Heidrick & Struggles International, Inc. (HSII) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. And welcome to Heidrick & Struggles Q1 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advice that today’s conference is being recorded. I’d now like to hand the conference over to your speaker today, Suzanne Rosenberg, Vice President of Investor Relations. Please go ahead. Suzanne Rosenberg: Good afternoon, everyone. And thank you for participating in Heidrick & Struggles 2021 first quarter conference call. Joining me on today’s call is our President and CEO, Krishnan Rajagopalan; and Chief Financial Officer, Mark Harris. Krishnan Rajagopalan: Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us today. I am extremely pleased with our robust financial performance this quarter and the pace of recovery in our business, which exceeded market expectations. While we are not done with COVID yet, our momentum is strong and we are very excited about the opportunities that lie ahead. Last year, we were very well-positioned ahead of the pandemic. We never stopped innovating or finding new ways to serve our clients and we continue to diversify and expand our capabilities. For example, our recently announced acquisition of BTG, which already has this year off to an exciting start. Most important, we are beginning to see the effects of our bolstered efforts in our strong financial and operating results, which Mark will take us through in a moment. Right now, I will highlight a few first quarter growth metrics and achievements relative to their prior-year period, much of which, of course, was pre-pandemic. Record net revenues increased approximately 13%. Operating margins returned to double-digit levels and adjusted net income more than doubled. Executive Search delivered an excellent performance with a record-breaking level of confirmations that steadily improved each month of the quarter and we experienced increases in each of our regions. In terms of our verticals, we saw strong increases from a year ago in healthcare and life sciences, industrial, financial services and global technology and services. We also experienced positive trends in consumer markets as this practice rebounded and increased 38% sequentially. Across all industry groups, private equity activity remains robust. Heidrick Consulting delivered a solid performance. Revenue was down slightly, reflecting a large project included in the year ago results. However, confirmations were strong and the pipeline heading into Q2 is encouraging. Mark Harris: Thank you, Krishnan, and good afternoon, everyone. Thank you for joining our call today. As Krishnan mentioned and by all accounts, this was an outstanding first quarter for our company with record breaking results. Net revenue in the first quarter marked a double-digit improvement, both sequentially and year-over-year, driven by broad-based strength across all regions and nearly all practices. This record growth coupled with operational savings resulted in return to double-digit operating margins with significant improvements in bottom-line profitability. While COVID still presents many challenges for our business, clearly our performance exceeded our own expectations through the continued hard work of our great Heidrick team. When discussing our first quarter results, I will focus on year-over-year comparisons as the first quarter of 2020 was predominantly a pre-pandemic and this is a good comparison to years given the seasonality we usually experience in our business. With that, I am pleased to report record net revenue of $193.7 million, which was 12.9% above the $171.5 million reported in the first quarter of 2020, which was also a near record quarter of its own. On a constant currency basis, our net revenue increased 10.2%. Let me provide some details for you on how this was achieved. Turning to Executive Search, we delivered a record breaking performance in the first quarter with net revenue of $179.6 million, up $24.2 million or 15.5% on a constant currency basis. Net revenue increased $19.9 million or 12.8%. We experienced growth in all regions, with the Americas up 16.2% or 16.5% on a constant currency basis, Europe increasing 13.8% or 4.8% on a constant currency basis with particular strength in Germany, Italy, the U.K. and France, and in Asia-Pacific, we saw growth of 15.4% or 8.2% on a constant currency basis, with strong performance in Korea, China, Hong Kong and India. This growth is reflected in our company’s new confirmation record, which increased 21.4% to nearly 1,600 confirmations compared to the 1,300 in the same period a year ago. We believe much of the strength in the market reflects suppressed demand from the COVID lockdowns, a reassessment of talent by our clients after navigating through such an impactful event, as well as an increased number of candidates looking for new opportunities post-pandemic. Operator: Thank you. Your first question will come from Josh Vogel of Sidoti & Company. Please go ahead. Josh Vogel: Thank you. Good evening, guys. Thanks for taking my questions. First question, obviously, very, very impressive results here. I guess, you are more than halfway through the quarter when you issued Q1 guidance. Yet you came in, I think, it was like 14% above the high end of your range and clearly is showing up in your Q2 guidance. But what and where specifically drove the delta between what you were seeing on February 22nd versus the rest of the quarter? Mark Harris: Hey, Josh. It’s Mark. Thanks for the question. So here’s kind of what we saw. We started to see ourselves ramp up in terms of the amount of engagements that were coming in through the quarter. What I would tell you is that the month of March was an absolutely robust month in terms of what we saw. The amount of engagements that kind of came through were not just beyond anything we could have expected, it was beyond any month we had ever seen in the history of our firm. That just was not expected. So we saw that kind of come in. We saw our average engagements in terms of the average retainers were very strong as well and maintained their strength even more so into March, and then as always, the more difficult one to predict is the upticks and those obviously came in very strong as well. So, not to sell an overused phrase, but it really was kind of a perfect storm of those three really coming together at the end of the quarter, in the last month of the quarter and that impacted two things. One, it absolutely changed and moved obviously in terms of the guidance we gave and what we accomplished it, but as you can tell by Q2, because a lot of that March is going to be recognized through our backlog into the second quarter, you are really seeing it come through there. Josh Vogel: Right. Great. Thanks for the insights there. I had a question around consultant productivity, obviously, given the strong revenue performance, but nearing all time high, does mean that the 373 consultants are at or new capacity? And could you maybe just talk about plans for headcount additions over the balance, you are outside of recent promotions? Krishnan Rajagopalan: Yeah. Hi, Josh. It’s Krishnan. Thank you. Look, I think, those productivity numbers are heavy numbers, number one. So let me acknowledge that, everybody is very, very busy. We are also completing searches faster. So that’s another part of the equation that didn’t change before, but we are noticing that with our tech platform and how people are working as well. And we plan on adding headcount. I mean we are strategically continuing to hire into markets. So that’s what I would say and we have got people starting and have already started in April and in our headcount, so there is an opportunity to continue to grow. But I think those are -- I think I would say that people are very busy right now and those are very high productivity numbers that we hope to try to maintain. Josh Vogel: Okay. Great. Thank you. A couple of quick ones on BTG, very interesting deal, I think it’s a great fit for you. If I inferred what you are saying correctly, Mark, you are going to be breaking that out as its own segment for reporting purposes starting in Q2? Mark Harris: Correct. That’s the -- what we will -- because it’s on demand and is very different to Heidrick Consulting and different to Executive Search, yet obviously pretty adjacent. But we believe for our investor base, we want to break that out separately for you. Josh Vogel: Sure. Okay. And can you just give directional commentary just what the margin profile was on that business in 2020? And then also when we think about the balance of this year and the $50 million that they did in 2021, one, is there any seasonality to the business and can you maybe give us a sense of what was built into your guidance for Q2 knowing that’s some participating for the full quarter? Mark Harris: Yeah. I mean, so we want to get away from segmental guidance, if you will, Josh. I think the way to do it is, as I mentioned, they did about $50 million last year. You could break that out on a quarterly basis and you are going to be in the ballpark, obviously, we expect some growth as we would on in a high growth area. In terms of the margin, my comment would be, it’s just not meaningful margin, negative nor positive. So it’s very much near breakeven as you would expect in that sense and we would maintain that because it is in a high growth market, like you see with others in that space, even though they play further downstream. It’s a business that you want to continue to make reinvestment in as it’s such an early point of its development and we expect the same. So I don’t want to kind of get into margin expectations until it really hits the maturity inflection point. Josh Vogel: Totally understand. Congrats guys . Just last question, is there any other restructurings or one-time items that we should expect to hit up in Q2 or even later quarters and any sort of drag from integration related costs related to BTG? Mark Harris: No. So, as I kind of gave in my script, there will be restructuring charge in Q2 between $3 million and $4 million and in Q3 of about $1 million. That really pertains to the real estate stuff we started back in Q3 last year. So nothing related to BTG on that sense. The synergy side of it, again, it’s a smaller business, obviously, we will be looking at synergies with them and see what makes sense and what doesn’t. But right now I think what’s really is to do no harm is the internal way that we are seeing it. That is to have them really go on their own. They are very different business. It’s not like you can be leveraged with Executive Search per se in terms of how they are doing and how they need to attack the market. So I wouldn’t expect a lot there. And then, again, as they grow the business, as we hit maturity inflection point, I think that’s really when you start looking at the business and saying, okay, now might be a good time to turn to that, but that’s a long way down the road, because the growth of the business that they have in front of them. Josh Vogel: All right. Well, thanks for taking my questions, and again, really impressive results. Mark Harris: Thank you. Appreciate that. Operator: Your next question will come from Kevin Steinke of Barrington Research. Please go ahead. Kevin Steinke: Hey. Good afternoon. I wanted to follow-up on the discussion about BTG. Maybe if you can just give us a sense as to how the relationship between BTG and Heidrick blossomed over the last couple of years? And how that maybe benefited their ability to grow kind of the synergies that you were able to build and that you see going forward between those two businesses? Krishnan Rajagopalan: Yeah. Kevin, thank you. Look, we -- this has been a great relationship. We started as an exclusive partnership with them a little over two years ago and we dedicated resources to making that relationship work and BTG did as well. And over time, there was so many projects that popped up across the radar screen, joint projects that we were able to work on together. We recognized that Heidrick along that journey could be a really important part of helping BTG grow as well. There were so many go-to-market synergies with our clients. We saw that. So that’s been the great part of this relationship. And as I mentioned in my opening, a real test out the culture, the values and see what the alignment is like. So we have been really pleased with all of that. That’s what makes us excited about this deal as well. Kevin Steinke: Okay. Great. Can you maybe give us a sense as to how the BTG’s visitors performed kind of during the downturn of the last few quarters or in 2020? I mean was there something for that -- for their business model that was maybe a little more resilient or just any comments on how they performed last year specifically? Krishnan Rajagopalan: Yeah. Let me just -- at a high level, I mean, look, we were incredibly impressed with their outperformance during COVID. I mean, this was the kind of market offering the clients were looking at and looking for. They wanted it fast. They wanted right there and then and BTG was there. So their business model held up really well. And Mark, maybe you could add more to that, but we are very, very pleased to see that very resilient through that downturn. Mark Harris: Yeah. Correct. That was really kind of the attraction side of it. Look, nothing is really counter cyclical, but it is absolutely less cyclical than you normally would see in Executive Search business. Their business was impacted single-digit, low single digits in terms of the COVID impact. As you can imagine when you turn the economy off, everybody gets kind of knocked around on that one. So that really was a very, very pleasant surprise to us, not to their company, they understood how it was going to play out, they did a great job forecasting it. So it was one of the attractions for our diversification strategy, Kevin, which you know we have been working quite hard and trying to figure out the proper way to do it to ensuring that we still have a product suite that is still very much appealing at the top where we play. So it’s definitely less cyclical than what we see typically in our business. Kevin Steinke: Okay. That’s helpful. So with the month-to-month confirmation growth in the first quarter on the Executive Search side and you mentioned kind of perfect storm, the great month of March that you had. I don’t know if there is any way for you to pinpoint kind of how much you would attribute that to pent-up demand just coming back in terms of searches that were may be put on hold or delayed, obviously, you said, you didn’t expect this type of growth to continue, that would be -- that’s pretty lofty. But I am just trying to get a sense for how the overall market feels and going forward and how much, like I said, do you think is pent-up demand coming back here? Mark Harris: Sure. So, I mean, obviously, the first answer is it’s hard to unscramble scrambled eggs. What I can tell you from the on hold is, it isn’t as relevant in terms of what we saw kind of come through, because that would be able to be some predictive analytics, right? What we know is a lot of the COVID searches that went on hold came off, they came up actually more in Q3, Q4 than in Q1. So we had a pretty good line of sight on that. It really is new engagements that came through, not on hold reversals. And the reason I think it caught many of us off guard, the industry and certainly our side of it, is just the ferociousness of it. So what I comment is we were expecting that more toward the second half of this year versus the first half of this year. And now to your question, how much of that is pent-up demand from people putting things on hold just generally versus what we are seeing. And my answer is, I think, there is a couple of things, right? Systemically, first, we saw in all three regions, right? So, it wasn’t just an Americas’ issue. We saw that in Americas. We saw in Europe. We saw in Asia-Pacific. So, we know globally, it was kind of a global demand curve shift. Then the second element to it is, I think, there is new roles, new ways of looking at the market going forward, new norm as people like to refer toward us. So, I think, there was kind of recasting and reposition themselves for that. I think the other area was kind of when the tide goes out, right? You can kind of see what’s underneath it and I think there was some upgrade opportunities and that some companies have also decided to double click down on. So I can’t give you a percentage of how much is one over the other. We would have to go back by each of the respective engagements and almost categorize them, which we don’t do like that. So we just know generally that’s kind of what’s happening. And I guess, to the question of trend, well, obviously, we saw kind of come through and you can see it in the guidance that I gave you, we are expecting Q2 to be somewhat similar. I think it will abate a little bit. So I don’t think it will be as continuous from the month of March into April, May, June, and, of course, the summer months will have better insights from the account of our Q2 earnings. How we think that’s going to plan? I really don’t know yet. But as we get close to it, hopefully, I will have some better vision for you. Krishnan Rajagopalan: Yeah. I’d just add that the current month feels quite healthy to us. So it doesn’t feel maybe record level the way March may have been, but quite healthy. Kevin Steinke: Okay. Great. That’s all very helpful commentary. I appreciate it. I will jump back in the queue and thanks for taking the questions. Operator: Your next question will come from Tobey Sommer of Truist Securities. Please go ahead. Tobey Sommer: Thanks. I wanted to start out by asking your opinion of how you think of this cycle and expansion? Do you consider it and you are hearing from customers that it’s sort of a reset of an economic cycle because it was very violence and happening very quickly, but it was kind of briefing condensed or is this an extension of the prior extent -- expansion sort of how are you thinking about it in terms of the potential duration? Thanks. Krishnan Rajagopalan: Yeah. I don’t know if I can answer your duration question. I think about it as a reset in some -- and how people are doing work, the things that they are focus on, the driving of digital transformation, the amount of dollars on the sidelines and for private equity and how they want to leverage that to be able to drive business growth. These are all the factors that are creating this. So, some of that is reset, some of that is stuff that was there before and people were worried about cycles ending maybe and sitting on the sidelines. So but -- so that’s why I draw a line to say, I think, people are looking ahead right now, and saying, how we are going to work is different as well and the opportunities that have been created as a result of this look different and let’s go. So that’s what’s happening. Tobey Sommer: And how do you look at your -- what’s your intention to deploy capital and manage the balance sheet? You have got surging demand in the core business. You have done a little bit? But could you -- here recently, but could you clue us in the sort of the multiyear view on how you would like to not only deploy cash, but thresholds that you would like to manage the balance sheet too? Mark Harris: Sure. Let me try to take that one on, Tobey. So, obviously, look, we are sensitive to our balance sheet and our capital structure. We are always evaluating what we want to do with it, et cetera. I think the way that we looked at it we finished in terms of our cash position strong. Clearly, the Q1 cash position doesn’t have the transaction price that we just did at the $32.6 million for BTG. So we had a pro forma that now. With our current pipeline in terms of potential M&A partnerships etc. is still very strong and robust. I think it’s on an accelerated curve in that sense that we are continuing to look more aggressively at those as we pivot into our strategic journey that we started last year even a little bit the year before that. So, unfortunately, valuation is still not cooperating, as you can imagine when you look at the Dow or the S&P. They are still pretty high valuations, but nonetheless. Our view is that we will have to use some of that cash for our strategic sense. It’s where we think the good growth rate is. And to the extent, we have the discretionary cash that we don’t need, then I think that’s what we will start looking at our capital options, as you can imagine, stock buyback, dividends, one-time dividends, all sorts of ideas are on the table. But we think pretty strongly that it’s going to be capital we want to use and we want to deploy for our growth strategy. Krishnan Rajagopalan: Let me just add. I think the -- we have become a bit more sophisticated in how we think about the markets as well. We kind of think there’s an ecosystem out there and there are opportunities to learn and partner as well. So it isn’t all just pure acquisition play. There is partnership opportunities. Some of which require capital as well, by the way. So our lens is broaden and we thought that was a positive experience with BTG and what we learned through our partnership that we did them. Tobey Sommer: Thank you. That’s helpful. And what are you hearing from clients about what’s driving turnover in Executive Search, any feeling you have for demographic changes would be helpful? Krishnan Rajagopalan: Yeah. So, look, I think, there are some underlying themes that are out there, we alluded to them in the -- in our comments earlier. Look, there was a lot of -- there is some C suite pent-up demand, I would say, from last year for individuals who want to change roles, who are planning on changing roles, maybe looking at the next five years of their career and COVID delta a bit of a reset. I think great leaders, they wanted to stay with their teams and now they sort of solidified some of those teams and ready to move on. So, on an individual level, you have that trend line that’s out there. Then you have got businesses that are transforming as well and that mismatch between, hey, do I want to be here to transform the business or not, creates opportunities in Executive Search. Clearly, diversity is a huge theme that’s out there as well and so we see a lot of mandates out there, particularly at the Board level and others related to that topic. So that creates some demand as well. So these are all the things that we are seeing that are fueling the Executive Search market. Tobey Sommer: Thank you. Operator: And we have no further questions. So I will turn the call back over to Krishnan for closing remarks. Krishnan Rajagopalan: Okay. Hey. Look, thank you for joining us on the call today. I’d like to close by saying thank you to our global team for all your hard work. And I would be remiss if I didn’t also acknowledge that COVID is a long battle and it continues to be a battle that’s far around the world. I mean, particularly in countries like India and Brazil where it’s still surging. Together our teams are working through this very difficult situation. We are doing everything we can to support our colleagues and clients in those areas and markets as well. We continue to forge ahead and remain excited about the good work and the opportunities in front of us. We look forward to working closely with BTG as we continue to execute on our growth initiatives. Thanks again and we will speak with you soon. Operator: This concludes today’s conference call. Thank you for joining. You may now disconnect.HSII Ratings Summary
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Heidrick & Struggles Q1 2024 Earnings: Revenue Up 11% to $265.2M
Heidrick & Struggles International, Inc. (NASDAQ:HSII) Q1 2024 Earnings Overview
Heidrick & Struggles International, Inc. (NASDAQ:HSII) recently held its Q1 2024 Earnings Conference Call, revealing a notable financial performance for the first quarter ended March 31, 2024. The company, a leader in global leadership advisory and on-demand talent solutions, reported a quarterly revenue of $265.2 million, an 11% increase year over year. This growth, as CEO Tom Monahan pointed out, reached the high end of the company's guidance range, showcasing solid margin performance. The adjusted EBITDA for the quarter was $25.9 million, with a margin of 9.8%, and net income stood at $14.0 million, resulting in a diluted earnings per share (EPS) of $0.67. Additionally, a cash dividend of $0.15 per share was declared, indicating the company's financial health and its ability to return value to shareholders.
The revenue increase was primarily fueled by growth in On-Demand Talent, Heidrick Consulting, and Executive Search services in the Americas and Europe. However, there was a noted decrease in Executive Search in the Asia Pacific region. The strategic acquisitions of Atreus Group GmbH and businessfourzero in early 2023 also played a significant role in boosting the company's revenue. Despite these positive developments, the company experienced a slight dip in net income and diluted EPS compared to the first quarter of 2023, which was attributed to an effective tax rate of 38.8% due to the non-deductibility of earnout expense associated with these acquisitions.
Looking forward, Heidrick & Struggles has set its Q2 2024 consolidated net revenue expectations to range between $255 million and $275 million. This forecast takes into account various external factors, including foreign exchange and interest rate environments, foreign conflicts, inflation, and macroeconomic constraints, which could impact the company's performance. The company's strategic focus remains on leveraging its assets to create value for clients, shareholders, and employees, emphasizing leadership's role in driving corporate performance. With a robust foundation of intellectual property, a trusted brand, and deep relationships at the C-suite and board levels, Heidrick & Struggles is well-positioned to meet the expanding needs of its clients.
In the broader financial market, HSII is currently trading at $30.05, experiencing a slight decrease of $0.26, or approximately 0.86%. The stock has fluctuated between a low of $30.05 and a high of $31.48 during the trading day, reflecting the market's reaction to the company's financial performance and future outlook. Over the past year, HSII's shares have ranged from a low of $22.52 to a peak of $35.38, with the company's market capitalization standing at around $607.21 million. The trading volume on the NASDAQ exchange was 96,314 shares, indicating investor interest and market activity surrounding the company's stock. This financial snapshot provides investors and analysts with a comprehensive view of Heidrick & Struggles' current market position and its potential for future growth.
