Heidrick & Struggles International, Inc.

Welcome, everyone, to the Hydric and Struggles Q1 2023 Earnings Conference Call. To ask a question today, please press star 1 on your telephone keypad. 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 2023 First 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. 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 gap measures may be found in the earnings press release. Also in our remarks, we may make certain forward-looking statements based on our current expectations. Such statements may involve risks and uncertainties that may cause actual results to differ materially. We ask that you please refer to the Safe Harbor language also contained in today's press release, as well as our filings with the Securities and Exchange Commission for information concerning the risk factors that could affect the company. With that, Krishnan, I'll now turn the call over to you.

Thank you, Suzanne. Good afternoon, everyone. As anticipated, we saw a slowdown in the first quarter revenue from a year ago, reflecting broader macroeconomic headwinds. Importantly, we acted deliberately and adjusted our costs accordingly, which allowed us to still hold strong first quarter adjusted EBITDA margins of nearly 12%. While we expect to see some continued volatility in our markets based on our guidance, we believe will continue to navigate through these complexities' prudent work. Turning briefly to our first quarter results, revenue for the quarter was $239 million, which was in line with our previously issued guidance, albeit at the lower end of the range. Adjusted EBITDA was $27 million, adjusted EBITDA margin was 11.5%, and diluted earnings per share was 76 cents. In terms of strategic achievements, we completed the acquisition of Atria in the on-demand talent space in the first quarter, and on April 1st, we completed the acquisition of Business 4.0, or B4Z, in hybrid consulting. Our strategy remains on track as we continue to leverage our strong balance sheet to focus on growth and diversification while serving our clients on their most pressing leadership challenges at the executive level. Before I provide some color on each of our business segments, I think it's important to take a step back and acknowledge that since our last call in February, there have been some new and increasing macroeconomic challenges. Sustained higher interest rates are continuing to pressure certain industries, including financial services and technology. In addition, recent issues of confidence in the banking sector have presented both new challenges and opportunities. For example, at Hydra, we have a sizable financial services practice, and while we've seen some causes in the banking sector, other areas such as wealth and asset management and insurance remain positive. Naturally, clients are prioritizing against the various macro externalities, just as we are. We're seeing that the uncertainty that organizations are facing is creating delays in decision-making. but it also emphasizes the importance of having effective leaders in place to drive critical transformations and position companies for resilience in a world of constant change. In addition, while we're extremely cognizant of the current operating environment, we also see significant opportunities, particularly given the diversification of our business across executive search, consulting, and on-demand talent. Opportunities are being driven by several factors including the ongoing digital transformation of businesses, new role creation across industries. For example, in financial services, new roles comprise over 50% of our new engagements. The critical importance of talent recruitment at the top. In fact, a recent industry report cited the number of CEO changes that U.S. companies alone jumped in February this year, reaching its highest point since January 2020. With the ongoing global economic uncertainty, an acute need remains for companies to turn to high-end independent talent with skills enabling them to pivot adeptly in today's increasingly competitive business environment and rapidly changing markets. Ongoing need to focus on change management, especially in the face of layoffs, and maintaining strong cultures to keep workforces engaged, motivated, and focused on purpose. As companies prepare for some turbulence ahead, we believe we're well positioned to maintain our market leadership position in executive search while continuing to take strategic actions within our adjacent businesses and implementing strong operating discipline. Speaking more broadly, while we do anticipate a slowdown in executive searches here, we are expecting to drive growth in both on-demand talent and hybrid consulting. Simultaneously, we are laser focused on the operational excellence we've been delivering over the past several years across each of our business lines and regions and remain confident in our ability to successfully manage our business through these fluid and dynamic times. Now let me turn to each of our business segments. In executive search, we continue to see a solid market given the level of change at the top as companies adapt to a new and changing operating environment. Increasingly, we see that clients want exclusive and holistic relationships, which plays well to our positioning and the diversification of our business. Hot topics in search include ESG, particularly with a focus on sustainability and renewable energy sources, cybersecurity, and AI. We continue to benefit from our distinguished brand, global presence, and best-in-class service we provide to our clients. These assets, together with our nimble and strategic team, are driving this segment to continue to operate efficiently despite some headwinds. In addition, we're encouraged that our backlog indicates a stronger second quarter. Shifting to on-demand talent, year-over-year revenue growth in the first quarter was primarily driven by the acquisition of Atreus, which closed on February 1st. From a strategic perspective, Atreus gives us greater geographic scope and serves as a springboard to establish a strong presence in continental Europe. The integration of Atreus is now well underway with our integration management office, executing on a strong roadmap. From a go-to-market perspective, we've already identified several cross-collaboration opportunities. While we continue to see high demand in our on-demand talent segment, the pace of decision-making has slowed, impacting revenue and reflecting corporate caution against the macro uncertainty. We have since seen volume rebound in recent months, which we expect will drive growth in the second quarter. Specifically, we're seeing growth in demand for interim executives driven in part by the shifting needs and executive skills to weather a changing environment. There is no doubt that on-demand talent is a formidable force now, and for the future of work, not only for employers, but for workers as well. A recent Wall Street Journal article cited that an incremental 1 million Americans alone are working part-time voluntarily from the prior year. With this segment's growing demand, we'll continue to increase its marketing and sales resource while opportunistically expanding its geographic footprint. In hybrid consulting, our clients remain engaged with us in accelerating their performance culture, particularly as it relates to talent retention, strategy, purpose, and execution. While demand remains strong and our new bookings were consistent with internal expectations, we did see some slowdown due to protracted decision making. Our strategy of partnering with our clients on longer and deeper journeys has kept us close to the top of the house, providing us with a positive outlook for the year. We're also doubling down on our purpose and culture work in Hydric Consulting. Today, more than ever, we know leaders are focused on purpose and culture, not only to increase employee engagement, but also to drive strategy implementation and accelerate business transformation. Critically, companies are engaging in the alignment of purpose, culture, and strategy to accelerate performance, create productive, engaging workplaces in hybrid environments, and retain top talent. On April 1st, we completed the acquisition of B4Z, a London-based consultancy that specializes in working with companies to develop and implement purpose-driven change. With B4Z, we will complement our existing culture shaping practice to offer a broader, more robust set of leadership advisory solutions as we work with clients to help them link purpose and strategy to leadership and culture, and further support their efforts to develop future-ready cultures and organizations. As we discussed on our last call, we continue to build out our digital assets. We're in beta mode with Hydric Navigator, and we're working with several clients to implement and operationalize the platform. We also continue to have productive discussions with clients in our pipelines. As we previously said, Hydric Navigator will require some time to build a distinguished user base. We expect bookings to begin in early 2024, translating the revenue over time, as with most subscription models. As signed contracts increase and total value rises, we expect the platform to meaningfully contribute to top and bottom line results. Overall, as a firm, we continue to advance our exciting transformational journey towards building and offering our clients the next generation of talent and leadership advisory service offerings, which will help their companies achieve higher performance levels through their leaders and teams. While we often slice our business into search and non-search when speaking on these types of calls, from a strategic perspective, we're focused on helping our clients in two primary capacities. First, talent acquisition, and second, effectiveness of leaders, teams, and organizations. The former includes our executive search and on-demand talent businesses. The latter includes our hybrid consulting segment and currently under development digital assets that will further support our ability to provide clients with a systematic and holistic approach at scale to manage and develop their leadership teams as an asset. When we look at these two areas, certain segments and service offerings present higher growth opportunities and are vital in our continued efforts to diversify our revenue stream. Importantly, these aren't new shoots of growth, but rather accelerating shoots in businesses that are already a part of our strategy. We will continue to invest in these prospects both organically and inorganically as supported by our strong balance sheet and cash generation capabilities. From an inorganic perspective, we have a proven track record of success as a result of our due diligence process predicated on identifying opportunities that are aligned with our strategy and our culture while maintaining our strong financial discipline. For example, sustained demand for on-demand talent services and culture purpose-related consulting fueled our recent HRAFs and B4Z acquisitions. We believe these inorganic investments will expedite our attainment of desired growth rates in these segments, and we remain opportunistic with our M&A practices, particularly in the event valuations turn more favorable due to economic uncertainty. We also see significant opportunities for reinvestment across our business, more specifically within our portfolio of digital assets spanning all three segments, in addition to our standalone product, Hydric Navigator. Here, we will continue investing R&D dollars towards these assets rather than looking to acquire them as we are truly developing unique solutions critical to address complex client issues. We look forward to continuing the strategy of supporting these high-growth opportunities within our company to further diversify our business. To conclude, I'm pleased with the performance of the team in the first quarter, particularly given the broader macroeconomic challenges. Our results speak to our strong operating discipline, nimble execution, and strength of our diversification strategy. As we progress through 2023, we remain focused on advancing the growth and diversification of our business, and we're excited about our current and future investments that will drive sustainable long-term growth and deliver value to our stakeholders globally. I'd like to now turn the call over to Mark.