Heidrick & Struggles reports Q1 3.6% net revenue increase
Consolidated net revenue (revenue before reimbursements) increased 3.6%, or $4.0m, to $115.2m from $111.1m in the 2014 first quarter. Exchange rate fluctuations negatively impacted results by $4.9m, or approximately 4%.
Executive Search and Leadership Consulting net revenue increased 2.3 percent year over year, or$2.4 million, to $107.0 million. The improvement was driven by a 12.0 percent increase in theAmericas and a 10.1 percent increase in Asia Pacific (16.5 percent on a constant currency basis), partially offset by a 25.0 percent decline in Europe (13.5 percent decline on a constant currency basis). From a global practices perspective, the Financial Services and Industrial industry practices were the primary drivers of year-over-year growth.
Net revenue from Culture Shaping services increased 24.6 percent, or $1.6 million, to $8.1 millionfrom $6.5 million in the 2014 first quarter. The improvement in net revenue primarily reflects a higher volume of client work in the quarter.
"Revenue growth and an increase in profitability underscore a solid first quarter for the firm globally," said Tracy R. Wolstencroft, Heidrick & Struggles' President and Chief Executive Officer. "We are pleased with the improved results in our Americas and Asia Pacific regions, and in our Culture Shaping business. Europe experienced a slower than anticipated start to 2015, in addition to being impacted by foreign currency exchange rates."
The company ended the first quarter with 323 Executive Search and Leadership Consultingconsultants compared to 303 at March 31, 2014 and 307 at December 31, 2014. Productivity, as measured by annualized Executive Search and Leadership Consulting net revenue per consultant, was $1.4 million in the 2015 first quarter, the same as in the 2014 first quarter.
Specific to Executive Search, the company's largest business, the number of confirmed searches in the 2015 first quarter increased 2.0 percent compared to the 2014 first quarter, while the average revenue per executive search was $102,700 compared to $101,200 in the 2014 first quarter.
Salaries and employee benefits expense in the 2015 first quarter increased 3.4 percent, or $2.6 million, to $78.5 million from $75.9 million in the 2014 first quarter.
Variable compensation expense increased $2.0 million, primarily related to improved company performance, and fixed compensation expense increased $0.6 million. Salaries and employee benefits expense was 68.1 percent of net revenue for the quarter, compared to 68.3 percent in the 2014 first quarter.
General and administrative expenses declined 12.8 percent, or $4.4 million, to $30.0 million from$34.4 million in the 2014 first quarter. The decrease primarily reflects lower professional services fees, a decline in internal travel-related expenses, and the absence of a tax-related matter in last year's first quarter. As a percentage of net revenue, general and administrative expenses were 26.1 percent compared to 31.0 percent in the 2014 first quarter.
Adjusted EBITDA(1) in the 2015 first quarter improved to $12.3 million, compared to $6.0 million in the 2014 first quarter. The Adjusted EBITDA margin (Adjusted EBITDA as a percentage of net revenue) in the 2015 first quarter was 10.7 percent, compared to 5.4 percent in the 2014 first quarter. The year-over-year improvements reflect higher net revenue and a decline in general and administrative expenses, partially offset by the increase in salaries and employee benefits expense.
(1) Adjusted EBITDA refers to earnings before interest, taxes, depreciation, intangible amortization, stock-based compensation expense, compensation expense associated with Senn Delaneyretention awards, earn-out 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 to the most directly comparable GAAP measures are provided on the last page of the financial statements in this release.
Operating income in the 2015 first quarter increased by $5.9 million to $6.7 million, and operating margin (operating income as a percentage of net revenue) improved to 5.8 percent. This compares to operating income of $0.8 million and operating margin of 0.7 percent in the 2014 first quarter.
Net income in the 2015 first quarter was $3.4 million and diluted earnings per share were $0.18, based on an effective tax rate of 47.5 percent in the quarter and a full-year projected tax rate of approximately 41 percent. In the 2014 first quarter, the company reported a net loss of $0.7 millionand a net loss per share of $0.04 after recording $1.3 million of income tax expense based on a full-year projected tax rate of approximately 51 percent.
Net cash used by operating activities in the 2015 first quarter, which includes annual bonus payments, was $87.8 million, compared to $74.9 million in the 2014 first quarter. Following the payment of bonuses, cash and cash equivalents were $107.6 million at March 31, 2015 ($79.6 millionnet of debt) compared to $211.4 million at December 31, 2014 ($181.9 million net of debt) and$101.4 million at March 31, 2014 ($67.4 million net of debt).
Second Quarter 2015 Outlook
The company is forecasting second quarter 2015 consolidated net revenue of between $127 million and $137 million. This forecast is based on the average currency rates in March 2015 and reflects, among other factors, management's assumptions for the anticipated volume of new Executive Search confirmations, Leadership Consulting assignments and Culture Shaping services, the current backlog, consultant productivity, consultant retention, and the seasonality of its business.
"We are adding to the talent base of our firm," Wolstencroft added.
"Through a combination of hiring initiatives, annual promotions and lower turnover, our worldwide consultant base increased by almost seven percent year over year at the end of the first quarter. As important, we have doubled our training and development budget to ensure the success of our new consultants. We'll continue to invest capital to attract and retain the best consultants in the world and to expand our service offerings so that Heidrick & Struggles is enabled to provide increasing value to our clients as a trusted leadership advisory firm."