Press Release

Quarterly Revenue of $263M, 3% Year Over Year Growth

13th Consecutive Quarter of Double-Digit Adjusted EBITDA Margin

CHICAGO, Oct. 25, 2023 /PRNewswire/ -- Today Heidrick & Struggles International, Inc. (Nasdaq: HSII) ("Heidrick & Struggles", "Heidrick" or the "Company") announced financial results for its third quarter ended September 30, 2023.

Third Quarter Highlights:

• Net revenue of $263.2 million increased 3% year over year
• Operating income of $22.1 million increased $8.6 million sequentially and operating margin was 8.4%
• Adjusted operating income of $22.1 million increased $1.3 million sequentially and adjusted operating margin was 8.4%
• Adjusted EBITDA of $32.3 million decreased $4.1 million sequentially and adjusted EBITDA margin was 12.3%
• Net income was $15.0 million and diluted earnings per share was $0.73

"We are very pleased with our third quarter results, posting year over year revenue growth and another double-digit adjusted EBITDA margin quarter despite ongoing macro uncertainty," stated Heidrick & Struggles' President and Chief Executive Officer, Krishnan Rajagopalan. "These results reflect the benefits of our One Heidrick strategy, which is to bring the best permanent executive level and on-demand talent to our clients, and to help leadership and organizations be more effective through our diversified product offering. Our diversified solutions of On-Demand Talent, Heidrick Consulting, and soon to include Heidrick Digital, will continue to be an increasing percentage of our business, and now contribute nearly 25% of our revenues." 

2023 Third Quarter Results

Consolidated net revenue was $263.2 million in the 2023 third quarter compared to consolidated net revenue of $255.2 million in the 2022 third quarter. The Company experienced growth in On-Demand Talent, Heidrick Consulting, and Executive Search in Europe, partially offset by declines in Executive Search in Asia Pacific and the Americas.

On a sequential basis, 2023 third quarter operating income was $22.1 million compared to $13.6 million in the 2023 second quarter. Adjusted operating income was $22.1 million compared to $20.8 million in the 2023 second quarter, and adjusted operating margin was 8.4% compared to 7.7% in the 2023 second quarter. Adjusted operating income in the 2023 second quarter reflects the exclusion of a non-cash impairment charge of $7.2 million. Adjusted EBITDA was $32.3 million in the 2023 third quarter compared to $36.4 million in the 2023 second quarter, and 2023 third quarter adjusted EBITDA margin was 12.3% compared to 13.4% in the 2023 second quarter. 2023 third quarter net income was $15.0 million compared to $9.0 million in the 2023 second quarter. This generated diluted earnings per share in the 2023 third quarter of $0.73, compared to $0.44 in the 2023 second quarter. Adjusted net income of $15.0 million and adjusted diluted earnings per share of $0.73 in the 2023 third quarter were consistent with 2023 second quarter results.

Executive Search net revenue was $198.8 million compared to net revenue of $212.8 million in the 2022 third quarter reflecting a decrease in the volume of executive search confirmations. Net revenue decreased 7.9%, or $16.8 million on a constant currency basis from the 2022 third quarter. Net revenue decreased 7.9% in the Americas (down 8.1% on a constant currency basis), increased 8.4% in Europe (up 1.0% on a constant currency basis), and decreased 21.6% in Asia Pacific (down 19.8% on a constant currency basis) when compared to the prior year third quarter.

The Company had 417 Executive Search consultants at September 30, 2023, compared to 389 at September 30, 2022. Productivity, as measured by annualized Executive Search net revenue per consultant, was $1.9 million compared to $2.2 million in the 2022 third quarter, reflecting a higher number of consultants combined with lower revenue.  Average revenue per executive search was approximately $153,000 compared to $155,000 in the prior year period.  The number of search confirmations decreased 5.1% compared to the year-ago period.

On-Demand Talent net revenue was $41.1 million, an increase of 76.6% compared to net revenue of $23.2 million in the 2022 third quarter, primarily due to the acquisition of Atreus Group GmbH ("Atreus"), partially offset by a decrease in the volume of legacy on-demand projects.

Heidrick Consulting net revenue was $23.3 million compared to net revenue of $19.1 million in the 2022 third quarter due to organic growth coupled with the acquisition of businessfourzero. The Company had 90 Heidrick Consulting consultants at September 30, 2023, compared to 72 at September 30, 2022.

Consolidated salaries and benefits decreased $4.3 million, or 2.5%, to $167.2 million compared to $171.5 million in the 2022 third quarter. Year-over-year, fixed compensation expense increased $9.2 million due to increases in base salaries and payroll taxes, expenses related to the deferred compensation plan, separation costs, and talent acquisition and retention costs, partially offset by decreases in stock compensation, and retirement and benefits. Variable compensation decreased $13.5 million due to lower bonus accruals related to decreased consultant productivity. Salaries and benefits expense was 63.5% of net revenue for the quarter compared to 67.2% in the 2022 third quarter.

General and administrative expenses increased $5.4 million, or 16.7%, to $37.6 million compared to $32.2 million in the 2022 third quarter. The increase was due to intangible amortization and accretion, increases in expenses related to office occupancy, and marketing, as well as the acquisitions of Atreus and businessfourzero, partially offset by a decrease in business development travel. As a percentage of net revenue, general and administrative expenses were 14.3% for the 2023 third quarter compared to 12.6% in the 2022 third quarter.

The Company's cost of services was $30.7 million, or 11.7% of net revenue for the quarter, compared to $17.8 million, or 7.0% of net revenue in the 2022 third quarter. This related to an increase in the volume of On-Demand Talent projects driven by the acquisition of Atreus.

The Company's research and development expenses were $5.6 million, or 2.1% of net revenue for the quarter compared to $5.4 million, or 2.1%, of net revenue for the third quarter 2022.

Operating income was $22.1 million for the quarter compared to $28.3 million in the 2022 third quarter. Operating income margin was 8.4% versus 11.1% in the 2022 third quarter.  Adjusted operating income in the 2023 third quarter was $22.1 million and adjusted operating income margin was 8.4% compared to 2022 third quarter adjusted operating income of $27.8 million and adjusted operating margin of 10.9%. Adjusted operating income in the 2022 third quarter reflects an adjustment to exclude a reduction in the fair value of an On-Demand Talent earnout by $0.5 million.

Adjusted EBITDA was $32.3 million compared to $33.3 million in the 2022 third quarter. Adjusted EBITDA margin was 12.3%, compared to 13.0% in the 2022 third quarter. In Executive Search, adjusted EBITDA was $51.9 million compared to $51.5 million in the prior year period. In On-Demand Talent, adjusted EBITDA was a loss of $0.6 million versus income of $0.2 million in the prior year period.  In Heidrick Consulting, adjusted EBITDA was a loss of $2.2 million compared to a loss of $5.2 million in the prior year period.

Net income was $15.0 million and diluted earnings per share was $0.73, with an effective tax rate of 37.5%. This compares to net income of $20.8 million and diluted earnings per share of $1.02, with an effective tax rate of 29.5% in the 2022 third quarter. Adjusted net income was $15.0 million and adjusted diluted earnings per share was $0.73, with an adjusted effective tax rate of 37.5% compared to 2022 third quarter adjusted net income of $20.5 million and adjusted diluted earnings per share of $1.00, which reflects the aforementioned earnout fair value adjustment.

Net cash provided by operating activities was $109.5 million, compared to $138.5 million in the 2022 third quarter. Cash, cash equivalents and marketable securities at September 30, 2023 was $334.0 million compared to $456.0 million at September 30, 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.

Dividend

The Board of Directors declared a 2023 fourth quarter cash dividend of $0.15 per share payable on November 21, 2023, to shareholders of record at the close of business on November 7, 2023. 

2023 Fourth Quarter Outlook

The Company expects 2023 fourth quarter consolidated net revenue of between $240 million and $260 million, which may be impacted by external factors, such as the foreign exchange and interest rate environments, foreign conflicts, inflation and macroeconomic constraints on pricing actions. In addition, this outlook is based on the average currency rates in September 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 third quarter results today, October 25, 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. 

About Heidrick & Struggles International, Inc.

Heidrick & Struggles (Nasdaq: HSII) is a premier provider of global leadership advisory and on-demand talent solutions, serving the senior-level talent and consulting needs of the world's top organizations. In our role as trusted leadership advisors, we partner with our clients to develop future-ready leaders and organizations, bringing together our services and offerings in executive search, diversity and inclusion, leadership assessment and development, organization and team acceleration, culture shaping and on-demand, independent talent solutions. Heidrick & Struggles pioneered the profession of executive search more than 65 years ago. Today, the firm provides integrated talent and human capital solutions to help our clients change the world, one leadership team at a time. ® www.heidrick.com

Non-GAAP Financial Measures

To supplement the financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), Heidrick & Struggles presents certain non-GAAP financial measures. A "non-GAAP financial measure" is defined as a numerical measure of a company's financial performance that excludes or includes amounts different than the most directly comparable measure calculated and presented in accordance with GAAP in the statements of comprehensive income, balance sheets or statements of cash flow of the Company.

Non-GAAP financial measures used within this earnings release are adjusted operating income, adjusted operating income margin, adjusted net income, adjusted diluted earnings per share, adjusted effective tax rate, adjusted EBITDA, adjusted EBITDA margin, and consolidated net revenue excluding the impact of exchange rate fluctuations (referred to as constant currency). These measures are presented because management uses this information to monitor and evaluate financial results and trends. Management believes this information is also useful for investors to evaluate the comparability of financial information presented. Reconciliations of these non-GAAP financial measures to the most directly comparable measures calculated and presented in accordance with GAAP are provided as schedules attached to this release.

Adjusted operating income is operating income excluding goodwill impairment and earnout fair value adjustments.

Adjusted operating income margin refers to adjusted operating income as a percentage of net revenue in the same period.

Adjusted net income and adjusted diluted earnings per share are net income and diluted earnings per share excluding goodwill impairment and earnout fair value adjustments, net of tax.

Adjusted effective tax rate is effective tax rate excluding goodwill impairment and earnout fair value adjustments, net of tax.

Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, equity-settled stock compensation expense, earnout accretion, earnout fair value adjustments, acquisition contingent compensation, deferred compensation plan income and expense, reorganization costs, impairment charges, restructuring charges, and other non-operating income (expense). 

Adjusted EBITDA margin refers to adjusted EBITDA as a percentage of net revenue in the same period.   

The Company evaluates its results of operations on both an as reported and a constant currency basis. The constant currency presentation is a non-GAAP financial measure, which excludes the impact of fluctuations in foreign currency exchange rates. The Company believes providing constant currency information provides valuable supplemental information regarding its results of operations, consistent with how it evaluates its performance. The Company calculates constant currency percentages by converting its financial results in a local currency for a period using the average exchange rate for the prior period to which it is comparing. This calculation may differ from similarly titled measures used by other companies.

Safe Harbor Statement

This press release contains forward-looking statements within the meaning of the federal securities laws, including statements regarding guidance for the fourth quarter of 2023 and the Company's expectations regarding its One Heidrick strategy and associated investment initiatives. The forward-looking statements are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and management's beliefs and assumptions. Forward-looking statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "outlook," "projects," "forecasts," "aim" and similar expressions. Forward-looking statements are not guarantees of future performance, rely on a number of assumptions, and involve certain known and unknown risks and uncertainties that are difficult to predict, many of which are beyond our control. Factors that may cause actual outcomes and results to differ materially from what is expressed, forecasted, or implied in the forward-looking statements include, among other things, our ability to attract, integrate, develop, manage and retain qualified consultants and senior leaders; our ability to prevent our consultants from taking our clients with them to another firm; our ability to maintain our professional reputation and brand name; our clients' ability to restrict us from recruiting their employees; our heavy reliance on information management systems; risks arising from our implementation of new technology and intellectual property to deliver new products and services to our clients; our dependence on third parties for the execution of certain critical functions; the fact that we face the risk of liability in the services we perform; the fact that data security, data privacy and data protection laws and other evolving regulations and cross-border data transfer restrictions may limit the use of our services and adversely affect our business; any challenges to the classification of our on-demand talent as independent contractors; the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems, networks, solutions, services and data; the impacts, direct and indirect, of the COVID-19 pandemic (including the emergence of variant strains) or other highly infectious or contagious disease on our business, our consultants and employees, and the overall economy; the aggressive competition we face; the fact that our net revenue may be affected by adverse economic conditions including inflation, the impact of foreign currency exchange rate fluctuations; our ability to access additional credit; social, political, regulatory, legal and economic risks in markets where we operate, including the impact of the ongoing war in Ukraine and the conflict in Israel and the Gaza Strip and the risks of an expansion or escalation of those conflicts; unfavorable tax law changes and tax authority rulings; the timing of the establishment or reversal of valuation allowance on deferred tax assets; the fact that we may not be able to align our cost structure with net revenue; any impairment of our goodwill, other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; and the fact that we have anti-takeover provisions that could make an acquisition of us difficult and expensive. We caution the reader that the list of factors may not be exhaustive. For more information on these risks, uncertainties and other factors, refer to our Annual Report on Form 10-K for the year ended December 31, 2022, under the heading "Risk Factors" in Item 1A, as updated in Part II of our subsequent Quarterly Reports on Form 10-Q, and other filings with the Securities and Exchange Commission. The forward-looking statements contained in this press release speak only as of the date of this press release. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Contacts:

Investors & Analysts:
Steven Horwitz, Interim Head of Investor Relations
shorwitz@heidrick.com 

Media:
Nina Chang, Vice President, Corporate Communications
nchang@heidrick.com