Heidrick & Struggles International Inc (HSII) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to your Heidrick and Struggles Second Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS] I would now like to introduce your host for today’s conference call, Ms. Julie Creed. You may begin.

Good morning and thank you everyone for participating in our 2006 second quarter conference call and webcast today. On our call this morning from Heidrick & Struggles are Tom Friel, our Chairman and Chief Executive Officer and Eileen Kamerick, our Chief Financial Officer. As a reminder, there are supporting slides that are available on our website at www.heidrick.com that will accompany our remarks today.

As always, we advise you that this call may not be reproduced or retransmitted without our consent. Also, we will be making forward-looking statements on today’s call and ask that you please refer to our Safe Harbor language contained in our news release dated today, August 1, 2006, which was widely disseminated by the various news wires and other media this morning. The same Safe Harbor language is also on Slide 2 of our presentation. And at this point, I’ll turn the call over to you, Tom.

Thank you, Julie and good morning everyone. Thank you for joining us. On the call today I’ll first go through some of the highlights of our second quarter and then Eileen Kamerick, our CFO will review our second quarter results in a little more detail. Then I’ll come back at the end and summarize.

This was a strong quarter for Heidrick & Struggles and we are excited to be able to share the highlights of it with you today. If you are following along with the slides we posted on our website, let me start with the slide marked number three in the bottom right hand corner.

First of all, the confirmation trends that picked up in March and continued strong through June helped us achieve our highest net revenue quarter in five years, the best we’ve reported since the second quarter of 2001. Net revenue of $120.2 million was up 16.3% year-over-year and up 18.4% sequentially. All three of our regions contributed to good year-over-year growth with the America’s region up 14.9%, Europe up 17.9% and the Asia-Pacific region up 18.9% achieving record net revenue.

Of even more significance, however, are the results we achieved in operating margin and operating income. Our reported second quarter operating income of $15.5 million is the highest we have achieved in the history of Heidrick & Struggles as a public company since our IPO in the second quarter of 1999. The reported operating margin of 12.9% is also the highest achieved since our IPO. On Slides 4 and 5 we provide you with a pro forma comparison excluding restructuring charges of operating income and operating margin over the last five quarters. On this basis, second quarter operating income was $15.9 million and the operating margin was 13.2%. In terms of some of the growth drivers and turning to Slide 6, second quarter executive search confirmations were up 6% year-over-year and were up 9% sequentially. And on Slide 7 where we provide you with confirmation trends on a monthly basis, you can see how second quarter confirmations picked up from the first quarter. With July having just ended yesterday, we saw continued healthy levels, although we do expect to see some typical seasonality during the summer vacation months.

Looking at Slide 8, we are still on track for our plan to add about 10% net additional consultants in 2006. Consultant headcount was 335 at the end of June, up from 333 at the end of last quarter and 315 at the end of 2005. We experienced some traditional second quarter turnover, but only two consultants left to join other executive search firms; but more importantly, we’ve made a number of key strategic hires in the second quarter. Again, a good mix of good consultants from other premier and boutique search firms as well as industry and functional experts who were formerly executives at companies that included Deutsche Telecom, Foote, Cone & Belding and Ahold among others. In particular, we also made some very strategic hires in our Life Sciences and Healthcare Practice, an area of focus for us that is undergoing enormous growth. All three of our regions and most of our practices have already recruited or have plans to recruit additional consultants in the second half of the year to finish filling out previously defined industry or practice gaps.

Now moving to Slide 9, despite having added 20 net new consultants so far this year, we have also increased annualized revenue per consultant to $1.4 million. That’s close to our historical high. We’re encouraged by our success in accelerating the productivity of our new consultants. What we have accomplished in terms of productivity is largely a result of the new training, on-boarding and mentoring programs that we told you about in our March call and we have every intention of continuing these programs and to improve this key growth driver.

And finally, I want to highlight the completion of our $50 million share repurchase program authorized and announced last September. In fact, this was the third such program that we have announced and completed in the last four years. We also began buying back shares under a new $50 million authorization approved and announced on May 31st. And under this new program we have repurchased over 270,000 shares at a cost in excess of $9 million with approximately $41 million that remains authorized.

All in all, this was a very strong quarter for us and now with that quick overview of some of the key metrics that we use to monitor our business, I will turn the call over to Eileen Kamerick to give you more detail on the quarterly results. Eileen?

Thank you, Tom. I’d like to review some of the major components of the second quarter. Looking at Slide 10, revenue before reimbursement or net revenue of $120.2 million, increased 16.3% year-over-year and was up 18.4% sequentially. The impact of foreign currency exchange rates in the quarter was not significant. The net increase in revenue deferral in the quarter was $1.8 million and the total balance sheet amount of deferred revenue now stands at $19.2 million. In the first six months of 2006 the revenue deferral was increased in total by $3.6 million.

Reported operating income for the second quarter was $15.5 million representing a 12.9% operating margin and a significant improvement compared to last year’s second quarter when we took restructuring charges of $20.8 million primarily in Europe. Excluding restructuring charges in this year’s second quarter, primarily related to a change in estimates for real estate costs, the operating margin would have been 13.2%. I would like to echo Tom’s enthusiasm about our second quarter results. We are very pleased with how far we’ve come and where we’re going; although, again, we think it is most appropriate to look at annual, not quarterly results since we budget and plan our business on an annual basis.

Looking a little further at operating expenses, I’ll explain some of the key drivers in the quarter. If you turn to Slide 11, we are including this slide again this quarter to provide you with more detail into the largest component of our business model – Salaries and Employee Benefits. Salaries and Employee Benefits expense in the second quarter was $81 million or 67.4% of net revenue. This expense was up $13 million or approximately 19% year-over-year. The main reasons for this increase are the fixed and variable costs associated with having added 28 net new consultants over the last year as well as higher bonus accruals that are a function of higher expected revenue in 2006 as compared to 2005.

As a reminder, our 2006 bonus accruals are based on our full year expectations for revenue and profitability. But we have only two quarters of actual results on which to base those estimates. Total equity based compensation expense was $6.3 million in the quarter compared to $4.5 million in last year’s second quarter. One thing that isn’t evident from the Equity Compensation section on this slide is that in last year’s second quarter we realized a one-time, $1.5 million benefit related to the first quarter of 2005 as a result of our adoption of the RSU program as part of our annual bonus.

Another reason for the year-over-year increase is stock option expense of $950,000 which we began recording January 1, 2006 under FAS 123R. As a percentage of total salaries and benefits expense, fixed compensation decreased to 64% from 70% in last year’s second quarter and discretionary compensation expense increased to 36% of total expense compared to only 30% in last year’s second quarter. Fixed compensation was higher on an absolute basis as a result of the increased consultants and other employee headcount. But the increase in discretionary compensation expense as a percentage is because we are accruing for higher bonuses at higher expected revenue levels for 2006.

For the full year we are expecting total bonus expense to be in the range of $95 million to $100 million. As a result of our having increased the equity component of our annual bonus program in order to increase employee stock ownership and further align employees with our shareholders, equity compensation expense as a percentage of Salaries and Employee Benefits will be slightly higher in 2006 than in 2005. And the cash compensation will be slightly lower on a percentage basis.

Moving on, general and administrative expenses in the quarter were $23.3 million, up only 4% from last year’s second quarter. And, as a percentage of revenue, G&A was down to 19.4% compared to 21.6% last year. We continue to closely manage G&A and are very pleased with this quarter’s results. Our plan is to continue to hold G&A as low as possible to approximately 20% of net revenue each quarter.

We reported net income in the second quarter of $10.4 million and fully diluted earnings per share of $0.55. These results reflect a second quarter tax rate of 36%. Our tax rate was lower in the second quarter and less than our underlying estimated annual effective tax rate of between 38% and 40% because we were able to take a foreign tax credit and affect a partial release evaluation allowance related to our deferred tax assets. Recall that in the first quarter our effective tax rate was 44.2% which was more than the underlying estimated annual rate because of the associated discreet impact of how we recorded deferred taxes. Combining the effective tax rate for the first two quarters results in a rate within the 38% to 40% range which, again, is the annual effective tax rate we expect depending on the income mix in each of the jurisdictions in which we operate.

In the press release, we’ve provided you with pro forma numbers for net income and EPS in order to provide you with a better basis for comparing our results to last year’s second quarter given the restructuring charge that we took in that quarter and because our effective tax rate was only 18.3% due to our partial reversal of the valuation allowance in that quarter.

Moving to Slides 12 and 13, Cash Flows and Balance Sheet Items, the cash, cash-equivalents and short-term investment balance as of June 30th was $159.8 million. Net cash provided by operating activities was $30.3 million in the quarter compared to $13 million in last year’s second quarter. This increase is as a result of higher net revenue levels realized this year. In addition, in last year’s second quarter, we used $17.1 million in cash for restructuring. For 2006 we are still expecting to generate free cash flow which we define as cash flow from operations, minus capital expenditures and less changes in accrued bonus of between $50 and $60 million. As a reminder, we have consolidated interim and final bonus payments for our consultants to one payment in the first quarter of 2007 which will result in a one-time increase to cash flow in the fourth quarter of 2006.

Turning to Slide 14, I’d like to briefly highlight our first six month’s results. Net revenue of $221.7 million for the first six months of 2006 is up almost 10% compared to the first half of 2005. Operating income of $24 million represents a 10.8% operating margin for the first six months. Excluding changes in restructuring estimates, operating income was $24.5 million and the operating margin was 11.1%. Net income of $16.3 million and diluted earnings per share of $0.85 reflect a tax rate of 39.2%. In this slide and in the text of the release, we provide you with year-over-year comparisons for the same period in 2005 on a GAAP basis. But last year’s restructuring and an effective tax benefit rate of 21% make these comparisons less meaningful. What is meaningful to us year-to-date in 2006 is our growth in revenue and significant growth in operating income.

Now let me give you a quick overview on regional results. Please turn to the Americas results on Slide 15. Following strong March confirmations as well as good April, May and June confirmations, the Americas region turned in a very good quarter. Net revenue of $68.1 million in the quarter was up 14.9% year-over-year and up 22.1% sequentially. Year-over-year, the Financial Services, Healthcare and Consumer Industry groups saw the strongest revenue growth. Operating income was $16.1 million, up 1.7% year-over-year and up 64.5% from the first quarter.

The year-over-year growth in operating income was negatively impacted by several items. First, the planned increase in consultant and employee headcount during the year. Second, higher bonus accruals in this year’s second quarter that are based on our expectation that annual revenue will be higher in 2006 than in 2005. Third, the absence of a one-time benefit of approximately $800,000 that was recognized in the second quarter of 2005 related to adopting the new RSU bonus program. And fourth, stock option expense of approximately $400,000 which was not recorded last year.

Consultant headcount at the end of June was 177, up by 17 people or 11% compared to last year at this time. Additional new consultant hires will continue into the third and fourth quarter but hiring will not continue at the same pace as in the first half.

Now for Europe’s results - turning to Slide 16, we are very pleased with the continuation of good year-over-year and sequential improvements in the European region. Second quarter revenue of $40.5 million was up 17.9% year-over-year and up 14.3% sequentially. Almost every office or country in Europe contributed to good growth in the quarter, the London and Paris offices and Italy and Spain particularly. We are also pleased with the progress of our German offices which continue to show meaningful sequential improvements in revenue and operating income growth.

Year-over-year and sequentially, strong performance in the Financial Services Industry group was the major driver of revenue growth; but very good year-over-year and sequential growth in the Healthcare Industry group is also noteworthy and the Consumer Industry group realized good sequential growth.

Second quarter operating income and operating margins both reflect strong year-over-year and sequential improvements but we will continue to drive to higher levels that we know are achievable over time through continued cost initiatives and by driving revenue growth through strategic hiring, generating higher fees per search and increasing productivity.

Consultants headcount at the end of June was 117, up net 4 from the end of March and up by a net 9 consultants since June of last year. This is particularly impressive given that 13 consultants left last year as part of the restructuring. Europe’s hiring strategy is ongoing this year as we continue to seek individuals who have the right practice background for the industry or functional gaps we are looking to fill and who are Pan-European in focus and attitude. In fact, we have already successfully added four new hires to date in the third quarter.

Turning to the Asia-Pacific region and Slide 17, the Asia-Pacific region turned in another record quarter with 11.6 million in revenue, up 18.9% year-over-year and up 12.6% sequentially. Offices across the region performed well but revenue growth was driven particularly by especially strong performances from our Hong Kong, Singapore and Beijing offices. In this region, we are well diversified with the Financial Services, Industrial and Technology Industry groups all roughly equal in size and Consumer and Healthcare is not far behind.

Although on a smaller scale, our India offices had a great quarter and have more than doubled their revenue compared to last year. With six consultants in place in India, our offices here showed tremendous potential to capitalize on the continued economic growth in India over the next few years. Operating income and operating margin were both up year-over-year largely driven by increased productivity and the Asia-Pacific region has already made several new consultant hires in the third quarter and is targeting several others in China, Korea and Australia. We are also targeting to begin operations in Bangkok in August with two consultants to be based there. With that review of our strong second quarter, six months and regional results, I’ll turn the call back to Tom.

Thank you, Eileen. As some of you have asked about it, let me quickly comment now on our search for my successor. We have no higher priority. The Board search committee and execution team meet weekly and are working passionately and diligently on this project with good progress. I am working with them as an advisor and the progress is good. This is, after all, what we do so we’re very comfortable with the shape that we’re in. In the meantime, however, all of our management is staying focused on track and moving forward.

One decision, however, that was recently made in light of the search for our next CEO was to postpone our worldwide consultants meeting that had been scheduled for October of this year. As you know, I firmly believe in the value of holding worldwide meetings regularly, however, postponing this meeting until next spring will allow our new CEO to work with our partners on the structure and the themes of this meeting. In lieu of a global meeting, we did hold very successful regional meetings this year in EMEA and Asia-Pacific and smaller meetings, practices and other areas around the world.

Our consultants worldwide are enthusiastic about our business particularly given the balanced growth and margin contributions we are now seeing across all three regions and most of our practices. Indicative of our increasingly global impact, we recently won a major highly confidential, board level assignment for a large, global, financial services firm. This groundbreaking assignment involves assessment, succession planning, a CEO search, on-boarding consulting and board of director recruiting. It promises to be a major project for our firm and one we expect to continue to replicate elsewhere and it provides tangible support for our strategy begun three years ago to link these additional leadership consulting services to our traditional search model.

As you know, there is also a lot of activity in private equity and venture capital backed companies and in the Industrial Consumer and Not-For-Profit Industry groups. And we have special task forces working on improving our service offerings in these sectors. These trends are all very encouraging. Interestingly, our three largest worldwide clients to date this year are European headquartered but truly global entities. This exciting outcome reflects the resurgence of Europe and our rising brand in this region and in the power of an integrated global delivery strategy.

So to summarize, we are very pleased with the first half of 2006 and are optimistic about the year ahead. Demographic and business trends that drive demand for our services, current confirmation trends and new business opportunities worldwide give us continued confidence in our business and in our strategy.

Accordingly, we are reiterating our expectations to achieve consolidated net revenue of between $445 million and $465 million for 2006 and excluding any changes to estimates for prior restructurings, for the full year operating margin to improve again to approximately 12%.

So with that overview of the quarter and of 2006 year-to-date, we will now open it up for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Clint Fendley from Wachovia.

Thank you. Good morning. I wonder, Tom, if you could comment on how we should think about seasonality in Europe for the third quarter. Historically we’ve seen a slight down tick here sequentially. Would you expect the same this year?

We haven’t seen a consistent pattern of seasonal downturn in Europe – or anywhere else for that matter – over the last three years. We actually expect some – particularly in Europe in August – although it’s historically been a little bit less the last couple of years than it had been in prior years; so I think probably caution says we should expect a little bit but we do not believe it will be excessive and it isn’t significant enough to have us feel there is any impact on our annual guidance.

And, Clint, this is Eileen. I would just say, I think in ’05 we saw an unusually strong third quarter in Europe. We would expect that third quarter would be perhaps not quite as strong as it was in ’05. That was kind of untypically strong in the third quarter.

And can you provide any color on your confirmation trends by geography?

Yes. The confirmation trends are really good in all the geographies. They’ve been good in Europe; Europe finished out July with good confirmations. We saw some slowness in the Americas around the July 4th holiday but they’ve picked up in July. So the good trends that we were seeing in June continued through into July and Asia Pacific continued on that trend as well.

And Eileen, final question, I think $80 million in accrued salaries -- how much of that is related to the $95 million to $100 million that you expect to pay in bonuses this year?

Well, you have a full salary and bonus expense for the full year. In terms of the bonus that is accrued in second quarter, there’s $29 million accrued for bonus in this quarter.

Okay. Thank you.

Our next question comes from Mike Carney from Aperion Group.

Good morning. Eileen, did you happen to mention the Other Expense line and what that significant expense was there?

The Other Expense line typically deals with two things. One of them is just change in FX on some intercompany loans that we have outstanding all over the world. So that varies in terms of what the FX effect is at any given country where we have those intercompany loans.

So that would be the substantial difference between last year’s gain and this year’s expense?

Yes.

And then also, Tom, you mentioned the major Financial Services contract and when you combine a number of those services and as you look to do more of that going forward, is it -- are there still separate fees for each service? Are you changing the model of how you price, you know, a combination of services?

Generally the services are all priced individually. There are cases where on a big engagement where they – an integrated set of services - we may, in fact, price the engagement on a fixed fee that incorporates all of that. But these are additive services and this work for us is not only profitable work, it locks in client relationships to us quite tightly. So this is a win for us and for the clients.

And then lastly, in terms of hiring going forward and in terms of just overall growth, would you say you are more focused on the leadership services or in terms of growing in executive recruitment - or is it 50/50?

Well, it’s certainly not 50/50 in absolute numbers because leadership consulting is still a small and growing part of our business. They have high hiring expectations which they are on track to meet this year and so on a percentage basis we will see the leadership consulting search team -- leadership consulting, consulting teams grow faster in most cases than our executive search teams around the world will grow; but in absolute numbers we will have higher growth in the consultant teams. I think we are looking for roughly 10% headcount growth in the professional staff worldwide this year; that’s 30 some people. Of that in leadership consulting it would be maybe around 8 or 10 and the rest would be in the executive search.

Okay. Thanks a lot.

Our next question is from Matt Litfin with William Beard.

Hi. It’s William Blair & Company.

We know that Matt!

Yes. Congratulations on a solid quarter.

Thank you.

I wonder if you could quantify at all for us the consultant turnover rate that you’ve mentioned. It ticked up a bit in the quarter?

Yes. The voluntary rate is still well below 5%, Matt. And of the people who left, only two of them left to go to other executive search firms. So people leave for a variety of reasons. Some of them go into clients, some of them decide to do something else; but in terms of our voluntary turnover rate it was below 5%.

One quick comment on that, Matt. As we, I think, mentioned in the remarks some expected consultant turnover in the second quarter -- we and the other major search firms either pay all or the bulk of our annual bonuses in the first quarter or typically near the end of the first quarter and so as a result, historically if turnover is going to occur, the bulk of it occurs in the second quarter. So it tends to be an unusual quarter in that regard because most of the voluntary turnovers that we will have – a good percentage of them for the year – will happen in the second quarter normally if they are going to happen just because of the normal cycle of payments and the fact that compensation for executive search consultants is highly variable based on often large bonus payments in the one time a year in the end of the first quarter.

Okay. I wanted to follow-up on a previous question about operating margins in Europe; although I’m looking at it on a longer term basis, you’ve seen up ticks the last few years here with the restructuring. I wondered if you could venture a guess as to where those could go on an annual basis down the road. Have we sort of topped out here in the very low double-digits? Or what’s the top side of your hoped-for range, there?

Sure, Matt. This is Eileen. We certainly think that we should be able to get margins – operating margins – in the high teens. It’s a little bit difficult to match the margin in an area like the Americas where you have the large homogenous work force that you can put to work and sort of even out your work flow. The European region has some challenges in terms of different cultures and languages. But that having been said, we have every expectation that the operating margins here over time can get to the high teens.

Okay. And one final question if I could – now that you have the expense structure pretty much in order here, I wonder if your appetite for acquisitions has gone up in the last quarter or so. Are there boutiques available? Are their prices acceptable?

Yes. As we’ve said before, Matt, we are always interested in acquisitions; the history of successful acquisitions in this profession is somewhat limited. Our bar for doing transactions is quite high; but having said that, if we can find an acquisition or multiple acquisitions where we believe the people are right and will fit our culture where the client service and the client match between who they are working for now and who we’re working for now is manageable relative to conflicts, and where the economics of whatever transaction we would have to do would be – if not immediately accretive – at least accretive quickly within a year or so, then we would seriously consider that kind of transaction. We’re working on looking at those aggressively all the time.

Okay. Thank you.

our next question comes from Tobey Sommer from SunTrust Robinson.

Hi, good morning. This is actually Mike Vincent for Tobey this morning. I had a quick question regarding the worldwide consultant meeting that was moved from October into the spring. Are there any cost savings associated with that? If you could just give a little bit more color around that?

Sure. The cost savings there are approximately $2 million so they are certainly real; but in terms of our overall cost structure, not significant.

Okay. And then one more question regarding kind of -- productivity seems to be improving pretty well on a per-consultant basis and it seems to be pretty consistently doing that. Any sense on where, maybe, kind of a top-out level for that or is there still room to grow?

We talked about that in prior calls and we believe there is still plenty of opportunity for us to improve that measure. We have a large percentage of our population of consultants operating significantly above the $1.4 million level. Many of them operating significantly – about $2 million per year in annualized production. So we think bringing that number to 1.5 or higher, somewhere between $1.5 and $2 million over time is very doable.

And then maybe if I can ask one more question – I was looking at kind of the overall macro environment, is there anything that you’re seeing out there that would cause you to pause on the hiring front? Or does everything look solid enough for you to just continue on that plan as normal?

Well, we’re very optimistic about this business but we’re also very cautious in terms of how we hire, making sure that we’re really filling strategic niches in terms of practice and functional and regional gaps that we have. So we’re really balancing trying to drive profitability with driving growth and I think this quarter, as an example, that we’ve been able to do that and have that balance between profitability and growth and do so successfully. So there’s nothing in terms of the trends in this business that would have us think otherwise. We think a lot of the demographic and regulatory trends are very positive in terms of the growth drivers for this business.

Okay. Thank you very much.

Our next question comes from Kelly Flynn from UBS.

Thanks. Actually you just mentioned demographic and regulatory drivers. I wondered if you could just talk more specifically about the economic color coming out of the US which seems to be pretty negative; your results obviously show something a little bit different. But how would you help us kind of put your results in the context of the economic data? Are you seeing any signs from your US clients that things are slowing a bit? And then I have a follow-up. Thanks.

Sure. Kelly, thanks. Well, first off while not every quarter historically has shown this as clearly as some do, this business has proven through most of the last 25 years to not drive very closely to major economic and business cycles. Clearly we have some relation to that, and when you have a major, major adjustment as we had about four years ago with the crash of the technology boom you can’t escape that without an impact on your business. But given that we’re so focused on the top of our clients, even slightly challenging economic times for them often result in more work for us, not less, as we help them restructure their senior management to face more difficult economic conditions. So I think within fairly wide bands of market performance we believe - and history has shown - that our performance is really more related to what we do and how well we serve our clients than it is overall macro-economic conditions.

Obviously, if those get to be very, very large - and most of the people that I’m talking to don’t expect that - short-term we should be able to continue with our business on the plan that it is without having it affected too much.

Okay. Thanks. And then the follow up is just on confirmations. I’m looking at 5/7 and I know you gave kind of sequential color on overall strength there and then strength by region, but could you help us out with more year-over-year detail by month? Did you see acceleration in confirmation growth as the second quarter progressed and what have you seen to date in the third quarter?

Well, thus far in third quarter -- I mean, we’re seeing as I said in July, we’re seeing really reasonably good confirmations. We’re seeing some slow down seasonality; but July was really very good. It was particularly encouraging in Europe where you’d expect some seasonality. And year-over-year our confirmations are up about 4%; so yes, we are seeing year-over-year improvements and acceleration. And I think a lot of that is due to the fact that we’re particularly adept at getting a lot of our new consultants productive as quickly as possible.

Okay. So -- well, the 4%, that’s for what, July?

No. That’s year-over-year, first six months through June 30th.

Oh, okay.

We’re up in terms of confirmations – number of confirmations we’re up 4%.

Can you tell us what your year-over-year growth was by month in the second quarter? Because I understand the seasonality but --

We typically don’t give confirmation; that’s sort of granularity, Kelly.

Okay.

But we are seeing good trends, strong trends. We saw a little bit of weakness in the beginning of January as I think you know. But we’ve seen pretty steady - as you can see from the chart - growth in terms of confirmations. So we’re pretty confident that the trends that we’re seeing in the market that Tom referred to – the need for executive talent by a lot of the private equity firms, the regulatory demands that are driving a lot of the changes in the C-Suite and board room - all of those things continue to flow through into our business model and we’re seeing good confirmation levels as a result.

Okay. Great.

Part of what makes this business difficult to predict on that basis on a quarterly basis – which is why we’ve gone to annual guidance – is even more exacerbated on a monthly basis when you see rapid jumps up and down in things like confirmations in a particular month where a few days one way or the other can push them from one month to another – make one month look bigger, one month look not so good; over time those things - and over the course of the year particularly when you’re comparing them year-on-year, little bit quarter-to-quarter, but certainly comparing them year-on-year - most of those aberrations month-to-month smooth out.

And the other thing is, Kelly, I think you know this but in terms of our revenue recognition? How a search falls in the quarter, and we have a slide on this in the Appendix, it’s Number 23, in terms of our revenue recognition, a search that we book in the first quarter we recognize about 78% of that revenue. If it’s booked in the third month of the quarter, that goes down rather significantly to the high teens. So just the timing of how searches come in, to Tom’s point, can affect a quarter in terms of how the revenue flows through on a quarterly basis. All of that really nets out on an annual basis which is one of the many reasons why we think our quarterly results this quarter are great but we really want to admonish people to look at the annual results because we run the business on an annual basis and all of these revenue recognition and bonus accrual issues, all of the noise and then really smoothes out on an annual basis.

Okay. Thank you.

Our next question comes from Michael Morin with Merrill Lynch.

Yes. Good morning. I just wanted to focus on the Corporate Expense line in the segments. That number -- was there anything maybe related to some of the regional meetings that might have impacted that number in this current quarter? And given that the partner’s meeting is being postponed until next year should we assume that maybe we’ve reached the high point of the year on that line item?

Well, we would expect that we can keep corporate expenses relatively flat to down for the rest of the year. Really what’s driving that is not so much the meetings which we’re pretty good at managing the costs around those meetings, it’s more really total Salary and Employee Benefits expense and a lot of it is increased stock comp expense, Michelle, and particularly stock option expense. I think that you know this, but basically we do not use stock options in any area frankly, other than the senior executives, so a disproportionate amount of the stock option expense is in the Corporate line; but most of it is around stock comp expense and its increased Salaries and Employee Benefits on that line.

Okay. And then on your Slide 11 at the bottom you have the break up of the fixed compensation and discretionary compensation?

Yes.

Is there a target number that you have in mind and what would be the potential impact on gross margin – and I’m thinking about gross margin in terms of just fee revenue minus salaries and benefits – is there a gross margin that you would be targeting as a result of that?

Well, our real target as it is in most professional services firms is to frankly have comp as a percentage of revenue declining over time. And to bring that down -- I mean we have – for this industry – relatively high comp as a percentage of revenue. The advertising industry has really targeted somewhere between 50% and 55%; this industry has comp as a percentage of revenue in the high 60s traditionally. So getting leverage on that in terms of making sure that people are as productive as possible, not having underwater consultants, all of those things would allow us to bring that percentage of comp as a percentage of revenue down into the mid to low-60s.

And in that kind of situation what would be the discretionary component?

Well, some of this is determined by how we pay people in cash, how much is paid as equity. So, again, trying to model how much of that would be discretionary -- in general what we’ve tried to do in modeling comps for our consultants is really to have a fairly low fixed component and then to have high discretionary comps. But understand that we have about 335 consultants now. We have a lot of people who are not consultants who are not paid with such a high discretionary component. So you really have to look at the workforce in two pieces.

Right. Okay. All right. Thank you.

Our next question comes from Mark Marcon with RW Baird.

Hi. This is Sean Connelly calling in for Mark. I had a question about the fee per search increase and I was wondering if you could give a little more color to that and was just curious if it was just due to mix of practice area or what was driving that increase?

We can both probably comment on that. This is Tom. That’s an area that we put a lot of emphasis on and we’re quite proud of. It’s also an area where the interests of the firm are completely aligned and the shareholders are completely aligned with the interest of our partners because our compensation system increases pay-out levels as people move up to higher and higher productivity levels, so this is something that the consultants are focused on as well. Really what it has to do with more than anything is the seniority level and the experience level of our consultants as if we’ve got the right consultants and the market is good and they’re working hard, their individual productivity goes up. And part of what we saw this year I think that helped move it up was the effectiveness of our training, mentoring and on-boarding programs which got newly hired consultants who typically are a little slow to get up that curve up it quicker than we had forecast in a couple of areas. So we’re going to continue to make those investments and eliminate the drags on the system of our bottom quartile and bottom half, consultants that pull it down. So, again, this is among all of the statistics we track, it’s one that we watch very, very carefully and we’re gratified to see it at close to record levels and we think we can push it higher.

And I think I would just add to that that Kevin Kelly and his team in Europe have been very focused at moving up market and increasing the fees per search in Europe. Generally in Europe people make less cash comps then they do in the US, so traditionally our fee has been somewhat lower. But we’re really pretty carefully monitoring that in Europe and we’ve made some pretty major gains in terms of increasing the fee per search there.

All right. Thank you. And then one just kind of housekeeping question - any thoughts on where share count might be for Q3? Just I know there had been some repurchases? So I was just curious if you knew what your anticipation was there?

Well, that really depends on what our stock purchase activity is in the third quarter and as we’ve said before, we’ll certainly advise you as we go through the quarter in terms of what our stock purchasing activities will be. As I think you know, we are in a black-out from the end of the second quarter through our earnings call. So we do have some limitations in terms of repurchase at the moment; but we typically comment on that at the close of the quarter.

Okay. And excluding any future repurchases just from stuff that’s happened already, do you have any flavor for the incremental difference that that’s going to have in Q3?

Yes. I mean, roughly for the back half of the year I think what you’re asking is what’s the sort of accretive effect of what’s been done thus far?

Yes.

We would estimate it’s around $0.05 a share.

Okay. All right. Thank you.

Our next question comes is a follow-up question from Mike Carney.

In following up on Michelle’s question about the discretionary compensation I’m just wondering, Eileen, do we look at that -- the discretionary comp in total has moved up and I know that most of the focus has been just in getting the consultant’s a higher percentage of share based compensation. So is that a factor in the discretionary compensation moving up or has that been also a focus in moving the discretionary compensation upwards?

Well, let me step back. I mean, the idea is in terms of paying people in equity is to align our internal revenue drivers with the shareholders. So that whole strategy that Tom put in place was really as a means of making that alignment closer between the people within Heidrick & Struggles who drive the revenue and our shareholders. The effect that that has on discretionary comp is really secondary; but in terms of compensating our consultants, our rationale in terms of how we compensate peoples remain the same. We have fairly low fixed compensation and then we have uncapped comp in terms of how high people can actually drive revenue and thereby be paid as a result of that discretionary comp -- or excuse me of that revenue that they’ve driven. So I’m not sure if that answers your question but --

Okay. That does. There’s been no basically specific focus in increasing discretionary compensation outside of the fact that you want all your consultants to produce more and more revenue which will naturally increase the discretionary compensation.

No.

With one exception. The one exception to the statement you made which is basically true is over the last two or three years including last year’s restructuring in Europe, we were very focused and continue to be focused on individuals that have relatively high fixed compensation and are not performing at high levels. And we’ve been asking some of those people to leave and making sure that we’re not carrying people in either a marginal situation or what we call an underwater situation where their calculated variable compensation is less than zero; and so eliminating some of those people has the effect of lowering fixed compensation as a percent of total compensation because most of the revenue is being produced by people that have big bonuses which by definition means they have big variable compensation and that is actually the healthiest thing that we can see is the higher our variable compensation goes against fixed, that means our people are performing well and we don’t have a lot of people that are dragging the system down by not doing that. So that’s a continual focus and hopefully you will see that reflected in the numbers over time.

And one other thing just to be clear. In terms of our bonus accruals - and I mentioned this in the script - we’re making estimates every quarter. So the bonus accrual this quarter is higher and that’s based on our estimate that we’re going to drive higher revenue levels for the year as a whole. But the percentage of fixed versus discretionary comp is going to vary a little bit by quarter just based on those estimates. You know, all of that a year end comes together; the estimates and the actual become one. But you will see a little of that because we have two quarters worth of performance and we’re estimating our full year bonus expense based on that. So I just want to give you a sense that little bits of percentage jumps in terms of fixed versus discretionary has something to do with our estimates associated with that. But Tom’s exactly right. The idea is, over time, to have lower fixed comp and higher discretionary comp.

Understand. Okay. And then one last question in terms of hiring consultants over the last year. I think we’ve talked about this in the past. When I look at the Financial Services revenue from that industry or that customer sector, would that be substantially productivity growth, or would that be due to a significant number of new Financial Services consultants?

It’s actually both plus a third factor which is while we have grown our Financial Services practice which is our strongest practice currently, we’ve also diversified it substantially. It doesn’t show necessarily in the way we report it but we’ve added capability and parts of the Financial Services practice where we were not particularly strong in real estate and insurance and some areas that we don’t typically think of and so that practice is actually much more balanced than it was a couple of years ago. But, yes, we have had both growth from new hires and growth from productivity in the Financial Service practice and in several others.

Okay. So essentially, Tom, you’re saying that that’s not -- that growth is not necessarily all from corporate and investment banks and your typical -- where most of the executive searches happen?

No. Actually quite a lot of it is coming from new areas and, in fact, the Financial Services practice itself is more balanced than it was a couple of years ago and the Asset Management is about 25% and that’s the largest single component - Investment Banking is 20, Diversified 20, Insurance 16, Real Estate about 10. So we have actually, while we call it Financial Services, it’s a very broad definition that we use with a lot of sub-practices and they’re all growing quite substantially. And we’re not overly dependent on any one and, in fact, less dependent on investment banking in the capital markets than we were a couple of years ago. Even though that sector has grown in terms of revenue as a percent of the total it’s gone down which is actually very healthy for us.

There are no further questions at this time.

Okay. Well, if there are no further questions then I would like to close out today’s call with two quick comments. First, this quarter probably more than any other validates the ambitious strategy this Company announced three years ago to focus on our core strengths and our client’s core needs and to improve revenue growth and operating margins worldwide to levels comparable with other top professional service firms.

Further, we initiated a plan to increase the alignment between our employees and our external shareholders and progress on that continues to be very good. To get to where we are today from where we were then was not easy, painless or quick. But these results reflect the hard decisions and the hard work of many people over that period. I’m very proud of what this team and our colleagues have done and continue to do everyday.

And second, and even more important, this quarter I believe finally shows the power and the potential of this firm to achieve even better future performance as we help our global clients manage their leadership challenges and profit with them as they succeed. This is a good business today and will be a great business for years to come. Thank you for your support and your participation on the call today.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect.