Seeking Alpha • Aug 02
Hudson Global's Financial Results Are Improving Rapidly In 2022 And I'm Bullish
The company has been cutting costs for years and is finally in the black thanks to a tight labor market after the lifting of COVID-19 restrictions across the world.
Hudson Global’s adjusted net revenue rose by 107% year-over-year in constant currency in Q1 2022 while its net income stood at $3.02 million.
Considering this is usually the weakest quarter of the year for the company, I think EBITDA for 2022 could surpass $20 million.
Hudson Global can now take advantage of its $340 million net operating loss carryforward in the USA, which could save about $66 million in taxes in the future.
Introduction
On July 27, I wrote a SA article about international executive search firm Heidrick & Struggles International (NASDAQ:HSII), in which I said it looked undervalued. I’ve been looking at other companies in this sector and one that also seems cheap to me is Hudson Global (HSON). It’s a total talent solutions provider that has a strong cash position and has reduced the number of its shares by 12% since the end of 2018. The company booked strong results in Q1 2022 and demand for its services is looking good. Let’s review.
Overview of the business and financials
Hudson Global was spun off from global employment website Monster.com in 2003 and it specializes in the provision of recruitment process outsourcing (RPO) permanent recruitment and contracting outsourced recruitment solutions. RPO includes the use of an external service provider to perform all or part of a recruitment process for a company.
Hudson Global
Hudson Global’s clients include mainly mid-to-large-cap multinational companies, and it currently has operations in 14 countries worldwide. Over half of its revenues are coming from Australia at the moment.
Hudson Global struggled financially during its first decade as an independent company until its current CEO Jeff Eberwein started investing in it and took the reins. He embarked on a cost-cutting plan that also involved eliminating cash compensation to the board. The reduction in corporate costs is still ongoing and this has resulted in a significant improvement in EBITDA margins over the past few years.
Hudson Global
Hudson Global
There is a strong labor market in the major developed countries at the moment and this is providing a boost to the financial results of Hudson Global. In 2021, the company returned to the black with a net income of $3.2 million and Q1 saw another significant improvement in the financial results. During the quarter, revenues soared by just over 50% and the net income came in at $3.02 million. Adjusted net revenue was $25.6 million, which was an increase of 107% year-over-year in constant currency. EBITDA, in turn, was $3.88 million.
Hudson Global
According to research from Staffing Industry Analysts, the global RPO market has annual revenues of around $5.8 billion which means that Hudson Global is a relatively large player in this sector. However, I don't think the company's size provides it with a meaningful advantage as there are dozens of companies of similar size that have the same offerings. It's a competitive market and I could find few rankings online that list Hudson Global among the top 10 recruitment process outsourcing firms in USA.
In November 2021, Hudson Global acquired Chicago-headquartered recruiting services provider Karani for $8.67 million. The latter serves mainly U.S.-based customers and employs about 560 people in India and another 120 people in the Philippines. However, the acquired company didn’t improve Hudson Global’s Q1 2022 results in a significant way as it contributed external revenue of only $2.57 million and a net income of $0.24 million for the quarter. In my view, Karani could help Hudson Global win new business in India and other markets in the future. However, looking at its financial results, it’s doesn't seem like a good purchase for the time being. In addition, I think that it's likely the company could find it tough to grow its revenues in the USA considering that there are several similar local companies that also rely on Indian labor, including Profit By RPO, and Collar Search. Overall, I'm not concerned that Hudson will continue to make unnecessary acquisitions but I'll watch their M&A activity carefully.
Hudson Global’s organic adjusted revenue growth was 86% in constant currency in Q1 2022, and the Americas business had a big part in the improvement of net income. It grew its revenue and adjusted net revenue by 220% and 226% in constant currency, respectively. The company said during its Q1 earnings call that business activity levels were strong in every region and that demand for its services remained robust. Considering that this is usually the weakest quarter of the year for Hudson Global, I think we can expect even stronger results in Q2 2022. However, it’s possible that growth rates and net income decline in the second half of the year as the world economy seems to be slowing down and this is likely to put pressure on the labor market in major developed countries.
Turning our attention to the balance sheet of Hudson Global, we can see that the company has an asset-light business model as cash and receivables accounted for over 75% of the asset base as of March 2022. The company had $19.2 million in cash and just $2 million in debts at the end of Q1 2022 which means that its enterprise value stands at only $61.8 million as of the time of writing.
Hudson Global
In addition, Hudson Global has a $340 million net operating loss (NOL) carryforward in the USA that could save it about $66 million in taxes in the future. This means that the company has an incentive to make investments and acquisitions in the country.
Hudson Global
Overall, I think Hudson Global is a company that has done a good job of cutting corporate costs and improving margins over the past few years and the economic recovery and tight labor markets after the lifting of COVID-19 restrictions across the world are boosting its revenues and profits. It can now finally take advantage of its NOL carryforward and Q2 financial results should be strong too. Considering Q1 is usually a weak quarter for the company, I think EBITDA for 2022 could surpass $20 million. If we assume that Hudson Global should be valued at a conservative EV/EBITDA multiple of about 5x, this gives us a share price of about $41.80.