Heidrick & Struggles International, Inc.

I am Nora, today's conference call operator. Welcome to the Hydric and Struggles 2021 fourth quarter and fiscal year-end conference call. Joining today's call is the company's president and CEO, Krishnan Rajagopalan, and Chief Financial Officer, Mark Harris. The company has posted fourth quarter slides on the IR homepage of its website at hydric.com. Management encourages you to view the slides for additional context. Please note that in the materials presented today, management may refer to non-GAAP financial measures they believe provide additional insight into underlying results. A reconciliation between GAAP and non-GAAP financial measures may be found contained in the earrings press release. Also in the remarks, management may be making forward-looking statements and they ask that you please refer to the safe harbor language also contained in today's press release. Mr. Rajagopalan, I'll now turn the call over to you.

Thank you, Operator. Good afternoon, everyone. Today we announced an important financial milestone for Hydric and Struggles, achieving more than $1 billion in net revenue in 2021 with dramatically higher profitability and meaningfully exceeding consensus expectations. It is clear that with our strategy and the choices we've been making on our transformation journey, along with the benefit of some macro tailwinds, we are delivering exceptional results. Our intense strategic focus included aggressive expansion in 2021 as we, number one, gained market share and geographic scope in executive search with an industry-leading 12-month productivity of a remarkable $2.4 million per consultant in 2021. Number two, grew the value-add leadership advisory work of Hydric Consulting. Number three, saw significant revenue growth from our newest segment, On Demand Talent. And number four, made our first moves forward in developing an innovative tech-enabled digital offering. More to come on that later this year. All of this has us excited about Hydric's future growth and the opportunities for success. Our guidance for a record first quarter this year reinforces our confidence in our transformation in delivering for our shareholders. Today, I'll start with some highlights from our fourth quarter and year-ended 2021. Then I'd like to share some perspectives on the high-end differentiated on-demand talent business segment, which we entered into with the acquisition of BTG last April. Finally, before handing the call over to Mark, I'll close with some thoughts about how our three lines of business purposefully and powerfully reinforce each other, with each contributing to the growth and success of the others, thereby making the whole greater than its parts. Uniquely among our peers, Hydric is the only firm that is focused on the top end and accelerating this kind of wider and perpetuating multiplier effect. On the macro front, 2021 was a revolutionary year in terms of leadership and human capital. Around the world, the ways in which we led our organizations, how we did our work, and the effective functioning of our office environments and cultures were forever changed and amplified by disruptions from COVID. Companies today not only face a war for talent, even at the top end where Hydric plays, but they also face increasingly important new business imperatives, such as the well-being of their teams, first and foremost, diversity, a sense of fairness and inclusion, sustainability, and the primacy of the quality and scope of the human capital in their organizations, all in the midst of disruption to their business models. This massive disruption poses tremendous opportunity for Hydric. For example, just a year or two ago, it would have been hard to imagine that a hybrid work model would be successful for companies large and small, or that C-suite professionals could live in a city far from corporate headquarters, or that experienced executives would be needed on an on-demand basis for any number of interim or project-based assignments, such as an organization's IPO or digital transformation. At Hydric, we never forget our responsibility to serve and empower our clients to develop high-performing leaders, teams, and organizations. In executive search, Hydric won and closed more searches in 2021 than at any other time in our history, putting up extraordinary results with net revenue one and a half times last year's figure. This is the result of a number of factors, including not only the perseverance and industry-leading productivity of our professionals, but also the expansion of our global footprint plus strong demand from our clients around the world. Here's some additional color. First, we saw a lot of change at the top of organizations in 2021 due to different business conditions, changing leadership styles, and senior leadership turnover. This was true for placing CEOs as well as roles across the C-suite, including, for example, CTO, CFO, and supply chain executives. Hydric won an impressive number of assignments to fill these roles. Secondly, Hydric's corporate clients sought diverse talent. Last year, diverse placements tracked at 51% of our total placements in the U.S., and we expect this kind of trajectory to continue. At the board level, Hydric's placement of diverse directors was at 73% in the U.S. Third, the pace of business transformation continued to accelerate. New business models emerged, digital transformations continued, and themes like sustainability and ESG gained more traction, driving the needs for top talent across the board. We expect this to continue. For Hydric Consulting in 2021, we served clients across many facets of their human capital journeys, and key assignments reflected growing corporate needs in three primary areas. Number one, with the recognition that top talent is an imperative for success, we had strong demand from clients for Hydric's guidance on matters of leadership assessment and development, the shaping of future-ready leaders, and follow-on support in organization design. Number two, Culture assessment and culture shaping were critical as companies managed through hybrid and return-to-work environments and began to re-energize and realign their teams. And number three, D, E, and I. Clients looked for help defining and aligning on diversity strategies and embedding new ways of working that are equitable and inclusive. Expanding our geographic footprint where we find opportunities also front and center at Hydric. Last year, in executive search, we expanded via acquisition in Finland, and Hydric Consulting grew its international presence as well, specifically in Australia, Brazil, Canada, Germany, Singapore, and the UAE. Turning now to our third business segment, on-demand talent. With the acquisition of BTG, Hydric got on the map as a market leader in the growing on-demand talent space. As you know, many companies stumble at the integration of an acquired entity, but kudos to our Hydric team for making the integration of BTG seamless and accretive from day one. Not only has our on-demand talent business exceeded our financial expectations on its own, but we anticipate its impact on the organization as a whole will build significant value over the long run. On our on-demand talent capabilities set Hydric apart from others in the executive search business, and now allow us to play at the high-end and C-suite portion of rapidly expanding independent freelance or gig revolution. Our on-demand talent business helps companies quickly find executive talent to fill unexpected gaps or lend expertise to our client-specific issues, transactions, or transformations. Once our corporate clients recognize the power of our on-demand offering, sourcing senior-level talent for either interim or project work, many keep coming back to us to fill more roles. Broadly, in a recent survey, 85% of corporate executives plan to increase their use of independent talent in the coming year. We expect that the talent shortages we are seeing in the market will continue and provide an additional impetus to consider on-demand solutions. The demographics of the available talent to fill these on-demand roles is strong. While we play in the C-suite and executive space today, 41% of post-graduates in the U.S. are freelancing, and remarkably, over 50% of the U.S. workforce are projected to be freelancers by 2027. This big wave is dramatically changing the way in which companies work. With the availability of talent in the U.S. independent work sector increasing 34% to 51 million workers in total last year, It's a trend that is expected to continue. Hydric alone, among the large global executive search firms, is positioned to ride the wave with its on-demand talent capabilities firmly established. As we anticipated, the mutually reinforcing and complementary businesses we've combined uniquely at Hydric, where one business segment can provide performance accelerators for another segment, are working well and creating lasting value. When we can drive interconnectivity, such as leads on talent, assessment on leaders, teams and cultures, and new digital solutions, our overall success is redoubled. For example, in 2021, 70% of our partners and principals at Hydric Consulting were involved in selling at least one search. Reciprocally, approximately 45% of Hydric's consulting revenue included search support. Additionally, about 30% of on-demand talent's revenue came directly from the Hydric organization through internal referrals. This expanding cycle of collaboration is an engine for Hydric's overall long-term performance, making each of our business segments stronger as a part of the whole than it could ever be as a standalone effort. That is why finding terrific adjacencies like our on-demand talent business and the upcoming addition of innovative digital capabilities through our partnership with Eightfold AI, which we will be ready to talk about more fully later this year, lend so much to the greater success and greater value of the organization in its entirety. Each business line is reinforcing and helping to drive the success of the other. We think this sets Hydric meaningfully apart from others in our talent and human capital sector. Our diversification strategy is underway at Hydric and Struggles, and we are seeing the results. We do expect executive search business, still more than 80% of our total net revenues today, to continue on a path of aggressive growth. At the same time, our non-search business, Hydric Consulting, on-demand talent, plus other adjacencies still to come, is likely to grow even faster. It is exciting to look back and note that Hydric's non-search business has gone from just $61 million in net revenue in the pre-COVID year of 2019 to more than doubling to $134 million in 2021. We think this deliberate approach to the diversification of our business model will prove valuable to shareholders. 2021 was an outstanding year for us, achieving efficiency and productivity that showed up in the success of our firm's culture, as well as in our expanded market share. profitability metrics, and margins. In addition to financial results, we also made important strides in ESG, publishing our first-ever ESG report, providing an in-depth look into our sustainability efforts while also outlining a firm commitment to offset our carbon impact. Hydric is the first in our industry to issue such a report, and I hope you'll take a look at it online at hydric.com. On our own human capital front, I'd like to note the appointment late last year of Tracy Heaton as Hydric's new chief legal officer and corporate secretary. Tracy comes to us most recently from a leading global payments technology company and brings to the firm significant M&A and international experience. In more news from our own C-suite, earlier today we announced the addition of Cecilia Nelson-Hert as our Chief Diversity Officer here at Hydric. Cecilia joins us from a leading global beauty brand and brings her proven DE&I and strategy experience to further strengthen our firm's diversity and inclusion efforts and drive deeper employee engagement and community outreach. We continue to maintain a strong culture of developing terrific talent in-house and promoting from within. I'm pleased to share that we recently named 23 exceptional individuals to partner and 29 to principal, making this one of the largest classes of principals promoted in recent years. These are incredibly talented colleagues who already appreciate what it takes to run fast and deliver results. I could not be more excited about the quality of the team at Hydric. In closing, the results we released today show the impact of our deliberate strategic focus on growth and diversification and the tremendous resiliency and professionalism of our team here at Hydric amid an environment where demand for our services and offerings is strong. I'm proud of the amazing agility and exceptional capacity of our professionals. We ran hard in 2021, and we entered 2022 with a solid outlook to the future. At Hydric, we're on our front foot moving forward. With that, over to Mark.

Thank you, Krishnan, and good afternoon, everyone. Welcome to our year-end and fourth quarter earnings call today, one that's very special given our achievements. Krishnan spoke about the high-level accomplishments, execution, and vision, so allow me to overlay that with some financial context around the figures we reported today. Before going on to our financials, let me start by reinforcing several of the revenue drivers behind our $1 billion revenue achievement in 2021. First and foremost, our team's relentless focus on driving growth, which cannot be understated. Second, how we coupled this with our increased cross-collaboration and advances in value-added products and services we deliver on for our clients. And third, how all of these tied to our investment in digital innovation. These are key factors that have led to our outsized productivity, market share increases, and record fourth quarter and year-end 2021 results, which we hope to continue into and through 2022. Please have no doubt, we still have many miles to go to the finish line of where we want to be. With that, I'll start this afternoon with a run through some of the key year-end performance comments given the incredible year that Hydric team delivered, then roll on into our fourth quarter financial results, make comments on a few balance sheet items, share a Q1 outlook, and finally close with some perspective on our shareholder value creation. Following that, we're happy to take your questions. To say our 2021 year-end results are impressive just does not do the performance justice in terms of the year that we had. The revenue contribution from all three of our verticals was record-setting or near record-setting with incredible work being done by our teams. Revenue of just over a billion dollars is a monumental achievement for Hydric and we're all very proud to be a part of it. However, this is thus not a normal revenue record-setting year. Historically, pre-COVID, our revenue grew around 4% per annum on average for the last 20 years, And right before COVID, our five-year revenue growth was 8% per annum on average. 2021, however, is a special year where revenue increased 61% over the prior year. But to put this in perspective, given 2020 was a recession year, when we compare 2021 to our previous record of 2018, we beat that by 40%. When looking at our year-over-year achievements, we noticed in executive search, we saw confirmations increased by 45%. Our upticks increased 43%. our billings increased 52%. In Hydra Consulting, we saw confirmation values increase 46%. Average client value increased 14%. Search referred work was up 48%. And the value of Hydra Consulting confirmations from search collaborations were up 52%. Every measurement has demonstrated the incredible achievement our team delivered this year, but nothing shows us more than seeing our adjusted EBITDA increase 89%, and adjusted EBITDA margins expand 210 basis points in 2021 over the year before. As for our shareholders, we're very happy to share with you our annual adjusted diluted earnings per share of $4.11, nearly 40% ahead of our 2007 record of $2.97 per share. Congratulations to everyone on this call. Whether you're an employee, client, shareholder, or stakeholder, we thank you so much for your contributions and support in 2021, a pivotal year for Hydrocon Struggles. With that, now let me turn to the quarter. Our net revenue reached $285.5 million, our fifth consecutive quarter of record growth, which was remarkable 77% higher than the previous year. Net revenue growth was driven by all regions in executive search, Hydra consulting, and the successful integration of our on-demand talent, demonstrating that we're hitting on all cylinders. It's truly an exciting time in our growth cycle, which we see continuing into the near future, as our guidance will provide. Let me give you some insights on the performance by turning to our three business segments. In executive search, net revenue was $243.4 million in the fourth quarter of 2021, 66% higher than the prior year. Looking at our search results geographically, all regions demonstrated growth. The Americas region was up by 75%, Europe was up 40%, and Asia grew by 66% when compared to the prior year quarter. All industry practices showed growth year over year as well. combining for an increase in billings of over 50%. With all that regionally and industrial sector success, we put an astonishing 2.4 million productivity per consultant on the boards in 2021. As a reminder, in 2019, just before the 2020 recession, we saw our year-end productivity at $1.7 million per consultant. However, when looking ahead at what we expect to become the post-COVID norm, we believe productivity will modulate between $1.8 and $2 million per consultant. when factoring in promotions we recently announced, new hires, and general expectations of sustainability, which will still be a substantial improvement from our pre-COVID levels of 2019. With regards to Hydra Consulting, their fourth quarter net revenue rose $18.5 million, up 26% compared to the prior year. As Christian mentioned, consulting continues to benefit from collaboration within the company, while also bringing new business opportunities to executive search and our on-demand talent segment as well. Our greatest gains in the quarter were in the areas of team and board effectiveness, followed by culture shaping and leadership development and leadership assessment. It's gratifying to see our ongoing strength in Hydra Consulting backlog numbers, with year-end backlog up 27% since December 2020. We believe Hydra Consulting's momentum sets us up nicely for more success in 2022. Finally, with regards to on-demand talent, This business has exceeded expectations yet again with revenues of $23.6 million in the fourth quarter. This is more than 80% higher than last year when BTG was a standalone company. On a fiscal year basis, we saw large account penetration increase more than 120% and project wins increased 45% with higher than normal average project size when compared to the previous year. Given the large total addressable market for Hydric's on-demand services, coupled with the results already achieved by this business segment, We believe we will see growth here for the foreseeable future. Now let me turn to operating expenses. With record-setting quarterly net revenue and higher volumes of work, naturally this comes with higher compensation and other variable costs, which was expected and a positive when overlaid with the revenue performance. For example, we saw consolidated salaries and benefit expense of $204.1 million in the quarter, more than 1.5 times higher than the prior year, but slightly lower as a percentage of net revenue at 71.5% in the fourth quarter of 2021 versus 75% for the same period last year. When looking at general administrative expenses, we saw $46.9 million in the fourth quarter compared to $25.9 million in the prior year quarter. This increase in the fourth quarter of 2021 stemmed largely from the one-time adjustment of $11.4 million to the earn-out payment due to higher expectations resulted from our on-demand talent segment. which should be received positively. In short, this segment is outperforming our initial expectations, and we needed to increase the earn-out amount accordingly. As a percentage of net revenue, G&A expense was 12.4% for the quarter after backing out the earn-out impact, which was a strong improvement over the 16.1% shown in the prior year quarter. Finally, we saw cost of services expense increase to $18 million in the fourth quarter, compared with $1.5 million in the previous year quarter, which was due to the acquisition of on-demand talent. As a reminder, this is where we expense the payments to consultants who perform project and interim work in on-demand talent. We're very pleased to report our adjusted operating income of $28 million in the fourth quarter of 2021, more than twice that of $12.8 million in the prior year. We like what we're seeing in our long-term trend of expanding margins when we look at our trailing 12-month consolidated adjusted operating margin, which is at an all-time high. except for last year's disruption due to COVID. Since 2014, our margins have been building steadily over the last 31 quarters, expanding a full 790 basis points over that timeframe, an achievement we're very proud of at Hydric. This has translated to adjusted EBITDA of $36.8 million and adjusted EBITDA margin of 12.9% in the fourth quarter of 2021, an increase of 70% when compared to adjusted EBITDA of $21.7 million, with adjusted EBITDA margin of 13.5% in the previous year's quarter. We finished the fourth quarter with an effective tax rate of 30.3%, leading to adjusted net income of $20.8 million, up 78.5% from the previous year quarter, and adjusted diluting earnings per share of $1.02, up from $0.59 the previous quarter, or an increase of 73%. On the balance sheet at December 31st, we ended the quarter with cash and cash equivalents and marketable securities of $545.2 million, which is over $200 million more than the same time last year. As we've discussed before, the company's cash position typically builds through the year as employee bonuses are accrued. Employee bonuses are paid out in the first quarter along with their associated tax and related costs. Our balance sheet, coupled with our renewed and expanded Hydra credit facility of $200 million, shows we have the strength and flexibility to meet our future investment objectives to pursue continued growth. We ended the year with nearly $750 million of liquidity, which again, was another record for Hydric. Now let me turn to the first quarter 2022 guidance. Given the continued strong Hydric projected volumes and effective productivity we're seeing so far, and with the macro tailwind still supporting our efforts in the marketplace, we believe our first quarter net revenue will be in the range of $270 to $280 million, which would be a hydric record for the first quarter and set up solid momentum entering into the new year. However, I would be cautious to conclude that this level could sustain for the entire year, as we anticipate some moderation in the second half of 2022 in executive search. But irrespective, we still expect this to be a strong year for hydric and struggles. Of course, we'll have more insights on these and other developments, including any margin compression due to wage inflation, market trend shifts, and investment initiatives in our next quarterly call in April. Please be reminded our guidance can be impacted by unforeseen inflation responses by central banks, global conflicts, and other unforeseen events, but this management team will continue to monitor those situations and ensure we're always plotting the best course through any challenge. With regards to our valuation, please keep in mind, while our foundational businesses, namely executive search and hydro consulting, are valued on an adjusted EBITDA and adjusted EPS multiples, the value of our on-demand talent business would be missed using those same metrics. as that segment is in a high growth cycle with negative to low EBITDA and adjusted EPS. This is why our on-demand talent peers are valued on a revenue multiple at this point in their life cycles. We believe that until on-demand talent market matures, the proper way to view our diversified strategy is a sum of the parts method, as this would more accurately reflect the value of Hydric in the aggregate. In conclusion, as Christian and I noted at the outset, we're very pleased with our performance. We are successful delivering against our diversified strategy and have shown tremendous year-over-year growth, which in turn is providing us with the flexibility needed to invest further in future value creation. We've been implementing our strategic initiatives across our core search and consulting businesses, while also expanding into growth areas through our on-demand talent acquisition. In addition, while it's still early days in our partnership with Eightfold AI, we are excited about the new digital capabilities that we are investing in, which we'll share more on later this year. And bringing all these initiatives together and driving a continuous, virtuous cycle, we're creating a strong springboard for Hydric's continued success. With that, Chris and I would be happy to take your questions.