Heidrick & Struggles International Inc. (NASDAQ:HSII) Q1 2018 Earnings Conference Call Transcript

Apr 23, 2018 • 05:00 pm ET

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Heidrick & Struggles International Inc. (NASDAQ:HSII) Q1 2018 Earnings Conference Call Transcript

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Presentation
Executive
Mark R. Harris

on earnings calls, the adoption of this standard in the first quarter of 2018 increased our reported consolidated net revenue by $2.5 million compared to the historical method of revenue recognition, or 2% of first quarter's net revenue. The change in methodology mostly affected how we recognize revenue associated with upticks for Executive Search contracts and for licenses related to our proprietary Culture Shaping tools, which we refer to as enterprise agreements, that resulted in an increase in revenue in Executive Search of approximately $3.5 million in the quarter, and a deferral of revenue in Heidrick Consulting of $1 million. For the full year, we're currently expecting the change in revenue recognition will not be material to our consolidated net revenue, but this is all subject to variability in the number, timing, and value of the Executive Search confirmations as well as our client's use and renewals of our enterprise license agreements.

With that, I'll move on to our results. Consolidated net revenue was up $20 million or 14% year-over-year driven by great results in the Executive Search, which was up 17% year-over-year to $146 million. All of the key Search business KPIs drove these results. For example, search confirmations were up 5% year-over-year with strong performance from Financial Services, Global Technology & Services, and Consumer Markets practices. Productivity and average retainers also improved compared to last year's first quarter. From our segment reporting, you can see we achieved double-digit growth in all regions. Americas was up 12%, Europe was up 36%, and Asia Pacific was up almost 13%.

While Heidrick Consulting did see a revenue retraction of approximately $1.3 million in the first quarter of 2018, $1 million of this decline in revenue was due to the new revenue recognition deferral in the quarter. Irrespective of the revenue decline, we are quite encouraged with what we are seeing in Heidrick Consulting. They are showing steady improvements in the business, including an increase in their pipeline.

Salaries and benefits -- salaries and employee benefits, excuse me, saw an increase of $14.2 million from the first quarter 2017, $12.2 million of which was related to an increase in variable compensation given the strong performance in Search on a comparative basis. We also made some strategic additions to consultant headcount in the quarter. We hired 14 new Search consultants to the Heidrick & Struggles family, and we promoted 13 internally to Executive Search Principals.

General and administrative expenses fell by almost 2% or $0.6 million year-over-year. The biggest declines in G&A were related to lower intangible amortization due to the impairments taken last year in the second and fourth quarters. The other two big contributors to the decline related to lower bad debt expense and a decline in external client services. These savings were partially offset by increases in office occupancy cost and professional services fees.

We have achieved a sizable improvement in operating income and operating margin in the first quarter of 2018. Operating income increased by $6.5 million, and our