Heidrick & Struggles International, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Hydric and Struggles Q3 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. 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 1 on your telephone keypad. And if you would like to withdraw your question, simply press star 1 again. Now, at this time, I'd like to turn things over to Mr. Steve Horowitz, Interim Head of Investor Relations. Please go ahead, sir.

Thank you, and welcome to our 2023 third quarter conference call. Before we begin, we'd like to congratulate VP of IR, Suzanne Rosenberg, on her newborn and a wonderful addition to our Hydric family. While she is on maternity leave for the quarter and year end, I will be serving as the interim head of IR, having been placed through the on-demand talent group. Moving on to the business of the day, 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 to our prepared remarks. Please note that in the materials presented today, we may refer to non-GAAP financial measures that we believe provide additional insight into our underlying results. Reconciliations between these non-GAAP financial measures and most comparable GAAP 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 now turn the call over to you.

Thank you, Steve. Good afternoon, everyone, and thank you for joining us today. Before we turn to our results, I'd like to take a moment to acknowledge the terrorist attacks on Israel that occurred a few weeks ago and the tragic events continuing to unfold in Israel and Gaza. Our thoughts go out to the countless people whose lives have been lost and changed forever. As a firm, we condemn all acts of terror and violence and reject all forms of racism and hate. We continue to focus on ensuring the safety and well-being of our colleagues and supporting friends and families around the world who've been impacted by these devastating events. Now turning to our financial results. We're very pleased with our third quarter results, where we delivered 263 million of revenue, which was at the upper end of guidance, and within a million dollars from being the largest third quarter in our history. Our revenue was 3% stronger than last year's third quarter, a return to year-over-year growth. With our continued focus on robust profitability, we're also proud to have achieved our 13th consecutive quarter of double-digit adjusted EBITDA margin. Our execution this quarter was impressive, especially given the uncertain macro environment in which we have been operating. Clearly, geopolitical risk has also meaningfully increased over the past few weeks, which will make our markets harder to navigate, but we're prepared to do so, just as we have in the past. It's important to note, however, that while we've historically demonstrated our ability to execute in difficult environments, these factors, among many others, make it difficult for anyone to accurately predict exactly what business conditions will look like over the coming few quarters and beyond. In response to current conditions, our clients are creating a wide range of scenario planning expectations based on a range of outcomes, as we are as well. With that as the backdrop, I want to be explicitly clear that regardless of how the economy moves in the short to medium term, we'll remain relentlessly focused on executing our one hydric strategy, As I mentioned before, this strategy encompasses the two main areas we focus on with our clients as their global leadership advisor. First, we bring the best talent to their companies, whether it's permanent executive-level talent or on-demand talent. And second, we help leadership and organizations be more effective through our consulting and now our digital offering. In doing so, we are continuing our decades-long position as a global market leader within executive search, while also investing in the diversification of our product offerings. Alongside our executive search services, we have a clear set of diversified solutions, which includes offerings in on-demand talent, Hydric Consulting, and the relatively soon-to-be contributor, Hydric Digital. These diversified solutions now represent nearly 25% of our revenues, providing higher growth potential for the broader Hydric and Struggles enterprise, while also beginning to lessen the impact of revenue cyclicality that have always existed within Executive Search. These diversified solutions also make us a stronger partner to our clients as we're able to provide them with a more comprehensive suite of talent, leadership, and human capital offerings. Critically, our diversified approach is more important than ever. Our clients' talent and human capital needs are continuing to grow and evolve and at a much faster pace. For example, rapid business transformations, including more recent AI-driven ones, are putting even more demands on leadership talent. Topics such as cybersecurity and sustainability are growing in importance for boards and companies. And there's a continued push-pull around leader and employee expectations and culture related to remote, hybrid, and traditional workplace environments. As our clients navigate through these needs, we're working closely with them, advising them on these issues, and providing them with a set of integrated talent and human capital advisory services in ways that previously have not been available to them. Now turning to each of our businesses. Beginning with executive search, there has been a moderate slowdown, reflecting macro and portfolio mix changes within the verticals in which we operate. While global technology services and financial services experienced some headwinds, all other practice groups grew year over year. Generally, the search business has been somewhat stabilized over the last few quarters, and our pricing remains strong. Demand has been more resilient with CEO, divisional CEO, supply chain, financial officers, and board of director roles. Now, as we talk about demand stabilization, we should keep in mind that the last few years have included an abnormally low demand period during the pandemics. followed by an abnormally high demand environment as companies began to refocus on future leadership needs. To more effectively measure our progress, it makes sense to take a longer-term view and a more comprehensive look at the growth patterns. From the beginning of 2017 until now, we've delivered a very respectable 7.5% compound annual growth rate. Additionally, the business has been meaningfully profitable, producing north of $50 million in adjusted EBITDA in eight of the last 10 quarters, including nearly $52 million this quarter. This profitability is very important to us as it helps us drive investments into our diversified solutions. Turning to our diversified solutions. In on-demand talent, we're very excited that our strategic acquisition of Atreus continues to drive outsized growth, and we now have a larger presence in Europe as a result of the acquisition. Additionally, demanding the Americas is showing strength. As I mentioned last quarter, we realigned our sales efforts to more directly pursue targeted market opportunities, and this realignment has enabled us to focus on the large talent constraints impacting our clients in areas such as AI, HR, CFO, and CISO roles. For example, we're seeing an increased number of opportunities and roles for AI business applications, for interim finance leaders, for event-driven strategic implementations, and for leadership in uncertain situations. While the labor market remains very tight and we're able to fill these interim positions effectively because of our expansive network of on-demand talent. At the same time, talent application volume is at the highest level ever. Diving deeper into the tight labor market, our ability to combine executive search and on-demand talent is one powerful illustration of our One Hydric strategy, where we're providing our clients with an expanded set of complementary talent offerings. For example, if a company is rapidly expanding, they may have difficulty quickly filling all of their positions. By partnering with us while they're working towards the placement of a permanent executive, they can also tap into our vast network of senior independent talent to fill vacant roles on an interim basis. In addition, there are numerous opportunities to help with high-priority project-related work. Another key component of our diversified solutions offering is the Hydric Consulting segment. As a reminder, the focus of our consulting business is to help clients with leadership assessment and development, to help them align around purpose, culture, and strategy, and to provide pragmatic DE&I solutions. This quarter, the consulting business achieved solid organic year-over-year growth and inorganic growth via the Business 4.0 or B4Z business. As I mentioned last quarter, our backlog was fairly encouraging, and that strength continued through the third quarter. We did see some of those projects that were on hold begin to flow through the business, and that execution has been a positive driver of our revenues. In addition to the nice growth of confirmations compared to last year, we increased our consultant headcount from 72 to 90. This helped drive the meaningful revenue growth we achieved compared to last year through purpose-driven culture and leadership projects. As part of the OneHydric strategy, and similar to our on-demand talent business, a significant amount of these projects were referred by our surge business. And finally, I'll discuss Hydric Digital. As we know, this business has the opportunity to be a large contributor to our diversified solutions, albeit further down the road. We feel strongly that the opportunity for our digital offerings, especially Hydric Navigator, will be significant. When companies take a systematic approach to viewing their talent, they can make better leadership decisions. Whether it's in identifying leaders to promote internally, more effectively aligning leadership talent to business needs, retaining top talent, ensuring that diversity, equity, and inclusion goals are being met. Our offering enables companies to maximize the value of their human capital. To that end, we're excited to share that we converted one of our first early access partners from our Hydric Navigator pilot program into a three-year subscription. This is great early proof of concept success measure. Looking ahead through 2024, we'll be focused on our early adopters and we're responding to their feedback with periodic opportunities to convert them into subscription clients. We're excited that the feedback for Navigator has been universally positive. The success of the digital offering has also allowed us to target higher-volume assessment engagements for Hydric Consulting. Again, we're still very early in our Hydric digital business journey, but we're excited by some of our early successes. Now, you've all heard me speak quite a bit today about the One Hydric Strategy and how all our businesses are strategically linked. Before we conclude, I'll share a client example that illustrates how our different businesses work together to provide a more diversified, comprehensive solution. This example is that of a large company that recently IPO'd. Their goals were to drive expansion into new markets, accelerate the pace of change and innovation, transform their culture to pursue more strategic growth opportunities, reshape their leadership team, and further globalize their business. Our search team introduced the client to our consulting team to perform assessments on potential COO successors from within their organization. After conducting the assessments, they decided that they would continue their search externally with us. The comprehensive nature of our approach coupled with our clear analysis gave this client a the confidence in our ability to be their leadership advisor, and has led to a stronger partnership. We now have multiple projects in place with them to drive organization-wide culture change, executive team acceleration, and CEO succession planning. This example really gets to the heart of what we are accomplishing with so many of our clients, which is to be their leadership advisor, guiding them to be a stronger company. So in closing, We continue to be a market leader and we're relentlessly focused on our One Hydric strategy, bringing clients to best permanent executive and on-demand talent and helping leadership be more effective through our consulting and digital offerings. Looking ahead, we will continue to develop our diversified solutions as we provide broader, more comprehensive offerings for talent and human capital challenges at the executive level. The fundamentals of the business are solid We're excited by the opportunities in front of us. Finally, a big thank you to the Hydric team for their continued hard work and incredible dedication to our clients. I would now like to turn the call over to Mark.