the blue collar side. You gave some good insights there. I am still curious though. When I think about the North American staffing business, can you talk about how much of the client base you would classify as facing challenges with finding available talent? And maybe just a little bit more detail which specific end markets are the toughest for you to find the workers? Thank you.

[Linda Perneau:]

Yes. So I will take that one, Herb. I have not heard about a client yet that isn't experiencing challenges in identifying talent. It is pervasive across the board, irregardless of skill set, irregardless of location across the country, this is a dynamic that we have not seen. It's a different dynamic than what occurred when the pandemic initially started. And it is the one that certainly is posing a number of challenges particularly, as I mentioned, in the low wage roles. We generally are having a more significant challenge in those roles. And the reason really is because what individuals are getting between the supplemental unemployment as well as stimulus generally exceed the wages that they were making in some of those roles, in a lot of those roles. So in many areas, we have been working very closely with our clients to address this. We have had clients that have increased pay rates to the extent that they are able. There is a glass ceiling to where they start butting up against their own internal employees' pay and that starts to present a challenge. We have had clients that have looked at specific bonuses, other types of benefits that they can provide, flexibility in shifts. So we certainly have been very fortunate that we got a portfolio of clients that understand the challenge and are addressing it to the extent that they can. We are optimistic that we will start to see some relief here as we start to see some of the states opt out which started this week. So we are expecting that that will hopefully provide some relief as we continue to move through the remainder of the calendar year.

[Josh Vogel:]

That was really helpful. Thank you. And some of your commentary leads into my next question thinking about wages. And I was just wondering, when I think about wage in general bill pay spread trends, can you just give us some commentary there? and I wanted to get a better understanding of the dynamic today where wages are seemingly going to go up potentially to entice workers to come back. So would that compress the bill pay spread early on for you but ultimately benefit you longer term on the pricing side? How does that work?

[Linda Perneau:]

Yes. Typically, when we increase wages, it is done obviously either through a state increase, right, in a wage base and we pass along the commensurate bill rate. As we have been working over the past 15 months, we have been extremely proactively working with clients to increase wages. And we have passed along the commensurate bill rate. So that is generally how it works. Are there situations where we work with our client and it might not be 100% of the commensurate bill rate? Yes. That is really an exception, not the rule.

[Josh Vogel:]

Okay. Great. And shifting gears a little bit, always a great job on the SG&A line. And Herb give some guidance around Q3. I guess looking out, maybe late this year and certainly as we get into next year, how should I be thinking about investment as we think about whether it's (ph) capability, new service offerings or headcount? How should we think about the level of SG&A spend longer term for anywhere from like three to 15 months out?

[Herb Mueller:]

Right. And as you saw in my guidance, I am upping the number a little bit from what we have had in the last couple of quarters. And as we look to invest in the business, both with the direct hire that we talked about and then as well as in our sales functions are going to be very important and then technology as well. We are expecting to start easing back into that. We have really cut back on that over the last 12 months or so. And we have got some opportunity to ease that up a little bit. So that's why you will see the guidance that we are giving there as a little bit higher. But really, beyond that we expect to be able to maintain those levels longer term. We are really committed to continuing to find additional opportunities for savings as we move into next year.

[Josh Vogel:]

Okay. Great. And I was curious, what's the average size you are seeing today of a new engagement with a retailer or mid-market client versus prior to the pandemic, whether it's in headcount or annualized revenue dollars? I am just curious how that's been trending?

[Linda Perneau:]

Yes. So we continue to kind of look at our buckets in three different ways. Generally, when we say something is retail or in our branch network, we look at something that's $1 million in annualized spend or less. Again, on average mid-market clients are generally over $1 million to potentially $8 million or $9 million. Generally, we sit onsite. And then our large clients are over that $9 million mark and could have one or many locations across the country. So that's really how we look at it. It's how we think about it when we sell it. It's how we think about it when we solution design the delivery model. And we really haven't seen much change from that throughout the pandemic.

[Josh Vogel:]

Okay. Great. And just one last one here. Given the unfortunate situation in India, my thoughts and prayers go out to everyone over there. I was just curious, has it affected Arctern at all on your operating and maintaining back office functions over there?

[Herb Mueller:]

Yes. Great question. We could not be more proud of the job that our Arctern team did. We had about a month ago when COVID was at its peak there on the second flare up, we had a significant impact on our team. We were scrambling to have contingency plans. In fact, we worried was to get worse. And these people, at great personal sacrifice, stepped up and pulled together and we have got to combined some teams in some cases, people took on new roles to get us through and just really scrambled to make it work. So we really got through this pretty much unaffected. We of course are doing our billing over there. We are doing your collections and all that. We were able to still hit our metrics. So it was just really a testament to the resiliency that that team has. And again, Linda indicated and I will back it up, we could not be more proud because some of these people had losses in their immediate family and it was just a devastating impact there. But they rallied through it and pulled each other up. So I think things are rebounding over there, getting a little bit better. We had actually started a program where we were paying for the vaccines for our team as well. Now the government has stepped in here to do that. So again, it's just been really impressive what they have done there.

[Linda Perneau:]

Yes. Really remarkable.

[Josh Vogel:]

Yes. And hoping for a speedy recovery for everyone over there. Well, thanks for taking my questions and impressive results. Looking forward to see how the rest of the year plays out.

[Herb Mueller:]

Thanks Josh.

[Linda Perneau:]

Thanks Josh.

[Operator:]

Thank you. Our next question comes from Mike Hughes with SGF Capital. Please proceed with your question.

[Mike Hughes:]

Good afternoon. Thanks for taking my questions. First one, can you just repeat your revenue expectations for the July quarter please?

[Herb Mueller:]

Yes. We expect them to be up about 12% to 15% from a year ago.

[Mike Hughes:]

Okay. So that would imply about a roughly 4.5% sequential decline and I think there are two fewer days in the current quarter versus the April quarter.

[Herb Mueller:]

That's correct. There are. So it's staying fairly close in the top end on the revenue per day. But then you also have, with those days, with those holidays, it's beyond just a one day impact because you typically associate getting into like Fourth of July holiday you have people not just taking the one day off but they take both the Friday and the Monday after for the weekend. So you run into that. Same thing with your Memorial Day. So it's a little bigger than a two day impact when you have those holidays.

[Linda Perneau:]

And I will just jump in, Mike. Know you mentioned that it does imply a 4% decline. The reality is that, it's very hard to look at it in that very literal way that I think you might be looking at it. So if you think about our COVID impact last year versus our COVID impact this year, because we continue to have COVID impacts. And what I mean by that is, we have clients that have not recovered. We have clients that have recovered and are doing a little better. And then others that, like I said, that aren't. Our COVID related impact this year in Q2 worsened by $7 million when compared to last year. Now keep in mind, seven weeks of Q2 last year were pre-COVID but what the punch line of that is, is that the overall growth that occurred this quarter came from the combination of existing customers' recovery, customer expansion and new business wins. So these factors actually exceeded the negative COVID impact. So our underlying business is actually growing quite significantly.

[Mike Hughes:]

Okay. So just turning to the labor challenges that you and your clients and everyone faces. Just thinking, month-by-month, did the fill rates kind of stay the same throughout the quarter? Or did they actually become more challenging?

[Linda Perneau:]

Yes. So certainly fill rates became more challenging. Fill rates is a bit of a, while it is a metric that we look at there are so many different factors that go into fill rate, particularly when you are doing business, MSP business, other business with programs where there is a software tool that is handling all of the aspect of that. So the fill rate can get a little funky. What I can tell you is that, year-to-date, despite the candidate challenges, our placements are up 25% for the year-to-date number versus prior year. So we have managed despite candidate challenges to drive a higher placement, more placement, higher placement through leveraging technology, becoming more efficient, more effective and overall have seen year-to-date driven revenue, year-to-date placement with less headcount.

[Mike Hughes:]

Okay. I think part of the bridge to the 3% goal is pricing. So it sounds like your key performance indicators continue to improve. So that would mean that you are still on track to maybe garner better pricing on a go-forward basis. Is that fair?

[Herb Mueller:]

Yes. I definitely think so. We are turning that way, really heavily focused on it. And again, the other key KPIs involve the direct hire and our retail performance which are both up year-over-year despite a tough labor market.

[Mike Hughes:]

Okay. And then just two more questions. Not to beat a dead horse here but I think about roughly 5% of your revenue comes from Texas. They are rolling back the extra $300 a week on June 26. So one would think that people in Texas receiving that would be looking for work now. So have you seen any change of behavior in the state of Texas or any other states that have rolled back.? Have you actually started to see that yet?

[Herb Mueller:]

Yes. A couple of things there. One, overall, of those 25 states that have announced rollback, the rollbacks really just started June 15. So nothing direct from that. And then also, July 15 is the latter date for that. But they lose 25 states represent 22% of our overall revenue. So it's not going to have a huge effect. But it is a positive impact. But then the other part of it is, how well do the states enforce people having to go out and look for work. So it's one thing the $300 is part of it. The other part is, all right, there's jobs that are available. Are you looking? Are the states holding the people accountable? But the short answer to your answers, from my standpoint I don't think I have seen a significant impact yet. But Linda, I don't know if you are starting to see anything or from the field people are starting to feel like it's getting better. But I haven't seen it measurable?

[Linda Perneau:]

Yes. It's hard to pinpoint like where exactly or why exactly it's happening in certain areas. We, very proactively, started to reach out to candidates that had previously turned down roles. We put together a whole presentation and talking points so folks can have a conversation, encouraging and inspiring folks to get out ahead of this and begin to look for work and go to work before the benefits expired. Over the last couple of weeks, anecdotally, I hear different things from my field teams that, look, things seem to be a little better. I am hearing that in Arizona. We are starting to get more candidates. I am hearing that we have done a couple of job there for various clients. And a month ago when 50 people would registered and two would show up, we are now getting the full number of applicants that are registering actually showing up. So again slight changes, nothing that I think is going to materially move the needle yet. But I do think it's promising.

[Mike Hughes:]

Okay. And is there any way to think about how much the labor shortages are holding back the revenue potential in the current quarter?

[Herb Mueller:]

Yes. I think it's a key factor. I mean that's our concern because again our order activity is extremely high. We are very happy with that. The opportunity is there. It's just a matter of how fast we can fill it. So to the extent that the labor market improves for us, I think we can definitely, you know we have got some upside but are just hesitant to project that in this quarter as we are close to halfway through the quarter and again, we are starting to see signs of some upside but I really kind of held where we were at for the he balance of the third quarter.

[Mike Hughes:]

Okay. It makes sense. Last question. I think you are trying to sublease part of your corporate headquarters. Any progress on that front?

[Herb Mueller:]

I would say that there's progress but nothing to announce at this point. And I will probably hold off saying much more until we actually get something done. But we are very aggressively doing it. And I feel better about it now than I did six weeks ago. But at the same time, I felt really good about it six months ago on a deal that I thought would happen that didn't happen. So until it's done, it's not going to happen. The one dynamic in the market place that has changed that does make me feel better about it is the potential of industrial developers having interest in you the property and the market value has gone up considerably in Southern California over the last six months in that area.

[Mike Hughes:]

Okay. Great. Thank you very much.

[Herb Mueller:]

It was good to talk to you, Mike. Thanks.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Linda Perneau for any closing comments.

[Linda Perneau:]

Thank you Paul. Thank you for your participation in today's call and for your continued interest in Volt. As a reminder, we are participating in the Three Part Advisors Virtual East Coast IDEAS Conference on Thursday, June 17. We look forward to speaking with you again during our third quarter fiscal 2021 earnings call in September.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.