Heidrick & Struggles International Inc (HSII) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to this Heidrick & Struggles 2003 fourth-quarter and full year financial results conference call. As a reminder, this call is being recorded. Now for opening remarks and introductions I will turn the conference over to Investor Relations and Communications Officer, Ms. Lynn McQue (ph).

Good morning, everyone, and welcome to our investor conference call and webcast regarding our results for the 2003 fourth-quarter and full year. On today's call are Tom Friel, our Chairman and CEO of Heidrick & Struggles, and Kevin Smith, Chief Financial Officer. Tom will spend a few minutes talking primarily about 2004 and Kevin will provide a detailed review of the 2003 quarter and full year.

As a reminder, there are supporting slides available on the website to accompany today's prepared comments and they have a lot of good information in them, so if you don't have them I would encourage you to get a copy. As always, I would like to advise you that this call may not be reproduced or retransmitted without our consent. Certain matters in this call are forward-looking statements. We refer you to the Safe Harbor language contained in our press release dated today, February 20th, 2004 which is widely disseminated by the various wire services and other media. The language is also on slide 2 of the presentation. So I'll now turn the call over to Tom.

Thank you, Lynn, and good morning, everyone. Most of the news that we have to share with you this morning is good news. The signs of a more robust economy that we first witnessed in October are certainly reflected in our results for the fourth quarter of 2003. Our net revenue of $82 million exceeded the top end of our expectations. It was our biggest revenue quarter of the year, and that in a quarter that usually is seasonally soft. And our core operating earnings, excluding some items Kevin will talk about in detail later, continued to improve. Assignments, especially in the financial services and industrial sectors, saw an acceleration in the quarter. Revenue from our for board work has been strong all year.

None of us should make any mistake about this. The market is still very competitive, but there is increased optimism among our clients and renewed drive and enthusiasm on the part of our consultants worldwide. We intend to capitalize on this momentum in 2004 by attacking the market in a coordinated but aggressive manner and taking our business to another level.

Allow me now to spend a few minutes telling you about some of our plans for 2004 and beyond. On our last investor call I told you that we were in the midst of reviewing our strategy and our structure through a range of initiatives that would examine every aspect of our firm. This work involved many of our colleagues around the world working in teams supported by a few selected outside experts. While some of this work continues, most of it was completed by year-end. In many areas we have taken decisions and begun execution of the recommendations of these groups, and most of these changes will be implemented this year.

One of the critical initiatives on our agenda was defining our go to market approach because so many other initiatives were dependent to some degree on the decisions made about this central piece of our strategy. Not surprisingly, professional service firms increasingly have migrated to organizing around clients and client needs as opposed to geographic or industry needs. And although clients focus has always been integral to our strategy, we're moving rapidly to a more formal structure in this area.

We have identified three types of client needs that we can and should serve, and our management is now structured around meeting these three needs with three major strategic thrusts. For the most part serving these client needs is not new for us, but they are at different levels of business maturity within Heidrick & Struggles. Let me tell you about these three thrusts.

The first continues to be searches and services for Boards of Directors, including searches for new chief executive officers. This has been core to our strategy for a long time and this work at the top is where our reputation is built and maintained. The second key initiative are searches and other services supporting CEOs, and the entire C suite of executives, mostly direct reports to CEOs. The third, and this is the area with the greatest potential and the greatest new focus for us, is increasingly serving selected key clients with the range of services that they need to build effective leadership teams.

We have demonstrated that we can leverage our entire toolkit of leadership expertise to create tailored solutions that mean even greater value as delivered to our clients. In addition, by focusing this way, doing more work for fewer clients, is a more profitable business model for us. And it further embeds our clients within our firm and our firm within our clients rather than the relationship being primarily dependent on one or two consultants and on a low transaction of business.

To be very clear, we are not saying that all of our work will be or should be in key accounts, but we certainly should be generating at least 50 percent of our revenue from our top group of key global accounts. We won't get there overnight, but we believe that is achievable within three years and achieving that is core to our new three-year strategy.

As I said earlier, we have put an organization structure in place over the last two months that centers on the client. It ensures that there is specific management responsibility for delivering on each of these client needs and for building better internal linkages across those three thrusts and across our entire company. We have combined a client facing team with our regional P&L managers and a smaller but very high-quality corporate administrative team, and these three groups together comprise our newly announced global leadership team.

Over the last several years our primary focus, as you all know, has been to bring our cost structure in line with changed business conditions. It was necessary and it was painful, but we believe we have now accomplished what we set out to do. Managing costs will continue to be an integral part of our culture, but, as we've told you before, after several years of stripping out much of our discretionary spending, we must return now to investing in certain activities that are critical to our growing again and to the firm's long-term success.

In 2004, we intend to invest selectively and carefully in a number of business building activities. We are and will continue to be making targeted spends in marketing and key account developments. We're working toward making certain that our research and knowledge management capabilities are the best in our profession and equal to any in any professional service firm.

We continue to enhance our training programs, which are vital in a professional services organization, and as part of this we're investing heavily in quality initiatives this year on a worldwide basis. We will also make a modest number of what we call investment hires. Some individuals who can contribute importantly to the future but will require some time to ramp up to productive levels. Within all of these new investment categories we're prioritizing our spending so that we can release the investment dollars based in part on our revenue performance during the year.

One other area that I know you want to hear about is our compensation structure, as consultant competition particularly is such a large part of our P&L. Our compensation programs will not change significantly structurally in 2004, but during this year we will be developing a comprehensive plan -- this work is already underway -- that we will implement beginning in 2005 and announce late in the year in 2004. Integral to this new comprehensive plan is that compensation at all levels in the Company and for all activities in the company must be much better aligned with our strategy and with our investment and financial performance goals.

While I don't want to speculate too much on this work before it's completed, there are some elements that I suspect will be critical parts of our new incentive plan. For example, as our focus on key accounts increases, we will differentiate to some degree our compensation programs around key accounts and around teamwork, as teamwork becomes even more important to factor into our compensation.

The other key element is profitability and we're also looking hard at how to incorporate incentives around margin and profitability into the equation at the same time evaluating carefully what role equity should play both short-term and long-term in our new plans. We'll have more to say about that in subsequent calls during the year. I hope that that gives you a sense of what will occupy a great deal of our time and frankly a great deal of my time in 2004.

From a budget planning perspective for next year -- for this year we've made the assumption that the economy will continue to look moderately better. Under that scenario, we would anticipate net revenue growing in the mid single digits range in 2004, with operating margins in the 5 to 6 percent range. This margin expansion, I should add, already factors in the investments I discussed earlier. In other words, we will make these investments and expect to deliver performance at that level.

For the first quarter of 2004, we expect our net revenue to be in the range of $80 to $85 million. January confirmations were up moderately from both November and December, and February looks like it's running at about January's pace. This is good news. We hope it improves, but we're cautiously optimistic about short-term performance at this point. At these estimated revenue levels we anticipate that the corresponding diluted earnings per share would be between 5 cents and 15 cents a share. These earnings estimates assume a normalized tax rates of 41 percent, the same rate we've been using.

The reason for the relatively broad range of earnings is that, as I think most of you know, our bonus accruals are based on estimated full year performance. So this early in the year the bonus accrual will vary only marginally, whether the revenue in the first quarter comes in at the high-end or the low-end of this range.

As a firm, we are very pleased to be entering 2004 on a much stronger footing than we've experienced in the last few years. With much of our strategic work and our cost management work completed, this year will be about execution. We all recognize, however, that we live in a world that can shift economically or geopolitically on a dime, so we'll make certain to maintain a cost structure that has enough flexibility in it to account for changing conditions.

Last year was the 50th anniversary of Heidrick & Struggles. After completing the first 50 years in business, we have much to look forward to in the next 50 years. Our global team is energized, the environment is a bit more friendly, and we're implementing a plan that formalizes the client focus that has always been so vital to our reputation and our success. Our success is reflective of our clients' success. As we move through the year I look forward to updating you on our progress on all of these things.

There is one other item I want to touch on briefly before we move to the next phase of this call, and that's the status of our Chief Financial Officer search. We're down to a short list of candidates that we are interviewing and I would expect that we will complete this search during the month of March. With the completion of this hire, we will have finished putting in-place our new administrative team, one of the three key legs of our new global leadership team. That will complete the team, which is now part of delivering these results.

In the meantime, as we complete this search, Kevin Smith is here to aid in the transition by completing the year-end close and handling some Investor Relations duties. We are grateful that Kevin has agreed to help us through this transition, and I would now like to turn the call over to Kevin, who will give you more detail on the fourth quarter and on the full year. Thank you.

Thanks, Tom and good morning, everyone. As Tom said earlier, we were very encouraged by the improving revenue picture in the fourth quarter, especially since Q4 is typically our weakest quarter. All of our regions reported higher revenue for the quarter except North America, which was down about 5 percent due to an increase in deferred revenue. In addition, our ongoing cost reduction efforts continue to benefit the bottom line and we expect that those benefits will continue into 2004.

Our fourth-quarter results are however a bit complicated due to the restructuring charge and the deferred tax valuation allowance that were recorded in the quarter. So let me now review the results in detail starting slide 5. Net revenue for the fourth quarter of 2003 was $82 million, a 4.9 percent increase over last year's fourth quarter and a 6.6 percent sequential increase versus the third quarter of 2003. On a year-over-year basis, the fourth quarter benefited from foreign currency exchange variances of approximately $5 million. Excluding the impact of currency, revenue declined approximately 1 percent versus the fourth quarter of last year.

The reported operating loss was $19.1 million in the fourth quarter of 2003, a $4.3 million improvement over last year's operating loss due to lower restructuring charges and the increase in revenue. Net nonoperating expense was $186,000 in the fourth quarter of 2003 versus net nonoperating income of $1.7 million last year, primarily due to lower interest income, smaller warrant portfolio gains, and some foreign currency transaction losses in 2003. The net loss in the fourth quarter was $72.4 million or $3.95 a share, compared to a net loss of $20 million or $1.10 a share last year. The increase in the net loss was entirely due to an increase in our deferred tax asset valuation allowance recorded during the quarter.

Let me now talk about our income tax provision. As we indicated in this morning's release, during the fourth quarter we recorded a full valuation allowance for our deferred tax assets that resulted in a non-cash charge to income tax expense of approximately $58 million. The charge was based on the provisions of FASB statement number 109 (technical difficulty) and a strong recommendation of our independent accountants. Simply put, FAS 109 indicates that if a Company has cumulative losses in recent years it is difficult to overcome the presumption that a valuation allowance is not required.

While this charge had a significant affect our fourth-quarter results, it will also impact our accounting for income taxes in the future. Assuming we are profitable going forward, it is unlikely that we will record any U.S. tax expense for at least the next two years. We will however continue to record foreign income tax expense. In addition, the company will continue to assess the realizability of the deferred tax assets in the future. If in the future the Company determines that a lesser allowance is required, it would record a reduction to income tax expense and a valuation allowance in the period of such determination.

The final point I want to make on this issue is that we continue to believe that we will be profitable in 2004 and beyond. Recording this allowance in no way undermines our commitment to significant improvements in profitability going forward.

Okay, let me now move on to slide 6 and look quickly at our performance for the year 2003. Net revenue declined 9.3 percent in 2003 to $317.9 million as the soft economy for much of the year adversely affected our results. The operating loss in 2003 of $22.3 million was an improvement over 2002's operating loss of $47.1 million. However, the net loss for 2003 increased to $80.7 million or $4.43 per share due to the increase in the deferred tax valuation allowance.

As I indicated earlier, our results for both the fourth quarter and full year contain a number of noncomparable items that we believe do not reflect the core operating performance of the business. Those items are detailed on slide 7 for your reference. Since the items are relatively straightforward I won't spend time running down the list, but we believe this information is helpful in analyzing our results.

Let's now turn to slide 8 and look at some of the line items on the income statement in more detail. Salaries and benefit expense in the fourth quarter of 2003 was $55.3 million, a 4.5 percent increase over the fourth quarter of last year. The fixed component of salaries and benefits declined by $7 million due to previous headcount reductions, but that benefit was more than offset by an increase in our bonus accruals in the quarter. Total bonus accruals in the fourth quarter of 2003 were $14 million versus $3.3 million in the fourth quarter of 2002.

As you may recall, bonus expense was unusually low in the fourth quarter of 2002 due to the reversal of excess bonus accruals recorded earlier in that year. In 2003, we've done a much better job of seasonalizing our bonus accruals. Also in the fourth quarter of 2003 we reversed a $1.3 million accrual related to our Performance Share Plan. Given the additional restructuring charge in the fourth quarter of 2003, it is unlikely that the profitability targets set for the plan in 2002 will be achieved and accordingly the accrual was reversed. Offsetting a large part of that benefit was $940,000 in additional executive severance.

Salaries and benefits were 67.5 percent of revenue in the fourth quarter versus 67.7 percent last year. For the full year of 2003, the ratio increased to 70.3 percent from 69.1 percent in 2002 due to approximately $6.7 million of noncomparable charges related primarily to executive severance. Excluding those charges, the ratio improved to approximately 68 percent in 2003. G&A costs for the fourth quarter of 2003 were $23.2 million, essentially flat with the fourth quarter of the prior year. G&A as a percentage of revenue fell to 28.3 percent from 29.8 percent last year.

Okay, let's move on to slide 9 and look at the details of the fourth quarter restructuring charge. The $22.5 million charge has three components -- severance of $3.9 million for the elimination of 32 positions, 29 of which were in Europe; a $3.3 million write-off of goodwill and other intangibles primarily related to the conversion of our operation in Finland to an affiliate; and property related charges of $15.3 million, the majority of which represents increases to previously established accruals for unused office space around the world.

While the economy has improved in some parts of the world, the commercial real estate market continues to be very soft in some markets, so we have increased our estimates of the time it will required to sublease certain properties and the anticipated losses on those subleases. On a geographic basis, $17 million of the charge is related to Europe. Most of the remainder relates to North America. Finally about $18.9 million of the charge is a cash charge and, given that most of the charge is property related, the majority of the cash outflows are beyond 2004.

The next slide, slide number 10, contains some selected search statistics for the fourth quarter and the full year. Confirmed searches in the fourth quarter increased 7 percent over the comparable quarter of 2002, while on a full year basis confirmed searches decreased approximately 5 percent versus 2002. The average fee per search was up approximately 1 percent in 2003 to $81,100. Our consultant headcount numbers are also on this slide for your information.

The next to slide, slides 11 and 12, show the breakdown of our revenue by industry practice and geographic region. As slide 11 shows, the only change of note in our industry practice mix were the increase in the professional service practice and a decrease in technology. And as slide 12 shows, there was minimal change in our geographic mix of our business during 2003.

All right, let's now move on to the review of our performance by geographic segment, and we'll begin with a look at the results for North America on slide number 13. North America's net revenue was $42.7 million in the quarter, up 4.6 percent decrease from last year. The year-over-year decline was largely due to an increase in the revenue deferral in 2003. The Financial Services and Professional Services practices reported significant increases in the quarter, but those increases were offset by a significant decline in the technology practice.

Operating income in North America was $8 million in the quarter versus $10.8 million in 2002. A bad debt credit of $1.6 million in the fourth quarter of 2002, lower revenue and employee separation agreements all contributed to the lower operating profit in 2003. The operating margin in the fourth quarter of 2003 was 18.6 percent versus 24.2 percent a year ago. The consultant headcount in North America at the end of the fourth quarter was 146, a 16 percent decline from last year.

For the year 2003, net revenue in North America fell 11.4 percent to $172 million. The Professional Services and industrial practices reported revenue increases for the year, while the remaining practices reported declines. Operating income, however, increased 6.8 percent to $36 million due to the lower headcount and reduced spending in almost every category. The operating margin for 2003 was 20.9 percent, compared to 17.4 percent in 2002.

Latin America's results are on slide number 14. Net revenue in the quarter increased 28 percent to $3 million, while the operating income improved to $285,000 from a loss of 127,000 a year ago. The consultant count in Latin America at quarter end was 18, an increase of 1 consultant versus last year. Despite the loss of $1.2 million of revenue from locations that were converted to affiliates in 2002, Latin America's net revenue increased 2 percent to $11.2 million in 2003.

Operating income improved to a profit of 863,000 in 2003 from a loss of $2.8 million in 2002. As you may recall, the region's 2002 results included approximately $1.7 million of non-recurring charges related to converting certain operations to affiliates and adjusting our value added tax liability.

Okay, let's now turn to our European results on slide number 15. Europe's fourth quarter net revenue increased 14 percent to $30.7 million, primarily due to favorable foreign exchange rate variances. On a local currency basis, net revenue declined 2 percent from the fourth quarter of last year due to the economic weakness that Europe has experienced throughout most of 2003. The good news, however, is that on a sequential basis Europe's fourth quarter revenue was up 19 percent over the third quarter of 2003. While we got some help from currency, most of the increase resulted from real improvements in the UK, Germany, and portions of the Nordic region.

Europe's operating loss was $276,000 in the quarter, a substantial improvement over both last year's fourth quarter loss of $3 million and the $2.2 million loss in the third quarter of 2003. The increase in revenue and the prior restructuring activity were the primary reasons for the reduced loss in Q4. Europe's consultant count was 114 at quarter end, a 2 percent decline from December 31st of last year.

Despite significant positive for exchange rate variances, Europe's net revenue declined 9.1 percent in 2003 to $113 million. On a local currency basis, Europe's revenue declined 22 percent versus 2002 due to the weak economic conditions we have discussed previously. Europe's reported operating loss for 2003 was $3.8 million versus $3.2 million in 2002. However, the loss in 2003 includes approximately $2 million of noncomparable severance charges that were incurred in the second quarter. With the restructuring actions we have taken, and the expectation of higher revenue in 2004, we certainly anticipate that Europe will be profitable in 2004.

Okay, let's move on slide 16 and look at the results of our Asia-Pacific region. Asia's net revenue was $5.5 million in the quarter, a 34 percent increase over last year's weak fourth quarter results. The Financial Services, industrial and consumer practices all reported strong year-over-year increases. Operating income in the quarter was $345,000 versus an operating loss of $25,000 last year primarily due to the improvement in revenue. The consultant headcount in Asia-Pacific was 33 at December 31st, an increase of 3 over the fourth quarter of 2002.

For the year 2003, Asia-Pacific's net revenue rose 2.6 percent to $21.6 million. Operating income, however, increased 50.8 percent to $2.3 million from $1.5 million last year primarily due to lower compensation expense. The operating margin improved 10.4 percent in 2003 from 7.1 percent in 2002.

Corporate expenses declined 15.8 percent in the fourth quarter to $4.8 million, largely due to lower compensation expense and reduced discretionary spending. On a reported basis, corporate expense for the year 2003 increased approximately 1.4 percent versus 2002. However, excluding net noncomparable charges of $5.7 million related primarily to executive severance, 2003 corporate expenses declined 19.1 percent due to lower fixed compensation expense and reduced IT spending.

Our last slide, slide 17, shows some selected balance sheet and cash flow information. Our December 31st cash balance of $119.3 million was well above the projection we gave you back in October, primarily due to higher than anticipated revenue -- receivable collections and the timing of certain restructuring and tax payments. Many of those payments, and our remaining bonus payments for 2003, will be made in the first-quarter of 2004, so we now expect to have approximately $85 to $95 million of cash on the balance sheet at the end of the first-quarter of 2004.

Looking at some selected cash flow data for the quarter, depreciation was $3.3 million, unchanged versus the comparable quarter last year, and amortization of intangibles fell 34 percent to $333,000. For the year 2003, depreciation was $12.6 million and amortization of intangibles was $1.5 million. Depreciation and amortization should be in the range of $13 to $14 million in 2004. Capital spending was $1.6 million in the quarter compared to $1.5 million in the fourth quarter of 2002. For all of 2003, capital expenditures increased to $5.8 million from $5.2 million in 2002. We expect capital expenditures to be in the $8 to $10 million range in 2004.

So, in summary I'd say that strength of our fourth quarter provides us with some clear momentum coming into 2004. Assuming the recent economic improvements hold up, we believe 2004 will be a year of moderate revenue growth and improved profitability. At the same time we are renewing some investment programs that are critical to our long-term success. Everyone in the firm is optimistic about the future and happy to be putting the difficulties of the past three years behind us. And with that we'll open up the call for your questions.

(OPERATOR INSTRUCTIONS) Bob Lavick (ph) with CJS Securities.

I noticed that your corporate expense, and you just said it, it was very low in the quarter and even backing out the benefit from the charge and then the severance charge. Is that new level sustainable or was there anything else special going on there? Can there be more cost or should we expect that to pick up next year?

No, we think it's sustainable. We've significantly brought down the cost of our corporate overhead as the revenue has come down, and we think that number is sustainable.

Great. And do you have cash from operations for the year?

It's about $10 million I believe -- yes, $10.5 million.

Great. And my last question is what's the expected consultant count for year-end '04 that you're thinking implied in your guidance?

It'll be up modestly, as Tom said earlier. We ended the year at 311, it should probably tick up modestly but we're not expecting a big increase.

Okay, great. I'll get back in queue. Thank you.

Kelly Flynn and UBS.

This is Andrew Founce (ph) for Kelly. I wanted to touch on margins a little if I may and the margins implied by your '04 guidance. If we looked at the revenue in '04, I guess it assumes a 5 percent growth rate I think which is about in line with what you were guiding to, that assumes about a 16 million increase in revenue. And then if we look at your operating margins, I guess it assumes that your operating costs increased by about 12 million. So based on that, could you perhaps speak a little bit to first of all savings from the restructuring during the fourth quarter? And then the increase in spending due to you mentioned discretionary spending on some investments, increases in consultant compensation? And then just kind of increases you would expect due to the higher revenue? Thanks.

I'll take the first piece of that, which was the savings from the restructuring charges. We expect the savings from the restructuring charges to be about $3.9 million, which was roughly about equal to the severance charge component of the charge, and I'll have Tom talk to the other elements of 2004.

Some of our increase in cost ramps up was increasing consultant compensation, not of increasing revenues. But as we indicated, we expect to spend somewhere in the neighborhood of $8 to $10 million on investment spending that's been really deferred over the last two to three years. Some of this is in marketing. Some of this is in quality. Some of this is in the client facing programs that we think will have high rates of return for us in the future. And we also, to the greatest extent possible, will manage these through the year towards the latter quarters so that we can make sure that the revenue increase more than covers them.

Okay, if you could, could you give me your estimate for depreciation and amortization in '04, and then also the bonus accruals implied by the guidance? Thanks.

Well, the depreciation and amortization, as we said earlier, should be in the range of $13 to $14 million for 2004, and I'm sorry --.

We're getting the bonus accrual assumption for --.

And our estimate for the first quarter is that it would be in the $10 to $11 million range, and that will track up or down a little bit from that number based on revenues in the quarter.

So probably about 45 million for the year.

Okay, great. And then finally, you mentioned that you were assuming a 41 percent tax rate in the first-quarter. I guess I had -- my understanding was you may see some slightly higher tax rates early in the year.

No, with the charge that we've taken now, Andrew, to provide a full deferred tax valuation allowance, as I explained in my formal remarks, we will not be recording any U.S. tax expense for at least the next two years even if we're profitable. The 41 percent is, if you will, a pro forma type normalized tax rate.

The actual tax rate is going to be lower than that, but it's just so hard to predict it because it's going to really be highly dependent on what entity the income comes from that frankly we figured we'd just give you some consistency to the estimates that we provide.

The only tax expense, Andrew, that we will be recording for at least the next two years will be foreign tax expense.

Okay, great. Thanks for your explanation.

Dave Koning (ph) with Robert W. Baird.

Congratulations on a very good quarter. First of all, just wondering about Q1 revenue guidance. It looks like it implies about a 7 percent year-over-year growth rate. I know your full year growth rate is sort of mid single digit range. Should we expect that growth rate basically to stay pretty constant or even decelerate a bit throughout the year or I guess what are your thoughts on that?

It's difficult to predict too far into the year, particularly on a quarter-to-quarter basis because, as you know, revenues in our business can tend to be a little bit sensitive to when assignments come in in a quarter and there's some seasonality in the forecast. Typically our first quarter is not our best quarter of the year, but we're off to a very strong start. So maintaining a growth rate at that level would certainly get us to or beyond the overall estimate.

And then secondly, on the salaries and benefits line, for the quarter you were at 67.5 percent of revenue. I'm wondering as we look out and as revenue increases, how we should look at that incrementally. Should we look at incremental revenues maybe at 60 percent of salary or what might be the best way to look that?

Kevin, do you want to take that?

As we've said, as the revenue grows the ratio should be coming down. Our goal is to get that ratio down close to 60 percent. We think we'll show some significant improvement along those lines in 2004.

So should -- maybe 1/5 of that or a quarter of that improvement -- of that from 67.5 to 60 percent maybe in '04?

Yes, that's about right, yes.

Thank you.

Mark Marcon of Wachovia Securities.

I was wondering, Tom, I wanted to delve a little bit into your initial comments. Can you give us a sense in terms of what percentage of your current revenues are coming from the major accounts that you would like to focus on and where would you expect that to go?

Yes, I would. Right now we're seeing in the neighborhood of 25 to 30 percent of our revenue from our top 100 global clients. Our goal is to drive that to 50 percent over three years. It's a very simple goal and it basically means roughly doubling over the next three years the revenue that we get from our top 100 clients around the world.

Would that be based on basically increasing your share of what those clients are currently doing, or are you anticipating also that their level of business is going to pick up?

It comes from three things. One, we do think that -- not only do we think but they think that their level of business will pick up, but for us more importantly is whether their level of spend on what we provided will pick up, and we (indiscernible) think it will. So that's sort of economically driven. Our goal by focusing on these clients that are so core to us, much more so than we have in the past and forging partnerships, contractual partnerships in some cases, with them that the percentage of what they do spend that comes to us versus somewhere else will go up.

We are also looking to build out better global geographic coverage in some of these clients where we've got very good relationships but it's not spread equally around the world. And finally, we're continuing to add new services cautiously to the mix so that an increasing percentage of our revenue in these key accounts will come from nonsearch services providing at the top of their house. So those three or four things together is what we think will get us there.

Okay. And do you anticipate declining the amount of business you do -- will the amount of business you do with your non top 100 accounts actually decline?

It might in some areas because in some cases choices will need to be made both by us and by some of our clients. But to the extent that even that other area stay flat or declines a little bit in the face of large gains in the major accounts where there's a lot of leverage for us to grow revenues quickly within these large 100 accounts, the percentage of revenue of the total from the non top accounts, if you will, by definition goes down as a percent of our total even if the revenue number states flat, because we're growing the overall top line of the company as well and shifting the mix of that breakdown from a broader group of clients with less revenue per client to a somewhat smaller group with more revenues per client. That's a very key part of our strategy and we're focusing on it, frankly as just about every other professional service (indiscernible) does. We just think that there's a lot of leverage for us short-term in doing it.

And Mark, as we've been talking about for some time, it's moving more from being transactional with a lot of clients to building deeper relationships with fewer clients.

And how much reorganization are you going to have to do in order to set yourself up to address that market opportunity?

Incrementally virtually none. We've done it already. We have kept our geographic P&L focus in place and for the most part the people in place that were leading those teams, and we've actually added a key account service organization over the top. This firm has always been very comfortable with various levels of metrics responsibility on a global basis, so this is nothing new for us. What is new for us is the increased emphasis on our key account or our top 100 client program.

Great. And then can you -- just shifting gears, going back to the tax rate, Kevin, what's your average tax rate on a normalized basis outside of the U.S.?

It's not substantially different than 40 percent, Mark. It's a little bit lower in some countries but across the board it's probably close to 40 percent.

Are you anticipating being profitable across all of your geographic regions next year?

Yes, we are.

If we look at that and we say roughly 60 percent or 55 percent of your revenues are going to come from the U.S. and you've got a 0 percent tax rate there, couldn't we just use a weighted average in terms of figuring out what the tax rate would end up being?

You'd get close but it will vary again based on the results by region.

And then with regards to cash that you'll have on the balance sheet after you pay out the bonuses, what's the cash outflow for bonuses in March?

25 million.

25 million. And what will the cash outflow be for previously announced restructurings?

7.5 million in Q1.

How about for the full year?

18 million.

Great, thanks. I'll jump back in queue.

Jack Salzman with Kings Point Partners.

I wonder if you guys could give us a little bit more detail on this other net item in the P&L. There was about a $1 million swing in the fourth quarter.

It's largely foreign exchange transaction losses. Most of which it relates to intercompany loans, Jack. The way the accounting literature works -- if you have an intercompany loan that is not designated as permanent financing, any gains or losses on those loans have to run through P&L. So if I'm in the U.S. and I have a pound denominated loan or a euro denominated loan that's not permanent financing, I have to obviously increase my expense in the U.S. to account for the higher payable that I have.

Now, you folks presumably are going to go profitable in Europe next year in '04. Do you folks, as a matter of course, hedge against remitted projected profits or what is your hedging strategy in general?

As a general rule, no, we don't.

Is there any way I can model this line -- if this is basically FX?

One of the things that we've been working on, Jack, is trying to come up with a better way of netting out all of these intercompany loans, and we have brought the exposure down considerably during 2003, we're still working on it. And so we're hoping to minimize the impact of that line going forward. I think it would be substantially less in the future.

And on the net realized/unrealized gains equity warrant portfolio, presumably it will be nominal this year in '04?

We can't really predict that, Jack. It's a function of which warrants get monetized and it's based on stock market conditions etc., so it's difficult for us to project that line.

Last question. You indicated that you want to significantly increase your revenue from your top 100 clients. What percentage of total revenue would those top 100 represent?

We covered that in a prior answer, but today in 2003 our top of 100 clients represent between 25 and 30 percent of our revenues. And our goal is to drive that to 50 percent in three years.

Thanks, guys. Nice quarter.

Dan Dittler with Lehman Brothers.

Tom, in your prepared remarks you discussed how you're going to push back your new comp plan 2004 rollout (inaudible) 2005 rollout. Could you provide some more color onto what is driving that?

Sure. We've had a consultant compensation plan which has been modified periodically through the years. It's part fixed and part variable and it has a component to it that is pure revenue production based and part of it's just based on some other firm wide initiatives. It's been very well accepted through the firm through the years. However, as we change from a more individually focused orientation in the firm to more of a large team and global client focus, we need to change the compensation programs to more reflect the goals that we have. We also are beginning to differentiate certain types of revenue from other types of revenue. There's some types of revenue particularly more aligned with our strategic objective that's both more desirable for us and more profitable for us.

So part of the shift during 2004 will be to move more towards a margin based compensation system at least in part from a revenue based compensation system which we've had historically. Changing compensation systems is something you do in a firm like this very carefully and very cautiously because it's the element that the working partners and consultants focus on entirely. So we've had a very large and we continue to have a large internal effort in this area with a lot of participation by our colleagues. It makes progress a little slower than if we just edicted (ph) something or designed it with outside consultants, but our goal is to make the changes smoothly and set them up for the very long term. And this is clearly what our consultants want.

But the end result is a continuing series of efforts to align our compensation program much more closely with our strategy, with the performance of our clients, and with a return to our shareholders. And keep in mind, many of our partners always have been and continue to be major shareholders. So they, and all of us here, are aligned with you on that measure. And we just need to make sure our basic programs reflect that going forward even better than they have in the past.

One quick one for Kevin. Kevin, the 3.9 million in cost savings that you're expected to benefit from in 2004 from the severance and the fourth quarter charge, do you plan to see a $1 million quarterly benefit as soon as the first-quarter?

No, it may be a little bit lighter in the first-quarter because some of these people, because of notice periods and the like in Europe, some of these people haven't quite gotten out the door yet, but they should all be out by the end of March.

Great. Thank you very much.

Bob Lavick with CJS Securities.

I just wanted to check two things. For the year bonus accruals wound up being around 49 million, is that correct?

For 2003 or 2002?

Bob Lavick For 2003.

Yes, that's right, 49 million.

Okay, great. And then you said the guidance implies 45 million?

For 2004, yes. That's correct.

So is there another form of compensation or is that actually suggesting that there's a lower bonus per consultant despite higher profitability next year?

The bonus accrual takes into account a lot of different types of bonuses. It's management bonuses, it's consultant bonuses, it's staff bonuses. So the $4 million reduction is spread across that entire universe.

There's also a reflection in there to a small degree of the result that some of our restructuring charges eliminated some guarantees and some things for a few people that would not have been compensation based, and we won't have those going forward in 2004. So in essence it's a -- even know it may be a slightly smaller number, and particularly in the management area where we've reduced the number of management jobs in the firm fairly significantly, the shift to bonuses based on revenue production and client service as opposed to internal management is relatively dramatic. And that allows us to pay our top performers even better by shifting some of that money from in essence non market facing roles to market facing roles. And that's been key to the strategy over the last year and that continues to be a key part of our strategy. That's why in essence we can take that number down but still put more money in the hands of the people that are producing the revenues and serving our clients.

Okay, great. Thank you.

A follow-up from Kelly Flynn with UBS.

It's Andrew again. I wanted to ask a little bit about your results in Europe. They looked very strong and I saw that I think in Q3 you said that on a constant currency basis revenue was down about 25 percent there. This quarter it was down only 2 percent. So, and it seems as though a lot of the improvement may have come out of your financial services practice. I was wondering if you could give us some color on what really drove that improvement? And then I've got a follow-up.

Yes, the improvement was really driven fundamentally in the fourth quarter by very large increases in performance by a handful of important new hires that we made a year or so ago and basically investments spent on last year. What we saw in the fourth quarter to a degree in Germany, somewhat in France, somewhat in the Nordic region, but most importantly in the UK, in London, pretty dramatic improvements in the fourth quarter of performance of individual consultants. And that's continuing into 2004. The ramp up of these individuals that we hired, which we hoped for, have happened and that bodes very well for us going into the new year. The team there, particularly the London team where we were struggling, is in much better shape now and benefiting both from their own performance, a little bit of experience, and from an improvement in their local market.

Okay, and I think that probably answers this question, but it sounds as though confirmations probably have continued to improve in this first quarter in Europe?

Confirmations are up and fees per assignment are up modestly. So those are very good indicators for us.

Thanks, guys.

Mark Marcon with Wachovia.

One question with regards to the revenue guidance, the lower end of it seems a little conservative in light of what you did in the fourth quarter and traditionally the first-quarter ends up being the seasonally stronger quarter. Can you explain why the lower end of the guidance might end up being a realistic possibility?

It's hard to predict. One of the things that you face was that the fourth quarter of 2003 is traditionally a weak quarter, and we had a stronger than normal quarter and that appears to be continuing into the first-quarter. Typically our first-quarter of the year is not our strongest quarter. It's generally the second and third quarters are our two strongest quarters and the first and fourth are the weakest. These patterns have been difficult to predict over the last couple of years, partly because so many of our clients coming out of difficult economic times haven't been making their decisions on the normal schedules that they do and we're reflective of that.

The other thing that I think you will see here is, frankly the last thing that we want to do is reach too high, over promise and under deliver. You're not going to see that from us if we can help it. The economy remains very strong. It is conservative. If the economy doesn't remain strong it's not. While we're very optimistic, particularly about Europe, which is a swing part of this for us, we're coming out of the recovery, it looks good, but we haven't had enough -- we don't have enough evidence that I don't think any of us have to really predict what Europe will look like. I think a couple more quarters of performance like this maybe we can declare the troubles in Europe are behind us, but right it's more we hope they are but we're still being cautious.

Okay. And then with regards to the revenue guidance for the year, are you assuming relatively even year-over-year growth? Or you're expecting a little bit more out of North America and a little bit less out of Europe? How should we think about that?

Pretty even, although I think we had good growth in the U.S. and we'll continue to expect good performance in the U.S. But given the fact that Europe has struggled over the past year, I suspect that the higher year-on-year performance will be in northern Europe. That's our hope.

What would be a reasonable target for European margins?

Mark, what we had said before was that we thought they would be -- in a normalized environment they would be about 5 points lower than the U.S., and that's something that we're ratcheting toward in 2004.

What was the U.S. target again?

Well, we said high teens for the U.S. is what we believe is a sustainable margin.

And that would be low to mid teens in Europe.

So, in the past you've talked about a $450 million revenue run rate and 11 percent operating margins. No change from that?

No, but I think it was 10. Nice try.

I think it depends on which conversation I was listening to.

It wasn't one you had from any of us. No, we have consistently said two things there and we'll continue that. It has been and continues to be our belief and clearly our goal that given this model, double-digit, 10 percent operating income and revenues in the $450 million range are very achievable and we still feel that way. The corollary to that is that our goal continues to be to achieve that level of margin on revenues less than that, and hopefully substantially less than that. So that hasn't changed and that, at last since we've incorporated that into our strategy over the next three years, that isn't going to change.

Great. And the last question is now that you've put in place a new account based organizational structure, can you give us any feel in terms of what your sense of voluntary turnover is?

Yes, our voluntary turnover, despite traumatic conditions and some trauma inside and outside the firm, remains quite low by historic standards and actually very low by the standards of most professional service firms and of our profession. It runs 5 percent or less. It has even through the worst years. It did last year. I think we've continued to maintain it at that level and I would not expect that it would be substantially different than that going forward.

Part of the strategy continues to be raising the bar on performance of our professional staff internally and the thing that we've seen over the last three years, and we may continue to see, is a slightly higher level of involuntary terminations on an annual basis as we manage our consultant workforce on a performance basis much more aggressively than we have in the past. Our high performing partners appreciate and welcome that and, in fact, I think the fact that we've been more aggressive managing low performing consultants out of the firm, being very careful in our hiring -- because of you don't do that you're just cycling -- has actually contributed to a decrease in involuntary turnover.

Now we're going to have some. You always have some. People's views change, their lives change, and their career aspirations change. And the spring is the time of the year when those peak if they're going to happen in our firm and every other firm because they tend to come after the bonus payments are made. But I would not expect that we would face anything more than a normal year in that regard.

Great. Thank you.

Dave Koning with Robert W. Baird.

Just a couple of quick follow-ups. Throughout the quarter -- I know you mentioned that January confirmations were up moderately from November, December and then February is about flat with January. How did those trend throughout the month of Q4? And then just a second question to that -- should we expect that all the charges are over now that we won't see those in the future?

We'll take the second one first. Yes, the charges are over.

Dave, what was your other question (multiple speakers). And Dave, your other question was what the progression looked like in fourth quarter in terms of confirmations? Well, not surprisingly your strongest month was October but you didn't have as much falloff in November and December as you normally would see at this time of year.

Okay.

Typically December as a very weak month in terms of confirming new assignments because the world shuts down midmonth and companies, both because of year end close, holidays, vacations and the like, particularly in Europe, tend to shut down the last couple weeks of the month. And some of that stalls and comes back in January. So we had a particularly strong December in terms of new engagements including the last two weeks of December, which in some years is virtually dead. That may have taken a little bit out of what might have been the first couple weeks of January, but it's continued pretty much on the same pace. That's actually almost getting two weeks that we didn't expect in terms of new business. But as I said, it was an odd year, so it's positive but it's difficult to make too many generalizations based on that.

December is usually one of the lowest billing months of the year, and there were four months in 2003 that had lower billings than December did. That's a little bit unusual, which may be because you're getting some pick up from the economy which then tends to match the seasonality a little bit just as it did on the way down and it exacerbated it. So it's a good sign.

Okay, thank you.

Dan Dittler with Lehman Brothers.

Tom, one of the earlier questions during the Q&A you had mentioned a push toward getting some of your top clients in an exclusive contract. How critical is that to your strategy going forward? And if it is at all, what is the incentive for a client to enter an exclusive contract with one particular firm?

Let me correct one thing. I don't think I used the word 'exclusive', and in fact, most of the contractual relationships that we have with our clients around the world are not exclusive. Frankly we don't seek that and they don't. We do have -- some of our clients seek this because it allows them to standardize terms and conditions on projects around the world, but also minimizes startup time. And frankly, in many cases, particularly as business grows and our consulting teams get stretched, some of our more sophisticated and better clients that have used us for a long time want to make sure that they get the access to the best teams and committed resources, and they pushed us for some of these.

There is some cost management and cost-sharing that comes into some of these contracts, but they're fundamentally not price based contracts. You asked how critical is it to us that we have these contracts? It's really not very critical to us. What is critical is that we continue to build the relationships with these clients. And most of the time when we enter into more of a contractual relationship that may have some minimum fees associated with it it's on the back end of having built a large and substantial and multiyear relationship with these clients, not on the front end. This is not a marketing -- contracts are not a marketing effort for us.

Thank you for the clarification.

And that does conclude today's conference. We thank you all for your participation. You may now disconnect.

Thank you, everybody, and goodbye.