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Hudson Global reports 7% increase in Q3 revenue & sale of legal ediscovery business to DTI

The company has announced its financial results for the third quarter ended September 30, 2014 and the sale of its Legal eDiscovery business to DTI, the largest privately-held legal process outsourcing company in the U.S.

DTI paid $23 million in cash for the assets of Hudson's Legal eDiscovery business, subject to a customary post-closing net working capital adjustment.

2014 Third Quarter Summary

With the sale of its Legal eDiscovery business, and the previously reported cessation of direct operations in Sweden, the results of both businesses are treated as discontinued operations in the third quarter 2014 financial statements for all periods presented. Other than net income, the financial information discussed herein refers to continuing operations only.

Revenue from continuing operations of $149.3 million, up 7.2 percent from the third quarter   of 2013, or 4.3 percent in constant currency.

Gross margin from continuing operations of $55.7 million, an increase of 10.3 percent from     the third quarter of 2013, or 8.3 percent in constant currency.

Adjusted EBITDA* loss from continuing operations of $2.9 million, an improvement of 30.9 percent or 31.1 percent in constant currency, as compared with a loss of $4.1 million in the same period last year.

Restructuring charges from continuing operations of $0.8 million in the third quarter of 2014, as compared with $0.6 million in the third quarter of 2013.

Net loss** of $7.0 million, or $0.21 per basic and diluted share, as compared with net loss of $5.0 million, or $0.15 per basic and diluted share in the same period last year.

* Adjusted EBITDA is defined in the segment tables at the end of this release.

** Net income/loss includes continuing and discontinued operations.

Year-over-year gross margin growth in the Americas and Asia Pacific was 19 percent and 15 percent, respectively. Third quarter gross margin was nearly flat in Europe, up 1 percent on a year-over-year basis, as some countries were affected by deteriorating economic conditions. In terms of business lines, RPO and talent management led the way with gross margin growth of 27 percent and 28 percent respectively, all in constant currency.

"Having successfully sold our Legal eDiscovery business, we are narrowing our focus and enhancing our ability to deliver improved results from our core business lines," said Manolo Marquez, chairman and chief executive officer at Hudson. "We expect to continue to invest selectively to accelerate growth in our core businesses, while driving additional efficiencies in our operations to deliver sustained profitability."

Stephen Nolan, chief financial officer at Hudson said, "Our investments in people and processes during the last year are having a greater impact on the organization. We will maintain our focus on disciplined execution in our core businesses as we push for continued improvements in productivity and business results in the coming quarters."

Strategic Actions

The divestiture of the Legal eDiscovery business is an important component of the company's previously announced strategic efforts to focus on its core business lines and growth opportunities. In the short-term, the company will have certain support costs remaining in its existing Americas business, as it transitions to a more efficient support structure. The company estimates these costs totaled approximately $1 million in the third quarter of 2014.

During the third quarter, the company also implemented some of the changes associated with its engagement of AlixPartners, LLP to assist management in identifying opportunities to better align the organization model to a more focused business after the divestiture of Legal eDiscovery and support profitable growth in core areas. Among the changes implemented in the third quarter were the streamlining of the front office administrative support in the Asia Pacific region and parts of Europe. The restructuring charges associated with the third quarter changes were $0.8 million. The Hudson Board of Directors had previously approved restructuring charges of up to $7 million to be taken by the end of the first half of 2015. The company expects an ongoing annualized return of 1.5 to 2x the charge.

Regional Highlights

Americas

Americas' gross margin increased 19 percent in the third quarter as compared with the same period in 2013. After becoming the company's largest practice in the Americas on a gross margin basis in the first quarter of 2014, RPO continued to deliver strong results with 38 percent gross margin growth in the third quarter. The remaining business grew by 3 percent. The quarterly growth in gross margin helped deliver adjusted EBITDA of $0.7 million for the third quarter, or 5.7 percent of revenue, compared with adjusted EBITDA of $0.1 million, or 1.0 percent of revenue for the same quarter a year ago.

Asia Pacific

Asia Pacific's gross margin increased 15 percent in constant currency in the third quarter as compared with the same period in 2013. This was the third consecutive quarter of year-over-year gross margin growth. Results were fueled by growth in Australiaand China with gross margin increasing 22 percent and 27 percent, respectively, against the prior year. Talent management delivered 30 percent growth in Asia Pacific, led by large assessment and career transition projects in Australia. This gross margin growth resulted in adjusted EBITDA of $0.6 million, or 0.9 percent of revenue, as compared to a loss of $0.5 million in the third quarter of 2013.

Europe

Europe's gross margin showed minimal growth in the third quarter, increasing by 1 percent in constant currency compared with the third quarter of 2013. Gross margin increases in Belgium and Spain were partially offset by a mixed performance in other markets in Europe. The UK delivered growth in permanent recruitment against softness in RPO. Strength in talent management, particularly in Belgium, more than compensated for the softness in permanent recruitment, with gross margin increasing by 27 percent in Europe against prior year. Europe delivered an adjusted EBITDA loss of $0.3 million, as compared with adjusted EBITDA of $0.4 million, or 0.5 percent of revenue, for the quarter a year ago.

Liquidity and Capital Resources

The company ended the third quarter of 2014 with $46.8 million in liquidity, composed of $18.8 million in cash and $28.0 millionin availability under its credit facilities. This compares with $17.9 million in cash and $34.1 million in availability under its credit facilities at the end of the second quarter of 2014, and $33.2 million in cash and $38.8 million in availability under its credit facilities at the end of the third quarter of 2013. The company used $2.4 million in cash flow from operations during the third quarter, and had $8.2 million in outstanding borrowings at the end of the third quarter.

Business Outlook

Given current economic conditions, and in particular the significant weakening of the EuroZone economy, the company expects fourth quarter 2014 revenue of between $135 million and $145 million and adjusted EBITDA of between negative $1 millionand negative $3 million at prevailing exchange rates. In the fourth quarter of 2013, revenue was $140.0 million and adjusted EBITDA was a loss of $2.0 million.

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