Hudson Global, Inc (HSON) CEO Jeff Eberwein on Q3 2019 Results - Earnings Call Transcript

Nov. 03, 2019 12:27 PM ETHudson Global, Inc. (HSON)
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Hudson Global, Inc (NASDAQ:HSON) Q3 2019 Results Earnings Conference Call November 1, 2019 10:00 AM ET

Company Participants

Jeff Eberwein - Chief Executive Officer

Matthew Diamond - Vice President of Finance

Conference Call Participants

Josh Vogel - Sidoti & Company


Good morning, and welcome to the Hudson Global Conference Call for the Third Quarter of 2019. Our call this morning will be led by Chief Executive Officer, Jeff Eberwein; and Vice President of Finance, Matthew Diamond.

Please be advised that the statements made during the presentation include forward-looking statements under applicable securities laws. Such forward-looking statements involve certain risk 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 this conference call, references will be made to non-GAAP terms such as adjusted EBITDA. An adjusted EBITDA reconciliation is included in our earnings release and quarterly slides, both posted on our website, I encourage you to access our earnings materials at this time as they will serve as a helpful reference guide during our call.

I will now turn the call over to Jeff Eberwein.

Jeff Eberwein

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 third quarter 2019 results. Matt Diamond, our VP of Finance, will then provide some additional details on our third quarter 2019 results. I will then give some perspective on our RPO business, Hudson's corporate costs and review the outlook for 2019. For the third quarter of 2019, we reported revenue of $25.8 million, up 57% year-over-year in constant currency. Gross profit of $11.4 million increased 9% year-over-year in constant currency, and we grew gross profit in constant currency in all 3 regions.

We saw a particularly strong growth in our businesses in Australia and Continental Europe in the third quarter. SG&A costs were $11 million in the second quarter, down 1% versus the same period last year in constant currency. We reported adjusted EBITDA of $800,000 compared to an adjusted EBITDA loss of $300,000 a year ago. In addition, we reported net income of $400,000 or $12 per share versus a loss of $900,000 or $26, $0.26 per share in the same period last year. I want to thank all of our highly dedicated employees for their hard work so far this year. It's beginning to show through in our operating results.

We believe our business is building strong momentum, and we're excited to continue improving our operating and financial results going forward. In September, Hudson RPO ranked among HRO Today magazine's Baker's Dozen list of top enterprise RPO providers for the 10th consecutive year. This recognition is a tremendous accolade for all of us at Hudson RPO. We're honored that based on client feedback, we have consistently ranked as a top global RPO provider.

Turning to regional performance for the quarter. Our Asia Pacific business had strong year-on-year growth in revenue of 97%, while gross profit grew 2% in constant currency. The revenue growth was driven by the commencement of a large MSP contract in Australia, as discussed on last quarter's call. Gross profit growth in Q3 was strongest in Australia, largely due to higher volumes at existing clients. Americas had gross profit increase of 7% year-over-year in constant currency, with strong performance at several newly won clients, somewhat offset by lower volumes at some legacy clients.

Adjusted EBITDA of $200,000 decreased from adjusted EBITDA of $300,000 a year ago. Our Europe business produced a very solid quarter, with gross profit up 29% in constant currency. The growth was driven by strong results in our businesses from Switzerland and Belgium. Adjusted EBITDA of $300,000 increased from breakeven adjusted EBITDA in Q3 of last year.

I'll now turn the call over to Matt Diamond, our VP of Finance, to review some additional financial details from the quarter.

Matthew Diamond

Thank you, Jeff, and good morning, everyone. Our third quarter tax provision from continuing operations was $150,000. The company generated approximately $200,000 in cash flow from operations during the third quarter. In addition, the company spent $271,000 in the quarter on the repurchase of 23,000 shares. Days sales outstanding was 51 days at the end of September, well improved from DSO of 70 days we had at September 2018.

We ended the quarter with $28.9 million in cash and restricted cash. As a reminder, in April, we finalized a new 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 Q3.

I'll now turn the call back over to Jeff to give some more perspective on our RPO business, Hudson's corporate costs and to review our outlook for 2019.

Jeff Eberwein

Thank you, Matt. Turning to Hudson's corporate costs. Immediately following the closing of the divestitures at the end of the first quarter of 2018, management reviewed the company's corporate costs on a line by line basis and began to rightsize these costs for the new business model. We believe the run rate for corporate costs in 2019 should be approximately $4 million, excluding nonrecurring items, or about 1/3 lower than 2018's level. This reduction does not impact our operating business. Year-to-date, the company's corporate costs of $3.2 million exclude $1 million of nonrecurring expenses. In the first 3 quarters of 2018, corporate costs of $4.4 million excluded nonrecurring expenses of $2.4 million related to severance expense.

Turning to our stock buyback program. We continue to view share repurchases as an extremely attractive use of capital, and we expect to continue to be aggressive in repurchasing shares going forward. Since the inception of this program in the third quarter of 2015 through the end of the third quarter 2019, the company purchased, has purchased 427,000 shares for a total of $8.2 million. To accelerate buyback activity at these attractive stock price levels, the company completed a tender offer in March of 2019 for 247,000 shares of the company's common stock for an aggregate cost of $3.7 million, excluding fees and expenses.

Turning to our outlook for 2019. We continue to have a goal of 10% growth in gross profit year-over-year in constant currency, while revenue growth will far exceed this rate due to the new MSP project that we started in Australia in April. The company expects to generate positive adjusted EBITDA in 2019 at the total company level and particularly so in the second half of this year. In addition, we believe investors should focus on our gross profit line in addition to the revenue line. The reason is that we had a large MSP contract go live in April in Australia, which we alluded to earlier. Contracting-type projects like this inflate revenues due to the labor cost pass-throughs.

Since the payroll costs of the contingent workforce and MSP projects are accounted for above the gross profit line, the gross profit margins are much lower than for RPO projects, where the delivery costs are mainly below the gross profit line. Including MSP in our service offering is an important part of being a total talent solutions provider and also positions us well to win new RPO business in the future, both with this new client and other potential new clients. We believe another key metric to focus on is adjusted EBITDA before corporate costs as a percentage of gross profit. Over the long term, we're targeting 20% for this metric, which would translate into mid-teens margins for EBITDA divided by gross profit after corporate costs.

Operator, can you please open the line for questions?

Question-and-Answer Session


[Operator Instructions] Our first question comes from Josh Vogel with Sidoti & Company.

Josh Vogel

So I guess my first question is, I know you touched on it, but obviously, you're sitting on a very strong balance sheet, sizable cash position, no debt. We know you're going to be aggressive on the share buyback front. Just was wondering if you could talk a little bit more about your capital allocation strategy. And outside of repurchases, what other avenues are the best way to return capital to shareholders? Would you maybe explore a one-time dividend? Or, and just on a tangent, can you just talk about what you're seeing on the M&A front and what's your appetite for deals today.


Sure. And we evaluate all those things. The Board of Directors and the management team are constantly thinking about capital allocation and thinking about how can we allocate capital to its highest and best use. And our strong balance sheet is a real strength of the company. We worked hard to get to that point, sold off a lot of noncore businesses and had a tremendous amount of transition as a company. I would say, look at what we've done. We put in place a $10 million stock buyback program, and we have completed 82% of that, so that's putting our money where our mouth is. And then in addition, we did a tender offer earlier this year that shrank the share count by about 7% or 8% at a cost of $3.7 million.

We think our stock price is incredibly attractive relative to the value of our business. And so continuing to aggressively repurchase shares is, we think, a really, really good use of our strong balance sheet, especially now that we've become profitable and we're generating positive cash, that just makes us want to buy back stock even more. So that's a really big item for us, is having an aggressive stock repurchase program. But we have talked about and we have looked at bolt-on acquisitions.

And what we're looking for there is not just to grow for growth's sake, but we do, we are optimistic on the RPO business and we, there are opportunities out there to look at our small, smaller RPO players that might have a particular niche in a geography or in a sector. And we're not just looking to get bigger. But if we found something that was a good fit, good cultural fit, good business fit, where we could look at it and say, inside of Hudson, we could really expand what they're doing.

We have 400 employees, roughly, globally. And if you have an RPO business that's just focused on 1 region or even 1 city or even 1 industry, we could be excited about combining that with what we're already doing and significantly increasing what that target can do versus if they just stayed independent. So we think we can do both. We think we can aggressively, the short version is we think we can do both. We think we can aggressively repurchase shares and continue to look at bolt-on acquisition targets, but it's got to make sense.

Josh Vogel

Okay, great. Obviously, you did a great job on the corporate cost line. You've been doing that for the better part of a year now. Q3 came in lower than at least what I was expecting. I was just wondering if you could talk to if there was anything onetime in there, or any cost items that usually hit up that didn't hit up in the quarter. And do you think that in, taking into consideration your $4 million run rate for the year, is there opportunity for that to come in even lower?

Jeff Eberwein

I would say $4 million is a good number to use, that is audit, legal, management. We've worked really hard to get it down to that number. On a quarterly basis, some quarters will come in, so that, that would average $1 million a quarter in corporate costs. We think some quarters will come in a little ahead of that. Some quarters, like this one, will come in a little below that. This is a quarter where all the stars lined up. We didn't have anything unusual that hit us. So this was just one of those quarters that came in a little bit below that $1 million number. But I would continue to use that number. But the great thing I would say about that is we've worked really hard to get to this point, and we strongly think we can grow and not have that number increase at all. So we think there's a lot of leverage in the business, and we think we can grow and really leverage the fixed costs. So we're excited about that.

Josh Vogel

Okay, great. We're now several months into the ramp of the large contingent contract to the Japanese tech company. I was just wondering, can you talk about that engagement? Is it hitting expectations? What do you look forward in Q4 and maybe beyond?

Jeff Eberwein

Sure. So we're very excited about this project. We're very excited to work with this client. It's a very prestigious, well-known global company to work for. And the thesis behind doing that project with them is that it would lead to RPO work and lead to work in other geographic regions with them. And we are having those conversations, and so that part of the thesis is certainly playing out. In terms of the specific contract itself on the contingent workforce, it's been a little slower to get fully, fully operational and fully ramped up versus what we initially thought. We think we'll still get there and have all of the roles, the contingent workforce that we originally envisioned when we signed up. It's just taking a little longer to be at kind of that 100% ramp level that we looked at.

Josh Vogel

Understood. And if I could just sneak in one more, a little bit higher level. Outside of maybe what's been going on in Hong Kong and, obviously, Brexit in the UK, it this impressive to see growth in Europe, especially with everything in the UK especially with Brexit going on. But I was just curious, how predictive is your business to economic cycles or downturns? If you could maybe just talk to the visibility within your business, that'd be helpful.

Jeff Eberwein

Sure. We only have as much visibility as our clients have because we're in a talent business, talent procurement business, and economies change and business plans change. Sometimes, businesses change solely for company-specific reasons, and that is most of what we see. So if I look at the results on a client-by-client basis and, inevitably, some clients come in stronger, some come in weaker, that is almost always explained by something specific going on with the client. That said, there are times when you have some macro factor that impacts our business, and this quarter was one of them. We saw a very significant decline in our Hong Kong business year-over-year.

So we had a good quarter in Australia. And then the whole region, the Asia-Pacific region results were brought down by the weakness that we saw in Hong Kong. So we still grew, that's the positive note. We still have positive growth in gross profit in the Asia Pac region, but it was one of the situations where the good growth that Australia had was largely offset by the weakness that we saw in Hong Kong. And I would say visibility there right now is poor. We don't have clients just canceling hiring plans and talent-related plans. All together, it's just been somewhat on hold. And our experience is that there's usually a catch-up, but trying to predict when that's going to occur is really difficult, if not impossible.


[Operator Instructions] That concludes our question-and-answer session. I will now turn the call over to Jeff Eberwein for closing remarks.

Jeff Eberwein

Great. Thank you for your interest. In conclusion, I would just say that we're very optimistic about our business going forward. Our growth this year has largely been driven by new clients that we've added in the year, and we have a pretty exciting pipeline going forward. So we're very excited about our business. We're very excited about our growth outlook going forward. We do expect to grow our business, our gross profit more than 10% a year, going forward, on a trend line basis. We have really great clients. We have a great team. We've worked very hard as a business to get to this point. And so we're excited about our future. We thank you very much for joining us today. We thank you for your interest in the company. And we look forward to next quarter's update call.


And pardon me. We do have a follow-up question from Josh Vogel with Sidoti & Company.

Josh Vogel

Yes, I figured I would sneak one more in. I was just curious when we, hold on, just getting into my notes. So when I think about the sales cycle today on an average RPO engagement, maybe from introduction to winning the business, signing the contract, and then ramping them and going online, have you seen any changes? Is the cycle getting any longer, shorter or similar to maybe a year ago?

Jeff Eberwein

We haven't noticed a big change on that. Most of our new client wins come from companies that have never used RPO before. We do win business from competitors on occasion. And there have been a few instances where we've lost business to competitors, that's normal. But by far, our growth tends to come from, our new clients tend to be companies that have never used RPO before. And it is a really long sales cycle. You're talking about changing how large companies do their whole talent procurement, talent management process. And it takes a long time to show them the case studies and do all the analysis of the money they'll save and how the outcome will be better.

So it's always been a long sales cycle business. The good news on that is once we get in the door with the client, it tends to be very sticky. We typically have 3-year contracts. We have a very high renewal rate when those contracts come up for renewal. And so it's a really great business to be in, but it is a very long sales cycle. I wouldn't say that we've noticed any change in that. I think it's always been a long sales cycle. I don't think the sales cycle has gotten slower or gotten faster. I guess one other note I would say is that the sales cycle, interestingly, tends to be shorter in places like Asia, China, Singapore, Southeast Asia.

We're really seeing really good growth in our Singapore, Southeast Asia region. That's often work that we do for large multinationals that are typically headquartered in Europe or the UK or the U.S. And once they make the decision to grow or expand in a new country, they tend to make decisions fairly quickly, move fairly quickly and want to ramp fairly quickly. The slower end of the spectrum might be multinationals in Continental Europe. But it's really a client-by-client thing. But the shorter version is we haven't noticed any big change in the sales cycle lengthening or shortening.


[Operator Instructions] And I'm not showing any further questions at this time. Thank you for joining the Hudson Global third quarter conference call. Today's call has been recorded and will be available on the Investors section of our website,

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