Resources Connections Rises After Upbeat Q2 Earnings

Shares of Resources Connection (RECN) were higher in late morning trading after the company reported better-than-expected earnings for the second quarter, with revenue just under Wall Street estimates. EARNINGS: After the market close on Thursday, Resources Connection reported second quarter earnings per share of 38c on revenue of $184.5M, compared to analysts’ estimates for 30c and $185.5M, respectively.

Adjusted EBITDA for the quarter increased to $22.7M from $20M in the prior year quarter, while adjusted EBITDA margin rose by 170 basis points to 12.3% compared to the same quarter of the previous year. “We experienced an improvement in revenue in North America this quarter and modest strengthening in Europe — both good developments since the previous quarter,” said Kate W. Duchene, chief executive officer.

“Despite the slight revenue dip year-over-year, we are actively managing the business to deliver more profit through gross margin improvement and lower SG&A. The pipeline is stronger heading into Q3 than it has been in 12 months and while year-over-year revenue is a tough comparable because of the peak of lease accounting project revenue in Q2 and Q3 last year, we are replacing that revenue stream with other opportunities, particularly in our Strategic Client Program with program and project management.”

GUIDANCE: On the company’s quarterly conference call, interim Chief Financial Officer Jennifer Ryu said that based on an early revenue trend that “may seemingly persist,” the company sees revenue for the third quarter falling in the range of $164M-$169M. Ryu said that Q3 includes two additional holidays due to the timing of Thanksgiving as well as the midweek timing of both Christmas Day and New Year’s day.

She added that the company expects Q3 gross margin to be adversely impacted by the additional holidays. STREET RESEARCH: Following the report, Baird analyst Mark Marcon maintained a Neutral rating and $16 price target on Resources Connection, saying that the company’s Q2 results exceeded the midpoint of the company’s guidance and were slightly better than his expectations. Marcon noted, however, that revenue guidance for Q3 was “materially below expectations” and implies roughly flat to very slightly down organic growth on a same billing day basis.

Meanwhile, JPMorgan analyst Andrew Steinerman kept an Underweight rating and $15 price target on the stock, saying that while he acknowledges the puts and takes from various year-over-year holiday impacts, Resources Connection’s Q3 revenue guidance indicates another year-over-year decline.

The analyst added that revenues continued to be “pressured” in Q2 and that slowing lease accounting projects will continue to be a drag on year-over-year revenue trends, though he also acknowledges the easier year-over-year comparisons in the second half of 2020. PRICE ACTION: In late morning trading, Resources Connection is up nearly 7% to $17.45.

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