Heidrick & Struggles International, Inc.

Welcome to the third quarter 2022 Hydric and Struggles earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. As a reminder, today's conference is being recorded. It is now my pleasure to turn the conference over to Suzanne Rosenberg, Vice President of Investor Relations. Please go ahead, Ms. Rosenberg.

Thank you, and welcome to our 2022 third quarter conference call. On today's call is our President and CEO, Krishnan Rajagopalan, and Chief Financial Officer, Mark Harris. We posted our third quarter slides on the IR homepage of our website at hydric.com, and we encourage you to view these slides for additional contact information. Please note that in the materials presented today, we may refer to non-GAAP financial measures that we believe provide additional insight into underlying results. A reconciliation between GAAP and non-GAAP financial measures may be found in the earnings press release. Also in our remarks, we may make certain forward-looking statements. We ask that you please refer to the Safe Harbor language also contained in today's press release. Krishnan, I'll now turn the call over to you.

Thank you, Suzanne. Good afternoon, everyone. We are pleased to report another set of strong results on both the top and bottom line compared to the record performance delivered last year. This was achieved while we continued to make investments in digital assets and weathered unfavorable foreign exchange rates, along with an inevitable market slowdown. Profitability neared historic highs. Specifically, our nine-month year-to-date operating income of $92 million, which is already approaching full year 2021's operating income, of $98 million. Third quarter operating margins remain robust at 11.1%. And on the bottom line, we achieved third quarter diluted EPS of $1.02. On the top line, constant currency net revenue of $266 million met our expectations and marked a new milestone as the highest third quarter of revenue in the company's history. In addition to these strong results, We ended the third quarter with our highest cash balance of $456 million, which provides us with great financial flexibility as we continue to invest in our diversification strategy, including the development of our digital assets. As we've discussed for several quarters now, the pace of business has been extraordinary over the past two years, and as we expected, we're now beginning to see a market slowdown. However, at this stage, we believe we'll continue to see revenue above the record years we delivered pre-pandemic in 2018 and 2019. As Mark will discuss in his comments, our fourth quarter guidance reflects the market slowdown, macro concerns, and the normal seasonality of our business. The advantage of our diversification strategy, which I'll discuss more in a minute, is that it's anchored in a strong core executive search business and supported by two large and growing complementary non-search businesses, on-demand talent, and hydric consulting. Each of these segments continue to operate in higher demand environments, and we intend to invest appropriately behind these growth opportunities. We believe on-demand talent will continue to grow in relevance and demand, particularly as the labor market is still very tight and companies are operating in an environment where variable versus fixed costs are priorities. Also, historically, the on-demand talent business has been better at weathering economic downturns. This was demonstrated most recently during the pandemic, when this segment bounced back in late 2020 following a relatively short dip. Similarly, hybrid consulting continues to operate in a higher demand environment. The tight labor market and a growing prioritization on succession planning is driving companies to invest more in leadership assessment and development of future leaders. versus solely relying on an inflow of new external talent to build their leadership bench. Bigger picture, beyond a quarterly snapshot, we continue to see that the world of work is changing on a global scale. Whether we're talking about mobility and hybrid workplaces, the need for agile leaders, identifying, assessing, and developing future-ready leaders, DE and I imperatives, and many other leadership and workplace shifts, Importantly, we believe Hydric is strategically positioned to address these various areas and our trusted premium brand gives us the permission to introduce new offerings and advise our clients to help solve for these increasingly complex issues. It's truly gratifying that our differentiated strategy of building a virtuous cycle of leadership offerings working in tandem and synergistically across our business segments is resonating in the marketplace with an increasing number of clients availing themselves of multiple services. In fact, year-to-date, over 40% of Hydric Consulting revenue was driven by referrals from executive search, and roughly 17% of on-demand talent was driven by the Hydric channel. We're building positive momentum for the future as our business becomes increasingly diversified with expanding cross-collaboration opportunities that drive not only our client success, but also create long-term shareholder value. Our strategy is focused on growth and diversification and reflects what our clients are asking for, broader, more comprehensive solutions to their talent and human capital challenges at the executive level. Each one of our business supports the other in a very natural way. Clients in need of executive search also often have near-term capacity challenges that can be solved with interim or project-based on-demand talent. At the same time, clients looking for new talent particularly in this type market, are also looking for ways to better assess and develop their existing and future leaders, as well as strengthen their workplace cultures and organizations overall. In addition, clients are looking for more powerful ways to leverage data and analytics to better attract, retain, develop, and predict the potential of their talent. While our business has historically had cyclicality because of its dependence on executive search, We believe our non-surge businesses have counter-cyclical attributes. So as these businesses grow, we'll expect to be more resilient in future cycles. We'll continue to build out our global platform to bring an even fuller suite of leadership advisory services to our clients, thereby creating broader, more sustainable engagements while helping them with their more pressing challenges. In addition, we remain focused on developing digital assets that can help bring visibility to our clients on key leadership and development topics, and transform how companies support their leaders. Now let me turn to each of our segments. Executive Search delivered a strong third quarter performance with constant currency revenue, slightly up compared to its record performance last year. Importantly, we believe we continue to gain market share and maintain an outstanding trailing 12-month productivity of $2.5 million per consultant. As we've discussed on prior calls, we expect productivity levels to settle above pre-pandemic levels, around $2 million per consultant, reflecting sustainable gains from greater automation and efficiencies in the hiring process. As anticipated, given the market slowdown, we did see global confirmations decrease in the quarter led by the Americas. However, year-to-date confirmations were slightly up from last year's incredible performance. Globally, we remain focused on growing search efficiently by optimizing our go-to-market strategy and growing through deepening client relationships in all industries. Regionally, we continue to assess expansion opportunities in new geographies and industry sectors and partner with our clients on burgeoning demand in areas such as DE&I, sustainability, in a variety of tech and digital hybrid roles that we continue to see emerging in every industry practice. Next, turning to on-demand talent. This growth segment continues to show great strength with year-to-date revenue up 60% to $69 million compared to $43 million in 2021. When looking at a trailing 12-month basis, we saw revenue grow to over $92 million, demonstrating the strength of this business. on the Hydric platform. Clients' response continues to be very positive as companies look for more leadership liquidity, whether that's through on-demand access to interim executive leaders or leadership on strategic project work. Overall, the on-demand talent space has a high TAM that continues to grow as clients increasingly see the need for fast, flexible talent. Key drivers of this market growth include increased ongoing client comfort with remote work, a tight labor market driving the need for faster and more flexible talent solutions, a growing awareness and openness to the on-demand model becoming enterprise-wide and at the C-suite level, and a changing talent landscape with significant growth in the number of high-end talent choosing to go independent. External sources who track this indicate that independent workers grew 34% in 2021. We expect organic growth to continue as the market grows and client awareness continues to expand. Building on our leadership position in the space, we're reinvesting in future growth, giving the accelerating market opportunity. We're focused on additional investments in sales and marketing, as well as geographic expansion outside the US and UK. We also expect to benefit from the accelerated growth through the Hydric Search Channel as we add resources to this side of the business. In Hydric Consulting, we continue to focus on delivering impactful solutions that develop future-ready leaders, organizations, and cultures. In the third quarter, this segment delivered net revenue of $19 million, up 14% on a constant currency basis. Growth was seen across nearly all our services and demonstrates our ability to drive higher revenue by expanding client relationships across multiple areas as we continue to increase our brand awareness and cross-sell more of our offerings. Importantly, we continue to see strong demand for our services as clients wrestle with strategic questions around talent, such as, do we have the right leaders in place? Who are our future leaders? And does our culture align with our strategy and purpose? In addition, we're advising clients as they confront return to office issues and how to navigate a challenging labor market and economic headwinds. Lastly, another piece of our diversification strategy and a key future growth area for our firm is the development of our digital assets. Today, many organizations lack the visibility and leadership intelligence systems they need to drive business impact. Current leadership solutions are often manual and fragmented, Leadership data is limited. Companies lack an organization-wide view of the experiences and capabilities of their leadership. And as a result, critical needs, such as succession planning, don't scale, and companies can't effectively identify or map leaders to roles, drive internal mobility, or build programs to address impactful development needs. We have been working actively with our partner, Eightfold AI, on our first digital asset to address these unmet needs. We have named it Hydric Navigator, and we've been beta testing it with clients. The beta program has been positive with strong initial client reception. We're now beginning to expand our beta program to several additional clients. The feedback from our early adopters will be incorporated into our product roadmaps over the course of the next six to nine months as we look to a full product launch. We're excited about our progress and positive market response to date, and look forward to sharing more as we advance our work over the coming quarters. In closing, our results reflect continued growth and successful execution, and we're heading in the right direction. With executive search as the strong cornerstone of our portfolio, we look forward to seeing faster-paced growth from our non-search businesses, hybrid consulting, on-demand talent, digital assets, and other adjacencies still to come. And as we continue on our multi-year journey, we are on an ambitious path to transform Hydric and Struggles into the world's leading leadership advisory firm, providing a new generation of business services that will enable companies to achieve higher performance from their executive-level talent in a fast-changing world. Before I turn the call over to Mark, I'd like to close with how proud I am of the contributions from our global team. In November, our team will participate in our annual Global Day of Service, where we as a firm give back to the communities in which we serve. I want to thank all of our employees in advance, not only for their time and commitment to this important event, but also for their hard work and many contributions they deliver each and every day towards advancing our clients' success and generating long-term shareholder value. With that, I'll turn the call over to Mark.