Q3 2020 Hudson Global Inc Earnings Call
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Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your like for like can be placed on music hold thank you for your patience.
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Good morning, and welcome to the Hudson Global Conference call for the third quarter of 2020.
On the call. This morning will be led by Chief Executive Officer, Jeff Eberwein, and Chief Financial Officer, Matt Damon.
Please be advised that the statements made during the presentation include forward looking statements under applicable securities laws.
Such forward looking statements involve certain risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements.
These risks are discussed in our form 8-K filed today and it our other filings made with the Securities and Exchange Commission, including our annual report on form 10-K.
The company disclaims any obligation to update any forward looking statements.
During the course of this conference call references will be made to non-GAAP terms, such as adjusted EBITDA and adjusted earnings per diluted share.
Conciliations for these measures are included in our earnings release and quarterly sides. Both posted on our website Hudson Arpino Dot Com I.
I encourage you to access our earnings materials at this time I think will serve as a helpful reference guide during our call.
I'll now turn the call over to Jeff Eberwein.
Thank you operator and welcome everyone.
Thank you for your interest in Hudson Global and for joining us today.
Start by reviewing the third quarter 2020 highlights and Matt Diamond, Our Chief Financial Officer, who will provide some additional details on our results.
Well then get some perspective on how we're navigating current business conditions.
For the third quarter of 2020, we reported revenue of 25.4 million down 5% year over year in constant currency.
Adjusted net revenue, which we formerly referred to as gross profit decreased 23% year over year to $9.1 million in constant currency.
S unit costs were $9.7 million in the quarter down 11% versus the same period last year.
Constant currency.
Reported adjusted EBITDA loss of 700000 compared to positive adjusted EBITDA of 800000, a year ago.
In addition, we reported a net loss of $1.2 million or 41 cents per share versus net income of 400000 or 12 cents per share in the same period last year.
We reported an adjusted net loss per share of 38 cents in Q3 2020 versus adjusted net income per share of 13 cents a year ago.
Significantly increased business, we think in this fast growing sector.
We believe this accretive combination will generate considerable value for our clients team and stockholders going forward.
I will now turn the call over to Matt Damon Our Chief Financial Officer to review some additional financial details from the third quarter.
Thank you, Jeff and good morning, everyone.
Our third quarter tax provision from continuing operations was approximately 200000.
The company used 500000 in cash flow from operations during the third quarter.
Days sales outstanding was 39 days at September 2020, which was favorable compared to DSO. A 51 days, we had back in September of 2019.
We ended the quarter with 29 $7 million in cash and restricted cash.
As a reminder, in April 2019, we finalized a new credit facility in Australia to support the expected growth and working capital needs as a result of new client winds in that market.
But we had nothing drawn in this facility at the end of Q3.
In April 2020, we received alone through the SBA PPP program for $1.3 million.
We've applied for forgiveness for this loan and to the extent that all or a portion of this phone is forgiven it will be reflected in other income.
In addition to the PPP alone in the U S. We have received government assistance in other countries of approximately 200000 in exchange for maintaining certain levels of compensation and other costs in response to the COVID-19 pandemic.
This is reflected in other income in the third quarter results.
Yeah.
Thank you good morning, Jeff and Matt how are you guys doing well thanks.
First question kind of higher level, maybe could you just talk about.
The new business tone.
And what kind of opportunities you're seeing in the pipeline today in terms of deal size as well as.
Our PEO versus MSP.
Yes. Thank you were very excited about the future of course, it's hard to predict.
What's going to happen with the virus and are we going to have.
More shutdowns, especially as we go into winter in the northern Hemisphere.
But in general at a high level that the tone in terms of new business is.
Much better clients are.
You know went went from being having a bunker mentality to more of a how do we.
Adapt and grow mentality, and we do strongly think that.
One.
Silver lining of what we've been through is that clients.
More strongly see their need for a partner to help them manage all of their talent needs and that's what we specialize and so I think the the the new business conversations have have picked up we're really excited about next.
Next year and beyond.
And it's a lot of different conversations lot of different sectors a lot of different.
Countries and we.
We could we could go around and I could give.
Little bit of comments on each one but in general we're looking at a lot of things, both ARPU and MSP a lot of different sectors and a lot of different countries and in particular.
We're excited to expand significantly in the tech sector through the recent acquisition that we made.
Yes, I was actually do have a question on that but before getting there just kind of building all the new business pipeline.
Are you starting to see any of those clients or prospects that that hit the pause button over the spring or summer months, starting to Reengage can get serious about ramping up.
Their head count.
Sure version is yes, it's.
It's it's client by client and even country by country.
In General Asia Pacific region.
Was the first one impacted by the virus they were kind of the first ones and at first ones out and then as you know we have a very significant business in Australia, and Australia hasn't been hit as hard by the virus as.
The us or Europe has been and so that's helped that country hold up better.
Yeah actually sorry that it's sort of the short version is yes, I think companies are starting to.
Hi, hire more and focus more on navigating this and growing through at and managing their business and set of.
Hunker down bunker mentality, which for us translates into.
Hiring freezes or a significant reductions in volume versus.
What they would view to be normal.
Right Okay.
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So that the recent acquisition seemed like a really good deal for you you got you deeper into tech.
I gave you an office on the West Coast and gets greater overall us footprint.
Well you know it also seemed to be a good deal given the apparent client base and opportunities that it can open up for you outside of the U.S. on a global scale and I was wondering if you could just talk to that a little bit.
Sure.
Yeah, we got to know the team at quite group.
Really well through.
[noise] discussions that.
Went on for over a year and.
They've built a really nice business, a really nice franchise.
Mainly in the San.
San Francisco Bay Silicon Valley area, and we're excited about a lot of different aspects one aspect is a.
Pitching to larger companies in the space.
Because of our combining.
Their expertise with our expertise and capabilities, we do think as one plus one equals three.
Another aspect that were excited about is how.
Helping many of their.
Existing clients and future clients with their international growth aspirations.
Thats not something that kuwait's been able to really maximize historically, but we have offices and people all over the world and we can we can really help them with that so there's a lot of different angles, where this transaction.
We think we will be one plus one equals three and so it's not just buying right.
Revenues and earnings.
It also comes with.
A.
Patient, where we can honestly say.
This could be much more valuable as part of Hudson.
The hope is to double or triple what they've been able to do on their own.
Great.
How is the acquisition been received by clients existing clients and.
As a general dialogue, we've been having with them.
I really really well I think it makes it makes a lot of sense.
To a lot of people.
Their whole team.
Has now joined us and.
Were working.
Together really really well and the Cushe aid that we a joke about internally is a one one team one dream, but I think everybody is really excited about it and sees the benefits of it and the potential of it you know.
They have felt for a long time that they have this.
This expertise they developed in these relationships they have developed but if they have a client who needs help and China or need help in Germany or needs help.
With the bigger hiring need.
They are now much more able to help that client and so that's that's a much more fulfilling place to be and then to go back to decline say sorry, we can't help you in China. So.
We're excited about it and there's a lot of things that we that we can do together and.
It's just a matter of executing on it.
I definitely like the new company slogan there.
Yes, just the last one and I'll hop back in the queue, but thinking about the acquisition pipeline look like we were saying.
Quite seem like a good deal for you because it gave you a bigger footprint Tac also makes sense from a global expansion and geographic standpoint.
How should we think about future deals in your appetite in general from here.
Sure.
You know this was also the right size, you know not not too big not too small and the way we think about it is we're always in the market looking we think there is a lot of benefits to.
Being in the market to constantly being in the market and looking at just helps us.
Educate be educated on whats available what different business models are out there.
But the most important thing I would emphasize is that we have a high bar and it's got a check a lot of boxes and it can't just be.
Buying a revenue or earnings stream on its own it's got to be a situation that.
Is synergistic where we can honestly look at the business and say that business inside our current.
Team our current business.
It could likely be more valuable may be much more valuable.
Because of the one plus one equals three aspect.
Beginning of this year as an example, we have we had roughly 400 employees.
More than half of those are in Asia Pac.
Quite group historically has been.
Around 25 employees and so you can kind of see how.
Combining the two teams together, we will be able to accomplish more than either one of us would honor own. That's the kind of thing we're looking for an acquisition we're open to.
Other acquisitions, ARPO or MSP, but it's got to be something that's unique and special where it really truly is accretive not just.
Getting bigger without any any synergies to it or any secret sauce to it and then.
Culture and people fit is really important.
This is a people business and teamwork is incredibly important to.
To having a good business, a well run business and.
So it's got to be a good cultural fit and people that.
No I appreciate the insights and if I could just sneak one more and maybe maybe more for Matt just thinking about.
Q4 as it stands today.
We shouldn't expect to see any foreign governments.
Stimulus, but theres the potential for the PPP loan forgiveness that'll get up in the other income line.
Yes.
As we do some more information that you can see in the Q, but.
With that we'll file our after market close today, but we had about 200000 worth of other income from foreigners foreign assistance.
It's about 465000 in on a.
Year to date, so far we do anticipate that there will be some additional activity and on that front, Tom certainly the UK recently announced that they were extending their furlough program a couple of days ago.
But as you mentioned in the us.
On the PPP front, we did apply for forgiveness for the loan.
We.
I believe that we will.
We're hoping to get 100% forgiveness, we'll have to see you know until like anything it has to go through the process and see there's supposed to be a 60 day turnaround time for this to happen. So our hope is that.
Well, we will have an answer for this in the in Q4 and.
To the extent that we receive all or a portion of the amount for given it will be reflected in other income.
On the PML similar to the other foreign assistance that we've received.
Alright, great well thanks.
Thank you guys, taking my questions absolutely.
Absolutely. Thank you.
And once again, if you like you guys can on your question Press Star then the number one on your telephone keypad.
Your next question comes from the line its market share.
Hi, Thanks for taking the question I just have a.
A few things about.
The acquisition.
Just looking at the compensation.
In the in the filing that you made about it.
For the executives going forward it seems like.
By my calculation that maybe there is supposed to make.
At least like 1.6 million of EBITDA next year into the.
Well or two in the second year.
That would.
Are those numbers to meet their needs to meet their.
Their payout goals that thing.
Yeah.
That is.
With those numbers include any cost cuts, but you might make or are you not expecting any cost cuts.
And.
I see.
Yeah, and then I have another question sure other the short version is.
No. It doesn't include any cost cuts were not anticipating.
Significant cost cuts certain certainly nothing on the people side, we actually want to add add people add recruiters.
To what they're doing so we're looking to invest and grow any cost reductions are going to be.
Back office.
Kind of things.
Office support costs.
Things like that certain certainly not on the on the personnel side, but now you're reading is right I think I'm on the EBITDA targets and it doesn't include any.
Any synergies to it and the the concept that we had coming into this is.
To give the owners.
Roughly half of the consideration upfront and then they are staying and helping us.
Execute on our plan to grow the business together and then they.
Get the other half with some upside.
Over time as they stay and help us grow the business.
Okay, Great and would those numbers represent the revenue from Kuwait, where it was over the last 12 months, So where are you where they currently see it or does that.
Is that kind of a number is that.
Require them to grow.
Grow 20% or are some them some percentage each.
Each year or is that just.
For example is the growth in the second year in EBITDA it would that be.
Grow or is that from some synergies in costs and also are those numbers.
All inclusive or is that is that a number be or any of their corporate cost.
Yeah. So those are all.
EBITDA numbers.
That the earn out is based on its not based on revenue is based on.
EBITDA and also we have an a wells in the U.S. and so one good thing about doing acquisitions in the U.S. is.
We can we can truly look at it on a pre tax basis because we.
I wont pay any income tax on.
On what we can we can offset any any income in the us with our with her in a well I should say, but.
So historically Kuwait has been a private company.
Unlike public companies that go through audited.
Having an audit and filing 10, Ks and 10-Q's.
We're incorporating all of their numbers into our numbers starting on Q4 and so.
That's kind of when the financials start so everything in the past is.
Not not audited and not in 10, Ks and 10-Q's, but I would say the 2021 and 2022 numbers.
Our.
Realistic based on what they've done in the past today.
Have a really great business profitable business, they've been able to grow it nicely over time and like all businesses they've been impacted by COVID-19, and most of the clients are in the Bay area and the Bay area similar to New York City did have.
Pretty significant shutdowns this year, but they manage through it very very well they stayed profitable which was very impressive to us.
So the the managers owners of Kuwait are very experienced and what they're doing navigated the crisis really well and we think we're poised to do right.
Really well together going forward and.
As I told them repeatedly nothing would make us happier than than them.
It getting the maximum compensation from this acquisition because that would mean the business is doing really really well and we're all winning together that's the goal.
Okay. Thank you maybe a a good question does generally on how you see the market recovering after co that is done you said that you've seen some clients talking about Oh, we're thinking about increasing their hiring.
Would you see this as a cautious coming of slow emergence over the next two years or would you see it or are you do you think your customers assuming it is.
Something that might end at some.
So in terms of their impact.
At.
Some pointed and then they would hire meaningfully more or like a like what would the growth be slower or faster than the expectations or industry growth over the next five years.
I think I saw somebody pulls it said that the industry is supposed to grow 20% a year or something like that I don't know if you can comment on that too yeah. That's a that's a really great question and I wish I knew all the answers to that my myself in my my Crystal ball is probably no no better than anyone else's.
But we I would just say a few things I mean, we do strongly think that that business. We're in is a growth business and different industry consultants have different growth rates I think you're right I did see one that projected the industry to grow 18%.
A year through 2027.
Other people have said, 15% and other people said low teens, but any way you slice. It we think we're in a.
High growth business, and we strongly strongly want to grow at least as fast as the industry is growing.
We actually want to grow faster than the industry is growing not just growth for growth sake, and not growth if it's not profitable growth but.
Before.
This crisis started we really felt like we had turned the corner mid year 2019.
We were having good growth.
That was in roughly in the 10% range, that's kind of top line and then our margins the way we look at them, we're starting to get into the mid teens and I'm defining margins as adjusted EBITDA before corporate costs divided by adjusted net revenue. That's the main metric I look at.
And we have a goal as a business.
Of.
Adding incremental.
Net revenue at a 30% EBITDA margin 30%.
Top down margin, we've got all the fixed costs.
Paid for we think we could double the size of our company without much of an increase in the fixed costs and so if the starting point is 10% margin and you're adding new business at a 30% margin and you double overtime mathematically the margin should get up to 20% I mean, that's that's the goal so.
So coming out of this.
You know there are some clients that had.
Almost no hiring or hiring freezes that need to catch up and we have other clients that does.
This continued to hire or continue to grow so.
So it's very much a business by business thing.
But the picture on painting is that the trend line for our business should be really really good mid teens ish and there could be a catch up.
For some clients to kind of get back on that trend line. Another.
Another thing I would say is that.
I think it's a good thing and clients are rethinking everything due to the pandemic, maybe they don't need to have as many people.
Working in big offices in Big cities, maybe they can have.
More people working remotely or in some kind of flexible environment, and we're set up very very well for that and.
We started investing in centers of excellence many years ago, we have a very good one in Scotland, we have one in the Philippines, we have one in China.
We're looking to add more of those over time so that.
Back maybe 10 years ago, the model would have been to have a 100% employees.
All in an office, either our office or the client's office and maybe going forward its only 50% that and the other 50% is to have a team in one of these centers of excellence and that that works.
That works pretty well for us and that that's the vision and.
We think clients are more accepting of models like that than they were.
Pre crisis.
That's great.
Thanks very much.
Thanks, Thanks for your questions.
Once again, if you would like to ask an audio question Darren followed by the number one on your telephone keypad.
And that concludes today's question and answer session I will now turn the call over to Jeff Lang for closing remarks.
Well, thank you everybody and I just want to say thank you to our team. Our team has really worked hard this year and as a persevere through a very difficult environment and we think the business has held up.
Really well in Asia, Pac and Europe and.
We have.
Done some restructuring in the Americas and that combined with the quid acquisition makes.
Makes us really excited about.
What we're going to see it going forward and in the Americas as well. So we're excited about the future. We appreciate your interest in our company and thanks for joining us today, and we look forward to giving you another update on next quarter's call.
Thank you for joining the Hudson Global third quarter Conference call. Today's call has been recorded and will be available on the investor section of our website Hudson our PEO dotcom.
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