2023-06-08 03:45:10 ET
Summary
- In Q1 2023, the company revenues went down by 17% while adjusted EBITDA decreased by 78.8% due to lower hiring activity, particularly in the technology sector.
- The number of layoffs in the tech sector in the USA was high in April and May, and I think the situation is unlikely to improve anytime soon.
- I expect financial results to go into the red over the coming months, and I think risk-averse investors should avoid this stock.
Introduction
I've written three articles on SA about U.S. talent solutions provider Hudson Global (HSON), the latest of which was in January when I said that the slowdown in hiring activity in the technology sector was likely to last at least several more months and that there was a lack of catalysts for the share price.
On May 10, the company posted its financial results for the first quarter of 2023 and I think they were underwhelming as revenues decreased by 17% year on year while adjusted EBITDA slumped by 78.8% to just $1.1 million. In my view, the results of Karani have been disappointing, and Hudson could be in the red by the end of 2023 as tech layoffs in the US tech sector are still high. In light of this, I'm changing my rating on the stock to sell. Let's review.
Overview of the Q1 2023 financial results
In case you're not familiar with Hudson, here's a brief description of the business. The company was spun off from Monster.com in 2003 and it specializes in the provision of recruitment process outsourcing (RPO) permanent recruitment and contracting outsourced recruitment solutions. Hudson's RPO solutions include complete recruitment outsourcing, project-based outsourcing, contingent workforce solutions, and recruitment consulting and the company operates directly in 14 countries worldwide, with its business being split into three geographic segments - Americas, Asia Pacific, and Europe. Its clients include mainly Fortune 500 companies in the healthcare, financial services, and technology sectors, and its top market in terms of revenues is typically Australia, followed by the USA, and the UK. Hudson currently employs about 1,400 people.
The company managed to grow its revenues significantly over the past few years thanks to strong labor markets in the countries in which it operates while EBITDA received a boost from a cost-cutting plan that included eliminating cash compensation to the board. In addition, Hudson bought Coit Group in October 2020, Karani in November 2021, and Hunt & Badge in August 2022.
Hudson Global Hudson Global
Turning our attention to the Q1 2023 financial results, Hudson booked a 17% decrease in revenues to $43.1 million while adjusted EBITDA came in at just $1.1 million as the business came under pressure from lower hiring activity, particularly in the technology sector. The effect was most noticeable in the Americas segment, where revenue slumped by 36.5% to $9.3 million while EBITDA went into the red. In addition, the company used $5 million in cash flow from operations compared to generating $2.4 million of cash flow from operations in Q1 2022.
I'm also concerned about the underwhelming financial performance of Karani during the period. The latter posted revenues of just $1.8 million and a net loss of $0.3 million (see page 12 here ). For comparison, the company contributed revenues of $10 million and a net income of $0.9 million in 2022 (see page 45 here ).
Hudson said during its Q1 2023 earnings call that estimates that hiring in the technology sector is down by some 80% compared to the same period of 2023. According to data from layoffs.fyi, the number of layoffs in the tech sector in the USA remained elevated in April and May as both tech giants and start-ups are downsizing their workforce amid macroeconomic headwinds. The US economy has managed to avoid a recession thus far in 2023 but high numbers of tech layoffs in early June suggest that hiring activity in this sector is likely to remain weak over the remainder of the year.
Turning our attention to the balance sheet, Hudson closed March with $21.9 million in cash and cash equivalents. This was $5.2 million lower than in December and the main reason was a $4.1 million slump in accrued salaries, commissions, and benefits. Working capital inched up by $0.2 million to $34.6 million while the net cash position was $20.7 million. Overall, I think that the balance sheet remains in a strong position and that Hudson is likely to weather a turbulent period without tapping the equity market.
The company has $303 million of usable net operating losses (NOL) in the USA, but this seems to matter little at the moment as I expect Hudson to slip into the red over the coming months. In my view, the share price is likely to remain under pressure over the remainder of 2023 due to weak hiring activity in the tech sector and there don't seem to be any significant catalysts on the horizon. Hudson has a significant cash position, but there is just $0.6 million remaining under its $10 million share buyback program.
So, how do you play this? Well, data from Fintel shows that the short borrow fee rate stands at just 2.21% as of the time of writing and it takes only 1.18 days to cover. However, I think that short selling could be dangerous here. You see, there are no call options available for this stock at the moment and I think there are significant risks for the bear case. First, I could be wrong about the high tech layoffs in the coming months, and hiring activity in the sector improves significantly. This would boost Hudson's revenues and EBITDA over the second part of the year. Second, the company has an enterprise value of just $20.5 million as of the time of writing and it's possible that most of the bad news is already priced in. In addition, the share prices of microcap companies can increase for spurious and unknown reasons which means there could be significant volatility here.
Investor takeaway
Hudson managed to grow its business significantly over the past few years thanks to a tight labor market in many developed economies while its margins benefitted from cost-cutting measures. However, tech layoffs are starting to affect its financial results significantly, particularly in the USA. In my view, the situation is unlikely to improve anytime soon and 2023 could be challenging for the company. I think that risk-averse investors should avoid this stock.
For further details see:
Hudson Global: Tech Layoffs Are Affecting Financials Significantly (Rating Downgrade)