Q4 2022 Heidrick & Struggles International Inc Earnings Call
Okay.
Good day everyone.
And I'll be your conference operator for today at this time I'd like to welcome everyone to the fourth quarter 2003 to Heidrick <unk> struggles conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad, if you'd like to withdraw your question.
Please press Star one again as a reminder, today's call is being recorded it is now my pleasure to turn the conference to MS. Suzanne Rosenberg Vice President of Investor Relations. Please go ahead ma'am.
Thank you and welcome to our 2022 fourth quarter and fiscal year end conference call. Joining me on today's call is our president and CEO Krishnan logical Holland, and Chief Financial Officer, Mark Harris, we posted our accompanying slides on the IR.
Our website at Heidrick Dot Com, we encourage you to view the 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 reconciliations between these non-GAAP financial measures and the most comparable GAAP 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 with that Krishnan I'll now turn the call over to you.
Thank you Suzanne.
Afternoon, everyone.
2022, with another excellent year for our company as we manage our business.
Rats, and global economic uncertainty, while successfully navigating the turn coming out of the pandemic and delivering for our clients.
I am pleased to report, we surpassed $1 billion in annual net revenue.
<unk> consecutive year and beat last year's record by 7% or 10% on a constant currency basis. Additionally.
Additionally, we maintained our intense focus on profitability.
Strong full year operating margin of 10, 5%.
Adjusted EBITDA margin of 12, 7%.
Our adjusted diluted earnings per share was $3 84 per share, which is meaningfully above the pre pandemic levels.
Overall, our strong performance was achieved even as we invested strategically in digital asset that we didn't have the previous year.
Quite unfavorable foreign exchange rates and the market slowdown.
As we've discussed the pace of business has been extraordinary over the past two years and as expected we've seen the market slowdown from these extremes now.
Nevertheless, our business in January remains on pace with our strong fourth quarter performance and we expect to continue operating above the heightened levels achieved during the pre pandemic record years of 2018 and 2019.
As a result of our team's efforts we believe we're strongly positioned to deliver sustainable growth.
<unk> value to all our stakeholders.
In 2022, we made significant progress on our financial operational and strategic objectives, which are paramount to the ongoing transformation of our firm.
This progress is the result of the strategy, we began implementing the law.
Last few years, and we're seeing our efforts come to fruition.
Executive search continues to serve as a powerful cornerstone of our business.
On demand talent is gaining significant traction with clients.
Heidrick consulting is growing and enabling us to deepen our client relationships with our advisory services.
And we are successfully executing on our foundational roadmap with our digital assets.
Pilot Heidrick navigate here with several clients.
In 2022, our dedicated efforts to solidify heidrick is a leader in providing compelling and differentiated solutions to our clients were further underscored when we advanced our strategy to achieve a more balanced revenue profile between our search and non search businesses.
As a reminder.
A key focus of ours is to aggressively developing growing non search businesses, both organically and inorganically, while maintaining the great strength, we have in executive search.
For context, historically, our search business.
Comprised more than 90% of our total revenue.
And in just the past two years, our revenue has shifted to 84% surge in 16% non surge while still growing our executive search fees.
Now with our recent acquisition of <unk> and the on demand space, coupled with our growth expectations for this segment overall, we expect to accelerate the diversification of our revenue stream in the near term.
With respect to our recent acquisition <unk> is a leading provider of on demand talent in Germany.
And this acquisition builds on the diversification strategy, we amplified in 2021, when we acquired business talent group.
The leading player at the high end of on demand talent.
Yes.
Increased allows for meaningful geographic and financial expansion of our on demand talent business, thereby strengthening our overall efforts to diversify the full breadth of executive talent and leadership Advisory services, we offer to our clients.
Drilling down on this a bit on demand talent present, an immense market opportunity for high grade.
Of course in today's tight labor market environment on demand is a compelling option.
We're looking beyond today. This is still a nascent market and we believe we are only in the first inning of how this business and create incredible value and impact.
Many corporations have begin to experiment with on demand talent.
And we're seeing positive results with.
With relatively fewer harnessing its full potential.
We continue to see acceleration in demand and more opportunity screener and talent and project services as it provides our clients with immediate additional bandwidth highly experienced professionals.
Over time, we believe companies will look to on demand talent as an option.
Whenever they need to augment their talent capabilities.
Why.
Because on demand talent offers unique advantages relative to traditional alternatives.
In many cases, its the quickest way for companies to obtain the expertise they need.
It allows companies to be more agile and flexible capacity and cost.
It allows them to access the level of talent that they may not be able to attract as effectively with a full time hire.
It may be easier for companies to manager integrate on demand talent.
And it may just be less expensive cost proposition.
Truly a powerful alternative and we believe most companies are only beginning to realize the full benefits.
Importantly, the need for on demand talent solutions isn't geographically bound we believe there are significant opportunities for scale and reach globally.
Beyond organic growth, we anticipate bolt on M&A will be a tool for scaling this business as we continue to implement our strategy by identifying targets that align with our strategic vision.
Fit our culture and deliver strong returns to our shareholders.
At an operational level, our business made meaningful strides and is well positioned for 2023.
I'll provide a little context by segment.
To start <unk>.
<unk> search revenue in confirmations in the fourth quarter were down again extraordinary performance last year, but remained well above the pre pandemic levels globally, we remain focused on growing efficiently by optimizing our go to market strategy and deepening client relationships across all industries.
I think it's also important to note that at the board and C suite level, where we operate there is still a very much a war for talent being driven by the burgeoning demand in areas such as digital transformation.
Eni.
ESG.
Sustainability and private equity along with a variety of tech and <unk>.
Digital hybrid role, which are continuing to emerge in every industry practice and.
In 2023, we expect executive search to continue to operate at a very healthy level as these broader market themes.
And our on demand talent segment, we saw revenues declined slightly both sequentially and year over year in Q4, but on a full year basis revenue reached $91 million versus $67 million for the nine months stub period in 2021.
The fourth quarter performance was somewhat impacted by economic headwind, but overall, we continue to see strong demand across industries as clients get more comfortable with the benefits of high end on demand talent and Utica situations ranging from growth.
<unk> improvement and transformation.
Also during the second half of 2022, we made additional investments in sales and marketing we expect to experience the benefit of this.
Coming quarters.
As I mentioned earlier, we believe on demand talent has a robust value proposition.
Particularly during an economic downturn, there are long term trends that favor growth in this segment.
We expect the on demand talent to expand and grow its total revenue contribution in 2023, both organically and with the recent acquisition of <unk>.
Now shifting to heidrick consulting.
Business is on a strong growth trajectory and continues to garner strong demand driven by clients needing help with identifying and developing future leaders.
<unk> purpose and organization as well as defining and implementing pragmatic eni programs.
In addition to revenue increases for both the quarter and the year Heidrick consulting meaningfully improved its margins and narrowed its operating loss.
A key driver of the improvement we've seen in this business is a deliberate strategic shift from more transaction oriented projects the longer term client journey.
As the fluid macroeconomic environment persists, we expect retention team.
Team development.
Turning to office issues and culture enhancement to remain at the forefront of our clients priorities, providing ample opportunity to sustain strong growth within heidrick consulting.
Turning to our digital assets, we're very excited about heidrick navigator, our digital platform currently in beta testing with several clients redesign navigator to serve as a digital solution for companies to help manage their leadership team Holistically has an asset and enables clients to systematically.
Assess talent versus the AD hoc manual approaches that of goods today.
Navigator <unk> clients in areas, such as succession planning and developing rising leaders among many other scenarios.
Using analytics and AI to make key leadership positions.
We have received positive feedback from the market and from our beta clients that we've worked with them to implement and operationalize platform moving forward to the opportunities navigators brings to our business as we believe its potential scale and growth prospects are unique and different from other businesses.
Specifically, our navigator business will operate predominantly as a subscription based model versus a more traditional consulting engagement led model.
That said heidrick navigate will require some time to build a distinguished user base and to sign contracts increase and total value rises we expect platform and meaningfully contribute to top and bottom line results.
We anticipate our broader ongoing investments in R&D will continue to provide us needed digital assets and intellectual property to support the firm as a whole.
Believe that a portion of these investments will continue to be dedicated to further developing heidrick navigators as we launch and incubate this part of our business.
In 2023, we plan to continue to build on the operational excellence, we are delivering on today.
While our business experienced some headwinds in the second half of 2022, we're still running well beyond the prepayment levels.
Confident in our ability to remain at strong levels throughout 2023.
We believe that our diversification strategy not only strengthens our client relationships, but also lessens the cyclical nature of our business is our higher growth complementary businesses are less severely impacted by slowdowns or recessionary conditions.
We project that this strategy together with the support and strength of our balance sheet will allow us to continue executing and progressing our strategic vision for the company.
And of course, none of this would be possible without our amazing team of people around the world. We continue to maintain a strong culture of developing terrific talent in house and promoting from within I'm.
I am pleased to share that in 2022, we named 23 exceptional individuals for partner from 31 to principal.
These are incredibly talented colleagues, who clearly demonstrated what it takes to run fast and deliver results.
I could not be more excited about the quality of our team at heidrick.
To close our 2022 performance advantageously positions heidrick to continue delivering strong results anchored by our powerful search business.
We remain steadfast on furthering our strategic path.
Deleveraging, our M&A playbook across future opportunities.
As we strive for a well balanced business portfolio, our focus will be on growth and diversification.
Flex our clients' need for a broader more comprehensive set of solutions with talent and human capital challenges at the executive and board level.
With that I'll turn the call over to Mark.
Thank you, Chris Sean and good afternoon to our investors employees and analysts.
Today I'd like to begin with an overview of some of our 2022 key performance metrics, which reflect another terrific year delivered by the heidrick team.
Then I'll go into the fourth quarter financial results discuss our strong balance sheet share, our Q1 outlook and close with some final comments on the future.
Following that we are happy to take your questions.
Before turning to 2022.
I want to congratulate all the heidrick team an exceptional achievement of $1 1 billion in consolidated net revenue.
This level in our company's history, and a 7% increase from last year's record achievement.
With a clear vision in place and flawless execution by our incredible team.
Exciting time, the heidrick as.
As we progress towards our goals to continue building for our future.
Given our current success, coupled with our financial strength, we're set up perfectly to prudently invest in growth through innovation and differentiation.
We see attractive opportunities emerging which we intend to capitalize on in 2023, while maintaining our disciplined opportunistic approach to capital allocation to maximize shareholder return.
Let me now share some of the full year highlights of 2022.
First I would like to congratulate each of our segments for achieving record revenue and delivering impressive year over year growth.
Executive search revenue increased 4% to nearly $902 million reaching.
Reaching a historical high with all regions, increasing on a constant currency basis, and the majority of our industry practices exhibiting growth over the prior year.
On demand talent segment revenue grew from approximately $67 million to $91 million or 37% demonstrating the power of the combined hybrid platform.
We're extremely excited about the future of on demand talent, including our recent acquisition of atria, which furthers our growth prospects in the global interim talent space.
In Heidrick consulting we saw revenue increase of 19% to a record breaking $80 million, while confirmation values increased 15% and search referred work was up 6%.
Profitability also remained strong with adjusted EBITDA of $136 7 million and adjusted EBITDA margin of 12, 7%.
With that now let me turn to the fourth quarter, which was strong across the board.
Net revenue for the fourth quarter was $235 7 million.
The search net revenue was $192 $7 million with declines in each region when compared to the fourth quarter of 2021.
Given the fourth quarter of 2021 is a very tough comparison, we posted a strong $2 $3 million and productivity per consultant for 2022 versus $2 4 million last year.
As a reminder, over time, we believe productivity will modulate between one eight and $2 million per consultant 12.
12% over 2019 pre pandemic level.
Fundamentals recorded revenue of $22 4 million, which is a slight decline versus the prior year period.
As Christian mentioned, we have aligned our sales and marketing resources to meet the heightened demand in this business and we expect to see the impact of these investments later this year in.
In addition, we're particularly excited to have added <unk> to our on demand talent portfolio, which provides us with an excellent partner to expand our platform in Europe .
Given the large total addressable market for heidrick on Demento on services.
We believe we will see considerable growth here for the foreseeable future.
Turning to Heidrick consulting fourth quarter net revenue rose to $20 7 million up 11, 6% compared to the prior year period, and up 17, 5% on a constant currency basis.
Coupled with revenue growth in the fourth quarter. This segment also cut its operating loss in half in the fourth quarter of 2022, when compared to the prior year period as we generated strong scale to this business.
We continue to see strong demand for future ready leaders and culture with retention dynamics being a big topic for our clients.
We're particularly encouraged by the strength in heidrick consulting backlog with year end backlog up 22% in December 2021, which bodes well for 2023.
We believe heidrick consulting is uniquely positioned to tackle client demand with the current market environment and we foresee strong growth in this segment as we move forward.
Now, let me turn to operating expenses.
With lower comparative quarterly net revenue nationally thumbs lower compensation variable costs as a result, consolidated salaries and benefits expense of $156 $8 million in the quarter.
$47 3 million versus the prior year period, and represented 66, 5% of net revenues compared to 71, 5% in the fourth quarter of 2021.
Looking at general and administrative expenses, we saw a decrease of 24% to $35 $5 million.
Compared to the fourth quarter of 2021.
However, sequentially expenses increased due to higher travel and entertainment costs as well as expenses associated with <unk> acquisition process.
In the fourth quarter G&A margin settled in at 15, 1% to 16, 4% in the fourth quarter of 2021.
Moving forward, we should expect to see G&A as a percentage of net revenue of approximately 15% maybe slightly lower.
Additionally, we saw R&D costs of $6 1 million in the quarter in line with our annual expectations of $20 million.
We anticipated R&D will continue to be an important aspect of our changing business, particularly in the development of Heidrick navigator.
<unk> R&D investments to be approximately 25 million in 2023.
Our goal is that the benefits from our R&D efforts will be utilized across our future offerings, such as our digital asset business executive search heidrick consulting and on demand talent segment.
Adjusted EBITDA was $30 9 million compared to $36 $8 million in the fourth quarter of 2021 with an adjusted EBITDA margin of 13, 1% slightly higher than the 12, 9% adjusted EBITDA margin recorded in the fourth quarter of 2021.
An executive search adjusted EBITDA was $56 1 million compared to $57 8 million in the prior year period.
Fundamental talent recorded adjusted EBIT loss of $1 4 million versus a gain of $2 $1 million in the prior year period.
And the Heidrick consulting adjusted EBITDA loss of $2 $1 million narrowed by more than half from a loss of $4 8 million in the prior year period.
We finished the fourth quarter with an effective tax rate of approximately 30%.
To adjusted net income of $16 1 million compared to $28 million from the prior year period, and adjusted diluting earnings per share of <unk> 78 versus $1 two in the fourth quarter of 2021.
The decrease in bottom line metrics is largely a result of R&D spending coupled with a step down in revenue.
Turning to our balance sheet at December 31, we ended the quarter with cash and cash equivalents in marketable securities of $621 $6 million.
$76 million more than last year.
As we discussed before the company's cash position typically builds through the year as employee bonuses are accrued which are mostly paid out in the first half of the year, along with the associated taxes and related costs.
Before I turn to expectations for the first quarter I would like to reiterate how pleased we are with the acquisition of Hs, which closed on February one.
As you can see in today's press release, we acquired Hs for initial consideration of $33 5 million.
Which was paid in the first quarter of this year and will make future payments from 2023 upon the completion of <unk> 2022 statutory audit.
In 2026, the former shareholders of atria are eligible to receive an additional payment subject to achievement of certain agreed upon financial metrics.
Moving forward <unk> financials will be included in our on demand segment beginning in February .
Now, let me turn to the first quarter of 2023 guidance give.
Given we expect to return to more normalized run rate was in heidrick projected revenue and effective productivity.
Barbara.
Lodging external macro factors, particularly with the foreign exchange interest rate environments. We believe our first quarter net revenue will be in the range of 235 $255 billion.
As we look forward, we remain committed to the ongoing transformation of heidrick to our diversification strategy and moving towards a 50 50 revenue split between our search and non search businesses.
We expect to maintain a strong executive search position, while we considerably grow and expand our on demand talent heidrick consulting and digital asset businesses.
As we move through this transition, we expect hydro take on new and exciting initiatives.
Also being active in M&A to further grow our business and expand our new geographies.
In conclusion.
Christian I noted at the outset, we're very pleased with our performance in 2022, but Moreover, we look forward to continuing to progress against our goals and further our transformation efforts to deliver maximum shareholder value.
With that Christian I would be glad to take your questions.
Thank you and again if you do have a question at this time that will be star one on your telephone we'll pause for just a moment.
Okay.
Okay.
Okay.
Okay.
We'll hear first today from Kevin Steinke with Barrington Research.
Good morning, I'm, sorry, good afternoon.
Congratulations on the solid results.
Wanted to.
Just.
Start off first by asking about the on demand talent segment obviously.
You remain.
Bullish long term on the <unk>.
Growth prospects there.
You did reference.
A bit of some project delays.
Weighted to the economy is there.
Anything more you could expand on there but at the same time I think you noted that you expected that business to grow organically in 2023 so.
Can you also comment on that and how much do you see those new sales and marketing resources contributing to that growth.
Yes, Kevin Hi, Chris.
Chris.
Yes, I mean, I think what we what we saw and what you feel in these markets.
Is.
The general slowdown in decision making.
Which causes even projects upon demand talent too.
To slow down a bit and thats some of what we that we started experiencing and I fully expect that as we can.
As we come out of this that that optionality of on demand talent will be the first one the companies would be able to.
To pull on as well.
So we're expecting it to to rebound.
From that perspective, we've added more sales capability as we referenced to.
To for not only the color Heidrick channel, but also outside of that to be able to drive that.
So we should be able to see some good organic growth promoting <unk> as a result of those actions.
Great. Thank you.
So.
With regard to the <unk> acquisition.
<unk>, maybe you could give us a little more.
If possible on how the deal came about.
<unk> been.
Looking at the company, a while and.
No.
Maybe how the process and.
Valuation and everything came together for you.
Sure happy to take that question.
Alright.
Our process of what we deal with a lot of the companies that we kind of look at one wed like to kind of internally sourced that so we've got a great business development group that looked at lots of parts around the world in terms of on demand talent really kind of doing a heat map trying to make sure we understand kind of where the good places. Good locations are that would be able for us to springboard into we really found.
As it pertains to atria, a real outstanding partner through preliminary conversations and as you kind of imagine Kevin and just kind of takes a life of its own where engagement.
More in depth.
We get a lot of good back and forth and then of course, we go into our full mode of.
Looking at the diligence looking at the model thinking of ourselves on the business kind of come together, we always look for is that one plus one equals three or better.
With what already we had a good strong foundation and the acquisition of BTG. So that's really kind of what brought it altogether and then the economics of the deal is structured the deal or just something that's always kind of <unk>.
<unk> and goes through its normal course and processing them I think we got to really an excellent agreement for both parties.
No.
And we strongly believe Germany is.
Our first critical step of.
Looking at Europe , and really thinking.
<unk> step into Europe , we already had a very good step.
With BTG and what they were developing in Europe et cetera. So this really kind of puts an excellent team together to let us penetrate that market, even more and thats our goal.
Okay great.
Leads to my next question I was going to ask.
We view <unk>.
Their offerings is leveraging <unk>.
Across more of Continental Europe .
Or is it more of a Germany specific offering.
Yeah.
So could you comment on that or maybe the potential for other acquisitions in that space.
Within Europe .
Yes.
It's a great question look.
It's predominantly Germany, having.
Having said that there are projects that.
M&A out of Germany that they've done in international locations as well.
But if we really want to scale it inside of another geography. It will probably you will need to talent in that geography to be able to do it.
But we think that the leverage points of places like decrease really are no.
One along the client site. Okay. There are so many clients that they are working with that we can even leverage.
BTG and we're beginning to do that already.
Sure.
German clients, who.
Have a presence in the United States here in the U K being able to work with them in a more seamless fashion. So so theres lots of client leverage that we'll get as a result of that.
Okay great.
Just wanted to ask.
More broadly to about the macroeconomic environment.
And if you're seeing any.
Changes in the pace of decision, making on the executive search side I think you referenced that you.
We expect 2023 to be.
Healthy year for that business, but.
Any little bit more uncertainty.
Creeping into the minds of clients.
Sure.
So kind of a war for talent.
Pretty much.
A good hedge against that I suppose.
Yes.
I think that we can.
If we take a step back.
'twenty one.
A lot of 2022 were.
I use the analogy of we're running 100 miles an hour okay.
So.
Things as we referenced in the fourth quarter, there slowed down but.
They slowed down to a point, where we're still running faster than we ran in 2018 in 2019, which were darn healthy years, and we continue to see that in our numbers and facts.
So I think thats sort of how we're feeling right now as to what the pace looks like we think that some of the thematic issues like you referenced there in the war for talent.
The.
Underneath there kind of the teams a transformation of digital of sustainability.
<unk>.
ESG.
All of these things and things like private equity are still continuing to charge the market quite a bit. So there is momentum in there and we feel good about that that's what we're speaking to it is clearly.
100 miles an hour of 'twenty, one or 'twenty, two but it's still healthy levels of executive search work that we're seeing the decision, making has taken a little bit longer, but thats part of that process of slowing down.
Alright. Thank you that's helpful and just lastly, I wanted to ask about Heidrick navigator and you mentioned some.
Good ongoing pilots with clients.
How are you thinking.
Uh huh.
Progress or timeline too.
Broader rollout.
Yes.
Half of that question as well.
Look I think that heidrick navigator, we're really excited about it.
We've got.
When we started with a couple of betas and now its expanding beyond that and there's a strong pipeline behind there as well and I just want to again reiterate what is it.
Digital solutions for our clients, that's going to help them manage their leadership population holistically as an asset that's traditionally managing a reasonably add halfway through excel files in Powerpoint decks et cetera. Some clients who are pretty excited to think about this asset which they all value so much.
Current manner. So that's the exciting thing we've actually gotten quite positive feedback in the market from a beta clients.
<unk> not only endorsing our work, but even serving as a reference for us to get other pilots that's exciting so.
We're going to do is we will be focused in 2023 on continuing to ensure the success of the beta clients and growing that beta client group and our pipeline of early.
Adopters and will continue to provide.
Commentary on market feedback our beta program.
Early adopter pipeline as the year progresses with the expectation to begin to share commentary on on bookings and other key business metrics in early 2024.
As we grow the revenue of this business. So bookings will translate in this kind of subscription based model to revenue.
A little bit over time, but that's roughly the timing of what we're trying to get done here.
Great. Thanks, a lot for the insight I'll turn it over.
Thanks, Kevin.
Our next now from Marc Riddick with Sidoti.
Yeah.
Hi, good afternoon.
Hey, Mark.
So I wanted to touch a little bit on one of the things that was mentioned was some of the.
Increasing activity around travel and meeting folks in person if I heard that correctly. So if you could touch a little bit on that may be foreseen.
Is there much of a differentiation and pick up either by industries geographies.
Maybe you could put a little bit more on that just sort of curious as to.
Where we're getting to see more folks who are new ones would be seen face to face.
Hey, Mark I'll try to tackle that question I can kind of chime in.
We're starting to see is definitely where we're trying to get back in front of our clients. We feel that it is important to.
To do that.
We've started to see a pickup in terms of those travel costs.
Having put that into its context, it's still not the same levels of 2018 to 2019. So we still believe the G&A side of it as I made in my prepared remarks and would be around 15% as a percentage of revenue maybe a little bit less so it's not going to go back up to the <unk>, but nonetheless, we still think it's a very important part to.
To see our clients to be in front of them I think with candidates.
Again, I still think zooms or the first wave as they go through the interview processes, maybe the second part of it but obviously towards the final.
The final part of the interview process.
Coming more of a live meeting meeting with candidates et cetera. So we're just starting to see a little bit more of that but certainly not to the old levels.
<unk> got based on conversations I still think people are in two to three times a week for the most part.
So we're still going to see some activity, where we're trying to go in and see our clients, but because there is.
More limited window to do so where people ran Monday through Friday, and other in two or three days and they're really busy those two or three days. It puts a natural hedge on that getting too out of control.
Okay excellent.
Excellent and then I Wonder if you could touch a little bit on I mean, certainly the headlines have been out there for quite sometimes as far as like Australia.
Take space and maybe more so.
Just wanted to talk a little bit about.
What youre seeing in talent availability from from those actions or or perhaps other things and maybe you should.
What we what you are expecting to see maybe.
Without too much of a crystal ball, but what we're expecting to see as far as talent availability through the year.
Yes, so it's Christy here Mark Thanks for that question sure.
Sure.
I think the majority of those layoffs.
Aren't at the level that we operate.
Based on number one.
So no.
We're not seeing that level of candidate.
Appear on our radar screen, Okay, having said that.
I think that in the cases, where.
Vps and others are being touched by these kinds of layoffs, we are seeing that emerge I think in the tech sector things.
Have slowed down.
They ramped up so fast that it needed to slow down and people are trying to make more strategic choices now doesn't mean, there's no hiring going on in tech just to be clear.
It's just a slower process right now and very strategic in terms of choices that theyre, making rather than hiring multiple people.
In one fell swoop, so that's what really what we're beginning to see happen I guess.
Depending on what happens in the economy.
What level of the layoffs or get too.
We'll see what happens with the availability, but we still see in our in our space.
We're still seeing the war for talent occurring inside of the spaces.
Operator.
Today.
Great and then I was wanted to touch a little bit on and I may have missed this so forgive me if I did but what if you can touch a little bit about your current views on the potential acquisition pipeline availability valuations and the like.
Sure Mark I'm, just trying to answer that better can you give me just a little more color. What you are looking for.
Sure I'm looking at potential targets.
So that maybe what youre seeing out there as far as what's available and.
Whether evaluations.
Or about the same as they were three to six months ago.
Folks getting a little more rational with their expectations are now.
Yes, well rationality.
Well, obviously look we just did a deal with a J I would say that that was a very rational deal on both parties I think both parties.
Fine job of coming to a good agreement that benefits them both.
In terms of our pipeline our pipeline remains.
Strong with interest rates going up cost of capital going up companies that may not be as mature.
We are et cetera, and are in need of capital or balance sheet. It definitely <unk> stem and the direction towards us and I think there is some rationality I think it's still very much a mix in my experience to really get what I would call market rationality in your pipeline you need a bit of slowdown to be a little bit more.
Perpetual longer until people start to realize that it's not just it's not been impact may or it's not going to impact.
Valuations for line will come right back so I'll try to hold my breath and wait for it to pass. So that's always kind of the trick of waiting to see if that kind of comes into the fold but.
But we definitely have conversations within executive search and heidrick consulting with on demand talent.
With lot of different types of companies in different industries that we look at all the time, so I will say, it's gotten a little bit better, but I still think that's got a way to go and I think only time potentially with uncertainty which is really what this market is right now.
Especially the numbers that have just been coming out still make it look very uncertain in terms of two hikes for high six hikes were announced.
And people know it is going up so cost of capital certainly not going to get cheaper.
Got you I appreciate it thank you very much.
Thanks, Mark Thanks, Mark.
And once again for questions that is star one at this time, we'll move on to Tobey Sommer with tourist security.
Thanks, I was wondering if you could start out by maybe telling us what you're hearing from.
Your best and biggest clients about their demand and I imagine at least some of those buy across your business units.
Sure yes so.
<unk>.
Tobey I think.
If I start with Teck.
We are.
We're basically seeing it go a bit slower I think there are topics insightec that are still quite high ti.
Things like that where there.
Hi, I'm going on there is lot of functional hiring is still happening in China.
The tech industry as well.
But the likely some of the growth ideas.
Are a bit slower than they were in the past.
Inside of industrial we're seeing.
Sure.
With.
With everything that all the conversations happening around energy about energy transitions, there's lots of work thats going on and momentum inside of that I think.
Sure.
Sort of tech, enabling industrial companies and there's lots of work.
Inside of that because those are teams that are there.
Seem to be pretty pretty strong.
We're seeing a lot of CEO related activity in the consumer space.
Probably more so than we've seen in a while.
So that's.
That's a team that's inside their private equity.
He is still operating it at a higher level than it was pre pandemic.
I want you to know for sure.
As we see it it isn't it to frothy levels.
Was in 2021, but it's still operating at a pretty strong level over there.
And in healthcare life Sciences, and medical devices healthcare services things like that.
Pretty strong biotech is trying to find its way.
What I'd say.
So those are those are strong areas and in financial services. We're seeing we've continued to see work in the payment space.
As a team with something Thats.
Strong growth.
Probably the one that's.
That's sort of going a bit slower as the banking sector, but the rest of the sectors insurance insurance is still quite high and Theres a lot of activity going in there. So we've got it organized sector by sector, but that gives you an idea of some of the work that we're seeing.
Thank you.
Sure.
How do you go about.
Assessing the sort of classic build versus buy.
Amy your capital deployment, because you've opted to.
Continue to assemble on demand businesses the acquisition yet.
Yet our pursuing an internal approach for navigator.
<unk>.
How were those sort of conclusions.
The right ones from your perspective.
Okay, Let me try to talk to that a little bit Tony and then I'll have Chris Sean jumping in.
In terms of the on demand side of it.
We absolutely are both okay. So we look at both internal build as well as the buy and we look at it both in terms of an ROI for our shareholders and what makes the most sense, but also the expedient.
Making sure that we're competitive so for example.
When you take a look at Germany and atria.
To build the time it would take to drop the revenues the process the system for people that could be a three to five year journey and you can accelerate that journey by combining yourself and coming together with a great partner like <unk>.
Does two things one yes, it accelerates, but it also from a competitive advantage point of view takes what we consider a very key business kind of ties it on with US right away versus trying to build them at the same time potentially.
And then partnering with one of our competitors are with somebody who can become one of our competitors. So.
What goes into that thought a lot of discussion happens at the board level with management teams trying to make sure we're really executing on the right decision.
The other element Christa, maybe you want to jump in on yes, sure, yes, so on something like card on Heidrick navigator.
Number one we don't think theres another asset out there that does what we're trying to do so buying it.
Really wasn't it wasn't a choice having said that.
There's some things we're good at we have the IP, we have the insight on a variety of these topics that we think we can bring.
So we partner.
As we referenced before.
We partner with a world class.
Human capital AI firm Eightfold AI.
To be able to drive new solutions, So heidrick snug.
Necessarily the tech.
Two pits buildings, so we have.
Exclusive partnership with them to be able to build it and do that so we do think about that from that context, but we've got a lot of IP. We've got a lot of insight and there is an idea that.
To being well received in the marketplace and there is no solution to go by.
Perfect.
Numbers question that I may have missed and I apologize if I did but what's the mix.
Embedded in your revenue guidance for the first quarter.
Organic revenue.
<unk>.
Or you could just give us a specific.
<unk> and other acquired revenue and will.
Back it out.
Would you consider organic and the reason I asked the question I'm not trying to be.
We've had other acquisitions that we've had in the past as well we've had business talent group now for a couple of years as well as partnership. So are you, meaning just the <unk> since that's really the latest.
The thing Thats been acquired in the last 12 months that wasn't present in the year ago period, I think it's the classic definition.
Yes, I mean for the most part that's simply a trace and that would be in our on demand talent segment and the way that I would kind of.
Give you some thoughts around that we disclosed I believe $61 million in 2021 revenue and you would expect.
Now on a growth rate to 23, since we know there'll be headwinds high single low double digit type growth rates from that point data point with property.
But you're in the right ballpark for 2023 now do remember we closed on February one so 11% 12% of that Toby if you will but last 12 months, that's pretty much been at now we've had.
The.
<unk> executive search side that pertains to some of our Nordic regions et cetera, but they're pretty small so I don't think theyre really meaningful in terms of what we're looking at.
Okay.
Do you have an expectation you could share with us for.
Yes.
Sure.
Capital expenditures that.
Internal R&D and software development that will roll through the income statement and be capitalized this year.
<unk> that's a good question.
So we talked about this year again, probably in the range of 20 to 25 kind of throwing to the P&L I think on the capitalized side of it we'd probably look.
More on the $5 million to $10 million would be on the capitalization that strictly pertained to capitalized software development costs.
That would have on their those would typically be amortized.
Three to five years, depending on which part of the software that we're looking at and the longevity and the useful life, but those would probably be about the right numbers.
Okay and last one for me.
How do you.
Think about cyclicality, you've got a portfolio of businesses that you are expanding.
And youre coming out with it.
Service here that'll be a subscription.
Do you think you are.
Expansion areas are sort of.
Not cyclical or <unk>.
Cyclical in a different way than the cornerstone search business.
Yes.
I think there is.
Couple of questions there one cyclicality one.
The wind blows.
Which one faces.
No pressure, which one faces a little bit of pressure, which was facing a lot of pressure. So.
I think that we're building things that they're definitely face less pressure that we see.
In correlation to.
Macro headwinds okay.
<unk>.
I think the on demand business as it matures has the potential to have a different cycle associated with it as well.
And because they are saying we are in the first inning of that game and as the adoption of that grows and continues it's going to have a different cycle, we believe than what it has today and.
Thats yet to be proven.
But it's in the early stages in terms of our peoples.
People will start using that as it comes to the market the subscription model business.
One that.
The headwinds that typically those fees once they get up and running is on new subscriptions and new clients. So that's a different kind of cycle.
That all of those companies Facebook. The first goal is to build that high value user base that will have.
Thanks Mark.
That is helpful. If I could sneak in one more.
If there is a little bit more.
Affiliation in the average revenue per consultant in executive search and we sort of bounce around that band that you said, we expect to settle in between $1 eight.
In the low twos.
Is there how do we think about margins in that context is there a significant difference in that.
Either the segment or corporate margin at a one eight to $2 two.
No I think when you look at it from a segment point of view I would not expect a meaningful difference in executive search.
The enterprise as much so as you know we would do two things Tobey I think the first one is we would assess the longevity of that oscillation and if we felt like it was permanent right. Those are different actions and temporary our view and this happened during COVID-19, where we felt like 2021 was going to come back strong now clearly.
Came back stronger than we anticipated, but still it came back strong.
Our view is even if there is a mild or a short or are low depth of recession that 2024 will be a good bounce back year for the most part.
We've got our reasons for believing it. So my comment is I think it would be very temporary at that level. If it were to breakthrough the bottom end of that band and.
And we want to make sure that we don't.
Again b.
Pennywise and pound foolish to make sure that we've got the team ready to go for 2024 and to be able to execute on our strategy and that strategy in my opinion paid off very very well for us in 'twenty, one and 'twenty two.
Thank you.
Yeah.
Sure.
And with no other questions at this time I would like to turn things back to Christian on for closing remark.
Thank you.
So just if I summarize we're extremely pleased with the results that we announced today, we continue to operate in a dynamic market. That's got very consistent demand for human capital services across many offerings, we're working hard to continue to deliver exceptional value to our heidrick clients.
Growth through our heidrick shareholders, all within the framework of a clear strategic vision.
Thank you for joining and we look forward to updating you on the next quarter call. Thank you.
And again that will conclude today's conference. Thank you all for joining US you may now disconnect.
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Good day everyone.
And I will be your conference operator for today at this time I would like to welcome everyone to the fourth quarter 2012 to Heidrick <unk> struggles conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question.
Please press Star one again as a reminder, today's call is being recorded it is now my pleasure to turn the conference over to MS. Suzanne Rosenberg Vice President of Investor Relations. Please go ahead ma'am. Thank you and welcome to our 2020 Q4th quarter and fiscal year end conference call. Joining me on today's call is our president and CEO Krishnan logical Mohan.
And Chief Financial Officer, Mark Harris, we posted our accompanying slides on the IR page of our website at Heidrick Dot Com and we encourage you to view the slides for additional context. Please.
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.
Conciliations between these non-GAAP financial measures and the most comparable GAAP 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 with that Krishnan I'll now turn the call over to you.
Thank you Suzanne.
Afternoon, everyone.
2022 was another excellent year for our company as we manage our business through a heightened geopolitical.
And global economic uncertainty.
While successfully navigating the current coming out of the pandemic and delivering for our clients.
I am pleased to report, we surpassed $1 billion in annual net revenue for a second consecutive year and beat last year's record by 7% or 10% on a constant currency basis.
Additionally, we maintained our intense focus on profitability and delivered strong full year operating margin of 10, 5% and adjusted EBITDA margin was 12, 7%.
Alright, adjusted diluted earnings per share were $3 84 per share, which is meaningfully above the pre pandemic levels.
Overall, our strong performance was achieved even as we invested strategically in digital asset that we didn't have the previous year and despite unfavorable foreign exchange rates and a market slowdown.
As we've discussed the pace of business has been extraordinary over the past two years and as expected we've seen the market slowdown from these extremes. Nevertheless, our business in January remains on pace with our strong fourth quarter performance and we expect to continue operating above the heightened levels achieved during.
The pre pandemic record years of 2018 and 2019.
As a result of our team's efforts. We believe we are strongly positioned to deliver sustainable growth and great value to all our stakeholders.
In 2022, we made significant progress on our financial operational and strategic objectives, which are paramount to the ongoing transformation of our firm.
This progress is the result of this strategy, we began implementing over the last few years and we're seeing our efforts come to fruition.
Executive search continues to serve as a powerful cornerstone of our business.
On demand talent is gaining significant traction with clients.
Heidrick consulting is growing and enabling us to deepen our client relationships with our advisory services.
And we are successfully executing on our foundational roadmap with our digital assets as we pilot heidrick navigator with several clients.
In 2022, our dedicated efforts to solidify heidrick is a leader in providing compelling and differentiated solutions to our clients were further underscored when we advanced our strategy to achieve a more balanced revenue profile between our search and non search businesses.
As a reminder to.
The key focus of ours is to aggressively develop and grow our non search businesses, both organically and inorganically, while maintaining the great strength, we have in executive search.
For context, historically, our search business.
Is comprised more than 90% of our total revenue.
Just the past two years, our revenue has shifted to 84% search.
16% non search while still growing our executive search business.
Now with our recent acquisition of <unk> and the on demand talent space, coupled with our growth expectations for the segment overall, we expect to accelerate the diversification of our revenue stream in the near term.
With respect to our recent acquisition <unk> is a leading provider of on demand talent in Germany.
And this acquisition builds on the diversification strategy, we amplified in 2021, when we acquired business talent with the leading player at the high end of on demand talent in the U S.
Increased allows for meaningful geographic and financial expansion of our on demand talent business, thereby strengthening our overall efforts to diversify the full breadth of executive talent and leadership Advisory services, we offer to our clients.
Drilling down on this a bit on demand talent present, an immense market opportunity for high grade.
Of course in today's tight labor market environment on demand is a compelling option.
But looking beyond today. This is still a nascent market and we believe we're only in the first inning of how this business and create incredible value and impact.
Many corporations that begin to experiment with on demand talent.
And we're seeing positive results with.
With relatively fewer harnessing its full potential.
We continue to see acceleration in demand and more opportunity screener and talent and project services as it provides our clients with immediate additional bandwidth highly experienced professionals.
Over time, we believe companies will look to on demand talent as an option.
Whenever they need to augment their talent capabilities.
Why.
Because on demand talent offers unique advantages relative to traditional alternatives.
In many cases, its the quickest way for companies to obtain the expertise they need.
It allows companies to be more agile and flexible capacity and cost.
It allows them to access the level of talent that they may not be able to attract as effectively with a full time hire.
It may be easier for companies to manager integrate on demand talent.
And it may just be less expensive cost proposition.
Truly a powerful alternative and we believe most companies are only beginning to realize the full benefits.
Importantly, the need for on demand talent solution isn't geographically bound.
We believe there are significant opportunities for scale and reach globally.
And organic growth, we anticipate bolt on M&A will be a tool for scaling this business as we continue to implement our strategy by identifying targets that align with our strategic vision.
Fit our culture.
Delivered strong returns to our shareholders.
At an operational level, our business made meaningful strides and is well positioned for 2023.
I'll provide a little context by segment.
To start.
The executive search revenue in confirmations in the fourth quarter were down again extraordinary performance last year, but remained well above the pre pandemic levels globally, we remain focused on growing efficiently by optimizing our go to market strategy and deepening client relationships across all industries.
I think it's also important to note that at the board and C suite level, where we operate there is still a very much a war for talent being driven by the burgeoning demand in areas such as digital transformation.
ESG.
E <unk>.
Sustainability and private equity along with a variety of tech and digital hybrid role, which are continuing to emerge in every industry practice.
In 2023, we expect executive search to continue to operate at a very healthy level as these broader market themes.
And our on demand talent segment, we saw revenues declined slightly both sequentially and year over year in Q4, but on a full year basis revenue reached $91 million versus $67 million for the nine months period in 2021.
The fourth quarter performance was somewhat impacted by economic headwind, but overall, we continue to see strong demand across industries as clients get more comfortable with the benefits of high end on demand talent and Utica situations ranging from growth.
<unk> improvement and transformation.
Also during the second half of 2022, we made additional investments in sales and marketing we expect to experience the benefit of the.
Coming quarters.
As I mentioned earlier, we believe on demand talent has a robust value proposition.
Particularly during an economic downturn.
Our long term trends that favor growth in this segment.
We expect on demand talent to expand and grow its total revenue contribution in 2023, both organically and with the recent acquisition of <unk>.
Now shifting to heidrick consulting.
This business is on a strong growth trajectory and continues to garner strong demand driven by clients needing help with identifying and developing future leaders.
Culture purpose and organization as well as defining and implementing pragmatic eni programs.
In addition to revenue increases in both the quarter and the year Heidrick consulting meaningfully improve its margins and narrowed its operating loss.
A key driver of the improvement we've seen in this business is a deliberate strategic shift from more transaction oriented projects the longer term client journey.
As the fluid macroeconomic environment persists, we expect retention.
Development.
Return to office issues and culture enhancement to remain at the forefront of our clients priorities, providing ample opportunity to sustain strong growth within heidrick consulting.
Turning to our digital assets, we're very excited about heidrick navigator, our digital platform currently in beta testing with several clients redesign navigator could serve as a digital solution for companies to help manage their leadership team holistically as an asset and enables clients to systematically.
First talent versus the AD hoc manual approaches.
Today.
Navigator <unk> clients in areas, such as succession planning and developing rising leaders among many other scenarios.
The analytics and AI to make key leadership positions.
We have received positive feedback from the market from a beta client as we work with them to implement and operationalize platform moving.
Forward to the opportunities navigator brings to our business as we believe it has potential scale and growth prospects are unique and different from other businesses.
More specifically, our navigator business will operate predominantly as a subscription based model versus a more traditional consulting engagement led model.
That said heidrick navigate will require some time to build a distinguished user base and to sign contracts increase and total value rises we expect the platform to meaningfully contribute to top and bottom line results.
We anticipate our broader ongoing investments in R&D will continue to provide as needed digital assets and intellectual property to support the perm as a whole.
Believe that a portion of these investments will continue to be dedicated to further developing heidrick navigators as we launch and incubate this part of our business.
In 2023, we plan to continue to build on the operational excellence, we are delivering on today.
While our business experienced some headwind in the second.
Half of 2022, we're still running well beyond the pre pandemic levels and are confident in our ability to remain at strong levels throughout 2003.
We believe that our diversification strategy not only strengthened our client relationships, but also lessens the cyclical nature of our business is our higher growth complementary businesses are less severely impacted by slowdowns or recessionary conditions.
We project that this strategy together with the support and strength of our balance sheet will allow us to continue executing and progressing our strategic vision for the company.
And of course, none of this would be possible without our amazing team of people around the world. We continue to maintain a strong culture of developing terrific talent in house and promoting from within I'm pleased to share that in 2022, we named 23 exceptional individuals to partner from 31% principle. These are.
Incredibly talented colleagues, who clearly demonstrated what it takes to run fast and deliver results.
I could not be more excited about the quality of our team at heidrick.
To close our 2022 performance advantageously positions heidrick to continue delivering strong results anchored by a powerful business.
We remain steadfast on furthering our strategic path.
Deleveraging, our M&A playbook across future opportunities.
As we strive for a well balanced business portfolio, our focus will be on growth and diversification.
Our clients need for a broader more comprehensive set of solutions with talent and human capital challenges at the executive and board levels.
With that I'll turn the call over to Mark.
Thank you, Chris Sean and good afternoon to our investors employees and analysts.
Today I'd like to begin with an overview of some of our 2022 key performance metrics, which reflect another terrific year delivered by the heidrick team.
Then I will go into the fourth quarter financial results discuss our strong balance sheet share, our Q1 outlook and close with some final comments on the future.
Following that we're happy to take your questions.
Before turning to 2022.
I want to congratulate all the heidrick team on the exceptional achievement of $1 1 billion in consolidated net revenue for <unk>.
I asked level in our company's history, and a 7% increase from last year's record achievements.
With a clear vision in place and flawless execution by our incredible teams.
Exciting times of the Heidrick as.
As we progress towards our goals to continue building for our future.
Given our current success, coupled with our financial strength, we're set up perfectly to prudently invest in growth through innovation and differentiation.
See attractive opportunities emerging which we intend to capitalize on in 2023, while maintaining our disciplined opportunistic approach to capital allocation to maximize shareholder return.
Let me now share some of the full year highlights of 2022.
First I'd like to congratulate each of our segments for achieving record revenue and delivering impressive year over year growth.
Executive search revenue increased 4% to nearly $902 million, reaching a historical high with all regions, increasing on a constant currency basis, and the majority of our industry practices exhibiting growth over the prior year.
On demand talent segment revenue grew from approximately $67 million to $91 million or <unk>, 37%, demonstrating the power of the combined hybrid platform.
We're extremely excited about the future of on demand talent, including our recent acquisition of atria, which furthers our growth prospects in the global interim talent space.
In Heidrick consulting we saw revenue increase of 19% to a record breaking $80 million while.
Asian values increased 15% and search referred work was up 6%.
Profitability also remained strong with adjusted EBITDA of $136 7 million and adjusted EBITDA margin at 12, 7%.
With that now let me turn to the fourth quarter, which was strong across the board.
Net revenue for the fourth quarter was $235 7 million.
An executive search net revenue was $192 7 million.
With declines in each region, when compared to the fourth quarter of 2021.
Given the fourth quarter of 2021 is a very tough comparison, we posted a strong $2 $3 million and productivity per consultant for 2022 versus $2 4 million last year.
As a reminder, over time, we believe productivity will modulate between one eight and 2 million per consultant.
What percent over 2019 pre pandemic level.
Fundamentals recorded revenue of $22 4 million.
Which is a slight decline versus the prior year period.
As Chris mentioned, we have aligned our sales and marketing resources to meet the heightened demand in this business and we expect to see the impact of these investments later this year in.
In addition, we're particularly excited to have added <unk> to our on demand talent portfolio, which provides us with an excellent partner to expand our platform in Europe .
Given the large total addressable market for heidrick on demand talent services.
We believe we will see considerable growth here for the foreseeable future.
Turning to Heidrick consulting fourth quarter net revenue rose to $27 million up 11, 6% compared to the prior year period, and up 17, 5% on a constant currency basis.
Coupled with revenue growth in the fourth quarter. This segment also cut its operating loss in half in the fourth quarter of 2022, when compared to the prior year period as we generated strong scale to this business.
We continue to see strong demand for future ready leaders and culture with retention dynamics being a big topic for our clients.
We're particularly encouraged by the strength in heidrick consulting backlog with year end backlog up 22% in December 2021, which bodes well for 2023.
We believe heidrick consulting is uniquely positioned to tackle client demand with the current market environment and we foresee strong growth in this segment as we move forward.
Now, let me turn to operating expenses.
With lower comparative quarterly net revenue nationally thumbs lower compensation variable costs as a result, consolidated salaries and benefits expense of $156 $8 million in the quarter.
Around $47 3 million versus the prior year period, and represented 66, 5% of net revenues compared to 71, 5% in the fourth quarter of 2021.
Looking at general and administrative expenses, we saw a decrease of 24% to $35 $5 million.
Compared to the fourth quarter of 2021.
However, sequentially expenses increased due to higher travel and entertainment costs as well as expenses associated with <unk> acquisition process.
In the fourth quarter G&A margin settled in at 15, 1% to 16, 4% in the fourth quarter of 2021.
Moving forward, we should expect to see <unk> as a percentage of net revenue of approximately 15% maybe slightly lower.
Additionally, we saw R&D costs of $6 $1 million in the quarter in line with our annual expectations of $20 million.
Anticipated R&D will continue to be an important aspect of our changing business.
Particularly in the development of Heidrick navigator, and we expect R&D investments to be approximately 25 million in 2023.
Our goal is that the benefits from our R&D efforts will be utilized across our future offerings, such as our digital asset business executive search and heidrick consulting and on demand talent segment.
Adjusted EBITDA was $30 9 million compared to $36 $8 million in the fourth quarter of 2021 with an adjusted EBITDA margin of 13, 1% slightly higher than the 12, 9% adjusted EBIT margin recorded in the fourth quarter of 2021.
An executive search adjusted EBITDA was $56 1 million compared to $57 8 million in the prior year period.
Fundamentals record adjusted EBIT loss of $1 4 million versus a gain of $2 1 million in the prior year period.
In Heidrick consulting adjusted EBITDA loss of $2 1 million.
Narrowed by more than half from a loss of $4 8 million in the prior year period.
We finished the fourth quarter with an effective tax rate of approximately 30%.
Leading to adjusted net income of $16 1 million compared to $28 million from the prior year period, and adjusted diluting earnings per share of <unk> 78 versus $1 two in the fourth quarter of 2021.
The decrease in bottom line metrics is largely a result of R&D spending coupled with a step down in revenue.
Turning to our balance sheet at December 31, we ended the quarter with cash and cash equivalents in marketable securities of $621 $6 million, which.
Which is $76 million more than last year.
As we discussed before the company's cash position typically builds through the year as employee bonuses are accrued which are mostly paid out in the first half of the year, along with the associated taxes and related costs.
Before I turn to expectations for the first quarter I would like to reiterate how pleased we are with the acquisition of Hs, which closed on February one as.
As you can see in today's press release, we acquired Hs for initial consideration of $33 $5 million, which was paid in the first quarter of this year and we will make future payments from 2023 upon the completion of <unk> 2022 statutory audit.
In 2026, the former shareholders of atria are eligible to receive an additional payment subject to achievement of certain agreed upon financial metrics.
Moving forward.
The financials will be included in our on demand segment beginning in February .
Now, let me turn to the first quarter 2023 guidance.
Given we expect to return to more normalized run rate.
In heidrick projected revenue and effective productivity.
Paul.
Margin external macro factors, particularly with the foreign exchange interest rate environments. We believe our first quarter net revenue will be in the range of 235 $255 billion.
As we look forward, we remain committed to the ongoing transformation of heidrick to our diversification strategy and moving towards a 50 50 revenue split between our search and non search businesses.
We expect to maintain a strong executive search position, while we considerably grow and expand our on demand talent heidrick consulting and digital asset businesses.
As we move through this transition, we expect heidrick to take on new and exciting initiatives.
We're also being active in M&A to further grow our business and expand our new geographies.
In conclusion.
Christian I noted at the outset, we're very pleased with our performance in 2022.
However, we look forward to continuing to progress against our goals and further our transformation effort to deliver maximum shareholder value.
With that Christian I would be glad to take your questions.
Thank you and again if you do have a question at this time that will be star one on your telephone we'll pause for just a moment, we'll hear first today from Kevin Spanky with Barrington Research.
Good morning, I'm, sorry, good afternoon.
Congratulations on the solid results.
Wanted to.
Just.
Start off first by asking about the on demand talent segment obviously.
You remain.
Bullish long term on the.
Growth prospects there.
You did reference.
A bit of some project delays.
Related to the economy is there.
Anything more you could expand on there but at the same time I think you noted that you expected that business to grow organically in 2023 so.
Also comments on that.
Do you see those new sales and marketing resources contributing to that growth.
Yes, Kevin Hi.
Chris.
Yes, I mean, I think what we what we saw and what you feel in these markets.
Is.
The general slowdown in decision making.
Which causes even projects upon demand talent too.
To slowdown a bit and thats some of what we that we started experiencing and I fully expect that as we as we come out of this debt.
That optionality of on demand talent will be the first one the companies would be able to.
To pull on as well.
So we're expecting it to rebound.
From that perspective, we've added more sales capability as we referenced before not only they will color heidrick channel, but also outside of that to be able to drive that and so we should be able to see some.
Good organic growth promoting <unk> as a result of those actions.
Oh, great. Thank you.
So.
With regard to the <unk> acquisition.
Can you maybe give us a little more.
Color if possible on how the deal came about.
Ben.
Looking at the company, a while and.
No.
Maybe how the process in.
Valuation and everything came together for you.
Sure happy to take that question.
Okay.
Typical process of what we deal with a lot of the companies that we kind of look out one wed like to kind of internally sourced that so we've got a great business development group that looked at lots of parts around the world in terms of on demand talent really kind of doing a heat map trying to make sure we understand kind of where the good places. Good locations are that would be able for us to springboard into we really found.
As it pertains to atria, a real outstanding partner through preliminary conversations and as you kind of imagine Kevin and just kind of takes a life of its own where the engagement.
More in depth.
We get a lot of good back and forth and then of course, we go into our full mode of.
Looking at the diligence looking at the model thinking of ourselves on the business kind of come together, we always look for is that one plus one equals three or better.
With what already we had a good strong foundation and the acquisition of Atg. So that's really kind of what brought it altogether and then the economics of the deal is structured the deal or just something that's always kind of.
Live and goes through its normal course and processing I think we got to really an excellent excellent agreement for both parties.
So.
And we strongly believe Germany is.
Our first critical step of.
Looking at Europe , and really thinking.
Strong step into Europe , we already had a very good step.
With BTG and what they were developing in Europe et cetera. So this really kind of puts an excellent team together to let us penetrate that market, even more and thats our goal.
Okay great.
That leads to my next question I was going to ask.
In view.
And then their offerings is <unk>.
<unk>.
Across more of Continental Europe .
Or is it more of a Germany specific offering.
Yeah.
So could you comment on that or maybe it's essential for other acquisitions in that space.
Within Europe .
Yes.
It's a great question look.
It's predominantly Germany, having.
Having said that there are projects that.
M&A out of Germany that they have done it in international locations as well.
But if we really want to scale it inside of another geography. It will probably you will need the talent in that geography to be able to do it.
But we think that the leverage points of places like gateways really are no one.
<unk> along the client site. Okay. There are so many clients that they are working with that we can even leverage.
BTG and we're beginning to do that already.
Our German.
Chairman clients too.
Have a presence in the United States here in the U K being able to work with them in a more seamless fashion. So so theres a lots of client leverage that we'll get as a result of that.
Okay great.
Just wanted to ask.
More broadly to about the macroeconomic environment.
And if youre seeing any.
Changes in the pace of decision, making on the executive search side I think you referenced that you expect 2023 to be.
Healthy year for that business, but.
Just any little bit.
More uncertainty.
Creeping into the minds of clients.
Sure.
Kind of a war for talent.
Pretty much.
A good hedge against that I suppose.
Yes.
I think that if.
If we take a step back.
'twenty one.
A lot of 2022 were.
I use the analogy of we're running 100 miles an hour okay.
So.
Things as we referenced in the fourth quarter, there slowed down but.
The slow down to a point, where we're still running faster than we ran in 2018 in 2019, which were darn healthy years, and we continue to see that in our numbers and facts.
So I think thats sort of how we're feeling right now as to what the pace looks like we think that some of the thematic issues like you referenced there in the war for talent.
B.
Underneath there kind of the teams a transformation of digital of sustainability.
<unk>.
ESG.
All of these things and things like private equity are still continuing to charge the market quite a bit. So there is momentum in there and we feel good about that that's what we're speaking to it is clearly.
100 miles an hour of 'twenty, one or 'twenty, two but it's still healthy levels of executive search work that we're seeing the decision, making has taken a little bit longer, but thats part of that process of slowing down.
Alright. Thank you that's helpful and just lastly, I wanted to ask about Heidrick navigator and you mentioned some.
Good ongoing pilots with clients.
How are you thinking.
Uh huh.
Progress or timeline too.
Broader rollout.
Yes.
Half of that question as well.
Look I think that heidrick navigated, we're really excited about it.
We've got.
When we started with a couple of betas and now its expanded beyond that and there's a strong pipeline behind there as well and I just want to again reiterate what is it it's a digital solution for our clients that is going to help them manage their leadership population holistically as an asset that's traditionally managing reasonably.
Add halfway through pixel filed in Powerpoint decks et cetera, some clients who are pretty excited to think about this asset which they all value. So much in a different manner. So that's the exciting thing we've actually gotten quite positive feedback in the market from our beta clients.
In fact, not only endorsing our work, but even serving as a reference for us to get other pilots. So that's exciting.
I would do is we will be focused in 2023 on continuing to ensure the success of the beta clients and growing that beta client group and our pipeline of early adopters and we will continue to provide.
Commentary on market feedback our beta program early adopter pipeline as the year progresses with the expectation to begin to share commentary on on bookings and other key business metrics and early 'twenty four.
As we grow the revenue of this business so bookings will translate.
In this kind of a subscription based model to revenue.
But over time, but that's roughly the timing of what we're trying to get done.
Great. Thanks, a lot for the insight.
Turn it over.
Thanks, Kevin.
Well her next now from Marc Riddick with Sidoti.
Yes.
Hi, good afternoon.
Hey, Mark.
So I wanted to touch a little bit on one of the things that was mentioned was some of the.
Increasing activity around travel and meeting folks in person if I heard that correctly. So what if you could touch a little bit on that maybe you are foreseeing.
Is there much of a differentiation and pick up either by industries geographies.
Maybe you can put a little bit more on that just sort of curious as to.
Where we're getting to see more folks who're, new wonder DC in face to face.
Hey, Mark I'll try to tackle that question I can kind of chime in.
What we're starting to see is definitely where we're trying to get back in front of our clients. We feel that it is important.
To do that.
We've started to see a pickup in terms of those travel costs, having put that into context, it's still not the same levels of 2018 to 2019. So we still believe the G&A side of it as I made in my prepared remarks, and it would be around 15% as a percentage of revenue maybe a little bit less so it's not going to go back up to the <unk>.
Nonetheless, we still think it's a very important part to.
To see our clients to be in front of them I think with candidates.
Again, I still think zooms or the first wave as they go through the interview processes, maybe the second part of it but obviously towards the final.
The final part of the interview process, it's becoming more of a live meeting meeting with candidates et cetera. So we're just starting to see a little bit more of that but certainly not to the old levels.
Our best got based on conversations I still think people are in two to three times a week for the most part.
So we're still going to see some activity, where we're trying to go in and see our clients, but because there is.
More limited window to do so where people ran Monday through Friday, and other in two or three days and they are really busy those two or three days. It puts a natural kind of hedge on that getting too out of control.
Okay excellent.
Excellent and then I Wonder if you could touch a little bit on I mean, certainly the headlines have been out there for quite some times as far as like Australia.
Space and maybe more so than in financials. Once you could talk a little bit about.
What youre seeing in talent availability from from those actions or or perhaps other things and maybe you ship.
What we what youre expecting to see maybe.
Without too much of a crystal ball, but what we're expecting to see as far as talent availability through the year.
Yes, so it's Christy here Mark Thanks for that question sure.
Sure.
Look I think the majority of those layoffs.
Alright at the level that we operate.
Based on number one.
So we're not seeing that.
Level of candidate.
Appear on our radar screen, Okay, having said that.
I think that in the cases, where.
Vps and others are being touched by these kinds of layoffs, we are seeing that emerge I think in the tech sector things.
Have slowed down.
They ramped up so fast that it needed to slow down and people are trying to make more strategic choices now doesn't mean, there's no hiring going on in tech just to be clear.
It's just a slower process right now and very strategic in terms of the choices that theyre, making rather than hiring multiple people.
In one fell swoop, so that's what really what we're beginning to see happen I guess it.
Depending on what happens in the economy.
What level of the layoffs get too.
We'll see what happens with the availability, but we still see in our in our space.
We're still seeing the war for talent occurring inside of the spaces that.
Heidrick operates in.
Today.
Great and then just wanted to touch a little bit on and I may have missed this so forgive me if I did but what if you can touch a little bit about your current views on the potential acquisition pipeline availability valuations and the like.
Sure Mark I'm, just trying to answer that better can you give me just a little more color what youre looking for.
Sure I'm looking at potential targets.
And sort of maybe what youre seeing out there as far as what's available and whether.
Whether it's valuations of.
Or about the same as they were three to six months ago.
Our folks are getting a little more rational with their expectations are now.
Yes, well rationality.
Well, obviously look we just did a deal with HSN I would say that that was a very rational deal on both parties I think both parties.
Fine job.
Two a good agreement that benefits them both.
In terms of our pipeline our pipeline remains.
Strong with interest rates going up cost of capital going up companies that may not be as mature.
As we are et cetera, and are in need of capital or balance sheet. It definitely point them in the direction towards us and I think there is some rationality I think it's still very much a mix in my experience to really get what I would call market rationality to your pipeline you need a bit of a slowdown to be a little bit more.
Perpetual longer until people start to realize that it's not just it's not going to impact me or it's not going to impact.
Valuations for Lauren will come right back so I'll try to hold my breath and wait for it to pass. So that's always kind of the trick of waiting to see if that kind of comes into the fold but.
But we definitely have conversations within executive search and heidrick consulting with on demand talent.
With lot of different types of companies in different industries that we look at all the time, so I will say, it's gotten a little bit better, but I still think it's got a way to go and I think only time potentially with uncertainty which is really what this market is right now.
Especially the numbers I've just been coming out still make it look very uncertain in terms of two hikes for high six hikes were announced.
And people know it is going up so cost of capital is certainly not going to get cheaper.
Got you I appreciate it thank you very much.
Thanks, Mark Thanks, Mark.
And once again for questions that is star one at this time, we will move on to Tobey Sommer with tourists security.
Thanks, I was wondering if you could start out by maybe telling us what youre hearing from.
Your best and biggest clients about their demand and I imagine at least some of those buy across year your business units.
Sure yes so.
<unk>.
Tobey I think.
If I start with Teck.
We are.
We're basically seeing it go a bit slower I think there are topics insightec that are still quite high.
Things like that.
Good time going on Theres lot of functional hiring is still happening inside of.
The tech industry as well.
But likely some of the growth ideas.
<unk> are a bit slower than they were in the past.
Inside of industrial we're seeing.
With.
With everything that all the conversations happening around energy about energy transitions, there's lots of work thats going on and momentum inside of that I think.
Sort of tech, enabling industrial companies, there's lots of work.
Inside of that because those are teams that are there.
Seem to be pretty pretty strong.
We're seeing a lot of CEO related activity in the consumer space.
Probably more so than we've seen in a while.
So that's that's a team that's inside their private equity.
He is still operating at a higher level than it was pre pandemic is what I would want you to know for.
US as we see it it isn't at the frothy levels that it was in 2021, but it's still operating at a pretty strong level over there.
And health care Life Sciences medical devices health care services things like that.
Pretty strong.
<unk> is trying to find its way is what I'd say.
So those are those are strong areas in it.
In financial services, we're seeing with <unk>.
<unk> work in the payment space.
As a team with something Thats.
Strong growth.
Really the one that's.
That's sort of going a bit slower as the banking sector, but the rest of the sectors insurance insurance is still quite high.
Our activity going in there. So we've got it organized sector by sector, but it gives you an idea of some of the work that we're seeing.
Thank you.
How do you go about.
Assessing the sort of classic build versus buy.
EMEA capital deployment, because you've opted to <unk>.
Continuing to assemble on demand businesses the acquisition.
Yet our pursuing an internal approach for navigator.
How were those sort of conclusions.
The right ones from your perspective.
Okay, Let me try to talk to that a little bit Tony and then I'll have christophe jumping in.
In terms of fundamental outside of it.
We absolutely are both okay. So we look at both internal build as well as the buy and we look at it both in terms of an ROI for our shareholders and what makes the most sense, but also the expedient.
Making sure that we're competitive so for example, when you take a look at Germany and atria.
To build the time it would take to drop the revenues the process. The systems the people that could be a three to five year journey and you can accelerate that journey by combining yourself and coming together with a great partner like <unk>.
Does two things one yes, it accelerates, but it also from a competitive advantage point of view takes what we consider a very key business kind of ties it on with US right away versus trying to build them at the same time potentially.
And then partnering with one of our competitors are with somebody who can become one of our competitors. So a lot goes into that thought a lot of discussion happens at the board level with management teams trying to make sure we're really executing on the right decision.
The other element Christa, maybe you want to jump in on yes, sure, yes, so on something like card on Heidrick navigator.
Number one we don't think there's another asset out there that does what we're trying to do so buying it.
Really wasn't it wasn't a choice having said that.
There's some things we're good at we have.
The IP, we have the insight on a variety of these topics that we think we can bring.
So we partner.
As we referenced before.
We partner with a world class.
Human capital AI firm Eightfold AI.
To be able to drive these solutions, so heidrick Snyder.
Necessarily the tech.
Two pits buildings, so we have a.
Exclusive partnership with them to be able to build it and do that so we do think about that from that context, but we've got a lot of IP. We've got a lot of insight into is an idea that.
To being well received in the marketplace and there is no solution to go by.
Perfect.
Numbers question that I may have missed and I apologize if I did but what's the X.
Embedded in your revenue guidance for the first quarter.
Organic revenue.
And.
Or you could just give us the specific.
<unk> and other acquired revenue.
Back it out.
Would you consider organic and the reason I ask the question I'm not trying to be.
We've had other acquisitions that we've had in the past as well we've had business talent group now for a couple of years as well as partnership. So are you, meaning just the <unk> since that's really the latest.
The thing Thats been acquired in the last 12 months that wasn't present in the year ago period, I think it's the classic definition.
Yes, I mean for the most part that's simply a trace and that would be in our on demand talent segment in a way that I would kind of.
Give you some thoughts around that we disclosed I believe $61 million in 2021 revenue and you would expect.
On a growth rate to 23, since we know there'll be headwinds high single low double digit type growth rates from that point data point property puts you in the right ballpark for 2023 now do remember we closed on February one. So 11 12 months of that Toby if you will but last 12 months, that's pretty much been at now we've had.
The acquisitions, the executive search side that pertain to some of our Nordic regions et cetera, but they're pretty small so I don't think they're really meaningful in terms of what youre looking at.
Okay.
Do you have an expectation you could share with us for.
Yeah.
Capital expenditures.
Current internal R&D and software development that will roll through the income statement and be capitalized this year.
<unk> that's a good question.
So we talked about this year again, probably in the range of 20 to 25 kind of throwing to the P&L I think on the capitalized side of it we would probably look more on the $5 million to $10 million would be on the capitalization that strictly pertaining to capitalized software development costs.
That would have on their those would typically be amortized.
Again, three to five years, depending on which part of the software that we're looking at no longevity and the useful life, but does it would probably be about the right numbers.
Okay and last one for me.
How do you.
Think about cyclicality, you've got a portfolio of businesses that you are expanding.
And youre coming out with it.
Service here that'll be a subscription.
Do you think you are.
Expansion areas are sort of.
Not cyclical or <unk>.
Cyclical in a different way than the cornerstone search business.
Yes.
I think there is.
Couple of questions there one cyclicality one.
Wind blows.
Kind of which one faces.
No pressure, which one faces a little bit of pressure, which when faces a lot of pressure so.
I think that we're building things that definitely face less pressure that we see.
In correlation to.
Macro headwinds okay.
I think the on demand business as it matures has the potential to have a different cycle associated with it as well.
And because they're saying were in the first inning of that game and as the adoption of that grows and continues it's going to have a different cycle, we believe than what it has today and.
Yes, we've proven okay.
But it's in the early stages in terms of how people will start using that as it comes to the market.
The subscription model business.
One that.
The headwinds that typically those phase once they get up and running is on new subscriptions and new clients.
Kind of cycle.
That all of those companies face, but the first goal is to build that high value user base that will have.
Thanks Mark.
That's helpful. If I could sneak in one more.
If there is a little bit more oscillation in the average revenue per consultant in the executive search and we sort of bounce around that band that you said, we expect to settle in between $1 eight.
In the low twos.
Is there how do we think about margins in that context is there a significant difference in either the segment or corporate margin at a one eight to $2 two.
No I think when you look at it from a segment point of view I would not expect a meaningful difference in executive search.
The enterprise as much so as you know we would do two things Tobey I think the first one is we would assess the longevity of that oscillation and if we felt like it was permanent right. Those are different actions and temporary our view and this happened during COVID-19, where we felt like 2021 was going to come back strong now clearly.
Came back stronger than we anticipated, but still it came back strong.
Our view is even if there is a milder short or are low depth of recession that 2024 will be a good bounce back year for the most part.
We've got our reasons for believing it. So my comment is I think it would be very temporary at that level. If it were to breakthrough the bottom end of that band.
We want to make sure that we don't.
Again b.
Pennywise and pound foolish to make sure that we've got the team ready to go for 2024 and to be able to execute on our strategy and that strategy in my opinion paid off very very well for us in 'twenty one 'twenty two.
Thank you.
Sure.
And with no other questions at this time I'd like to turn things back to Christian on for closing remarks.
Thank you.
Just if I summarize we're extremely pleased with the results that we announced today.
We continue to operate in a dynamic market.
Very consistent demand for human capital services across many offerings and working hard to continue to deliver exceptional value to our heidrick clients.
Growth through our heidrick shareholders all within the framework of a clear strategic vision. We thank you for joining and we look forward to updating you on the next quarter call. Thank you.
And again that will conclude today's conference. Thank you all for joining US you may now disconnect.