Volt Information Sciences, Inc.
Q3 2017 Earnings Call Transcript

Published: 8 Sep 2017

[Operator:]

Greetings, and welcome to the Volt Information Sciences Incorporated Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lasse Glassen, Investor Relations.

[Lasse Glassen:]

Good afternoon and thank you for joining us today for Volt Information Sciences’ fiscal 2017 third quarter earnings conference call. On the call today is Michael Dean, President and Chief Executive Officer; and Paul Tomkins, Senior Vice President and Chief Financial Officer. Before beginning today’s call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to Volt Information Sciences recent filings with the SEC for a more detailed discussion of the risks that could impact the Company’s future operating results and financial condition. Also on today’s call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. A reconciliation of those measures to GAAP is included in the earnings press release issued this afternoon, September 7, 2017. With that, it’s now my pleasure to turn the call over to Volt’s President and CEO, Michael Dean. Michael?

[Michael Dean:]

Thank you, Lasse. Good morning and thank you for joining us today for our fiscal 2017 third quarter earnings conference call. I’ll begin today’s call with an overview of our results from this past quarter along with the discussion on the next phase of our turnaround strategy aimed and returning Volt to profitable growth. Paul Tomkins, our CFO will then provide additional details about our third quarter financial results, including an update on our balance sheet and liquidity position. A question-and-answer session will follow after our prepared remarks. While Volt’s third quarter results showed continued evidence of improvement in several key financial and operational metrics, our progress in driving revenue growth was disappointing. Let’s first start with some of the progress. During the quarter, we continued to benefit from our focus on higher margin business with third quarter gross margins of 15.8% expanding once again on both a sequential quarter and year-over-year basis. In addition, we continue to reduced costs and improved operational efficiencies. Third quarter selling, administrative and other operating costs improved by 5.3%, or $2.6 million, compared with the third quarter of last year. And despite our lower revenue, operating results improved and adjusted EBITDA nearly doubled from a year ago. However, while we continue to make headway on important fundamental, such as adding to our book of business with important new customer relationships, third quarter revenues fell short of our expectations. Notwithstanding, the progress we made last year bending the revenue curve, year-over-year revenues this quarter were down 7.2% excluding the impact from fluctuations in foreign currency exchange rates and businesses exited or divested over the prior 12 months. Progress and turnaround is rarely linear and additional factors that made revenue growth a challenge this year, including the recent launch of our information technology platform, that’s been a significant enterprise wide undertaking, while this technology is critical to our future competitiveness. The enterprise wide deployment requisite employee training and learning curve issues to utilize the platform have diverted some of our operational focus. In addition, the tight labor market in North America has made for a highly competitive business environment. Furthermore, it is clear that we have not gone far enough in investing in and developing our sales and customer relationship management efforts, including a more focused strategy and investment in team and training. We are now executing on doing just that. When I assumed the CEO position two years ago, we articulated a turnaround plan for the company, comprised a three basic pillars that included balance sheet improvement, cost reduction and revenue growth. This plan helped us address many of the operational challenges that confronted our business and created a strong foundation from which to build. During this time, we dramatically simplified our operating structures through a sale of non-core businesses and company owned real estate, which is strengthen our balance sheet and liquidity position. At the same time, we’ve also been successful and streamlining our cost structure and margins continued to improve. We will continue to take steps to maintain a strong balance sheet and to drive further efficiencies across the enterprise. With this foundation in place, we’re now fully focused on the third pillar of our turnaround strategy, which is to drive revenue growth. In order to do this, we have to get back to the basics that we call win, fill, grow. We need to win more new clients, we have to efficiently fill all the orders and opportunities there are current engagements offered, and we have to grow by better finding ways to expand with our existing clients. Let me take a moment to discuss each of these in more detail along with our progress so far. First we need to win more new business. The nature of this industry and the contingent services we provide by definition is temporary. So attrition is a normal part of this business. The aspects of this, is to a new opportunities to replace the normal customer attrition. The good news is that in this area, we’re not starting from the bad place. Over 7% of our total staffing revenue this quarter was from clients that are brand new versus a year ago, and we continue to win new business. During this quarter, we won five new clients with annual revenue opportunities of between $1 million and $5 million each. But this is not enough given that our attrition of business outlays this new growth. Part of the reason is that we have not invested enough in our sales team and structure. We have been diligent in cutting expenses and diverting some of those investments towards sales. However, we still need to better fortify the number of sales people and to help them address the highest areas of opportunity. In addition, we need to provide better and deeper training for them to being more effective. We’re implementing a plan to expand these efforts beginning this very quarter. Another way to bring in more new business is the strategy we put into place for VCG or MSP business. Over a year ago, we implemented across selling strategy between our MSP and our staffing businesses recognizing both businesses ability to bring new revenue opportunity to each other’s business. And this strategy is showing great science of success. For example, in our MSP, business we’ve won more new clients in the last two quarters than we have in several years. These wins not only increase the revenue for the MSP business, but the majority of these new customers will initiate or grow our staffing business as part of the engagements as well. Potentially, tens of millions of dollars of revenue that is truly incremental to our staffing side of the business. These wins will start to show revenue in the following two quarters. The second imperative to grow revenue is to fill our clients’ need efficiently and with high quality candidates. Given the historic tightness of the job market right now, our recruiting team has become strained. In response, we are immediately expanding the recruiting team and resources in key areas where opportunity exist for us in the near-term, but had previously been too short handed to capitalize on. The last piece of our win, fill, grow strategy is to grow our business with our existing roster of client. Volt has blessed with strong brand recognition in the staffing industry and longstanding relationships with large enterprise customers, including nearly one quarter of the Fortune 500. However, the single largest factor driving our revenue decline is the loss of share of our existing customer spend on temporary staffing. As we lose very few of our large client outright. During this last quarter we’ve conducted an in-depth analysis of situations where we’ve lost share with existing customers. Our research has found that the primary cause can ultimately be traced for the strength and depth of our client relationships. Good customer relationship management is more than just promptly filling customer orders and providing strong workers, although this is important. When done properly, it extends to becoming a thoughtful adviser and provider of a range of services to our customers thereby creating a partnership that clients don’t let go of easily. To improve those customer relationship management capabilities, we’re implementing a number of initiatives including; one, an organizational alignment to provide more defined and in some cases new additional roles that are intended to provide better customer service and client coverage; two, expanding the client relationship planning for each client, while over a year ago, we invest in client planning and better processes we have more to do here; and three, training programs to enhance our employees ability to develop and maintain strong relationships with current clients and enhanced their ability to be a strategic advisor through value added services and resources based on our evaluation of customer needs. All of these win, fill, grow initiatives are designed to drive revenue as quickly as possible, strengthen the resources and support for employees and to provide better service for our clients. As we implement these initiatives, our plan is to reallocate resources internally in order to fund the customer facing activities I just described without adding incremental expenses. Before turning the call over to Paul, I’d like to provide an update on our executive search permanent replacement to lead our North American Staffing operation. Given the importance of this position, we’re moving ahead with urgency, while being mindful that this is critical role and we need to make sure we find the right person. We are in process with several excellent candidates and hope to have the position fill clearly. In summary, while much has been accomplished, it’s clear that we still have a lot of work ahead of us and significant hurdles to overcome. I remain confident that we can successfully meet our challenges, an ultimately emerge as a stronger company. I look forward to executing the next phase of our turnaround strategy to top line growth. With that, I’d now like to turn the call over to Paul for more detailed discussion on our third quarter financial results. Paul?

[Paul Tomkins:]

Thank you, Michael. Good afternoon. Today, I will provide additional details on our third quarter financial results as well as discuss our balance sheet and liquidity position. Our revenue in the third quarter was $289.9 million, a decrease of $40.7 million or 12.3% on a year-over-year basis. The decrease was primarily driven by declines in our North American staffing segment of $20.3 million, a decrease from our sale of Maintech of $17.1 million, as well as the impact of foreign exchange rate fluctuations of $1.3 million in our International Staffing segment. Excluding the impact of non-core businesses sold or shut down during the past year, as well as normalizing for the impact of foreign exchange, the year-over-year revenue decline would have been 7.2% on a same-store basis. On a sequential quarter basis, revenue in the third quarter declined by $13.1 million or 4.3%. The sequential quarter decline was primarily due to the impact of two less working days in the quarter. Turning now to the revenues by segment. Revenue for our North American Staffing segment, which provides a broad spectrum of contingent staffing, direct placement recruitment process outsourcing and other employment services was $229.4 million down 8.2% on a year-over-year basis. The decline was primarily driven by lower demand from customers in both our professional and commercial job families, mostly within the aerospace industry and a significant change in a large transportation manufacturing client’s contingent labor strategy. As Michael mentioned, we have a detailed plan to turnaround our North American Staffing segment. We remain firmly dedicated to our turnaround efforts in this segment with an increased focus on improving top line performance. Revenue for our International Staffing segment, which includes the company’s contingent staffing, direct placement and managed program businesses in Europe and Asia was $29 million in the third quarter, down 10.9% from a year ago. The year-over-year decline was attributed to increased economic slowdown in the United Kingdom, as well as the impact of foreign exchange rate fluctuations of $1.3 million. Excluding the FX impact on an operational basis, international revenues decreased $2.2 million or 7.2% year-over-year. Our Technology Outsourcing Services and Solutions segment revenue, which includes quality assurance, business intelligence and analytics and customer service support for companies in a variety of industries, was $24.3 million in the third quarter up 2% year-over-year, primarily due to an increase in demand for our customer care services, partially offset by lower volume in our quality assurance services. And finally, looking at our corporate and other businesses, which are primarily comprised of VCG, our North American managed service programs business, revenues were $9 million in the third quarter down 66.8% versus last year. The year-over-year revenue decline was primarily driven by the impact from the sale of Maintech, which occurred early in the second quarter of 2017. On a same-store basis, excluding businesses sold or exited of $17.1 million, VCG decreased $1 million, or 9.9%, year-over-year, due to lower volume as well as contracts that were not renewed in the latter half of fiscal 2016. It’s important to note that our third quarter results do not yet include revenue from our new VCG wins that Michael highlighted a few minutes ago. Turning to our total company profitability for the quarter, net loss in the third quarter of 2017 was $5.5 million compared to a loss of $4.6 million in the third quarter last year. Adjusted EBITDA as highlighted in our earnings press release was a positive $1.4 million in the third quarter of fiscal 2017 compared to earnings of $0.7 million in the year ago period. Now let’s move on to the profitability of our core segments. I think it’s worth mentioning that all of our business units continue to be profitable. Operating income in our North American Staffing segment was $5.7 million in the third quarter of 2017, compared to $6.7 million a year ago. We expect this to improve overtime through a combination of operating efficiencies and leverage from revenue growth achieved from the initiatives Michael discussed earlier in his remarks. Looking at the other segments, the Technology Outsourcing Services and Solutions business generated operating income of $1 million, while our International Staffing segment generated operating income of $0.7 million. Our total operating loss in the third quarter of 2017 was $1.5 million improving by $0.5 million compared to $2 million in the prior year period. Importantly, we achieved this year-over-year improvement while generating $41 million less revenues in the third quarter of fiscal 2016. This was accomplished by our ability to create efficiencies and leverage in our operating costs wherever possible. While revenue generation remains a key focus leveraging our SG&A to maintain profitability is also a top priority. We will continue to make improvements in our cost structure as we realize the full functionality of our IT upgrade and focus on intelligent changes to our business processes. Overall gross margin percentage during the third quarter was 15.8%, a 109 basis point increase year-over-year. The increase was primarily attributable to the Technology Outsourcing Services and Solutions segment, which experienced higher costs by investing in growth in the third quarter of fiscal 2016 and improved margins on certain customer care projects in fiscal 2017. Gross margin percentage also benefited from the sale of certain low margin non-core businesses in fiscal 2017 and 2016. Excluding the business is sold or exited, gross margin in the third quarter this year increased 90 basis points on an apples-to-apples basis. Selling, administrative and other operating costs in the third quarter decreased $2.6 million, or 5.3% versus last year. The year-over-year decrease was primarily due to ongoing cost reductions in all areas of the business and due to the sale of Maintech. SG&A in the third quarter improved despite being impacted by higher depreciation and software license expenses related to completion of the first phase of our back office financial suite and information technology updates. We incurred restructuring and severance costs of approximately $0.2 million in the third quarter as a result of the cost cutting initiatives we implemented beginning in the first quarter last year. We continue to expect these initiatives will result in savings of approximately $13 million annually, excluding Maintech. Turning now to our balance sheet and liquidity position, our total debt balance at the end of the third quarter was $100 million up $10 million and $8 million from the prior quarter and the third quarter of fiscal 2016 respectively. At the end of the third quarter, we had a total of $33.4 million in global liquidity for working capital requirements down from $55.9 million in the second quarter of fiscal 2017. The increase in debt and reduced liquidity position were both due to the operating performance in the third quarter and the temporary billing and payroll issues we encountered as our back office suite went live. While these billing issues have since been largely corrected with our customers, our accounts receivable aging balance increased beyond the permitted ratio in our financing agreement, which further impacted our liquidity balance during the quarter. As a result on July 14, we amended our financing program to increase the permitted ratio of delinquent receivables through September 2017. On August 25, we amended our agreement to lower our minimum liquidity levels and minimum earnings targets to allow us flexibility as we resolve any remaining billing issues as part of the post implementation phase. Both amendments are positive results of our partnership with PNC, as we navigated a temporary issue that negatively impacted our liquidity position. It’s important to reiterate that while these billing issues did impact our liquidity during the quarter, they were temporary and our teams are working diligently to correct them as quickly as possible, and we expect the billing issues to be fully resolved by the end of the fiscal fourth quarter. As a result of these actions as of September 1, our liquidity was at $38.9 million, a $23.9 million cushion from our new covenant level. In terms of managing our liquidity, our top priorities remain consistent. We are focused on ensuring there is adequate liquidity for working capital purposes to effectively manage our business on an ongoing basis, as well as investing in the necessary tools and technology that are required to support our growth plan. In addition, returning excess capital to shareholders remains an ongoing consideration for the board, when circumstances permit. In closing, I’d like to continue to thank the entire Volt team for their very hard work, can-do spirit and commitment in many areas. While our third quarter revenues fell short of our expectations, we feel confident in our plan and focus to invest in the future and towards returning Volt to profitable growth. Thank you for joining the call and at this time I’d like to open it up to questions. Operator?

[Operator:]

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Joe Gomes of William Smith. Please proceed with your question.

[Joe Gomes:]

Good afternoon guys.

[Michael Dean:]

Hi, Joe.

[Paul Tomkins:]

Hi, Joe.

[Joe Gomes:]

In the quarter, again, you’re saying that you’re a little disappointed in the top line not meeting your expectations. And Mike, you outlined a program, the win, fill, grow program. Just wondering, can you give us – is there even more detail or give us on how you guys are hoping to drive – or planning to drive, I guess, I should say, top line growth? Are you seeing – is there any other indicators you can give us in terms of wins out there that can show us, look at where we are, hoping to bend the revenue curve here again?

[Michael Dean:]

Yes. So we – one of the things you want to look at in turnaround and make sure that the business continues to be healthy enough to do, the work they need to do is whether or not you’re generating wins. And our rate of generating wins continues to be – we’re still bringing in strong, which have client, and we’re not losing very many at all. And the wins like I said, if all of the things being equal we would have grown 7% this quarter if we didn’t have sort of share losses in existing clients. So that 7% growth is not bad if that was the only sort of issue. But because we have attrition, and like I have said more than we would like, our plan is to do a couple things to trigger revenue growth. One – and the fastest thing we can do on the win, fill, grow if you were to prioritize how quickly can get revenue really turning on the fill issue, where there’s orders out there, because of this time market that we’re not filling. And we’re not filling fast enough to sell other vendors are out there, filling orders that we could be filling with clients that we work with alongside other vendors. And so we’re going to invest opportunistically in strong recruiting resources right away that can help potentially generate better results from existing opportunities out there for us. It’s not that easy to go get, but we’re going to go get whatever we can there. There is some opportunity and that’s fairly short-term to work on that. The second thing we found is in the grow perspective, the shareholder – I’m sorry, the client relationship management efforts, some of that is hanging onto the business we already have and if we can do better at that, that can pretty quickly change the top line if we can do that with enough clients. So investing more there and trying to accelerate that client relationship capability program is important, because I think that can have relatively near-term to medium-term impacts because it’s business we already have. And then lastly, in the sales perspective, on the retail side, where there’s feet on the ground getting stuff that’s shorter term and the longer term sales cycle of some of the bigger clients, on the retail side, where there’s smaller clients investing more in our sales resources right away in some opportunistic areas that we’ve defined can hopefully try and get some drive some top line growth sooner than later as well.

[Paul Tomkins:]

Joe, this is Paul. I’ve just add one thing and Michael mentioned in his remarks. VCG also won a number of deals over the last several months. And those are going to materialize and actually have some solid pull through for VWS. So I think that’s a really good development and I think from the MSP perspective that’s a strategic asset for us and we think that’s going to help going forward.

[Joe Gomes:]

Okay, great. Thanks. And on the information technology implementation, you talked a little bit about it. Can you just again give a little more flesh that out as to how that is going? I mean is everything being implemented or any hiccups, where does that stand today.

[Michael Dean:]

Yes. Sure, sure. So we went live as we indicated before, and everything is operating we’ve had some issues with billing and also payroll. The payroll issues are really resolved and with some implementation of an IT upgrade of this magnitude, you’re going to have some hiccups. But, the ones that were remaining right now are on the billing side. So that’s – those are the ones we’re focused on, we’ve had some additional aging on the receivables as we get the billing record, but we’re working full court press on it and we’ve been working with our customers to get it resolved. So we’re confident we’ll have those resolved in the fourth quarter fully. And in addition, some additional functionality in the IT upgrade is going to help us really take it to the next level.

[Joe Gomes:]

Okay, great. Appreciate that. One last one for me and I’ll get back to queue. The last quarter there were some discussion about insider purchasing and do you guys had mentioned that you were not eligible at that point in time to be making any type of insider purchases have the restrictions been lifted. Are you still under restrictions?

[Michael Dean:]

There are still restrictions. Look I’d love to be able to buy right now and I said this before I think this is an attractive valuation. Senior management and the board are currently prohibited from doing so. Right now as we’re possession of material nonpublic information. As soon as I’m able however, I intend to buy.

[Joe Gomes:]

Thanks, guy. Appreciate it.

[Michael Dean:]

Okay, Joe.

[Paul Tomkins:]

Thank you, Joe.

[Operator:]

Our next question is from David Wright of Henry Investment Trust. Please proceed with your question.

[David Wright:]

Hi, good afternoon. New to the story this year.

[Michael Dean:]

Hi, David.

[David Wright:]

Hi, do you have a targets for where you think the debt on the financing agreement is going to be at year end and then into next year as well. I asked because the first of your three pronged strategy is enhancing balance sheet, I know you’ve got in the debt down some, but where do you see that going.

[Paul Tomkins:]

Yes, so this is Paul, David. We expect that we would be roughly in the same position we’re in right now towards year end. We really don’t give guidance at this point and on results or debt levels or liquidity, but I can just tell you that our intention over the longer term as we generate positive operating cash flow and begin driving a lot more cash flow is certainly going to, we’re going to be looking to reduce our debt position. But nothing significant between now and year-end.

[David Wright:]

Okay. Can you just briefly give us an example of a billing issue of the client that you’re having or have been having? Just briefly was a…

[Paul Tomkins:]

Yes, sure. So there are a number of smaller issues, some of them could be let’s say not accounting for holiday pay appropriately. That would be maybe one example that’s a small number, but it could go over a number of customers. So we’ve worked hard to fix that and make sure that the code appropriately covers that. So let’s say, it would only happen when you hit a holiday like a Labor Day or any of the holidays. So – and if our contracts with customers allow for holiday pay. So that was a nuance that that we had some hiccups on that’s been resolved and that were moving forward. So that would be an example.

[Michael Dean:]

And this is Michael. One of the things that caused, so even if you make – we have – we write 20 something thousand checks a week and all under very different circumstances required by very special situations by almost every client we have. And getting all of them perfect in the first couple of months that we found that there were small little changes that we had to make, and what happens is when you have that incorrect you have to correct it before you can get, even if it’s a very immaterial dollar amount, we have clients with the millions of dollars as accounts payable that won’t – at our accounts receivable draft won’t pay at until the bill is exactly right. And so we fixed all the system errors we believe they were causing some of those small changes on the payroll that – it took us while to get all the bills correct and make sure that the clients are comfortable with those bills and then you get paid on them. And that was really – even though there were quite a few small things, the whole bills would be – large bills would be held up until we got every individual correct.

[David Wright:]

Okay, thanks for that list of item side. Two brief additional questions, in the last conference call you talked about a slate of upcoming conferences that you were going to visit on behalf of world and the idea of becoming more active in investor relations. What’s the status of that presently?

[Michael Dean:]

Yes, we have a number that were signed up for I think we have a few by the end of the year. I am trying to get that in front of me. We already did – we did the CJS Conference I think, it was June. And we have the Dallas Conference in I think November and a few more at the beginning of next year. I’m sorry, I don’t have in front of me, we’re announced those and the idea for those is to, well, the turnaround still in process or it’s basically trying to get – we’re not a well traded stock yet. And I think the idea is to start getting our story out there and the work that we’re doing for those investors who do like buying at the part where you’re starting to turnaround. And I think getting our story out there, which we like telling our story is the idea for that.

[David Wright:]

Great. I would encourage you to do that as much of as possible in a market like this people are looking for things that are not completely exploited yet. My last question goes back to the previous question or the previous person’s question, about insider purchases and you said on the last call and you’ve said on this call that no one’s able to buy stock. Is that because are being technical that you’re in the blackout period because you’ve got the earnings release or is this a persistent condition.

[Michael Dean:]

It’s because – it’s beyond just the quarter release. It’s because of possession of material nonpublic information in this turnaround. And so when the SEC rules allow us to I know a number of us intend to buy.

[David Wright:]

So that waiting for you in a strategic alternatives process, is that correct?

[Michael Dean:]

No. I can I’m not lot of speak to why, but it’s a material nonpublic information that we possess.

[David Wright:]

Okay. Well the difference was quite a subject on the last call and it’s great that you’re going out to IR, and you want people to buy the stock. But it’s a little disconnected to say that we’re unable to buy the stock, but it’s okay to promote the stock. So it’ll be curious to see how this resolves. Anyway, I’m interested. I appreciate you taking my questions.

[Michael Dean:]

All right. Thank you, David.

[Paul Tomkins:]

Thanks, David.

[Operator:]

Our next question is from Walter Schenker of MAZ Partners. Please proceed with your question.

[Walter Schenker:]

It’s just two questions. I won’t beat the last point again until the second part of my question. But the first question is you’ve indicated that one of the factors in the sales performance is a need to reallocate more resources to the selling side of the business, I know you don’t exactly break it out, but the company spends $180 million, I guess $190 million a year on what’s broadly defined as selling, administrative and other expenses. Can you give us some idea or how much of that’s already in selling, which I assume was pretty large and how significant a shift you’re talking about. Are we talking about $1 million or something significant within that $200-odd million that’s broadly called selling and administrative and other?

[Paul Tomkins:]

In the SG&A total, that includes all of our corporate expenses, whether it be legal, finance all the back office staff. It includes all the branches, which is a lot of brick and mortar and staff there, which are recruiters and branch managers and branch coordinators and there’s a lot of people that are on it – the S part of the SG&A. The S part of SG&A is a small portion of $180 million to $200 million. And while there is going to be shift from the G&A to the S if you will, it’ not in tens of millions.

[Walter Schenker:]

Okay. And small part of the – 25% or under 10%, I mean, just – I’m not trying to pin you down, but within 5% or 10%, how much of that you would broadly cuff in cross-selling?

[Michael Dean:]

I don’t have the numbers in front me, because we calculated in different ways than that. Because it’s what you consider selling there’s a bunch of different roles that could or could not be considered selling. But I’m not sure you’re materially on those percentages, maybe about that. It depends on what you consider selling, because we have a bunch of factors that sort of do – a bunch of different roles. But I think that there’s a reason it’s not a giant number, because given that we’re not OI positive yet, that we’re trying to be very targeted about our investment. But it’s clear we have to invest more in those areas and we know some of the targeted places to do that without overspending, but they have real we believe real impact fairly sense.

[Walter Schenker:]

And to be the – to pile on just a quick further point on management buying – a number of people by some, I assume a fair number of people in this call, have been in a position where they’ve been restricted as insiders. Of course they’ve been on a board and boards always as we all agree have at some level of material inside information by definition. I know that earlier this year, there appeared to have been insider buying in the open market. And so it isn’t totally prohibited from buying in the open market. It would be helpful at some point and maybe we’ll find out when you announce something to better understand why for a prolonged period of time insiders can’t buy the stock beyond just subject and aware of material inside information, which to some degree is always the case. It’s a statement give answered to I just had event. Thank you.

[Michael Dean:]

All right, thank you, Walter.

[Operator:]

Our next question from Roger Whittaker [ph] of XGM Asset Management [ph]. Please proceed with your question.

[Unidentified Analyst:]

Yes, thank you for letting me ask the question. I’m curious, first I’d like to follow-up on some of the comments you’ve made earlier about the ability to turn the top line you’ve said that you think you can – could do that fairly quickly. When should we expect the top line to turn? I mean looking at, you’ve looks like the company is basically been in a bleed out situation top line for a while and stabilizing that would probably go a long way to helping both the stock, but also helping the finances. I would think that the firm.

[Michael Dean:]

So the question is when – will you able be turn top line profit – top line growth.

[Unidentified Analyst:]

When will you – you talked about the ability to stabilize it. You’ve been – what, this turnaround’s been going on for two or three years. And I’m just trying to figure. And yet, if you look at it, pretty much every quarter has been down year-over-year. And it just seems that the reason why your stocks settles where it is, because more of the top line even than bottom line and from your comments about adding the cost structure and the like, it’s not like you’re going to get to profitability by cutting cost. You’re going to get there by growing the top line. So both are stabilizing it. So when do you see stabilizing it and then obviously, moving it up?

[Michael Dean:]

Well – so we – versus two years ago, our top line is declining less. But you’re right that we’re not there yet. And you’re also correct that you don’t get – we don’t get to where we need to go and we want to go and where our goals to go on profitability without stabilizing the top line. All true and correct. And I think that the fundamental that we’ve been working on or the drivers of what will cause us to stabilize the top line is we have to stabilize our share losses across a broad range of clients. And the ability to predict that in aggregate is difficult.

[Unidentified Analyst:]

All right, thank you.

[Operator:]

Our next question is from Scott Hood of First Wilshire. Please proceed with your question.

[Scott Hood:]

Hi, guys.

[Michael Dean:]

Hi, Scott.

[Scott Hood:]

First question, I’m wondering, you talked about internal expectations on how the quarter would turn out. And I’m just wondering, what happened during the quarter? How did that roll out different than expected? Was it internal? Something you could control or outside issues? Anything you can add to that?

[Michael Dean:]

Yes. I just – I think, to your question, I think that there’s no new issues here. The – I guess why it was disappointing to us is that we’re finding it sort of challenging to turn it quicker than we are, which is the same issues that we talked about, which is bringing in the leaky bucket. We’re bringing in more new clients at a faster rate and slowing the share loss. And those are tricky levers to pull because it’s sort of an aggregate. It’s not one or two clients we have to sort of fix our issues with. And it’s not that our quality is suffering of our product and the candidates that we deliver. We actually do very good work. But in highly competitive business you have to do more than just good work, you have to be very sort of an advisory value-added relationship with the client in order to sort of get ahead in a very competitive business where other clients are vying for that same business. And in order to do that, we have to really sort of change our MO on how we approach our client relationships. And we have to get there in ways that really drive more value for them and over and above the basic fundamentals. And doing that is hard to predict. And this quarter, like last quarter, there’s nothing fundamentally different, we’re just not getting towards flatting growth as fast as we would like.

[Scott Hood:]

And then, of the business that’s lost, I think, you touched on it, but existing versus full clients, or less business with the same customer or losing the entire customer, it sounded like more the former. Would you say it’s half and half, the loss of business?

[Michael Dean:]

No. Actually, very little loss of business. So clients lost outright is de minimis. It’s a very sort of good metric from a – we really – and we have 43% of the Fortune 100, and the average tenure of those relationships – business relationship is something like 25 plus years. And we just – we have good work and we did good work of that client. But what we’re not great at is those – our clients often have more than one bucket of sort of work that we do with them or that they do with contingent workers. And out of four buckets – four areas of spend where they spend on contingent workers, we may be in one of two. And as those one or two of them wind down, we haven’t been very good at being a value-add partner when we can find other ways to help them in some of those other areas that they do work with other players in the business but not us. And so it’s sort of a battle of not all projects last forever, but we’ve not been adept at rolling from one project to the next within an existing client as well as our competitors so we ultimately lose share over time when we don’t do that. And if you’re good at it, what happens is even if one project is winding down, sometimes, you have an ability to talk to that client and say, look, we have really good workers that know your company, they’ve done great work for your company, that’s fine ways with our skill set and some of these people to transition them to other areas of your work or work with them on a larger strategy beyond just contingent staffing. But recruitment now placed and direct hire situation. There’s a lot more services that we can be talking to them that we’re actually pretty good at. And in the past, we haven’t been, I think, as good as some of our competitors about rolling one piece of work into using our skill set and our knowledge with that client or relation with that client to grow into other areas where we can help them. And so we don’t lose those clients, but we don’t grow with them in ways some of our other competitors do.

[Paul Tomkins:]

We need to take better advantage of those other opportunities within an existing client where we have – where we’re in good stead.

[Michael Dean:]

Yes. Where we can help them and have skill set.

[Scott Hood:]

If you’re not – you’re keeping the bucket, it’s just that when the bucket goes, to use the words you used, once the bucket goes away, you’re not moving those clients over – the contractors over to a different project. So you’re not moving the bucket or losing the share of that bucket. You’re keeping that.

[Michael Dean:]

That’s correct. I mean, not that we do that. We just don’t do enough of that. I think, if we – I think, our stronger relationships and our ability to understand our clients at the next sort of level of depth, then we can actually be better partners and find more ways to help them than we currently are. So we do that. I’m not saying that we don’t do that. And sometimes, we do that very well. But I think, in aggregate, over thousands of clients, I think, we can do it, we can actually provide a better service for those clients, which is going to actually help us grow revenue and not shrink it.

[Scott Hood:]

And is there still – I mean, I think, with IT, there might be more, it’s hard to get the perfect balance between supply and demand for certain categories work. Is it still favored to IT where you could fill – if you had certain quality people, you can fill those jobs much easier. Or you can fill as many people as you could get, of course. And is there other example of industries like that?

[Michael Dean:]

I’m sorry, I don’t understand the question.

[Scott Hood:]

Are you able to get enough supply of the kind of workers or for demand for those jobs?

[Michael Dean:]

Yes, okay. Yes, I think, in general, the answer is yes. We have a very tight labor market right now. It’s historic unemployment lows and it’s sort of a double-edged sword. It’s good in that, generally, with the economy and that strong employment, that’s good for the industry. But it’s gotten so tight and unemployment so low, but now, across many categories, not just IT, that you have to work harder to fill the same sort of level of a number of positions. So – and it’s not something that – we’re not alone. I think, the whole industry is having to sort of strengthen their resources to the last client – candidates because the tight labor market. And that’s part of the recruiting investment that we need to do carefully. I think, there’s a places that we can invest in recruiting that allows us to go after that,

[Scott Hood:]

Well. The press release talked about aerospace, you highlighted that industry. And is this a slow sort of decline in aerospace? Or is it – was there a step down? And how does it look for the next few years there?

[Michael Dean:]

It’s hard for me to predict the aerospace industry. We have been here for at least three years in that, each year has gotten worse. And we not only have aerospace clients but we have industries that support the aerospace clients that we have. And so we’ve been notably hitting the engineering and IT in those areas and that’s part of the big hit for engineering and IT for this company. Well – and I’d like to believe that it can’t be hit that much harder. And as – we are poised and we still have hung on to those relationships, so when that rebounds, we like to believe that we have the relationships that will help us rebound with them. But I can’t predict when that’s going to be.

[Scott Hood:]

Yes. Is it defense? Or commercial? Or pretty just given your thoughts on.

[Michael Dean:]

It’s both.

[Scott Hood:]

Okay. I just wanted to ask about the gross margin improvement. I’m just trying to think of the mix. Is it maybe older worse contracts, lower margin contracts moving out, either on purpose or not, and better contracts that have come on going forward, but how would you characterize the improvement?

[Paul Tomkins:]

Yes, Scott. It’s Paul. So a combination of things. We’ve continued to really be vigilant on taking on new contracts and making sure that we get the – we maximize our margins. So that’s been a real concerted effort to get better margins. And the year-over-year improvements include those activities, number one. So it is getting better margins, but it’s – there’s pressure the other way as well. Some large customers put pressure on us in terms of – and other vendors on margin all the time, very competitive marketplace. And so you have to negotiate hard and we do. One of the factors on the year-over-year is our technology and outsourcing business last year did some investments with certain clients to bring on new business and to bring on growth. And that – their margins, as we’ve disclosed last year, in the third quarter, were a little more depressed and that helped us year-over-year as well. So in combination…

[Michael Dean:]

Right. They were more – that’s a real factor. They were more depressed then and they’re accelerated now because those paying off this year. So you sort of double benefit on a year-over-year comparison.

[Scott Hood:]

Okay. Great. Looking at the SG&A number, I was wondering how clean this would be the run rate for the quarter. Is there any severance or residual legal accounting for the Maintech sale? Or – and then, also, you had the full burden of the IT moving from capitalized to the expense side. Is there amortization all the way there from that? That can be able to little bit more, is there any more you could talk about the chance for it to go down other than the variable portion?

[Paul Tomkins:]

Yes. Sure. So we – the number of factors, as you can imagine that go in there. We had a couple of items. Maintech was sold last quarter. So this quarter, when you compare it to the year-over-year, we’re getting some benefits from Maintech leaving. We also had a medical health trust that we actually closed after multiple quarters, multiple months of shutting it down. We had a little benefit in the P&L as well for that. But broadly speaking, the IT project right now is – since we went live, a lot of the fixes that are going on now are hitting expense. So we do have an inflated IT expense hitting SG&A right now. And once we get beyond the – fixing the defects, that should drop as well. But we continue to look for cost efficiencies. We’ve gone through a number of events where we’ll see some benefits in the fourth quarter. They haven’t hit in the third quarter from those activities. But we do continue to always look at SG&A. And I’d say there’s a bunch of factors that kind of go in. And this level will continue to drop over time.

[Scott Hood:]

All right. Thanks guys.

[Michael Dean:]

Thanks, Scott.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Michael Dean, President and CEO, for closing remarks.

[Michael Dean:]

All right. Thank you, operator. Before we end the call, I’d like to take a moment to recognize our entire team for their continued hard work and perseverance. And despite the challenges that we’re facing, I couldn’t be more proud of the dedication and loyalty of our team and how we pull together, working tirelessly to improve our company everyday. To our investors, thank you again for your support and for joining us on today’s call. We look forward to speaking with you when we report our fiscal 2017 fourth quarter and full year results in January. Thanks again.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.