HSII - NASDAQ

Please standby, we are about to begin. Good afternoon, ladies and gentlemen. Welcome to the Heidrick & Struggles Q2 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 speakers prepared remarks, there will be a question-and-answer session. [Operator Instructions] And now at this time, I would like to turn things over to Ms. Suzanne Rosenberg, Vice President, Investor Relations. Please go ahead, ma’am.

Thank you. And welcome to our 2023 second quarter conference call. 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 heidrick.com and we encourage you to view these slides for additional context. Please note that in the materials presented today, we may refer to non-GAAP financial measures that we believe provide additional insight into underlying results. Reconciliations between these non-GAAP financial measures and the 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 will now turn the call over to you.

Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us today. We are pleased with our second quarter results, which marked a continuation of what we were beginning to see in the first quarter with business trending as anticipated. Revenue met our expectations and included the first full quarter of results from our recent acquisitions, Atreus in the On-Demand Talent segment and businessfourzero or B4

Thank you, Krishnan, and good afternoon and evening to everyone on today’s call. Today, I will start off with a review of our second quarter results, which came in within our expectations with revenue at the midpoint of our guidance. While business is slower than the frantic pace of last year, we are pleased with today’s current market performance and remain laser focused on delivering strong profitability to our shareholders. Importantly, as Krishnan mentioned, you can see the underlying fundamental strength of our business through the sequential balance via contributions by all lines of business. As a reminder, second quarter results include the full quarter performance related to our acquired Atreus and B4

Thank you, Mr. Harris. [Operator Instructions] We will take our first question this afternoon from Kevin Steinke of Barrington Research.

Hey. Good afternoon. I wanted to start off by asking about the pace of change accelerating. You mentioned that a couple of times, Krishnan, in your opening remarks and maybe if you could just talk about some of the factors or the broader macro trends you are seeing that are accelerating the pace of change when organizations are looking at their leadership teams?

Yeah. Hey, Kevin. Thanks for that question. Multiple things that we are seeing regarding pace of change and how companies are looking at it. Like, even if you look at something like succession planning, which typically that word was reserved for the CEO, it’s now being applied to the entire C-Suite. So that’s a broad sweeping change that’s going on, how to think about succession for the entire C-Suite as well. And how to think about that over multiple years, such as one example of something which is changing rather fast in our world. If we look at that over the last couple of years. If we look at technology, it go a different way in making decisions and how to make decisions. We are going to see an increased pace of change in the incorporation of Gen AI and things like that into decision-making processes of executive teams and the implications of that and what that means for leadership teams as well. So these are the kinds of things that we are finally seeing that are going on out there that and digital transformation, these are all continuing and there’s an urgency about it that things go much, much faster for us right now.

Okay. Thank you. I also wanted to ask about the On-Demand Talent segment. I think you used the phrase that you are reshaping the On-Demand Talent segment. Just if you could expand on that. Is that just more referring to your investments in the sales team or is there something more kind of going beyond are going on there as you develop that segment to meet the demand in the future?

Yeah. Let me start with that and then, Mark, if you got something to add, jump in. So one of the things we are doing is we are realigning the sales function that we have there with the talent function and bringing those closer together rather than keeping them as a slightly separate organization. So that’s the realignment that we are really talking about and we think that’s going to create a lot of synergy, as well as expertise that we need to be able to drive that. We do continue to invest in the sales go-to-market function over there as well as you alluded to. So that’s another big thing that we are doing in that space. So we feel like between all of those things, we will be able to address market needs much faster and with far more expertise as a result of that. So those are two things that we are doing.

Okay. Thank you. I also wanted to ask about the digital products you are investing in and specifically Navigator. You have said it’s resonating very well with your pilot clients. You also mentioned building out a direct sales organization for digital. Just wondering if you envision using that sales organization to go after maybe organizations that you are currently not working with in any fashion or if you see the best opportunity just to cross-sell to existing clients, I think that would be, given your relationships kind of maybe an easier path ahead, but just on maybe any comments on how you plan to penetrate the market with your digital offerings?

Super. Yeah. So you are hitting on a bunch of teams over there. So we kind of referred to working with Heidrick, as almost the Heidrick channel, okay? And so we have got a set of clients and relationships that we work with and we typically make those introductions in the beginning parts of those sales through our Search and Consulting and other relationships, as you can imagine. We do believe that for a bit more of a technical sale like this, we need to augment that with some expertise, so there is some additional expertise that’s coming in there to be able to manage that process and get everything done with that. There’s lots of requirements on privacy, as you can imagine, just to name one big category that you have got to walk your way through contracts, et cetera. The standalone sales force as well that we are building is about outside the Heidrick sales channel predominantly, okay? We see a very large market that’s there that’s actually asking us for exactly the same set of solutions and how do we prosecute that. So we build that slowly, we first leverage the hybrid channel, but at the same time, we are starting to build that muscle for sales as well.

Okay. Great. You mentioned on a sequential basis, Search confirmations being down about 5%. I guess, would you just attribute that primarily to seasonality going into the summer season or anything in the macro environment perhaps contributing to that?

Hey, Kevin. It’s Mark. I will try to take that one. So in terms of the slowdown that we saw about the 5%. I think it was a little bit -- there was a little bit of a nuance in April that we experienced. That was a bit of an interesting glitch. That really, again, could be pointed as a lot of holidays coming together, a lot of spring breaks and then we saw some of that made up in May. So I think that was kind of where the original gap was kind of created. I think what’s been pleasantly surprising is the -- what I’d call the relative strength of the second quarter, that is still very much further ahead in 2018 and 2019 pre-COVID levels, but certainly not with 2022 and 2021 were. So, we talked about at the end of the year, we said, we knew those were going to be our goalpost and we would probably be somewhere in the middle is our best guess. I think that’s the nice part is, we are coming in pretty much where we would expect to be. The seasonality element that you have mentioned is really more of a Q3 phenomenon. So we gave the guidance range of $245 million, $265 million, which give the $255 million midpoint from the $271 million that we just completed. And again, you would expect and we have seen in July is already starting to slow down considerably, mainly because people are going on summer holiday, we would expect August, especially in Europe to be weaker than average just because it’s August and its Europe and they take their time off. Now we would expect September to have a nice strengthening return so to speak. So I think it was -- the way that I would kind of step back and think is to say that, look, we haven’t seen tremendous weakness, yes, weaker than last year, but not tremendous weakness. We will continue to monitor and watch what that’s going to do in their next meeting and see how that could put essentially cause some hiccups. But right now, I think, we are very pleased with the performance of the year and at least based on what we are seeing in our future, we are still very happy with the market given the conditions and the headwinds they are facing.

Okay. Thank you. I will turn it over.

Thanks, Kevin.

Thank you. We will go next now to Tobey Sommer at Truist Securities.

Yeah. Good afternoon. This is Jack Wilson on for Tobey Sommer. Thanks for taking my question. I also started off, but can we dig into sort of the Executive Search confirmations and productivity per consultant. So you mentioned that paradigm shift from sort of that higher level in terms of revenue. Can we just start there?

Yeah. Let me try to hit on the productivity side of it. So if you remember back in the really busy days of 2021 and 2022, our consultant productivity was showing up at a trailing 12 months, around $2.6 million. We made comments when reporting on that number that, that was very much unsustainable, that it would break the team to try to maintain something at that level. We gave our view that really the new norm will be somewhere between $1.8 million, $2 million, and that is different than the $1.5 million, $1.7 million we saw pre-COVID and that’s just because the post-COVID world that they discussed was just very different than what we were experiencing.

That makes a lot of sense. Is there any variance in that sort of by region?

Oh! Yeah. Absolutely. And you expect the U.S. region to be much higher than that just because of the way that our compensation levels in Executive Search, et cetera. Europe would obviously fall right behind that, and of course, Asia would be further behind that just because of the economics. Also, the mix makes a big difference, too, so it’s a fair question and challenge, which is a lot more in the U.S. in terms of -- I am just going to talk about norms, not necessarily the current state, but GTF [ph] and Financial Services are where you get a lot more average retainers that are typically higher, as well as Optics. And obviously, those are the two parts that are suffering right now in the current market. Europe, a little bit better on the industrial and consumer, their mix side of it. So Keep in mind, it’s not just absolute because that is true CEO in the U.S. certainly gets paid more than on average, the CEO in Europe. But the mix also makes a play in terms of what’s going on in the market, the strength. So again, our team in Germany are doing a fabulous job with their play and their strength, et cetera. So it really plays a big difference between country mix, between industrial mix and that really kind of plays out, but they are absolutely very different in the three regions.

All right. So on the German point, would you be able to sort of size the contribution or the expected contribution from the acquisitions sort of the second half of the year?

I am sorry, in terms of EBITDA?

Revenue and EBITDA.

I mean, so -- yeah, I think, we gave some pretty good numbers in terms of just overall in terms of where the -- by each segment of what the contribution was between organic and our inorganic and really it was more of a question that was really kind of asked in our last earnings call. So I wanted to give you a flavor. We are not going to go into very specifics on each of our acquisitions, we don’t do that, nor do we break it out that way anywhere in our segment porting because we just don’t look at it that way. But I think you get a good sense that, look, the acquisitions are helping, but it’s the -- really the legacy organic side that’s really performing also very, very well right now.

That makes a lot of sense. Thank you for additional color. I will turn it over.

Thank you.

Thank you. [Operator Instructions] And it appears we have no further questions this afternoon. Mr. Rajagopalan, I’d like to turn the conference back to you for any closing comments.

Thank you everyone for your participation and continued support. As we mentioned earlier, we are encouraged by our results and we continue to see good demand signals, despite a broader macro uncertainty that continues to exist. In tandem with navigating the economic challenges, we remain focused on growing our business and continuing to execute on our diversification strategy. We look forward to speaking with you again next quarter. Thank you.