Heidrick & Struggles reports Q1 2014 results
Consolidated net revenue was $111.1 million in the first quarter, up 7.9 percent from $103.0 million in the 2013 first quarter. Exchange rate fluctuations negatively impacted net revenue by $0.5 million, or less than 1 percent.
Executive Search and Leadership Consulting net revenue increased 7.4 percent year over year, or $7.2 million, to $104.6 million. The increase was driven by a 42.6 percent increase in Europe (approximately 37 percent on a constant currency basis), and a 5.0 percent increase in Asia Pacific (approximately 12 percent on a constant currency basis), partially offset by a 2.7 percent revenue decline in the Americas. From a global practices perspective, the Consumer Markets, Financial Services and Global Technology & Services industry groups each achieved double-digit revenue growth, partially offset by declines in the Healthcare & Life Sciences, Education, Nonprofit & Social Enterprise, and Industrial practices.
Revenue from Culture Shaping services increased 16.9 percent, or $0.9 million, to $6.5 million from $5.6 million in the 2013 first quarter. Reported results in the 2013 first quarter excluded $2.0 million of pre-acquisition deferred revenue that the company was unable to recognize related to Senn Delaney as a result of purchase accounting.
The company ended the first quarter with 303 Executive Search and Leadership Consulting consultants compared to 293 at December 31, 2013 and 322 at March 31, 2013. Productivity, as measured by annualized net revenue per consultant, increased to $1.4 million compared to $1.2 million in the 2013 first quarter. Specific to Executive Search, the company's primary business, the number of confirmed searches increased 8.5 percent compared to the 2013 first quarter and the average revenue per executive search was $101,200 compared to $103,100 in the 2013 first quarter.
"Our first quarter results show progress, but also significant room for growth and improved profitability," said Tracy R. Wolstencroft, Heidrick & Struggles' President and Chief Executive Officer. "Net revenue increased 8 percent year over year, with particularly good improvement in Europe, and we saw positive confirmation trends and productivity improvement. I am encouraged by these results and by the growth in our consultant base since the end of the year."
Salaries and employee benefits expense in the first quarter increased 6.2 percent, or $4.4 million, to $75.9 million from $71.5 million in the 2013 first quarter. Variable compensation expense increased $7.4 million, primarily related to improved consultant performance, while fixed compensation expense declined $3.0 million, mostly reflecting lower year-over-year headcount. Salaries and employee benefits expense was 68.3 percent of net revenue for the quarter, compared to 69.4 percent in the 2013 first quarter.
General and administrative expenses increased 10.7 percent, or $3.3 million, to $34.4 million from $31.1 million in the 2013 first quarter. The increase was primarily driven by a number of non-recurring professional services fees, a one-time franchise tax matter and unbillable travel-related expenses. As a percentage of net revenue, general and administrative expenses were 31.0 percent compared to 30.2 percent in the 2013 first quarter.
Adjusted EBITDA(1) in the 2014 first quarter was $6.0 million and Adjusted EBITDA margin was 5.4 percent, compared to Adjusted EBITDA of $6.6 million and Adjusted EBITDA margin of 6.5 percent in the 2013 first quarter. The year-over-year decline mostly reflects the increase in general and administrative expenses.
Operating income in the first quarter was $0.8 million and operating margin (operating income as a percentage of net revenue) was 0.7 percent, compared to operating income of $0.4 million and operating margin of 0.4 percent in the 2013 first quarter.
The company reported a net loss in the 2014 first quarter of $0.7 million and a net loss per share of $0.04. The company recorded $1.3 million of income tax expense based on a full-year projected tax rate of approximately 51 percent. In the 2013 first quarter, the net loss was $1.2 million and the net loss per share was $0.07, reflecting $1.3 million of income tax expense. The effective tax rates in both years are higher than the statutory rate because of losses incurred that cannot be benefitted for tax purposes due to valuation allowances in certain jurisdictions.
Net cash used in operating activities in the 2014 first quarter, which includes annual bonus payments, was $74.9 million, compared to $69.1 million in the 2013 first quarter. Following the payment of bonuses, cash and cash equivalents at March 31, 2014 were $101.4 million ($67.4 million net of debt), compared to $85.7 million at March 31, 2013 ($45.7 million net of debt), and $181.6 million at December 31, 2013 ($146.1 million net of debt).
(1) Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, compensation expense associated with Senn Delaney retention awards, earnout accretion expense related to acquisitions, restructuring charges, and other non-operating income (expense). Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures which the company believes are useful to management and meaningful to investors because they provide insight into the ongoing operating results of the company's core business. A reconciliation is provided on the last page of the financial statements in this release.
2014 Second Quarter Outlook
The company is forecasting 2014 second quarter consolidated net revenue of between $120 million and $130 million. Among other factors, this forecast reflects assumptions for the anticipated volume of new Executive Search confirmations, Leadership Consulting assignments, expectations for Culture Shaping services, the current backlog, consultant productivity, consultant retention, the seasonality of its business, the global economic climate and no change in future currency rates.
Wolstencroft added, "Heidrick & Struggles is a premier brand with talented consultants and strong client relationships. Our growth and increased profitability will be guided by leveraging these core attributes. Attracting and retaining exceptional talent continues to be a primary focus, but there are other priorities which will also govern our initiatives. For example, we plan to expand and leverage our CEO & Board of Directors practice, where our brand impact in the market is greatest and has the potential to fuel growth in all the other aspects of our business. We are also pursuing ways to partner and integrate more aggressively across our geographies, practices and service offerings."