Hudson Global Inc (HSON) 2022 Q2 法說會逐字稿

Good morning, and welcome to the Hudson Global conference call for the second quarter of 2022. Our call today will be led by Chief Executive Officer, Jeff Eberwein; and Chief Financial Officer, Matt Diamond. (Operator Instructions) A question-and-answer session will follow the formal presentation. (Operator Instructions) And please note that this conference is being recorded.

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 in 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 the conference call, references will be made to non-GAAP terms such as constant currency, adjusted EBITDA and adjusted earnings per diluted share. Reconciliations for these measures are included in our earnings release and quarterly slides, both posted on our website, hudsonrpo.com. I encourage you to access our earnings materials at this time as they will serve as a helpful reference guide during our call.

And I will now turn the call over to Jeff Eberwein. Please go ahead, sir.

Thank you, operator, and welcome, everyone. We thank you for your interest in Hudson Global and for joining us today. I'll start by reviewing the second quarter 2022 highlights; and Matt Diamond, our CFO, will provide some additional information and then give an update on our current business conditions.

For the second quarter of 2022, we reported revenue of $51 million, up 37% in constant currency. Adjusted net revenue, which we used to refer to as gross profit, was $27.3 million and increased 91% year-over-year in constant currency. SG&A costs were $21.6 million in the second quarter, up 68% versus the same period a year ago. We reported adjusted EBITDA of $5.7 million, up $1.7 million from a year ago, and we reported net income of $3.1 million, $0.98 per share, versus a net loss of $100,000 or $0.04 a share in the same period a year ago. We reported adjusted net income per diluted share of $1.25 in Q2 versus $0.15 a year ago.

I'm now going to turn the call over to Matt Diamond, our CFO, to review some financial results by region as well as some additional details from the second quarter.

Thank you, Jeff, and good morning, everyone. Our Americas business grew revenue and adjusted net revenue 169% and 177% in constant currency, respectively, with approximately 70% of this growth attributable to organic growth and the remainder coming from the acquisition of Karani in the fourth quarter of 2021. Adjusted EBITDA of $3.4 million increased versus last year's adjusted EBITDA of $0.5 million.

Our Asia Pacific business grew revenue 12% in constant currency and adjusted net revenue 42% in constant currency. Adjusted EBITDA of $2.6 million increased from adjusted EBITDA of $1.4 million a year ago.

Our EMEA business grew revenue at 34% and adjusted net revenue 49% in constant currency. Adjusted EBITDA of $0.8 million in Q2 2022 increased compared to adjusted EBITDA of $0.6 million in Q2 of last year.

Lastly, we believe it is important to highlight that adjusted net revenue again grew at a faster rate than SG&A in the second quarter. This operational leverage we have been seeing is critical to achieving our goal of growing adjusted EBITDA before corporate costs as a percentage of adjusted net revenue to the 20% level over the long term.

Turning to some additional financial details from the second quarter. We ended Q2 with $26.2 million in cash and restricted cash. Days sales outstanding was 52 days at June 2022, up from DSO of 41 days at June 2021.

In connection with the acquisition of Coit Group in the fourth quarter of 2020 and Karani in the fourth quarter of 2021, our balance sheet as of June 30, 2022 reflects $4.2 million of goodwill and $4.9 million of net amortizable intangible assets.

The company's working capital excluding cash increased to $8 million in the second quarter of 2022 from $7.8 million at the end of 2021. As a reminder, in April of 2019, we finalized the credit facility in Australia to support the expected growth in working capital needs as a result of new client wins in that market. But we had nothing drawn on this facility at the end of Q2.

The company generated cash flow from operations of $7.6 million during the second quarter.

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

Thank you, Matt. In Q2 2022, we continued to see strong activity levels as our teams in each region capitalized on the strong demand for our services. Our business exhibited very strong growth in revenue, adjusted net revenue and adjusted EBITDA across all 3 regions in the second quarter of 2022 versus the prior year quarter. Globally, our sales teams continue to deliver new business wins, while our delivery teams continue to provide excellent service to our clients.

The strong momentum in organic growth that we've been generating is a testament to the dedication and quality of our team. Consistent with our growth strategy, we continue to invest in organic growth and evaluate potential bolt-on acquisition opportunities. Importantly, I want to thank all of our highly dedicated employees for their flexibility, hard work and dedication to our clients and business in a challenging business environment.

Operator, can you please open the line for questions?

(Operator Instructions) Our first question comes from the line of Walter Schenker with MAZ Partners.

Jeff, a couple of questions. And it may have been old but I didn't find it. Why -- and everyone -- many companies have it. Given your balance sheet, why would you file a shelf?

Yes. Good question. Our thought is that any company of size typically has a shelf on file. Historically, we've had one on file, and they expire and have to be renewed every few years. I think it's every 3 years. So our previous one expired at some point and we just thought it was prudent to put a new one in place. It's a pretty low-cost thing to do. And it's just kind of in the category of you never know. I mean, we have no plans to issue any securities. We have, as you pointed out, cash and no debt. But in the event some large acquisition opportunity came along, it's good to be prepared even if there's a low probability of ever needing it or using it.

Okay. Second question. Year-over-year there's been a 5%, 6% share creep, but in no way complaining about using stock in part to -- as part of management compensation. The stock -- if we look at the first half of the year, you're running almost at a $5 per share rate, which was a $30 stock at 6x earnings. You're not forecasting the second half. I'm not forecasting in the second half. But you're surely earning a fair amount of money this year. Why are you not buying back stock?

I understand there are quiet periods. I know you -- and don't tell me you bought a lot over time because I know you bought a lot over time. That's history. You weren't earning $5 a share when you were doing that. You're buying an asset very cheap. Now you're buying something, if you buy it at 6x earnings or 7x earnings, it's a 15% to 20% return on investment.

Right. Yes. Agree with everything you said, Walter. And we have bought back stock in a lot of different ways historically. The easiest one we've ever done is buying back blocks from large shareholders who wanted to exit. And that's the easiest way to do it, and we have tried to do that. Haven't been able to shake loose any blocks thus far. But the Board talks about it every Board meeting. We're well aware that we have a share repurchase authorization and have $1.7 million left on that authorization as we talked about in the press release.

So over time, we're going to invest in organic growth and we're going to opportunistically buy back stock when we can. And companies do it a lot of different ways. At a minimum, we'd like to offset the share creep. But historically, we have shrunk the share count meaningfully in absolute terms. So it's very much on the radar. You're right. Sometimes the window is open, sometimes it's closed. So it's not always a quick, easy thing to do, but it's very much on our minds.

And lastly, with -- it only sounds like I'm trying to get you to make a forecast. In the first half of the year, we've now had 2 quarters where you've earned, roughly in the ballpark, the same amount. The business is growing, you're getting new customers. Understanding more than normal, there's uncertainties in the world economically, central banks are acting differently, blah, blah, blah. We all understand there's lots of uncertainties. But unless something dramatically changes on a macro level, what we've seen in the first half is broadly what you look forward being the operating rate for the company.

In a word, I'm going to say yes. But the reality is always more complicated and nuanced than that. So our approach, and we stay -- we try to stay on top of our environment, we try to stay very, very close to our clients. And we want to be nimble and respond quickly to their needs, but we also don't want to be overstaffed and have excess resource. So what we're seeing in the environment is the only -- despite all the macro, the headlines and stock market going down earlier this year, the only places where we've seen some weakness is what I would call kind of the medium-sized tech companies, who maybe they hope to go public, haven't gone public yet or maybe they were hoping for that next round of financing and they had the mentality previously of growth at any cost. They'll spend any amount of money to hit their growth targets. And now if the IPO window is not open for a while, the mentality more is, "Hey, let's take the accelerator off a bit and pace ourselves. And maybe we don't have to grow as fast as we previously thought." So we have seen a little bit of weakness in that segment.

The vast majority of our clients are large Fortune 500 companies, publicly traded, well-known companies in the marketplace. And the mentality there is very different. The mentality is that there's a shortage of talent. If they -- they feel like if they take their foot off the accelerator for 1 minute, the competitors will grab the talent and they'll be at a disadvantage. And there's still a talent shortage mentality amongst those big companies. And as long as we stay close to them and we're doing everything in our power to help them with everything related to talent, it's not just hiring people but it's also advising, consulting on a whole lot of different things, whether it's technology tools, diversity hiring initiatives, we're in good shape.

So it is a confusing environment, but what we're seeing on the bottom up is still largely positive. So there's no reason to think that the second half would be radically different than the first half. We do -- I've talked about this before, do have seasonality in our business. Usually, Q2 or Q3 is the strongest quarter of the year and Q4 and Q1 tend to be weaker quarters, just less hiring activity. But at least for what we're seeing right now, there's nothing to suggest that the second half would be radically different than the first half.

And our next question comes from the line of Marc Riddick with Sidoti.

I wondered if you could touch a little bit about what you're seeing with your -- in general, with the utilization levels that you're seeing seem to be quite strong. I was wondering if you could sort of talk about maybe your own internal needs as far as investing in both talent and technology for the remainder of the year.

Yes. No, thank you for the question, Marc. So when we talk about investments, it's largely in people, technology, sales and marketing. And we are hiring and adding to our teams globally. So each region, we're hiring. But I would say at the margin, we're trying to grow our centers of excellence as a percentage of total -- and I think there's a slide in our slide deck that has all of our centers around the world. And we think that's a win-win for us and our clients. And that's where the acquisition of Karani last year is really going to help. Just having hundreds of people in India and Manila just makes our team more effective and enables us to go after bigger projects and better serve our clients. So I hope that answers the question.

But I would say, in general, labor is tight for our clients and for us. But we're in the business of recruiting, and if we can't recruit recruiters, I think I've said this before, we're in the wrong business. I mean, it's what we do, it's what we're good at. And we're navigating the current environment as best we can, but it requires more creativity and more flexibility and open-mindedness, hiring people in different locations, flexible work hours, work from home, et cetera. All the same themes our clients are experiencing are ones we're experiencing ourselves.

Great. And then you touched on this a bit on the client side as far as the pace of global M&A and sort of maybe sort of where it is now versus maybe where it was at the beginning of the year or this time last year. So wondered if you could talk maybe a little bit about what you're seeing on your end from an acquisition pipeline and opportunity perspective and maybe sort of the level of competition that you're seeing for those assets and valuation levels in the line?

Yes. No, it's a good question. We like to always be in the market, always looking at acquisition targets. It's a skill set that we're, I think, much better at today than we were 2 or 3 years ago. And as you know, we've completed 2 medium-sized acquisitions, medium for us. And what we've seen is sellers' expectations are still high, I would say. And so at least for us, we tend to be pretty value-oriented. There's still often a gap between the sellers' expectations and what we would value it at.

But the single biggest thing that we're looking for is 1 plus 1 equal 3. We're looking for something we don't have or can't build ourselves or would take a long time to build. And so putting that business inside of Hudson would lead to accelerated growth. And fortunately, that's been the case with the 2 acquisitions we've done. We're always looking for additional acquisitions. But we're in a really good position. We don't have to do anything. The 2 acquisitions we've done have added a lot of value. We have a lot of exciting organic growth. We are continuing to add new clients.

And importantly, we're continuing to invest in sales and marketing, which is a little bit like an acquisition. It hurts our bottom line in the short term, but it's a really important part of being successful over the long term in this business. So having the best people we possibly can is the best way to get new clients and retain those clients once we get them. So we're focused on both, organic growth and acquisitions. And if we find something great and if we don't, that's no problem. There is a small one we've been working on in the Asia Pacific region that if all goes well, we hope to announce soon. But it's significantly smaller than the 2 that we've done previously.

Okay. Great. And then the last one for me. You touched on sort of the industry vertical from different tech perspective. I was wondering if there were any areas or particular verticals that are maybe performing well or standing out either specifically to the second quarter or just sort of the general pace that may be a little stronger than some of us may be thinking.

If I had to pick one, it would probably be the life sciences space. Health care has always been a really important sector for us. The 3 main sectors that our clients are in are health care, financial services and tech. All 3 are strong. I did mention that there's a little bit of weakness in the medium-sized tech category but not the larger tech category, actually. But the sector that continues to be really, really strong is life sciences.

And health care is a very big sector. There's other RPO providers that focus on the health care provider space, so hospitals, et cetera. Our focus in health care is much more on pharma, life sciences and medical devices. And that area is really, really strong and we're winning new business in that sector. And as everyone knows, it's a sector historically that hasn't been that cyclical or that economically sensitive. And so it's, a, holding up well and, b, experiencing a high growth rate. And we're a really good fit for that sector.

And then just one more if I could sneak it in. I wondered if you could talk a little bit about the pricing dynamic and maybe if you're getting much in the way of pushback there and sort of what you're experiencing, whether or not -- you made -- you touched on this a little bit when you mentioned as far as some folks who may not necessarily -- may be a little bit more price sensitive than they were on the tech side. I was wondering if you could sort of just talk about the general sort of the pricing dynamic that you're seeing there.

Yes. I mean, in a word, no, we're not really experiencing pricing pressure. And clients always want a lower price, they always want more service for a lower price. Said another way, they always want to extract as much value as they possibly can. But our clients for the most part are very value for price oriented. So in other words, they're not going for the lowest price. They're going for the best value. And so clients that are hyper-focused on the lowest price, and there are some out there, specifically not ones that we're a good fit for. We tend to have a very white-glove, high-service level approach that adds a lot of value to our clients. And the vast majority of our clients pay for that value added and think it's a good value because we do save them money.

We're not the most expensive firm out there but we're also not the cheapest. And our thought is if we provide a high level of customer service, and we're typically ranked the highest in the industry or very high in the industry on our customer service, you usually -- the pricing side takes care of itself. It's always a discussion. It always comes up. But we feel like we do pretty well in that area and hold our own in that area.

Our next question comes from the line of Edward Reilly with EF Hutton.

Just curious on what's driving organic growth. Is it starting on new customers or with existing customers? And what's the opportunity set look like for -- with existing customers?

Yes. It's -- if I understood you correctly, it's really, d, all of the above. We are having growth with existing customers, which is always good to see. Our motto is land and expand. And there's a lot of examples where when we're starting a new relationship, we might get 1 country or 1 division, especially if the client has never used RPO before.

And our strategy is to provide a good level of service, really prove that we can save them money and deliver good outcomes. And usually, that leads to more business over time, more divisions getting turned over to us, more countries getting turned over to us. And we do focus on companies that are growing. So as they grow, we grow. So it's always good to see growth with existing clients. That's probably the #1 thing -- important thing that we focus on.

And then we do -- when we win new clients, most of the time -- it's kind of growth area #2, most of the time a new client is someone who's never used RPO before. And especially with bigger companies, it's a long sales cycle, it takes a lot of meetings, a lot of case studies, a lot of modeling, just kind of showing what we do, how we save them money, how it leads to better outcomes. We try to quantify as much of that as possible and really kind of make the case for RPO in general and then hiring us specifically.

And the third thing that does happen is we do occasionally win business from competitors. And occasionally, they win business from us. Usually, it comes down to fit issues. We're a good fit with some clients but not all clients, and we have competitors that might be a better fit with certain clients than we are.

And we're seeing growth in all 3 of those right now. So growth with existing clients, new business from clients that have never used RPO for and then occasionally a few situations where we win business from a competitor. It's typically contracts coming up for renewal and for whatever reason, it's not working out as great as the client hoped and they're open to -- they love the RPO model, wants to stick to RPO but are open to other providers. And that does happen from time to time.

Okay. Great. And then given that the NOLs are U.S.-based, I'm wondering how that impacts the decision-making process about where geographically you guys decide to grow.

You -- I missed the first part of your question. I think the question was given that the NOLs are in the U.S., how does that factor into our decision making?

Yes, that's right. Yes.

Yes. So when it comes to tax, our thought is that it is the tail, not the dog in that we want to make the best business decision first and then optimize for tax later on. So in other words, if there's a great acquisition target in the U.K. or in Asia Pac, we'll pursue it even though we don't have NOLs in those areas. And in fact, we pay cash taxes in some of those countries.

But I would say if everything is equal, which it never is, if everything is equal, of course, we prefer to grow in the U.S. whether it's organic growth or acquisitions because of our large NOL in the U.S. And we effectively, for the foreseeable future, have a 0% effective tax rate in the U.S.

(Operator Instructions) At this time, I'm not seeing any questions coming in. I would now like to turn the call back over to Jeff Eberwein for any closing remarks.

Well, thanks, everybody, for joining us today and for your interest in Hudson Global. Feel free to contact us any time using the contact information in our press release or on our Investor Relations website. We look forward to next quarter's call, and have a great day.

Thank you for joining the Hudson Global second quarter conference call. Today's call has been recorded and will be available on the Investors section of our website, hudsonrpo.com.

Thank you. You may disconnect your lines. Have a great rest of the day.