Heidrick & Struggles International Inc (HSII) 2004 Q1 法說會逐字稿

Please stand by for Heidrick & Struggles conference call.

Please stand by. Good day everyone and welcome to the Heidrick & Struggles first quarter 2004 financial results conference call. This call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mr. Eric Sodarth. Please go ahead.

Good morning everyone. And welcome to our investor conference call and webcast regarding our results for the 2004 first quarter. On today's call are Tom Friel, Chairman and CEO of Heidrick & Struggles, Todd Ballou, Worldwide Controller and Tammy Kamarosus, acting Investor Relations Director. Tom will review the first quarter results and the outlook for 2004. Then Todd will provide additional details. As a reminder there are supporting slides available on the web to accompany today's prepared comments. As always, I would like to advise you that this call may not be reproduced or retransmitted without our consent. Second, certain matters in this call are forward-looking statements. We refer you to the safe harbor language contained in our press relays dated today, April 30, 2004, which was widely disseminated by the various wire services and other media. The language is also on slide two of the web presentation. And now I'll turn the call over to Tom.

Thank you, Eric and good morning everyone. I would like to begin with a brief overview of our financial results. We're pleased with our performance this quarter, with revenue, earnings and the cash position all above our expectations. The economic environment has strengthened, business confidence has improved and our search professionals in every region performed well. Our net revenue of 87.2 million exceeded the top end of our expectations and grew 6% sequentially from the December quarter. Our operating earnings improved with our operating margin of 5.9% comfortably within our 5 to 6% goal for the year. Compared to the prior year, net revenue in the first quarter benefitted from foreign currency exchange variances of approximately $5.1 million. Excluding the impact of currency revenue increased approximately 6%, versus the quarter -- first quarter of last year. Our assignments especially in the consumer financial services and industrial practices accelerated in the quarter.

We're also seeing positive results from our focus on target accounts with a percent of revenue derived from the largest global accounts continuing to rise. We are very encouraged by this performance since this is is a key part of our strategy. Operating income was $5.1 million in the first quarter of 2004. A $10 million improvement over last year's operating loss. Net income in the first quarter was $4.2 million or 22 cents per diluted share, compared with to a net loss of $6.7 million or a loss of 37 cents per share last year. The operating income and net income improvements were due to higher revenue, cost reduction efforts in 2003 and carry forward tax benefits available from prior years. As you may call and we'll comment more on this later, we booked a full evaluation allowance for deferred tax assets in the fourth quarter of 2003. That eliminates the need to record U.S. federal income taxes for the near future. If you take look at the webcast slides, particularly slide number seven, you will see selected search statistics for the first quarter.

Our confirmed searches in the first quarter increased 1% over the comparable quarter of 2003 and were up 15% sequentially quarter on quarter. The average fee per search was up approximately 11% in 2004 from the prior year to $78,000. We're confident now that our cost structure is at the appropriate level for 2004 and we will continue to balance cost control with business building activities critical to our long-term success and growth. As a reminder to from you our last conference call, during 2004 we intend to invest in targeted marketing and account development, in research and knowledge management capabilities, in training and quality programs, and in investment hiring. Individuals who can contribute importantly to our future but who may require some time to ramp up to full production. Within all of these expense categories and investment categories we are prior -- prioritizing our spending so that we can release our investments based in part on our revenue performance during the year.

Our budget for 2004 assumes that the economy will continue to improve modestly this year. Under that scenario, we would anticipate net revenue growing in the mid single digits in 2004 with operating margins in the 5 to 6% range. As a reminder, this margin goal does factor in the investments that I discussed earlier. For the second quarter of 2004, we expect net revenues to be in the range of 88 million to $93 million. We expect sequential growth driven from general economic stability and business confidence. At these estimated revenue levels, we anticipate that the corresponding diluted earnings per share would be between 20 and 25 cents a share. These earnings expectations assume an estimated effective tax rate of 25%. Todd Ballou will comment further on income taxes and our change in income tax accounting in his remarks. As a firm, we're very pleased with the strength of 2004 so far and are anxious to continue executing our strategic plan. We will proceed cautiously and carefully since we are aware that any region can experience abrupt economic or geo-political shifts at any time.

Given the significant impact, external factors can have on our business, we will continue to make certain that we retain a flexible cost structure. One last item I want to provide is an update on the status of our CFO search. As you know, Kevin Smith served as CFO of Heidrick & Struggles through the end of March. And we are still interviewing candidates to replace him in this key role. We're taking the time to make sure this hire is a perfect fit for Heidrick & Struggles. In the meantime, our Worldwide Controller, Todd Ballou and his team have stepped up and performed extremely well managing our financial matters. I would now like to turn the call over to Todd, who will give you more details about our first quarter results. Todd?

Thanks, Tom and good morning everyone. As Tom said earlier, we are encouraged by the two sequential quarters of solid revenue growth and our comfortabe with our current cost structure and the plan for modest growth in 2004. I will provide additional detail regarding expenses and revenue by region. If you turn to slide five, salaries and benefits expense in the first quarter of 2004 was 61.4 million, up 13% over the first quarter of last year, primarily due to an increase in our bonus accruals year over year. The bonus accruals in the first quarter of 2004 were 19 million versus $12 million in the first quarter of 2003. As a percentage of revenue, salaries and benefits were similar to last year at 70.4% in 2004 and 70% for the first quarter of last year. G and A costs for the first quarter of 2004 were $20.7 million, down 8% compared to the first quarter of the prior year. G and A as a percentage of revenue fell to 23.8% from 29.2% last year. Net non-operating income was $48,000 in the first quarter of 2004 versus net nonoperating expense of $140,000 last year, primarily due to lower foreign currency transaction losses in 2004. Now let's talk about our income tax provision. As a reminder, in the 2003 fourth quarter, we recorded a full evaluation allowance for our deferred tax assets that resulted in a noncash charge to income tax expense of approximately $58 million in accordance with FASBI statement number 109. This charge had significant noncash effect on our fourth quarter results, but also impacts our future income tax accounting. Assuming we are profitable going forward, which is what we expect, and the valuation allowances is still needed, it is unlikely that we will record any U.S. federal tax expense for at least the next two years. We will however continue to record foreign income tax expense and state tax expense. In addition, we will continue to assess the realizability of thee deferred tax assets in the future. If in the future we determine a lessor evaluation allowance is required, we would record a reduction to income tax expense and to the valuation allowance in the period of such determination. Our effective tax rate will continue to fluctuate throughout the year. Our effective tax rate estimates we will be impacted by the profitability of our foreign tax paying entities and the mix of taxable income within those jurisdictions. The effective tax rate in the first quarter of 2004 was 18%. This rate reflects the impact of non-U.S. earnings permanent differences an the lack of U.S. federal tax expense due to the valuation allowance recorded in the fourth quarter. We estimate that our annual effective tax rate for 2004 will be approximately 23%. Our second quarter guidance includes taxes provided at a 25% rate, which is subject to wide fluctuations based on the actual results of foreign tax paying entities versus our estimated results. Now let's move ton to review our performance by geographic segment. We'll begin with a look at the results for North America on slide eight. North America's net revenue was 45.9 million in the quarter, a 10% increase from last year. The year over year increase was largely due to an improved economic environment. The financial services and consumer practices reported significant increases in the quarter, offset slightly by the education, non-practice -- nonprofit practice decline. Operating income in North America was 9.7 million in the quarter, versus 5.9 million in 2003. Higher revenue, cost reduction actions taken in 2003 and our discretionary spending constraint at higher revenue levels contributed to the higher operating income in 2004. The operating margin in the first quarter of 2004 was 21.1%, versus 14.1% a year ago. The consultant head count in North America at the end of the first quarter was 141, a 19% decline from last year. Latin America's results are on slide nine. Net revenue in the quarter increased 11% to 2.5 million, while operating results improved to a loss of $86,000 compared to a loss of $123,000 a year ago. The consultant head count in Latin America at quarter end was 18. The same as one year ago. Okay. Let's now turn to our Europe even results on slide 10. Europe's first quarter revenue increased 14% to 32.1 million, primarily due to the favorable foreign exchange rate variances. On a local currency basis, net revenue declined 1% from the first quarter of last year. On a sequential basis, Europe's first quarter revenue was up 5% over the fourth quarter of 2003, but most of this increase was from currency. Europe's operating income was $780,000 in the quarter, improving from last year's first quarter income of $565,000 and the $276,000 loss in the first quarter of 2003. The increase in revenue and the prior restructuring activity were the primary reasons for this turn to profit in Q1. Europe's consultant head count was 109 at quarter end, a 4% decline from the March 3 -- from March 31st of last year. Okay. Let's move to slide 11 and look at the results of our Asia-Pacific region. Asia's net revenue was 6.7 million in the quarter, a 35% increase over last year's first quarter result. Operating income in the quarter was 1.1 million, versus operating income of 439,000 last year, primarily due to the improvement in revenue. The consultant head count in Asia-Pacific was 34 at March 31, an increase of 3 over the first quarter of 2003. Corporate expenses were essentially flat in the first quarter at 6.3 million versus 6.2 million last year. Our last slide, slide 12, shows selected balance sheet and cash flow information. Our March 31 cash balance of 97.3 million was above the 85 to 95 million projection we gave you back in February. Primarily due to the higher than anticipated receivable collections and the timing of certain restructuring payments. Looking at some selected cash flow data for the quarter, depreciation was 2.8 million, down .3 million versus a comparable quarter of last year. And amortization of intangible assets fell 51% to $225,000. Depreciation and amortization should be in the range of 13 million to 14 million in 2004. Capital spending was 1.5 million in the quarter compared to 1.3 million in the first quarter of 2003. We expect capital expenditures to be in the 8 to $10 million range in 2004. With that, I will hand it back to Tom.

Thank you, Todd. To summarize, I would say that the strength of our first quarter provides us with good continued momentum for 2004. Assuming the recent economic improvements hold up, we continue to believe that 2004 will be a year of moderate growth and improved profitability. The same time as we have said, we are renewing some investment programs that are critical to our long-term success. Our investments will be controlled and in line with revenue growth. Overall we are optimistic and we look forward to updating you on our progress during the year. With that, we will open the call up for your questions.

Thank you. The question-and-answer session will be conducted electrically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch tone telephone. If you are using a speaker phone, please make you are sure your mute function is turned off to allow your signal to reach our equipment. And we will proceed in the order you signal us and we'll take as many questions as time permits. Once again, please press star one on your touch-tone telephone to ask a question. We'll take your first question from Bob Lavic, CGS securities.

Good morning.

Good morning, Bob.

Hi. Wanted to ask, could you discuss the the mix in terms of positions filled or maybe geographically to explain the 1% searches up but, you know, 11% or 12% growth in revenue?

Oh, yeah, that's primarily due to the improvement in average fees per assignment. You know, which does reflect a little bit of a mix up in terms of the level of work that we're doing. It's reflective of that. It also is partly reflective of just increasing compensation for comparable positions year on year, but, you know, we are seeing that primarily reflected in the average -- average fee per search statistic.

Got it. And it's -- in terms of the level of positions you're filling, is that generally foreboding of the lower positions we'll fill after that or is there anything we can read into that?

No, I don't any that there's lot that we could draw from that particular statistic, not based on one quarter. This number does very vary quarter on quarter and we're not seeing a fundamental shift of any kind of the business mix that we've been able to determine so far.

Okay and just one other question. G and A was, you know, well below my expectations in the 20 -- you know, down 600 hundred basis points almost year over year. Were there any one-time items or bad debt reversals or is the 24% of sales sustainable going forward?

Well first a, this is Todd, and first of all to answer your question,there were no one-time items in there that really contributed to that reduction. We do not think that that amount is sustainable going forward because with as we mentioned, most of our investments will -- will actually take place through this line and, you know, it's a little slow on the investments in the early part as we're planning and we're starting to see some of those pick up.

So what's a better percentage of revenue that we should expect throughout the year?

Well, I think that, you know, you could probably -- you'll see this creep up a little bit, maybe a point or two but of course it will be impacted by our level of revenue in those periods going forward as well.

Great. Thank you very much.

Moving on, we'll hear from Randy Mehl, Roberter W. Baird.

Good morning, Tom, Todd and Tammy and congratulations on good results here.

Thanks, Randy.

I wanted to just go into a couple of items. One is what is your goal for number of search consultants for the year? Obviously that's been turning down but it seems like stable here. Do we expect that number to move up as we get through the rest of the year?

Yes. As we have indicated, I mean, the net consultant count is a mix of a new hiress and departures, departures have been frankly very low by even our historic standards, although they're -- there always are some. We are -- we are making careful selected hires and I think -- two things. One, I think we've bottomed out in term of our restructuring activities. We had those behind us at the end of 2003. So we're going to be cautious about adding people. I would think that we would expect to add -- you know, consistent with revenue growth, mid -- you know, mid single digits of consultants over the course of the year, you know, so that number would be up, you know, 10 -- you know, 15, 20 people I would suspect over the next couple of quarters.

Okay. And that's a net number?

Yes.

Okay. Very good. And then the other question is just on the investment programs. It seems like -- trying to reconcile your revenue guidance in the second half of the year, which seems to call for, you know, sharp, sequential decline from the first half with the fact that you are going to be adding people and you're investing more heavily in marketing in client penetration initiatives, and make you could just make a comment on that.

Yeah. Let me preface it by saying our tendency in general has to be -- has been to bee cautious. In these areas because as we look at the past three or four years, we have seen some seasonal patterns, particularly in the third and fourth quarter, with revenue drops from the first and second. We've got, you know, pretty reasonable visibility now into the second quarter but pretty limited visibility after that. You know, longer term I mean, prospects are fine but it's been our sense up to now that, you know, being caution and not assuming that the seasonal pattern of prior years won't happen this year seems like a better strategy than assuming that we'll have continued quarter on quarter growth. We hope we do and we'll have more visibility into that after the second quarter and we'll update this forecast and change those expectations if we see a continued path of business improvement and revenue growth, which obviously we hope we do.

Okay. Thank you. I appreciate that.

Moving on, we'll take our next question from Kelly Flynn, UBS.

Hi, guys. This iss Andrew for Kelly. I was wondering if you could just kind of walk us through the month to month change in confirmations by geography.

Well, we definitely during the quarter we did see some sequential increases in our revenue in each of those quarters. As far as confirmations on a geographic basis, I don't believe that we disclose that periodically.

Could you then just give us the confirmation trend month to month just for the -- on a consolidated basis and perhaps some flavor for how April's trended?

You know, I think you can assume that the confirmation trend, you know, went consist went with the sequential increases in the revenue given our overall average fee per search.

And we do see a continued modest up trend in that through the second quarter, which is why we have increased our revenue forecast accordingly.

That's correct.

Okay. And then I had a, you know, a couple of housekeeping items. Could you give us your cash flow from ops in Q1?

Yeah, we have that number. Our cash flow from operating activities was actually a use of almost $24 million.

Okay. And --

Recognize, Andrew, as I think you know, in the first quarter the fourth quarter and the first quarter are our two bonus payment quarters. We make in essence a first payment on our consultant bonuses in the first quarter and we true it up an make the final annual bonus payments in the first quarter. So the first quarter of every year is a negative cash flow quarter because of that. We accumulate cash over the course of the year and pay it out in the third and fourth quarter. I think the key there is the net cash balance year on year increased slightly better than what we expected. Our cash outflow was about what we predicted and our cash inflow was a little better than what we predicted, which is why we ended up 2 or 3 million over the top of our forecasted cash balance at the end of the quarter.

Okay. Could I ask what the bonus payments, the cash bonus payments were in Q1?

The cash bonus payments were consistent with with a we told you at the end of the year. The total payments were $29 million during the period.

Great. And could you give us a sense of what you think your kind of long-term fully loaded tax rate will be once, you know, you start paying taxes again in the U.S.?

It is very difficult for us to estimate that number. I mean, we -- again, we have some visibility in the quarter and given that in the guidance that we've given you but we're a couple of years out from reflecting federal tax income and -- or income tax expense for U.S. federal purpose and therefore any guidance at this point would not be appropriate.

Okay. Thanks.

And next we'll hear from Mark Marcon, Wachovia Securities.

Good morning and congratulations on the good progress this quarter.

Thanks, Mark.

How are you?

Good, thanks. I was wondering if you could talk -- you know the margins were quite nice in North America and Asia Pac. Are they sustainable at these levels? Where do you think the top is in North America?

I think generally, yes, I would say that they are sustainable at these levels. But, as we will see some, you know, additional G and A spending in periods as well as our investments continue.

Roughly speaking, assuming that you're going to grow, you know, revenues 5 to 6%, what's the incremental increase in terms of the -- the investments?

It would be certainly in line with that -- it. It would be a little less than that, actually. I mean, we're going to make sure that it doesn't impact the margin forecast. We have some -- we have some deferred activities in training and in a few other things that have been squeezed pretty hard through the restructuring of the last two or three years. I mean, you can do that for the year or two but then you have to start putting it back too, which is what we've said all along, we're going to do this year. But we're going to do that very cautiously and it should be manageable within the margin forecasts that we have. Some of those investments will as a result pull down margin growth a little bit in the face of revenue growth because we're going to use some of that revenue growth to make these investments to get the business back on a solid, you know, long-term sustainable footing but, you know, we're very confident that we can do that within the guidance that we've provided.

I understand. I'm just trying to get a sense of a dollar figure in terms of what it could be like and then, you know, with the -- trying to get a sense for that.

In know, in our guidance we had indicated that we would have -- we would have about five to eight million of this investment spending going forward and I think can you expect that that will impact that G and A rate, kind of consistent with what our prior year amounts have been , kind of offsetting the benefits that we're receiving from some of our -- some of our restructuring activities over the past few years.

Okay. Great. And then with regards to the -- you know, the salaries and employee benefits as a percentage of revenues, I understand the bonus accrual went up but I mean, that is part of the compensation. You had fewer, you know, fewer consultants, you know, on a system-wide basis, you know, during this quarter. How should we think of that salary and employee benefits as a percentage of sales going forward?

Well, I would say that, you know, in the first quarter, you know, any unusual items in there were not materially significant but we would expect that on a go forward basis that that may go down as you mentioned in the first quarter, given the way that we reflect our bonus expense and given the conservative impact of that as we look out and estimate forward, we tend to have, you know, in particular given the -- you know, the concentration of our -- of our revenue by number of high-producing consultants, you know, and the way we estimate that, I would expect that it's a little higher in the first quarter than we would expect it to be going forward for the next three quarters of the year.

I mean, should we see through the rest of the year some improvement on a year over year basis as a percentage of sales?

I think you can expect that.

Okay. And in the past we talked, you know, potentially getting down at least in the near term down to 65%. Is that still a target?

I think that's still a reasonable, you know, goal between 65 and 70, I think, is reasonable. We're at about 70 now and I think that somewhere in that range over the course of the year would be a reasonable assumption, one we're using.

Okay. And then with regards to your recruitment activities, are you primarily looking at consultants who are had a lot of experience from, you know, at different firms or are you looking to bring some people in who are brand new to the industry and might take a little bit longer to ramp up?

Our recruiting historically has been really a three-part efforts. You know, we recruit seasoned industry hires from competitors where we feel they can add value and they're appropriate to our culture. We'll continue to that do. We will bring in some new to our business, new to search professionals who do not have search experience, but are industry experts or sector experts in certain places, and teach them the business. That's a very high potential hire, but it takes longer to ramp those people up. And we will promote from our own ranks some of our more promising associates and principals and move them up. We try to keep that balanced at about a third each over a long period of time. Those variations are wider over a short period of time. This year we have some specific targeted holes that we need to plug, so I suspect that in 2004 with a very targeted hiring program it's going to be more skewed to proven search consultants. There's actually, given the results of the last few years, there's a potentialally some available high talent that we think can attract to Heidrick and Struggles and we're working hard against that -- on that, against a very specific plan of what we want to hire and where we want to hire.

So we shouldn't see productivity levels go down?

No, we don't expect that overall productivity levels will go down.

And then Europe, how is that trending?

Europe is still essentially flat from an economic standpoint. Overall, the variations country to country are fairly significant. We've had good performance in some countries, less good in others. As I think you'll recall, we really completed the final phase of the restructuring in Europe in the fourth quarter.

Right.

That had been deferred so we were maybe six months or so, a couple of quarters, behind North America in completing that, reflected by the way of the fact that Europe lagged a couple of quarters behind the U.S. going into the downturn and typically lags a couple of quarters behind coming out of the downturn. So we've had -- European results are now stable. You know, we're profitable in northern Europe, although not by a lot but we -- you know, we have improvement forecasted for the second quarter in northern Europe but it's still touch and go in terms of the European economies. I think we're -- we're not losing money there. We don't expect to -- ah, we expect to see improving margins quarter on quarter.

Okay. Great. And then finally, when do you think the CFO position would be filled?

Well, we're -- we wanted to make sure that -- and by the way, Todd and his team have done a great job.

Yeah.

So we have no issues of problems that are associated with that, which has allowed us to be a little more careful and make sure that we do this right. We are in the final discussions with a couple of key candidates and we're in the search business. You never exactly know how a search is going to work out and when it's going to be over until it's over. But I would think that, you know, within the fairly near future we will have that wrapped up

Within a couple of months then?

Oh yeah, easily within a couple of months I would think.

Okay, I mean, part of the reason why I'm asking that question is because I'm assuming that that person would have some input in sort of what your ultimate compensation plan is going to be which is I think, the thing that you were going to come back to us at some point in terms of laying out the ultimately what the right balance is between internal and external share stake holders is in terms of the company.

Yeah, let me comment on that because your point is -- is well taken, yes, that individual clearly will have some contribution in that area, but that project is well underway and is proceed ing with, you know, -- without any negative impact from that search still being open. We -- we, we've had a couple of reviews of that and as we've said, we will make some changes to our compensation program this is year and we expect to make more significant changes for the long-term that we're working on a schedule to have completed by year end and we'll probably introduce formally at at our worldwide consultant meeting in November.

Great. Thank you very much.

So that's -- we're a quarter or two away from being able to report anything specific on that but the work's underway.

Okay. Thank you.

Sure. Thank you.

Now we'll hear from C.L. Kings' Ty Govatos.

Tom, Todd, let me add my congratulations on a nice quarter.

Thanks, Ty. How are you?

Okay. In the fourth quarter you said the investment spending for the year would be about 8 to 10. And you just said it would be about 5 to 8 going forward. Does that mean you've already spent some of that money in the first quarter?

We have actually spent some. You know, supporting some of our marketing activities and our focus on our key account program, which is showing very -- both are showing very dramatic improvements. I think on a -- on a , you know, quarter to quarter basis we spent less in the first quarter than we will in subsequent quarters but that -- I think that overall number is still in the ball park.

Five to eight for the last three quarters?

I think that -- at the moment we feel pretty comfortable with that.

Okay. Thanks an awful lot and great quarter.

And now we'll hear from Jack Falsing King's Point Partners.

Well,not to add all the kudos but it's a great quarter.

Thank you.

Two quick questions, one, your forecasting apparently a 25 corporate tax rate for the second quarter. I think you came in around 18 for the first. That would imply that you're guessing and perhaps that's the proper word for it or not, roughly a low 20s corporate tax rate for the full year. Is that the way I should be looking at it or is the volatility in the actual tax rate projections in the second half of the year so pronounced that that simple formulation could be substantially off?

I think the way that you're depicting it is reasonable to assume at this point in time and I think guessing you referred to it is probably the right way to, you know, consider it as well.

And just for modeling purposes, can we assume -- let 's say you achieve all of your margin objectives, revenue objectives, so and so and so forth, can you give us a little bit of a guidance for the following year, should we work back into a 30, 35% corporate tax rate or is it too early to say?

I think that guidance for the following year, I think, would be very consistent with what we're telling you this year because again, we will not be able to reverse that evaluation allowance and show, you know, a more typical effective income tax rate until we've -- in accordance with that, 109, until we've been able to demonstrate enough positive evidence to reverse that valuation allowance.

So it will be something under 30%?

I think that's fair to assume, yes.

Secondly, in Europe, obviously you folks have made great progress in cost reduction. Is it -- you know, you're at a position where hopefully you're at an early inflexion point in Europe where revenues ex-currency impacts in real terms starts to accelerate and presumably your expectation for the second half would suggest that there will be some acceleration in counts and currency growth in Europe. Can we assume that the margin leverage is likely to fall to the bottom line and meaning are you building expense in Europe to temper the projected leverage in the earnings streams or could you -- do you think that a lot of that is going to float to the bottom line once that turn occurs?

Yes, Tom, let me take that one. You know, we -- we have Europe, we believe now sized right and so the result of that should be a fairly, you know, reasonable margin growth in Europe on any currency adjusted revenue increase, which we -- we also hoped to see, although we've had to build the business not based on the assumption that we would see it. Obviously, we have the hope that we will see it and we're working hard on our marketing programs. We also made some key hires in the number of markets, particularly in the U.K. last year, and these individuals are now coming up to speed. We started to see the result of their good performance in the fourth quarter. That's -- that's continuing, so I would expect and we certainly are driving to improve margin in Europe in subsequent quarters, quarter on quarter. That would be our expectation. And we will be careful with any spending, any incremental spending in Europe that would affect that outcome.

Is it -- is it fair to say that this trend right now we should see some inflexion point in terms of currency growth by let's say by the third quarter of the fiscal year?

Barring some economic -- external economic or social issue or change, I think the answer to that is yes. I mean, that's a big caveat and particularly in Europe, you know, where some of these national businesses are a little bit smaller and are more affected by, you know, economic activities or other activities in these individual countries and clearly we don't have very good visibility in terms of where the exchange rate on the -- major European currencies will go over the course of the year. But, you know, we would expect in constant dollars barring any disasterous external events to see continued improvement.

Okay. Well, much great quarter again. Thanks, guys.

Thank you.

Thank you.

We'll now take a follow-up question from Kelly Flynn, UBS.

Hi, guys. I wanted to ask if you could perhaps give us a little bit of detail by vertical industry kind of -- you mentioned you've seen a pick up in consumer and financial.

Yeah.

And that your nonprofit slash, I guess education was a little bit slower in Q1. Could you give us kind of a sense of, you know, perhaps on a year over year trend or kind of quantify a little bit the impact you've seen in the different verticals?

Let make a general comment and then I think Todd can give you some -- maybe give some little more specific numbers. These -- these market sectors, financial services, which is the most volatile probably of the industry sectors is doing extremely well or not extremely well but better now than it is, as is consumer. We're lagging in technology, we're, you know, we're flat to up a little bit in industrial. The not-for-profit area is a high profile sector for us you it's small, you know, in terms of revenues an margins, so the impact, you know, of that decline, which is probably reflective of the economic tough times of the last two or three years in that sector is not of really very much impact. The other piece of this in line with our strategy is we are seeing a definite and a welcome increase in both the percent of our work and the the quality of our work in our large -- some of our very large global accounts, our top 100 targeted global accounts, which spannedd a number of industries but where we're seeing both increased penetration and increased revenue. Todd, can you comment in terms of maybe a little more particular about some of industry sector numbers?

Yes, I think that -- I mean, overall when you look at the mix of the industry sector, I mean they have not changed significantly from prior year with the exception of the financial services market, which did provide us more in 2004 as compared to the prior year 2003. But again, when you look at the mix overall, there's not significant variations other than what we indicated to you earlier with respect to the -- you know, what we're seeing in consumer and financial services markets.

Yeah, the one sector that really hasn't kicked in in a significant way yet is technology, which has always been a very strong sector for us and so improvements in that sector which we're -- you know, we're beginning to see some signs of will certainly be welcome.

Okay. Thanks, guys.

And we'll take our last question from Mark Marcon, Wachovia Securities.

I have a quick follow up to a couple of comments. One, you mentioned the top 100 global accounts. Could give us a perspective of what percentage of revenue you're now deriving from those accounts and how that compares to a year ago?

What I would say is that we're seeing some early benefits of our strategy but any -- you know, we have not seen what I would call a significant increase in our revenue from those top 100 accounts but we are starting to see more penetration.

I mean, your fees per search went up, which would suggest that you're not getting a lot pricing pressure. Is that in fact the case with those?

There's pricing -- every business faces pricing pressure and we're no, we're no exception. Particularly, on the back end of three very difficult years with still some over capacity in our business that exacerbates that problem. One of the reasons shy we focus so much on our quality programs and on taking care of our best clients is that these are -- these are companies that stay with us over the long haul. I mean, we have good relationships and we'll sometimes make adjustments in pricing reflective of volume or other things to a certain degree but pricing pressure on our best clients is actually less than it is in the clients that we would just serve occasionally or that have multiple vendors. We're really interest the in building long-term relationships key our clients. They know that and that actually helps us withstand some of the price pressure, which is definitely a factor we face every day.

Okay. And so when we take a look at the revenue guidance in terms of plus five to six, how much of that is an increase in searches as opposed to an increase in fees per search, how should we think about that?

We would expect, you know, modest increase in the number of assignments. I mean, that's basically the -- you know, the measure that we have. And, you know, there may well be some continued increase in the average fee per assignment, so it's a combination of these two that drive the revenue line. It's pretty simple math. But we would hope to continue to have an increase in the volume, which is both those factors are valuable but the volume increase is the one that we track the closest.

Why would you expect an increase in the fees?

Well, overall and I mean, if you compare -- if you look at our over all last year, I mean, we were about 80 million -- I'm sorry, $80,000 average fee per search.

Right.

Compared to the $78,000 that we report this had period. So I mean, looking at -- looking forward, the evidence we have of the future is looking at the past and we expect that we could see, you know, some of that change as we go through the year.

Some of that is, Mark, is just inflation. I mean, it's just year on year salary inflation in the same positions that's, you know, reflected in the fact that as we base our fees on the compensation positions that we recruit as compensation of those positions, same positions goes up. So do our fees.

So, I mean, with the overall economy being better, companies are having to pay up a little bit more in order to get the same level of talent that indirectly helps you?

Well it directly helps us.

Directly helps.

It also indirctly helps us, but it directly helps us and that's -- that's reflective of more hiring against a still relatively tight and valuable pool of talent at the top. You know, the senior positions of critical leadership position, which is where we focus the bulk of our by business is not in oversupply and so even though labor overall maybe, executive talent is not. And so that continues to cause companies to have to pay the market rate for the leaders they need to transform their businesses and that's our business and that part of the sector is looking much better than it has.

Great. And so -- I mean, from that perspective, can you also just address the -- your current capacity in terms of, you know, one of the things we've talked about in the past is that you might have some excess capacity. How many -- with your current consultant base, what sort of revenue level could you potentially address?

Well, we -- we -- we're confident that, you know, we could cover the revenue levels that we've forecasted with the team that we have. Most --

Sure.

-- of the investments that we're going to make in people will frankly be kicking in in 2005 an beyond, you know, for the most part. So there is a certain amount of expandability at the margin people work harder, we add a little more support resource to help the senior partners. Given that we don't sell time by the hour, you know, we're not -- we don't have any hard limits on the amount of work that our consultant teams can handle and the mix is wide but I mean, our view is we could easily handle a hundred million dollars, you know, a quarter, probably 110, you know, with the current staff. You know,, beyond that we're probably pushing it beyond where we want to push to maintain the quality and so you're balancing that all the time.

Great. And then last question, just want to make sure I got this right, the 29 million that was paid out for the bonus accruals referrals to what what was paid out during the first quarter of this year, right?

That's correct.

Okay. Super, thank you.

Thank you.

And that does conclude our question-and-answer session. That also concludes today's conference call. We do thank you for your participation. You may now disconnect.