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spk01: Good morning and welcome to the Hudson Global Conference Call for the fourth quarter of 2022. Our call today 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 8-K filed today and in 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 consistent currency, adjusted EBITDA, and adjusted earnings per diluted share. Reconciliation 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 Eberwine.
spk00: 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 fourth quarter 2022 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. In the fourth quarter of 2022, we reported revenue of $44 million and adjusted net revenue of $22.2 million. SG&A costs were $19.7 million in the fourth quarter, and we reported adjusted EBITDA of $2.4 million, net income of $0.1 million, or two cents a share, and adjusted net income of $0.33 a share versus $1.02 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 fourth quarter.
spk03: Thank you, Jeff, and good morning, everyone. Revenue and adjusted net revenue for America's business decreased 12% in constant currency. Adjusted EBITDA of $0.5 million decreased versus last year's adjusted EBITDA of $2.7 million. Revenue for our Asia-Pacific business decreased 7% year-over-year in constant currency, and adjusted net revenue grew 17% in constant currency. Adjusted EBITDA of $2.1 million decreased from adjusted EBITDA of $2.4 million a year ago. Our EMEA business grew revenue 14% and adjusted net revenue 33% in constant currency. Adjusted EBITDA of $0.5 million in the fourth quarter of 2022 increased slightly versus a year ago. Turning to some additional financial details from the fourth quarter, we ended Q4 with $27.5 million in cash and restricted cash. Day sales outstanding was 50 days at December 2022, up from DSO of 43 days in December 2021. In connection with the acquisition of Quake Group in the fourth quarter of 2020, Karani in the fourth quarter of 2021, and Hunt & Badge in the third quarter of 2022, Our balance sheet, as of year-end, reflects $4.9 million of goodwill and $4.5 million of net amortizable intangible assets. The company's working capital, excluding cash, decreased to $7.3 million in the fourth quarter of 2022 from $7.8 million at the end of 2021. As a reminder, in April 2019, we finalized a 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 Q4. The company generated $4.4 million in cash flow from operations during the fourth 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.
spk00: Thank you, Matt. In the fourth quarter of 2022, we grew adjusted net revenue 5% as strong top line growth in the UK and Australia was partially offset by the slowdown in the tech sector and lower hiring volumes in China due to COVID-19 related lockdowns. Although adjusted EBITDA declined versus last year's fourth quarter, we were able to reduce SG&A costs by more than a million versus Q3 and can make further adjustments to our cost structure if needed. We continue to win new business and we have a very experienced team with a history of navigating different market cycles. We believe we're well positioned to respond quickly to the needs of our clients at various activity levels. Further, I'd like to emphasize that our enterprise RPO work, which now comprises approximately 80% of our business, continues to hold up very well. The remaining 20% of our business, which consists of work in the technology sector and project work, is where we have seen a significant slowdown starting in the second half of last year. Our teams have responded accordingly to these market changes to protect our profitability and position the business to respond quickly should these conditions reverse. As always, I want to thank all of our highly dedicated employees for their flexibility, hard work, and dedication to our clients and business in the challenging conditions we've been working through. Operator, can you please open the line for questions?
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mark Riddick with Sidoti and Company. Please go ahead.
spk04: Hi, good morning. Good morning.
spk05: So I was wondering if you could bring us up to date as to maybe what you're seeing as far as the pricing environment, bill rates, pay rates, as well as I recall you were working on putting through some price increases. Maybe you could sort of give an update as to maybe what you're seeing there.
spk00: Sure. Yeah, the issue that we had in the second half of last year was all volume related. Pricing continues to be positive and we are getting continued price increases. And in general, our pricing follows wage rates and the labor market. So if wage rates, labor rates are going up, that's a pretty good indicator, leading indicator for our pricing trends.
spk05: Okay. And then I was wondering this to be one of the things I did notice about the results was the tax rates seem to be kind of higher than maybe I was expecting. I was wondering if there was anything in particular there that we should be aware of.
spk00: Yeah, that's a really good question, Mark. It really is just a mix issue, and it's frustrating because we have such a large NOL, but that NOL is only for U.S. income. And as you know, we're very global and generate income around the world. So like in Q3 and Q4, we had a decline in the U.S., which is effectively has a 0% tax rate. And international grew as a percentage of total. And if you look at our 10K when it comes out, you'll see that we pay taxes in places like Australia, UK, Hong Kong, China. And so that's why the effective rate looks a little crazy. It's really because of mix.
spk05: Okay, that makes sense. And then I was wondering if you could talk a little bit about given the – and you mentioned in your prepared remarks some of the prior acquisition activities. I was wondering if you could sort of give us an update as to maybe what you're seeing out there and what your thoughts may be as to if anything much has changed, whether it be at the pipeline or potential valuations or maybe geographic mix attractiveness, anything like that.
spk00: Yeah, I would say, I would summarize it by saying we're always looking, but we're patient and waiting for some good opportunities to come along. There were actually quite a few acquisition possibilities that were on the market last year. A few of those did get acquired by other people who were just willing to pay a higher, uh, valuation than, than we were. And, but quite a few of them, uh, didn't happen, didn't, didn't get done. And, um, you know, we're always in the market. We're always looking, uh, we don't have to do anything. Uh, we're really looking for those situations where, um, a, it's a good valuation immediately creative, but B, uh, really add something to our business that, um, maybe we don't have or is just easier to acquire than to build from scratch, whether it's in a new sector or a new geographic region. That's really what we're looking for. Great.
spk05: And then I guess the last one for me, I know we've seen a lot of headlines around everything that's taking place and and the tech world, I think, and some prior commentary that you've made talking about how some of that kind of filtered from smaller companies to bigger companies, I guess, throughout the year, last year leading into this year. I was wondering if you could talk a little bit about maybe what we've seen with some of the other verticals, or are there any call-outs that maybe we're not seeing as much talked about that would be worthy to know about? Thank you.
spk00: Yeah, I would say we're – we're seeing a lot of strength in healthcare and healthcare for us is life sciences, pharmaceuticals, medical devices. Other companies, other providers might focus on hospital chains and healthcare providers. That's not really what we mean when we talk about healthcare. So that's an area of particular strength, but we're also seeing some strength in select consumer, particularly high-end, and manufacturing, industrials. There's some pockets of strength there, and there's some pockets of strength in financial services. So it's really – there's a lot going on under the surface, but in general those have been areas where we've won new business clients are continuing to hire at healthy rates. And by far, the weakest sector, as we've talked about, is the technology sector. And even there, our team is repositioned. And there are a few areas where there is still some decent activity, like IT services, and we're starting to see some activity with, um, AI related companies. And those are typically backed by venture capital firms, but we're seeing more and more of those, um, uh, startups get funded and, uh, need to partner with someone like us to help them, uh, ramp.
spk05: Great. And then one, one, I'll sneak in one last one. And sorry, uh, I wanted to see if you had any update as to maybe what you're seeing with RPO trends and receptivity given the microeconomic environment. Thanks.
spk00: Yeah, it continues to be healthy. So enterprise... RPO, which is the vast bulk of what we do, had a really good year last year. And we think we'll have another good year this year. And like I mentioned just a minute ago, by far the biggest opportunities are in healthcare. And I would chalk that up to it being somewhat independent of the economic cycle or what's going on in the banking sector and but i would also chalk it up to just kind of coming out of covid a lot of those companies either want to use rpo have an rpo solution for the first time and they've been studying it for a while and they just were kind of on hold because of covid because that was such a distraction and they were dealing with that and then another thing we're seeing is that they're unhappy with their incumbent provider because the incumbent provider wasn't, in some cases, as flexible as they needed them to be. And so we're seeing more opportunities than usual to pitch for business where the client's already convinced RPO is the way to go, and they're just not satisfied with their current partner.
spk06: Thank you.
spk01: Our next question comes from Ignacio Vernaldez with EF Hutton.
spk04: Please go ahead.
spk02: Hey, good morning, and thank you for your time. I'm calling on behalf of Eddie Riley. Two questions here. The first, regarding the new business wins mentioned in the press release, just curious what's driving these wins given the current macro environment?
spk00: Yeah. Well, there's always, as someone on TV says, there's always a bull market somewhere. And when I look, this is probably one of the more encouraging things. We've won a healthy amount of new business in the first quarter. I would estimate it at around $3 million. And That number is an annualized net revenue number. It doesn't mean $3 million additional in 2023. That's when it's fully up and running, what the annualized run rate is. And it's a collection of gaming, healthcare. We won a pretty decent-sized account with a specialty chemical company that focuses on clean water products, hygiene products, And so it's really just looking for where the need is and responding to that client need. I think we've all seen situations like during COVID where a lot of sectors, a lot of countries were on pause. And then coming out of COVID, it was to varying degrees, all sectors, all countries at full steam ahead. And I would just say the current environment is more mixed. There's a lot going on in some countries, some sectors, some companies, and the real epicenter of the weakness from what we see is the tech sector, particularly the west coast of the US. That's the real epicenter, and it's as bad as other severe downturns like after the dot-com bust and during the great financial crisis.
spk02: That's really helpful. Thank you. And then just secondly here, just kind of looking ahead at 2023, wondering what your top strategic priority for the year is.
spk00: Yeah, that's a really good question. It's really just to continue to execute well and make sure that our investments are prudent and delivering the results we expect them to deliver. We've talked in the past about how much we've increased investment spending and we believe we're in a growth business. We believe we're a growth company and the areas where we have significantly increased our spending versus say four or five years ago are the areas of sales, marketing, technology, and we continue to invest in those areas. We think it's very high ROI, and that's why we think, that's why we're seeing a pretty healthy pipeline of new business opportunities. It's because of those investments we've made. And so it's really just making sure that those are, playing out the way we expect them to given the investment that we've laid out.
spk02: That's really helpful. Thank you so much for your time today.
spk06: Absolutely.
spk01: Our next question comes from Mark Dishup with Private Investor.
spk04: Oh, hi. Morning. Thanks for taking my call. I have a couple of things here. In your, you said you've cut about a million dollars plus in SG&A. How much of that flowed through to Q4? And how much has not benefited earnings yet?
spk00: Yeah, I would say we have a very flexible, just at a high level, we have a very flexible cost structure. And so we can adjust fairly quickly to changes in activity levels. And the second half of last year was one of those odd times where certain clients, certain countries, certain sectors were ramping while others were decreasing. And there can be some inefficiencies in the short term as we move people around and we had situations where we're hiring in one area and reducing in another area. That usually takes a quarter or two to kind of work itself out. rule of thumb is that our SG&A costs should run around 70% of adjusted net revenue. So just like if you're building a model or kind of looking at a long-term forecast, that's a pretty good way to look at the business, we think. So if we get another dollar of revenue in general, we have to add 70 cents of SG&A and that other 30 cents should drop down to the EBITDA line because we already have all the costs of being global and the overhead and different things like that. So, you know, we were just pointing out that, you know, our SG&A costs in absolute dollars declined by, I think it was a little over a million dollars in Q4 versus Q3. And we can make further adjustments up or down as required by our clients. And we just wanted to highlight that just to show we do have a flexible business model. We can make adjustments pretty quickly. Sometimes it takes a quarter or two. But over time, we do think that 70% number is a good one to use in terms of SG&A as a percent of net revenue.
spk04: Okay, just looking at your numbers here from your presentation, you have adjusted net revenue for the year. Let's see, for the quarter, you had it at about almost 20 million on adjusted net revenue of 22. Seventy percent would be more like 15 or 16 million, I think, or something like that. Does that mean that going forward, like in the next couple of quarters, we could expect that SG&A number to get back to, you know, in the neighborhood of 70% of adjusted net revenue? Or am I looking at the numbers wrong?
spk00: No, I think you're looking at the numbers right. You know, it's hard to give precise guidance by quarter on something like that, but, you That definitely is the trend, and that is where it will normalize to over time. And, for example, coming out of COVID, hiring volumes in a lot of sectors and a lot of geographies increased so quickly that I think our SG&A divided by net revenue was below 70 for a while, which is kind of an unsustainable level. Said another way, our team was stretched incredibly thin and was – working way more than kind of normal work hours. I think, you know, one other thing, if you look at the SG&A numbers, is that you have to strip out the non-recurring items. Sometimes there are some non-recurring items in the SG&A number. And then when I look out, I mean, we stopped giving guidance during COVID and not giving guidance for the year. But when I look out for this year, Q1 is always the slowest quarter of the year. That is largely due to our significant presence in Asia-Pac. Most of Australia is at the beach in January and you have Chinese New Year and China. Hong Kong ended the year on a very weak note and started the year on a weak note. Q1 is almost always the weakest quarter of the year for us, and I think 2023 is going to be no exception. And then I think each quarter will show improvement versus the prior quarter. So if things go the way we think and there's no massive disruption in the economy or hiring trends or anything like that, probably the highest quarter of the year will be Q3 or Q4. And then just the way the annualization works, you know, we entered 2022 on a really, really strong note. So we had a very strong Q1, very strong Q2, and then started seeing weakness in Q3 and further weakness in the Q4. And so the comps get much easier when you get out to like Q3. And so I think we'll be, uh, having positive year over year comps when you get out to Q3 and Q4. So, you know, to, to answer your direct question, um, you know, very confident we'll be at that number, you know, sometime around the middle of the year, Q2 or Q3, in terms of 70% of net revenue, SG&A being 70% of net revenue. Probably be worse than that in Q1.
spk04: Okay. That's great. Thank you very much for all that. On your – you said that tech and project revenue – uh, are the weak areas. I was wondering if you, um, could break out, is that still 20% of revenue? And can you break that out by tech versus project and, uh, give a little bit of thought on, on whether you think, uh, tech is anywhere near, near the bottom, or you think it has maybe some more weakness to come or, uh, if you think project is, um, just sporadic by its nature or is it being reined in more because of economic things?
spk00: Yeah, all good questions. And let me just zoom out a little bit and say our original business, our bread and butter business is enterprise RPO. And that is the growth Um, that's the highest value thing we do. It's typically three year contracts with, um, medium to larger size companies. It's usually fortune 500 companies. Most of our clients are big publicly traded companies that you've heard of. We have three other businesses we're in that we think all help funnel business to enterprise RPO. So one is the contracting work we do. That is, um, historically largely just kind of a side service we offer for our enterprise RPO clients. But there have been a few examples where we've led with contracting to build a relationship with the hope that it leads to enterprise RPO. And our biggest new business went in Q1 was exactly that. It was a contracting client that became an enterprise RPO client. So we're very, very happy about that. In the tech sector, You know, the most of the work we do in the tech sector came from the acquisition we did in late 2020. And that's a different business model. That's more recruiter on demand. It's more for pre IPO companies. It's it can be turned on, turned off fairly quickly. And we might have a contract in place like an MSA type of contract, but it can be ramped up or ramped down. And a little bit similar for project work. So we're hoping the whole reason to do Recruiter on Demand in the tech sector and to do project work is to convert that to enterprise RPO. So I just wanted to kind of throw that out there. And in terms of the numbers, I think coming into 2022, a year ago, tech sector was really, really strong. Project work was very strong coming out of COVID. companies needed as much help as they could possibly get. Enterprise RPO takes a long time to put in place. It takes a long time to study and kind of show people what it can do. And there was a big need for project work. And so coming out of COVID, we saw a tremendous amount of strength in tech, a tremendous amount of strength in project work. And probably at the peak a year ago, it was probably 30% of our total And by the end of the year, it was probably down to 15% of our total. And I would split that half tech, half project. So right now today, enterprise RPO is probably 80% to 85% of what we do. And it's very, very steady. And it's growing. And the big, big areas of weakness have been in the tech sector and the project work.
spk04: That's very helpful. Thank you. I have a question. I've been hearing that there may be some issues with private equity in general. I just didn't know if, can you speak to whether you're seeing any weakness or any talk of possible future concerns from your customers that are backed by private equity?
spk00: Yeah, a short version is we don't see that. You know, we don't have that many clients that are backed by a private equity firm. Most of our enterprise RPO clients, like I mentioned, are big publicly traded companies. Um, we, we do have one, um, client, interestingly enough, and this is just an anecdote that's owned by a PE firm. It's once one of the big global PE firms and it's a, it's a European based, uh, uh, company. and they just acquired a publicly traded company and so we're gonna get a lot more business because of that. So I would say the one client that comes to mind that is PE-backed is doing incredibly well and just made a huge acquisition. And if there is a lot of weakness with PE-owned companies, we wouldn't really see that because we're not really exposed to that except for maybe in the tech sector. where we do have exposure to PE and VC-owned companies. And like I've been talking about, that's kind of bouncing along at a really low level, and we've already seen the big decline, and that was in Q3 and Q4.
spk04: Okay, that's great. I'm almost done here. Just the last one, then, thank you, is do you think this is a good time to still be considering acquisitions? Yes. Or are you more leery because of economic uncertainty? And secondly, can you talk about how your India acquisition that you did is doing?
spk00: Sure. So, you know, acquisitions are, you know, a tricky thing because it takes a willing buyer and a willing seller. And so our approach is to always be in the market, always looking for We learn a lot from that approach, from just being in the market and meeting with different companies and listening to their business model and how they approach the market. And the acquisitions we've done have really come from it just being the right place at the right time, really good fit. And we had a vision where one plus one equals three, where we could do that acquisition And we were the natural owner and we could we could really help accelerate their growth. So that's really the key to it. So it's much more bottom up than some macroeconomic view or we're trying to predict what the market's going to do or what the economy is going to do or what what hiring volumes are going to do. And in terms of the the India acquisition we made last year, that was a very, very small acquisition. We do think we got it at an attractive valuation based on their historic results. They have been impacted by the slowdown in hiring in the tech sector, but they have a very strong list of clients that they do business with, both in the past and currently, and we are winning new business in India. So it's really a very, very small acquisition. But it positions us very well for what we think will be a great place to be for decades to come. So historically, we haven't had any offering in India. We've had employees in India, but they're serving U.S. clients. And with that acquisition, we now have an offering in India. And our strategy is to work similar to our strategy in China, where we're working for European, US, UK, multinationals who have big operations in India.
spk06: Thank you very much for all that. Sure.
spk01: That concludes today's question and answer session. I would now like to turn the call over to Jeff Eberwine for closing remarks.
spk00: All good questions. Thank you very much. Thanks for joining us today. Thanks for your interest in Hudson Global. Feel free to contact us anytime using the contact information in our press release or on our investor relations website. And we look forward to updating you on next quarter's call. Have a great day.
spk01: Thank you for joining Hudson Global fourth quarter conference call. Today's call has been recorded and will be available on the investor section of our website, HudsonRPO.com. Thank you.
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