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RCSF: PRGX: Major Moves Position PRG For Future Growth-New Accountin... (Page 1
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09:14am EDT 20-Jul-99 BancBoston Robertson Stephens (Wolk, Marianne 212-407-04
July 20, 1999
T H E P R O F I T R E C O V E R Y G R O U P
Major Moves Position PRG For Future Growth---New Accounting, New
CFO, New Acquisitions; Q2 Ahead Of Estimates
Marianne Wolk (212) 407-0427 marianne_wolk@rsco.com
BancBoston Robertson Stephens BancBoston Robertson Stephens
The Profit Recovery Group PRGX $43.81 7/20/99
Industry: Information Services Marianne Wolk (212) 407-0427
marianne_wolk@rsco.com
Change in Yes/No Was Is
...Rating: No Buy FY Dec 1998A 1999E* 2000E*
...EPS 1997Actual $0.55 EPS: 1Q $0.06 $0.08A
...EPS 1998Actual $0.80 2Q $0.13 $0.25A
...EPS 1999 No $1.08 3Q $0.28 $0.33
...EPS 2000 Yes 1.44 $1.53 4Q $0.30 $0.42
52-Week Range: $48-28 Year $0.80 $1.08 $1.53
Shrs Out (MM): 28.4 P/E 47.0 40.6 28.6
Market Cap ($MM): $1,244
Avg Daily Vol (000): 180
6/99* Book Value/Share: $8.87 Revs($M) 1998A 1999E* 2000E*
1998 ROAE: 16% 1Q $33 $57A
Price/Book: 4.9 2Q $39 $72A
6/99* Tot. dbt / cap: 21% 3Q $62 $81
6/99* Net Cash/Share: ($1.49) 4Q $69 $87
Dividend/Yield Nil Year $203 $296 $389
3 Year Sec Growth Rate: 35% EqtyMkt/Rev 6.1 4.2 3.2
*1999E and 2000E figures have been restated under new invoice-based revenue
recognition policies.
Key Points:
** PRG reported Q2 earnings ahead of estimates. Under historical accounting,
EPS of $0.22 surpassed our forecast of $0.21 and revenues of $70.7 million
exceeded our $70.0 million forecast. Under new accounting, EPS was $0.25
driven by $0.71.7 million in sales. Operating cash flow was neutral 1H:99.
** PRG announced widespread organizational changes---including the addition
of a new CFO---to support expectations for significant future growth of 35%
annually from organic operations.
** Two new acquisitions bolster 1999-2000 forecasts. PRG announced the
acquisition of ITMG and PRS (closes August)---adding at least $9MM to 1999E
revenues and $24MM in 2000E. PRS and the possibility of other acquisitions
later this year should be additive to published 2000E figures.
** PRG announced a move to more conservative accounting, reducing June
DSOs from 138 days to 48. Under invoice accounting, revenues are recognized
when PRG bills its clients---when clients are reimbursed for overpayments to
suppliers.
** PRG should benefit long term from its strategic investment in operations and
move to bring revenue recognition closer to cash flow. The changes announced
are extremely complex. We expect investors to take some time to sort
through PRG's new accounting, analyzing balance sheet and cash flow
statements (when released) to better understand these changes.
**SECOND QUARTER SURPASSES ESTIMATES
BRS Actual Results Actual Results
Estimate Historic Basis New Invoice Basis
US $51.5 $52.5
International $18.5 $19.2
Revenues $70.0 $70.8 $71.7
Gross Margin 47.5% 48.7% 49.9%
Operating Margin 15.4% 16.1% 17.7%
EPS $0.21 $0.22 $0.25
Source: Company reports and BRS.
** Revenues grew 84% on an apples-to-apples comparison (all figures on prior
accounting).
** US operations very strong. At least 3 new secondary audit clients signed in
the first-half.
** International operations favorable, led by ongoing expansion. The company
signed a significant number of new accounts---30 in all---in the first half.
NEW ACCOUNTING POLICY BRINGS REVENUE RECOGNITION
CLOSER TO CASH FLOW
** To date, PRG has employed accrual-based accounting for its retail
operations---about 55% of revenues 1H:99. Essentially, it has recognized
revenues and auditing expenses as it concludes its role in auditing
retailers' operations. This is typically 150-170 days before it collects
cash from its retail clients.
** Looking forward, it will recognize revenues when it bills its retail
clients, typically when its retail clients "collect" or are "reimbursed" by
their suppliers. We believe auditor payroll expenses will be recognized
with revenues, reported when a client is invoiced rather than accrued as
under previous policies. Under the new invoice method of accounting, PRG is
likely to see retail DSOs closer to 40-50 days---down significantly from
140-170 in the past. For the June quarter, PRG's DSO was 138 days under its
older accrual methodology and 48 days under the new invoice method. PRG's
accounting changes are retroactive to January 1, 1999
** The change in accounting allows PRG to unify and standardize its accounting
across all business lines and geographies. As we have indicated in prior
reports, PRG's business has been shifting significantly to new audit-types
(freight, tax, etc.) and geographies where it has employed more conservative
invoice-based accounting. With today's move, PRG is moving its retail
operations---55% of first-half results---in line with the accounting already
utilized for the remainder of its businesses.
** The company is taking a write-off as of Q1:99 to implement these changes.
PRG is writing off $69MM in 12/98 receivables and $21.5MM of accrued payroll
liabilities as of Q1:99. On an after tax basis, this is likely to be
approximately $29.2MM.
** The shift from accrual to invoice-based revenue recognition reduces 1H:99
revenues by just $436,000. Under GAAP, historic 1998 figures are not
adjusted. Therefore, approximately 2-3 months of revenues are included in
late 1998 results under accrual accounting and again in early 1999 results
under the invoice method. Revenues affected by PRG's accounting changes are
nominal---in our view---suggesting "bookings" late 1998 are very comparable
to "billings" early 1999.
** Looking forward, overpayment claims---no longer recognized as revenues or
measured as unbilled receivables---may provide a source of visibility for
future revenues. Potential revenues associated with completed auditing
assignments will now be viewed as a backlog toward future results.
OLD NEW Comments
1999 EPS 1.08 1.08
1999 REVENUES 292 296 Includes ITMG, roughly $9MM due 2H
2000 EPS 1.44 1.53 Includes ITMG---15c+
2000 REVENUES $386 $389 Includes ITMG, estimated at $24MM
Source: Company reports and BRS.
ACQUISITION ACTIVITY LIKELY TO ACCELERATE
** PRG announced it had acquired ITMG, an earlier player in the telecom
auditing market. We anticipate PRG will realize $9 million in revenues from
ITMG in the second-half of 1998---under purchase accounting. Our forecasts
for 2000 are closer to $24 million and we assume operating margins will far
exceed PRG figures---perhaps approximating 40%. Incremental earn-outs are
possible for ITMG management in both periods if they exceed pre-stated
EBITDA targets.
** PRG indicated it expects to close an acquisition of PRS International
sometime in August. PRS results are therefore not yet included in our
forecasts. The acquisition of this player in the small-business market (sub
$1 billion in revenues) would be accounted for as a pooling. We estimate
PRS could contribute at least $18 million in revenues to 1999 and $23-$25
million in 2000. This acquisition would likely be neutral to 1999 results
and modestly accretive to our published 2000 figures.
** Additional acquisitions are likely in the second-half of 1999 and 2000. PRG
indicated major expansion plans in the telecom and utilities segments of its
new Facilities division. It also indicated it wished to continue to build
up its tax practice---supplementing Groupe Alma's activity with further
expertise in unemployment, payroll, sales tax and VAT tax auditing. In the
Freight division, PRG would like to add more expertise in ground/trucking
audits and log this
risk, in our view. Other risks include price competition within the more
established retail audit recovery market, potential technology advances by the
company's competitors, and its financial dependence upon the retail industry.
As is the case with many growth companies, about one-third of its revenues are
END OF NOTE
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