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Heidrick & Struggles Reports 2022 Third Quarter and Nine Month Results
Heidrick & Struggles International, Inc. (Nasdaq: HSII) ("Heidrick & Struggles" or the "Company") announced financial results for its third quarter ended September 30, 2022.
Third Quarter Highlights:
- Net revenue of $255.2 million; on a constant currency basis net revenue was $265.8 million
- Operating income of $28.3 million and operating margin of 11.1%
- Net income of $20.8 million and diluted earnings per share of $1.02
- Adjusted EBITDA of $33.3 million and adjusted EBITDA margin of 13.0%
- Cash, cash equivalents and marketable securities was $456.0 million, 30.9% higher than September 30, 2021
"We are pleased with the performance we delivered in the third quarter, which was near historic highs," stated Heidrick & Struggles' President and Chief Executive Officer, Krishnan Rajagopalan. "Our strong profitability was realized even as we continue to make investments for the long-term in digital product innovation and despite unfavorable foreign exchange fluctuations. We are proud of our results as they were achieved in a slowing global market that is being impacted by looming recessionary concerns given rampant inflation and rising interest rates. On a constant currency basis, revenue for the quarter exceeded our record year-ago levels. Further, even with the current market slowdown and the strength of the U.S. dollar, we still expect to see our performance to be above the record years we delivered pre-pandemic in 2018 and 2019."
Rajagopalan continued, "We continue on our ambitious path, with a goal to transform Heidrick & Struggles into the world's leading leadership advisory firm that will provide a new generation of business services that will enable companies to achieve higher performance from their executive-level talent in a fast-changing world. Across Executive Search, On-Demand Talent and Heidrick Consulting, we're leveraging our assets while developing complementary digital products to strategically differentiate our firm and address vital leadership needs along with commitments to DE&I, purpose and sustainability. Together with our powerful One Heidrick go-to-market approach, we expect our diversification strategy will meet increasingly complex client demands, while further enhancing long-term shareholder value."
2022 Third Quarter Results
Consolidated net revenue of $255.2 million compared to record consolidated net revenue of $263.8 million in the 2021 third quarter. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 4.0%, or $10.6 million, consolidated net revenue increased 0.7%, or $2.0 million from the 2021 third quarter.
Executive Search net revenue of $212.8 million compared to net revenue of $221.6 million in the 2021 third quarter. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 4.2%, or $9.2 million, net revenue increased 0.2%, or $0.4 million from the 2021 third quarter. Net revenue decreased 3.4% in the Americas (down 3.3% on a constant currency basis), decreased 3.6% in Europe (up 12.7% on a constant currency basis), and decreased 7.3% in Asia Pacific (down 0.6% on a constant currency basis) when compared to the prior year third quarter. The Industrial and Social Impact practice groups exhibited growth over the prior year.
The Company had 389 Executive Search consultants at September 30, 2022, compared to 368 at September 30, 2021. Productivity, as measured by annualized Executive Search net revenue per consultant, was $2.2 million compared to $2.4 million in the 2021 third quarter. Average revenue per executive search was approximately $155,000, up from $134,000 a year earlier. The number of confirmed searches decreased 17.1% compared to the year-ago period.
On-Demand Talent net revenue of $23.2 million compared to net revenue of $24.3 million in the 2021 third quarter. This reflects an anticipated seasonal slowdown partially offset by increases in average project size, reflecting strategic initiatives to expand and penetrate key accounts, along with increases in project extensions.
Heidrick Consulting net revenue of $19.1 million compared to net revenue of $17.9 million in the 2021 third quarter. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 7.5%, or $1.3 million, Heidrick Consulting revenue increased 14.4%, or $2.6 million, compared to the prior year period. The Company had 72 Heidrick Consulting consultants at September 30, 2022, compared to 66 at September 30, 2021.
Consolidated salaries and benefits decreased $14.4 million, or 7.8%, to $171.5 million compared to $185.9 million in the 2021 third quarter. Year-over-year, fixed compensation expense increased $3.4 million due to base salaries and payroll taxes and retirement and benefits, partially offset by decreases in the deferred compensation plan and talent acquisition and retention costs. Variable compensation decreased $17.9 million due to a decrease in production. Salaries and benefits expense was 67.2% of net revenue for the quarter, compared to 70.5% in the 2021 third quarter.
General and administrative expenses were $32.2 million compared to $29.2 million in the 2021 third quarter. The increase was primarily due to business development travel, information technology, bad debt and professional fees. As a percentage of net revenue, general and administrative expenses were 12.6% for the 2022 third quarter compared to 11.1% in the 2021 third quarter.
The Company's cost of services was $17.8 million, or 7.0% of net revenue for the quarter, compared to $18.7 million, or 7.1% of net revenue in the 2021 third quarter, primarily related to On-Demand Talent and a decrease in the volume of on-demand projects.
Research and development, a new category of expense in 2022 that captures expenses associated with new digital product development efforts, was $5.4 million, or 2.1% of net revenue for the quarter. Consistent with all investments, research and development is subject to the Company's return on investment criteria.
Operating income was $28.3 million for the quarter compared to record $33.3 million in the 2021 third quarter. Operating income margin was 11.1% versus 12.6% in the 2021 third quarter. The Company recorded a fair value adjustment to reduce the On-Demand Talent earnout by $0.5 million in the 2022 third quarter. Year-ago results included a $3.3 million restructuring credit related to the timing of office closures associated with the Company's real estate strategy. Excluding these items in both periods, adjusted operating income in the 2022 third quarter was $27.8 million compared to $30.1 million in the 2021 third quarter and adjusted operating income margin was 10.9% compared to 11.4% in the 2021 third quarter.
Net income was $20.8 million and diluted earnings per share was $1.02, with an effective tax rate of 29.5%. This compares to record net income of $24.5 million and record diluted earnings per share of $1.21, with an effective tax rate of 27.0%, in the 2021 third quarter. Excluding the aforementioned fair value adjustment of the earnout in the 2022 third quarter and the restructuring credit in the 2021 third quarter, adjusted net income in the 2022 third quarter was $20.5 million compared to $22.4 million in the 2021 third quarter and adjusted diluted earnings per share was $1.00 compared to $1.11 in the 2021 third quarter, with adjusted effective tax rates of 29.5% and 26.0%, respectively, for the 2022 third quarter and 2021 third quarter.
Adjusted EBITDA was $33.3 million compared to $35.5 million in the 2021 third quarter. Adjusted EBITDA margin was 13.0%, compared to 13.5% in the 2021 third quarter.
Net cash provided by operating activities was $138.5 million, compared to net cash provided by operating activities of $117.1 million in the 2021 third quarter. Cash, cash equivalents and marketable securities at September 30, 2022 was $456.0 million, compared to $545.2 million at December 31, 2021 and $348.3 million at September 30, 2021. The Company's cash position typically builds throughout the year as employee bonuses are accrued, mostly to be paid out in the first quarter. There was no debt on the balance sheet at September 30, 2022, providing the Company financial flexibility.
2022 Nine Month Results
For the nine months ended September 30, 2022, consolidated net revenue was $837.7 million compared to $717.5 million in the first nine months of 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 3.2%, or $22.9 million, consolidated net revenue increased 20.0%, or $143.2 million, compared to the prior year period.
Executive Search net revenue in the first nine months of 2022 increased 13.4%, or $83.9 million, to $709.3 million from $625.4 million in the first nine months of 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 3.2%, or $20.0 million, net revenue increased 16.6%, or $103.9 million. Net revenue increased 16.9% in the Americas (increased 16.8% on a constant currency basis), increased 11.0% in Europe (increased 23.4% on a constant currency basis), and increased 0.6% in Asia Pacific (increased 5.8% on a constant currency basis). All industry practices exhibited growth over the prior year, except for Healthcare & Life Sciences. Productivity was $2.5 million for the first nine months of 2022 compared to $2.3 million in the first nine months of 2021. The average revenue per executive search was approximately $142,000 in the first nine months of 2022 compared to $127,000 the same period in 2021, while confirmations increased 1.2%.
On-Demand Talent net revenue in the first nine months of 2022 was $69.0 million compared to $43.0 million in the same period of 2021. The increase in net revenue was primarily due to the timing of the acquisition in the prior year and an increase in the average project size.
Heidrick Consulting net revenue in the first nine months of 2022 increased 21.3%, or $10.4 million, to $59.5 million from $49.1 million in the first nine months of 2021. Excluding the impact of exchange rate fluctuations, which negatively impacted results by 5.6%, or $2.7 million, Heidrick Consulting revenue increased 26.9%, or $13.2 million, compared to the prior year period.
Operating income for the first nine months of 2022 was $92.4 million compared to operating income of $81.7 million in the same period of 2021. The operating income margin was 11.0% compared to 11.4% in the first nine months of 2021. Excluding the $0.5 million fair value adjustment to reduce the earnout in the 2022 year-to-date period and the restructuring charge of $3.8 million recorded in the 2021 year-to-date period, adjusted operating income for the first nine months of 2022 was $91.9 million compared to $85.4 million in the first nine months of 2021 and adjusted operating income margin was 11.0% compared to 11.9% in the first nine months of 2021.
Net income for the first nine months of 2022 was $63.4 million and diluted earnings per share was $3.09, with an effective tax rate of 31.3%. This compares to net income of $60.1 million and diluted earnings per share of $2.97 with an effective tax rate of 31.8% in the first nine months of 2021. Excluding the aforementioned fair value adjustment of the earnout recorded in the 2022 year-to-date period and the restructuring charge recorded in the 2021 year-to-date period, adjusted net income for the first nine months of 2022 was $63.1 million compared to $62.7 million in the first nine months of 2021 and adjusted diluted earnings per share was $3.07 compared to $3.10 in the first nine months of 2021, with adjusted effective tax rates of 31.3% and 31.7%, respectively, for the 2022 period and 2021 period.
Adjusted EBITDA for the first nine months of 2022 was $105.7 million and adjusted EBITDA margin was 12.6%, compared to adjusted EBITDA of $104.5 million and adjusted EBITDA margin of 14.6% for the same period in 2021.
Dividend
The Board of Directors declared a 2022 fourth-quarter cash dividend of $0.15 per share payable on November 18, 2022, to shareholders of record at the close of business on November 4, 2022.
2022 Fourth Quarter Outlook
The Company expects 2022 fourth quarter consolidated net revenue between $215 million and $235 million, while acknowledging that continued fluidity in external factors such as the foreign exchange and interest rate environments, foreign conflicts, and inflation may impact quarterly results. In addition, this outlook is based on the average currency rates in September 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 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 24, 2022 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.
