Heidrick & Struggles Reports Fourth Quarter and 2022 Results
Today Heidrick & Struggles International, Inc. (Nasdaq: HSII) ("Heidrick & Struggles", "Heidrick" or the "Company") announced financial results for its fourth quarter ended December 31, 2022.
Fourth Quarter Highlights:
Net revenue of $235.7 million; on a constant currency basis net revenue was $243.9 million
Operating income and Adjusted EBITDA of $19.8 million and $30.9 million, respectively; operating margin was 8.4% and Adjusted EBITDA margin was 13.1%
Net income of $16.0 million and diluted earnings per share of $0.78
Declared fourth quarter dividend of $0.15 per share
Acquired Atreus, a leading German on-demand talent business, on February 1, 2023; expands diversification strategy embarked upon in 2021 with the acquisition of BTG in the U.S.
"We are pleased with the financial, operational, and strategic progress achieved during fiscal 2022 as we reported record net revenue on top of the historic billion-dollar milestone we achieved last year," stated Heidrick & Struggles' President and Chief Executive Officer, Krishnan Rajagopalan. "Our strong top- and bottom-line results are a testament to our ongoing efforts to further diversify our business, as we continue to make investments for the long-term in digital product innovation and aim to set the stage for prolonged, profitable growth. The year was highlighted by our dedicated efforts to further solidify Heidrick as a leader in providing diversified solutions to our clients while advancing our strategy, with a goal to achieve a more balanced revenue profile between our search and non-search businesses. During the year, we expanded our core Executive Search business and its geographic presence; On-Demand Talent continued to grow; Heidrick Consulting improved operations and efficiencies; and, we began beta testing a new digital product, Heidrick Navigator, which is receiving positive feedback from initial client usage. Additionally, our recent acquisition of Atreus, a leading player for executive interim management in Germany, meaningfully adds to our On-Demand Talent segment."
Rajagopalan continued, "Looking ahead to 2023, we are excited to continue advancing our differentiated strategy as we expand and evolve our business. Despite the current market slowdown and the strength of the U.S. dollar, our business in January remained on pace with the fourth quarter of 2022, and we expect to continue to operate above the heightened levels achieved during the pre-pandemic years of 2018 and 2019. We remain steadfast in our vision to transform Heidrick & Struggles into the world's premier leadership advisory firm that we believe will provide a new generation of business services, enabling companies to achieve higher performance from their executive-level talent in a fast-changing world. We believe execution of our strategy will allow us to even more fully satisfy our clients' needs while further enhancing long-term value for our stakeholders."
2022 Fourth Quarter Results
Consolidated net revenue of $235.7 million compared to record consolidated net revenue of $285.5 million in the 2021 fourth quarter. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 2.9%, or $8.2 million, consolidated net revenue decreased 14.6%, or $41.6 million from the 2021 fourth quarter.
Executive Search net revenue of $192.7 million compared to net revenue of $243.4 million in the 2021 fourth quarter due to an anticipated market slowdown. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 2.9%, or $7.0 million, net revenue decreased 18.0%, or $43.7 million from the 2021 fourth quarter. Net revenue decreased 22.6% in the Americas (down 22.5% on a constant currency basis), decreased 17.4% in Europe (down 6.4% on a constant currency basis), and decreased 16.0% in Asia Pacific (down 9.6% on a constant currency basis) when compared to the prior year fourth quarter. The Industrial practice group exhibited growth over the prior year.
The Company had 390 Executive Search consultants at December 31, 2022, compared to 365 at December 31, 2021. Productivity, as measured by annualized Executive Search net revenue per consultant, was $2.0 million compared to $2.7 million in the 2021 fourth quarter reflecting a higher number of consultants combined with lower revenue. Average revenue per executive search was approximately $150,000, up from $144,000 a year earlier. The number of confirmed searches decreased 24.1% compared to the year-ago period.
On-Demand Talent net revenue of $22.4 million compared to net revenue of $23.6 million in the 2021 fourth quarter reflecting trends associated with softening around potential macroeconomic conditions, which led to some delays in projects.
Heidrick Consulting net revenue of $20.7 million compared to net revenue of $18.5 million in the 2021 fourth quarter due to the higher value of longer-term engagements. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 5.9%, or $1.1 million, Heidrick Consulting net revenue increased 17.5%, or $3.2 million, compared to the prior year period. The Company had 70 Heidrick Consulting consultants at December 31, 2022, compared to 69 at December 31, 2021.
Consolidated salaries and benefits decreased $47.3 million, or 23.2%, to $156.8 million compared to $204.1 million in the 2021 fourth quarter. Year-over-year, fixed compensation expense increased $10.4 million due to base salaries and payroll taxes, talent acquisition and retention costs, separation, stock compensation and the deferred compensation plan. Variable compensation decreased $57.6 million due to a decrease in production. Salaries and benefits expense was 66.5% of net revenue for the quarter, compared to 71.5% in the 2021 fourth quarter.
General and administrative expenses decreased $11.4 million, or 24.3%, to $35.5 million compared to $46.9 million in the 2021 fourth quarter. The decrease was primarily due to the Company's On-Demand Talent earnout fair-value adjustment recorded in the prior year, lower professional fees, taxes and licenses, and intangible amortization, partially offset by increases in business development travel, marketing, and office expense. As a percentage of net revenue, general and administrative expenses were 15.1% for the 2022 fourth quarter compared to 16.4% in the 2021 fourth quarter.
The Company's Cost of Services was $17.5 million, or 7.4% of net revenue for the quarter, compared to $18.0 million, or 6.3% of net revenue in the 2021 fourth quarter. This related to both On-Demand Talent's reduction in revenue and associated support costs and Heidrick Consulting's project mix, where more of the projects were serviced internally.
The Company's Research and Development ("R&D") expenses were $6.1 million, or 2.6% of net revenues for the quarter. Due to the rapid pace of technological advances and digital disruption many of our clients are experiencing, our ability to compete successfully depends increasingly upon our ability to provide clients with timely and relevant technology-enabled products and services. As such, we are focused on developing new technologies to enhance existing products and services, and to expand the range of our offerings through R&D, licensing of intellectual property and acquisition of third-party businesses and technology. The benefits from our R&D efforts will be utilized to develop and enhance new and existing services and products across our current offerings in Executive Search, Heidrick Consulting, On-Demand Talent and for products and services in new segments that we embark upon in the future from time to time, such as our new digital product Heidrick Navigator which we are beta testing. R&D expenses consist of payroll, employee benefits, stock-based compensation, other employee expenses and third-party professional fees associated with the enhancement of existing products and the development of new services and products.
Operating income was $19.8 million for the quarter compared to $16.6 million in the 2021 fourth quarter. Operating income margin was 8.4% versus 5.8% in the 2021 fourth quarter. The Company recorded a fair value adjustment to increase the On-Demand Talent earnout charge by less than $0.1 million in the 2022 fourth quarter to finalize the earnout payment based on actual results. Year-ago results included a one-time earnout charge of $11.4 million associated with the Company's On-Demand Talent business. Excluding these items in both periods, adjusted operating income in the 2022 fourth quarter was $19.9 million compared to $28.0 million in the 2021 fourth quarter and adjusted operating income margin was 8.4% compared to 9.8% in the 2021 fourth quarter.
Adjusted EBITDA was $30.9 million compared to $36.8 million in the 2021 fourth quarter. Adjusted EBITDA margin was 13.1%, compared to 12.9% in the 2021 fourth quarter. In Executive Search, Adjusted EBITDA was $56.1 million compared to $57.8 million in the prior year period. In On-Demand Talent, Adjusted EBITDA was a loss of $1.4 million versus $2.1 million in the prior year period. In Heidrick Consulting, Adjusted EBITDA was a loss of $2.1 million compared to a loss of $4.8 million in the prior year period.
Net income was $16.0 million and diluted earnings per share was $0.78, with an effective tax rate of 29.9%. This compares to net income of $12.5 million and diluted earnings per share of $0.61, with an effective tax rate of 30.3%, in the 2021 fourth quarter. Excluding the aforementioned fair value adjustment of the earnout in the 2022 fourth quarter and the one-time earnout charge recorded in the 2021 fourth quarter, adjusted net income was $16.1 million compared to $20.8 million in the 2021 fourth quarter and adjusted diluted earnings per share was $0.78 compared to $1.02 in the 2021 fourth quarter, with adjusted effective tax rates of 29.9% and 29.0%, respectively, for the 2022 fourth quarter and 2021 fourth quarter.
Net cash provided by operating activities was $160.3 million, compared to net cash provided by operating activities of $206.6 million in the 2021 fourth quarter. Cash, cash equivalents and marketable securities at December 31, 2022 was $621.6 million, compared to $545.2 million at December 31, 2021 and $456.0 million at September 30, 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.
Fiscal 2022 Results
Consolidated net revenue increased 7.0%, or $70.5 million, to a record $1,073.5 million compared to $1,003.0 million in 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 3.1%, or $31.1 million, consolidated net revenue increased 10.1%, or $101.6 million, compared to the prior year.
Executive Search net revenue increased 3.8%, or $33.2 million, to $901.9 million from $868.8 million in 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 3.1%, or $27.0 million, net revenue increased 6.9%, or $60.2 million. Net revenue increased 5.4% in the Americas, increased 3.5% in Europe (increased 15.5% on a constant currency basis), and decreased 3.6% in Asia Pacific (increased 1.9% on a constant currency basis). All industry practices exhibited growth over the prior year, except for Healthcare & Life Sciences and Financial Services. Productivity was $2.3 million, in-line with productivity reported in 2021. The average revenue per executive search was approximately $144,000 compared to $131,000 in 2021, while confirmations decreased 5.3%.
On-Demand Talent recorded net revenue of $91.3 million compared to $66.6 million in 2021. The increase in net revenue was primarily due to the timing of the acquisition of Business Talent Group in the prior year and an increase in the average project size.
Heidrick Consulting net revenue increased 18.6%, or $12.6 million, to $80.2 million from $67.6 million in 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 5.7%, or $3.8 million, Heidrick Consulting revenue increased 24.3%, or $16.4 million.
Including fair-value adjustments made to the Company's On-Demand Talent earnout recorded in 2022 and in 2021, operating income was $112.3 million compared to operating income of $98.3 million in 2021. The operating income margin was 10.5% compared to 9.8% in 2021. Excluding the fair value adjustments recorded in both periods and restructuring charges in 2021, adjusted operating income was $111.8 million compared to $113.4 million in 2021 and adjusted operating income margin was 10.4% compared to 11.3% in 2021.
Adjusted EBITDA was $136.7 million and adjusted EBITDA margin was 12.7%, compared to adjusted EBITDA of $141.3 million and adjusted EBITDA margin of 14.1% in 2021. In Executive Search, Adjusted EBITDA was $211.8 million compared to $199.0 million in the prior year. In On-Demand Talent, Adjusted EBITDA was a loss of $0.3 million versus $4.6 million in the prior year. In Heidrick Consulting, Adjusted EBITDA was a loss of $5.5 million compared to a loss of $14.0 million in the prior year.
Net income was $79.5 million and diluted earnings per share was $3.86, with an effective tax rate of 31.0%. This compares to net income of $72.6 million and diluted earnings per share of $3.58 with an effective tax rate of 31.6% in the 2021 fourth quarter. Excluding the previously mentioned fair value adjustments recorded in 2022 and 2021 and restructuring charges in 2021, adjusted net income was $79.2 million compared to $83.5 million in 2021 and adjusted diluted earnings per share was $3.84 compared to $4.11 in 2021, with adjusted effective tax rates of 31.0% and 31.1%, respectively, for the 2022 and 2021 periods.
Acquisition of Atreus
On February 1, 2023, the Company completed the acquisition of Atreus Group GmbH ("Atreus") which was announced in December 2022. Atreus is one of the leading providers of executive interim management in Germany, and now becomes part of the Company's On-Demand Talent segment. Total initial consideration is comprised of $33.5 million paid in the 2023 first quarter and an estimated subsequent payment, which the Company estimates to be between $9.0 million and $13.0 million, to be paid in 2023 upon the completion of Atreus' statutory audit for the year ended December 31, 2022, subject to customary working capital adjustments. The former owners of Atreus are also eligible to receive additional cash consideration, which the Company estimates to be between $30.0 million and $40.0 million on the acquisition date, based on the achievement of certain revenue and operating income milestones for the period from acquisition through 2025.
The Board of Directors declared a 2022 fourth quarter cash dividend of $0.15 per share payable on March 24, 2023, to shareholders of record at the close of business on March 10, 2023.
2023 First Quarter Outlook
The Company expects 2023 first quarter consolidated net revenue of between $235 million and $255 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 December 2022 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 current backlog.
Quarterly Webcast and Conference Call
Heidrick & Struggles will host a conference call to review its fourth quarter and full year results today, February 27, 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.