Heidrick & Struggles Reports First Quarter 2023 Results
Heidrick & Struggles International, Inc. (Nasdaq: HSII) ("Heidrick & Struggles", "Heidrick" or the "Company") announced financial results for its first quarter ended March 31, 2023.
First Quarter Highlights:
- Net revenue of $239.3 million; on a constant currency basis net revenue was $244.8 million
- Operating income of $17.8 million and operating margin of 7.4%
- Adjusted EBITDA (adjusted to exclude acquisition accounting and deferred compensation expense) of $27.5 million with Adjusted EBITDA margin of 11.5%
- Net income of $15.6 million and diluted earnings per share of $0.76
- Completed acquisition of businessfourzero on April 1, 2023
"As we anticipated, we saw a slowdown in first quarter revenue from a year ago and adjusted our costs accordingly, as demonstrated by our Adjusted EBITDA margin of nearly 12%. While we expect to see some continued volatility in our markets, which is reflected in our guidance, we will continue to navigate through these complexities prudently," stated Heidrick & Struggles' President and Chief Executive Officer, Krishnan Rajagopalan. "Importantly, we continued to advance our diversification strategy with the acquisition of businessfourzero to augment our Heidrick Consulting offering, as well as the ongoing integration of Atreus into our On-Demand Talent platform."
2023 First Quarter Results
Consolidated net revenue of $239.3 million compared to record consolidated net revenue of $283.9 million in the 2022 first quarter. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 1.9%, or $5.5 million, consolidated net revenue decreased 13.7%, or $39.0 million from the 2022 first quarter.
Executive Search net revenue of $190.5 million compared to net revenue of $242.5 million in the 2022 first quarter reflecting an anticipated market slowdown. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 1.8%, or $4.3 million, net revenue decreased 19.7%, or $47.8 million from the 2022 first quarter. Net revenue decreased 21.7% in the Americas (down 21.5% on a constant currency basis), decreased 21.7% in Europe (down 16.3% on a constant currency basis), and decreased 19.9% in Asia Pacific (down 15.6% on a constant currency basis) when compared to the prior year first quarter. The Social Impact practice group exhibited growth over the prior year.
The Company had 432 Executive Search consultants at March 31, 2023, compared to 394 at March 31, 2022. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.8 million compared to $2.5 million in the 2022 first quarter, reflecting a higher number of consultants combined with lower revenue. Average revenue per executive search was approximately $124,000, flat with the prior year period. The number of search confirmations decreased 21.8% compared to the year-ago period.
On-Demand Talent net revenue of $31.1 million increased 33.1% compared to net revenue of $23.4 million in the 2022 first quarter, primarily due to the acquisition of Atreus, partially offset by a decrease in the volume of legacy on-demand projects. Foreign exchange rate fluctuations negatively impacted results by $0.6 million, or 2.5%.
Heidrick Consulting net revenue of $17.7 million compared to net revenue of $17.9 million in the 2022 first quarter. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 3.8%, or $0.7 million, Heidrick Consulting net revenue increased 2.5%, or $0.5 million, compared to the prior year period. The Company had 78 Heidrick Consulting consultants at March 31, 2023, compared to 70 at March 31, 2022.
Consolidated salaries and benefits decreased $42.6 million, or 21.1%, to $158.9 million compared to $201.4 million in the 2022 first quarter. Year-over-year, fixed compensation expense increased $13.1 million due to base salaries and payroll taxes, the deferred compensation plan and retirement and benefits, as well as the acquisition of Atreus, partially offset by talent acquisition and retention costs, and stock compensation. Variable compensation decreased $55.7 million due to a decrease in production. Salaries and benefits expense was 66.4% of net revenue for the quarter, compared to 71.0% in the 2022 first quarter.
General and administrative expenses increased $4.5 million, or 15.2%, to $34.3 million compared to $29.8 million in the 2022 first quarter. The increase was due to business development travel, intangible amortization and accretion, office occupancy, IT, professional services and the acquisition of Atreus, partially offset by hiring fees. As a percentage of net revenue, general and administrative expenses were 14.3% for the 2023 first quarter compared to 10.5% in the 2022 first quarter.
The Company's cost of services was $22.8 million, or 9.5% of net revenue for the quarter, compared to $18.0 million, or 6.3% of net revenue in the 2022 first quarter. This related to an increase in the volume of On-Demand Talent projects, the acquisition of Atreus and Heidrick Consulting's project mix, where more of the projects were serviced externally.
The Company's research and development expenses were $5.5 million, or 2.3%, of net revenue for the quarter compared to $4.4 million, or 1.6%, of net revenue for the first quarter 2022.
Operating income was $17.8 million for the quarter compared to $30.2 million in the 2022 first quarter. Operating income margin was 7.4% versus 10.7% in the 2022 first quarter.
Adjusted EBITDA was $27.5 million compared to $35.7 million in the 2022 first quarter. Adjusted EBITDA margin was 11.5%, compared to 12.6% in the 2022 first quarter. In Executive Search, Adjusted EBITDA was $48.4 million compared to $51.9 million in the prior year period. In On-Demand Talent, Adjusted EBITDA was a loss of $1.3 million versus income of $0.3 million in the prior year period. In Heidrick Consulting, Adjusted EBITDA was a loss of $2.7 million compared to a loss of $1.8 million in the prior year period.
Net income was $15.6 million and diluted earnings per share was $0.76, with an effective tax rate of 31.7%. This compares to net income of $18.5 million and diluted earnings per share of $0.90, with an effective tax rate of 33.7%, in the 2022 first quarter.
Net cash used in operating activities was $337.0 million, compared to net cash used by operating activities of $262.2 million in the 2022 first quarter. Cash, cash equivalents and marketable securities at March 31, 2023 was $204.7 million compared to $268.0 million at March 31, 2022 and $621.6 million at December 31, 2022. The Company's cash position typically builds throughout the year as employee bonuses are accrued, mostly to be paid out in the first half of the year.
Acquisition of businessfourzero
On April 1, 2023, the Company completed the acquisition of businessfourzero which was announced in March 2023. businessfourzero is a London-headquartered next generation consultancy specializing in developing and implementing purpose-driven change and will now become part of the Company's Heidrick Consulting segment.
The Board of Directors declared a 2023 first quarter cash dividend of $0.15 per share payable on May 19, 2023, to shareholders of record at the close of business on May 5, 2023.
2023 Second Quarter Outlook
The Company expects 2023 second quarter consolidated net revenue of between $260 million and $280 million, while acknowledging that continued fluidity in external factors, such as the foreign exchange and interest rate environments, foreign conflicts, inflation and macroeconomic constraints on pricing actions, may impact quarterly results. In addition, this outlook is based on the average currency rates in March 2023 and reflects, among other factors, management's assumptions for the anticipated volume of new Executive Search confirmations, On-Demand Talent projects, and Heidrick Consulting assignments, consultant productivity, consultant retention, and the seasonality of the business along with the current backlog.
Quarterly Webcast and Conference Call
Heidrick & Struggles will host a conference call to review its first quarter results today, April 24, 2023 at 5:00 pm Eastern Time. Participants may access the Company's call and supporting slides through its website at www.heidrick.com or by dialing (888) 440-4091 or (646) 960-0846, conference ID# 6106012. For those unable to participate on the live call, a webcast and copy of the slides will be archived at www.heidrick.com and available for up to 30 days following the investor call.