Heidrick & Struggles International, Inc.

Thank you and welcome to Hendrick and Struggles 2025 Second Quarter Conference Call. Participating on the call today are company CEO, Tom Monahan and CFO, Neera Pam Sinha. Accompanying slides are posted on the IR homepage of the company's website at Hendrick.com. And you are encouraged to view these slides for additional context. Please note that in the materials presented today, management may refer to non-GAAP financial measures that the company believes provide additional insight to the underlying results. Reconciliations between these non-GAAP financial measures and the most comparable GAAP 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 Tom Monahan. Please go ahead.

Thank you for the kind introduction. Let me add my welcome and share an outline of the agenda for today's call. I'll start by touching on our Q2 results and our strong current operating performance, provide some context for our outlook on the rest of 2025 and provide an update on our strategic priorities. Then I'll hand the call over to Neera Pam to walk us through a closer look at our Q2 results or go-forward outlook and we'll both be available for Q&A. Maintaining our strong start in 2025, our Q2 results exceeded the high end of our revenue range. While we are pleased, we continue to stay close to clients as economic and geopolitical events remain very uncertain. We quickly reflect on the macro trends that shape our business and strategy and comment on how they are currently affecting our business. In the near to midterm, we see three big trends that affect our clients and provide us with a unique opportunity to grow our business and our impact. The first is probably the least volatile, but the most important. Great leadership talent is in chronically short supply, but there are both short and long-term till wins that make it scarcer than ever. First, in the near term, the volatility that we all see is increasing demand for great leaders capable of managing organizations through this period of complexity. Simply put, clients need our help, both to discover new leaders and to enable existing leaders to lead differently. Second, over the long term, demographic headwinds touch all our markets across the coming decades, which will obviously affect general labor availability, but squeeze the pool of top talent even further. The second major trend is that for more than a decade now, dating back to Brexit, if not earlier, changing geopolitics and global economic relationships are reconfiguring business strategy. Our clients aren't backing away from global markets, supply chains, or talent pools, but they do need to adjust strategy to reflect changing context. This obviously continues to be a really important theme in client conversations. Even as our overall business remains strong, we can and do see intermittent pockets and hesitance as clients digest industry-specific implications of, say, tariffs or tax policy. Finally, new technologies continue to remake work. AI is the most obvious of these, and clients continue to adapt their strategies to this powerful new asset. As we have learned in previous technology revolutions, fully realizing the potential of AI requires rethinking leadership, organization, and work itself. Our job is to be their partner in transforming the promise of new technologies into progress against their goals through great leaders, teams, and high-performing organizations. And at the same time, we need to continue to leverage these technologies in our own organization to drive great client impact. Against this backdrop, we saw growth in both revenue and confirmations across the firm, and believe that we are entering the second half of the year in a great position to sustain and extend our impact on clients. All three of our reported solution lines saw growth and contributed to profit through outstanding work in solving client problems against the backdrop of this complex environment. In the near term, we know that our diverse business mix across sector, region, service lines, and client-driven solutions gives our team the ability to perform even against this complex environment. In the medium and long term, this complexity and the growing client need for great leaders leading in the right way reminds us just how much white space we have available in our existing core business areas. We have an enormous opportunity, both to drive broader client relationships and secure new client relationships in nearly every sector around the world. And we are working hard to grow the teams necessary to realize this opportunity. As we have shared, the number one driver of growth in our business or any professional services firm is a simple formula of how many great people you have multiplied by how productive they are. Given the white space opportunity in our existing business areas, we are intensely focused on two things. One, growing our talent base. This, of course, begins with ensuring that we retain, develop, and inspire our incredible global community of outstanding hydric professionals. Our great retention of top performers, combined with our track record of promoting from within, are evidence that we take this really seriously. Achieving our goals also demands that we bring great new people on board effectively at all levels of the firm. Second, driving great enablement of those people via training, development, and importantly, cutting-edge analytics technology. Those of you at Investor Day saw a few of the tools that we've developed, but we see an opportunity to accelerate innovation even further and faster. This focus governs how we think about the consistent margin progression we targeted at Investor Day. You can see that we maintained a healthy margin in the first half. As we look to the second half of the year, we expect to see quarterly margins cycle down as we make progress on our hiring plans for the year. Even with this focus, we still anticipate making margin progress on an annual basis and setting ourselves up for continued expansion next year on a full-year basis. Before I hand the call over to Neera Palm, let me update you on our three areas of strategic priority. First, we aim to build differentiated relationships by being the most trusted leadership partner to the C-suite and board. The need here is great, as illustrated by the most recent edition of our annual route to the top analysis that listed CEO succession across major markets globally. The most surprising finding was that, although the majority of boards agreed that CEO succession was a critical strategic priority, 30% of them admitted that time on this topic was crowded up by more urgent and likely less important tasks. This creates a huge opportunity and a huge obligation for us to consistently partner with CEOs and boards to shape their leadership strategy on an ongoing basis. Second, we work to deepen client relationships by partnering with them on transformation in this new world of leadership. We've made great progress in standing up consultant toolkits for key recurring client challenges like cost transformations. These should allow us to bring a fuller set of our capabilities to bear when clients are driving major work. Finally, we aim to create durable client relationships through innovations that embed our solutions more consistently in client workflows. Adding great people, combined with intense focus on our long-term strategic priorities, will enable us to create unrivaled value for clients, colleagues, and shareholders by creating differentiated, deep, and durable client relationships. In sum, our strong Q2 results reflect our team's energy and focus on our compelling and integrated growth opportunities across executive search, consulting, and on-demand talent. This performance gives us confidence in our medium-term through-cycle targets shared at our investor day, organic revenue growth amid the high single digits, and organic adjusted EBITDA growth between five and 8% per year. While top-line growth and margins won't always move in a straight line, we see an attractive opportunity for our entire suite of increasingly digitally-enabled professional services as our clients move leadership strategy to the forefront of their corporate initiatives. With that, I'll now hand the call over to Nirupam to provide a detailed review of our financial performance and outlook. Thank you,

Tom. We delivered strong results in the second quarter of 2025 without performance and revenue that exceeded the high end of our outlook as well as robust profitability. In the next few minutes, I'll walk through the details of our performance along with our Q3 outlook. Second quarter revenue reached approximately $317 million, marking a 14% increase compared to Q2 2024. Adjusted EBITDA improved $5 million to $34 million, and adjusted EBITDA margin expanded 40 basis points to 10.7%. Looking more deeply at operating expenses, salary and benefits increased .6% from the prior year quarter. Fixed compensation increased $14.1 million in the second quarter of 2025 due to higher base salaries and payroll taxes, expenses related to our deferred compensation plan, talent acquisition and retention costs, retirement and benefit costs, and stock compensation. Variable compensation increased $17.2 million, benefiting from an increase in consulting productivity. As a percentage of net revenue, salary and benefits was .9% versus .8% in the year ago period. Excluding a $5.2 million change in the market-based deferred compensation, salary and benefits would have been 64.3%. 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 improved by $4.3 million to $42.2 million, or .2% from the prior year quarter. It includes a fair value earn-out adjustment, which is excluded from our adjusted results. As a percentage of net revenue, general and administrative expenses improved 340 basis points from the prior year to 13.3%. Obviously, this is a significant improvement. A part of the improvement is driven by the one-time fair value adjustment, but a major portion is also due to the progress we're making across the enterprise in scaling GNA. 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, which includes digital assessments. R&D spent for the second quarter was $6 million, or .9% of net revenue. We continue to look for ways to maximize the return of our technology spend. Now, let's turn to our service lines for further details. In executive search, revenue grew 13% to $238 million. Looking at our regional performance compared to the prior year quarter, we saw revenue increases of 9% in America, 31% in Europe, and 12% in APAC. As you know, we have a diverse site practice platform with great client engagement. During the second quarter, we saw outperformance by the majority of our practice groups. Consultant productivity analyzed in the second quarter at $2.3 million, up from $2 million, on the same basis in the year-ago quarter, and we saw increases in confirmations in average revenue for executive search. Executive search continues to produce strong profitability with adjusted EBITDA of $54.6 million and an adjusted EBITDA margin of 22.9%. Turning to on-demand talent, revenue increased 14% to $48 million, marking a continued outperformance amid market dynamics. We saw growth in both wins and project extension. On-demand talent recorded an adjusted EBITDA of $1 million versus an adjusted EBITDA loss of $1.6 million in the year-ago period. Clients continue to benefit from our ability to address urgent needs, which complements our search business and enhances our ability to serve clients comprehensively. Looking at Hydra Consulting, we saw second quarter revenue increase 17% year over year to $31 million, driven by increases in leadership assessment as we implement a more intense focus on pairing assessments with different client solutions. Adjusted EBITDA was positive at 0.6 million for the quarter. Moving forward, we are focused on growing the business and ensuring continued efficiency gains. We're refining and simplifying Hydra Consulting's offerings to focus on its core strengths, including assessments, leadership development, and performance culture. Turning to the bottom line performance, adjusted net income for the quarter was $18.1 million. 2025 second quarter adjusted diluted EPS was 85 cents, which was 27% above last year's performance. Now I'll turn to the balance sheet. We ended the second quarter in a strong cash position of $400 million, up $103 million from $297 million at the end of June 2024. This balance, coupled with our credit facility, gives us great strength and flexibility to execute our strategic plan. As you will know, we're heading into higher watermark seasonality for cash. With bonus payouts in Q1, cash levels typically build across the rest of the year. Moving forward, we expect third quarter revenue to be within a range of $295 million to $315 million. This compares to $279 million in Q3 of 2024, with the midpoint being almost 10% growth. As we discussed previously, the current economic climate can heighten uncertainty, which may lead clients to delay initiating new projects. In most cases, the underlying demand does not dissipate, and this client work resumes once there's greater clarity of stability in the macro environment. Similarly, we also find that client demand can accelerate quickly if critical client needs arise. As Tom mentioned, we're also focused on ensuring continued growth into 2026 and beyond. As we look to the second half of the year, we'd expect to see margins ebb down as we make progress on our hiring plans and subsequent expense comes online. We still anticipate making margin progress on an annual basis. In conclusion, our performance underscores the ability to deliver for clients across a variety of market environments. We're fortunate that dedicated and focused global teams remain committed to serving our clients with excellence. As we look ahead, we remain confident in the ability to navigate the evolving landscape with discipline and continue to drive long-term value for our shareholders. With that, operator, if you please open the line, Tom and I would be