Good morning, and welcome to the Hudson Global Conference Call for the First Quarter of 2023. Our call today will be led by Chief Executive Officer, Jeff Eberwein and Chief Financial Officer, Matt Diamond. Please advise that 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 with 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 constant currency, adjusted EBITDA, adjusted earnings per diluted share.

Reconciliations for these measures are included in our earnings release and in our quarterly slides, both posted on our website, hudsonrpo.com. I encourage you to access the earnings material at this time as the reserve as a helpful restaurant guide during this call. I will now turn the conference 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 first quarter 2023 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 first quarter of 2023, we reported revenue of $43 million, down 13% year-over-year in constant currency. Adjusted net revenue was $22 million and decreased 12% year-over-year in constant currency. SG&A costs were $21 million in the first quarter, up 5% versus the same period last year in constant currency.

We reported adjusted EBITDA of $1.1 million, down 77% in constant currency versus a year ago. In addition, we reported net income of $0.4 million or $0.11 per share versus net income of $3 million or $0.97 per diluted share in the same period last year.

We reported adjusted net income per diluted share of $0.22 in the first quarter of 2023 versus $1.23 a year ago. I will 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 first quarter..

Thank you, Jeff, and good morning, everyone. Revenue and adjusted net revenue for our Americas business decreased 36% and 35%, respectively, in constant currency. Breakeven adjusted EBITDA decreased versus last year’s adjusted EBITDA of $3.5 million.

Revenue for our Asia-Pacific business decreased 8% year-over-year in constant currency and adjusted net revenue grew 9% in constant currency. Adjusted EBITDA of $1.7 million decreased from adjusted EBITDA of $2.4 million a year ago. Our EMEA business grew revenue 16% and adjusted net revenue 31% in constant currency.

Adjusted EBITDA of $0.5 million in the first quarter of 2023 increased from adjusted EBITDA of $0.3 million a year ago. Turning to some additional financial details from the first quarter, we ended Q1 with $22.3 million in cash and restricted cash. Day sales outstanding was 53 days at March 2023, up from DSO of 47 days at March 2022.

In connection with the acquisition of Coit 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 March 31, 2023, reflects $4.9 million of goodwill and $4.3 million of net amortizable intangible assets.

The company’s working capital, excluding cash, increased significantly to $12.7 million in the first quarter of 2023 from $7.3 million at the end of 2022. The company used $5 million in cash flow from operations during the first quarter.

The cash flow use was due to seasonal moves in working capital that we typically see in Q1 as well as a $2 million outflow for the final earn-out payment related to the Coit acquisition. I’ll now turn the call back over to Jeff to give some more perspective on our RPO business and to review current trends in our business..

Thank you, Matt. In the first quarter of 2023, lower hiring activity, particularly in the technology sector, led to declines in revenue, adjusted net revenue, and adjusted EBITDA versus the prior year quarter. Activity and other sectors remained stable, and we’ve seen a number of new business wins thus far in 2023.

Importantly, our experienced leadership team has a history of navigating different market cycles and continues to respond quickly to changes in the market to protect our profitability. We are confident in our ability to manage the business in this environment and remain well positioned to respond to the needs of our clients going forward.

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?.

[Operator Instructions] And the first question comes from Edward Reilly with EF Hutton..

Yes. Thanks for taking my question. Europe looks to be doing really well.

Just wondering if you could maybe uncover this a little bit for us, what’s really driving the growth here?.

Yes. Thanks for the question. We did have a really good quarter in Q1. That was a bright spot for us. We have continued to win new business there. So, we had a significant win towards the end of last year that was ramping up in the first quarter. And so if you just add new business on top of the existing portfolio, it makes for good year-over-year growth.

And then a year ago at this time, the sentiment there was very poor, everyone was talking about a recession, downturn. So, we think some of our clients there may be under hired last year and then things ended up not being so bad.

They are from what I can tell, things stabilized and they didn’t go into a recession and hiring actually picked up at the beginning of this year and was ahead of our expectations and showed year-over-year growth..

Okay. Got it.

And then on some of the other new business wins that you have had, which geographic regions have these predominantly taking place? And should we maybe expect this to ramp for the rest of the year?.

Yes. We are very excited about this year. First quarter is always the weakest quarter of the year.

And Australia is largely on the vacation pretty much the whole month of January, and we had a lot of instances where our clients and our own team actually took quite a bit of leave in January to make up for not taking their full vacation when we were coming out of COVID.

And everyone was super busy, and stretched really been – and we have seen improvement globally each month throughout the quarter, and April is better than March, which is encouraging. The new business wins are heavily in Australia, UK, U.S. and a little bit in Continental Europe, India, and China..

Okay. Great. Then last one for me.

Could you maybe just talk about how you have been adjusting your cost structure just given the weakened environment, particularly in the U.S.?.

Yes, that’s a really good question. We have talked before about how our cost or team costs tend to be 70% of net revenue, so not the gross revenue, but the net revenue. And we strongly believe in that trend over time. And if you look at Q1, it was significantly higher than that if you take out the stock-based comp and the non-recurring items.

I think the salaries and related line was something like 77% of net revenue, and we see a combination of revenues increasing from here. We think each quarter is going to improve as the year progresses and costs will – cost as a percentage of that revenue will decline going forward.

And I guess, the issue we have had over the last nine months has been, it was just a global unevenness. Some areas having a very sharp decline like the technology sector and other areas where we have won new business and have continued to hire and it’s not so easy to take someone who was doing tech recruiting in the U.S.

and move them to Australia because we just had a new win in Australia. So, we had some areas where we have too little labor and other areas where we have too much and just takes a quarter to get it all adjusted. And we strongly think that the long-term trend line is going to be that 70% salary cost, 70% of net revenue..

Okay. Great. Thank you very much..

Thank you. And the next question comes from Marc Riddick with Sidoti & Company..

Good morning Marc..

Hi. Good morning. I wanted to see if we could touch a little bit on maybe what you are seeing. And I think in the past, we have talked about maybe some of the different behaviors that – and actions that you are seeing, whether it was smaller tech companies, larger tech companies, things like that.

I was wondering if you could talk a little bit about maybe what you have seen more recently and various differentiation and then maybe we can sort of go into maybe what you are seeing as far as project-based actions..

Yes. So, what we are seeing in the technology sector. And also, just to be clear, we do lots of technology hiring. Every one of our clients, whether it’s a pharmaceutical company or a financial services company or a consumer company does a lot of IT hiring, and we do a lot of hiring of IT professionals.

And when we talk about technology, we are talking about the tech sector specifically and what we have seen there, everybody can see the headlines with a lot of big tech companies doing multiple rounds of headcount reductions and our specialty has been in that high-growth medium-sized company that maybe just recently went public or it will soon be public and they are ramping their team in order to meet the growth that’s going on in the business.

And so a lot of that has stopped and they have shed people. And so we would estimate that hiring in the technology sector is down 80% year-over-year, which really seems like an unsustainable level to us. A lot of our clients – we have all the paperwork in place, all of the contracts, etcetera.

So, if they want to resume hiring again, we can turn that back on very, very quickly. And a lot of them have – would tell us that they have cut very, very deeply, including cutting a lot of people in HR and talent procurement.

And going forward, they would like to have more of a variable cost model, less of a fixed cost model and we will use more RPO the next time around. So, we don’t know when it’s going to recover. But when it does, we are incredibly well positioned to quickly get back to the levels we were at previously.

And the areas that – there is a little, I would say, some green shoots are smaller down in the VC area, where there are companies getting funded in AI and cyber security. Those are two areas where we are seeing some activity in hiring and some companies get funded. And then another area, we had a decent win in Q1 that was ramping up of IT services.

So, these are companies that help other companies with their ERP systems, upgrading to the cloud version, building websites, and there is still a decent amount of work for those IT services companies. And so we have been – we did have a decent win of an IT service company, and we have been targeting that space..

So, you actually anticipated some – a couple of things I was going to ask, particularly on how this sort of lays out for future RPO opportunities and the like as well as the AI commentary, so thank you for that.

I was wondering if you could talk a little bit about maybe what you are seeing with candidate availability and how that might play out through the year as well as sort of the bill rate, wage rate opportunities throughout the year and what you are anticipating there?.

Yes. Let me just make sure I understand your question.

In terms of candidate availability, are you talking about recruiters hiring for clients, or are you talking about our ability to recruit recruiters?.

The first, for the former..

Yes. It’s still really tight. It depends which sector and it depends which geography and there are pockets.

I would say the tech sector and Silicon Valley, San Francisco area are the epicenter of hiring weakness, but then you have other sectors that are really struggling to find people, particularly; healthcare, life sciences, medical devices, we have a client who has really struggled to find IT people in places like Texas and the Midwest.

There is a real shortage of IT people. And so it’s kind of hard to paint with a broad brush because there is pockets that are still really tight, and then there is other areas of weakness or even extreme weakness. I would say light industrial, we have seen some weakening there.

And then on the salary wage rates that – it’s certainly less hot than it was.

But what is encouraging to us is that – and what makes us really optimistic about our margins expanding going forward is that because of the increase in wage rates, it gives us a pricing umbrella and so on new contracts or when the contracts renew, we are getting, in some cases, significant price increases just because the cost of people is up, and we feel that immediately, and we are not able to pass that through until the contract comes up for renewal.

And it’s kind of an industry-wide thing. But said another way, we are under-earning right now, our margins are at a low point. I think this is the low point of the cycle for us..

Okay. And then I was wondering if you could talk a little bit about has there been much of a change in what you are seeing as far as acquisition, the pipeline valuations, whether you have seen much of a change in what’s available out there and whether the macroeconomic conditions have provided maybe some potential opportunities there? Thank you..

Yes. I think that’s getting better, but I would say not yet. So, what we saw last year is we looked at a lot of targets. It seemed like there were a higher than normal number of acquisition targets on the market.

And a few of those deals did get done, many of them did not get done, which we would chalk up to the seller wanting a peak multiple on peak earnings and just had two lofty expectations. And now for a lot of those candidates similar to us, earnings are flat to down.

And usually, their expectations – it takes a few quarters for them to reset the memory of that high point is still really fresh. But I would say it’s the gap between bid and ask is starting to narrow.

Not enough, in our view, and we are pretty value-oriented and we have the luxury of not needing to do anything at all, but we are looking at things all the time. We are in the market all the time. We have benefited from looking at things. We have learned a lot from doing that.

And even if we never do another acquisition, we benefit from being in the market and looking at things and just staying in touch with people who we think might want to sell at some point..

Thank you very much..

Good questions. Thank you, Marc..

Thank you. And the next question comes from Gabe Sanchez, a private investor..

Good morning..

Hi Jeff. Thank you for taking the questions. So, RPO is a fragmented industry with a few barriers to entry. And while I recognize that there is room for numerous players, I am still curious how you think about long-term survivability and Hudson’s competitive advantage. I know you all focus a lot on reducing corporate costs.

So, I am wondering if you are looking to maybe the low-cost operator or if you would argue that there is a specialized or unique service offering at Hudson..

Yes. No, really good question. I would say our specialty is our big company capability, but small company service level and feel we get rated really highly in the industry on our service level and our value proposition. We really do well.

Our sweet spot is clients that hire 500 to 10,000 people a year, somewhere in that zone is our sweet spot and most of our clients are in that range. So, if it’s a client that hires a lot more than that, we might not be such a great fit. So, RPO is hard to break into.

There are some boutique firms out there that specialize in a geography or maybe they specialize in an industry, and I think there will always be a place for small boutique firms that have that kind of specialty, but they tend to have a hard time breaking out of that geography or that sector.

And a lot of the ones that we have talked to and looked at, even if we don’t end up looking at them from an acquisition point of view, we developed a relationship with them. And we had an example of the recently where a smaller RPO, that’s a regional player, had a client that needed to help expanding globally.

And this smaller RPO provider isn’t really set up. And so we are going to partner with them and service the client. We are looking into servicing the client together as a team where they would focus on what they do best, which is that particular region, and we would focus on all of the international roles.

So, there are some big global firms out there that are trying to be all things to all people, but they don’t always have the service level that we have.

And I would say we also specialize in white collar professional roles where talent is absolutely everything and the company has to get that right and has to find the right people and build the right team and the sectors that we are in line up well for that. So, I think we are – I think there is – I think we are in a good space in that market.

There is a lot of, I guess you would call them, medium-sized companies in that zone where they hire 500 to 10,000 people a year that we offer the best service and the best value proposition..

Yes. Wonderful. Thank you for offering that thoughtful answer and I am curious because acquisitions have been mentioned several times on this earnings call.

Do you consider a particular hurdle rate when you are making these acquisitions? And how likely do you think it is that we leverage the full and operating loss carry-forward over the years in acquisitions?.

Yes. Our number one bullet point on an acquisition is, is it accretive to the business and to us financially, so does it fill a hole in our portfolio.

And then, can we do something more with it than they could do on their own, so in other words, what’s the industrial logic, is it truly more valuable owned and managed by us than by someone else or just staying independent. And it’s a pretty high bar. And this is a people business, and so the culture has to fit.

And if we do all those things, I think the returns take care of themselves. If you force me to throw out a number, I think any acquisition we do, we want to look at it and say, inside of Hudson, this is going to be a 20% return on investment, and we are going to be able to grow the size of the business over time..

Awesome. Thank you. And if I could just sneak in one last question.

Given that 50% of sales were attributable to just two clients last year or in 2022, are you willing to share any insight at all regarding those two clients? And do you think that that high client concentration will persist, or do you expect to diversify the customer base over time? Thank you..

It’s the second one. As we grow, we think we are in an industry that is growing 15% a year on average. That doesn’t mean every single year is exactly 15%. Some years will be less than that. Some years will be higher than that, but we think we are in a high-growth industry, and we want to grow at least as fast as the industry is growing.

And what you are referring to is a disclosure in our 10-K, and that disclosure is based on gross revenue, not net revenue. And in the contracting business we do, we have a huge amount of revenue. Most of it is pass-through, and we make a very small margin on that.

So, it’s less concentrated if you look at it on a net revenue basis, but those larger clients are very long-term relationships, very, very sticky, very interdependent. It’s not something that keeps me up at night. I guess I will put it that way.

And we don’t have any major contracts coming up for renewal in the next year that certainly none that I am worried about..

Got it. Thanks so much, Jeff..

[Operator Instructions] And if there is nothing more, I would like to return the floor to Jeff Eberwein for any closing comments..

Well, thank you, operator, and thank you for your questions today, very good questions. We appreciate you joining us. We appreciate your interest in the company and feel free to contact us any time by using the information in our press release or on our Investor Relations website, and we look forward to next quarter’s update call.

Have a good day, everybody..

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