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spk00: Good morning and welcome to the Hudson Global Conference Call for the third quarter of 2021. Our call this morning will be led by Chief Executive Officer Jeff Eberwine and Chief Financial Officer Matt 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 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 8K filed today and in our other filings made with the Securities and Exchange Commission, including our annual report on Form 10K. 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 constant currency, adjusted EBITDA, and adjusted earnings per deleted 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. I will now turn the call over to Jeff Eberwein.
spk03: 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 2021 highlights, and Matt Diamond, our CFO, will provide some additional details on our financial results. I'll then give an update on current business conditions. For the third quarter of 2021, we reported revenue of $45 million, up 72% year-over-year in cost of currency. Adjusted net revenue, formerly referred to as gross profit, was $18 million and increased 93% year-over-year in cost of currency. Estimate costs were $15.1 million in the third quarter, up 51% versus the same period last year in cost of currency. We reported adjusted EBITDA of $3 million up from an adjusted EBITDA loss of $700,000 a year ago. In addition, we reported net income of $1.5 million or $0.49 per diluted share versus a net loss of $1.2 million or $0.41 per diluted share in the same period last year. We reported adjusted net income per diluted share of $0.78 in the third quarter of 2021 versus an adjusted net loss per share of 38 cents a year ago. I'll now turn the call over to Matt Diamond, our CFO, to review our financial results by region, as well as some additional financial details from the third quarter.
spk02: Thank you, Jeff, and good morning, everyone. Our Asia-Pacific business grew revenue 58% and adjusted net revenue 54% in constant currency. Adjusted EBITDA of $2.2 million increased from adjusted EBITDA of $900,000 a year ago. Our Americas business grew revenue and adjusted net revenue 280% and 315% in constant currency, respectively, with over 40% of this growth attributable to organic results, while the remainder was due to the acquisition of Quake Group. Adjusted EBITDA of $1.4 million increased versus last year's adjusted EBITDA loss of $800,000. Our EMEA business grew revenue 39%, and adjusted net revenue 22% in constant currency. Adjusted EBITDA of 0.2 million in Q3 2021 increased compared to breakeven adjusted EBITDA in Q3 of last year. Lastly, we believe it's important to highlight that adjusted net revenue grew at a faster rate than SG&A across each of our three regions in Q3. This operational leverage we are 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 third quarter, we ended Q3 with $26.5 million in cash and restricted cash. Price sales outstanding was 39 days at September 2021, in line with DSO we had at September 2020. In connection with the acquisition of the Coit Group in the fourth quarter of 2020, our balance sheet as of September 30th, 2021, reflects $2.1 million of goodwill and $1.2 million of net intangible assets. The company's working capital, excluding cash, increased to $5.7 million in the third quarter of 2021 from $4.5 million at the end of 2020. As a reminder, in April 2019, 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. The company generated $2.3 million in cash flow from operations during the third 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.
spk03: Thank you, Matt. In the third quarter of 2021, we saw activity levels continue to rebound globally off the trough created last year by the COVID-19 pandemic. Our teams have capitalized strongly on this resurgence in demand for our services. Our business exhibited very strong growth in revenue, adjusted net revenue, and adjusted EBITDA across our three regions in the third quarter of 2021 versus the prior quarter. This growth was particularly strong in Australia and the Americas, whose economies have reopened and rebounded more so than economies in other areas. I'm proud to say that in Q3, the company recorded its strongest levels of growth and profitability of any quarter since its reorganization in early 2018. I continue to be particularly encouraged by the success and collaboration of our sales teams globally as our new business pipeline remains robust and growing. Coit Group, our 2020 acquisition, has significantly outperformed our expectations this year, and we're very excited to see what Karani, our new 2021 acquisition announced earlier this week, will be able to do as part of Hudson RPO. The addition of Karani will enhance Hudson RPO's global delivery capability and open up opportunities to win new business in India and other new markets. As a combined company, we expect to expand Karani's offering beyond the U.S., leverage the capability of the Karani team for Hudson RPO projects and clients, penetrate the enterprise RPO markets in India and the Philippines, and strengthen Hudson RPO's expertise in technology recruitment. Importantly, I want to thank all of our highly dedicated employees for their flexibility, hard work, and dedication to our clients and business and the challenging conditions we've been working through. Operator, can you please open the line for questions?
spk00: Absolutely. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Your first question comes from the line of Josh Vogel of Sidoti and Company. Your line is open.
spk04: Thank you. Good morning, Jeff and Matt. Hope you guys are doing well. I got a bunch of questions here. First, I just had a couple on Karani, just kind of some housekeeping type items. I was curious if you could discuss the timeline to fully integrate it, any near-term costs that may be involved as well. And then also just, you know, what type of revenue profile they've done over the last 12 months and I know that we'll see inherent efficiencies emerge over time, just like we have with Koi, but what was the margin profile on Karani's business versus your legacy business? Thank you.
spk03: Yeah, sure. Thanks for the question, Josh, as always. So we think the integration will be pretty seamless. They have existing clients, existing revenue. I think they have about 150 clients. And Hudson RPO actually became a client earlier this year before we acquired them. And so we already started a nice working relationship together. And I think we mentioned in our press release that it's going to be accretive on day one. And interestingly, the financial metrics are very similar to the COIT acquisition that we made about a year ago. We filed... an 8K earlier this week with the Karani acquisition. And inside the 8K, you can see that the purchase price was roughly $8 million, $6 million cash up front that we paid at closing on November 1st, and then another $2 million that comes over time. And that's roughly the same purchase price as we had for Coit. And the financial numbers are similar in terms of the EBITDA contribution that we expect. Like if you go back to the COI deal, we bought it in October 1st of 2020, and the expectation was 2 million of EBITDA in 2021. And touching wood, they've surpassed that this year, which is really great to see. And it gave us confidence to do acquisition number two. And that's roughly the same number we're expecting for 2022 for chronic.
spk04: That's helpful. Thank you. I wanted to shift gears a little bit. You know, you've talked about the robust and growing new business pipeline. So just a few questions around that. I know that it's across the three regions, but are there any specific, and you mentioned America's and Australia, but are there any sectors that you're seeing the most end market demand today? And just a little bit higher level, any changes you're seeing in sales conversion ratios, the length of the sales cycle, the scope of the work, or duration of engagements? Thank you.
spk03: Yeah, no, really good questions, Josh. I would put it – there's so many different categories and ways to describe it, but one thing we're seeing in the – I guess you could call it the – middle market or medium-sized company market is speed is incredibly important and that's really driven by technology companies and life sciences companies and that's where we saw the the strongest growth coming out of the downturn particularly in the americas was those two sectors tech and life sciences and there the sales cycle can be the the conversion can be very quick And it's all about having the capability, being able to start working for the client as soon as possible, ramping quickly. And as an example of that, what we've been able to do with COIT inside of Hudson has really been encouraging. It really has been, you know, we joke that we look for one plus one equals three in acquisitions, and that one has been more like one plus one equals three. five, we've been able to do a lot more together than either one of us could separately. I think their employee count at the time we acquired them was in the 20s, and it's already, we've probably tripled that over the last year, and it looks like by the end of this year, entering next year, we'll have 100 people on the COIT team that's largely focused on and we've won some larger accounts, fast-growing accounts, and it's very exciting to see what we've been able to do together. So that's kind of one category. The other category are more traditional Hudson clients, which is the Fortune 500. These are typically global, multinational companies Our strength historically has been in healthcare and financial services, and now we're adding tech and some other sectors. And the dynamic there is different. They are coming out of the downturn, but those companies see their need for a partner like us more so than they ever have before. If you think about what we've been through over the last couple of years with dealing with COVID and, uh, ramping down the workforce and remote work and ramping back up the workforce and then, um, heightened awareness of, uh, diversity and inclusion initiatives. You know, the typical fortune 500 company realizes that they need a partner, need an expert. Um, also there's, um, so many technology tools these days, and we're experts in all those technology tools, and we're good at helping clients navigate which one of those tools are the best ones for them. And so we've really deepened our relationships with clients, won new clients, and really become an even more trusted partner with some of those clients, which is a really good position to be in.
spk04: I appreciate all those insights. I had a question on, When looking at RPO recruitment, the adjusted net revenue surged last quarter of about $3 million sequentially, if I'm doing my math right. America is making up two-thirds of that sequential improvement. Was that all COIT and the traction you're getting in tech, or are you also seeing good traction in the legacy business there?
spk03: Yeah, no, it's really both. It's good traction in both. had a legacy business. We had a pharmaceutical client that does do some work associated with COVID. And we used to work for them in several countries. And we've kind of doubled our business with them in North America. And that really just is ramping up in Q3 and in the Q4. And so that was a nice kind of expansion with an existing client. So we're seeing really strong growth on both of those, Josh.
spk04: All right, great. And I just want to switch over to the contracting work. You're one of the few companies out there that really powered through the pandemic, and we're still seeing really good growth there. I was curious, you know, is the bulk of the growth there coming from new business or is it increasing activity in hires within the existing base or really just a good mix of both?
spk03: It's mainly new business. And it's mainly in Australia. And it really has to do with the separation of that we made three years ago from the recruitment agency businesses. We made a strategic decision to re-enter the contracting business in Australia and we had a lot of relationships there and it's one of those situations where success begets success and we talked about landing a contracting project with a large technology company that's headquartered in Asia Pacific And we've won new business since then that's like that. And it's heavily in Australia. We think we have number one market share in Australia. And it's just one of those situations where success begets success. And we'd like to replicate that in other markets. But if you look at our numbers, most of our contracting business is in Australia.
spk04: Right, okay. And just last one for me, if I could squeeze it in. Hearing commentary from a lot of other companies, just wanted to hear your thoughts, both at the recruitment and contracting business. Can you talk a little bit about the pricing environment and then at the client level, what impact wage inflation may be having on their business as well as how that comes into play when you're looking to help them step up?
spk03: Yeah, no, it's a... It's a huge issue across the board, but it stems from an issue below that issue, which is just finding enough talent and the right talent to meet the needs of the business. Every region, every sector, I would say, is trying to hire, trying to add talent struggling to do so and that's where the need for a trusted partner like us comes in and it's helpful you know it's good for what we do but we think though the wage inflation stems from that kind of lack of workers and one thing we've noticed that hasn't gotten a lot of press is that many countries around the world historically have had immigration flows. The U.S. is like that. The U.K. is like that. Australia is like that. And that's basically stopped for 18 months now. And, you know, everything is reopening and the supply of workers isn't what it used to be.
spk04: Yes, that makes sense. Well, I appreciate you taking all my questions.
spk03: Thanks, Josh. Good questions.
spk00: Your next question comes from the line of Adam Waldo of Listmore Partners. Your line is open.
spk05: Good day, Jeff and Matt. Thanks very much for taking my questions. I hope you can hear me okay.
spk03: Sure can.
spk05: Okay. So really a very strong quarter. Congratulations to the whole Hudson team on that. And I wonder, you know, you find yourselves really with a high-class problem, as I see it right now, assuming reasonably good visibility and sustainability of the ongoing business operating results. So let's talk about the sustainability, if we may, of the business operating results and then the high-class capital allocation opportunity that you have in that context. You know, you did $18 million of net revenue in the latest quarter and obviously have Karani layering in on top of that here from November 1st. So How comfortable are you, given that you've come pretty much roaring out of the pandemic, how comfortable are you with the visibility and sustainability of that, you know, net revenue on a quarterly basis in that $18 million range that you just posted?
spk03: Yeah, I'd say very comfortable for the foreseeable future. You know, there's always things that could come out of left field, you know, resurgence of the pandemic or economic downturn. And it's so hard to separate these with precision, but there's a cyclical aspect and a secular aspect. And, of course, we're very excited about both. But the secular aspect is we do think in a normal economic environment, the RPO business should grow about 15% a year. That's what the industry consultants say. I think one's as high as 18%. Others might be in the 11%, 12% range, but that's kind of the consensus, and there's good reasons behind that. Is that a scientific forecast? No, it's not. It's their best educated guess, but there's a lot of strong reasons behind that, and we expect to participate in that growth, and we have a goal of gaining share but we want to at least grow with the market, i.e. maintain share. So we think there's an underlying secular growth trend here for the next few years, maybe the next five years of an industry growing 15% a year. So that's kind of point number one. And then the cyclical aspect is we had a cyclical downturn in 2020 because of the pandemic. Our business mix, helped us really well just being focused on the healthcare sector and then even within financial services. It's a very diversified suite of companies and financial services. It's not all investment banking, for example. It's insurance companies, pension funds, it's banks, it's a wide variety of financial services. So we think the business held up pretty well in what was a cyclical downturn and now we're having a strong rebound out of that so it's really the cyclical on top of the secular for right now for the foreseeable future and I'm sure we'll have another cyclical downturn at some point in the future and we will deal with it similar to how we dealt with it last year but we are really hopeful that that secular trend is is there the way the industry forecasters say it is. It's certainly what we're seeing, and it makes a lot of sense. So very well stated.
spk05: I mean, clearly a growth cyclical business model with both drivers really firing at this point. You know, you have about $26 million of unrestricted cash at the end of the quarter, $20 million net of what you're paying up for Karani. And if we sort of start with the $26 million of net cash, obviously this talks up a lot today, but you're still trading on, if we net out the cash, you're trading on an equity market value based on 3 million shares of about $40 million. And given your comments on the near to intermediate term visibility and sustainability of your run rate revenue, you have a business that's doing in the vicinity of $8 million, $9 million a year of run rate free cash flow and EBITDA in the $11 million to $13 million range, if I'm extrapolating fairly from the quarter. So is that a fair extrapolation? And if it is, you know, you're able to repurchase your stock at a year one cash on cash return in the 25% range, you're able to acquire, you know, very attractive businesses like Coyote and Karani at, you know, year one cash on cash returns, somewhat lower, but with good growth prospects. So how do you think about sort of, you know, capital allocation between those two opportunities, given the high class problem you face?
spk03: Yeah, no, it's a really good question. And it um, and that's, again, that's, it's kind of part, part art, part, part science. Uh, and so far, um, we haven't had to choose between A or B or C. We've, we've done D all, all the above. Um, we, we have bought back a significant amount of stock and, we think we've been, uh, opportunistic on that, um, We did a tender offer at $15 a share a couple years ago, and that's when numbers were lower and were valued type investors. And so we wouldn't have done it at $15 a share if we didn't think the stock was cheap and that that added net asset value per share doing that. And then in the midst of the downturn, we were able to buy about 9% of the company and at a stock price that was below cash per share, which you don't see very often. So we've liked doing buybacks historically. We would hope to do buybacks again in the future. The tricky thing is that the window is closed a lot of the year, and then it was closed with this Karani acquisition that we just announced. And so the window is not always open, but that's a tool in the toolkit that we have done in the past. We've also paid dividends a couple times in the past. And we're continuing to look for bolt-on acquisitions. I think in a perfect world, if we found interesting businesses to buy and it was clearly one plus one equals three, maybe we would do one of these bolt-ons a year. But we don't have to do anything. We're super excited about the two that we've done over the last 12 months. We'll continue to look. It's been helpful to us to be in the market and looking, but we don't feel like we have to do anything at all. It's more, you know, if the right one comes along, that's really accretive, not just on the financial metrics, but to our business and to our clients, we'll strongly give it a look. And so... What a long-winded way of saying I think the future will be like the past. Those are all tools in the toolkit, and we're going to look at all of them and just be opportunistic.
spk05: So final one, I appreciate it, Jeff. Final one, if you'll permit me, $1.7 million on the existing buyback authorization of $10 million, and you've obviously bought back very thoughtfully and intelligently and are achieving good returns on those buybacks. They're risk-free, essentially, right? I mean, if you can do a 25% risk-free return, buying back your stock, ignoring the future growth. I should say 25% year one cash on cash return, ignoring the future growth of the business. That's a home run, right? So we're getting close to the end of the existing buyback. Is it fair for investors to assume that we could expect the board to sort of authorize a new buyback authorization as you complete this one, given where the valuation of the company stands?
spk03: Yes, I think that's a fair assumption. We've talked about that. We think... Stock buybacks are a really good tool to have in the toolkit. So, you know, it's a board-level decision, not a management decision, but the expectation would be we want to have that tool in the toolkit so when we complete the existing plan, I would expect us to institute a new plan.
spk05: Thank you very much, and continue good success. Thank you.
spk00: Your next question comes from the line of Walter Schenker of Maz Partners. Your line is open.
spk01: Hi, Jeff. Good morning. I thought two different sets of questions, one on Karani, one on Coit. On Karani, on the 8K, their employees, of which there's a fair number, are largely in Asia, India, and the Philippines, and then there's a periodic reference to the United States. Is their business at this point... largely in Asia?
spk03: Yeah, it is a little complicated. So the clients are in the U.S., and the clients are typically staffing firms and recruitment agencies. And then we became a client earlier this year, and they didn't have any other RPO clients. We're the only one. So the clients are in the U.S., The headquarters is Chicago, so the sales team is in Chicago, the management team is in Chicago, but the employees who do all the work are in India and the Philippines. So think about it like an India operation for those staffing and recruitment firms that don't have that in-house.
spk01: Okay. Okay. So they're making calls or contacting people, and it's not a back office service?
spk03: Well, they do a lot of sourcing, you know, finding candidates, helping onboard those candidates, screening candidates, and they also have a day shift and a night shift. So, like, if you think about a staffing firm in the U.S. or a recruitment firm in the U.S., They're constantly looking for people, constantly looking for good candidates to then place with their clients, and having 500 people in India who can help you overnight while the U.S. is sleeping makes your team more productive, more efficient, and that's the value-add of the service.
spk01: Okay. which actually is a lead-in, although it wasn't meant to be, which is value-add. On COIT, I was surprised at how significantly you've increased the number of employees there. It's a two-part question. One, how do you find large numbers of employees that fit what you're looking for at COIT? And secondly, how do those new employees or what are they doing to generate revenue?
spk03: yeah so the a few things there and um the pandemic was an awful event for uh for the globe um and i don't want to um you know minimize the the human suffering there but there's been a big adjustment because of covid in that technology companies who used to have all the employees in the office and then switch to all the employees working remotely are much more open-minded than they were before about having people work in a center of excellence rather than at their offices. And it is incredibly hard to find people in Silicon Valley, and if you do find them in There's heavy demand, heavy poaching of good people. And so we've been able to staff those accounts. So clients are Silicon Valley, but we've been able to find very talented recruiters at our center in Tampa. We found a lot of people in Canada, but really all over the country, St. Louis, Arizona. And so we've just collected... And this is what we do. We're experts at recruiting recruiters. And we've assembled some very experienced tech recruiters all throughout North America to serve the clients. And that's really what's led to the growth.
spk01: Okay. I didn't think of it that way. I thought of all those people out on the West Coast and said it's a pretty impressive achievement finding that many people. But it would make sense what you said. And the only other question, and you answered it, but I tend to ask the same question repeatedly just because I like hearing it, which was the last speaker. There was nothing, excuse me, in this quarter that was significantly unusual or atypical, and therefore, and I know you've answered this already, but I'll make you do it again, in looking at this, seasonality, et cetera, but in the intermediate to short term, this is a reasonable base to look at broadly as the operating level pre-Karani of the business.
spk03: Yes, unless there's another downturn of some sort, economic downturn, COVID or other natural disaster downturns. but we think our business has really solid momentum. A lot of the things that, you know, the numbers tell the story, but with a lag, you know, a lot of these things have been in the works for some time, and it's nice to see a plan coming together and, you know, there is some seasonality in our business. I mean, we do tend to see The fourth quarter, you have holidays, fewer hours worked. And then the first quarter is particularly slow for us because of our Asia-Pac exposure. Sounds odd to us in North America, but Australia is basically at the beach from Christmas through mid-January. And you have Chinese New Year, which slows down our China and Hong Kong operations, but We keep winning new business. Revenues are increasing, and, you know, we think we're going to continue to see good growth going forward. So, in other words, despite slowdown from holidays, you know, Q4 should be better than Q3, and 2022 should be better than 2021. That's what we're seeing.
spk01: Good. Thank you, and congratulations. Thank you.
spk00: Again, to ask a question, you will need to press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. That concludes today's question and answer session. I will now turn the call over to Jeff Eberwine for closing remarks.
spk03: Well, thank you for joining us today and for your interest in Hudson Global. Feel free to contact us anytime using the contact information found in the press release or on our investor relations website. We look forward to next quarter's update call. Thank you for your time today.
spk00: Thank you for joining for Hudson Global third quarter conference call. Today's call has been recorded and will be available on the investor section of our website, HudsonRPO.com.
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