Heidrick & Struggles International Inc (HSII) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the first quarter earnings conference call. At this time all parties are in a listen-only mode. Later we'll conduct a questions and answers session and instructions will follow at that time. If anyone should require assistance during today's program, please press star then zero on your touchtone telephone. I would now like to introduce your host for today's conference call, Mr. Eric Sodorff, you may proceed.

Good morning, everyone, and welcome to our 2005, first quarter investor conference call and webcast. On today's call are Tom Friel, Chairman and CEO of Heidrick & Struggles; Eileen Kamerick, Chief Financial Officer; and Todd Welu, Controller. Tom will review the first quarter results and the outlook for the 2005 second quarter and the 2005 year. 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 comments. As always, we advice 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 Provisions of the Private Securities Litigation contained in the Press Release dated today, April 28th, 2005, which was widely disseminated by the various wire services and other media. This language is on slide two of the web presentation. Now, I'll turn the call over to Tom.

Thank you, Eric and good morning, everyone. First, I'd like to begin with a brief overview of our financial results. Our net revenue for the quarter was $98.6 million, strong again this quarter and at the high end of our expectations. It grew 13% compared to the 2004 first quarter. The strongest net revenue increases were driven by the industrial, consumer, professional services, and financial services industry groups.

Our operating income of $6.4 million was up 25%, compared to the prior year and resulted in a 6.5% operating margin. Diluted earnings-per-share were $0.33 a share, up 50% from last year's first quarter. Confirmed searches in the first quarter increased 14% compared to the fourth quarter of 2004, but were down 2% versus the first quarter of 2004.

Consultant headcount grew by eight compared to the end of the last quarter and now totals 305 as we begin to carefully expand our recruiting. And our consultant productivity increased as executive search revenue per consultant rose 12% from the 2004 first quarter to an analyzed rate of $1.2 million in the 2005 first quarter. As we look forward to the remainder of 2005, we have a number of business building efforts and cost control initiatives in place and being put in place to help us improve both top and bottom line results, again, in 2005.

The efforts I would like to focus on today relate to our two most important strategic objectives. Objectives that were initiated in my first few days as CEO of Heidrick & Struggles and have been consistently restated ever since. The first is profitable growth and the second is increased internal ownership.

The first specific effort is our current restructuring plans and the second specific effort focuses on this year's annual equity grant cycle and the awards that resulted from that. On the first one, an essential component of our improvement effort this year is the focus on raising overall company profitability and in particular, bringing Europe's profitability in line with the rest of the Firm. To help us achieve higher profits we have announced our intent to take a restructuring charge in the second quarter.

As announced last quarter we estimate that the second quarter restructuring charge will range from $9 million to $15 million. But because this range is still preliminary we're not able to share details regarding the types of costs or saving's estimates that would result from this restructuring. However, I would like to share some recent decisions that we've made that are critical to the success of this important effort.

First and foremost, earlier this month, Kevin Kelly, our Asia-Pacific Regional Managing Partner, accepted the position of President of EMEA, Europe, Middle East, and Africa, replacing me in my interim role which I've been in for the last few months. Kevin is in the process of moving from Tokyo to London and in this role will team with Jeff Scherb, our Chief Technology and Operations Officer, who is already temporarily relocated to London to manage the restructuring effort along with Kevin.

We're extremely pleased to have Kevin take the lead in Europe. He and his team have successfully grown both the top and bottom line in Asia-Pacific. In 2004, Asia-Pacific's net revenue grew 47% and the margin increased to 20% from 10% in 2003. This good performance in Asia-Pacific in 2004 continues in 2005. Kevin's an excellent addition to the executive team in Europe which is firmly focused on long-term margin improvement as well as revenue growth.

Jeff Scherb also brings outstanding leadership skills to this team. Jeff has previous restructuring experience in North America, was critical in our efforts there, and a lot of other experience that relates to this effort, including global technology improvements, work on our global financial systems and the creation of our industry leading consolidated research center in India. We believe that the combined leadership of Kevin and Jeff gives us the absolute confidence in our ability to succeed in this effort.

Currently, our global leadership team is working with Kevin and Jeff to finalize the restructuring actions and the timing, while minimizing disruption to our top line and still meeting some tricky European regulatory requirements in this area. We will provide more restructuring detail at a later date, likely on our next quarterly conference call. That's the first of our two major strategic initiatives focused on increasing our profitability.

The second major strategic initiative we worked on this quarter, is to continue to increase employee stock ownership to drive greater alignment with our nonemployee shareholders. In March we increased this alignment granting 600,885 restricted stock units and 114,000 stock options as part of our annual grant cycle which we conduct in March.

Todd Welu, later in the call, will provide more details on the pricing and vesting schedules for these grants, but I'd like to explain now how they fit into our overall compensation program and the changes we've been making in it, gradually over last year and this year.

First of all, the percentage of stock held by Heidrick & Struggles employees is low, too low. So we have been purposely raising the share ownership now to jump-start this alignment of management and consultant interest with our other shareholders to motivate value-creating behavior and to provide additional retention incentives. These changes are consistent with our overall compensation strategy that has four main components.

Number one, reinforce a strong meritocracy based on performance. Pay for performance based on both our historic revenue models and our new profitability metrics that we first introduced in 2004.

Number two, shift a portion of current compensation from cash to equity via restricted stock units in lieu of cash. Third, offer our employees and partners the opportunity to acquire additional stock ownership by voluntarily foregoing current cash compensation and taking RSU's instead.

And four, continuing our historic program and increasing it of rewarding outstanding performance through the grant of additional stock ownership rights not additional cash bonuses. These four approaches comprise the essential elements of our compensation program, which we believe continues to increase the alignment of our consultants and partners around the world, both with our strategy and with the interest of our other shareholders.

We're very proud that we have a group of the most productive consultants in the executive search business and we want to the keep our historic retention levels at the high levels they remain. We believe that a greater share of ownership and greater alignment with our shareholders will help us tremendously in this regard. Let me make one final point in terms of context in this area.

It's important to note that the general trend in compensation confirmed by our outside compensation consultants, is to stress a mix of direct stock ownership and stock options through the use of restricted shares and programs that provide stock ownership increasingly in lieu of straight cash compensation. This goal is to drive real ownership behavior and real partnership behavior, not just short term gains or short term cash focus and will continue to work in this area to increase the impact of these programs on our consultant population.

Finally, in this regard, as a reminder, we do have an ongoing stock buy-back program in place to keep the overall stock dilution low as we implement these programs. Now, having talked about the two key strategic initiatives let me turn now to talk about the outlook in the future. Looking forward, for the 2005 second quarter, our net revenue is anticipated to be in the range of $95 million, to $103 million. Those net revenue levels the Company expects that operating income would range from $6 million to $9 million excluding any restructuring charges.

If we assume that all the estimated restructuring charges of $9 million to $15 million are recorded in the second quarter, the results for the second quarter would range, then, from break-even to an operating loss of $9 million. For the 2005 full year, our net revenue is anticipated to be in the range of $400 to $412 million. And at those net revenue levels the Company expects the operating margin would be about 10% excluding any restructuring charges. Including our expected restructuring charges the operating margin would range from about 6% to 8%.

As we've mentioned before, our revenue is difficult to predict. However, this lack of predictability is even more pronounced now since over the past two quarters we've seen great volatility and variance in the trends by industry and by practice area. Given that lack of visibility we remain focused on making sure that 2005 spending follows revenue growth so that we can meet our profitability goals at any reasonable revenue level.

Given that summary, I'd like now, to turn the call over to Eileen Kamerick, our Chief Financial Officer who will give you more detail about our first quarter results. Eileen?

Thank you, Tom. As Tom said earlier we're encouraged with the continued top line strength this quarter. Our operating margin of 6.5%, also grew, compared to prior year. But clearly, is below our 10% target for the year. I will provide additional color on what we have done and what we still plan to do, to improve the operating margin for the year and provide more details on results for each region.

Todd Welu, our Controller, will cover the income statement items, line by line, and provide additional cash flow detail. As Tom mentioned we're in the midst of the restructuring decision-making process, so please note that the preliminary restructuring estimates could change. Given that, I will begin with an overview of the specific items we're working on to improve the margin other then restructuring. After examining the discretionary expenses we have acted to gain more operating leverage by limiting nonrevenue producing staff hiring in 2005.

We have better prioritized and narrowed the list of discretionary IT spends to those critical to our operating success. We decided to defer the 2005 worldwide meeting until the spring of 2006. We plan to hold multiple focus practice meetings in 2005, and strongly believe these meetings, which are also global in scope, effectively achieve our business-building goals for 2005. For months, we have been reviewing, renegotiating, and deciding which operating leases may not require renewal. As you may have noticed, our operating lease expense is higher then some of our competitors and has room for improvement.

In total, these discretionary spending control actions will give us greater comfort with our ability to reach a 10% operating margin for the year, excluding restructuring. Of course, the 10% margin is more challenging at the lower end of revenue estimates. The bottom line is that until we are running at a higher net revenue run-rate, certain plans but discretionary costs simply must follow revenue, not lead it. Now, moving to net revenue in the first quarter.

Worldwide, all of our regions posted top line growth. Company wide, we noted a benefit from foreign currency exchange fluctuations of approximately $2.1 million on the revenue line. Revenue increased 13% versus the first quarter of last year, and approximately 2% of the increase was from foreign currency exchange fluctuation.

Now we will look at the results for the the Americas which you can see on slide 5. The Americas is the combination of the region's formerly known at Latin America and North America. We have consolidated the management of these two regions under the very capable hands of Bonnie Gwin, President of the Americas, who has done an outstanding job of managing North America.

The Americas net revenue was $54.6 million in the quarter, a 13% increase from the same quarter of last year. The year-over-year increase was largely due to strength in the industrial, consumer and professional service industry groups. While the technology and healthcare industry groups posted the only decline.

Operating income in the Americas was $8.9 million in the quarter versus $9.6 million in if comparable quarter of 2004. The operating margin was 16.2% versus 19.8% a year ago. A few items caused this decrease, including increased noncash compensation, higher equity forfeitures in the prior year, meeting costs to train and mentor internal resources, and research, travel and meeting costs to improve our win rate and build new client opportunities.

The consultant headcount in the Americas at the end of the first quarter was 157 versus 159 last year. Our goal is to build the Americas headcount by about 5% net by year-end. Okay, let's turn now to the European results which you can find on slide 6.

Europe's 2005 first quarter net revenue increased 6% to $34.1 million, with about 5% of that increase coming from a favorable exchange rate impact. Europe's operating income was $856,000 in the quarter, about the same as last year's $780,000. Europe's consultant headcount was 110 at the end of the quarter, a slight increase from 109 as of March 31, 2004. Clearly, we should be performing much better then just over break-even on $34 million in revenue and we intend to make that aspiration a reality with our current restructuring program.

Let's move on to slide 7 and look at the results of our Asia-Pacific region. Asia's net revenue was $9.9 million in the quarter. A 49% increase over last year's first quarter. Operating income in the quarter was $2.5 million, up from $1.1 million last year, primarily due to the significant improvement in revenue. The consultant headcount in Asia-Pacific was 38 at March 31. An increase of 12% over the first quarter of 2004. In the first quarter, total corporate expenses decreased by $500,000 to $5.8 million in the 2005 first quarter, from $6.3 million in the 2004 first quarter, and just below the 6 to $7 million we gave as guidance on this item in our fourth quarter earnings release.

I'll turn the call now over to Todd, who will give you more detail about the first quarter results by income statement line item, and more detail about the cash flow expectations.

Thanks, Eileen. If you turn to slide 8, salaries and benefits expense in the first quarter of 2005, was $67.9 million, up 11% over the first quarter of last year, growing slower then revenue, which was up 13%. The expense increase compares to the 2004 first quarter was primarily the result of additional bonus accruals that increase with higher net revenue levels, merit increases effective January 1st, 2005, and headcount increases since the first quarter of 2004. It is important to note that salary and benefits expense is accrued based on expected overall company results for the year. Both revenue and profit.

Salaries and benefits expense as a percent of revenue was lower then last year at 68.9% in the quarter versus 70.4% for the first quarter of 2004. Sequentially, the percentage increase from the 2004 fourth quarter. As some of you may remember from last year, our salary and benefits percent of revenue is generally higher in the the first and second quarter when we expecting revenue growth over previous year results. Total bonus accruals in the first quarter of 2005 were $21.4 million versus $19.3 million in the first quarter of 2004.

Also, included in the first quarter salary and benefits, was about $868,000 of RSU expense related to the 600,885 RSU's granted an March 10th, 2005, that Tom mentioned earlier. These were granted at a price of $36.17, about one half of these cliff vest after three years and are expensed evenly over that three-year period. The other RSU's follow our standard 3-year radable vesting pattern and are expensed roughly, 61% in year one, 28% in year two, and 11% in year 3. That's roughly $8.7 million to be expensed in 2005 and about $7.2 million in 2006. These expenses are all included in our guidance.

G&A costs for the first quarter of 2005 were $24.3 million. Up 17% compared to the first quarter of the prior year. As a percent of net revenue, G&A was 24.6%, compared to 23.8% in the first quarter last year. The increase in G&A is attributable to the timing and level of rebuild expenses, professional fees mostly related to Sarbanes-Oxley compliance, and tax services, and higher levels of business development, training, and external marketing expenses related to programs started in the middle of 2004.

As Eileen mentioned earlier, this percent is too high and we've adjusted our spending for the remainder of the year to gain better leverage. Net nonoperating income of $1.3 million in the first quarter of 2005 was up, versus zero last year, due to higher interest income and foreign currency gains. Operating income was $6.4 million in the first quarter, and net income was $6.9 million or $0.33 per diluted share. Net income and earnings-per-share if the first quarter benefited from a lower tax rate then expected, 10% versus the 15 to 20% estimated at the end of last quarter, due to some nonrecurring discrete quarterly tax benefits, the lower rate resulted in about $0.03 per diluted share of benefit versus the first quarter guidance we provided in February.

Now, let's talk about the income tax provision for 2005. Based on the requirements of FAS 109, we have restored 10.5 million of the tax asset values in 2004 and another 100,000 in the 2005 first quarter. The offset to the restored tax asset value is an income tax expense reduction. For 2005, we expect that income tax expense will continue to benefit from reductions in the the valuation allowance for most of the year.

Our 2005 tax rate estimate is about 20%. This 2005 tax rate assumes that taxable income and the regional mix is similar to 2004, excluding the Google monetization, of course, and we will be able to continue to utilize deferred tax assets. Our effective tax rate estimates will continue to be effected by the amount of tax assets we are able to record in accordance with FAS 109. The profitability of foreign tax-paying entities and the mix of taxable income within those jurisdictions. This rate ob a GAAP basis would also be affected by the nature, timing and deductibility of restructuring costs.

Our March 31st cash and cash equivalents and short-term investments balance of $185 million was $88 million higher then one year ago, but $38 million lower then December 31st, 2004, due to our bonus payout of $35 million in March of 2005. Our Board of Directors authorized a $30 million stock repurchase in October of 2004. To date, the Company has repurchased 151,900 shares for a total cost of $4.9 million, and we remain committed to continuing and completing this program.

Looking at other cash flow items for the quarter, depreciation was $2.8 million, and amortization of intangible assets was $219,000. Capital expenditures were $1.1 million in the quarter, compared to $1.5 million in the first quarter of 2004. We expect capital expenditures to be in the $6 million to $7 million range in 2005. With that, I will hand it back to Tom.

Thanks very much, Todd, and Eileen. In summary, we're confident that we're taking the right steps to expand our profitability this year with a restructuring plans and other ongoing cost control measures. We're pleased with our revenue growth this quarter but will not be completely satisfied until we we can add another digit to our top line results and be reporting over $100 million in revenue per quarter.

But we have the right team, the best clients and I believe, the right strategy and business plan to get us there. And I'm very confident with the way we're running our business. With that, the I would like to close the formal comments.

We look forward to giving you an update next quarter and we will now open the call up for questions. Thank you.

Ladies and gentlemen, if you have a question or comment at this time, press the 1 key on your touchtone phone. If your question has been answered remove yourself from the queue, press the pound key. Our first question is from Mike Carney from Stephens.

Good morning, a couple of questions. First, in Europe, it seemed like the revenue on a constant currency basis was essentially flat year-over-year which was the first time in a number of quarters. I assume some of that was, maybe, due to the planned restructuring that was already announced, but was there anything that you saw in Europe?

Is that the question?

Yes.

In terms of Europe, it was fairly flat. The business economics in Europe are complicated. It's very mixed country to country. Actually, the preliminary results for the second quarter look reasonable and do show an increase. There is absolutely, you know, the potential that the announced restructuring has some impact. We accept that. But we don't think it's going to be very much. And we're confident that once we get through the second quarter we'll be back on track in Europe, not only with increasing revenue growth but with profitable revenue growth. Driving revenue growth without profitability is not our objective there. We've seen that in the past and that's why we're taking actions we're taking to make sure we capture increased margin and bring Europe into a reasonable consistency with the margins from the other regions.

So nothing that you saw on a demand, you know, from a demand standpoint across the -- a certain country or industry mix?

Nothing particularly substantial, all though, you know, business in Europe generally remains challenging, I think, for everybody that's doing business there.

Okay. Thank you. And one other question. Eileen, on the business building activities you had mentioned that you'll be reducing going forward. Are some of those activities maybe not getting the rewards that you thought they would or is it simply that you want to try to maintain the operating margin guidance and that's the reason that there's a reduction?

Well, we're not cutting business building opportunities. We're really focused on targeting our spend to those areas where we can get the highest ROI in terms of driving revenue and meeting and expanding the demand of our clients. So we're looking at discretionary items and saying: Can we defer this as a means of, one, continuing to drive revenue by directing dollars towards those areas that we think will have the greatest results in the short, medium and long-term, and just deferring some of the investments spend and prioritizing it differently to make sure we can make our commitments to our shareholders regarding margin.

So there's not any real reduction in marketing investments that you had mentioned in the past of the sort?

Well, again, we're prioritizing our spend in those areas to those initiatives we think will provide the highest return in terms of driving revenue and, also, being able to deliver our top line results. So, something like the worldwide meeting, the reason why we've deferred it is that instead this year, we've had very targeted and very focused practice meetings that bring together people and, for example, the consumer practice worldwide, to focus specifically on business building initiatives in that area. Given that, we think ewe're pretty effectively spending those dollars that we can defer that meeting into 2006, and still drive our topline revenue. It's a matter of prioritizing and really making judgment calls on what will provide us the greatest value both on the top and bottom line.

Thanks.

Our next question comes from Tobey Sommer from SunTrust Robinson Humphrey.

Good morning. This is Jack Scherk (ph) for Tobey Sommer. A couple of quick questions, I was wondering if you could give us an update on what you're seeing on the environment for CIO and CTO searches.

This is Tom. I'll take that one. They remain strong. But I don't think it's -- there's anything particularly unusual going on there. That's an area of strength for us. We have solid practice leaders in that area. It's been a good area tor us for a long time. We're also seeing strong demand in the CFO area. And so it's caused us to actually beef up our focus on our functional practices, the position practices which particularly for CIO and CFO can go cross-industry which is why we slice it an additional way there. But, there's nothing in the the CIO area that is particularly unusual relative to prior quarters that I've seen.

Okay. And then, just along those lines, what are you seeing in the market as far as trends and warrants as components of fees versus historical cycles.

Warrants in terms of our fees? Or warrants in terms of what placed candidates are get something.

In terms of your fees.

You know, we're seeing -- we're continuing to do reasonable number of warrant transactions. Obviously, there was a lot of focus on this last year given the big monetization on the Google warrant. But we continue to have monetization on a regular basis and book assignments on a regular basis.

There is generally, and we talked about it earlier, been a you know, somewhat of a return to cash compensation in the packages that we've done, particularly in technology post the big boom. We're not seeing nearly as many executives interested in working for a dollar a year at a million shares as we might have three year ago. But, you know, in general, we think this program will continue to have value for us and we continue to push it internally.

Great. Thank you very much.

Our next question comes from Matt Litfin from William Blair & Co.

Yes, good morning. None of the factors that caused the North American margin shortfall seem particularly extraordinary or difficult to anticipate. At least to me. Could you walk us through the decision process, that senior management made to sacrifice these near-term profits for the benefit of the search consultants, training, travel, and stock-based comps which I believe were the three reasons outlined for the shortfall?

Matt, this is Todd Welu. There's a couple of things I'd like to explain about the margins in North America because it's difficult to explain without talking about a tough comparable that we had against 2004. In 2004, we had some RSU forfeitures which, as well as some timing of rebilling of expenses, which that kind of factor is behind us given what we did at the end of last year, so there's a large portion of that swing is related to benefits of 2004 versus what we saw in 2005, making that comparison very difficult. There were certainly increased costs in what I would call BD travel travel, Business Development travel that's not rebillable and then increased, you know, other costs related to that training, et cetera, in those numbers, as well as in the overall G&A increase for the Company.

Matt, and let me respond to that. You know, one thing in terms of managing this business, we try very hard to give you as much visibility that we have and we manage our business as carefully as possible, given limited visibility on revenue. But we will have both within the region and the Company as a whole, variations in terms of margin, quarter-to-quarter. We really run this business on a full-year basis.

Now, that's not to say we don't do our utmost to meet our quarterly targets, but there will be variations and some of that's due to year-over-year comparison issues that Todd outlined. But in general we're looking at this business on a full-year basis, we can't plan quarter-to-quarter but we manage expenses as closely as possible to match them and have them follow revenue rather then lead it.

But you will see the variations in a number of areas, the comp expense as a percentage of revenue, as Todd mentioned is higher in first and second quarter because we're forecasting revenue for the full year, and we have to accrue on that basis. So in all businesses it's difficult to look at just one quarter and capture trends. It's particularly difficult in this industry and we manage for the short-term but we really focus on the long and intermediate-term.

That answer was very instructive. Let me throw one other question out there. What amount of cash on hand do you need to run this business, in your opinion, and I guess -- well, depending on your answer I guess I have one brief follow-up.

Well, there's a reasonable level of cash that you could maintain in terms of working capital and just being prudent. We estimated that before as core cash, it's somewhere around $50 to $60 million that you would reasonably keep on hand, without considering, you know, using your lines or credit in any way. And that would be sort of a reasonable basis of core cash given the revenue levels we're predicting for this year.

Right. So I guess the follow-up then is maybe predictable. What would keep you from quadrupling or quintupling the share repurchase authorization that stands out there today?

I think we certainly would consider that, perhaps not the quintupling, but certainly we'd consider increased stock buy-back but our first commitment is to finish this stock buy-back. What we consider means of using the cash to enhance shareholders value at every board meeting and it's a topic on the top of the agenda for the Board of Directors and we look at it consistently at each board meeting.

And we'll be following that closely. Thank you very much.

Once again, ladies and gentlemen, if you have a question or comment, press the 1 key on your touchtone phone. Our next question comes from Kelly Flynn from UBS.

This is Andrew Phones for Kelly. First of all on the restructuring, I was wondering if you could get into a little bit of what you expect in terms of the nature of that restructuring. Would you expect that to involve any layoffs or any office closings or most of that restructuring charge going to come from other areas?

Well, I mean, if you look at our business, Andrew, it's really a question of people and places in terms of what's in the P&L, so we are looking at a variety of means of improving our profitability in Europe. At this point we don't have a definitive plan so I can't you any more details. But we're certainly looking at every place where we operate in Europe and deciding what is the optimum means of improving that profitability.

Okay. And then, secondly, in terms of the trends in Europe in the quarter. I was wondering if you could give us a sense of, kind of either by practice or by business area, you know, industry or geography, you know, kind of, perhaps, where you were seeing strength versus where you were seeing weakness?

I think financial services, particularly in our London office, has been reasonably strong. The German economy, as everyone knows, is certainly going through a difficult patch, so, Germany, generally, in terms of revenue growth has been a bit more of a struggle. And we have really focused our European management not necessarily on driving revenue hard, but on getting but on getting profitable revenue. The incentives we put in place are really to improve their profitability. Certainly they need to drive revenue to do that, but their first priority is to manage for profitability.

We will also -- this is Tom -- be putting a lot more focus over the coming quarters on some of the other statistical measures in Europe, individual consultant productivity, team productivity, employee productivity per total employee and per total fee earner. The profitability of individual offices -- all of this is under evaluation at this point.

We have some -- and I should point out, we have some offices and some parts of Europe that are performing extremely well. Some others that are not performing so well. And, unfortunately, some of our highest performing offices are small ones in smaller countries. And obviously, the performance of Europe is heavily driven by the performance in the mega markets of UK and Germany, in particular, and France.

So it's a very complicated mosaic as anybody who's ever done business in Europe knows. By the time we get through the next quarter, I suspect we'll be able to give you better answers on some of these questions once we've taken the actions that we've done. On an industry basis, just to add a little color around that question, financial services has been very solid. Our professional services and healthcare practices, in particular, in Europe have been up. Technology has been off and the consumer practice in Europe has been off a little.

Okay, thanks, that's very helpful. And in terms of timing, I know it sounds as though things still aren't, you know, very clear yet. But would you expect this at the moment? Is your best estimate that this would be complete by the end of the second quarter?

We expect decisions would be made in the second quarter.

The decisions will be made in the second quarter. It is -- I think Eileen will confirm -- it's possible given the nature of the timing of some of the charges they may not all be reflected in the second quarter due to the nature of how some of these things play through the GAAP and some of the accounting rules. But we will certainly have taken the bulk, if not all of the actions that we intend to take by the end of the second quarter as part of our plan, even though there may be some accounting flow-through over the ensuing couple of quarters. But most of it will be, we believe, in the second quarter.

I think Todd said that the equity was the expense of that was 8.7 -- it's expected to be 8.7 million in '05. I was wondering if you could give a sense of what the impact was in Q1, whether that expense started right at the beginning of Q1, and, also, whether that was reflected in the bonus accrual number that you gave us, I think, $21.4 million.

Yeah, let me take you through that, Andrew. First of all, the 8.7 that I commented about was the expense for the new grants that occurred at the beginning of March. It was just under a million dollars of expense of that was incurred in Q1. And, yes, all of those amounts were included in our bonus accrual numbers, our comp expense numbers that we provided in the prepared comments.

Okay. Thanks. Finally, I was wondering if you could give us an update on what the current tax valuation allowance is?

The valuation allowance balance is $52 million currently.

Okay. Thank you very much, guys.

Thanks, Andrew.

Our next question comes from David Koning from Robert W. Baird.

Good morning, everyone. I was wondering if you could provide the gross in the number of searches in Q1?

Yeah. We had that earlier in the prepared remarks. Do you have that handy?

Year-over-year our confirmations are down 2% in the quarter. They're up 14% on a sequential basis.

Okay. thanks. And then, during the quarter and --

By the way, let me make one comment, one follow-up comment to that. You know, part of our goal globally has been and continues to be, to increase consultant productivity. We've talked about this in prior calls. We felt we had capacity in the system and you increase, you know, consultant productivity and firm wide productivity really by driving two variables.

One is the number of assignments per consultant, which we would hope to drive up over time. Obviously, as you hire consultants you put that under pressure. The other one is the average fees per assignment.

And, you know, we've had good increases in that and that's a very important variable for us over -- that was up, what, about 15% over 2004? So that's the productivity of individual consulting consultant's driving revenue. So those factors all together drive consultant productivity and given that, that's why we have been relatively conservative in terms of ramping headcount because we felt around the world that we still had capacity in the system to drive more revenue and more revenue per project with the people that we have.

One issue with the comparison of year-over-year is the last two weeks of March are typically very big weeks for us in terms of confirmations. That was a holiday period in terms of Easter. So we saw a little bit lower then we would typically in that period so, year-over-year comparison we think that's one of the things driving it.

Those that came in the first couple of weeks of the second quarter as opposed to the last couple weeks of the first quarter.

Right.

Based on historic patterns, frankly, because Easter was early.

Those are some of the things that can can, on a quarter-to-quarter basis, distort the quarter-to-quarter comparisons a little bit. But over a annual basis or a multiple quarter basis get flushed out.

That's very helpful. Thank you. Secondly, you know, based on your guidance, it looks like the first half of the year you're expecting a margin of somewhere around 7% which would imply somewhere around 13% in the second half. Is virtually all of that just due to some of these cost reductions and can we, I think if we back into a number that's maybe $5 million or so per quarter of cost reductions that a good way to think about this?

Well, we haven 't actually sized the cost reductions in terms of restructuring. Well we will certainly have more detail on that when we give you details of restructuring given we haven't made final decisions. Obviously, we're prioritizing based on what return we can get on the actions we take. And also, the leverage on higher revenue given that we've now put in place these cost containment measures. We can get a higher revenue level across that platform, we should certainly be able to see higher conversion of those higher revenue rates.

We also have, in terms of managing our bonus expense, not just a revenue-driving component of that, but also, a profitability component so there is a filter that our bonus goes through in terms of what profitability targets we need to hit so that, obviously, helps us in terms of meeting our margin commitments.

Okay. Thank you.

There are no further questions at this time. Ladies and gentlemen, this concludes today's presentation, you may now disconnect.