Q2 2023 Heidrick & Struggles International Inc Earnings Call

Speaker 1: Please stand by. We're about to begin.

Speaker 1: Good afternoon, ladies and gentlemen. Welcome to the Hydric and Struggles Q2 2023 Earnings Conference call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded.

Speaker 1: After the speaker's prepared 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. And if you would like to withdraw your question, simply press star one again. And now at this time, I would like to turn things over to Ms. Suzanne Rosenberg, Vice President, Industrial Relations. Please go ahead, ma'am.

Speaker 2: Thank you and welcome to our 2023 second quarter conference call. Joining me on today's call is our President and CEO , Krishnan Rajagopalan and Chief Financial Officer, Mark Harris. We posted our accompanying slides on the IR homepage of our website at hydric.com and we encourage you to view these slides for additional context.

Speaker 2: 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 may be found in the earnings press release.

Speaker 2: 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. Christian, I'll now turn the call over to you.

Speaker 3: Thank you, Suzanne.

Speaker 1: Good afternoon, everyone, and thank you for joining us today. We're pleased with our second quarter results, which marked a continuation of what we were beginning to see in the first quarter with business trending as anticipated.

Speaker 1: Revenue met our expectations and included the first full quarter of results from our recent acquisitions.

Speaker 1: Atreus in the On Demand Talent segment in Business 4.0, or B4Z in our Hydrate Consulting segment.

Speaker 1: Of significance, even before the positive effects of these acquisitions, each of our business segments demonstrated organic, sequential growth despite the ongoing macro uncertainty and an anticipated return to a more normalized level of business performance.

Speaker 4: I'll let Mark go into the details later on the call.

Speaker 4: Our steadfast focus on the execution of our strategy while maintaining strong profitability positions us well to navigate a choppy macro environment, as well as manage the seasonality we typically see in the back half of the year. From our perspective and where we operate, the market for leadership talent remains tight and continues to show strong fundamentals with encouraging demand signals.

Speaker 4: In addition, the pace of change within the organizations we serve is faster than ever, resulting in new and continued growth opportunities for hydric, which I will discuss in a few moments.

Speaker 4: Now moving on to some financial highlights for the second quarter.

Speaker 4: While year-over-year comparisons are down given the record results we achieved in 2022, we are very pleased that revenue increased 13% sequentially, including 10% organic growth.

Speaker 4: and adjusted EBITDA increased 33% sequentially with an EBITDA margin of 13.4% up 190 basis points from the first quarter.

Speaker 4: and adjusted diluted EPS was 73 cents versus 76 cents in the prior quarter.

Speaker 4: Our results and continued diversification were further propelled by our recent acquisitions.

Speaker 4: Our well-defined M&A strategy has enabled both of these acquisitions to progress seamlessly, resulting in an immediate positive impact to our business.

Speaker 4: Overall, the business continues to operate at strong levels, resulting in a notable top-line performance that translated into robust profitability.

Speaker 4: This focus on profitability allows us to fuel progress toward our overarching strategic goal of diversifying our revenue composition.

Speaker 4: As I stated earlier, the market for leadership talent remains tight and the pace of change continues to accelerate. Across our entire enterprise, we see boards and CEOs constantly shifting priorities and navigating crises in real time. And now more than ever, boards and CEOs must act quickly and decisively.

Speaker 4: We see a few important trends cutting across the various business segments that are driving growth.

Speaker 4: trends cutting across the various business segments that are driving growth. For example...

Speaker 4: CEOs are prioritizing talent, leadership, and culture.

Speaker 4: Succession planning continues to be a growing priority and is expanding in scope.

Speaker 4: There is an increasing focus on overall board effectiveness.

Speaker 4: Organizations are also prioritizing top team effectiveness. And of course, teams such as AI and cyber and potential changes in regulation will result in heightened need for those who bring relevant skills and insights.

Speaker 4: into businesses and their boards globally.

Speaker 4: businesses and their boards globally. We are now turning to each of our business segments.

Speaker 4: Beginning with executive search, this business posted sequential top-line improvement on the heels of increased confirmation demand in the first quarter.

Speaker 4: As anticipated, this business moderately decreased from the record levels achieved last year, reflecting both the macro environment and the portfolio mix within verticals in which we operate.

Speaker 4: More specifically, we saw a slowdown in the financial services and technology markets.

Speaker 4: whereas industrial continued to

Speaker 4: We continue to see a solid market in executive search given the level of change at the top as companies adapt to a new and changing operating environment.

Speaker 4: Demand has been most resilient at the

Speaker 4: CFO Board of Directors.

Speaker 4: other burgeoning demand areas.

Speaker 4: include a variety of tech and digital hybrid roles that are rapidly being created and cut across every industry practice.

Speaker 4: Turning to on-demand talent.

Speaker 4: We are very excited by the strong acceleration in this business from last year, primarily driven by strategic acquisition. In addition to significantly contributing to the segment's revenue growth, we are also looking at the growth of the business from last year.

Speaker 4: The acquisition of a Trius is helping us establish and grow our presence in continental Europe .

Speaker 4: Integration is well underway, particularly on the sales side, and our integration management office is leading a strong team with a clearly defined roadmap.

Speaker 4: It remains clear that on-demand talent is a strong avenue for growth and revenue diversification for hydrant, as it complements our other segments and offerings.

Speaker 4: Additionally, as the economy and various industries continue to transform, there's a growing market for on-demand talent solutions where flexible, independent talent is valued.

Speaker 4: Given the opportunities that we see today, we are reshaping this business to best serve our clients and continue to stay at the frontline of their needs.

Speaker 4: We're supporting the business through investment, particularly in sales and marketing, while opportunistically expanding its geographic footprint.

Speaker 4: Remain enthusiastic on on-demand talents expansion and see meaningful runway for the segment moving forward.

Speaker 4: Lastly, our Hydric Consulting segment saw strong organic sequential revenue growth. Year-over-year growth was also robust and primarily driven by acquisition. The integration of B4Z is proceeding smoothly. We have already deployed integrated go-to-market teams on several opportunities.

Speaker 4: Overall, Hydric Consulting is seeing good demand signals, and despite some projects being delayed or put on hold, we don't see cancellations and are encouraged by our record strong backlog for this segment.

Speaker 4: Given the current market conditions, particularly with a tight job market, clients are especially focused on assessment.

Speaker 4: particularly with a tight job market. Clients are specially focused on assessment, development, and

Speaker 4: retention and culture. Ensuring a strong talent pipeline, especially retaining good

Speaker 4: In response to this we are seeing increased demand for leadership development programs, especially around the themes of agility and employee engagement.

Speaker 4: Turning now to our overall strategy, we remain focused on building and offering our clients the next generation of talent and leadership advisory services that will help them achieve higher performance through their leaders and teams. Our strategy centers on diversification, both organically.

Speaker 4: and inorganically within the two primary areas that Hydric already serves its clients.

Speaker 5: First,

Speaker 4: Applying talent, the pillars of which are executive search and our on-demand talent business.

Speaker 4: And second, improving the effectiveness of leaders, teams, and organizations, which encompasses both Hydric Consulting and our developing portfolio of digital assets.

Speaker 4: Strategically, we continue to invest in digital assets where we're focused on helping companies manage and develop their leadership talent as an asset, systematically and holistically at scale using technology.

Speaker 4: We're bullish on our first digital asset, HydroNavigator, which is currently being beta tested with a select group of multi-billion dollar global clients.

Speaker 4: Hydrofnavigators strongly resonating with declines by helping them automate and optimize the task of evaluating the effectiveness of leaders, identifying new leaders, and succession planning.

Speaker 4: We continue to make progress and we're working to incorporate feedback and further shape the product for its official launch in the near future.

Speaker 4: We have also begun to aggressively pursue a direct sales organization in conjunction with our direct channel as we pivot towards monetization.

Speaker 4: In addition to Hydric Navigator, we continue to make appropriate investments in our digital capabilities and technologies.

Speaker 4: through the company, including Gen AI. Importantly, we continue to integrate technology at the core of our business, enabling each of our segments to be more effective and efficient. And we continue to integrate technology at the core of our business, including Gen AI.

Speaker 6: In closing.

Speaker 4: We are encouraged by the pace of business and we see signs of strong fundamentals to support our current operating levels.

Speaker 4: From our view, the talent market is tight.

Speaker 4: and easing inflation could translate to

Speaker 4: We are confident in our strategy, focused on growth and diversification that solves for client needs on complex issues and provides broader, comprehensive solutions for talent and human capital challenges at the executive level.

Speaker 4: Separately, we are very pleased to welcome John Beresford to our board of directors, expanding the board to eight members, seven of whom are independent. John most recently was an executive with S&P Global, serving as president of S&P Global Ratings, and formerly was the Chief Human Resources Officer.

John brings Hydric a wealth of experience as a transformative business and HR leader who will serve us well as we continue to diversify our business and innovate for the future.

Finally, a big thank you to the Hydric Team for their continued hard work, an incredible dedication to our clients.

I would now like to turn the call over to Mark.

Thank you, Chris, for having a good afternoon and evening to everyone on today's call.

Today I'll start off with a review of our second quarter results which came in within our expectations with revenue at the midpoint of our guidance.

While business is slower than the frantic pace of last year, we're pleased with today's current market performance and remain laser focused on delivering strong profitability to our shareholders.

Importantly, as Christon mentioned, you can see the underlying fundamental strength of our business through the sequential bounds by contributions by all lines of business.

As a reminder, second quarter results include the full quarter performance related to our acquired atrium and B4Z businesses.

In addition, second quarter gap results include a 7.2 million non-cash goodwill impairment charge, which I'll comment on shortly. And a $3.4 million charge related to operational reorganizations.

That is accounted for interstellaries and benefits.

My comments today will adjust for the impairment as this is one time in nature and not expected to be in the future results or comparative periods.

On a consolidated basis, second quarter revenue was $271.2 million, or 13.3% above first quarter of 2023 results.

Even before the impact of acquisitions, we delivered 10% sequential organic in that revenue growth, thus demonstrating we had strong growth from our legacy businesses and not all from acquisitions.

An executive search revenue grew 8.6% sequentially to $206.8 million.

Looking at our regional performance sequentially, we saw increases in each region except for Asia Pacific.

Specifically, American search revenue was up 8.8%, Europe was up 17%, and Asia Pacific was down 6.5%.

The strong overall revenue performance reflects increased confirmation demand we saw in the first quarter of 2023.

However, confirmations were down 5.2% sequentially in the second quarter, which will likely translate into a slower revenue in the third quarter as we enter seasonally slower time for the segment.

Consultant productivity on a trellis 12 month basis in the second quarter was $2 million compared to $2.1 million in the first quarter of 2023.

As you may recall, we made previous comments that we expect the new long-term trend of conflontment productivity to be in the range of $1.8 to $2 million.

Whereas pre-COVID, this is more around $1.5 to $1.7 million.

This shift has been driven by a post-COVID where technology has been enhanced, embraced, and accepted by the market.

Turning to on demand talent, revenue is up 26.1% sequentially to $39.2 million, and up 3.7% with only organic growth.

As Chris mentioned, we're reshaping this business for the shifting opportunity set we're seeing and did record some associated reorganization costs that we do not expect to see moving forward.

Specifically, we re-aligned the organization and made some key leadership changes to the business, enhanced our hiring process, and overhaul and streamline our internal processes and technologies to move our businesses forward.

We expect these changes to be fully in effect for the year 2024, if not before.

Hydro consulting second quarter revenue grew at 42.3% sequentially to $25.2 million and up 27.7% with only organic growth.

Our clients remain engaged with us in accelerating their performance culture, particularly as it relates to talent retention, strategy, purpose, and execution.

Both revenue and confirmation value grew on the sequential quarter comparison.

While we're seeing some client deferment of project delivery, demand remains strong and our strategy of partnering with our clients on longer and deeper journeys has kept us close to the top of the house, providing us a positive outlook for the balance of the year.

In addition, a recent acquisition on B4Z is expected to meaningfully contribute to the segments revenue once it reaches its full potential under the hydro-consulting umbrella.

Overall, we look forward to further scaling hydro consulting while achieving appropriate levels of profitability.

Turning to operating expenses, including our recent acquisitions, we saw salary and benefits increase 12.6% from prior quarter.

Variable compensation increased 18.5 million sequentially due to the higher level of production and fixed compensation increased $1.5 million sequentially, primarily due to new acquisitions and reorganization costs offset by decreases in RSU emurization, retirement and benefit costs and the deferred compensation plan.

As a percentage of net revenue, salary and benefits was 66% versus 66.4% in the prior quarter.

General administrative expenses increase $6.2 million to $40.5 million or 14.9% of net revenue compared to 14.3% of net revenue in the first quarter of 2023.

The modest increases primarily the result of business development, professional fees, and tangible amortization, and earn out costs in the corner.

In a more normalized environment, we would expect to see DNA as a percentage of net revenue, to feel approximately 15% or slightly lower. So we're pleased with these results.

Lastly, we remain focused on progressing the development of Hydric Navigator and our other digital assets through R&D Spent.

R&D spend for the second quarter was $5.7 million or 2.1% of net revenue versus $5.5 million or 2.3% of net revenue in the first quarter of 2023.

The spending is consistent with fire quarters and for the full year, we continue to expect R&D to be approximately $25 million. As we continue to incorporate M&A activity into our business model, we must also record the non-cash charges related to purchase accounting.

Therefore, in terms of underlying profitability, we've viewed just that EBITDA as the best proxy of our operating performance of the business, and we'll use this more going forward as we're doing internally.

And the second quarter adjusted EBITDA increased 33% sequentially to $36.4 million compared to $27.5 million in the first quarter of 2023.

Adjust the able to margin, increase 190 basis points to 13.4% from 11.5% in the prior as well.

On a second basis, executive search finished the quarter with adjusted EBITDA up 11.3% to 53.9 million dollars compared to 48.4 million dollars in the first quarter of 2023.

On demand talent recorded just at EBITDA gain of $2.6 million versus a loss of $1.3 million in the prior quarter, primarily driven by acquisition.

And hydric consulting, it's adjusted the able to loss to $1.6 million from a $2.7 million loss in the prior quarter, primarily driven by organic improvements.

Finally, adjusted income to the quarter was $15 million and adjusted the living earnings per share was 73 cents.

Now I'll turn to the diamond chain.

At the end of the second quarter, or cash and marketable securities sequentially increased by $34.3 million to $239 million compared to $204.7 million at the end of the first quarter.

We continue to believe our greatest returns will come from reinvesting our cash in the business, particularly in growth of on-demand talent and our digital portfolio.

Moving forward, whether it's press-run corporate spending, we are still seeing good demand signals and strong fundamentals across our business lines.

Therefore, we expect the second half to be similar to what we've experienced in the first half of 2023, coupled with seasonality.

That said, turning to our third quarter, 2023, revenue guidance, we expect a range between $245 million and $265 million, which reflects typical summer seasonality patterns from the second quarter.

As a reminder, our diversification strategy provides us with new businesses that carry different macro-risk profiles, which tends to be less cyclical. So while our guidance contemplates a slowdown executive search, we do expect to see stronger relative performances from on-demand talent and hydro consulting.

I'd like to conclude today's call by outlining how the Evolution of our Strategy will impact our financial results as we move forward.

As we continue to leverage our distinguished executive search business and grow our adjacent segments, we would of course expect to see top-line expansion.

This means increased revenue diversification, less duplicality in revenue, and less making revenue more stable.

While new businesses are growing and will carry lower margins versus executive search, and therefore will decrease our margins overall, they will add aggregate dollars to the bottom line.

This coupled with not increasing share count or adding leverage to pay for these acquisitions will be EPS or creative over time. Thus, as we continue to focus on organic and inter-organic growth opportunities, we'll leverage our healthy balance sheet and proven M&A strategy.

Of note, RNA strategy is particated on finding opportunities that are strategically and culturally aligned, present high-cash on cash returns, and are additive to our EPS after integration expenses roll off.

In conclusion, we look forward to continuing this journey and throughout this transformation, remain dedicated to delivering strong returns to our shareholders.

Finally, before turning the call over to the operator for Q&A, just a minor housekeeping item. Given various calendar and scheduling obligations, we are targeting Wednesday, October 25th, for our third quarter earnings conference call, which is different from our usual Monday calls.

This is the only time we expect to make this change. With that, Chris and I would be glad to take your questions. Thank you, Mr. Harris. Ladies and gentlemen, at this time, if you do have any questions, I'm going to press the star one. And if you do find that your questions has already been addressed, you can remove yourself from the queue by pressing star one again.

We'll take our first question this afternoon from Kevin Steinke of Barrington Research. And good afternoon. I wanted to start off by asking about the pace of change accelerating.

Yep, hey Kevin, thanks for that question. You know, multiple things that we are seeing regarding pace of change and how companies are looking at it. Like, if you're even given it to look at something like succession planning, we're typically that word was reserved for the CEO . It's now being applied to the entire C suite. So that's a broad sweeping change that's going on. How to think about succession for the entire C suite as well. And how to think about that over multiple years. That just...

One example of something which is changing rather fast in our world. If we look at that over the last couple of years, if we look at technology, it's a different way in making decisions and how to make decisions, we're going to see an increased pace of change.

in the incorporation of Gen AI and things like that into decision making processes of executive teams and the implications of that and what that means for leadership teams as well. So these are the kinds of things that we are definitely seeing that are going on out there that digital transformation. These are all continuing and

Okay, thank you. I'll turn it over. Thanks, Kevin. Thank you. We'll go back to now to Toby Summer at Truist Security. Yeah, good afternoon. This is Jack Wilson on for Toby Summer. Thanks for taking my question. I also started off with can we dig into sort of the executive search confirmations and productivity per consultant? You sort of mentioned that paradigm shift from sort of that higher level into revenue. Can we start there?

Let me try to hit on the productivity side of it. So if you remember back in the really busy days of 21 and 22, our consultant productivity was showing up at a trolling 12 months of around 2.6 million. And we made comments when we were reporting out that number that that was very much unsustainable, but it would break the team to try to maintain something of that level.

pre-COVID. And that's just because the post-COVID rule does they discuss was just very different than what we were experiencing. The Zoom is very much embraced. The travel is very much down. Last mile still has travel containing two of it, not the beginning stages of searches, et cetera.

We saw our days to close, go from possibly 180 days to sub 150 days. So we've seen a nice change of that pace. And that just means people can do more by still maintaining a reasonable balance. So again, the two millions right at the top end of that one point, two million guidance that we kind of gave way back when. And so I'm just trying to make...

Is there any variance in that bi-region?

Again, a lot more in the US in terms of, and I'm just gonna talk about norms, not necessarily the current state, but GTS and financial services are where you get a lot more average retainers that are typically higher as well as optics. And obviously those are the two parts that are suffering right now in the current market. Europe , a little bit better on the industrial consumer, their mixed side of it. So keep in mind, it's not just absolute, because that is true, as CEO in the US certainly gets paid more than, on average, to CEO in Europe , but the mix also makes it apply in terms of.

what's going on in the market, the strength. So again, our team in Germany are doing a fabulous job with their play and their strengths, et cetera. So it really plays a big difference between country mix, between industrial mix.

Okay, so on the German point, would you be able to sort of size the contribution or the expected contribution from the acquisition in sort of the second half of the year? I'm sorry, in terms of EBITDA? Revenue and EBITDA. No, I mean, so, yeah, I think we gave some pretty good numbers in terms of just overall in terms of where the, by each segment of what the contribution was between organic and inorganic, and really was more of a question that was really kind of being asked in our last earnings call, so I wanted to give you a flavor. We're not going to go into very specifics on each of our acquisitions. We don't do that.

Thank you. Thank you. And just a quick reminder, star one please for any further questions this afternoon. And it appears we have no further questions this afternoon. Mr. Roger Gopalan, I'd like to turn the conference back to you for any closing comments. Thank you everyone for your participation and continued support. As we mentioned earlier, we're encouraged by our results.

and we continue to see good demand signals despite a broader macro uncertainty that continues to exist. In tandem with navigating the economic challenges, we remain focused on growing our business and continuing to execute on our diversification strategy.