Heidrick & Struggles International Inc (HSII) 2004 Q3 法說會逐字稿

Good day everyone. Welcome to this Heidrick & Struggles Third Quarter 2004 Financial Results Conference Call. This call is being recorded. For opening remarks and introductions, I will now turn the call over to Mr. Eric Sodorff. Please go ahead.

Good morning everyone, and welcome to our 2004 third quarter investor conference call and webcast. On today’s call are Tom Friel, Chairman and CEO of Heidrick & Struggles, Eileen Kamerick, CFO, and Todd Welu, Corporate Controller. Tom will review our third quarter results, and the outlook for the 2004 fourth quarter, then Eileen and Todd will provide additional financial details.

As a reminder, there are supporting slides available on our website, 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, October 28, 2004, which was widely disseminated by the various wire services and other media. The language is also on Slide 2 of the web presentation.

And now, I’ll turn the call over to Tom.

I would like to begin this morning with a brief overview of our financial results. We are very pleased with our performance this quarter. It was a little complicated, but very positive. We met the high end of our revenue guidance, and our operating margin reached 8.9 percent, and was up for the third sequential quarter. Our earnings exceeded the guidance we provided last quarter, and this is true even if you exclude the sale of Google stock during the quarter. Our net revenue of $91.6m grew 19 percent compared to the 2003 September quarter, and our $8.2m in operating income more than doubled compared to last year’s results in the same quarter.

We also are pleased to announce that our board of directors has approved a $30m stock repurchase program. We believe that this in an effective means of enhancing shareholder value as we continue to build a profitable, sustainable business model.

Our confirmed searches in the third quarter increased 14 percent over the comparable quarter of 2003, but were down 2 percent sequentially from a very strong second quarter. Consultant headcount was 295, down 1 compared to the end of last quarter. We do expect consultant headcount to rise slightly by year-end. Our consultant productivity increased as executive search revenue per consultant rose 30 percent from the 2003 third quarter, to an annualized rate of $1.2m in the 2004 third quarter, and this is a historically good level.

While some of our regions have more capacity than others, we believe the Company overall still has room to further improve on this productivity measure. This allows us to be very selective in our hiring, and still handle an increasing number of assignments without difficulty. In the quarter, assignments in the Financial Services, Consumer, and Technology practices were up from the prior year. Of course, a very significant transaction during the quarter was the exercise of our Google warrants, and the subsequent sale of the stock for total proceeds of $128.8m.

As we mentioned last quarter during the call, in accordance with our standard policy, 55 percent of this gain will go to the team of Heidrick & Struggles’ consultants who conducted the 2001 Google CEO search. The net gain to Heidrick & Struggles of $56.8m is reported as non-operating income. While this is certainly the largest gain we have had in this program to date, it’s important to point out that our warrant program has, in total, generated over $172m in total monetizations, $107m in net gains to date, and has involved over 500 employees participating in over 1,000 transactions. We continue to book warrants, and see this program as continuing to be an attractive part of our overall business strategy.

Now, turning to our bottom line results for the quarter. Net income, which includes the Google gain, was $62.1m, or $3.08 per diluted share. We hope that this gain does not overshadow the Company’s underlying operating strength during this quarter. Even during this seasonally slower time period, we kept costs in line with revenue, and expanded our margin. Excluding the Google gain, net income would have been $6.5m, or 32 cents per diluted share for the quarter.

As always, we plan to continue our prudent use of cash. We are comfortable that our investment spending forecast of $6m for 2004 will contribute to our strengths and growth in future business, and allow us to maintain our tradition of high quality client service. As we planned, the spending is back-end loaded, with about $3m of it coming in the fourth quarter.

One important component of this investment spending is our annual worldwide consultant meeting, which will take place in November in Miami. In 2000, and 2001, we canceled these meetings due to the severe economic environment, but brought them back beginning in 2003, since getting our key worldwide team together for one consolidated annual meeting, we believe, is critical for enhancing client service, promoting consultant recruiting and retention, and focusing on key account development, and expanding profitability in 2005 and beyond.

Looking forward, we recognize that revenue in our business is often difficult to predict accurately, but we remain focused on aligning 2005 spending with revenue, so that we can continue to meet our profitability goals. We are confident that we can achieve these goals while still funding a $30m stock repurchase, and maintaining a very strong balance sheet. In summary, we believe this quarter’s financial results, along with the planned stock repurchase, provide solid evidence of our commitment to grow a high quality and profitable business for the benefit of our shareholders, our employees, and our clients.

I would now like to turn the call over to Eileen Kamerick, our Chief Financial Officer, who will give you more detail about third quarter results.

Eileen?

As Tom said earlier, we are encouraged by our operating and cash flow performance this quarter. We are very pleased with our operating margin, particularly since third quarter results have typically been less robust due to normal seasonal trends in our business. We’re comfortable with our ability to achieve year-over-year growth in the fourth quarter, and an overall annual operating margin of approximately 7 percent.

In order to provide you with some insight into the results, I will provide additional details on each line of the income statement. Todd Welu, our Corporate Controller, will cover revenue by region, and additional cash flow detail, as well as discuss the bonus accrual.

Starting with net revenue in the third quarter, we noted a benefit from foreign currency exchange fluctuations of approximately $2.7m. Excluding the impact of currency, revenue increased approximately 16 percent versus the third quarter of last year. If you turn to Slide 6, salaries and benefits expense in the third quarter of 2004 was $60.4m, up 18 percent over the third quarter of last year. The expense increase was primarily the result of additional bonus accruals that increased with higher revenue compared to third quarter 2003.

Salaries and benefits expense as a percent of revenue was slightly lower than last year, at 65.9 percent in this quarter, versus 66.5 percent for the third quarter of 2003. Sequentially, the percentage dropped from 67.7 percent in the 2004 second quarter. Total bonus accruals in the third quarter of 2004 were $19m, versus $11m in the third quarter of 2003. Later, Todd will provide more detail on how we estimate the bonus accruals each quarter.

G&A costs for the third quarter of 2004 were $23m, up 9 percent compared to the third quarter of the prior year. Although the absolute dollars expensed were up, the percent to net revenue was down from 27.4 percent last year to 25.1 percent. Sequentially, we expect G&A to increase by $1m to $2m in the fourth quarter, due to a number of planned investments, including key account and knowledge management initiatives, and our November worldwide consultants meeting. This quarter’s operating margin of 8.9 percent is above our 7 percent estimate for the year, since $3m of the $6m total 2004 investment spending will occur in the fourth quarter, and the operating margin during the 2004 first quarter was 5.9 percent.

As we mentioned in the earnings release, our goal for 2005 is to reach an annual operating margin of approximately 10 percent. Because there are seasonal trends for our revenue, as well as phasing differences in our investment spending, we manage costs on an annual basis, rather than quarterly, so the operating margin may not expand sequentially every quarter.

Net non-operating income of $57.3m in the third quarter of 2004 was up, versus $677,000 last year, due to gains on the equity and warrant portfolio, specifically the Google stock sale gain of $56.8m. Operating income was $8.2m in the third quarter of 2004, a $4.9m improvement over last year. Net income in the third quarter was $62.1m, or $3.08 per diluted share, compared to a net income of $1.1m, or 5 cents per share, last year. Excluding the Google gain, a comparison which we believe more appropriately reflects our core operations, net income would have been $6.5m, or 32 cents per diluted share. The operating income and net income improvements compared to prior year, excluding the Google gain, were due to higher revenue, operating leverage, and a lower effective tax rate.

Now, let’s talk about our income tax provision. We estimate that our full-year effective tax rate for 2004 will be 8 percent. The Google gain had a dramatic effect on our overall income tax situation. We were able to fully utilize our U.S. net operating losses, capital losses, and other benefits, to significantly reduce the taxable gain, effectively saving $16m in cash on taxes today, versus waiting to offset taxable income over the next few years. Needless to say, we are quite pleased with our ability to utilize these tax assets at this time.

In addition, the Google gain has put us into a federal income tax paying position, which means that we are able to restore some of our deferred tax assets. As you may recall, in the fourth quarter of 2003, we took a $58m charge to set up a valuation allowance for the full value of net deferred tax assets. As we stated on our 2003 fourth quarter earnings call, if, in the future, the Company determines a lesser valuation allowance is required, it would record a reduction to income tax expense and the valuation allowance in the period of such determination. As you can see, based on the requirements of FAS109, we have restored $7m of the tax asset values in the current quarter, and the direct offset is an income tax expense reduction of $7m.

For 2005, we expect that income tax expense will continue to benefit from reductions in the valuation allowance. Our 2005 tax rate estimate is 25 to 30 percent. This 2005 tax rate assumes that taxable income, and the regional mix, is similar to 2004, without Google, and that we will be able to utilize deferred tax assets. Our effective tax rate estimates will continue to be affected by the amount of tax assets we are able to record in accordance with FAS109, the profitability of our foreign tax paying entities, and the mix of taxable income within those jurisdictions.

Year-to-date, our year-over-year net revenue growth was 17 percent. Excluding the positive impact of exchange rate fluctuations, net revenue increased by approximately 13 percent. Our guidance for the 2004 fourth quarter assumes that the economy will continue to grow, and takes into account the typical seasonal pattern in the industry, which suggests lower growth in the fourth quarter of the year. Under that scenario, we anticipate net revenue of $85m to $90m, with earnings per share of 10 to 20 cents.

For the year 2005, we are well into our budgetary and forecasting meetings around the world, so we expect to provide guidance for 2005 on our next call. We intend to be cautious when budgeting our 2005 spending, to take into account the timing of expected economic recovery around the world, and other events that could potentially impact our business. What I can tell you at this point, is that the budget will be built with a flexible cost structure, so that we can be profitable even at lower revenue numbers, if that occurs. If revenue exceeds our forecasted amounts, then we will have substantial operating profit leverage.

I will now turn the call over to Todd, who will give you more detail about third quarter results by geography, our cash flow expectations, and bonus accruals.

Worldwide, all regions posted top line growth, but the growth rates versus prior year third quarter varied widely, from 8 percent in Latin America to 63 percent in Asia Pacific. We’ll begin with a look at the results for North America on Slide 8. North America’s net revenue was $49.9m in the quarter, a 17 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 and executives in companies, as a result of the changes associated with Sarbanes-Oxley, and other compliance regulations.

Similar to last quarter, the Financial Services, Consumer and Technology practices reported significant increases in the quarter, while the Professional Services practice posted the most significant decline. Operating income in North America was $10.8m in the quarter, versus $12m in 2003. The operating margin in the third quarter of 2004 was 21.6 percent, versus 28 percent a year ago. The consultant headcount in North America at the end of the third quarter was 137, a 10 percent decline from last year.

The 2003 third quarter included the benefit of a few significant expense reductions, the largest of which was a reduction to the bonus accrual to account for a significant reduction in the 2003 annual forecast. Excluding the bonus reduction, and other third quarter expense reductions, last year Q3 2003 operating margin was similar to Q3 2004 margin, about 20 percent.

Latin America’s results are on Slide 9. Net revenue in the quarter increased 8 percent to $3.6m, while operating income was down to $450,000, compared to $598,000 a year ago. The consultant headcount in Latin America at quarter end was 20, up 1 from one year ago.

Okay, now let’s now turn to our European results on Slide 10. Europe’s third quarter net revenue increased 16 percent to $30m. On a local currency basis, net revenue increased 6 percent from the third quarter of last year. Europe’s operating income was $1.1m in the quarter, improving from last year’s operating loss of $2.2m. Europe’s operating income was up by $557,000, from $582,000 in the second quarter of 2004. Europe’s consultant headcount was 103 at quarter end, an 11 percent decline from September 30th of last year.

Okay, let’s move on to Slide 11, and look at the results of our Asia Pacific region. Asia’s net revenue was $8.1m in the quarter, a 63 percent increase over last year’s third quarter result. Operating income in the quarter was $1.6m, versus $0.4m last year, primarily due to the improvement in revenue. The consultant headcount in Asia Pacific was 35 at September 30th, an increase of 21 percent over the third quarter of 2003.

One item that significantly affects the operating profit overall, and for each region, is the bonus accrual. Since how we calculate the bonus accrual is a common investor question, I will now take a moment to explain the accrual. The bonus accrual is recorded based on a formal matrix, approved annually by the compensation committee. Each region has its own formal calculation that depends on regional and overall company performance.

The bonus amount is calculated and recorded on a year-to-date basis as a function of both annual forecasted revenue and operating profit. True-ups of the year-to-date estimate flow through the quarter. As a result, the salary and benefit line item, which includes this variable bonus cost, may not be comparable to other quarters. As we go through the year, we receive more data, and have more visibility, regarding the full-year results, and the calculation each quarter requires less estimation.

Corporate expenses were down 5 percent in the third quarter at $5.8m, versus $6.1m last year. Our last slide, Slide 12, shows selected balance sheet and cash flow information. Our September 30th cash balance of $280.2m was $162m higher than at June 30th, 2004. $129m of this increase is due to the Google proceeds, with the rest from operations. Cash flow from operations for the 2004 third quarter, excluding Google, was $32.9m. Of the amounts payable to consultants at September 30th, 2004, $53.1m was paid in October 2004, and $17.7m will be paid in the future under the terms of an existing corporate deferred compensation plan. Please note that cash and cash flow will include this $53.1m Google-related outflow in the December 2004 quarter, along with a significant portion of 2004 bonus payments.

Looking at other cash flow items for the quarter, depreciation was $3m, and amortization of intangible assets was $219,000. Depreciation and amortization for the year should be about $13m in 2004. Capital expenditures were $879,000 in the quarter, compared to $1.3m in the third quarter of 2003. We expect capital expenditures to be in the $5m to $6m range in 2004.

With that, I will hand it back to Tom.

In summary, I’d say our third quarter performance provides us with continued optimism that 2004 will be a year of revenue growth in the mid-teens, with significantly improved year-over-year profitability, even after selected investments for long-term growth. We have held this view consistently throughout year, and we still do. We see opportunities to improve productivity, and leverage our cost base going forward, even though our consultant productivity is already very strong. As a result, we will be very careful in monitoring consultant productivity as we add staff over the next few quarters.

We also believe that the repurchase program is an effective means of enhancing shareholder value as we continue to build a profitable, sustainable business model for shareholders, employees, and clients. This repurchase program will also help us offset shareholder dilution as we increase the percentage of employee ownership though our compensation programs over the next few years. We also believe that we will end the year with the strongest balance sheet in our industry, even after any of our planned stock repurchase activity. We look forward to updating you after we end the year.

And with that, we’ll open this call up for your questions.

(OPERATOR INSTRUCTIONS.)

Tobey Sommer, SunTrust.

Congratulations on a strong quarter. Question for you regarding how we should think about revenue growth and your cost structure going forward, just kind of looking into ’05. Had some real good revenue growth as the expansions kicked in this year. Should we look for kind of more modest growth, or a return to the seasonal revenue patterns, and therefore more seasonal margin swings as well?

Yes. This is Tom. Let me take that one. I think, Toby, that that’s a reasonable expectation, which we share. Obviously we don’t have any more visibility into the global economy, and its impact on us, or others, than anybody else does. But our expectation and our planning is based on the assumption that normal seasonal patterns will take place in 2005. We’re building our planning on that basis, so a year that we -- until other information convinces us to change our mind -- assumes reasonable growth, and normal seasonal patterns.

If I could follow-up, Eileen, you mentioned a more flexible cost structure in ’05. Could you describe what kind of differences or changes that may make the cost structure more flexible?

Well, I think we’ve been flexible thus far in that we have been very careful in terms of hiring. And, as Tom mentioned, we think we have capacity. We know we have capacity in the system, so we don’t need to overreact in terms of hiring to be able to accommodate revenue growth, and drive revenue growth. And, in addition, as you can see from our investment spending and CAPEX through the year, we have, in fact, released that, as we’ve seen revenues come through.

So, we’ve back-end loaded it to accommodate the fact that we wanted to make sure that revenue was going to come through the system as we anticipated that it would. And we’re not going to build costs ahead of revenue. The idea is that we’ll build a fairly low-cost structure, so that if we get higher revenue than we forecast, it will convert at very high levels.

We added as a follow-up comment to that, we also have -- and I suspect others may as well -- but we have built in to our system a sort of a little bit of a fortuitous situation on the back-end of some of the restructuring that we’ve done over the last few years. In that we have office capacity in most places to absorb new hires with minimal investments in real estate, and we have capital equipment.

So, for a while, we can absorb reasonable revenue growth with less than normal investment spending around that. And we run out of that at some point, but we still have for 2005 the ability to absorb a reasonable amount of new hires without some of the ancillary costs that would normally be associated with them. And that’s a short-term situation, but it will help us next year, we think.

Thanks. And can you refresh our memory as to where you think that capacity in terms of revenue per consultant may sort of top off? And how that compares to your historical peak, in terms of revenue per consultant?

Well, at the moment we’re annualizing at about $1.2m. We have seen annual rates higher than that. And certainly there’s at least a couple hundred thousand that we think in capacity, in terms of an annualized rate. So, if you’ll talk to our operating managers throughout the system, they’re clear that they see more room for productivity growth.

So, in terms of an historical peak, it’s certainly been as high as $1.3m. But given the analysis that we’ve done, we think there is capacity above and beyond that. So, we can be very careful and thoughtful on how we hire, and do so strategically.

Mark Marcon, Wachovia.

I was wondering, it appears from the macro data points that we’re in the fourth quarter of a labor market recovery at this point, and your consultant headcount keeps declining. I understand the rationale for being cautious, but I’m wondering at what point, or what sort of evidence would you need, in order to start increasing the consultant headcount? And then I’ve got a follow-up.

Mark, we are going to increase the consultant headcount, and in fact, we have -- we’re in process right now with discussions with a number of very key hires. One of the things that we’ve done over the last few years, coming out of this --the restructuring, is that our -- that the quality of our consultant workforce, if you will, is higher than it’s ever been. And so this changes, as Eileen commented, this changes the capacity of our existing consulting teams somewhat, because those that are here have the capability to handle both higher production and higher business development. So, we’re in a fortunate situation that for a while we can drive reasonable revenue increases without increasing headcount much.

Now, you run out of capacity at some point there, and it’s different by region, and by practice. And so we would expect, and we have built in to our plans, a reasonable increase in overall headcount next year. Some of that we expect we will see in the fourth quarter, because we’re actively in the market recruiting now. But we don’t feel the need to drive revenue increases via headcount increases. We’re going to reverse that, and actually drive our headcount increases behind revenue increases. And we think we can do that for at least a year, if not longer.

And what’s a reasonable headcount increase?

A reasonable headcount increase? I would say next year we suspect -- we will drive headcount increases at a lower percentage than revenue increases. So, if we -- now, I would think in the ballpark of, if we increased revenue 15 percent, we should probably be looking to increase headcount maybe 10 percent.

All right --

I think the ratio, at least for the next year or two. ought to be about that two-thirds ratio, ballpark.

Okay. That’s great. And then if we can --

I would -- that would say we would add 25, 30 net consultants, if not next year, within --

And Mark, just so you know, in the budgeting process, we’re very specific in terms of budgeting around assumed hires, and focusing attention on that. And assuming within the budget constraints what it’s going to take to hire, how people will come on, how they will ramp up. So, it’s a very specific part of our planning process.

Fundamentally, in most cases, I mean, there are exceptions if we bring in very experienced partners with the ability to generate a lot of revenue in a hurry, and we’re certainly always looking to do that, and have done some of that this year. But aside from that, hiring doesn’t really drive revenue. Hiring drives cost. And so you want to make sure that you’ve got the revenue growth in balance. Most of our revenue increases will come from our existing consultant base, and it’s the execution side of this that, at some point, we need additional resources to do.

But as we said, we have -- we believe we have sufficient execution capacity, both in our consultants, and in our leverage teams of our associates and support, to handle increased revenues. So, that puts us in the fortunate position of being able to be very strategic in terms of the hires that we do make at the partner level.

Great. And then one question. I’m just wondering, is part of the dynamic that’s occurring this year, particularly as we look at your North American margins, that in prior years -- the last couple of years have obviously -- prior to this year, have been fairly rough. North America had really been carrying the ball. And it may be the North American consultants had subsidized your international consultants, in terms of giving up a greater percentage of their compensation in order to pay off other folks around the globe, and this year we’re kind of making up for it?

Because if I take a look at your third quarter results in North America, even assuming a 20 percent operating margin for last year, the expense per consultant -- and I know there’s obviously real estate and supporting cast, and things of that nature, but if we assume a 20 percent operating margin in 2003 third quarter, we’re basically looking at an expense of about $223,000 per consultant, versus $289,000 per consultant for this quarter. Am I thinking about this correctly, or -- and at what point do we stop making up for things? Or, another way of asking the question is, what’s a reasonable profit expectation for North America on a go-forward basis?

Mark, this is Todd to answer your question. A couple of things that I would like to point out. Clearly, we have a lot of people that are producing at very higher levels this year, as compared to prior years. And that bonus level, and that number you cited, is clearly a function of those higher producers, and, of course, is influenced by our full-year projections. Also, explaining a little bit more about Q3 in 2003. Q3 in 2003 was our highest margin quarter of the year at 28 percent. The ranges of last year range from 14 to 28.

Yes, I was using 20 percent, in terms of the numbers I cited.

Yes, our full year was about 20.9. But we also had in 2003 -- we had some favorable expense accrual adjustments, including some take-down of bonus accruals, and some bad debt reversals. And a lot of that was related at that point in time, given the quarter performance on revenue in Q3 of 2003, the forecast comes down, so the bonus accrual comes down at that level as well.

So, what’s a reasonable target for North America?

Well, I mean, we’re comfortable with the margin that we produced this quarter, and I think we’re going to -- we should be able to maintain that, and hope to increase it as revenue increases as well.

One other thing I wanted to add, Mark. You noticed the sort of change in what you called the subsidy of some other international partners, particularly in Europe in the U.S. We have a regional matrix, which, in fact, Todd referred to, whereby we’re assessing profitability on a regional basis. So, that subsidization is being brought down, and it’s really a matter of kind of each boat on its own bottom in terms of driving profitability on a regional basis. So, we think that that’s a very key lever in terms of driving the profitability in the business.

Okay. And then, you may not be able to answer this question, but I’ll ask it anyways. What sort of tax rate should we think about for next year?

Well, we gave a range of tax rate from 25 to 30 percent, and we’re comfortable with that. We’ll obviously refine that at our year-end call when we have a little more visibility into our forecast for the full year. But we have scrubbed that pretty hard, and we are certainly comfortable within that range. So, 25 to 30 percent we think is an accurate range.

(OPERATOR INSTRUCTIONS.)

Kelly Flynn, UBS.

This is Andrew Fones for Kelly. I had a couple of questions. First of all, if I could turn to your Q4 revenue guidance, it appears that there is a midpoint to the range you gave at about $87.5m, assumes normal seasonality in Q4. Could you tell me if that is kind of how you approach the guidance? Or whether you actually kind of looked at the bookings or the confirmation trends? And perhaps on that note, could you give us a sense of where -- what confirmations are up year-over-year in September and October?

In terms of looking at trying to give you guidance, we look at confirmations, we look at seasonal trends. What we’ve seen as the economy starts to come back is that this business is showing its typical seasonal trends, i.e., third and fourth quarter are not as strong as first and second. So, we are seeing that come through.

And the comparable to fourth quarter last year is a bit unusual, because we had a very strong fourth quarter. That is not typical of the seasonality in the business. So, in giving you a range in revenue, we look at a number of factors, where the business is in a recovery phase, what the confirmations look like, all of that, to give us as much visibility as possible into the revenue.

Could you actually talk to kind of what confirmations -- the trending confirmations was year-over-year at the end of the quarter, perhaps in September and October?

Well, I think as we mentioned in the script, Andrew, this is Todd, that quarter-to-quarter we are up on confirmations clearly. And we’ve seen that trend kind of continue into what we have seen so far in the fourth quarter as well.

And October, thus far, has been comparable to September, so it’s not that we’re seeing a drop-off. So, again, we’re comfortable with that guidance that we’ve given you. But compared to last year it’s a lower growth rate, because we think the fourth quarter was a bit of an aberration. It was the first quarter where we saw the economy really coming back, and hiring trends pick up significantly.

Okay. Thanks. And then perhaps following on with the example you gave regarding hiring, you said that you’d be looking -- I mean, 15 percent revenue growth, so perhaps a 10 percent growth in headcount. Could you break out of that 10 percent, what you might be looking for as being experienced search consultants, versus people new to the industry?

This is Tom. Let me take that one. I don’t think we can break that number down that finely at this point. Clearly, when we can recruit experienced productive industry players that have established client relationships, that fit strategic needs that we have, and that fit our culture, we will do that. And we’ll hire as many of those as we can hire, because they’re productive quickly, and they involve minimal investment.

Generally we would sort of overall like to see a reasonable balance. I wouldn’t say necessarily one-third each, but a reasonable balance between experienced hires, new to search senior professionals that are coming in from industry to learn our business, and promotions from our associate and principal ranks. And over a long period of time, if we can keep those three pieces roughly in balance that seems to serve us better. But, opportunistically we will depart from that if we have an opportunity to make high quality hires. We’ve always done that, and we’ll continue to do that.

Okay, thanks. And then perhaps a final question? You mentioned that you think you still have significant capacity, spare capacity, in terms of offices and so forth. Could you kind of talk to where the spare capacity -- the magnitude of the spare capacity in terms of your offices? I know that perhaps in 2000 you did nearly $600m in revenue. Could you give us kind of an estimate of what revenue you could do on your current office (indiscernible)? Thanks.

Well, I don’t think we could do $600m with our current capacity. But, I think we could certainly do into the low to mid $400m range with our current capacity. Now, that’s not our goal. Our goal is to grow capacity and grow revenue in balance, not to stretch our current capacity to its absolute limit. That’s not healthy, and we’re not going to do that. But we have done some other things over the last couple of years, which increased our capacity.

We’ve made major investment in our knowledge management center in India, which none of our competitors, to our knowledge, have really done. This gives us a tool that makes our search teams around the world more efficient. We maintain a fairly high leverage ratio of associate and administrative support to our partner teams, in relation to a number of our competitors. That gives us more execution and support capability, and in fact, should require higher revenue per consultant levels to pay for it. I mean, that’s a simple economic model, so those resources are high quality, but they’re expensive.

And so I think we’re showing now that we’re in the zone where we’re getting good return in most places geographically on our leverage models. But we don’t have it yet everywhere. We still have some consultants and some partner teams in some geographies where we have fairly significant capacity because revenue hasn’t caught up with staff size yet. That’s fundamentally in Europe at this point, in a couple of countries. But overall we believe that the increasing productivity, particularly of our senior people, is a critically important thing to do, and we’re working hard at that. But we will grow. I mean, we clearly will grow our staff over the course of the next year.

Okay. Thank you.

But it’s not the prime driver, really. I mean -- and I think looking to headcount increases as a measure of how revenue gets created is not the right way to look at our business model. I mean, revenue is almost in some ways independent of that to a fairly large degree in the short-term. In the long-term, no. I mean, we have to ramp our staff of producers to get to that $600m level. But we were -- that was at the peak of the boom, and I would say we were not nearly as efficient in the use of our staff, or of our other assets, at that point in time, as we are now. We’re a much more efficient operating business now than we were then. Even though revenues were higher then.

Ty Govatos, CL King.

Couple of questions. When you say you’re going to target, or reach, 10 percent operating margins next year, I assume you’re doing that on net revenues?

Yes. Oh, yes.

Not gross.

Yes. Absolutely.

Okay.

That’s always the way in which we’ve managed and measured our business.

Okay. Fourth quarter tax rate?

Yes. The fourth quarter tax rate, the annual effective tax rate is 8 percent, and the fourth quarter tax rate is 8 percent as well.

Okay. And now let me delve into the bonus accruals a little. It looks just, on a cursory glance, that your bonus accruals in the fourth quarter will be about what they were in the third quarter, $19m?

A range of between $17m and $19m would be a good estimate.

Okay. When I look next year at the bonus accruals, is there any reason to believe they could change substantially as a percentage of revenues than what I’ve seen this year?

Well, we are undertaking a compensation study to look at how we compensate the consultants throughout the firm. I don’t anticipate that that would cause a major change in our bonus accruals, but it is a potential that they could be reduced. But we’re trying to align our compensation strategy with the interest of the shareholders by driving profitability. So, while we don’t have visibility to exactly what that plan will be, our hope is to drive profitability through aligning our consultants with shareholders, and results should be that we have greater profitability. Whether or not that results in dollar for dollar lower bonus accruals depends upon how that works through the system with revenue tie.

Okay, so it’s --

-- there’s several things that come into bringing that percentage down as a percent of net revenues. One is, revenue increases on the same cross base do that automatically.

Right.

Second, by the nature of our compensation system, if we have consultants -- and we still have a few that are what we call underwater. That are in a fixed cost compensation, that is at our -- in excess of their total earnings, i.e., they’re not earning a bonus in our system, or a negative bonus, in essence, on calculation. That’s a drag on the system, and it drives the overall percentage up. If we can eliminate those underwater consultants, either by getting them an amount of work that gets them out of that category, or if that’s not possible, having them leave the firm, then that changes the mix in a positive way as well.

And then finally, to the extent that we can realign some of our compensation programs to drive more emphasis on profitability, but a little bit less on revenue, and more shifting of some of the compensation to equity, as opposed to current year cash, we have an impact -- a positive impact on that also. So, all those things together impact what that number is, which obviously it’s the largest number on our P&L. We’ve paid attention to it very carefully. We have brought it down a couple of points this year. Our hope is that we could do that again.

If I take a look at mix, if Europe comes on strong next year, would that change?

Yes.

Yes.

Would that raise it or lower it?

Well, again, if you’re talking about just actual bonus dollars, as such, Ty, it’s a little hard to say that outside of sort of a full set of line items with revenue. But if Europe comes back, we think that would drive our profitability significantly, and again, that would drive operating margin. Whether or not on a dollar basis our bonus accruals would be up or down, would really depend upon what the revenue levels are, and where people are producing.

But, as I mentioned before, we have an alignment matrix that compensates people based on regional profitability. As we continue to work that through our system, and also some of the changes to the compensation plan that Tom mentioned, all of that should work to drive profitability. And in Europe in particular, we have a fair number of consultants who are in an underwater position, as Tom mentioned. So, the extent to which we remediate those fixed costs that are burdening our profitability, that will make a significant difference.

Yes. And the impact of that -- the positive impact of that is we’ll have the dual impact of -- or triple impact of increasing revenues, it would increase the amount of bonuses paid, but would in the end reduce the amount of total compensation as a percent of revenue. So, those are not contradictory outcomes. They’re actually compatible outcomes. Because we could -- if we had the ability to completely change the mix of our business, and who’s doing it, to optimize it totally, which you never can -- but if we could, we would either at the same bonus level, or a slightly increased bonus level, see the percent of compensation as a percent of revenue come down.

And obviously aiming at that optimization -- and you get -- it’s a target that we continue to chase with all of our management decisions over the course of the year is optimal. I mean, it’s an objective that you never quite get there, because things are changing all the time. But that’s the goal.

Michael Weisberg, ING.

Yes, a couple things. What kind of currency gain are you expecting -- benefit are you expecting in the fourth quarter guidance?

I would say that it’s comparable to what we considered in this -- what we had in this quarter. Obviously we can’t manage the currency fluctuations, but we’re not expecting a major swing that would affect that guidance. So, it would be, in concert with what we’ve had in the third quarter.

Okay, thanks. Eileen, I guess when we met in New York, my sense was on the seasonal basis typically the Company runs second quarter, first quarter, fourth quarter, third quarter in descending order of seasonal strength. So, disregarding last year as being unusual, you would think, based on that, fourth quarter would be higher than third quarter.

No, third quarter, that depends. I mean, it can flip either way. But typically fourth quarter is actually weaker than third quarter.

Is that right? Okay.

But you’re right, the other orders that you had were approximately right.

Okay. Normalized tax rate once we get through this period is about 40 percent?

Yes. We think that it would be 40 percent.

Okay. The $30m buyback, I assume that’s going to take -- begin soon after this call -- soon after the period ends?

We have authority from our board of directors to begin the stock repurchase, and we will pursue it opportunistically as we go into the market, and see where our stock is, and take advantages of any blocks of stock that are offered to us. So, it depends upon where we are with the stock price. And we’ll look at it on an opportunistic basis, and obviously update you at every earnings call in retrospect.

Okay. Could we -- should we expect this to be the first of several stock buybacks, given the amount of cash you have?

We look at a variety of ways of enhancing shareholder value. We thought in this instance that stock buyback was the most effective means of doing this. So, we don’t have any particular deadline for in fact completing it, but we think it’s important as a means of showing to the shareholders that we think that our business is back on track for profitability. Whether or not we would consider it in the future, the board would always consider stock repurchase as one means of enhancing shareholder value. But for the moment, we’re focused on completing this stock buyback.

Okay. I think we’ve talked --

By the way, as Todd was pointing out, that this is not the first stock buyback that we have done historically. So, well, this is one of the obvious tools that you have to deliver shareholder value, and an obvious one for consideration when you’re in a period of excess cash over the short-term. This was not directly linked to the Google monetizations. But we were comfortable with our cash position prior to that, and this gives us an opportunity over a more short-term basis to return some of that cash that we don’t have an immediate short-term need for to the shareholders. Which, I think, from our conversations -- which most of them may appreciate.

Okay. I mean, I guess you were talking about potential of bringing your cost of goods down to 65 percent. It would seem like you’re almost in an optimal position now, because you’re growing your revs, and you’re not hiring people. You’d almost think that you were getting close to where you -- to optimal levels, and that as you start hiring more people maybe the gross margin starts moving against you. What’s wrong with that thinking?

I don’t think that that’s true for a couple of reasons. First of all, we can leverage fixed costs. Secondly, we don’t see major increases in G&A. We can’t keep G&A absolutely flat dollar-for-dollar as we grow, but we certainly can leverage it. And as I said, we still have capacity within the system, so we’re going to be very careful about hiring.

That having been said, certainly we want to grow this business, and we think there are opportunities to attract people to the business, consultants who can contribute. But we’re conservative in budgeting how they come on, and how quickly they can produce revenue. All of that is contained in the plan that we put together in order to attain our profitability levels.

Is there much room, do you think, I mean, a 10 percent operating margin goal for next year is certainly admirable. Is there much room, do you think, beyond next year, in terms of further margin expansion?

I think so. Absolutely.

Yes, we do. We believe it comes from really two places, fundamentally. One is continuing to leverage our fixed costs, and our G&A, which while they will go up with increases in revenue, they should come down as a percent of revenue --

Right.

-- as the business grows. The same is true for some of our fixed infrastructure costs, real estate, and support staff. So, all of those things, if we, as I said before, if we grow our headcount at a rate that’s at or lower than our revenue growth rates, we’ll continue to have margin leverage as the business grows.

The other main area, and we haven’t talked about it much on this call, is the expansion of our service offerings beyond transactional executive search into, in accordance with our plan, into other businesses that almost by definition have higher margin than the core executive search business. And we’re looking very carefully at some of those business extensions now. We have several of those businesses.

And maybe one more. Is there margin opportunity in the U.S., or is most of it going to come in the overseas markets?

There’s margin opportunity, we believe, everywhere.

Adam Wise (ph), Chilton Investment Company.

A couple of questions real quick. In the press release you said there was a non-operating gain of $56.8m, net of other costs, and then ex that, net income would have been $6.5m. So, if I add those two, I get $63.3m, and reported net income was $62.15m. Just want to know, was the difference in taxes there?

Yes. There was a difference in taxes there. That’s exactly right.

Okay. So, to get to the 32 cents, it would have been --

Yes, it’s a 5 percent tax rate for the quarter, if that’s helpful.

But if I back out the gains to get to 32 cents, it would have been roughly a 40 percent tax rate or something?

No. I can take you through the tax rate, certainly, on a discreet basis for the quarter. But on -- for this quarter it was a 5 percent tax rate. And then the full effective tax rate was 8 percent for the year.

Okay. What was --

If you take out -- if you want to back out, without the Google transaction, as if we were -- we never had the Google transaction at all, if you’re trying to normalize that tax rate, it’s about 25 percent. Perhaps that’s helpful.

But what was pre-tax income before the Google?

Pre-tax income before the Google transaction was $8.6m.

Okay. So, if I look at your Q4 guidance, using an 8 percent tax rate, the 10 to 20 cents would translate into somewhere around a $4.5m to $6.5m decrease sequentially in pre-tax income?

Yes. And some of that is due to the fact that we don’t see revenue in the fourth quarter necessarily being as strong as third quarter. Some of it is because our investment spending, particularly the worldwide partner meeting, is in the fourth quarter, so it’s back-end loaded. So, that accounts for much of the differential in terms of that EPS reconciliation.

Well, the high end of your revenue guidance would be about a $1.5m below what you did in the third quarter.

That’s right.

So, I’m trying -- you talked about incremental investment spending of $1m to $2m sequentially. Is there something else in the quarter?

No. There’s a total of $3m of spending in the fourth quarter, some of which is the worldwide partner meeting, and some of it is related to investment spending, including some spending on key accounts, which are extremely profitable for us -- those accounts where we have a very long-term relationship, and where we derive fees of more than $1m a year, also in marketing, and some professional development. So, there is a back-end spend to this. Yes, $3m of the $6m is in lower revenue, and then another $3m is basically as a result of the back-end spending in investments in fourth quarter.

Okay. And then -- that’s helpful. And if I look at the third quarter versus the second quarter in North America, you had, I think it was $3.7m decline in revenues, but you had -- you did a pretty good job in terms of keeping operating income -- it was only down a couple hundred thousand sequentially. But I was wondering if you could provide some color on that?

This is Todd. I think we just in North America have done a great job of controlling some of our discretionary spending, and managing those costs as we see that revenue increase and change, et cetera. So, I think it’s primarily just good controls over discretionary spending. And we’ve had good results related to bad debt expense, and things of that sort as well.

How should we think of -- this may have been asked earlier, but how should we think about the leverage of the business going forward? Because people typically assign sort of a 40 percent, 40 to 50 percent, marginal impact in cost due to the payouts to the consultants, but when you look at kind of quarterly trends of the business, it looks pretty tough to model out. How do you look at it, kind of going into next year?

Let me make sure I understand your question. What you’re saying is that sort of the take out percentage, or the compensation percentage, is 40 or 50 percent. Is that -- I’m not sure I understand your question.

Yes, that’s -- well, that’s my assumption, and then how much will flow through the bottom line? Because when I look back at kind of quarterly changes in revenues and operating income, it’s tough to gauge what kind of book-to-bill leverage is. Because there’s a lot of fluctuations going on.

Yes, there’s a fair amount of fluctuation, which we talked about when we opened the call. And some of that’s due to frankly the bonus accruals that Todd spoke to, where we’re trying to estimate accurately based on our revenue forecast, where we will end up for the year on bonus accruals. It’s difficult, frankly, to try to look at this business on a quarter-to-quarter basis. The spending in our business, we phase in a way that isn’t necessarily even throughout the year. Revenue does not come in evenly throughout the year. There’s a seasonal bias to it.

So, for an awful lot of the metrics that you’re trying to model, it’s difficult to do so on a discreet quarterly basis. And we would suggest that it makes more sense to look at this business on a yearly basis, because this is the way in which we manage the business. You have seasonal trends. We’ve released investment dollars on an uneven basis throughout the year. Frankly, we do so to be disciplined, so that we wait until we are sure we have the revenue to support it.

So, it’s difficult, again, for us to tell you discreet sort of quarterly numbers on all of these metrics, because we manage the business throughout the year. So, I understand your frustration, and we can certainly talk further offline if you’d like, to give you further insight. But I think it is difficult on some of these metrics to have a discreet quarterly view on them.

I think that impacts the fourth quarter a little bit in particular, because it’s not typically the strongest -- one of the stronger quarters of the year. And this year, in particular, we have more spending in this quarter, which I think was the right decision to defer some of this capital spending and other things until later in the year where we were sure they were supported on an annual basis. They do impact a little bit in the fourth quarter, which is, in a perfect world, not the quarter that you maybe even have the annual meeting, but it’s from the standpoint of the right cycle time in the year to have the meeting to have maximum impact. It happens to fall where it falls.

So, again, back to Eileen’s point, if you simply look at that on a quarterly basis, you don’t get the picture that’s as accurate as if you smooth out some of these quarterly irregularities, both in revenue and costs, and look at it on more of an annual basis.

And confirmations was a way of predicting revenue. For example, which a number of analysts have (indiscernible), but are not consistently indicative of where we’re going to go with revenue.

I appreciate that. But even if I look at the nine months, your North American revenues were up $20m, and your operating income was up $3.5m. And I think most people would expect there’d be a lot more leverage. And I understand last year’s third quarter was unusually high. But is it fair to say that there should be more leverage to revenue than what you’ve experienced this year?

This is Todd. I definitely -- we definitely believe that we can improve that leverage going forward. I mean, there’s -- even though we talk about our average consultant performance, there’s still quite a bit of disparity between the top producer and the lowest producer, which should allow us to be able to increase leverage as those lower producers perform better, up to expectations. Of which their take-out percentage on our program would be different than what that higher producer would be earning.

And obviously the extent to which we align our compensation programs with profitability measures should drive that as well.

Tobey Sommer, SunTrust.

I had two follow-ups. One, I wanted to get back to the capacity in terms of revenue per consultant. In thinking about the $1.3m annual revenue per consultant historical peak, is the reason that you think that you can go higher than that because perhaps the composition of the consultants during that historical peak included some less-seasoned folks, so it might -- should we think of that as not necessarily a maximum in a more deliberate environment where you’re able to expand sort of how you’re thinking about it in ’05 and ’06?

And then secondly, I wanted to ask you what your uses of cash for are going forward? You talked about perhaps expanding service offerings beyond the transactional search business, so I was wondering if you could elaborate on that, because you do have, as you said, a very solid balance sheet at this point?

Yes. Let me just respond to the average revenue per consultant. First of all, those averages, it is an average, so of course, it varies widely. So, if you look at the $1.3m, you’re exactly right. Because at the point that we in fact hit that peak, we had more of a mix of consultants, because we’d hired a lot of people who were less experienced in the search business. So, as a result of that, we don’t think that that’s a peak. We think we can move beyond that.

If you look at it in terms of our fee per search, we’re really only talking about one more additional search, or two more additional searches. So, we certainly think that there is capacity, and that’s based on people’s experience in this business over several decades, of what the capacity is to be able to take on one, or two, or three, or more additional searches, and still maintain quality and high qualities of -- or high levels of customer service. So, I don’t think that that historical peak is constraining.

In terms of uses of cash, obviously Heidrick has had a very strong balance sheet for many years, and at the times when, frankly, the search business was not in the strong position it is now, the fact that it had a strong balance sheet was very advantageous. We’re very conscious of that. We think in a very disciplined manner about how to use cash. We certainly look at things like acquisitions as a means of growing the business. But we’re very disciplined in looking at them to make sure one, that they’re accretive, two, that they make sense in our business, three, that we could integrate them in a way that would not be disruptive, and that we would be able to maintain the value of the acquisition. All of those things are certainly opportunities that we consider.

In the near-term, the stock repurchase appeared to us to be the best way to use our additional cash to drive shareholder value. And that means that enhancing shareholder value will be the first priority in terms of utilizing cash in the future.

In terms of --

-- a moment on your other question about expanding our business mix. We have, as part of our strategy, been clear that we are driving to a broader set of services. Not so much because we want to provide them, but because our clients are consistently asking us to help them in these areas, which involve not just transactional search, but fundamentally the assessment and evaluation of their existing team; helping them do succession planning; and optimization of their executive talent -- not their whole workforce, but the top couple levels of the company; coaching; and team development.

These are all areas surrounding our transactional search, and very consistent with our overall corporate stated objective of helping our clients build high-performance leadership teams. These things fall in that area. We’ve made major commitments in this area. We’ve brought an industry expert in Vince Perro, to run this part of our business. Vince’s strategy is largely together for 2005, and we’ll probably be sharing some of that selectively in our next calls as we roll it out in 2005.

But those businesses which are more consultative businesses, looking a little more like in some ways traditional management consulting models, have higher margin in most cases than the search business does. And so as that mix alters, and we’ve set a goal of increasing the percentage of non-search businesses over the next three years to somewhere in the neighborhood of 20 percent of our business, that will, in and of itself, those changes will improve our margin. And it is likely that we will have investments that we will make in that growth strategy.

Clearly we’ve experienced the fact that cash, particularly for a service business, is sometimes hard to come by. So, we’re going to be careful about giving it back, and not having it available to us until we’re sure we don’t need it to build and grow the business. And our investors have consistently supported that position. But as we’ve done now, if we feel we have more than we need short-term for either acquisition or business opportunities, we’ll return it to the shareholders. I think that’s the prudent thing to do, and we’ll consistently take that position while maintaining what we believe is a healthy cash balance, and a strong balance sheet, which also we believe is a prudent thing to do.

If I may have one follow-up to that? Could you let us know what a threshold is, or a healthy cash position is, just to give us a sense for the resources that you’re thinking about potentially deploying? And then I wanted to get a sense for whether investments in new services is contemplated in your 10 percent operating margin for 2005?

There are investments in new services contemplated in that operating margin, because, as Tom mentioned, obviously we’ve brought in an industry expert, Vince Perro, who is going to be running -- and is running, our leadership services business. So, we certainly have investments in that business. And, that is contemplated within our budgetary goal of reaching at least a margin of 10 percent. That will not put the 10 percent margin at risk. So, the extent to which we’re investing in that is certainly included in the profitability margin that we’re giving you.

In terms of what is a healthy cash balance? There’s a core amount of cash in this business in terms of working capital and some cash for any contingencies, which is significantly less than we have now. We would certainly not go below that. And, in fact, we would think carefully before going below, say $100m in cash. But that allows us a fair amount of flexibility. Our forecast for cash at the end of Q4 would be $150m to $180m, depending upon a number of things -- how our performance is going in our business; but also where we are in the stock repurchase.

So, that affords us a fair amount of additional cash to either make additional investments, return to the shareholders, consider acquisitions. Again, to grow our business, and enhance shareholder value.

Mark Marcon, Wachovia.

Thanks for taking my follow-up. I’ve got a few quick questions. One, can you talk a little bit about the influence of Sarb-Ox in terms of board searches and CFO searches? And where are we in that cycle from your perspective?

Well, I think certainly we’ve seen an increase in both board and CFO searches as a result of the new standards and requirements for boards. That continues to be a very strong demand. We have not seen that drop off. In general, I expect that the board search world will continue to be strong, as there is sort of a reconstitution of boards, and new requirements for board members. With CFOs as well, we haven’t seen any slackening in that demand.

As part of this also, we have a service of board assessment, and helping boards evaluate their own performance. As you know, this is a requirement now at some level, that virtually every public company, not just in the U.S., but around the world -- where actually board assessment, formal board assessment, particularly in Europe, has been more widely accepted than it has in the U.S. So, this is actually a little bit of an usual situation where we’ve developed quite an effective service in Europe that we’re now deploying in the U.S. later. Sometimes things go one way, sometimes they go the other way.

There is, we believe, a lot more capability for us there as we build this business in the U.S., and other global markets as well. So, Sarbanes-Oxley in terms of its direct impact on our business is not major. I mean, it’s a 5 percentage kind of number that, well, you could say this is directly a project attributable fundamentally to Sarbanes-Oxley. I mean, we have a much higher level of CFO and director searches, but most of those are the normal course of business, companies do them, and will be doing them, with or without Sarbanes-Oxley. So, there is some marginal increase.

But my sense is that it is not a fundamental driver of our business. It’s an incremental -- little bit of an incremental driver, which probably has at least another year or so to go, I would guess.

Great. And with regards to the cash, obviously some of your bonuses get paid out in March. Where would you expect the cash balance to be by the end of March, after the full bonuses are paid out?

Well, we’re going to pay out full bonuses, we pay it in two pieces --

Right

-- in December and in March. The amount that we would pay in March is roughly $35m. But we’d be building cash at that time, so again, that range of $150m to $180m may be slightly lower than that, depending again on where we are in the stock repurchase, will not be far off.

Great. And then, as it relates to the repurchase program, it sounds like you’re evaluating the compensation program, and stock ownership. When we think about $30m, is that something that would actually -- or we’d actually see a decline in the share counts that were fully exercised over, say a 1-year period? Or is that just going to offset dilution from options and enhanced stock ownership programs for the current consultants?

Well, we’ve taken a look at how much dilution we think that would offset. It should do more than just offset the dilution from our compensation program. So, it should in fact reduce the share count. So, we don’t expect to issue enough equity that in fact it would be enough to be equal to the number of shares you would buy, assuming something around the current price, or above it, in the stock repurchase. So, it should do more than just offset that dilutionary effect.

Okay, great. And then, this is the first time you’ve talked about margins going above 10 percent. The first thing I’d like to understand is, would you generally expect, in terms of getting to a 10 percent operating margin, that compensation would basically be around 65, 66, and then G&A would be the balance? Or is there a different way to think about it?

That’s probably about right. I mean, I think in terms of what we’ve looked at in modeling that, and again, let me remind you that we are focusing on 10 percent for next year, although as Tom said, we think there’s a capacity to drive margin beyond that in the future.

Right.

We think something like 65 percent, or slightly lower, as compensation expense as a percentage of net revenue is where is you need to be in order to drive that profitability.

And then as we think about -- that was somewhere around the $400m revenue run rate. If we think about you getting back to like 85 percent of prior peak, say around $500m, where could the margins go? I mean, first of all, very grateful that you’re talking about going beyond 10 percent, because this is the first time you’ve talked about that. Where could that go?

Well, I think that remains to be seen. This is a journey, we think, that we can certainly, having driven the profit margins in the last year, that we have the capacity to drive it above 10 percent. But that 10 percent stake in the ground is very important for us for next year, and that’s really what we’re focused on. We should be able, at higher revenue levels in particular, to really drive leverage and take it beyond 10 percent. But we really need to hit that hurdle next year, and that’s what we’re focused on first.

That does conclude today’s Q&A session. I would like to turn the conference back over to Thomas Friel for any additional or closing remarks.

Well, I think we’ve gone past the time that we allotted. I appreciate all of you for staying with us through the call. And thank you for participating. I think we call this call closed for today, and we look forward to sharing the results of our fourth quarter and our full year with you in the next call. Thanks very much everybody.

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

END