Heidrick & Struggles International Inc (HSII) 2004 Q2 法說會逐字稿

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

Good morning, everyone, and welcome to our investor conference call and webcast regarding our results for the 2004 second quarter. On today's call are Tom Friel, Chairman and CEO of Heidrick & Struggles, Eileen Kamerick, CFO, and Todd Welu, Worldwide Controller. Tom will review our second-quarter results and the outlook for 2004. Then Eileen and Todd will provide additional financial details.

As a reminder, there are supporting slides available on our Web site, www.heidrick.com, to accompany today's prepared comments. As always, we advise you that this call may not be reproduced or retransmitted without our consent.

Second, certain matters in this call are forward-looking statements. Please refer to the Safe Harbor language contained in our press release dated today, July 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.

Now, I'll turn the call over to Tom.

Thank you, Eric, and good morning, everyone.

Before I comment on our second-quarter financial results, it's my great pleasure to introduce to you our new CFO, Eileen Kamerick. Welcome, Eileen. Eileen has tremendous professional industry experience, most recently serving as CFO of a major international advertising and media holding company, Bcom3 Group, prior to its merger with Publicis. Eileen is a strong leader who understands our operating model, and her legal background and extensive financial experience will be a great asset to Heidrick & Struggles.

In other news, also importantly during the quarter, we added two new Board members and completed the build-out of our global leadership team. Our new independent Board members, Jill Kanin-Lovers, former Senior Vice President of Human Resources at Avon Products, and Paul Unruh, former Vice Chairman and Chief Financial Officer of Bechtel Corporation, who will both serve on the Audit Committee, bringing that committee to a total of four people. At present, our Board of Directors is comprised of nine individuals, including seven outside directors, providing Heidrick & Struggles with excellent Board diversity, breadth of experience and objectivity.

On the management side, just last week, we announced the arrival of Vince Perro to our global leadership team. Vince is our Leadership Services managing partner. Most recently, he headed up Simpson Consulting, a leading human capital consulting firm. Vince will lead our business-expansion activities outside the search arena, an area of focus very important to our strategy. With the hiring of Eileen and Vince, we've now completed the designed construction of our global leadership team.

Now, I will provide a brief overview of our financial results for the quarter. We are very pleased, first off, with our performance. The economic environment has remained stable and we experienced typical second-quarter revenue growth. Our revenue, earnings and cash generation all exceeded the guidance we provided last quarter. Our net revenue of 97.9 million grew 12 percent sequentially from the March quarter, and our operating margin reached 8.8 percent. This margin is above our 6 to 8 percent goal for the year due to higher-than-expected revenue in the quarter and the resulting fixed-cost leverage.

Compared to the prior year, net revenue in the second quarter benefited from foreign currency exchange fluctuations in the amount of approximately $2.8 million. Excluding the impact of currency, revenue increased approximately 16 percent versus the second quarter of last year.

Our operating income was 8.6 million in the second quarter of 2004, a $2.2 million improvement over last year, excluding last year's 8 million of severance costs.

Net income in the second quarter was $6.9 million, or 34 cents per diluted share, compared to a net loss of $2.6 million, or 14 cents per share last year. If you exclude second-quarter severance in 2003, a more comparable net income for last year was $3.8 million and diluted earnings per share at 20 cents. The operating income and net income improvements this quarter were due to higher revenue, continuing cost discipline and a lower effective tax rate.

Our confirmed searches in the second quarter increased 11 percent over the comparable quarter of 2003 but were down 7 percent sequentially. The average fee per search was $95,000, up approximately 9 percent in 2004 from the same quarter the prior year. Our assignments, especially in Financial Services, technology and healthcare practices, accelerated in the quarter. Overall, our performance for the quarter in all major categories was very encouraging.

Now, changing topics, given the publicity and the interest in Google's IPO, I would like to make a few comments about our Google warrants. As you probably know, Heidrick & Struggles holds warrants to purchase slightly fewer than 1.2 million shares of the Google common stock at 30 cents per share. Historically, it has been our policy to monetize warrants within a limited time period after we are able to do so. Given the number of warrants involved, this particular monetization timing could be more heavily influenced by many factors, including potential contractual limitations. Unfortunately, at this time, we cannot provide any further specifics regarding the expected monetization timing. What we can tell you is that, once the warrants are exercised and monetized and we know the amounts involved, the proceeds will be invested considering all alternatives that increase shareholder value.

In accordance with our standard policy, 55 percent of the gain will go to the team of Heidrick & Struggles consultants who conducted the 2001 Google CEO search for which these warrants were issued. While we typically do not disclose specific consultants who work on search assignments, we've chosen to do so in this case because one of the consultants on that 2001 Google CEO search team was me. I will share in 25 percent of the consultant team's share, or a little less than 14 percent of the overall gain. I'd like to emphasize that my share of the gain is 100 percent related to my work as a consultant and search partner in Silicon Valley during 2001. It is not in any way related to or influenced by my current position as CEO of the Company.

As a matter of note, over the 500 consultants worldwide, including me on prior occasions, have participated in over 1,000 transactions since this program began. It has been a very successful program with over $50 million monetized since inception, and the plan continues.

While this potential warrant gain is good news for the Company, for the shareholders and for the Google team, the better news this quarter is the Company's operating strength in 2004 thus far. We do believe the market is in a recovery phase, but the recovery is not smooth. It ebbs and flows week-to-week and month-to-month and has not been consistent or strong across all practice areas and geographic regions. We will proceed cautiously, since we know all too well from prior experience that any particular sector or region in the world can experience abrupt economic shifts at any time.

While revenue remains difficult to predict, we are confident that we can and will control or cost structure in 2004. We believe this cost structure allows for profitability if the market weakens and margin expansion if the market continues to grow. We plan to continue our responsible use of cash as well. As we told before -- and we believe strongly -- maintaining a strong balance sheet has served us well in the past, especially during the past few years when we experienced a challenging worldwide economy.

In summary and as we discussed last quarter, we will continue to carefully balance cost control with necessary business-building activities critical to our long-term success.

With that, I would like to now turn the call over to Eileen Kamerick, on her first call, who will give you details about our second-quarter results.

Good morning, everyone. This is a very exciting time for Heidrick & Struggles and our industry. It's a great pleasure to be part of the team and to work with you to add value to the Firm.

As Tom said earlier, we are encouraged by our operating performance this quarter. We experienced the third sequential quarter with solid revenue growth and delivered significant margin expansion. We are comfortable with our current cost structure and year-over-year growth for the remainder of 2004.

I will now provide additional detail regarding expenses. Todd Welu, our Worldwide Controller, will cover revenue by region and additional cash flow detail.

If you turn to slide six, salaries and benefits expense in the second quarter of 2004 was 66.3 million, up 5 percent over the second quarter of last year. The expense increase was primarily the result of additional bonus accruals that increased with higher revenue, offset by a significant reduction in severance costs compared to second quarter 2003. Excluding 8 million of 2003 severance, salaries and benefits as a percentage of revenue were similar to last year at 68 percent in this quarter and 67 percent for the second quarter of 2003. Sequentially, the percentage dropped from 70 percent in the 2004 first quarter. Total bonus accruals in the second quarter of 2004 were 23 million, versus 12 million in the second quarter of 2003.

G&A costs for the second quarter of 2004 were 23 million, up 13 percent compared to the second quarter of the prior year. G&A as a percentage of revenue fell to 23.5 percent from 25 percent last year. Although the absolute dollars spent were up, the percentage to revenue was down. Most of the dollar increase was due to investment spending that was discussed last quarter, such as targeted marketing and account development, research and knowledge-management capabilities, training and quality programs and investment hires, individuals who can contribute significantly to the Firm, but who require some time to ramp up to full productivity. Within all of these categories, we are prioritizing our spending requirements so that we can release the investment spending based on our revenue performance during the year. We expect G&A to increase in the third and fourth quarter due to a number of planned investments, including IT initiatives and our November worldwide consultant meeting.

Net nonoperating income of 1 million in the second quarter of 2004 was up versus 121,000 in the same quarter last year, primarily due to gains on the equity and warrant portfolio.

Now, let's talk about our income tax provision. We estimate that our full-year affective tax rate for 2004 will be 21 percent. The effective tax rate in the second quarter of 2004 was 28 percent. That's a bit higher than the annual rate, due in part to some catch-up from first quarter's lower rate. Our effective tax rate estimates will continue to be affected by the profitability of our foreign tax-paying entities and the mix of taxable income within those jurisdictions. All of our tax estimates exclude the effects of any warrant monetization.

Year-to-date, our year-over-year net revenue growth was 16.5 percent. Our guidance for full-year 2004 assumes that the economy will continue to grow for the remainder of the year and takes into account the typical seasonal pattern in this industry, which would suggest lower growth in the second half. Under that scenario, we would anticipate net revenue growing in the low to mid-teens in 2004 with operating margins in the 6 to 8 percent range.

For the third quarter of 2004, we expect net revenue to be in the range of 87 million to 92 million. At these estimated revenue levels, we anticipate that the corresponding diluted earnings per share would be between 20 and 25 cents. These estimates exclude the impacts from any warrant monetization.

I would now like to turn the call over to Todd Welu, who will give you more detail about second-quarter results by geography and our cash flow expectations.

Worldwide, all regions posted topline growth, but the growth rate versus prior year's second quarter very widely from 15 percent in Europe to 41 percent in Asia-Pacific. On a sequential basis, the rate of growth varied from 1 percent in Europe to 29 percent in Asia-Pacific.

We will begin with a look at the results for North America on slide eight. North America's net revenue was 53.7 million in the quarter, a 20 percent increase from last year. The year-over-year increase was largely due to an improved economic environment. We have also noted increased demand for Board members in companies as a result of Sarbanes-Oxley and other regulatory demand.

The Financial Services, Consumer and Technology practices reported significant increases in the quarter while Professional Services practice posted the most significant decline. On a sequential basis, North America's second-quarter revenue was up 17 percent over the first quarter of 2004.

Operating income in North America was 11.1 million in the quarter, versus 10.2 million in 2003. The operating margin in the second quarter of 2004 was 20.6 percent versus 22.7 percent a year ago.

The consultant headcount in North America and the end of the second quarter or 140, and 8 percent decline from last year.

Latin America's results are on slide nine. Net revenue in the quarter increased 18 percent to 3.1 million, while operating income improved to 134,000 compared to 103,000 year ago. The consultant headcount in Latin America at quarter end was 19, the same as one year ago.

Okay, let's now turn to our European results on slide ten. Europe's second-quarter net revenue increased 15 percent to 32.5 million. On a local currency basis, net revenue increased 7 percent from the second quarter of last year. On a sequential basis, Europe's second-quarter revenue was up 1 percent over the first quarter of 2004. Europe's operating income was 582,000 in the quarter, improving from last year's second-quarter income of 11,000, which excluded 1.9 million of severance. Europe's operating income was down slightly from 780,000 in the first quarter of 2004. Europe's consultant headcount was a 103 at quarter end, an 11 percent decline from June 30 of last year.

Okay, let's move on to slide 11 and look of the results of the Asia-Pacific region. Asia's net revenue was 8.6 million in the quarter, a 41 percent increase over last year's second-quarter results. Operating income in the quarter was 2.3 million, versus 1.1 million last year, primarily due to the improvement in revenue. The consultant headcount in Asia-Pacific was 34 at June 30, an increase of 10 percent over the second quarter of 2003. Corporate expenses from core operations, excluding 2003 severance, were essentially flat in the second quarter at 5.5 million versus 5.7 million last year.

Our last slide, slide 12, shows selected balance sheet and cash flow information. Our June 30 cash balance of $118.7 million was above the 100 to $110 million projection we gave you back in April.

Looking at some selected cash flow data for the quarter, depreciation was 3.2 million, the same as the comparable quarter of last year, and amortization of intangible assets fell 39 percent to 219,000. Depreciation and amortization for the year should be in the range of 13 million to 14 million in 2004.

Capital spending was 1.5 million in the quarter, compared to 1.6 million in the second quarter of 2003. We expect Capital Expenditures to be in the $6 million to $7 million range for 2004.

With that, I will hand it back to Tom.

As I summarize our prepared remarks for today, I'd like to repeat that the strength of our second quarter provides us with continued optimism for 2004.

Assuming the global economy remains stable, we continue to believe that 2004 will be a year of double-digit revenue growth and improved profitability, even after selected investments made for our long-term growth. We look forward to updating you on our progress during the year, and thanks for joining us this morning.

With that, will open up the call for your questions. Thanks very much.

(OPERATOR INSTRUCTIONS). Randy Mehl with Robert W. Baird.

Randy Mehl. Good morning, Tom, Eileen and Todd, and very nice results on the quarter. I wanted to pursue this average fee increase, which was substantial. How much of that was related to compensation moving up, just relative to mix, versus just core inflation in compensation?

Some of it was, Randy. The average fee measure is actually an important measure for us because it does measure the quality and level of the work that we are doing. To the extent a lot of that high-end work that pulls up the averages, which we have particularly in the Financial Services sector this quarter, is generally performed by our highest-producing consultants. They tend to be the ones that do the higher-fee searches, which pull up the average. We had a lot of very high-quality, high-end work this quarter, which pulls that average out.

The effective that, given our compensation system, is somewhat of an increase in bonus accruals because, at the high-end of our tiered structure of compensation payout, there is a slightly higher percentage that accrues when our top producers are producing at the top of the brackets. That's actually good news in terms of the performance of the business overall.

Just a follow-up to that, the producer headcount fell and I assume that was a bit of a surprise to you. I think you expected it to be flat, maybe even up a little bit. I'm wondering, number one, what was the source of that? Then number two, plans for the rest of the year in terms of producer headcount.

Yes, it went down a little bit, although most of that was planned and managed headcount by us. The involuntary, or unexpected turnover -- resignations -- was about in line with normal standards, normal measures. Typically, when we do have turnover, it generally happens in the second quarter because with us and our major competitors, it follows typically the payment of the annual bonus (indiscernible) it's just part of the cycle. So, I think that will average out over the next couple of quarters.

We are, at the moment, in a hiring mode with very targeted, carefully planned key hires underway. Actually, we've brought several key people on board since the close of the quarter, so I would think that we will see that number trending up slightly in the next quarter or two. But we have a very productive work force at the moment.

Of course, one of the things we've done, as you know from prior discussions, is we've been very targeted on making sure that we are focusing not only on bringing in and moving up high-end producers, but we're dealing with producers at the low end of the performance range more effectively than we may have in prior years.

Since the close of the quarter, we've added I think about four to five new hires and we have another four or five in the pipeline.

Is that four to five net?

Four to five net hires since the end of the quarter, and I think you probably would see that kind of number continue. I wouldn't have an exact number but I think it's unlikely that the total would go down again in the next quarter.

Kelly Flynn with UBS.

This is Andrew Fones for Kelly. You mentioned that, month-to-month, the demand has been a bit lumpy. I was wondering if you could give us a confirmation, trends by month through the quarter, please.

We typically don't give confirmation trend on a monthly basis through the quarter. What we did see, Andrew, is that we ended kind of the first quarter very strong and that caused some of our confirmations to be a little bit down in the second quarter but again, it remains lumpy. I think we're seeing consistent results going forward in our third quarter as well.

Could you kind of talk about Europe and kind of the strength of your business there in some of the different countries and perhaps touch on seasonality as well and your expectations for the seasonality in Q3?

We would be happy. Let me address the seasonality issue. Typically, in a normalized state in this business, we would see third and fourth quarter not being as strong as the first half of the year. Just to give you a comparison, in three of the past four years, we've experienced a pretty definite seasonal pattern that resulted in Q4 revenue being in a range of 10 to 30 percent lower than second quarter. So if that pattern holds, we would expect that necessarily third and fourth quarter wouldn't be as robust on the revenue line.

In regards to the situation in Europe, what we are seeing is that it varies by country. The UK appears to be in a stronger employment and hiring position than in the continent. Certainly, Germany and France are struggling with economic issues. The UK, on a macrolevel, appears to be in better shape economically, and that's translating through in terms of what we're seeing on confirmations in our pipeline.

Thank you. One final question -- could you give us cash flow from operations for the quarter?

Why don't we get back to you on that?

We will look back to that, unless we have it right here.

20.4 million.

Thanks, guys. Good job.

Mark Marcon from Wachovia.

Good morning. I was wondering, can you talk a little bit about what sort of margin trends we should expect to see as the quarter unfolds, or as the year unfolds? As I look at the guidance for the full year, if you get up to the mid-teens in terms of revenue growth, you're talking about 8 percent in terms of a full-year operating margin. That would seem to imply that operating margins, particularly in the fourth quarter, should be higher than where they are during the second quarter. Is that a correct assessment?

No, because we're going to target and we think that we can give you a good sense of being in the 6 to 8 percent range, but as we suggested to you, we see higher G&A in the back half of the year for the reasons that we gave you. We have a worldwide consultants meeting and in addition, we have some IT initiatives that will raise our spending levels. So no, even at that higher end, we don't expect to be significantly above the operating profit margin that we are at right now.

So this would kind of be the peak for the year?

Yes, except to the extent that -- you know, obviously, I think we've said all along if we see major increases in revenue, we expect that we will be able to stay at a revenue line of 450 all-in for the year, something like a 10 percent margin. So, given our projections right now as to where we are in revenue, which again are based on what we've seen in the business the last three to four years in the seasonality, we are comfortable with 6 to 8 percent on the operating margin line but we don't think it's going to be above that, given what we know now.

I would just add a comment to that. You've seen, in terms of the quarter-on-quarter results, that the operating margin is pretty sensitive, at this revenue level, to even relatively minor shifts in the top line, because we've got our costs scaled to, as we said earlier, to make sure we are profitable at any predictable revenue level. That gives us pretty good upside if revenues increase and exceed our target. So, if we see revenues over 100 million, then I think we will see even more significant revenue growth.

Given our history with prior quarters, particularly the third summer quarter, we are being pretty cautious for the moment relative to how that looks like it's going to play out through the balance of the year.

I'm kind of wondering, just with regards to North America, just to use that as an example. Tom, we've talked before about what the long-term compensation strategy and philosophy is going to end up being. If we take a look at the second quarter and compare it year-over-year, you had a 20 percent increase in revenue, yet the operating margin in North America ended up declining by 210 basis points and you had fewer consultants, you know, an average decline of 12 percent in terms of the consultant count. I'm trying to understand how -- will the leverage basically be purely off of the G&A and the corporate expense line, or how should we think about the compensation line on a go-forward basis, particularly if we do have a sustained recovery?

Let me start that and then Todd and Tom will step in. One of the issues that you have here, in terms of trying to drop the revenue down to the operating profit line, is that we had to modify our estimates, so we are reporting bonuses based on our full-year estimates. So you're talking about really a smaller number of consultants being more productive and bringing through more work at higher revenue levels, and that means higher bonuses.

So necessarily, you are in a catch-up mode in terms of trying to figure out exactly where your comp is going to be for the second quarter. So that's part of the issue in dealing with where the compensation is. There's less fixed-salary components; you've got fewer consultants producing more revenue, so there's an increased flexible bonus at higher incremental rates. So that's a sense of what's happening in this quarter. Todd, you may want to comment on that.

I think also, Mark, if you look at the year-to-date results, you'll see that being a little more comparative and you'll definitely see the spike in the adjustment that we had to make in the second quarter to reflect those modified estimates for the whole year. With those fewer consultants, they are producing more revenue, which essentially equals a higher incremental pay-out for them as well, so that's impacted also.

That means negative leverage.

Was there anything further, Mr. Marcon?

Yes, I said that implies negative leverage.

No, I don't think it does imply negative leverage. Some of this is a catch-up component in terms of getting people to the appropriate bonus accruals from an accounting standpoint -- that what we've estimated before. So there's that component. Also, if you look at this on a year-to-date basis -- and Todd can comment on that -- some of this is phasing, and there is leverage that we are seeing in the operation, but in terms of accruing appropriately for the increased revenue that we are seeing, we have to do that in this quarter, so you will see a pressure on the margin.

In prior years, we've had the similar issue, because the first quarter is very limited and spotty amount of information to predict and model the full-year performance compensation. As we get through the year, the year-to-date number is actually much more relevant as a comparison and when we get through into the third quarter, it will become even more relevant because we've got three quarters of data and we've smoothed out the quarter-to-quarter differences -- (Multiple Speakers).

The year-to-date margin is 20.8 in 2004, versus 18.5 percent in 2003.

I got it. So when we think about getting to a 10 percent margin at $450 million in revenues, would the leverage be basically off of the G&A or would there also be some leverage off the salaries and employee benefits?

Absolutely there's going to be leverage off the salary and employee benefits. If that wasn't happening, you would be assuming that, at incremental levels, you're handing over every dollar in compensation. That's not the way our compensation plan works, so you are getting leverage.

You're getting leverage out of G&A because the -- and fixed costs, which increase hardly at all between the 360, 370 and 425 or 450. It will have some incremental G&A but not nearly in the proportion (inaudible) the revenue growth. At that point, you've got pretty much all the consultants fully up to speed and fully having all of the salaries covered or almost all of them covered, so the operating leverage on incremental fee revenue is 30, 40 points on incremental revenue at that point.

Great. I don't want to sound overly critical; it's a great quarter. I'm just trying to understand it a little better.

They are very good questions.

With regards to the tax rate, when does it normalize?

Well, that's difficult to predict because it depends upon when we have a string really of more periods of operating profit before we reverse the valuation allowance. The other issue that we don't really have total visibility to at this point is to what extent the impact of Google would affect that as well. So I can't give you any real visibility as to when that would normalize at this point. We will certainly update you each quarter as we have a better sense of it but at this point, I would only be speculating.

SunTrust Robinson Humphrey, Tobey Sommer.

Good morning. I just wanted to ask you a couple of questions about different verticals in a couple of geographies. You talked about industrial in Europe perhaps lagging and professional in the U.S. I wonder if you could drill down that and perhaps give us your expectations for what conditions may turn that around and sort of what you're seeing currently.

The sector performance in any geography, Tobey, is really driven by really two things. One is the hard performance of the sector itself economically. Then the second is our staffing and our level of capability to serve it. The two together really cause the results that you get in any particular sector.

In a strong sector where we are strong and well staffed, we do better than in one where we have only one of those going. In the industrial sector in Europe, for example, the sector has been flat and we are a couple of people below our critical hiring targets to beef that up, so a combination of those will bring that back into better performance.

Generally, we track the performance of the sectors. Over the last few years, for example, the last three years, through the toughest times that we've gone through, big falloffs in Financial Services and Technology, as those sector said very substantial retrenchment, but our industrial and healthcare and to a degree consumer product sectors weren't nearly as affected. They weren't as high in the peak years; they weren't as low in the off years. The industrial sector just kind of bumbles along for the most part. It's a very solid, core sector for us.

So I think, if you look at economic indicators in these particular sectors, in the various economies, that's probably a pretty reasonable predictor of our business -- not perfect, but it's reasonable.

Two other questions, one relates to your discussion of the industrial sector in Europe and perhaps suggesting that maybe you could add a couple of people there. Regarding your employee additions in upcoming periods, are there any specific geographies or verticals that you think you may want to add to? Then I was curious what your perceptions were for your market share in the quarter, if you happen to think that you may be taking some market share from competitors and just sort of general commentary about what the competitive landscape looks like currently.

Let me take those in turn. We do have a very targeted hiring program focused on, at the moment, you know, between 10 and 15 really key investment hires that we've talked about before that fill in the lineup in various geographies and sectors. Partly for competitive purposes, I don't think we really want to go into the details of those specifically but you know, we are very focused on those.

As far as the market share, that's hard to say. Most of the companies that we compete with, with one or two exceptions, are private companies. The information that we would use to compare is sketchy but I think, if we are growing faster than some other firms, the presumption is we are probably gaining share. I think we're certainly holding our own at a minimum share at the moment, based on everything I've been able to see, although that would vary, I think, sector by sector in certain areas.

Then regarding competition, do you have any sort of general comments on what the competitive landscape looks like coming out of a couple of years where things were a little bit more challenging and now seeing a couple of quarters consecutively with good growth?

Well, I think, as you know and as some have observed before, there is some linkage between the performance of the leading firms in the business. Most of our major competitors have seen some increases in their revenues in the last quarter or two. That's good for the profession; I think it's reflective of better conditions in the economy, for the most part. There will certainly be some jockeying and changing of share from time to time among the major three or four firms, but from what I've been able to tell and hear from some of my competitors, most of their businesses are improving also and that's actually good for the sector and for the profession.

Ty Govatos with C.L. King.

Great quarter, by the way. On the bonus accruals, on your original forecast, when you were looking for mid-single-digit growth, you were looking for a full-year accrual of about $50 million, or about 15 percent of net revenues. Can you give us a handle on what that full-year figure might be now under the new guidance?

Yes, based on the guidance that we've given you today, our full-year bonus estimate is 75 to 82 million.

Second question, is there any way, since you have hired new consultants while eliminating some others, of separating out how much those new consultants have added to the top line versus maybe the cyclical swing we've seen so far for the industry, or is it just too difficult to pull out?

There isn't really an absolute sense of that. We actually have some new consultants, including four or five that have joined us within the last year, that are producing among our top 15 or 20 worldwide and some others who are not.

The good news is, I think we've got our hiring and our evaluation of new hires pretty well in hand. We are not making many bad hires. At least, we don't think we are. So, they are fitting into the mix, the average mix maybe more quickly than they might have otherwise, and that's a good trend for us. I think it's reflective of experience in hiring and in dealing with lower performing consultants, which we've been fairly aggressive in doing over the last couple of years. So, there doesn't appear to be any great segmentation of the performance by experience versus new. That's a good thing, we believe.

A follow-up question from Mark Marcon with Wachovia.

I was wondering if you could comment on the strong performance in Asia. Was there anything unusual in there?

No. Well, there's good performance and good people. We've done some hiring of a number, particularly in Asia -- more in Asia than in some of the other regions. It's a new team; it's a fairly young team. We've, as a result, got a little bit less fixed salary load and a little bit less infrastructure costs, and so the leverage on margin is higher in Asia than it is in some of the other regions. It's also a high-growth region and frankly, the numbers are small. So still, so percentage increases, even though they look dramatic, are on a fairly small base and that will continue. It's good, but it's on a fairly small pace. So, I think we've got very high expectations for Asia over the next few years, particularly China, where we're doing very well. It's mostly -- we've got good management. We've had low turnover. Asia didn't actually experience some of the whipsaw of the economic cycle that we've seen in Western Europe and in North America either. That's a contributing factor, so they've had a stronger couple of years growth and aren't rebuilding out of as much of a downturn.

I mean, can this revenue level last?

We think it will last and improve. We think Asia still has very good growth ahead for, frankly, as far as we can see.

Mark Marcon Excellent. Where would you expect the number of consultants to end for the year?

You know, we would probably expect that we would increase mid double digits from our current level, so I think we've talked about that before. That would be probably in the neighborhood of 30, 35 net increases over the course of the year -- bring us in at the low 300s.

Great. Then with regards to the comment in terms of the sequential decline in searches, what drove that, do you think? Was it just really strong Q1?

Yes, it was, it really was. It's a little bit of an odd comparison, frankly, and the numbers of newly confirmed searches in the quarter don't match exactly with the revenue that is recognized in the quarter because if you -- for example, as we had here -- had a very strong batch of new engagements that were confirmed really in the last week or two of the first quarter. So those confirmed searches counted in the first quarter but virtually all of the revenue associated with them was in the second quarter. So, it's a misleading statistic, if you look at it just on any particular quarter compared to another one. If you look at it on an annual basis, year-on-year, it's much more relevant because those things move out.

There is some impact of a slightly smaller consultant population doing, on average, about the same number of searches but at a higher average fee level. We've seen that in the average fee per search statistics, and those are actually good statistics.

great. Would you generally say, broadly speaking, that things (indiscernible) better?

Yes, we did say that! (LAUGHTER). If anybody missed it, I will say it again! (multiple speakers) -- we are cautious, as we said before. I think we have the effects of the world economy, the impact of the election in North America; there are a number of things which have the potential to be disruptive. We hope it doesn't happen. Absent disruptive things that nobody has any control over, I mean, we are optimistic that business will continue to improve and revenues and margin will continue to grow. We feel very strongly we are controlling well everything that we are able to control. There are certain things that we're not able to control and that we hope work out well, but what we can control we are I think pretty much on top of.

Kelly Flynn with UBS also has a follow-up.

I've got a couple of follow-up questions. I think you mentioned, on the last call, that the spending initiatives you've talked to, you may spend about 5 to 8 million through Q2 to Q4. I was wondering if you could give us an update on kind of where you are with those spending initiatives, and then perhaps what the impact of the new IT initiative could be -- and then perhaps whether the guidance also includes the perhaps 30 to 35 new hires you expect over the remainder of the year?

Yes, let me address the questions you had about the investment spend in CapEx. Just to keep it clear, we've talked about a CapEx spend about 6 to 8 million and we are about 3 million into that thus far through the end of second quarter. In addition to that, there is an investment spend, which I detailed when I went through the script, which was basically an investment spend in terms of what we're going to do in marketing and also with investment hires. So those items, in terms of where we will be spending, are impounded into our guidance.

Okay, so in terms of kind of what you're looking at now over the remainder of the year in terms of the investment spend and all run through the income statement, could you give us perhaps an update on that part of it? Will the IT initiative be capitalized?

Well, the IT investment will be capitalized to the extent we can capitalize it. How it will go through the income statement specifically for each quarter, that's going to be difficult to give you. We can certainly update you on it as we go through it. The basic sense is there will be about a $3 million IT spend, all-in in the third and fourth quarter and it basically will be evenly split between those two quarters.

That's a fairly normal level of spend for us. There's not a major new project spending in there.

The other numbers are pretty consistent with the things we've talked about before. We do have our annual partner meeting, which last year was in the third quarter and this year will be in the fourth quarter; and we have some marketing spend on some carefully selected events and some intellectual capital spending to develop our knowledge base, all in line with the amounts that we've indicated before. Some of these are back-end loaded a little bit because we essentially did that to make sure we could phase these expenditures based on how the year was going. We can still do that. A couple of initiatives that we are planning on are discretionary enough that if the performance of the business doesn't support doing them, we will shift them into next year.

Okay, thanks. I also had a question on your NOL. I was wondering if you could give us an update on where that stands.

The amount of the NOL at the moment is 23 million.

Okay, thanks a lot.

We will also take a follow-up from Tobey Sommer with SunTrust Robinson Humphrey.

Thank you. I was curious perhaps if you have plans or could foresee opening any new offices over the next twelve months or so, maybe how many do you think you have in mind?

Yes, we will likely open one, possibly two offices worldwide over the next twelve months. No more than that. We have a couple of places in mind where we think it's likely that we will go. It's conceivable we might close one or two, so the net change won't be more than a couple.

Could be a little bit more specific? Is there a geography that you are focusing on, perhaps?

Yes, but I'd rather not be specific about that in this call.

That does conclude today's question-and-answer session. I will turn today's call back over to Mr. Tom Friel for any additional or closing remarks.

I think we pretty well covered what we have to deliver today. We appreciate your participation and just once again, I wanted to reiterate, in summary, that we are happy about the performance of the quarter and looking forward to the balance of the year. The business is running well and we appreciate your support. Thanks very much for participating.

That does conclude today's teleconference. Thank you for your participation. You may now disconnect.