Good morning, and welcome to the Hudson Global Conference Call for the Third Quarter of 2020. Our call this morning will be led by Chief Executive Officer, Jeff Eberwein; 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 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 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. I will now turn the call over to 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 2020 highlights, and Matt Diamond, our Chief Financial Officer, will provide some additional details on our results.

I'll then give some perspective on how we're navigating current business conditions. For the third quarter of 2020, we reported revenue of $25.4 million, down 5% year-over-year in constant currency. Adjusted net revenue, which we formally referred to as gross profit, decreased 23% year-over-year to $9.1 million in constant currency.

SG&A costs were $9.7 million in the quarter, down 11% versus the same period last year in constant currency. Reported adjusted EBITDA loss of $700,000 compared to positive adjusted EBITDA of $800,000 a year ago.

In addition, we reported a net loss of $1.2 million or $0.41 per share versus net income of $400,000 or $0.12 per share in the same period last year. We reported an adjusted net loss per share of $0.38 in Q3 2020 versus adjusted net income per share of $0.13 a year ago. Turning to performance for the quarter by region.

Our Asia Pacific business grew 10% in constant currency, while adjusted net revenue declined 13% in constant currency. Adjusted EBITDA of $0.9 million declined somewhat from adjusted EBITDA of $1.1 million a year ago. I'm very proud of the results our Asia Pacific team have been able to generate given the headwinds facing them this year.

Our Europe business saw revenue decline 29% in constant currency, but 13% in adjusted net revenue. Adjusted EBITDA was breakeven in Q3 2020 as opposed to positive adjusted EBITDA of $300,000 in last year's quarter.

Our Americas business had a difficult quarter with revenue and adjusted net revenue declining 45% and 48% in constant currency, respectively. Adjusted EBITDA loss of $800,000 versus last year's adjusted EBITDA of positive $200,000.

At the end of Q2, we consolidated management of the Americas and Europe regions under the leadership of Darren Lancaster, formerly CEO of our Europe business. We are excited to leverage his skills and expertise to stabilize and grow the Americas business over time, and we've also revamped the sales team in the Americas.

Once fully integrated later this year, we anticipate over $1 million in annual cost savings as a result of this change. Also, we're excited about the recent acquisition of Coit Group and what our combined team can accomplish together in the technology space.

Coit brings the Hudson RPO a wealth of technology sector recruiting experience and relationships, which combined with our global presence will lead to significantly increased business, we think, in this fast-growing sector. We believe this accretive combination will generate considerable value for our clients' team and stockholders going forward.

I'll now turn the call over to Matt Diamond, our Chief Financial Officer, to review some additional financial details from the third quarter..

Thank you, Jeff, and good morning, everyone. Our third quarter tax provision from continuing operations was approximately $200,000. The company used $500,000 in cash flow from operations during the third quarter. Days sales outstanding was 39 days at September 2020, which was favorable compared to DSO of 51 days we had back in September 2019.

We ended the quarter with $29.7 million in cash and restricted cash. 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.

In April 2020, we received a loan through the SBA PPP program for $1.3 million. We have applied for forgiveness for this loan. And to the extent that all or a portion of this loan is forgiven, it will be reflected in other income.

In addition to the PPP loan in the U.S., we have received government assistance in other countries of approximately $200,000 in exchange for maintaining certain levels of compensation and other costs in response to the COVID-19 pandemic. This is reflected in other income in the third quarter results.

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. Turning back to our business. As disclosed and previously issued company press releases as well as various SEC filings, our business like many other businesses has been adversely impacted by the COVID-19 outbreak and the accompanying economic downturn.

This downturn as well as the uncertainty regarding the duration, spread and intensity of the outbreak led to a reduction in demand for our services this year. The duration of this reduction in demand for our services remains uncertain and difficult to predict considering the rapidly evolving global landscape.

In Q3, we started to see some improvement in activity levels at some clients. However, we're vigilantly monitoring the situation surrounding COVID-19 and its impact on our business, and we will continue to proactively address this situation as it evolves.

Globally, we've now rightsized the business to better match client needs while retaining the ability to respond quickly as activity starts to rebound. We are pleased with the resilience of our business thus far which is a testament to the strength of our clients and the flexibility of our team.

Our partnerships with our clients have deepened during this challenging time, and we will believe -- and we believe we will emerge from this crisis as a stronger and better partner for our clients.

Importantly, I want to thank all of our highly dedicated employees for their flexibility, hard work and dedication to our clients and our business in these challenging conditions that we're all working through.

Operator, can you please open the line for questions?.

[Operator Instructions] Your first question comes from the line of Josh Vogel with Sidoti..

I hope you guys are doing well. First question, kind of higher level. Maybe if you could just talk about the new business tone.

And what kind of opportunities you're seeing in the pipeline today in terms of deal size as well as RPO versus MSP?.

Yes. Thank you. We're very excited about the future. Of course, it's hard to predict what's going to happen with the virus and are we going to have more shutdowns, especially as we go into winter in the Northern Hemisphere. But in general, at a high level, the tone in terms of new business is much better.

Clients are -- went from being -- having a bunker mentality to more of how do we adapt and grow mentality. And we do strongly think that 1 silver lining of what we've been through is that clients more strongly see their need for a partner to help them manage all of their talent needs, and that's what we specialize in.

So I think the new business conversations have picked up. We're really excited about next year and beyond. And it's a lot of different conversations, a lot of different sectors, a lot of different countries and we could go around and I could give a little bit of comments on each one.

But in general, we're looking at a lot of things, both RPO and MSP a lot of different sectors and a lot of different countries. And in particular, we're excited to expand significantly in the tech sector through the recent acquisition that we made..

Yes. I actually do have a question on that. But before getting there, just kind of building off the new business pipeline.

Are you starting to see any of those clients or prospects that that hit the pause button over the spring or summer months starting to reengage and get serious about ramping up their headcount?.

Sure, version is yes. It's client by client and even country by country. In general, Asia Pacific region was the first one impacted by the virus. They were kind of the first ones in and first ones out. And then as you know, we have a very significant business in Australia. And Australia hasn't been hit as hard by the virus as the U.S. or Europe has been.

And so that's helped that country hold up better..

Yes, actually -- sorry..

Right. Okay. So the recent acquisition seemed like a really good deal for you, got you deeper into tech, gave you an office on the West Coast and just a greater overall U.S. footprint. But it also seems to be a good deal given the apparent client base and opportunities that it could open up for you outside of the U.S. on a global scale.

I was wondering if you could just talk to that a little bit..

Sure. Yes. We got to know the team at Coit Group really well through discussions that went on for over a year. And they've built a really nice business, a really nice franchise, mainly in the San Francisco Bay, Silicon Valley area. And we're excited about a lot of different aspects.

One aspect is pitching to larger companies in the space because of our -- combining their expertise with our expertise and capabilities, we do think is 1 plus 1 equal 3. Another aspect that we're excited about is helping many of their existing clients and future clients with their international growth aspirations.

That's not something that Coit has been able to really maximize historically, but we have offices and people all over the world, and we can really help them with that. So, there's a lot of different angles where this transaction, we think, will be 1 plus 1 equal 3. And so it's not just buying revenues and earnings.

It also comes with a situation where we can honestly say this could be much more valuable as part of Hudson. The hope is to double or triple what they've been able to do on their own..

Great.

How has the acquisition been received by Coit's existing clients? And how is the general dialogue you've been having with them?.

Really well. I think it makes a lot of sense to a lot of people. Their whole team has now joined us. And we're working together really, really well. And the cliche that we joke about internally is 1 team, 1 dream.

But I think everybody is really excited about it and sees the benefits of it and the potential of it, they have felt for a long time that they have this expertise they developed and these relationships they've developed, but if they have a client who needs help in China or needs help in Germany or needs help with a bigger hiring need, they're now much more able to help that client.

And so it's a much more fulfilling place to be in than to go back to the client say, sorry, we can't help you in China. So, we're excited about it, and there's a lot of things that we can do together, and it's just a matter of executing on it..

All right. Definitely like the new company slogan there. Just the last one, and I'll hop back in the queue, but thinking about the acquisition pipeline, like we were saying Coit seemed like a good deal for you because it gave you a bigger footprint in tech also makes sense from a global expansion and geographic standpoint.

How should we think about future deals and your appetite in general from here?.

Sure. This was also the right size, not too big, not too small. And the way we think about it is we're always in the market looking. We think there's a lot of benefits to being in the market to constantly being in the market and looking. It just helps us be educated on what's available, what different business models are out there.

But the most important thing I would emphasize is that we have a high bar and it's got to check a lot of boxes and it can't just be buying a revenue or earnings stream on its own.

It's got to be a situation that is synergistic where we can honestly look at the business and say that business inside our current team, our current business could likely be more valuable, maybe much more valuable because of the 1 plus 1 equal 3 aspect.

At the beginning of this year, as an example, we have -- we had roughly 400 employees, more than half of those are in Asia Pac. The Coit Group historically has been around 25 employees. And so you can kind of see how combining the 2 teams together will be able to accomplish more than either 1 of us would on our own.

That's the kind of thing we're looking for in acquisition. We're open to other acquisitions, RPO or MSP, but it's got to be something that's unique and special where it really truly is accretive, not just getting bigger without any synergies to it or any secret sauce to it. And then culture and people fit is really important. This is a people business.

And teamwork is incredibly important to having a good business, a well-run business. And so it's got to be a good culture fit and people fit..

I appreciate the insights there. And if I could just sneak 1 more in, maybe more for Matt. Just thinking about Q4, as it stands today, we shouldn't expect to see any foreign government stimulus but there's the potential for the PPP loan forgiveness that will hit up in the other income line..

Yes. I mean, as we -- there's some more information that you can see in the Q, but that we'll file after market close today. But we had about $200,000 worth of other income from foreign systems. It's about $465,000 on a year-to-date so far. We do anticipate that there will be some additional activity on that front. Certainly, the U.K.

recently announced that they were extending their furlough program a couple of days ago. But as you mentioned in the U.S., on the PPP front, we did apply for forgiveness for the loan. We believe that we're hoping to get 100% forgiveness. We'll have to see like anything, to go through the process and see.

There's supposed to be a 60-day turnaround time for this to happen. So our hope is that we'll have an answer for this in Q4. And to the extent that we receive all portion of the amount forgiven, it will be reflected in other income on the P&L similar to the other foreign assistance that we've received..

[Operator Instructions] And your next question comes from the line of Mark Bishop..

Hi. Thanks for taking the question. I just have a few things about the acquisition. Just looking at the compensation in the filing that you made about it for the executives going forward, it seems by my calculation that maybe they're supposed to make at least like $1.6 million of EBITDA next year and $2 million -- or $2 million in the second year.

Would -- are those numbers -- to meet their -- that's to meet their payout goals, I think, is -- would those numbers include any cost cuts that you might make? Or are you not expecting any cost cuts? And -- let's see. And then I have another question..

Sure. The short version is, no. It doesn't include any cost cuts. We're not anticipating significant cost cuts certainly nothing on the people side, we actually want to add people, add recruiters to what they're doing.

So we're looking to invest and grow any cost reductions are going to be back-office kind of things, office support costs, things like that, certainly not on the personnel side. But your reading is right, I think, on the EBITDA targets, and it doesn't include any synergies to it.

And the concept that we had coming into this is to give the owners roughly half of the consideration upfront, and then they are staying and helping us execute on our plan to grow the business together and then they get the other half with some upside over time as they stay and help us grow the business..

Okay. Great.

And would those numbers represent the revenue from Coit where it was in the last 12 months or where you -- where they currently see it? Or does that -- is that kind of numbers that require them to grow 20% or some percentage each year? Or is that just for example, is the growth in the second year in the EBITDA, would that be from growth? Or is that from some synergies in costs? And also, are those numbers all inclusive? Or is that a number before any of their corporate costs?.

Yes. So those are all EBITDA numbers that the earnout is based on. It's not based on revenue, it's based on EBITDA and also we have NOLs in the U.S. And so 1 good thing about doing acquisitions in the U.S. is we can truly look at it on a pretax basis because we won't pay any income tax on-- well, we can offset any income in the U.S.

with our NOL, I should say. But -- so historically, Coit has been a private company unlike public companies that go through audited -- having an audit and filing 10-Ks and 10-Qs, we're incorporating all of their numbers into our numbers starting on Q4. And so that's kind of when the financials start.

So everything in the past is not audited and not in 10-Ks and 10-Qs. But I would say the 2021 and 2022 numbers are realistic based on what they've done in the past. They have a really great business, profitable business. They've been able to grow it nicely over time.

And like all businesses, they've been impacted by COVID-19 and most of their clients are in the Bay Area and the Bay Area, similar to New York City did have pretty significant shutdowns this year, but they managed through it very, very well. They stayed profitable, which was very impressive to us.

So the managers, owners of Coit are very experienced, know what they're doing, navigated the crisis really well, and we think we're poised to do really well together going forward.

And as I told them repeatedly, nothing would make us happier than them getting the maximum compensation from this acquisition because that would mean the business is doing really, really well, and we're all winning together at the goal..

Okay. Maybe a question just generally on how you see the market recovering after the COVID is done. You said that you've seen some clients talking about or thinking about increasing their hiring.

Would you see this as a cautious kind of slow emergence over the next 2 years? Or would you see it or -- do you think your customers are seeing it as something that might end at some -- in terms of their impact at some point and then they would hire meaningfully more? Like would the growth be slower or faster than the expectations for industry growth over the next 5 years.

I think I saw some reports that said that the industry is supposed to grow 20% a year or something like that. I don't know if you can comment on that, too..

Yes. That's a really great question, and I wish I knew all the answers to that, myself and my crystal ball is probably no better than anyone else's. But we -- I would just say a few things. I mean we do strongly think that the business we're in is a growth business and different industry consultants have different growth rates.

I think you're right, I did see 1 that projected the industry to grow 18% a year through 2027. Other people have said 15% and other people have said low teens. But any way you slice it, we think we're in a high-growth business, and we strongly, strongly want to grow at least as fast as the industry is growing.

We actually want to grow faster than the industry is growing, not just growth for growth sake and not growth if it's not profitable growth. But before this crisis started, we really felt like we had turned the corner midyear 2019. We were having good growth. That was roughly in the 10% range. That's kind of top line.

And then our margins, the way we look at them, were starting to get into the mid-teens, and I'm defining margins as adjusted EBITDA before corporate costs divided by adjusted net revenue. That's the main metric I look at. And we have a goal as a business of adding incremental net revenue at a 30% EBITDA margin, 30% drop-down margin.

We've got all the fixed costs paid for. We think we could double the size of our company without much of an increase in the fixed costs. And so if the starting point is 10% margin and you're adding new business at a 30% margin and you double over time, mathematically, the margin should get up to 20%. I mean, that's the goal.

So coming out of this, there are some clients that had almost no hiring or hiring freezes that need to catch up. And we have other clients that just continue to hire or continue to grow. So it's very much a business-by-business thing.

But the picture I'm painting is that the trend line for our business should be really, really good, mid-teens-ish and there could be a catch-up for some clients to kind of get back on that trend line. Another thing I would say is that I think this is a good thing. Clients are rethinking everything due to the pandemic.

Maybe they don't need to have as many people working in big offices in big cities. Maybe they can have more people working remotely or in some kind of flexible environment. And we're set up very, very well for that. And we started investing in centers of excellence. many years ago. We have a very good 1 in Scotland. We have 1 in the Philippines.

We have 1 in China. We're looking to add more of those over time. So that back maybe 10 years ago, the model would have been to have 100% employees all in office, either our office or the client's office.

And maybe going forward, it's only 50% of that and the other 50% is to have a team in 1 of these centers of excellence, and that works That works pretty well for us, and that's the vision. And we think clients are more accepting of models like that than they were precrisis..

[Operator Instructions] And that concludes today's question-and-answer session. I will now turn the call over to Jeff Eberwein for closing remarks..

Well, thank you, everybody. And I just want to say thank you to our team. Our team has really worked hard this year and has persevered through a very difficult environment, and we think the business has held up really well in Asia Pac and Europe.

And we have done some restructuring in the Americas, and that, combined with the Coit acquisition, makes us really excited about what we're going to see going forward in the Americas as well. So, we're excited about the future.

We appreciate your interest in our company, and thanks for joining us today, and we look forward to giving you another update on next quarter's call..

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, hudsonrpo.com..