Heidrick & Struggles International - Q1 2023

Transcript

Operator (participant)

Welcome everyone to the Heidrick & Struggles Q1 2023 earnings conference call. To ask a question today, please press star one on your telephone keypad. As a reminder, today's conference is being recorded. It is now my pleasure to turn the conference over to Suzanne Rosenberg, Vice President of Investor Relations. Please go ahead, Ms. Rosenberg.

Suzanne Rosenberg (VP and Investor Relations)

Thank you, and welcome to our 2023 Q1 conference call. Joining me on today's call is our President and CEO, Krishnan Rajagopalan, and Chief Financial Officer, Mark Harris. We posted our accompanying slides on the IR homepage of our website at heidrick.com, and we encourage you to view these slides for additional context. Please note that in the materials presented today, we may refer to non-GAAP financial measures that we believe provide additional insight into underlying results. Reconciliations between these non-GAAP financial measures and the most comparable GAAP measures may be found in the earnings press release. Also, in our remarks, we may make certain forward-looking statements based on our current expectations. Such statements may involve risks and uncertainties that may cause actual results to differ materially.

We ask that you please refer to the safe harbor language also contained in today's press release, as well as our filings with the Securities and Exchange Commission for information concerning the risk factors that could affect the company. With that, Krishnan, I'll now turn the call over to you.

Krishnan Rajagopalan (President and CEO)

Thank you, Suzanne. Good afternoon, everyone. As anticipated, we saw a slowdown in the Q1 revenue from a year ago, reflecting broader macroeconomic headwinds. Importantly, we acted deliberately and adjusted our costs accordingly, which allowed us to still hold strong Q1 Adjusted EBITDA margins of nearly 12%. While we expect to see some continued volatility in our markets, based on our guidance, we believe we'll continue to navigate through these complexities prudently. Turning briefly to our Q1 results. Revenue for the quarter was $239 million, which was in line with our previously issued guidance, albeit at the lower end of the range. Adjusted EBITDA was $27 million. Adjusted EBITDA margin was 11.5%. Diluted earnings per share was $0.76.

In terms of strategic achievements, we completed the acquisition of Atreus in the On-Demand Talent space in the Q1. On April first, we completed the acquisition of businessfourzero or B four Z in Heidrick Consulting. Our strategy remains on track as we continue to leverage our strong balance sheet to focus on growth and diversification while serving our clients on their most pressing leadership challenges at the executive level. Before I provide some color on each of our business segments, I think it's important to take a step back and acknowledge that since our last call in February, there have been some new and increasing macroeconomic challenges. Sustained higher interest rates are continuing to pressure certain industries, including financial services and technology. In addition, recent issues of confidence in the banking sector have presented both new challenges and opportunities.

For example, at Heidrick, we have a sizable financial services practice. While we've seen some pauses in the banking sector, other areas such as wealth and asset management and insurance remain positive. Naturally, clients are prioritizing against the various macro externalities, just as we are. We're seeing that the uncertainty that organizations are facing is creating delays in decision-making. It also emphasizes the importance of having effective leaders in place to drive critical transformations and position companies for resilience in a world of constant change. In addition, while we're extremely cognizant of the current operating environment, we also see significant opportunities, particularly given the diversification of our business across executive search, consulting, and On-Demand Talent. Opportunities are being driven by several factors, including the ongoing digital transformation of businesses, new role creation across industries.

For example, in financial services, new roles comprise over 50% of our new engagements. The critical importance of talent recruitment at the top. In fact, a recent industry report cited the number of CEO changes at U.S. companies alone jumped in February this year, reaching its highest point since January 2020. With the ongoing global economic uncertainty, an acute need remains for companies to turn to high-end independent talent with skills enabling them to pivot adeptly in today's increasingly competitive business environment and rapidly changing markets. Ongoing need to focus on change management, especially in the face of layoffs and maintaining strong cultures to keep workforces engaged, motivated, and focused on purpose. As companies prepare for some turbulence ahead, we believe we're well-positioned to maintain our market leadership position in executive search while continuing to take strategic actions within our adjacent businesses and implementing strong operating discipline.

Speaking more broadly, while we do anticipate a slowdown in executive search this year, we are expecting to drive growth in both On-Demand Talent and Heidrick Consulting. Simultaneously, we are laser-focused on the operational excellence we've been delivering over the past several years across each of our business lines and regions and remain confident in our ability to successfully manage our business through these fluid and dynamic times. Now let me turn to each of our business segments. In executive search, we continue to see a solid market given the level of change at the top as companies adapt to a new and changing operating environment. Increasingly, we see that clients want exclusive and holistic relationships, which plays well to our positioning and the diversification of our business. Hot topics in search include ESG, particularly with a focus on sustainability and renewable energy sources, cybersecurity, and AI.

We continue to benefit from our distinguished brand, global presence, and best-in-class service we provide to our clients. These assets, together with our nimble and strategic team, are driving the segment to continue to operate efficiently despite some headwinds. We're encouraged that our backlog indicates a stronger 2nd quarter. Shifting to On-Demand Talent. Year-over-year revenue growth in the 1st quarter was primarily driven by the acquisition of Atreus, which closed on February 1st. From a strategic perspective, Atreus gives us greater geographic scope and serves as a springboard to establish a strong presence in continental Europe. The integration of Atreus is now well underway with our integration management office executing on a strong roadmap. From a go-to-market perspective, we've already identified several cross-collaboration opportunities.

While we continue to see high demand in our On-Demand Talent segment, the pace of decision-making has slowed, impacting revenue and reflecting corporate caution against the macro uncertainty. We have since seen volume rebound in recent months, which we expect will drive growth in the Q2. Specifically, we're seeing growth and demand for interim executives, driven in part by the shifting needs and executive skills to weather a changing environment. There is no doubt that On-Demand Talent is a formidable force now and for the future of work, not only for employers, but for workers as well. The recent Wall Street Journal article cited that an incremental 1 million Americans alone are working part-time voluntarily from the prior year. With this segment's growing demand, we'll continue to increase its marketing and sales resource while opportunistically expanding its geographic footprint.

In Heidrick Consulting, our clients remain engaged with us in accelerating their performance culture, particularly as it relates to talent retention, strategy, purpose, and execution. While demand remains strong and our new bookings were consistent with internal expectations, we did see some slowdown due to protracted decision-making. Our strategy of partnering with our clients on longer and deeper journeys has kept us close to the top of the house, providing us with a positive outlook for the year. We're also doubling down on our purpose and culture work in Heidrick Consulting. Today more than ever, we know leaders are focused on purpose and culture, not only to increase employee engagement, but also to drive strategy implementation and accelerate business transformation. Critically, companies are engaging in the alignment of purpose, culture, and strategy to accelerate performance, create productive, engaging workplaces in hybrid environments, and retain top talent.

On April 1st, we completed the acquisition of B Four Z, a London-based consultancy that specializes in working with companies to develop and implement purpose-driven change. With B Four Z, we will complement our existing culture shaping practice to offer a broader, more robust set of leadership advisory solutions as we work with clients to help them link purpose and strategy to leadership and culture, further support their efforts to develop future-ready cultures and organizations. As we discussed on our last call, we continue to build out our digital assets. We're in beta mode with Heidrick Navigator. We're working with several clients to implement and operationalize the platform. We also continue to have productive discussions with clients in our pipeline. As we previously said, Heidrick Navigator will require some time to build a distinguished user base.

We expect bookings to begin in early 2024, translating to revenue over time, as with most subscription models. As signed contracts increase and total value rises, we expect the platform to meaningfully contribute to top and bottom-line results. Overall, as a firm, we continue to advance our exciting transformational journey towards building and offering our clients the next generation of talent and leadership advisory service offerings, which will help their companies achieve higher performance levels through their leaders and teams. While we often slice our business into search and non-search when speaking on these types of calls, from a strategic perspective, we're focused on helping our clients in two primary capacities. First, talent acquisition, and second, effectiveness of leaders, teams, and organizations. The former includes our executive search and On-Demand Talent businesses.

The latter includes our Heidrick Consulting segment and currently under development digital assets that will further support our ability to provide clients with a systematic and holistic approach at scale to manage and develop their leadership teams as an asset. When we look at these two areas, certain segments and service offerings present higher growth opportunities and are vital in our continued efforts to diversify our revenue stream. Importantly, these aren't new shoots of growth, but rather accelerating shoots in businesses that are already a part of our strategy. We will continue to invest in these prospects both organically and inorganically, as supported by our strong balance sheet and cash generation capabilities.

From an inorganic perspective, we have a proven track record of success as a result of our due diligence process, predicated on identifying opportunities that are aligned with our strategy and our culture while maintaining our strong financial discipline. For example, the sustained demand for On-Demand Talent services and culture purpose-related consulting fueled our recent Atreus and B four Z acquisitions. We believe these inorganic investments will expedite our attainment of desired growth rates in these segments, and we remain opportunistic with our M&A practices, particularly in the event valuations turn more favorable due to economic uncertainty. We also see significant opportunities for reinvestment across our business, more specifically within our portfolio of digital assets spanning all three segments, in addition to our standalone product, Heidrick Navigator.

Here, we will continue investing R&D dollars towards these assets rather than looking to acquire them as we are truly developing unique solutions critical to address complex client issues. We look forward to continuing the strategy of supporting these high growth opportunities within our company to further diversify our business. To conclude, I'm pleased with the performance of the team in the Q1, particularly given the broader macroeconomic challenges. Our results speak to our strong operating discipline, nimble execution, and strength of our diversification strategy. As we progress through 2023, we remain focused on advancing the growth and diversification of our business, and we're excited about our current and future investments that will drive sustainable long-term growth and deliver value to our stakeholders globally. I'd like to now turn the call over to Mark.

Mark Harris (CFO)

Thank you, Krishnan, and good afternoon, everyone. Let me start by commenting that while our Q1 revenue was what we expected, you can see the effects of our operating discipline as we maintain strong profitability in the face of very challenging macroeconomic environment by printing an Adjusted EBITDA margin of 11.5% in the Q1 of 2023 compared to 12.7% in all of 2022. Our financial strength is also evident in our debt-free balance sheet as we ended the quarter with over $200 million in cash even after funding the acquisition of Atreus, the BTG performance-based earn-out payment, 2022 bonus payments, and our quarterly cash dividend. In addition, we've added the flexibility of a $200 million credit facility available to us, giving us over $400 million of liquidity.

As we move forward, our focus is on growth and diversification, we will continue to leverage our balance sheet to drive organic and inorganic growth through innovation and differentiation. Please remember, the businesses we're adding do carry lower margins versus executive search. However, these are higher growth businesses, and over time, we expect the aggregate dollars flowing to the bottom line will be EPS accretive, a trade that we believe brings greater returns to our shareholders. In addition, the Q2 guidance we are providing demonstrates that even in the face of certain headwinds, our diversified revenue is potentially on track for another year on par with the previous two years. I think this speaks volumes to the ongoing success of that strategy, and we have been able to achieve thus far as we continue to execute on our strategic roadmap.

Without further ado, I'll now provide a financial summary of the quarter. As a reminder, Q1 results include two months of the Atreus business and no operational performance of businessfourzero as this acquisition closed on April first. On a consolidated basis, Q1 revenue was $239.3 million which was within our guidance range. On a constant currency, revenue was $244.8 million which was at the midpoint of our guidance range. This compares to historical levels achieved 2022 and reflect the broader market slowdown. Let's shift to our three business segments. In executive search, revenue was in line with expectations at $190.5 million with decreases in each region. As previously stated, the segment's performance was hindered by certain macro conditions.

Consultant productivity of $2.1 million on a trailing twelve-month basis compares to $2.5 million in 2022 and reflects the lower level of production, coupled with 38 more consultants versus last year. For On-Demand Talent, revenue was $31.1 million, which is an increase of 33% compared to the year ago period. This comparison includes Atreus in the Q1 of 2023. Taking that out, we were down about 13% in our existing platform. This was due to having 339 active engagements at the end of the Q1 of 2023 compared to 379 at the end of the Q1 of 2022, a decrease of 11%.

This was a result of a slower Q4 that initially bled into January and early February, March came in very strong and indicates a much stronger Q2. As Krishnan mentioned, we continue to view On-Demand Talent as a higher growth opportunity and an important avenue for Heidrick to further diversify. Future growth from this segment will likely be a mix of organic and inorganic. In the U.S., growth will be organic as we have a great foothold with a dominant position. In Europe, we have built a strong organic business in the U.K., now with the acquisition of Atreus in Germany, we are further developing our presence in continental Europe. Importantly, we've identified the markets that we need and want to cover and will continue to reinvest in the business, as demonstrated by our recent actions.

Heidrick Consulting's Q1 revenue was $17.7 million, basically flat with the Q1 of 2022. Given the environment, we've seen more delays in certain in-flight projects. With no material cancellations, coupled with strong new engagements coming in, and leads to a stronger backlog that will eventually come through in revenue. Companies are focused on re-energizing their workforces and aligning around purpose, strategy, and structures, especially those that will enable them to manage within the hybrid working environment. This bodes well especially for our recent acquisition of businessfourzero, which will deepen our existing consulting offerings and is expected to meaningfully contribute to the segment's revenue. Overall, we look forward to further scaling Heidrick Consulting while working to achieve appropriate levels of profitability as we add that scale.

Turning to operating expenses, salaries and benefits being a variable cost, our lower revenue translated to lower compensation costs. Salary and benefits for the Q1 was $158.9 million versus $201.4 million in the Q1 of 2022. As a percentage of revenue, it was 66.4% versus 71% in the period. general and administrative expenses were $34.3 million compared to $29.8 million in the Q1 of 2022. as a percentage of revenue, it was 14.3% versus 10.5% in the year-ago period. The increase in dollars is a result of business development, intangible amortization and accretion, office occupancy, IT, and professional services.

In a more normalized environment, we would expect to see G&A as a % of net revenue to be approximately 15% or slightly lower, thus this number is in line with our expectations. In cost of services, we saw an increase of $4.8 to 22.8 million in the Q1 compared to $18 million in the previous year quarter, which was mostly due to an increase in volume of On-Demand projects. As a reminder, this line item is where we expense our payments to independent consultants who perform high-level projects and interim work in On-Demand Talent, which is a % of revenue. We continue to invest in the digitization of our products and solutions across the enterprise, including Heidrick Navigator through R&D spend.

R&D spend in the Q1 was $5.5 million versus $4.4 million last year. We expect the return on these investments to generate strong benefits as we leverage technology in our search, consulting and On-Demand Talent segments, while providing a systemic and holistic approach to leadership asset management through our digital portfolio. In terms of profitability, we view Adjusted EBITDA as the best long-term proxy of our underlying operating performance, especially given M&A activity in our business and associated noise from purchase accounting. In the Q1, Adjusted EBITDA was $27.5 million compared to $35.7 million last year. Adjusted EBITDA margin remained strong at 11.5% compared to 12.6% in the prior year period.

On a segment basis, executive search finished the quarter with Adjusted EBITDA of $48.4 million and a 25.4% margin compared to $51.9 million with a 21.4% margin in the Q1 of 2022. On-Demand Talent recorded Adjusted EBITDA loss of $1.3 million versus a gain of $0.3 million in the year ago period, stemming from the hiring mandate we have for 2023 in our U.S. business. Heidrick Consulting reported Adjusted EBITDA loss of $2.7 million compared to a $1.8 million loss in the prior year period. Again, stemming from hiring mandate we have for 2023 and our cost of sales pertaining to certain services that need to be delivered outside of our core businesses.

Our Q1 effective tax rate was 31.7% and continues our company's trend of a tax rate consistently in the low 30% range. Net income for the quarter was $15.6 million and diluted earnings per share was $0.76. While down from 2022, it should be noted that annualized, we're still in the $3 handle for EPS despite the headwinds in 2023. We ended the quarter in a strong cash position of $204.7 million compared to $268 million at the end of March 2022. Most of the change in the cash is due to our M&A activity.

This shows that our balance sheet is a very powerful asset. We believe that right now our greatest returns will come from reinvesting in our business both organically and inorganically. In addition, as we enter a bit of a down cycle here, we see more opportunities on the real estate side of the equation to further shape and reduce global square footage and create even more oxygen for our shareholders without the need to add liquidity. Now turning to Q2 2023 revenue guidance. We expect the range to be between $260 million and $280 million. For now, our diversification strategy provides us with new businesses that carry different macro risks, which tend to be less cyclical, which has always been our goal.

While our guidance contemplates a slowdown in executive search this year, we do expect to see stronger relative performance from our On-Demand Talent and Heidrick Consulting as the demand within these businesses still looks robust. To conclude, our management of the business continues to deliver meaningful profitability and a strong bottom-line performance. Always our key focus here at Heidrick. We believe we're extremely well positioned to continue to navigate successfully through this rapidly changing global market. In addition to driving the financial performances, we remain steadfast in our strategy to transform our firm through the diversification of the business model and revenue stream. We believe this strategy will drive long-term profitable growth and deliver sustainable value to our shareholders. With that, Krishnan and I will be happy to take your questions.

Operator (participant)

Thank you. Once again, that is star one if you would like to ask a question today. We'll go first to Tobey Sommer, Truist Securities.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Thanks. Good afternoon. I'll start with a question on the results themselves in the quarter. Was there anything special from a margin perspective, particularly in executive search? Cause it was a pretty big year-over-year decline, yet.

The, I think 21% in terms of revenue, but EBITDA only down 7%. Any kind of swing factors you would point to explain that, you know, very low decremental margin?

Mark Harris (CFO)

Yeah, absolutely. Good question there, Tobey. Most of it has to do with the way that we do our fee SOV tiering in executive search. When the revenue kind of comes in much lower at the outset, a lot of people haven't broken through their tiers like we have in 2021 and 2022. Sometimes that accelerates, especially when it's a strong quarter as we saw in the previous two years. This year, because of the slow start, it really just kind of underspent on the sellers and benefit side of it. As we kind of ramp that up during the year and people start going through the different tierings, would expect a little bit of catch-up, but overall, that's really what was generating it.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Okay, that makes sense. What would the normal, to the extent we can even recall, because I know the last few years have kind of been anything but normal, but what kind of seasonal change would you expect, sequentially or year-over-year in confirmations in executive search in the Q1, you know, compared to the prior quarter?

Mark Harris (CFO)

Well, again, fair question. I think you have to kind of go back and look at 2018 and 2019 in terms of those kinds of confirmation numbers. What you would typically see in the Q1 versus the other quarters, Q1, you kind of come out a little bit lighter. You really get the roll from December and November in on the revenue side of it. Confirmations start coming in pretty strong in Q1, much stronger in Q2. Then we typically see a little bit of a lighter load in Q3, mainly stemming from the August holiday period. Then as you know, Q4 is typically a lot lighter with the, both the holidays in November and December, year-end, et cetera.

Some people trying to get their headcount in if they've got budget allocation, they don't want to try to move it over to the year following. Those are the typical type trends. As you rightly point out, in 2021 and 2022, it was anything but normal. That's just how that kind of comes out.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Okay. From a strategic standpoint, do you expect to invest in R&D at a couple of points of sales over the long term? Is that how you think about managing the business and developing technologies and sort of an edge internally? Is this more discrete and associated with the projects and initiatives that you have sort of in the, in the business now, but maybe won't have 5 or 10 years from now? How do you think about that?

Krishnan Rajagopalan (President and CEO)

Yeah. Let me take a crack at that. Look, I think we can see that we would be investing at this rate currently, given the project work that we do. We think we'll continue to invest. I think the revenue lines will change, so the equation of the points required will be less from that perspective. I think that in the human capital business, reinvention, innovation is gonna be pretty critical going ahead. Expect to see an R&D type of a line is what I would say. How that will modulate might change because we're in a bit of a heavier investment cycle right now.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Okay. Last question for me. Could you help me understand the contribution from acquisitions to the 2Q guidance and maybe juxtapose how that's feathered in, just so I can try to get to an organic number? You're buying things at relatively small dollar increments, so we're not getting, you know, sort of explicit numbers to know for our modeling. Thank you.

Mark Harris (CFO)

Yeah. In terms of the guidance, you know, the, the amount of, I'll say last 12 months, I think that was your question last time around, Toby, I'll use that as my threshold of new stuff. Really sub 10%, right? Really around 7%, 8% of that revenue is being contributed by the new acquisition. It's still very much core growth. If you actually think about the growth of our, I'll call it core business, which is defined as outside of the last acquisitions over the last 12 months, which is really just HRS and businessfourzero. You know, that our growth is 9% out of our core between Q1 and kind of Q2 midpoint. Of course, we've got, you know, the layering in of the new acquisition.

There's a couple different ways to cut it if you want, but I think it's impacting it, a little bit, but it's not the lion's share by far of the growth. The growth of the core is what's really being generated between Q1 and Q2.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Okay. Maybe to just draw a finer point on it, of the incremental acquisitions that have taken place in 1 year to date, what's the $ contribution to the 2Q guidance?

Mark Harris (CFO)

Yeah. We don't disclose the actual dollar amounts, Tobey. That's not broken out. As I said, I think the core side of it is still growing at that 9%-10% clip. The rest would be the acquisitional revenue that would be in there.

Tobey Sommer (Managing Director and Senior Equity Research Analyst)

Okie dokie. Thank you.

Mark Harris (CFO)

Sure.

Krishnan Rajagopalan (President and CEO)

Thank you.

Operator (participant)

Up next, we'll hear from Kevin Steinke, Barrington Research.

Kevin Steinke (Managing Director)

Good afternoon. You mentioned, you know, maybe about more macroeconomic headwinds since your last call. You specifically talked about uncertainty in the banking sector. Have you seen that uncertainty, you know, bleeding over into, to other industry practices or financial services where, you're seeing it, mostly appear, I guess?

Krishnan Rajagopalan (President and CEO)

Yeah, I mean, look, I think that, you know, in our comments, we have seen general macro uncertainty leading to some delays, in projects, in cycles. I think it's actually more than just industries actually, you know, impacted across the businesses a little bit. We haven't seen cancellations or anything, but just delays in getting started as people have to address other topics that are popping up on their radar screen, et cetera, things like that. I think it has had an impact, overall.

Kevin Steinke (Managing Director)

Okay. You know, you noted a slower January and February in search, but then a nice pickup in March. Would you just attribute that mostly just to, you know, typical seasonality, you know, or maybe some, you know, increased confidence among your clients? Just any comments on, you know, kind of those monthly fluctuations you mentioned there.

Krishnan Rajagopalan (President and CEO)

Sure. Let me try to run it on that, Kevin. I think, what we saw was January and February pretty much being on target, slightly ahead, and I think March started to show a little bit, again, very, very modestly in terms of a differentiation off of what our expectations were. In terms of the overall quarter, it definitely performed, again, modestly, above our expectations. I think for the most part, there wasn't a lot of shock to the system. There was some currency and other stuff that took us off our midpoint, but we're pretty much in stone's throw from it. I think that was all kind of as we expected, plus or minus, you know, 1%, so to say, or 2%, to help clarify the comment.

Kevin Steinke (Managing Director)

All right. You mentioned in your financial services practice, new roles representing I think you said over 50% of your new engagements. Could you just maybe give a little more color on the, you know, some of the new roles and that you're seeing in the financial services sector that's driving that work?

Krishnan Rajagopalan (President and CEO)

Sure. I can help with that a bit. I mean, all kinds of new roles and titles. If I look at existing business, I'll just give you a snapshot of some things we saw that, a Chief Policy Officers that maybe all companies don't have, and some are hiring. Chief Purpose and Brand Officer, a Chief Scientific Officers in financial services, Head of Agile Transformation, Head of Digital Business and Ecosystem. You know, these kinds of things are just existing companies, or titles that they didn't have. Then you have a whole bunch of new businesses that get launched, as well, where they need, you know, as part of that, a Chief Commercial Officer, Heads of things like advice and planning and investments.

All kinds of new opportunities that begin to look like that are popping up both in new businesses as well as existing businesses.

Kevin Steinke (Managing Director)

Okay, great. You've talked again about Navigator, being, continued being in beta mode there, and I believe you said, you know, bookings will start in early 2024. Just, you know, any other color there in terms of. Have you started up any other new pilots? For Navigator specifically, and then, any comment on any other digital products in addition to Navigator that, those R&D dollars, might be going towards?

Krishnan Rajagopalan (President and CEO)

Yeah, sure. Yeah, we have started up a couple more pilots since then, the first ones are moving along in a nice way where, you know, the clients are beginning to use it, maybe even elevate it a bit inside their organization. We're eagerly awaiting that feedback and working with them on that. Yeah, there's progress being made on Navigator with a couple of new clients as well, which is great. We're also taking some of those investments and digitizing our assessment processes and creating a platform that is feeds into Navigator as well, to provide assessment work and can stand alone at the same time. That's another product which takes some digital investment dollars, R&D dollars into it.

Kevin Steinke (Managing Director)

Okay, great. Well, that's all I had. Thanks for taking the questions.

Krishnan Rajagopalan (President and CEO)

Thank you.

Kevin Steinke (Managing Director)

Thanks.

Operator (participant)

We'll go to Mark Riddick, Sidoti.

Mark Riddick (Senior Equity Analyst)

Hey, good afternoon.

Krishnan Rajagopalan (President and CEO)

Hi.

Mark Riddick (Senior Equity Analyst)

Several of my questions have already been covered. I did want to touch on a couple of things, though. I was wondering if I know there was in the prepared remarks, some commentary around banking sector activity. I was wondering if there were any other industry vertical type call-outs that were worth noting that folks might learn something from.

Krishnan Rajagopalan (President and CEO)

Yeah, I mean, I think we've seen some good momentum in the industrial segment. It's held its own, we continue to see momentum in there. I think that's worth a call-out. We referenced that tech was a little slower, you know, we're beginning to see some... There's lots of energy inside of the world of AI, as you can imagine.

Mark Riddick (Senior Equity Analyst)

Right

Krishnan Rajagopalan (President and CEO)

as well. You know, that might be worthwhile to drill into on the next call to see where we go with that. There's lots of energy associated with that. We've seen in consumer, the retail segment come back a bit, as well, so that's been a positive theme for us.

Mark Riddick (Senior Equity Analyst)

Okay, great. I was wondering I think you made there were also some comments around real estate footprint, and I was wondering if we should be thinking about sort of, is there a timing aspect that you're looking? I would imagine that part of that is gonna be a function of when these renewals come up. Is there any lumpiness or visibility as to maybe when some of those real estate efforts might take place?

Mark Harris (CFO)

I think that's right. I think the way I'm thinking about it is 80% of the time, you're absolutely right the way that you articulated it. The other 20%, keep in mind, if the real estate, location is suffering, you know, a major setback or we think we can get into a new lease that's much cheaper, we'll accelerate that process like we did in New York, where we go, we engage, we get a location that's either a better fit from either a cost or just a square footage point of view, and then we'll take our old lease and work with the landlord from an exit strategy to exit that on an early termination basis. As you can imagine is really just a net present value calculation of some sort.

Most of the time, you're absolutely right, we wait for our leases, and we kinda go through that process. That's usually when there's really not much of a difference. It's not worth the early termination clause. If we see the opportunity set where there is, and we can make a real estate play that makes a lot of sense for our team and the long-term G&A side of the equation, then we will accelerate that path. Hopefully that helps you.

Mark Riddick (Senior Equity Analyst)

It does. Thanks. I guess the last one for me, I was wondering if you're seeing much in the way of any macroeconomic impact or benefit on acquisition pipeline, be it availability or pricing or the like. Thanks.

Mark Harris (CFO)

Sure. I think in terms of, you know, the valuation side of the equation, which gives us our comps to have discussions about potential acquisitions have clearly been helpful-ish. You know, there hasn't been a dramatic impact on the valuation side in terms of the plays that we've looked at. I think it's more of a question of how long that's going to last and how many people are gonna try to stave off from doing a down round, et cetera, and that will might bring more sensitivity into the pipeline. The way I would characterize it is, we've got a strong pipeline. We know kind a, you know, what we wanna do and how we wanna do it, and we'll run the playbook.

You know, everything's a function of economics, so we do wanna make sure that it's gonna be accretive to our shareholders or we'll hold off or maybe partnerships, other ways that we look at it. We always weigh the cost of organic and inorganic. We always weigh the timing of the two, and we really hope that the valuations kind a come down. I think the pipeline is still very similar as it was before. I think what you're seeing with the management team and the company is when it makes a lot of sense with Atreus, with businessfourzero and BTG in Brazil and everything before that is we'll definitely pull the trigger. We're not shy about that when we think we've got things locked up in a creative manner.

Mark Riddick (Senior Equity Analyst)

Excellent. Thank you very much.

Mark Harris (CFO)

Sure.

Operator (participant)

Everyone, at this time, there are no further questions. I'll hand back to management for any additional or closing remarks.

Mark Harris (CFO)

Super. Thank you everyone for your participation, your ongoing support. We're very pleased with the progress we're making on our diversification journey as we develop a more resilient business model while providing our clients with an unparalleled suite of services in the human capital arena. We look forward to updating you again next quarter. Thank you very much.

Operator (participant)

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.