Hudson Global Inc. Q1 2023 Earnings Call

[music].

Good morning, and welcome to the Hudson Global Conference call for the first quarter of 2023.

Credit call today will be led by Chief Executive Officer, Jeff Eberwein, and Chief Financial Officer, Matt Diamond.

Please be advised that statements made during the presentation include forward looking statements under applicable securities laws.

Such forward looking statements involve certain risks 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 was the 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 for offensively made to non-GAAP terms, such as constant currency adjusted EBITDA adjusted earnings per diluted share practice till the Asian such measures are included on Orange release and in our quarterly slides both posted on our website Hudson RP O Dot com I encourage you to access the earnings for trio at this time as they always sorry.

As a household restaurants start guy during this call Howard I'll turn the conference over to Jeff Eberwein.

Thank you operator and welcome everyone.

Thank you for your interest in Hudson Global and for joining us today.

I'll start by reviewing the first quarter 2023 highlights and Matt Diamond, our CFO , who will provide some additional details on our financial results.

Didn't give an update on current business conditions.

For the first quarter of 2023, we reported revenue of $43 million down 13% year over year in constant currency.

Adjusted net revenue was $22 million and decreased 12% year over year in constant currency.

SG&A costs were 21 million in the first quarter.

50% versus the same period last year in constant currency.

We reported adjusted EBITDA of $1 1 million down 77% in constant currency versus a year ago.

We reported net income of <unk> 4 million or 11 cents per share.

Net income of $3 million or 97 cents per diluted share in the same period last year.

We reported adjusted net income per diluted share of 22 said in first quarter 2023 versus $1 23, a year ago.

I'll now turn the call over to Matt Diamond.

To review, our financial results by region as well as some additional financial details from the first quarter.

Thank you, Jeff and good morning, everyone.

Revenue and adjusted net revenue for our Americas business decreased 36% and 35% respectively in constant currency.

Break even adjusted EBITDA decreased versus last year's adjusted EBITDA of $3 five night.

Revenue for our Asia Pacific business decreased 8% year over year in constant currency and adjusted net revenue grew 9% in constant currency.

Adjusted EBITDA of one 7 million decrease from adjusted EBITDA of $2 4 million a year ago.

Our EMEA business grew revenue, 16% and adjusted net revenues of 31% in constant currency.

Adjusted EBITDA, one 5 million in the first quarter of 2023 increased from adjusted EBITDA was $2 3 million a year ago.

Turning to some additional financial details from the first quarter.

We ended Q1 with $22 3 million in cash and restricted cash.

Days sales outstanding was 53 days at March 2023 up from DSO of 47 days at March 2022.

In connection with the acquisition of Cui group in the fourth quarter of 2020 Gorani in the fourth quarter of 2021.

Batch in the third quarter of 2022, our balance sheet as of March 31, 2023 reflects $4 9 billion of goodwill and $4 3 million of net amortized on intangible assets.

The company's working capital excluding cash increased significantly to $12 7 million in the first quarter of 2023 from $7 3 million at the end of 2020 two.

The company used $5 million in cash flow from operations during the first quarter.

The cash flow use was due to seasonal moves in working capital that we typically see in Q1.

As well as a 2 million outflow for the final earn out payment related to the Cui acquisition.

I'll now turn the call back over to Jeff to give some more perspective, our rps business and to review current trends in our business.

Thank you Matt in the first quarter of 2023, lower hiring activity, particularly in the technology sector led to declines in revenue adjusted net revenue and adjusted EBITDA versus the prior year quarter.

Activity in other sectors remained stable and we've seen a number of new business wins, thus far in 2023.

Importantly, our experienced leadership team has a history of navigating different market cycles and continues to respond quickly to changes in the market to protect our profitability.

We are confident in our ability to manage the business.

And remain well positioned to respond to the needs of our clients go to board.

I want to thank all of our highly dedicated employees for their flexibility.

Work and dedication to our clients and business in the challenging conditions, we have been worked through.

Operator can you. Please open the line for questions.

Yes. Thank you we will now begin the question and answer session.

I'll ask a question you May press Star then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble the roster.

Yeah.

And the first question comes from Edward Riley with E F Hutton.

Hey, guys. Thanks for taking my question Europe looks to be doing really well, but just wondering if you could maybe uncover this a little bit for us, what's what's really driving the growth here.

Yeah. Thanks, Thanks for the question.

We.

We did have a really good quarter and Q1 that was a bright spot.

For us.

We've continued to win.

New business there. So we had a significant win are towards the end of last year that was.

It was ramping up and are in their first quarter and so let me just add new business on top of the existing portfolio. You know it makes for good good year over year growth and then.

You know a year ago at this time the sentiment there was it was very poor everyone was talking about a recession downturn.

So we think some of our clients are maybe under hired last year, and then things ended up not being so bad there.

From what I can tell.

You know things stabilize then they didn't go into a recession.

And hiring I'm actually picked up.

At the beginning of this year and it was ahead of our head of our expectations and showed a year over year growth.

Okay Gotcha, and then on some of the other new business wins that you've had which geographic reasons regions of these predominantly taking place and should we should we maybe expect this to ramp for the rest of the year.

Yeah. We're we're very excited about this year you know first quarter is always the weakest quarter of the year.

And Ah.

Australia is largely on.

The vacation pretty much the whole month of January and we had a lot of instances where clients and our own team actually took.

Quite a bit of leaves and in January to make up for not a lot taking their full vacation. When we were coming out of Covid and everyone was super busy interests really men and we've seen improvement globally each month throughout the quarter.

And April is better than March which is encouraging the new business wins are heavily and Australia.

U K U S and a little bit in Continental Europe , India and China.

Okay, Great and then one last one for me could you maybe just talk about how you spend.

And adjusting our cost structure I'm, just given given the weak environment, particularly in the U.

Yeah, that's a that's a that's a really good question.

We've talked before about Oh.

Our costs are.

Team costs.

Tend to be 70% of net revenue so not the gross revenue, but the but the net revenue and we strongly believe in that trend over time and if you look at Q1. It was a significantly higher than that if you take out the stock based comp and the nonrecurring items.

I think the.

Salaries and related line with something like 77% of net revenue.

And we we see a combination of revenues increasing from here or we think each quarter is going to improve as the year progresses and costs will.

Cost as a percentage of that revenue will decline going forward.

And the I guess the issue we've had.

Over the last nine months has been a I was just a global unevenness you know some areas, having a very sharp decline like the technology sector and other areas, where we have won new business and have continued to hire.

And it's not so.

So easy to take someone who was doing tech recruiting in the U S.

<unk> moved them to Australia, because we just had a new win in again in Australia. So we have some areas where we have.

Two little labor and other areas, where we have two more too much and it just takes a quarter or two too.

Get it get it all adjusted.

And we.

We strongly think that the.

The long term trend line is good is gonna be that a 70% salary costs, 70% of net revenue.

Okay, great. Thank you very much.

Yeah.

Thank you and the next question comes from Marc Riddick with Sidoti and company.

Good morning, Ralph Good morning.

Morning, I wanted to see if we could touch.

Touch a little bit on maybe what you were seeing it I think in the past we've talked about maybe some of the different behaviors and actions that you were seeing whether it was smaller.

These larger tech companies things that things like that I was wonder if you'd talk a little bit about maybe what you've seen more recently and in various differentiation and then maybe we can sort of go into maybe what you're seeing as far as project based auctions.

Yeah. So what we're seeing in the technology sector and also just to be clear, we do lots of technology hiring every one of our clients, whether it's a pharmaceutical company or a financial services company or a consumer company.

It does a lot of I T hiring and we do a lot of hiring.

Hum it professionals and when we talk about technology, we're talking about that the tech sector, specifically and what we've seen there everybody can see the headlines with a lot of big Tech companies.

Doing multiple rounds of head count reductions and our specialty has been in that high growth medium sized company that maybe just recently went public or will soon be public and there.

Ramping up.

Their team in order to.

Meet the growth that's going on in the business.

And you know so a lot of that is.

It has.

Stopped in Naves shed people and so we would estimate that hiring in the technology sector.

Is down 80% year over year.

Which.

Sure.

Really seems like an unsustainable level to us a lot of our clients.

We have all the the the paperwork in place are all of the contracts et cetera. So if they want to resume hiring again.

We can turn that back on very very quickly.

And a lot of them have.

Tell us that they've cut.

Cut very very deeply including cutting a lot of people and our HR and talent take care of it and going forward they'd like to have more of a variable cost model less of a fixed cost model and will use more RP O. The next time around so we don't know when it's going to recur.

But when it does we're incredibly well positioned to quickly get back to the levels, where we were at previously.

And.

The areas that there there is a little let's say some green shoots are smaller down in the D. C area, where there are companies getting funded and AI.

And cyber security those are those are two areas, where we are seeing some activity in hiring and some companies get funded.

And then another area, we had a decent win in Q1 that was ramping up of I T services. So these are companies that help.

Help other companies with their ERP systems upgrading to the cloud version building websites and there's still a decent amount of work for those it services companies and so we have.

We did have a decent win of an it service company and we have been targeting.

Targeting that space.

So you actually anticipated some of them had something of a couple of things I was going to ask particularly on how this sort of lays out for future RP O opportunities and and the like and as well as the AI commentary. So I. Thank you for that I was wondering if you can talk a little bit about maybe what you're seeing with with candidate availability and how that might play out.

Through the year as well as you know sort of a bill bill rate a wage rate Oh, all opportunities throughout the throughout the year and what you're anticipating there.

Yeah, Let me just make sure I understand your question in terms of the candidate availability are you talking about.

Recruiters hiring for clients or are you talking about our ability to recruit careers.

The the first time I heard the former.

Yeah.

It's still really tight you know it is.

It depends which sector and it depends which geography.

And there are.

Pockets.

You know I would say the tech sector and she'll at Silicon Valley, San Francisco area are the epicenter of hiring weakness.

But then you have other sectors that are really struggling to find people, particularly health care life Sciences medical devices.

We we have a client.

Who has really struggled to find people and places.

Places like Texas, and the Midwest, there's a real shortage of people and so it's kind of hard to paint with a broad brush because there's pockets that are still really tight and then there's other areas of.

Weakness or even extreme weakness.

You know I'd say light industrial.

We've seen some weakening there.

And then on the salary wage rates.

Got it.

It's certainly less.

Hot then it then it was but what is encouraging to us is that.

And what makes us really optimistic about margins expanding going forward is that because of the.

Increase in wage rates.

It gives us a pricing umbrella and so on new contracts or when contracts renew where we're getting in some cases, a significant price increases just because the cost of our people is up and we feel that immediately and we're not able to pass that through until the contract comes.

Up for renewal.

And is it just kind of an industry wide thing, but yeah set another way, where we're under earning right now our margins are at.

At a low point I think this is a you know the low point of cycle for us.

Okay, and then I was wondering if you could talk a little bit about has there been much of a change in what you're seeing as far as acquisition.

The pipeline valuations, whether you've seen much of a change in what's available out there and you know.

Whether the the macroeconomic conditions.

Provided maybe some potential opportunities there. Thank you.

Yeah, I think that I think that's getting better but.

But I would say I'm not yet so what we saw last year is we looked at a lot of targets. It seemed like there were Ah.

Higher than normal.

A number of acquisition.

Acquisition targets on the market and few of those deals did get done.

Many of them did not get done, which we would chalk up to.

The seller wanting a peak multiple on.

Peak earnings and just had too lofty expectations.

Now for a lot of those candidates.

A lot of us earnings are flat to down and Ah you usually there their expectations that it takes it takes a few quarters.

For them to reset the eight eight.

The memory of that high point is still is still really fresh, but I would say it is the gap between bid and ask is starting to narrow.

Not.

Not enough in our view and we're pretty value oriented and.

We we have the luxury of not needing to do anything at all but we're looking.

Looking at things all the time, we're in the market all the time, we have benefited from from looking at things we've learned a lot.

From from doing that.

And even if we never do another acquisition we benefit from.

Being in the market and and and looking at things and just staying in touch with with people, who we think.

Might want to sell at some point.

Great. Thank you very much.

Good questions. Thank you Mark.

Thank you and the next question comes from Gabe Sanchez, a private investor.

Yeah.

Good morning, Hi, Jeff Hi, Jeff. Thank you for taking the question.

So our P. O is a fragmented industry with few barriers to entry.

I recognize that there's room for numerous players I'm still curious how you think about long term survivability and Hudsons competitive advantage I know you all focus of modern on reducing corporate costs. So I'm wondering if you're looking to be the low cost operator, or if you would argue that there's a specialized their unique service offering at Hudson.

Yeah, no really good question.

I'd say our specialty.

Is are big company capability, but small company service level and feel we get rated really highly in the industry on our service level.

And our value proposition.

We.

We really do well our sweet spot is clients that higher.

510.

10000 people a year somewhere in that zone is our is our sweet spot and most of our clients are in that range. So if it's a client that hires.

A lot more than that.

Might that be.

Such a great fit so.

You know RPM is hard to break into you know there are some boutique firms out there that specialize in a geography or maybe they specialize in an industry and I think they there will always be a place for small boutique firms that have that kind of specialty but.

They tend to have a hard time breaking out of that.

Geography or that sector and a lot of the ones that we've talked to and looked at them you.

You know, even if we don't end up.

Looking at them from an acquisition point of view, we develop a relationship with them and we had.

An example, recently where a smaller RPE Oh, that's a regional player had a client that needed help expanding globally and that's a smaller RVO provider isn't really set up.

And so we're going to partner with them and service the client we're looking into servicing the client together as a team where they would focus on what they do best which is that particular region and we would focus on all of the international rules.

So.

You know there are some big.

Global firms out there that are trying to be all things to all people but.

They don't always have the the service level that are that we have.

And what I would say, we also specialize and.

White collar professional roles where.

Talent is absolutely everything and the company has to get that right and it has to find the right people and build the right team.

And the sectors that we're in our lineup.

Well for that so I think we're I think there's I.

I think we're in a good a good space.

In the market, there's a lot of.

I guess, you can call them medium sized companies in that.

Gentlemen, where they hire 500 to 10000 people a year that.

We offer the best service and the best value proposition.

Yeah wonderful. Thank you for offering that's thoughtful answer and I'm curious because acquisitions have been mentioned several times on this earnings call you.

Do you consider a particular hurdle rate when you're making these acquisitions and how likely do you think it is that we leverage the full net operating loss carry forward over the years and acquisitions.

Yeah, our our number one bullet point on an acquisition is it.

Accretive to the business and to us.

Nationally.

So does it.

Still a hole in our portfolio and then can we do something more with it than they could do on their own. So in other words, what's the industrial logic is it truly more valuable owned and managed by US then.

Someone else or just staying independent.

And.

It's a pretty pretty high bar.

And this is a people business and so the culture. The culture has to fit and if we if we do all of those things I think the returns are.

Take care of themselves.

You know if I had to eat people asked me to throw out a number you know I think any acquisition we do.

We do we want to look at it and say.

Inside of Hudson. This is gonna be a 20% return on investment and we're going to be able to grow.

Grow the size of the business overtime.

Awesome. Thank you and if I could just sneak in one last question given that 50% of sales were attributable to just two clients last year or in 2022.

I want to share any insight at all regarding those two clients and do you think that that high client concentration will persist or do you expect to diversify the customer base over time. Thank you.

It's the second one as we grow where we think we're in an industry that is growing 15% a year on average that doesn't mean every single year is exactly 15%.

Some years will be less than that some years will be higher than that but we think we're in a high growth industry and we want to grow at least as fast as the industry is growing and what what youre, referring to is a disclosure in our 10-K and that disclosures based on gross revenue not net Rev.

And in the contracting business, we do we have a huge amount of.

Our revenue most of it is passed through and we make a very small.

Margin on that so.

It's it's a less concentrated if you look at it on a net revenue basis, but those larger clients are very long term relationships.

Very very sticky.

Very interdependent.

It's not something that keeps me up at night, I guess I'll put it that way.

And we don't have any major contracts coming up for renewal.

And in the next year that I'm, certainly not that I'm worried about.

Got it thanks, so much Jeff.

Thank you and once again, please press star and then one of you would like to ask a question.

And is there something where I would like to return the Florida, Jeff Eberwein for any closing comments.

Well. Thank you operator, and thank you for your questions today are very very good questions. We appreciate you joining us. We appreciate your interest in the company and feel free to contact us anytime by using the information in our press release or on our Investor Relations website, and we look forward to.

Your next quarter's update call have a good day everybody.

Thank you and thank you for joining the Hudson Global first quarter Conference call.

Call has been recorded and will be available on the investors section of our website Hudson RP O Dot com.