Q1 2022 Heidrick & Struggles International Inc Earnings Call
[music].
Please standby were about to begin.
Good afternoon, ladies and gentlemen, and welcome to the Heidrick <unk> struggles Q1 2022 earnings Conference call. Just a reminder, today's call is being recorded at the end of today's prepared remarks, we will have a question and answer session to ask a question. Please press star one and I'd like to turn things over to Suzanne Rosenberg Vice President.
After relations.
Thank you and welcome to our 2022 first quarter Conference call also on today's call is our president and CEO Krishnan radical pollen and Chief Financial Officer, Mark Harris.
We've posted our first quarter slides on the IR homepage of our website at Heidrick Dot Com and we encourage you to view these slides for additional context. Please note that in the materials presented today, we may refer to non-GAAP financial measures that we believe provide additional insight into underlying results a reconciliation between GAAP and non-GAAP financial.
[noise] measures maybe found in the earnings press release also in our remarks, we may make certain forward looking statements. We ask that you. Please refer to the Safe Harbor language also contained in today's press release.
Krishnan I'll now turn the call over to you.
Thank you Suzanne.
Before I begin my prepared remarks on our results and outlook I wanted to take a moment to pause in order to share our sentiment about the conflict continuing between Russia and Ukraine.
As a firm Heidrick is condemned the war and we have ceased our operations in Russia. This.
This includes no longer continuing to serve any Russian headquartered clients.
As a global team, we continue to provide support to our colleagues clients and their loved ones, who have been impacted operating resources to help secure their safety and provide comfort.
Our firm is also contributing to organizations, providing humanitarian assistance to the people of Ukraine, and we will continue to provide further support when and where we are able to do so.
Moving on to hybrid performance and our strategic progress first I'd be happy to share some highlights from our first quarter and the success of Heidrick differentiated strategy that is unfolding organically and inorganically as we anticipated.
We like our expanding position with its unique and targeted focus on the top end marketplace needs for talent leadership and human capital across industries and geographies.
I'll talk a bit about our three businesses.
The exceptional productivity of our executive search business.
The critical advisory work of Heidrick consulting and.
And the high trajectory growth from our on demand talent segment.
Then briefly touch on digital product research and development, we are on track to deliver strategic diversification and business mix over the long run.
Finally, before handing the call over to Marc I'll close with thoughts about how each of our three lines of business purposefully and powerfully reinforced and contribute to the growth and success of the others, thereby making the value of the whole greater than its parts.
Perpetuating multiplier effect here at Heidrick.
But first stepping back for a moment I'd like to say that this is an incredibly exciting time for our company on a macro level. It's a time of tremendous change and fast moving decision, making for our clients around the world.
I would call it a season of more where.
For the job of leadership for boards, and Ceos is getting tougher and more complex.
More is at stake is companies emerge from the pandemic with larger scopes of responsibilities in more places.
More is uncertain as the velocity of change increases exponentially.
Boards and leaders are navigating through constantly shifting priorities navigating crises and addressing larger issues much faster than ever before.
More is expected of leadership with increased accountability to get it right across more time zones, and greater speed and agility.
As we continue to build out our exceptional suite of products and services Heidrick is front and center with our clients advising them on how to meet the challenges of these new imperatives of more.
I am proud of how the Heidrick team has delivered on the more that's been asked of them.
<unk> to be able to report out on our excellent results from our first quarter 2022 and share our near term outlook.
Today, we announced consolidated net revenues of $284 million.
47% higher year over year, a record for the first quarter and the second highest quarter in our company's history exceeding expectations.
Executive search our largest contributor in absolute terms and net revenue of $243 million for the quarter.
35% higher than last year, a remarkable achievement. We believe we continue to gain market share with an outstanding trailing 12 month productivity of $2 5 million per consultant.
We're still running at 100 miles per hour with the team delivering tremendous efficiency to the company and its shareholders and to clients.
<unk> business acumen.
Also in Q1, our executive search set a new quarterly record for confirmation volume, which was 16% higher than the previous high watermark achieved just last quarter.
This was the best confirmation quarter for our executive search business and our history across every region and nearly every practice <unk>.
Banding and strengthening our geographic footprint is a high priority at heidrick.
For example, we just announced a new executive search partners and principals, who joined the Heidrick team in several international markets, including Sao Paulo, Mexico City.
Coquito, Dubai, Amsterdam, Stockholm, and London.
We like our growing global footprint.
Turning to Heidrick consulting.
Heidrick consulting had $18 million in net revenue a record for the first quarter.
This was an impressive 28% higher than last year.
This segment delivered another milestone in the quarter with its highest quarter ever of new business wins, while also setting record revenue backlog stats.
We grew the value added leadership advisory work performed by Heidrick consulting, especially in the critical areas of leadership assessment culture shaping and leadership development.
Heidrick consulting colleagues are an important part of our company's success.
From our newest segment on demand talent, we are seeing significant benefit from this adjacency acquisition made last year.
With first quarter 2022 revenue of more than 23 million, 66% higher than last year Heidrick is the clear market leader in securing high end project, an interim on demand talent.
It's relatively easy to understand the incredible value add for our clients.
Need of interim executive talent pursuing interim CFO or CIO.
But it's also impressive to share. An example of the type of quality project work our on demand talent business performed during the quarter.
Project based work represents the majority of the work we do in on demand.
Take the case of a major energy company.
Following the merger this company's strategy and corporate development leaders face the need for implementation of major cost reduction through changes in procurement network optimization and global supply chain program management.
Hydraulics on demand talent group delivered four season experts to this client and program manager to identify cost reduction opportunities.
<unk> expert to renegotiate contracts to.
The supply chain optimization expert.
And the transformation consulting to lead these four distinct work streams to successful completion.
It's just this sort of high value combination that creates a win win for our clients the independent consultants and for heidrick on demand talent business and our shareholders.
While still on the topic of our on demand talent business overall, just one year in from our acquisition of BTG in April of last year.
I'd like to share the impressive fact that a remarkable 20% of the segments Q1 revenue was referred to by our executive search and Heidrick consulting colleagues.
Our on demand talent segment is now on a note worthy annual revenue run rate of more than $90 million. We believe we will see growth here for the foreseeable future.
All of this has us excited about heidrick overall future growth and opportunities for success. Following these record Q1 results our guidance for our record second quarter reinforces our confidence in our strategy and in delivering for our shareholders.
Our diversification strategies underway at Heidrick <unk> struggles and we're seeing the results. We do expect our executive search business still more than 80% of our total net revenue today to continue on our path of notable growth.
At the same time.
Search businesses Heidrick consulting.
On demand talent plus other adjacencies still to come are likely to grow even faster. We think this approach to the diversification of our business model will prove valuable to shareholders.
As Mark will share in a moment.
Starting in the first quarter, we've given visibility to expense associated with innovative digital product research and development here at Heidrick we.
We've defined marketplace problems in the areas of for example, mobility and succession planning that we think can best be solved by our development of unique digital products utilizing the latest in data analytics.
AI and machine learning.
The first product should be ready for beta testing with clients in the coming months.
It's gratifying to see the mutually reinforcing and complementary businesses were combined uniquely at Heidrick, where one business segment can provide performance accelerators for another segment.
Proving out in our strategic execution.
We've said that when we can drive interconnectivity such as leads on talent assessment on leaders teams and cultures and new digital solutions. Our overall success has redoubled.
Valuable Cross collaboration at Heidrick is working we're proud of the culture and professionalism, making this happen.
We think this sets heidrick meaningfully apart from others in our talent and human capital sector.
It's a powerful engine driving growth at heidrick.
In closing the results, we released today show the impact of our deliberate strategic focus on growth and diversification and the tremendous resiliency and professionalism of our team here at heidrick immediate an environment, where the demand for our services and offerings is strong.
Out of the amazing agility and exceptional capacity of our professionals and I want to thank the entire team for another outstanding quarter and for their individual and collective contributions to heidrick success to come.
With that over to Mark.
Thank you Christian and good afternoon, everyone. Thank you for joining our 2022 first quarter earnings call.
As Christian noted we've delivered yet another record quarter, our fifth record setting quarter in row in terms of top line revenue growth delivered by all three businesses in all regions.
Just as importantly on a consolidated basis. This quarter also set records in all key underlying profitability measurements.
As you will hear in my prepared remarks, our markets remained strong and Moreover, our teams are executing flawlessly with edmar.
Thank you to everyone at Heidrick <unk> struggles for your continued hard work your accomplishments are astonishing to see.
Krishnan spoke about our high level achievements execution and vision.
Allow me to overlay that with some financial context around the first quarter figures, we reported today.
I'll start with a run through of our financial results make comments on a few balance sheet items and share our second quarter outlook.
Lastly, I will close with some important perspectives on valuing heidrick, particularly given the transformation of our business model.
Just taking a view from a consolidated basis Youll see our net revenue in the quarter reached $283 9 million.
Which was an impressive 47% higher than in the prior year, which was a record on its own.
Net revenue growth was driven by all regions and practices in executive search.
<unk> growth of our on demand talent platform and expansion in sale and execution of assignments at Heidrick consulting.
For more color on our performance, let's turn to the three business segments.
An executive search net revenue was $242 $5 billion in the first quarter of 2020% to 35% higher than in the prior year looking at our search results geographically all regions demonstrated growth. The Americas region was up by 40% Europe was up 32% and Asia grew by 19%.
When compared to the prior year quarter.
All industry practices showed growth year over year as well combining for an increase in billings of 37%.
With all the regional and industrial sector success, we've put a remarkable $2 5 million trailing 12 month productivity per search consulting on the board in the first quarter, a 56% increase compared to last year's trailing 12 months of $1 6 million.
To reiterate a comment from last quarter, we do believe over the long run we will modulate within a range between one eight and $2 million productivity per consultant.
This range is still outsized productivity and impressively higher than even our pre Covid 2019 high watermark of $1 7 million productivity per consultant, mainly due to changes in our search process and digital enhancements.
On demand talent has exceeded expectations, yet again with the first quarter revenue of $23 4 million.
This was over 60% higher than last year, when BTG was a standalone company.
Trailing 12 month net revenue per client for our on demand solid business was $367000 in the first quarter, 25% higher.
Led by that metric in the prior year.
At an annualized revenue run rate of approximately $94 million.
<unk> on demand talent business, which plays in the high end level of talent as the clear market leader in North America and appears to be gaining market share.
Regarding heidrick consulting.
Their first quarter net revenue rose to $17 9 million up.
28% compared to the prior year quarter.
As Christian mentioned like all three segments Heidrick consulting continues to benefit from the collaboration within the company, while also bringing new business opportunities to executive search and tour on demand talent segment as well.
Our greatest gains in the quarter were in the areas of leadership assessment, followed by culture shaping and leadership development.
Heidrick consulting continues to be very strong with first quarter backlog up 58% compared to the prior year we.
We believe heidrick consulting is momentum has set them up nicely.
For this year and continues to build.
Now, let's turn to operating expenses.
With record setting quarter net revenue and higher volume support naturally this comes with higher compensation and other variable costs, which was expected in a positive and overlaid with our revenue performance for example.
We saw consolidated salary and benefit expense of $201 $4 million in the quarter.
42% higher than the prior year, but somewhat lower as a percentage of net revenue at 71% in the first quarter of 2022 versus <unk>, 73% for the same period last year.
While these increases were driven by bonus accruals pertaining to our revenue gains.
We are getting scale in executive search, but with tempered this with the expectation that the war on talent will continue to be systemic pressure as we move through 2022.
When looking at general and administrative expenses, we saw $29 8 million in the first quarter, a modest increase compared to $27 4 million in the prior year quarter.
As a percentage of net revenue.
G&A expense were 10, 5% for the quarter, which was solid improvement over the 14, 1% shown in the prior year quarter.
Most of the increase of the $2 4 million was related to travel expenses and some other expenses around our upcoming May Global conference, which we have not had in three years due to COVID-19 . So expected an increase in G&A expense in the second quarter of around $4 million.
Turning to cost of services, we saw an increase to $18 million in the first quarter compared with $1 $5 million in the previous quarter, which was mostly due to the acquisition of our on demand talent business. As a reminder, this line item is where we expense the payments to independent consultants, who perform high level project and interim work and on demand talent.
Which as a percentage of revenue thus as revenue continues to grow silver costs of services.
As Christian noted earlier this quarter, we showed a new category of expense research and development, which captures costs associated with the new digital product development Heidrick is working on.
We logged $4 $4 million on this line item for the first quarter of 2022, representing one 6% of net revenue.
We expect this to grow modestly over the next several months to around a $20 million annual run rate in 2022 with some capitalization in accordance with generally accepted accounting principles.
Capitalization will amortize upon product introduction into the market.
We're pleased to report Q1 operating income of $30 2 million, 54% higher than operating income in the prior year and operating margin of 10, 7%.
When accounting for the first time R&D expense to see a more comparable operating income and margin to the previous quarter. You'll note. Our operating income would be $34 6 million and 12, 2% margin compared to $19 6 million and 10, 1% margin.
At the 77% increase in operating income and just over 200 basis points of margin expansion on a like for like basis.
Speaking of profit metrics and margins adjusted EBITDA in the first quarter was $35 $7 million and adjusted EBIT margin was 12, 6%.
When accounting for R&D, our comparable adjusted EBITDA was $40 $1 million and EBIT margin of 14, 1%.
Which compares to adjusted EBITDA of $29 9 million and adjusted EBIT margin of 15, 4% in the previous year's quarter.
I'm very pleased with the $10 $2 million growth in EBITDA.
Generated by our core business verticals and remind all that we expect EBIT margin compression as our on demand talent business EBIT margin is one 5% will be low during their high growth cycle, which is a good trade given the revenue gains in 2021 and 2022.
We finished the first quarter with the benefit of a slightly lower effective tax rate of 33, 7% compared to the prior year quarter, leading to net income of $18 5 million and diluted earnings per share of <unk> 90.
However to make consistent with R&D expense, our net income was $21 4 million and diluted earnings per share of $1 <unk>.
Which is higher by 45% and 42% respectively from the prior year quarter.
This demonstrates our core business is performing very well and surpassing expectations.
On the balance sheet at March 31, we ended the quarter with cash and cash equivalents of $268 million, which is almost $84 million more than at the same time last year.
As we've discussed before the company's cash position typically build through the year as employee bonuses are accrued employee bonuses are paid out in the first quarter, along with the associated tax and related costs.
Our balance sheet, coupled with our renewed and expanded hydro credit facility of $200 million.
It shows that we have the strength and flexibility to meet our future investment objectives and a preferred pursue continued growth. We ended the quarter with nearly $470 million of liquidity, giving hybrid significant dry powder for organic and inorganic growth.
Now, let me turn to our second quarter 2022 guidance.
Given the continued strong executive search project volumes and effective productivity, we're seeing so far coupled with the growth expectations from both our on demand talent business in Heidrick consulting we believe our second quarter net revenue will be in the range of $290 million to $300 million.
This would be a quarterly record for hijacked while further establishing solid momentum for the first half of 2022. Please.
Please be reminded.
Our guidance can be impacted by unanticipated inflation responses by central banks continued an escalating global conflicts.
And deepening supply chain challenges, but this management team will continue to monitor those situations and ensure that we're agile and plot. The best long term course through any challenge.
Before concluding.
Last quarter I spoke about our value drivers.
That our core business, namely executive search and Heidrick consulting.
Our historical business has been valued on an adjusted EBITDA and adjusted EPS multiples, but when using these methods our on demand business will be severely undervalued.
For example, using heidrick market EBITDA multiple of around six five times today and given our on demand EBITDA of $3 million in the first quarter of 2022, we'd see a value of approximately $8 million for a business generating annual annualized $94 million of revenue.
The methodology used for on demand companies are valued between 1% and two times revenue multiples.
Given their growth cycles and reinvestment of liquidity. Thus this would put our on demand valuation around $140 million.
In short the difference in valuation methods creates evaluation gap of $132 million.
We believe that until the on demand talent market matures the proper way to view our diversified strategy is a sum of the parts method as this would more accurately capture the full value of our businesses.
Let me conclude.
While we're still in the race with many miles to go to the finish line of our long term strategic vision, we're very proud of both the quality and differentiated products and services heidrick expects to continue to deliver to our clients each and every day.
As Christian and I have noted we're very pleased with our performance and we are successfully delivering against the diversified strategy. We embarked upon several years ago has shown tremendous year over year growth.
With that Chris and I will be happy to take your questions.
Thank you Mr. Harris, ladies and gentlemen at this time to give any questions or comments simply press star one and we'll pause for just one moment to assemble our queue.
We'll take our first question this afternoon from Mr. Marc Riddick ex Adobe.
Hi, good afternoon, everyone.
Sure.
So I wanted to start with just a couple of questions on the.
The referrals and the pace of those and maybe what some of that might look like.
Can you give a little more color as to maybe maybe what that might what.
What you saw there and maybe where it came from it was it similar to revenue make sure industry verticals or or how should we think about sort of the progress that was made there.
The referrals.
Sure and Youre talking it's Krishnan here.
Youre talking about the referrals between to on demand and into Heidrick consulting is that yes, great.
What we're beginning to see and there is a broadening really in.
In terms of the number of consultants getting involved.
They're engaging in understanding.
The service offering so with on demand.
We had a core group.
In the early parts of or in the middle part of last year, and we've expanded that significantly so thats, what youre seeing and it tends to follow areas, where there is some demand by the way so.
Life Sciences is a is a opportunity spot for us over their consumers as well. So we're seeing some demand in there and consultants who are following that.
Yes.
Okay, Great and then maybe if we could shift gears to the.
The adding of talent.
Across the Globe, just wonder if you could talk a little bit about sort of.
What we might see there through the year and maybe whether it's.
Competitive advantage standpoint, or just opportunity of services, how we should think about those.
Those.
Ads across the across the globe.
Yeah. So we've got.
A pretty strategic hiring plan for the year.
We're very mindful of the markets. Okay. We're not trying to to get ahead of that but there are pockets, where we believe heidrick is still underserved and we tend to focus on those first and that's where you see some of the geographic hires that we've done we see those to be wide open opportunities for us. So we're going to continue on a cadence that.
Looks like that.
Culture matters, an awful lot as well in terms of how we think about the team that we're attracting and we're really happy with the new hires from that perspective, so you'll probably see it at a similar pace to what you've seen it in the beginning of the year.
And Thats, what will moderate throughout the year on on our hiring plan.
Okay, Great and then the last one for me when you look at the productivity.
That youre seeing and Youre expecting a moderation at some point.
Slightly lower levels, but I was wondering if you could talk a little bit about the.
The amount of time it takes to ramp up new consultants to company average historically and then what we might expect from that going forward given how productive everybody is right now. Thank you, yes, I mean, that's a great question and I think we're seeing we are the beneficiaries of that already a little bit often when we.
We promote a new class.
You don't see the productivity in aggregate go up we see it go down and what you've seen is that it's actually ticked up a little bit for us this year, which is reflective of the market. It's reflective of some fantastic people, we promoted and the ability for us to onboard them into the consultant ranks and BD and see their productivity. So.
I do expect that it's gotten better not just because of the market, but because of some things we're able to do as well in terms of assigning them to accounts and how we operate with them, but there's good news there.
Excellent.
Thank you very much.
Thank you.
Thank you and just a reminder, ladies and gentlemen star one for questions and we'll go next to Kevin Psyche at Barrington Research.
Hey, good afternoon.
As you were just discussing you know really the productivity.
And the search business continues to be.
Very impressive.
You talked about some of the.
The long term growth drivers for you in the market.
It doesn't appear that you've really seen any.
Slackening in the pace of demand.
Going into the second quarter here given your guidance.
You again referenced how you expect productivity to gradually trend down to levels that would still be above pre COVID-19 levels, but I think.
Last quarter call you mentioned, maybe some moderation in search.
Just the pace of the search business in the second half of this year or is that something.
And you would still anticipate.
Or is.
As the momentum here kind of shifted as we move into the second quarter, just maybe any commentary on.
Any sort of visibility you might have over the next two.
A few quarters here.
Yes.
Now let me go and then Mark why don't you.
So I'm going to say here.
Look I think as we look ahead the second quarter.
There's tons of momentum heading into the second quarter, but we certainly do expect that.
Between some of the conflicts that are happening Ukraine, Russia supply chain.
And that there will be some moderation that we should expect to see in the second half of the year as a result of all that what does that mean.
I believe I said this before I don't think.
We're running 100 miles an hour, we're going to be maybe we were running 85% to 95 miles per hour.
This is not a slowdown that we are seeing.
Typical to what we may have seen before so that's kind of our outlook right now for the second half of the year, a little bit of a slowdown but.
Nothing that significant yes, I would only kind of a pet brand that remember when we did the Q1, we were expecting a slowdown because thats typically when we do a lot of our promotional so it's more of a denominator.
Inflection so to speak.
Two things that help offset that I think the two offsets were one first quarter was obviously a very good quarter in terms of our performance and you can see that in our operating metrics and obviously our revenue number and then two when you kind of promote.
And to the consultant ranks.
Within a strong market they actually came with a very good book of business in and of their own. So it was one of those where we didn't see as much of an impact on it but as Christiane rightly points out as we kind of roll into the second half I would imagine the ability to sustain the first half.
To the second half is going to be.
Challenging I don't think its going to be a months or drop off I, just think it's going to be a little bit of a slower pace that kind of.
We will feel a little bit slower, but certainly be a heck of a lot higher than what you've ever seen historically in 2018 to 2019.
Alright understood. Thanks.
Are you hearing anything from clients in terms of.
Yeah, and how they're thinking about or planning.
Environment, where interest rates are expected to go up.
Any concerns about.
Maybe a hard landing.
Think thats.
Factoring into clients' expectations currently in terms, how they are thinking about.
Some of the work Youre doing what they're doing with you or their hiring plans.
Yes, I mean, I think everybody is trying to figure out exactly.
If and when the slowdown occurs and what that timing begins sulfide. So there are lots of conversations.
And each and every day you see volatility.
In the equity markets as well, so theres a lot of moving parts to this.
I think everybody feels like they're all running pretty fast.
There isn't anybody that we're speaking with and thinks that there is a a steep fall to this right now that doesn't mean that if you don't look longer term out there that we might see something like that but that's what we're hearing from clients right now.
Okay. Thanks.
Yes, I just wanted to try and get my arms around this.
R&D expense category that you.
We introduced here in the first quarter.
I know you've been talking about your.
Digital product.
Development efforts over the last few quarters.
Just trying to get a sense as to what what.
Cause you to have to break out that expense separately now is it just large enough to where it has that has to be done and there wasn't any significant.
<unk> on that.
That front in previous quarters, or just maybe a little more color on.
How that is.
<unk> be factored into the numbers now.
It's a great question, Kevin Let me try to answer it for you I think the first aspect was as you rightly pointed out we've been speaking to this for quite some time in terms of investing ourselves into the future digitization of a lot of our different verticals that includes on demand.
<unk> search and Heidrick consulting.
We have really done an internalization of an initiative that really creates a core group of team members that are really helping us out we made the comment I believe it was last quarter was eight fold AI in the partnership and that was good indication in terms of how we were really trying to rethink our transformational process on this given that we are very dedicated.
This is being our future and our growth.
And the numbers as you rightly point out are significant last quarter. As you can see we don't have anything that was very de minimis as.
As we startup this side of our cycle. So we will be investing our excess cash if you will into this business. It's something we feel very passionately about in terms of how we need to restructure ourselves for the future and I think as we develop the products and they come to market and you start to see them I think that's really going to.
Quite well with our Investor base in terms of where we're going.
And a very.
Interesting direction. It is not a change from what we do today and as a complete enhancement of what we do today and makes us I think.
Much more into the.
And to the views of our clients, making sure that we're there at all times. So that's the reason we broken out we think it's important for investors to see it it was de Minimis last quarter as we ramp up into it. It is basically a combination as you can imagine a salary and benefits and G&A so to speak but our real focus obviously on our investment in it.
That's what we're trying to do.
Okay.
I know, it's still early days here, but.
How do you think about.
Or how should we kind of think about perhaps the revenue in <unk>.
Profitability model for some of the digital products, you're working on do you.
The use of those products is.
Kind of a cross sell along with.
Your existing consulting engagement for example, or something Thats embedded along with.
Yes.
In other engagements you're working on just maybe some color around.
The business model and the financial model.
As you're kind of envisioning going forward.
Yes, let me start with that a bit.
Look I think that as we think about the financial model two.
2023.
When were.
I'm, hoping to see some revenue that.
Emerges from there as a result of all that.
And work that we're going to be doing with clients.
So thats just putting it out there I think thats sort of the timeframe to think about that I think it's a little bit of all of the above.
On how that gets embedded with clients I mean, just like we do that with on demand as an example, okay. So we're working through the heidrick channels and we've got an independent channel that we do that and we're going to do exactly the same with this set of <unk>.
Products as well so our heidrick consulting heidrick search all of our core accounts will be exposing them to those through that process and there'll be other opportunities as well that we think.
That sit outside of that so those will be a different sales force that will have to build so that's kind of what we expect to be doing over the course of the remainder of this year and probably more into next year really in terms of building that team and will be proof of concept.
For the next six months or so.
And I would also add to that Kevin. It's a decision that we as management team really felt like we needed to make we could have not invested and returned about $1 five of EPS like I made comments around.
But our decision was this is something that we feel is going to pay very large dividends down the road for us. So we decided to make that investment so from a core business point of view throwing off $1. Five obviously was was.
Very important which is why I wanted to make sure. We had that conversation are embedded in the remarks, but we do want to take this time to really reinvest in our strategy on the Digitization side of it. So we think it's well worth it.
Thank you we'll take our next question now from Tobey Sommer at <unk> Securities.
Yes.
Thanks.
Couple of questions aside from the Digitization effort that I would like to revisit that also a follow up.
You cited a pretty.
Good rate of growth I think in the.
Our backlogs the right term, but kind of bookings for consulting.
Is that measure of almost 60% growth a useful tool in modeling future quarters or is that the duration of kind of those bookings are there any other factors, we need to consider that would not make that sort of a good modeling factor.
No I think Tom it's Mark it's a good modeling factor right.
What that should tell you and I know what it tells me is that we've got a great book of closed business that we are still executing on for the most part heidrick consulting is on a revenue recognition percentage of completion. So if you think the backlog being much higher it's in the it's in there it's being worked on it'll come through the P&L. It gives a lot of stability in terms of the variability of the <unk>.
Revenue.
And which is why you've seen some pretty good.
Stabilization on a quarter on quarter basis on the revenue side for Heidrick consulting. So I think there is one element I think the other element is hopefully we hope to build upon that base.
And to continue obviously execution will still be important but the more we can kind of build and have that kind of going through.
The P&L I think it gives a nice level of confidence so as you kind of see us in Q1, and maintaining kind of that pace or potentially higher pace in Q2, as we kind of go through that backlog I think is.
A nice syndication, which is kind of what you saw last year, when we were 20% up.
Is there a.
Any kind of particularly scalable element to that or in order to kind of get that kind of growth would you have to have.
Pretty rapid internal head count growth to accompany it.
Well, so theres two answers to that question I think the first answer is on the organization that attained that revenue, obviously, you need a little bit of scale to kind of go in and.
Engage into our clientele and I think the other one is the delivery element of it which you'll see sometimes some fluctuation in cost of services pertaining to heidrick consulting, which again, if we have a lot of work and we have a lack of capacity, we're calling tapped Hughes on external parties to help us deliver on those services.
Again bite a little bit on the margin side of it but nonetheless, the right thing to do as we hire as hopefully we drive that number down which really shows what I would call. It self sustainability of the revenue that is the revenue that is being serviced by our core team that that kind of work with heidrick. So it's a little bit of both is the answer depending on which side of the.
Do you want to look at it from yes, and we continue to tech enabled those businesses. So the tech enablement of those businesses allows us to find net leverage allows us to work on larger projects as well so I think thats a.
A real benefit to two.
What we're trying to do there.
Okay.
Okay.
In terms of the guidance you have for <unk>.
For the second quarter is that does that include.
On a sequential.
An assumption for a sequential decline in consultant productivity or stable, how do you think about that.
I know you've got your longer term view on where things settle but what is what does the guidance assume.
I would say that from an executive search point of view, we would expect that to be kind of where we're seeing it right. Now there is not going to be a tremendous differential and that at least that's our expectation.
Within Heidrick consulting we would expect it to be up a little bit in terms of their productivity sign it and as you know on demand talent, we really don't look at it in that regard.
Okay.
Now I'd like to switch to the digital platform just ask couple of questions let's.
Let's say you were.
Yes.
John .
Not done, but at a point, where youre going to kind of describe what youre doing and what customers are going to buy from you and why it's great.
Today, how much of a head start would you have.
On potential executive search competitors that would want to replicate what you do or do it slightly differently, but similarly.
How much of a head start do you think you would have at that point.
That's a great question.
I'm going to say that we would probably have a six to nine months at least head start on on most maybe.
Even a bit longer than that in terms of that I mean.
But you got to remember I think one of the key things is.
At Heidrick, we have a huge brand head start I think in terms of where we're operating where we're trying to position. These things. So I think the technology and catch up but the ability for the team to be able to engage in to be authentic with clients to be able to talk about these things thats, where we have a pretty large head start as well so we've been talking to.
<unk>.
50, plus clients, how about these ideas and trying to get a sense of whether they are important or not and how we are presenting them do they solve a real problem and and I would tell you that overwhelmingly.
Incredibly positive response from our clients in terms of the sets of problems that we're trying to solve and how important they are to them. So we feel very positive about that.
Okay.
Yes, I was just kind of curious about the headstart because well.
4 million Bucks in the quarter adds up to some nickels in terms of EPS in the quarter.
Absolute basis, its not a lot of money.
Okay.
<unk>.
At what point throughout the year do you think we're going to be in a spot to kind of have a bigger more tangible reveal rather than talking around this initiative.
Yes.
It will it will be towards the latter half of this year without any question I mean, where.
Where we are right now is.
Piloting getting client feedback that will then go back into the product that will cycle, one more time at least the beta and I think that's the point at which will be ready to to have the bigger reveal as youre, saying over here.
There are lots of little facets to the to the product suite and what we're working on that are very very attractive and saw a set of different issues for clients as well. So look forward in the latter half of this year.
Okay, if I could sneak one last one what are you seeing recently in your financial services vertical I saw the slide so I know what the growth was year over year, but since capital markets have slowed ipos M&A has slowed any changes in the demand and confirmation trends.
Within that vertical.
That vertical has been quite strong for us really.
And despite.
Everything okay. So its probably the one that we keep our eye on the most given all the pressures that we are seeing in the marketplace.
I think we see a lot of private equity players still inside of there.
So there is there is momentum with that Youre right. Some of the more traditional things are probably a little slower, but fintech payments things like that are on fire. So.
So it's a balancing act inside of there and we've got a great team that is agile and we've got a.
Our sector focus too is we've got expertise that drives it as well. So I think we're in a good spot to be able to pivot as needed, but it's clearly something we're keeping our eye on.
Thank you very much.
Welcome Thanks, Tom.
Thank you and ladies and gentlemen, just a final reminder, today's star one for any further comments or questions.
And ladies and gentlemen, it appears we have no further questions today, Mr. <unk> I'd like to turn the conference back to you for any closing comments.
Thank you everyone for joining our call today, but clearly.
The results that we announced today were impressive.
We're working very hard to continue to deliver value to our heidrick clients, our employees and growth to heidrick shareholders.
All within the framework of our strategic vision, we look forward to updating you again in the next quarter. Thank you so much.
Thank you, ladies and gentlemen that will conclude today's heidrick <unk> struggles Q1 2022 earnings conference call, we'd like to thank you all so much for joining us and wish you all a great remainder to day Goodbye.
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