Hudson Global Inc (HSON) 2007 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Hudson Highland Group's Q3 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr.

David Kirby, Director of Investor Relations.

Sir, you may begin.

Thank you, operator, and good morning, everyone.

Welcome to the Hudson Highland Group Conference call for the third quarter of 2007.

Our call this morning will be led by Jon Chait, Chairman and Chief Executive Officer, and Mary Jane Raymond, Executive Vice President and Chief Financial Officer.

Before we begin, I will read the Safe Harbor statement.

Please be advised that, except for historical information, the statements made during the presentation constitute forward-looking statements under applicable securities laws.

Such forward-looking statements involve certain risks and uncertainties, including statements regarding the Company's strategic direction, prospects, and future results.

Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements, including economic and other conditions in the markets in which we operate, risks associated with acquisitions, competition, seasonality, and the other risks discussed in our filings made with the SEC.

These forward-looking statements speak only as of today.

The Company assumes no obligation and expressly disclaims any obligation to review or confirm analyst expectations or estimates or to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

With that, I will now turn the call over to Jon Chait.

Thank you very much, David, and thank you for joining us today.

The third quarter was noteworthy for the high level of global financial turmoil.

Many investors are asking us what impact that may have on our business going forward.

Accordingly, in my remarks today, I'm going to comment on that issue, as well as the highlights of the third quarter.

The volatility of the global financial markets did not have a material impact on our reported results for the third quarter.

However, for the first time in September we experienced a tendency among large financial institutions to defer hiring decisions or reduce new orders for permanent recruitment.

This tendency simply confirms some of the public announcements that have been made by those institutions with respect to staffing levels.

It is not so pronounced as to be characterized as a trend, but there is clearly an increased caution with respect to hiring in that sector.

It is very mixed with some institutions being more effected and, in some cases, mixed even within a single institution.

This is factored into our guidance, which MJ will review shortly.

Our business, with over 50% of gross margin dollars attributable to permanent recruitment, is sensitive to uncertainty, as well as to actual downturn.

So we are keeping a close eye on developments in this area.

Before I turn to a review of regional results, I want to mention that I'm going to do two things today that I usually resist.

First, I'm going to discuss our September monthly results in more detail because I think it is the best indicator of trends that may impact our future results.

I'm also going to comment, in most cases, on permanent recruitment specifically, since this is the part of our business, which is most sensitive to the economic cycle.

Turning now to the regional review, let me start with North America because I know this is a region that many of you have raised questions about over the last several quarters.

Revenue is down 5% on a gross margin decline, 8% compared to prior year.

The gross margin decline is entirely attributable to permanent recruitment, since contracting gross margin dollars were up slightly.

Looking first at contracting, as measured in gross margin dollars, contracting improved sequentially through the quarter with September being sequentially up more than the expected seasonal impact.

Contracting was fueled by good results in Legal, IT, and Financial Solutions.

I would say it's too early to characterize this as a recovery in our North American contracting business, but I would say it is a sign of progress.

Perm, on the other hand, in North American was down in Q3 compared to prior year, and also down sequentially.

Although, most of the sequential decline is attributable to the conclusion of one RPO project taken in-house by a client after several years.

As a result, looking at the results for the quarter and the results for the year to date, I would characterize the North American perm business, overall, as steady.

Looking at the European region, Europe had another strong quarter in terms of profitability.

EBITDA was up 49% and reached 5.5% for the third quarter compared to 3.7% in prior year.

As most of you know, the third quarter in the European business is fairly dramatically affected by seasonality due to the heavy vacation season in July and August in Europe.

In the UK, permanent GM was up for the quarter, but down in September.

The practice group results were mixed.

With IT banking up, but finance down and banking flat.

In continental Europe, permanent gross margin was up for the quarter and the month.

However, in continental Europe, we did see evidence of deferral of decisions and slowdown in new orders spread across a range of large European financial institutions.

While very mixed across geographies, there is certainly an increase in cautious sentiment with respect to new hiring.

Critical hires are still being made, but others are being deferred.

EBITDA increases were achieved in the UK, Belgium, France, Sweden, and in our Balance subsidiary in the Netherlands.

Looking at APAC, revenues increased 5%, gross margin increased 14%, and EBITDA remained at over 9% of revenue.

The differential between revenue and gross margin growth reflects the exiting of low margin business in the Australia/New Zealand market earlier in the year.

While our gross margin growth was driven by strong results in Asia, particularly Hong Kong, China, and Singapore.

The Australia/New Zealand unit had good results in increasing their gross margin percentage with GM increasing to over 18% from 16.6 in the prior year.

In closing, many investors have asked whether we believe there will be a recession and, if so, what the impact would be on Hudson.

I'm not an economist, so I have to say I don't know whether they'll be a recession, but I will say that we've taken action over the course of the last year to strengthen our financial position and improve our cash flow.

As I mentioned previously, we are seeing some data that is causing us to be somewhat more cautious in our guidance for Q4, but this caution is very measured.

In the meantime, our goal is the same, whether we have a recession or we don't.

Build our business and our brand so that we can be more strongly positioned in the future, regardless of the cycle.

With that, I will turn over to Mary Jane for a more detailed analysis of the financial results for the quarter.

Thanks, John.

Good morning.

You all have the report of results, so I'm not going to read them to you.

I'll just give you a few highlights, first, operationally then, on a few of the financial matters, including the open accounting issue.

At Hudson, the case for the last two years in our company, we delivered gross margin dollar growth at a rate measurably greater than the revenue growth.

That is due to the consistent application of our strategy to move to higher-margin businesses and higher value areas in some of the businesses we were already in.

It also includes selling non-core businesses.

As John already mentioned, we signed a definitive agreement to sell the Australia Trade Industrial business earlier this month.

Financially speaking, that's now in discontinued operations and the results for that business are out of both years.

This strategy is further seen in the gross margin percentages where temporary gross margin is up 20% this quarter compared to last year.

It's up to 20% from 18.7 last year and the total gross margin is at 39.9 against last year's of 36.9.

These patterns of greater gross margin dollar growth and the stronger temporary gross margin percentages is true in all of our regions.

Our revenue of $341.3 million is flat to last year's revenue in this quarter.

While that may actually appear at the low end of our guidance, which was $340 to $355, our reported results don't include the Australia Trade Industrial business.

The guidance did not anticipate, as it never does, any disposals of business.

So, if one were to add that back -- you have the results for prior years -- it's roughly about $11 million a quarter.

If we added that back to the $341 you'd see that actually we'd be towards the top end of the revenue guidance.

Our adjusted EBITDA of $11.8 million compares with last year's $11.4.

This came in at the top half of our guidance as we had indicated in mid-September.

It actually includes absorbing the loss of the adjusted EBITDA from the Australia Trade Industrial business, which is roughly about $300,000 notwithstanding, as I just mentioned, our guidance did not anticipate any disposals.

The international regions, Europe and Asia-Pacific, delivered adjusted EBITDA returns in this quarter of 5.5% and 9.1%, respectively.

This, as you look at their pattern over the last few quarters, moves them pretty squarely on a trailing 12-month basis towards the stated goal of 7 to 10% EBITDA return.

John talked about the North America market already.

While down to prior year in dollars on the key parameters, revenue, gross margin, and adjusted EBITDA, they did a very good job delivering on the challenges they had in this quarter.

We had noted in the third quarter guidance that Legal, for example, had a challenge of converting its sales pipeline pretty quickly inside a quarter due to a project that ended at the end of the second quarter.

This business, which has grown wonderfully over the last four years, never actually quite faced that before, converting inside the next quarter.

And they did a very good job at that.

Similarly, the Financial Solutions business, which had reorganized, did a good job converting the benefits of that, again, inside the third quarter.

So, North America exceeded my expectations of being flat to the second quarter, which is what I had mentioned on the last call.

Moving to some of the more financially oriented points, currency is helping our results.

About 80% of our gross margin comes from the international operations.

Reported revenue and gross margin are up about 0 and 8% respectively, were on a constant currency basis, negative 6% growth on revenue and 1% growth in gross margin.

Our adjusted EBITDA is below prior year on a constant currency basis by $1 million.

But actually, I mean, if you just do the math, frankly, that's really driven by North America still because North America was down $2 million to prior year.

Our EBITDA is higher than our adjusted EBITDA, which is a pretty atypical relationship.

The reason for that is because we successfully assigned an old lease that was part of the pre-spend merger and integration charge.

The UK team did a very good job on this because assigning this lease to the new tenant means we have basically extricated ourselves from that total liability, leaving us no more responsibility for it and that means we can bring that charge back into the equity.

We have about $1 million in non-op income, which, frankly, is basically currency-related.

We had favorable impacts from exchange rates on intercompany balances that we settled in this quarter.

Our tax rate is high this quarter, it's 58% and it's about $3.7 million over last year.

$2.4 of that is from International for two reasons.

One is the increased income in International.

The other is actually this sort of arcane thing of the valuation reserves.

The valuation reserves in New Zealand and the UK expired last year.

They were still in effect through last year and, as a result, they actually lowered the reported tax rate last year.

That valuation reserve impact is about $1.8 million.

The remainder of the increase in tax is primarily due to the increase in our FIN 48 interests, as well as state and local taxes in the U.S.

As we've mentioned in the past, or as I have mentioned in the past, tax planning is important to us and it's an area that we're focusing on at this point in time.

Notwithstanding our flat adjusted EBITDA to prior year and the higher tax provision, income before discontinued operations is up 20% over last year on a reported basis and 44% on a constant currency basis.

The discontinued operations number of negative $300,000 is actually the combination of two things.

It's the disc-ops income from Trade and Industrial, which would have otherwise been at the disc-ops level about $200,000 positive.

But it's offset by some charges for liabilities that we retained with the Highland Partners divestiture.

Net income is $3.9 million, ahead of prior year by 10% -- excuse me, sorry, below prior year by 10%.

Having said that, net income is a major priority for us.

Turning to cash flow.

Our net cash at the end of the quarter was $20 million.

As of yesterday, however, we had paid off the outstanding debt and we had no debt compared to $15.2 million outstanding at the end of September.

The cash flow from operations was $2 million in the quarter.

I was pretty disappointed by this because, as you know, we've made cash flow a priority in our company.

That said, for the whole year, year-to-date, the cash flow is still at about $15 million compared to $17 last year, so it's a fairly decent continuation of the track record.

DSO is flat to prior year at 58, largely driven by the DSO in Europe, which itself is largely driven by the high vacation period making, not only some of us not in the office but, frankly, all of our customers not in the office.

Capital expenditures for the third quarter were $2.9 million.

That was consistent with our expectations.

That brings us to $9.2 million year-to-date.

You might ask me, your guidance -- your amount that we talked about was $14 million, not quite guidance, but just our indication, indicating that $5 million would be spent in the fourth quarter.

Generally, as most of you know, capital -- everybody thinks they'll spend it by April and they always spend it in the fourth quarter.

We may come in slightly better than that, but I wouldn't be surprised to see the capital a little higher in Q4, that tends to be relatively consistent.

Turning to the guidance.

Our guidance for revenue is $325 million to $340 million for the fourth quarter against $329.3 million last year.

Our adjusted EBITDA guidance is $12 million to $14 million, compared with $14.8 million last year.

Just remember, if some of you are remembering the 15-ish number, this is, again, because trade industrial results are exploded from last year's number.

Regionally, we expect (inaudible) and Asia to be flat in the fourth quarter to prior year.

For Europe, we expect them to be flat the second quarter of this year.

Just as a reminder, their pattern is that, typically, Q1 and Q3 behave sort of the same and Q2 and Q4 behave sort of the same.

Last year Europe's Q4 was above Q2.

I think, based on the good comments that we have from John, we're not really banking on that this year.

I think that Europe will be, again, flat to the second quarter of this year.

We expect North America to be sequentially flat to the third quarter, which, again, would be down about $2 million to prior year.

This, as always, doesn't include the impacts of any acquisitions, divestitures, restructuring, or any other unusual stuff.

And, again, this is on the adjusted EBITDA level that we gave the $12 to $14 million guidance.

As we noted in the shareholders letters, we expect that our competitors will deliver strong international results, particularly in U.S.

dollars, given the currency situation.

As John already well pointed out, we're just a little bit more cautious about the macro-economic impacts on our business.

Because of the relative size of our business outside the U.S., the degree of our earnings outside the U.S.

and, frankly, the relatively low level of earnings in dollars that we have as we have probably spent more time talking about than you would like.

No, a million dollars is a lot of money to us.

I will address a couple of questions that I think might be on your minds before I do this accounting matter that I'll describe to you.

Some of you might ask me about the Highland Partners divestiture, which was completed last October and has an earn-out provision in it.

We have worked very well with Heidrick & Struggles over the last year on the post sale aspects of that divestiture.

They've done everything that you read and I read about that Heidrick has to say.

The Highland Partners business seems to be working according to plan.

Obviously, I can't speculate on anything with Heidrick's results or Q4, really, for either of us.

But, at the current course and speed, it does look like some part of the 2007 earn-out should be possible.

As to our tax rate for the full year, we expect it in the mid-fifties on a percentage basis.

For this year, I think it, frankly, would be pretty hard to be at 30 or less since North America will be roughly at break-even and that is the region that has most of our 250 million NOLs.

And also the effects of the valuation reserves that had lowered last year's rate now being expired in two of our countries.

As to what may happen with other core businesses that we have talked about in the past, you may remember in February of '07 we said we had about 10% of our revenue that we considered un-core.

I would say that, as we said at the time even then, timing on these things is always very difficult, and what options are available to us, when.

But I would say that current market conditions that are prevailing right now may change the set of options that are open to us and they may change the timing.

But we are focused on driving the consolidation of our core business.

With that, let me turn and just describe to you this open accounting matter that we have in our press release.

The company recently came upon the existence of an agreement that existed among the four JMT Partners.

This agreement provides that if any one of the four of them were to leave for any reason during the earn-out period, portions of their earn-out would be reallocated among the other shareholders who continue to be employed.

Our company wasn't a party to that agreement, but the JMT Partners themselves actually thought it was just between them and wasn't relevant and they were careful in that thinking.

The effect of this agreement, however, could be considered to convert a portion of the earn-out payments currently booked to the goodwill, as compensation.

Any portion of the earn-out that are conditioned on employment would be recorded for as compensation.

Under the accounting rules applicable at the time this agreement was done, which was back in 2004, we believed this agreement was simply an agreement among the JMT Partners and not attributable to the company.

In addition, subsequent accounting interpretations from 2005 forward, that we believe aren't retroactive, could be seen as making this agreement now attributable to the company, even though we weren't a party to it and it wasn't actually meant to include us.

Our auditors have said that this is actually a very unique situation and set of circumstances.

The company has to figure out how to apply various judgmental accounting standards to this, given all the facts and circumstances of this transaction.

So, to do that, the company plans to use all available channels that it has to resolve this matter and we are working to accomplish that before the 10-K filing.

As I say, if this were straightforward, it would be straightforward, but it isn't.

We have worked very well with our auditors on this process to understand it and, as I say, we are working all channels available to us to try and resolve this.

My personal view is I think this is the right thing for us to do.

It's important to do this well and so that's what we will do.

With that, let me turn it back to John.

Thank you, Mary Jane, you meant to say before the 10-Q filing.

Oh, I'm so sorry.

Actually, that's important, thank you, John.

Absolutely.

I did absolutely mean that.

Which is what is in our shareholder letter --

It was in the shareholder letter, yeah, that we will try and resolve this before the Q filing which is, as you guys know, around about mid-December.

Thanks.

Okay.

With that, operator, Amy, we'll open up to Q&A.

Thank you.

(OPERATOR INSTRUCTIONS) The first question comes from the line of Jeff Silber from BMO Capital Markets.

That's pretty close, it's Jeff Silber, good morning.

First of all, thank you so much for the caller and the candor, it's very appreciative.

I don't know if you can give us any update on the trends in October.

You kind of talked about September.

Have things changed at all materially in any of the regions?

I give you a very qualified answer and, Jeff, which is to say, we have very -- we have data, but given the fact that it's only a couple of weeks of -- we're here at October -- what is it, October 25th?

So, we really only have two or three weeks of data depending on the region.

But we haven't seen any change.

Okay, that's fair.

You had mentioned the earn-out with -- in terms of the divestiture of Highland.

Are there any other potential earn-outs out there that we need to be concerned with?

You mean the possibility of getting more money?

Well, yeah, either that or any of the other acquisitions that you've made in prior years, are there any other earn-outs that you might potentially have to pay out?

Oh, okay, then because you said Highland, and in the Highland case -- I think you said Highland -- the Highland case, we're going to get money.

Yes, sorry about that, messed up.

And we're actually pretty focused on hoping that we get a lot of money.

But, in terms of possible payouts, Mary Jane, you wanted to comment about that.

Jeff, we're over the hump, really on most of them.

In the 10-K we had noted that we had about $30 to $40 million of earn-out payments and the largest one was paid out in the beginning of July to JMC.

So we do have, let's see, I guess, three relatively small acquisitions with earn-out provisions in them, but I wouldn't say those numbers are material.

And then, jumping back to the Highland Partners payout to you, do you have any rough estimate how much that might be?

Probably not at this time.

The formula is pretty clear.

As much as 70% of the earn-out can be earned after the first year -- after the 2007 year.

That's the formula that's in the purchase agreement.

And -- but I'm not an expert on Heidrick's business as to how steady it is across the quarters.

But, again, I'd say it's a fairly decent chance that we'd be able to have some of that.

And, I think, just to remind you of another fact, the way the formula roughly goes -- just kind of as an adjective -- is they basically have to maintain the revenue levels that they had when we sold them.

So it doesn't have a huge up-tick in revenue for that 70% to kick in.

And I think, as I understand it, they're doing, not marginally -- not majorly different than that, but I just -- I can't quote those numbers to you.

Okay, that's fair.

In terms of, I guess, what you categorize as the non-core businesses, you mentioned at the beginning of the year, roughly about 10% of revenue.

Now that you've divested the Australian business, how much is left?

Jeff, hang on -- first of all, I'll answer your question on the non-core businesses, but John was just going to give you one other comment.

Yeah, let me just ask you -- I'll ask Mary Jane a question, because I think I just want to get this on the table.

Mary Jane, do you remember the maximum we can get on the earn-out from Highland?

Yes, the maximum on the earn-out from Highland is $15 million.

I'm sorry -- 1-5?

Yeah, that 70% got me a little nervous.

So it's $15 million maximum on the earn-out and there's -- it's a two-year period for the earn-out and the earn-out is actually a little bit weighted towards the second year results, as I recall.

Right.

Sorry, so, it's $15 million.

I think, if I recall correctly, roughly speaking, the way it would pay out is, up to 6 in the first year and up to 9 and then -- 9 on the balance in the second year.

Great, that's helpful.

We'll double-check the paperwork, as well.

In terms of the non-core business again, roughly how much is left?

Well, because the -- we had said it was roughly about 10% of revenue.

And what we sold here was about $40 million, so we've got somewhere between 100 to even say 120 depending on what's included in the acquisition that's left.

So a fair bit of it still.

Okay, that's fair.

One more, and then I'll let somebody else jump on.

In terms of this open accounting issue, I'm assuming if things have to be, I guess, restated it would be non-cash?

Is there any tax impact or -- just let me double-check, is there any cash impact, as well?

Well, first of all, let's do the cash question.

There's no cash impact.

The cash, we've already paid.

This is -- I wouldn't be so cavalier to say it's simply a geography issue, because obviously it would come off of the balance sheet onto the income statement, but there's no financial impact other than where it's recorded.

So, there's no cash impact to that.

As to the tax situation, we are in the process of evaluating that at the present moment.

All right, great.

I'll jump back in the queue, thanks.

Thank you, Jeff.

Your next question comes from the line of Mark Marcon from Robert W.

Baird.

It's Mark Marcon from Baird.

Good morning.

Good morning.

With regards to this -- quick housekeeping questions.

In terms of Australia and Asia-Pac, what's the year ago comparison period that we should use in terms -- for the fourth quarter?

I don't --

I think he's trying to take out discontinued operations.

The Trade Industrial --

That's exactly what I'm trying to do, John.

Sorry, I was feeling like a bit of a dope, wondering what your question was.

Okay, so, I'd say roughly speaking, the Trade Industrial business was not terribly seasonal.

I'd say it's around about $10, $11 million of revenue.

And probably around about 300,000 to 400,000 of EBITDA.

Great, thanks.

Maybe it could be slightly 5 up but 500,000 of EBITDA, but it's roughly something like that.

Okay, so that's the easy question.

The harder question is first of all, I appreciate the candor, again, with regards to your note to shareholders and friends.

And, what I'm wondering is, can you tell us if you weren't concerned about things, is your guidance basically predicated on what you're currently seeing or what you fear may happen?

How do we think about your guidance vis-a-vis what your actual experiences are relative to what could potentially happen?

I think what I'd say, Mark, is it is more trying to extrapolate what we're seeing.

Because -- and what happens, like, in our business because it's so perm-oriented -- we get orders, let's say in a month -- month one -- those orders get fulfilled in month two or month three.

Right.

And so, what we're looking at is changes in incoming rates in month one and extrapolating forward to month three.

Now there's a lot of noise or variation because it's not a straight line.

Some orders get filled, some orders the customer pulls, there's all sorts of other things that happen.

But, what we're seeing, as I mentioned in the Financial Institution sector, is a much greater degree of caution, which makes us look at incoming order rates when we're seeing some reduction.

Not massive reduction, so we're trying to be very careful about balancing it.

So, we're seeing some reduction and we're also extrapolating from that a little bit and saying we're exposed to orders that are on the books being pulled.

And you only have to pick up the newspaper and see what banks are announcing layoffs and restructurings and huge losses, and you can imagine that chief executives of those institutions are telling their team to be careful about hiring new people.

We're trying to be very balanced about it because it is very mixed.

We have an institution in Europe, which is telling us in one country that a couple of decisions that are, for us, significant decisions, are put on hold.

And, on the other hand, they're giving us an order in a emerging market for 25 new bankers.

So, clearly those institutions are making decisions about areas of high priority to them and in those areas they're still hiring, but in other areas they are being cautious.

Okay, can you remind us across your various geographies what your exposure is to financial institutions?

Mary Jane will give you the exact detail, but I would say it this way first.

The two largest components of our industry are financial institutions and technology companies.

That's true, so far as I know, in almost every company in our industry, on the industry overall.

I would say -- I mean, I don't know what you think, you probably have as good a handle on this or better than I do.

I would say those two sectors account for 30% to 35% of the industry's revenues.

Those two sectors and roughly half and half -- financial institutions and technology companies.

So, our business is similar, you have to also look at it within our practice groups because some practice groups might be doing business with financial institutions, but they're less exposed to the economy.

For instance, our legal group is somewhat less exposed than the others.

But, having given you that background, I'll let Mary Jane talk about the actual facts.

Well, as usual, John has given you the only points that matter.

But, seriously, in the North America Unit, we do not have a huge exposure to the financial services sector.

It's obviously an important sector in the U.S.

in general, as an economy, but we do not have very much of a practice there at all.

From a gross margin point of view, our whole Financial Solutions practice is only 13% and, generally speaking, a relatively small portion of that, and a relatively small portion of our IT practice, is in financial services.

In the UK, however, it's probably about 15%, so when John talks about what the whole industry's about 30-ish to 35% in the UK, it's roughly about 15 and then I'd say when we get to continental Europe, it's 15-ish to 20.

When we get to Asia, it's closer to the 25-ish kind of range.

So, that's kind of the walk around the geography.

Okay, great, thank you.

I'll jump back in line.

Thanks, Mark.

See you, Mark.

Your next question comes from the line of Tim McHugh from William Blair and Company.

Yes, I just wanted to ask, given the comments you mentioned about some of the trends or issues you saw in the month of September, is there anything you're doing differently in either the United States or Europe as you manage the business going into the fourth quarter here?

Well, we've been doing -- as I mentioned in my remarks, Tim, in our way of thinking, we've been doing something differently for at least a year.

About a year ago -- and it was no great genius -- I couldn't have forecast the sub-prime crisis, but it did seem to us about a year ago that the U.S.

economy was slowing.

And, as much as you -- every manager is always focused on cash, we became more focused on cash and I think we've had a very good improvement in cash collection over the last year.

The other thing we've done is we've improved our credit agreements.

Elaine Kloss, our Treasurer, has done a great job in renegotiating our credit agreements and I really think we have to give her credit for that.

In a time where financial institutions are being very reluctant to give credit to anybody, we've actually gotten an increase in our credit agreements and improved terms as recently as about six weeks ago at the height of the crisis.

So, we're in a much stronger liquidity position, we're in a much stronger financial position.

Certainly we've been very careful about our hiring and very balanced.

In some places where our business is really booming -- in Asia, of course we're hiring.

We're doing the same thing that I talked you about our clients were doing.

Places where our business is booming, it's a priority of us, absolutely we're hiring.

Other places, we're being very careful about hiring because we're looking at the same macro-economic environment everybody else is and being careful about ramping up our expenses.

So, that's the management side.

I think, in terms of calling on customers, we continue to focus on our specializations, which we think are important in terms of giving us some degree of insulation from macro-economic developments.

People always need lawyers, people always need accountants, maybe not always, but they need them -- there's a much higher degree of need, regardless of economics, I think.

Okay, thank you.

You mentioned -- this is for Mary Jane, you mentioned that you paid off all the debt as of yesterday.

Is that because of some timing issues, did a lot of cash flow come in right after the end of the third quarter or did you simply take down your cash balance?

And then, I guess, how does that relate to, I guess, if you can, give us an update on what you might think about cash flow for 2007?

Okay.

So first of all, with respect to the question of, did we just take down -- did we just have a lot of cash come in?

Basically, the challenge that we have in the third quarter, as I said, is sort of the vacation period.

So, what we then have the ability to do in the beginning of October is to begin to collect the September receivables, which is the biggest month of that quarter by far.

So, by definition, since the last week of the last month of the quarter in our business, particularly in perm, tends to have a lot of business billed out.

The time we would collect that, then, is in October.

So, that's part of what was happening.

Secondly, we -- and just in terms of managing our interest rate on our credit facility, we had a LIBOR loan that was locked on the 24th, just given how various things were moving around the world, so we wanted to be able to pay that off, and that's what we did.

So, I think, really what -- again, even though I would have liked to have the cash flow positive in the third quarter proper, basically the timing just worked a little bit against us at this point.

So, even though we have a reported net cash position and net -- and an outstanding debt position at 930, from a cash management point of view, the team stayed really super focused on continuing to get after that debt and pay it down.

If you're asking me about the cash flow for the whole of '07, as I have threatened all of you, I'll have to kidnap (inaudible) if you call this a cash flow guidance -- the only thing I can really tell you is, as John mentioned, we've been focused for the better part of two years now, on the cash flow for a lot of reasons.

One, I just don't think we have very much of it and wanted more.

And, second of all, if we look at the economy being a little bit more, shall we say, tentative at the very least, having some strength on the balance sheet helps us.

We are very, very focused on trying to improve the cash flow through the fourth quarter, particularly with respect to the DSO around the world.

And, obviously, given that we're trailing a little bit behind prior year right now, I would -- why, do you say?

I don't have a desire to get that at least flat to prior year, but in terms of actually just predicting the number right now, that's a little bit up in the air, too.

But I would say that, again, conceptually, getting that at least flat to prior year is a pretty big goal of mine.

Okay, then lastly, if I could touch on the Legal business.

You had mentioned when you -- I think it was at a conference earlier in the quarter that the business had performed better, but I think it was a few shorter-term engagements that you had been successful in winning.

I wonder if you can give us an update in how that pipeline has filled out as they've continued to try to replace the contract that fell off at the end of the second quarter.

Let me approach it this way.

The Legal business has become probably dominated by large projects.

And, like any large project business, that can be good news and bad news.

The good news is you have large projects for long period of time.

The bad news is that when one concludes because, God forbid, somebody settles the litigation or -- our clients are frequently law firms, so if a law firm ends up getting fired, that has an impact on our business.

Things conclude for all sorts of reasons, but settlement is one of the big reasons.

Then you have to hustle around and try to replace the business.

The team in Legal did a very good job of replacing the business and, as we did mention, some of that, however, was short-term projects, which we like.

I mean, that's our business, is supplying projects.

And so we don't view that as a negative at all.

I would say, indeed, some of those have run off between the end -- let's say mid-September and mid-October, but we've signed others.

And I would say, as we look out into the fourth quarter, we're cautiously optimistic that our legal business will have another good quarter.

I might just, if I can, underscore one point that John made, about the short-term projects.

I mean, obviously, the business has a lot of, shall we say, sustainability with a high percentage of long-term projects.

But, frankly, I think, internally, we absolutely don't see the short-term projects as a negative.

And I think it's important that you not either.

It's a really wonderful sign of maturity in that business that they can also convert to short-term projects because if they were totally dependent on long term projects we would potentially run the risk of having a lot of choppiness.

So, for them, having established such a good business with a good track record of longer term projects, developing the ability to cultivate short term projects, notwithstanding that, as John says, there's a lot more hustle involved in that, is actually a good thing.

And we're proud of them for figuring that out.

You know, the paradox here, Tim, is that, I know you're new to our business -- the paradox is that we used to tell people that we were basically oriented away from long term RFP contracts as a philosophical matter.

I mean, you can't do that if the market is driving towards it because you'd be out of the market.

And the paradox is that the Legal business has just become dominated by long term RFP-driven projects and our guys have a great business model and they've been very successful, not only at winning, but at delivering and very -- and I will say, extremely profitable.

So, it's kind of a paradox because, philosophically we'd be more comfortable with lots of little projects, but that's just not the way this business is going towards.

Thank you.

Your next question comes from the line of Mike Carney from Coker & Palmer.

Hey, good morning.

Hi, Mike, how are you?

Good.

Again, appreciate the clarity and disclosure.

A couple -- let me run through a couple of quick questions, Mary Jane.

First, the discontinued operations -- or the gain from the Australian business, that'll also be in discontinued operations, correct?

Oh, yes, exactly, it will be.

It's in Q4 because I'm -- we didn't remind you of the details.

That's probably an end of October closing.

And the other income in the third quarter?

What is that related -- that's higher than typical, is that anything specific or is it just currency again?

Genuinely, we look at this -- you know, when you have an improvement of a $1 million in non-op, it's basically, it's the currency effect of settling the inner-companies' loans through the quarter.

Okay.

And then, you had mentioned -- it looks like about $500,000 related to some liabilities from Highland Partners.

What was that?

Basically, when we did the Highland Partners transaction, we kept some historical liabilities and there's lots of typical ones a company might keep in those sort of situations.

As an example, absolutely not related to this business, but an on-going worker's comp claim from five years ago sort of thing, lawsuits, etc.

So, what we're trying to do here is just close those down as soon as possible so when we agreed to retain them we absolutely, obviously, did that knowingly.

And, what we're doing at this point is just working through the settlement.

And, also, what about the -- can we get a restatement on some of the last quarters after the sale of the Australian business?

Mike, it's David Kirby here.

We will put that restatement out post-trade industrial sale as soon as we can and, frankly, as soon as we get the unresolved accounting issue settled.

I think, just directionally -- so I'm not giving you a restated quarter here, but just directionally.

I mean, again, I think it's probably about $11 million a quarter of revenue.

And it's about $1.5 million in total across the year so, if -- you probably have Q1 pretty lowish this quarter was about $300,000 and next quarter's probably 4 or 5, so you can probably say it's roughly about $300,000-ish, something like that.

If that helps you, at least directionally.

Okay.

And then also, I think, Mary Jane, you had just mentioned Financial Solutions was 13% in the U.S.

Are you talking about permanent recruitment or overall?

Yes, permanent recruitment, sorry.

Okay.

So, the Financial Solutions business is still more than 13% overall, correct?

Yes.

Okay.

And then, also, that Financial Solutions business is not -- I mean, that's primarily finance and accounting to many different industries, not just financial services, correct?

Oh, Mike, yeah, you're doing probably a better job of making my point than I did.

In the U.S., our Financial Solutions business here in perm probably has a fairly small component of the financial services practice.

It's almost entirely in the accounting and finance kind of area.

Yeah, exactly, our exposure to the financial services practice, the financial services sector, in the U.S.

is not really good.

Okay, good.

And, last question, for either of you.

In terms of -- it sounds like the U.S.

-- the trend -- you have more of a positive outlook on the trend in the U.S.

both in temp, obviously, but also perm as it hasn't gotten really any weaker, is that correct?

I'd give you a qualified, yes, Mike.

Perm is, as I said, steady.

I think you put it very well, it hasn't gotten weaker in a period where the macroeconomics are probably weaker.

So, I would view that as somewhat positive.

We're still feeling like we can do a lot better at perm than we're doing.

And, as you may recall, I'm sure you will, that we've made a number of management changes in the firm, and structural changes, and we believe we'll see the benefits in the future.

Contracting, I think, has been better and I suppose you can say that we're cautiously optimistic about that.

Okay, and one more thing, John.

When I look at the -- if I take out currency effects from the profit level, from let's say the EBITDA level, in Asia and Europe there's really only modest improvement.

We've really gotten to a point where there's only modest improvement each quarter or year over year.

As we go forward the next couple of years, in order to start -- or to continue to get improvement on a constant currency basis, are you going to have to increase your growth or are there still cost cuts or productivity measures to increase that profit or how should we think about that?

Well, let's -- we'll take a quick spin around the regions.

In Australia/New Zealand, which is a major part -- a big piece of our Asia PAC business, it's a -- we have a very mature business that, on the top line, is growing, again, looking out over the next two or three years, is probably going to grow slowly.

We have room to improve results through improvement in productivities -- improvement of productivity in Australia/New Zealand.

And that's really our focus in that market.

In the Asia reason -- so, our Asia sub-region -- we've experienced very strong growth, as the world has in -- certainly in our Chinese business, which had a fantastic quarter.

Hong Kong had a great quarter.

Singapore had a good gross margin quarter.

So, again, probably like everybody else in the world, we see that as an area of growth, although it's a smaller business for us.

However, it is an extremely profitable business for us.

So from a driving of profitability standpoint that's an important area for us.

That's why we bought -- you remember, we bought a Chinese company that we closed earlier this year.

We're very pleased with the results so far.

So, that's the way I look at Asia-Pac.

But we have a big piece of that that's is -- and I tried to make the point here, perhaps not well -- is operating at a very high level of EBITDA as a percent of revenue, well into our 7 to 10% range.

Very good cash producer, very strong business, but not growing very fast.

If we look at Europe, we've had great improvement in profitability over the last couple of years.

Most of that, I would say has been productivity and mix-driven.

Certainly, we're focused on growing our businesses there as we look out over the next two or three years and we're relatively optimistic that we can do that in Europe.

And then the third place, which is the biggest delta in terms of growth, is North America.

And I know you know we've struggled in North America, but we think we have the team in place now to drive growth and that's really the market of opportunity, particularly from a profitability standpoint.

Okay, I appreciate it.

Your next question comes from the line of David Feinberg from Goldman Sachs.

Good morning.

Hi.

Hi, David.

Hey, how are you?

Question -- one question for John.

Any update on management changes in the U.S.

-- you've been running that business for the better part of '07, wanted to know if you'd made any headway in finding a permanent head for that region?

No, the reason is I'm not looking right at the moment.

I would love to find a permanent head and go back to one job, but the -- what I had said, and it's still the case, David, is that I wanted to make sure that the internal candidates had a real chance to show they can get the job, that they're ready for the job.

We certainly have internal candidates that we believe can do this job at some point in their careers.

The question is, really, is this the right point?

And, so I'm essentially keeping the chair warm for them to have a chance.

And I had said, and it continues to be the case, that somewhere at the end of the year, I would make a decision, obviously, in consultation with our Board, as to whether we would go to the outside and begin a process or whether we had internal candidates that, either in the near term or in the intermediate term, could fill the position.

Great, and one other question -- and this is -- I'm just trying to reconcile some of the commentary about -- from the shareholder letter and, again, thank you for putting that out -- with regard to seeing mixed trends in Europe.

If we look at the business on a constant currency basis, it was down year over year, which would imply to me that, one, that the business is more negative than positive as opposed to mixed.

It might be a matter of semantics, but I'm just trying to understand, is that all Financial Services that's pushing it down year over year or are there other pockets of weakness that's resulting in the constant currency declines?

Are you -- David, are you talking about revenue?

Yes, I'm sorry, revenue.

Yeah, okay.

Well, first of all, a couple of things.

Let me just give you our orientation.

Europe has, in particular, I mean, part of the reason why their profitability is doing well has really embraced the strategy of moving to higher margin businesses.

As a result, they, number one, in their composite result still have in them a quarter of a business that we sold in January of '07.

Not a huge amount of money, but I'd say maybe around $3 million.

So, that's one thing.

You know, good little business, again, but not quarter-wise.

So that's one thing impacting it.

Second of all, they continue to refine what clients they are serving to move out of a lower margin contract, so, I would say, probably they're nearing the end of that.

And then, thirdly, as John said, we had one, what he referred to as RPO client -- that stands for Recruitment Process Outsourcing.

It's typically kind of a contract for clients that's done globally.

Europe also serves that client.

That revenue is also a decline in the third quarter for them.

So, really, that's probably the main thing, kind of in chunks, that's kind of driving their top line.

As a result, from there you then have John's commentary on the shareholder letter about kind of mixed results in different places.

It's, for sure, I would say, not the banking sector that's driving their revenue number down.

Do you want to add?

No, I think that's perfect.

Wonderful, thank you for the clarification.

I think we have time for one more question, operator.

Okay, you have a follow-up question from the line of Mark Marcon.

Two quick questions.

First of all, with regards to North America, that's obviously the big opportunity, where are we in terms of optimizing the cost structures?

Is the cost structure kind of set at this point and we just need to get revenue growth or is there further opportunity?

I would say -- I'd look at it this way, Mark.

I mean, the biggest issue in North America is that we need more revenue growth.

You know, we have an infrastructure in place and we need more revenue growth to drive it.

There is an opportunity to improve our efficiency and I hate to bring this up again, but a lot of it relates to the heritage of PeopleSoft or back office or something else.

And that is simply that over the course of the last two years, as we've been grappling with PeopleSoft, we've built up a lot of work-arounds and manual operations and other things.

Now that PeopleSoft is up and running and efficient and performing well for us, it gives us the opportunity to reconsider internal processes.

But, that's not a huge portion -- that's not a huge opportunity.

The biggest opportunity is really in the area of driving more revenue growth on a fixed-cost base.

And, do you think that -- macro-events -- let's say we have a normal macro-environment, who knows, but if we have a normal macro-environment, what's your outlook in terms of being able to grow revenue in North America?

Well, I mean in a normal macro-environment I'd be pretty optimistic.

I mean, I don't think we are in a normal macro-environment, first of all, since you know, and I've talked about.

But -- because I think -- I feel like we have the leadership in place in our practice groups, which are the key people that can really drive our revenue.

We have the leadership in place to do it.

We have the infrastructure, we have the processes, we have the internal strategies and, I think, we have the ability.

I think -- you ask me how would I -- what was the sign of progress?

I think you were one of the people -- one of the many people to ask me, "What did John mean when he said sign of progress?" So, I think in a not great economy to have contracting gross margin up in the quarter -- not up phenomenonally, but up in the quarter after several quarters of less than stellar results, I think it's a sign.

I'm not saying one quarter -- absolutely, I'm not saying one quarter is a victory.

I'm absolutely not saying we're satisfied with where we are, but I'm saying it gives you -- it should give you as an investor, it gives me as a manager, some degree of confidence, that confirmation, that the team can deliver.

And I think they can build on this.

Now, when you're at this level, I don't want to be captive of losing one account next quarter and then coming back to you and saying, "Oh, well, it was down 1%" and having everybody get all upset.

Yeah.

Because we are in that kind of a situation where if somebody decides, for their own economic purposes, that they're going to cut their spending in IT development, for example, and it hurts us, that -- I'm excluding that from my comment of looking more at a broader trend over several quarters.

But I feel we have the team that can grow the business.

Perfect, thank you.

Thanks, Mark.

And with that, I'll turn it over to David for closing comments.

Thank you, John, and thank you, everyone, for joining us at the Hudson Highland Group's third-quarter conference call today.

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