Heidrick & Struggles International, Inc.

Thank you and welcome to Hydric and Straggle's 2025 first quarter conference call. Participating on the call today are the company's CEO, Tom Manahan, and CFO, Nirupam Sena. Accompanying slides are posted on the IR homepage of the company's website at hydric.com, and you're encouraged to view these slides for additional context. Please note that in the materials presented today, Management may refer to NAND gap financial measures that the company believes provide additional insight into underlying results. Reconciliations between these NAND gap financial measures and the most comparable gap measures may be found in the earnings press release. Also, certain forward-looking statements may be made in management's remarks. Please refer to the Safe Harbor language also included in today's press release. I will now turn the call over to Tam Monaghan.

Thank you for the kind introduction. Let me add my welcome and share an outline of the agenda for today's call. Today, I'll start by touching on our Q1 results and our strong operating performance. I'll reflect quickly on what has become a suddenly tumultuous operating environment and comment on the threats and opportunities it presents for our business. I'll reaffirm our strategy to create unrivaled client value, particularly in times like these. Then finally, I'll hand the call over to Nirupam to walk us through a closer look at our Q1 results or go-forward guidance, and we'll both be available for Q&A. Both our first quarter results and the momentum we are carrying into the second quarter are reflective of the ever-expanding need for organizations to engage and enable world-class leadership talent. In short, we delivered strong results in the first quarter of 2025, without performance on the top line that exceeded the high end of our outlook, coupled with robust profitability. This performance, reinforced by the Q2 guidance which Nirupam will share, reflects the relevance of our strategy, the resilience of our business model, and the ability of our world-class team to create value for and with clients. I want to spend just one moment to reflect on that last point. Think about the economic environment our clients expected in 2025 and compare it to what they actually encountered. Our team showed a remarkable ability to stay close to clients and pivot to serve their rapidly changing needs. Our outcomes are a reflection of their professional excellence and deep client focus. Turning to the second topic of my remarks, that mix of professional excellence and client focus will be vital to our success in a considerably more complex operating environment. Let me spend a minute sharing what we hear in client conversations, how we are responding, and how it might shape our performance. First, I'll state the obvious. This is not a business that benefits from the status quo. In simple terms, not a single client meeting in the last 72 years has ended with the following client quote. Things are going perfectly right now, and we are well set up for the future. Let's call Hydric. Our opportunity to create value springs from the simple client need to drive great business outcomes by getting the right leaders in the right roles working in the right way. This need becomes more pronounced, more visible, and more urgent during times of economic chop. That said, this incredible opportunity for impact can sometimes be balanced by client caution in initiating, proceeding, or completing work. The net result is the dynamic we shared yesterday. where although we demonstrate consistent growth across time, individual quarters can show periods of volatility and periods of economic difficulty. As you can see from our strong results and forecasts, we aren't seeing that dynamic. That said, we can obviously imagine a world where caution creeps into client decision-making, and the second half of the year looks different than the first half. We are staying very close to clients and monitoring activities, tone, and outcome really closely right now. Our resulting strategy for this environment is quite simple. Stay close to clients and arm our teams with tools and resources to drive great client impact. We know that in times of uncertainty, clients look for help on a different set of issues, and we are putting in place tools and resources so that teams rapidly deliver on these needs. In this category, we are putting in place great resources to help them adapt leadership strategies to changing supply chain networks, link people's strategies to the opportunities and risks of AI, and drive resilient performance cultures in times of rapid change. That said, every client and every client's strategy is unique, and it's our job to stay in constant touch with them to shape their response and our support for these complex times. This client focus is enabled by some really attractive business model attributes that allow us to focus on client outcomes rather than financial engineering. These include revenue that is well diversified across geographies, industries, and solution areas, zero client concentration, a variable cost structure, low capex, and zero debt. These factors, combined with our incredible people and unique set of assets and capabilities, gives us great confidence in our medium term through cycle targets shared in our investor day. organic revenue growth of mid to high single digits, and organic adjusted EBITDA growth between 5% and 8% per year. This is a great place to transition to one more topic. Achieving these through-cycle growth targets requires us to relentlessly focus on our long-term strategic priorities. Together, these will enable us to create unrivaled value for clients, colleagues, and shareholders by creating differentiated deep and durable client relationships. Let me reshare these with you. First, we want to be the most trusted leadership partner to the C-suite and board. We believe that our focus on leadership talent differentiates us. We remain committed to consistently growing our executive search and assessment capabilities, which are the cornerstone of our enterprise. This work not only immediately inflects client performance, It gives us unmatched access to leaders and their priorities, allowing us to build valuable insights and rich data sets. We believe one of the most important C-suite roles that we help define and support is the Chief People Officer. It's a role that has undergone dramatic transformation in the past decade, and CPOs have been at the center of the most challenging issues of our time. From pandemic response to the hybrid work debate, to the rapidly shifting dialogue about inclusion, to the challenges posed by changing immigration approaches. But even as headlines whipsaw their daily agenda, CPOs are on the hook for architecting corporate strategies that reflect several of the most important challenges to the C-suite. Remaking work to best leverage the interplay of human and digital workers in the age of AI. creating leadership and talent strategies for a world where demographic and labor mobility headwinds create real scarcity in leadership talent, assuring the performance of leaders and leadership teams in a world where volatility is the norm, to name just a few. We've launched deep research and an event series to help CPOs balance this complex mandate and to help CEOs and boards select and leverage the next generation of key people partners. Second, help clients lead transformation in the new world of leadership. As we shared in Investor Day, relationship size and stickiness correlate strongly with our ability to support clients in multiple ways. This isn't some boiler room cross-selling effort. It's leveraging the access and insight of our exceptional consultants to accelerate client performance in new ways. We enjoy a substantial tailwind in this work. Every leader in every role in every industry as a transformation mandate. It might be to leverage AI or enter new markets or drive cost advantage. Regardless of the destination, this transformation invariably requires new leaders and new ways of leading and creates an opportunity for us to partner with them to drive great outcomes. Obviously, the environment right now is leading to a reprioritization of key initiatives, with topics like creating a cost-focused culture and rationalizing the corporate portfolio rising in prominence. In response, we have assembled toolkits that help our teams guide clients through this work and allow us to partner with them to accelerate their outcomes. We know that we grow larger and more impactful client relationships by linking our work to ambitious client goals. And no matter the environment, clients always have, indeed clients always need, ambitious goals. Third, we're innovating to create continuous client engagement. And working with leading CEOs, boards, and chief people officers, we continue to see an important theme emerging. Leadership and talent decisions are becoming an always-on activity. This shouldn't be surprising, as there has been a step function increase in annual report language devoted to the economic importance of talent, culture, and succession. And yet, historically, the process for managing this risk has lacked consistency and rigor. We don't expect every company to change how they work overnight, but we also can't imagine a world in which a topic as important as top of the house leadership will be a continued afterthought in ongoing corporate management. And we know that embedding this work at scaling companies will require just the type of at scale digital tooling that our investments are targeting. In sum, while we confront a volatile market, we see enormous opportunities to grow our impact on clients. and thereby our business. Our fast start to 2025 reflects our team's ability to create real value for clients in the face of this complex environment. That said, we know that this complexity can slow down client decision-making, but never eliminates their need to perform at a high level. Our roadmap for executing our strategy of creating differentiated, deep, and durable relationships will allow unrivaled value for clients, colleagues, and shareholders. With that, I will now hand the call over to Neuropom to provide a detailed review of our financial performance and outlook.

Thank you, Tom. In a highly dynamic environment, we delivered strong results in the first quarter of 2025 without performance in the top line that exceeded the high end of our outlook and robust profitability. In the next few minutes, I'll walk through the details of our performance along with our Q2 outlook. First quarter revenue reached approximately $284 million, marking a 7% increase compared to Q1 2024. Adjusted EBITDA improved $3.3 million to $29.1 million, and adjusted EBITDA margin expanded 50 basis points to 10.3%. Looking more deeply at operating expenses, salary and benefits increased 8.6% from the prior year quarter. Fixed compensation increased $4.2 million in the first quarter of 2025 due to higher separation, base salaries and payroll taxes, retirement and benefits, and talent acquisition and retention costs, partially offset by decreases in the deferred compensation plan and stock compensation. Variable compensation increased $10.9 million, benefiting from an increase in consultant productivity. As a percentage of net revenue, salaries and benefits were 66.8% versus 65.8% in the year-ago period. Excluding a $3.7 million operational reorganization charge, salaries and benefits would have been 65.5%. Consistent with our prior commentary, for the full year, we continue to expect the normalized run rate to be in the 65% range. General and administrative expenses of $41.4 million were relatively flat versus the year-ago period and include a fair value earn-out adjustment, which is excluded from our adjusted results. As a percentage of net revenue, general administrative expenses improved 100 basis points from the prior year to 14.6%. With respect to R&D, as we have described previously, we continue to invest in the future of Hydra. At the core of this investment is IP that powers all our businesses, including Search, Hydra Consulting, and our digital product portfolio. R&D spent for the first quarter was $6.4 million, or 2.3% of net revenue. Now, let's turn to each of our businesses for further details. In executive search, revenue grew 6% to $213 million. Looking at our regional performance compared to the prior year quarter, we saw revenue increases of 6% in the Americas, 9% in Europe, and 1% in APAC. As you know, we have a diversified practice platform with great client engagement. In the first quarter, we saw outperformance by the majority of our practice groups. Consultant productivity annualized in the first quarter at $2 million compared to $1.9 million on the same basis in the year-ago quarter, and we saw increases in confirmations and average revenue per executive search. We were also very pleased with executive search improving its already strong profitability, with adjusted EBITDA of $52.3 million and an adjusted EBITDA margin of 24.5%. Turning to on-demand talent, revenue increased 12% to $43 million, marking a continued outperformance amid market dynamics. We saw increases in volume in both wins and project extensions. On-demand talent recorded adjusted EBITDA of $0.4 million versus an adjusted EBITDA loss of $0.9 million in the year-ago period. This business addresses an urgent client need, complements our search business, enhances our ability to serve clients comprehensively. We're continuing to foster innovation in our products and services as we pivot and accelerate growth, particularly on the interim talent side of our on-demand business. Looking at Hydric Consulting, we saw first quarter organic revenue increase 7% year-over-year, to $28 million driven by increases in leadership assessment as we implement a more intense focus on pairing assessments with executive search. Adjusted EBITDA loss was $2.1 million for the quarter. Moving forward, we are focused on growing the business while benefiting from efficiency gains as we refine and simplify Hydric Consulting's offerings and focus on its core strengths. Turning to the bottom line performance, adjusted net income for the quarter was $14.2 million, which includes a fair value adjustment related to the on-demand talent business versus $14 million last year. 2025 first quarter adjusted diluted EPS to $0.67, consistent with the year-ago period. Now I'll turn to the balance sheet. We ended the first quarter in a strong cash position of $325 million, up $72 million from $253 million at the end of March 2024. This balance, coupled with our credit facility, gives us great strength and flexibility to execute our sheet plan and return capital to our shareholders. Moving forward, we expect second quarter revenue to be within a range of $285 million to $305 million. This compares to $279 million in Q2 of 2024. As we discussed previously, the current economic climate can heighten uncertainty, which may lead clients to delay initiating new projects or to temporarily pause ongoing ones. In most cases, the underlying demand does not dissipate, and this client work resumes once there is greater clarity of stability in the macro environment. In conclusion, our performance underscores the strength and diversification of our business model, which continues to enable us to deliver for clients across a variety of market environments. These results are a testament to the dedication and focus of our global teams who remain committed to serving our clients with excellence amid ongoing macroeconomic uncertainty. As we look ahead, we remain confident in our ability to navigate the evolving landscape with discipline while continuing to drive long-term value for our shareholders. With that, operator, if you could please open the line, Tom and I would be happy to take questions.