Heidrick & Struggles International Inc (HSII) 2006 Q3 法說會逐字稿

Operator. Good day, ladies and gentlemen, and welcome to your third quarter earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to introduce your host for today's conference call, Ms. Julie Creed, Vice President of Investor Relations.

Julie Creed. Good morning, everyone, and thank you for participating on our 2006 third quarter conference call. On today's call from Heidrick & Struggles are Kevin Kelly, Chief Executive Officer, and Eileen Kamerick, our Chief Financial Officer. Kevin will start by discussing some of the operational and financial highlights of our third quarter; then Eileen Kamerick will review our third quarter results in a little more detail. We will then discuss our integration of Highland Partners, and then Kevin will finish with a few thoughts on his priorities as our new CEO. 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. And, 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, October 31, 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, Kevin.

Thanks Julie, and thanks to all of you who are taking the time to participate on our call today.

I'm very pleased to be here today and reporting another strong quarter of results. As Julie mentioned, I'm going to take a minute to highlight the third quarter, and then I'll come back after Eileen to give you a bit more insight into some of our future initiatives. As a reminder, none of the third quarter results we are reviewing today reflect our acquisition of Highland Partners, which was not closed until October 2. Now, if you're following along with the slides we've posted on our website, let me start with the slide number 3.

Net revenue in our third quarter of $124.6 million was up 13.7% year-over-year, and up 3.7% over second quarter. All three of our regions contributed to good year-over-year growth, but especially Europe, which was up 23.4%, and the Asia Pacific region, which turned in another record quarter with revenue up 42.8%.

Our reported third quarter operating income of $17.6 million surpassed last quarter's operating income of $15.5 million and was another record quarter for us. The reported operating margin of 14.1% is also the highest ever achieved by Heidrick & Struggles as a public company.

On slides 4 and 5, we provide you with pro-forma operating income and operating margin, excluding restructuring charges which primarily affected last year's results. On this basis, third quarter operating income was $17.4 million, and the operating margin was 14%.

In terms of some of the growth drivers, and turning to slide 6, third quarter executive search confirmations were up 7% year-over-year but down 7% sequentially. And on slide 7, we provide you with confirmation trends on a monthly basis. Although today is the last day of the month and final numbers are not yet available, we believe confirmations in October will be comparable to third quarter levels.

Looking at slide 8, consultant headcount was 343 at the end of September, up from 335 at the end of last quarter, and 315 at the end of 2005. We are on track to add net 10% new consultants by year-end; and, even with our acquisition of Highland Partners, we will continue to make strategic hires around the world, especially in Europe and in Asia Pacific.

Moving to slide 9. Despite having added 28 net new consultants so far this year, the annualized revenue per consultant remained strong, at $1.4 million, and close to our historical high. We remain very pleased by our success in accelerating the productivity of our new consultants and have every intention of continuing to focus on ways we can further improve productivity. This has taken on even higher priority given our acquisition of Highland Partners.

Another key contributor to growth in the third quarter was the increase in average fee per search to $108,100. As you know, this number changes from quarter to quarter and can be influenced by a number of factors, but we have been making a concerted effort, especially in Europe, to move higher into the C-suite for more search work.

We are very pleased with the third quarter and year-to-date results and are executing the integration of Highland Partners on a solid foundation.

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 as well as on our integration of Highland Partners.

Thank you, Kevin. I would like to review some of the major components of the third quarter.

Looking at slide 10, revenue before reimbursements, or net revenue, of $124.6 million, increased 13.7% year-over-year, and was up 3.7% sequentially. The impact of foreign currency exchange rates in the quarter accounted for 1.8 percentage points of that growth.

Reported operating income for the third quarter was $17.6 million, representing a 14.1% operating margin and a significant improvement compared to last year's third quarter. In the third quarter, the restructuring credit of $149,000 was the reversal of a previous real estate accrual that was taken for a lease for one of our offices which we will now use for shared space with Highland Partners.

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'll give you more detail regarding salaries and employee benefits expense. Salaries and employee benefits expense in the third quarter was $83.7 million, or 67.2% of net revenue. This expense was up $12.4 million, or 17.4%, year over year. The main reasons for this increase are the fixed costs associated with having added 37 new consultants compared to last year, as well as higher bonus accruals that are a function of higher expected revenue in 2006 as compared to 2005. In addition there was $1.2 million of non-cash expense in the quarter related to the adoption of an RSU retirement policy. Essentially, the policy allows our employees to retire and, provided they do not compete with us, continue to allow their RSUs to vest. According to SFAS No. 123R, this policy revision constitutes a modification of those equity awards; and, as a result, we are required to expense all the RSUs held by those consultants eligible to retire, even if they are still actively working for us.

Total equity-based compensation expense in the quarter was $7.1 million compared to $3.9 million in last year's third quarter. This increase is primarily a function of a greater proportion of a consultant's bonus being paid in RSUs but also reflects the $1.2 million in expense related to the modification I just discussed.

As a percentage of total salaries and benefits expense, fixed compensation increased to 66% from 63% in last year's third quarter. Bonus expense, or discretionary compensation expense, was $28.4 million in the quarter and represented 34% of salaries & benefits expense compared to 37% in last year's third quarter. Fixed compensation was higher on an absolute and relative basis as a result of the increased consultant and other employee headcount. Discretionary compensation, or bonus expense, increased in absolute dollars as a function of higher expected revenue levels in 2006.

For the full year, we are expecting total cash and equity bonus expense to be approximately $105 to $110 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, accordingly, the cash compensation will be slightly lower on a percentage basis.

Moving on, general and administrative expenses in the quarter were $23.5 million, a slight decrease of less than 1% from last year's third quarter. And, as a percentage of revenue, G&A expenses decreased to 18.9%, compared to 21.7% last year. We continue to closely manage G&A and are very pleased with this quarter's result. Our plan is to continue to hold G&A as low as possible, although expenses related to our integration of Highland Partners will affect G&A in the fourth quarter of this year. The good news is that we're moving very quickly to integrate this business. For example, we're holding a number of industry practice meetings in order to integrate their partners and begin maximizing the working relationships among our consultants as well as our clients. We are working on an aggressive real estate consolidation plan, and we are training to integrate their partners onto our platform.

Corporate expenses increased year over year in the quarter by about $1.5 million, or 23%. This was due to about $900,000 in severance costs, options expense and some integration planning expenses.

We reported net income in the third quarter of $11.2 million and fully diluted earnings per share of $0.60. These results reflect a third quarter tax rate of 41.9%, slightly higher, but still in line with our expectations for an annual effective tax rate of approximately 40%.

Moving to slides 12 and 13 - Cash Flows and Balance Sheet Items. The cash, cash equivalents and short-term investments balance as of September 30 was $197.4 million. As a reminder, this cash balance does not reflect our initial payment to Hudson Highland Group of $36.6 million for the acquisition of Highland Partners that was closed on October 2, 2006.

Net cash provided by operating activities was $44.3 million in the quarter, compared to $38.3 million in last year's third quarter. This increase is as a result of higher net revenue levels this year.

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 into one payment, in the first quarter of 2007, which will result in a one-time year-over-year increase to cash flow in the fourth quarter of 2006.

Turning to slide 14, I'd like to briefly highlight our first nine months' results. Net revenue of $346.3 million for the first nine months of 2006 is up 11.1% compared to the first nine months of 2005. Operating income of $41.5 million represents a 12% operating margin for the first nine months, which is right on target in relation to our annual guidance. Net income of $27.5 million and diluted earnings per share of $1.45 reflect an effective tax rate of 40.3%. 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 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 allow me to give you a quick overview of regional results. Please turn to the Americas results on slide 15. Net revenue of $67.9 million in the quarter was up 4.1% year over year. We are not satisfied with this level of growth and are taking concerted steps to focus on this region's growth going forward.

Operating income was $14.9 million, up 2.8% year over year. As you know, we have significantly increased our level of hiring over the last year, and this has impacted the operating margin. In fact, consultant headcount at the end of September was 182 in the Americas, up by 24 people, or 15%, compared to last year at this time.

In addition to the increase in fixed salaries and employee benefits, the Americas operating income was also impacted by higher bonus accruals in the quarter that are based on our expectation for higher revenue levels for the year. It was also the region most affected by the change in our RSU retirement policy as well as the expensing of stock options, which were not recorded last year.

Turning to slide 16, we are very pleased with the continuation of good year-over-year and sequential improvements in the European region.

Third quarter revenue of $42.3 million was up 23.4% year over year and up 4.5% sequentially. In the quarter, the positive impact of foreign currency exchange represented 5.2 percentage points of the year-over-year revenue growth. All regions within Europe contributed to good revenue growth in the quarter.

Consultant headcount at the end of September was 121, up net 4 from the end of June and up by a net 14 consultants, or 13.1%, compared to September of last year.

Despite the increased investment in hiring, Europe's third quarter operating income and operating margins both reflect strong year-over-year and sequential improvements that reflect higher revenue levels driven by increased productivity and higher average fees per search, as well as from continued cost containment initiatives.

Turning next to slide 17 and the Asia Pacific region, the Asia Pacific region turned in yet another record quarter, with $14.5 million in revenue, up 42.8% year over year and up 25.1% sequentially. Almost all the offices across the region contributed significantly to growth; but Hong Kong, Sydney, Tokyo, Singapore and the Indian offices turned in especially strong results.

Operating income was up 68.3% year over year; and the operating margin was 30.7%, largely driven by increased consultant productivity.

Consultant headcount was 41 at the end of the third quarter, but we have 5 new hires that are already started or are scheduled to start in the fourth quarter.

Finally, I'd like to quickly review with you the status of our integration of Highland Partners. As you know, all of the 48 consultants who were offered employment agreements accepted, and we closed the acquisition October 2. We set forth a very aggressive plan for Highland Partners to be fully integrated within one year. We engaged the assistance of Ernst & Young's Transition Services to manage the project. They are assisted by several people from Heidrick & Struggles who are dedicated to ensuring a successful integration, as well as John Wallace, Highland Partners' former CEO and chief operating officer, and Chris Beck, their former CFO. On slide 22, we've highlighted some of the accomplishments to date.

On slide 23, we've outlined some of the value drivers of the transaction. In terms of cost synergies, there are three primary buckets for savings. The first, which will be realized after January 1, 2007, is a function of Highland Partners transitioning over to the Heidrick & Struggles compensation plan.

The second element of savings is simply a function of our being able to reduce duplicate administrative costs for things like insurance, communications, marketing materials, professional fees like legal and accounting, and the elimination of administrative costs.

Combining our real estate is the third major area of savings. Highland Partners had fourteen offices - one in Sydney Australia, one in London, one in [Tokyo] [sic - later corrected to Toronto] and the rest in the US. Eleven of these locations are in cities where we already have an office. We have already merged or combined several Highland Partners' offices into our existing space and expect to have seven offices merged by the end of this year. Five others will be merged into our office system by mid-2007.

And in two cities, neither of our offices can accommodate the combination. But we feel very strongly about everyone being together, so we're in the process of evaluating several options for expanding current space or moving to new space.

While executing on cost synergies, we are focused on achieving revenue growth opportunities. Office managing partners in each city and managing partners of each practice are all working towards common goals of our integration plan. At the most basic level, we are intent on retaining the top-performing consultants who joined Heidrick & Struggles by providing the necessary training and support to increase their productivity and help ensure that they are successful on our platform, using our brand. In addition, we are methodically working through each of our client lists in order to capitalize on the current relationships with our new or expanded practice expertise and/or geographic reach.

Guidance. To account for one quarter of Highland Partners' results, we have revised our 2006 annual guidance for net revenue of between $465 million and $475 million.

Since our operating margin was 12% for the first nine months, we were definitely tracking towards achieving our annual guidance for an operating margin of 12%. But now, with the acquisition, there will be some incremental spending that we did not anticipate when the year began. As I discussed a few minutes ago, we are moving very quickly to integrate this business. But to realize the full potential of this acquisition, we need to spend some money to get there, and that will put some pressure on the fourth quarter operating margin. The timing and the extent of these integration costs are one reason for an operating margin range of between 11% and 12% for the full year. The other factor associated with the acquisition of Highland Partners that is affecting the fourth quarter operating margin is the amortization of cash and equity retention bonuses for the former Highland consultants. The cash bonuses are three-year, cliff-vested bonuses which we began accruing for on October 2 when the acquisition was completed. Only those consultants who remain with Heidrick & Struggles for three years will be eligible to receive the cash bonus. Next year, in 2007, one of the key synergies kicks in when all of their consultants move to our compensation plan. So it is really the fourth quarter that is bearing the brunt of integration costs without all the expected synergies.

Net income and earnings per share are expected to reflect a full-year effective tax rate of approximately 40%.

With that review of our strong third quarter, nine months and regional results, I'll turn the call back to Kevin.

Kevin Kelly. When I first took this job six weeks ago, I saw huge opportunity for us as an organization. The last three years we spent righting the ship and were focused on getting the margins to the highest that they had ever been and, specifically, on establishing a new platform for success in Europe.

Now, we are switching our efforts from internal to external, and it is my responsibility to accelerate growth, especially in the Americas region. We're going to do this by focusing on three things - one, capitalizing on our current assets; two, unleashing the talent of the strategic hires we've made in the last year, as well as those we've invested in with our acquisition of Highland Partners; and, three, differentiation through innovation - challenging ourselves to find new and better ways to do things.

The business model in this industry is over a half a century old, and it's served us well. Now it's time to be more creative. But first, let me reassure you that this management team remains committed to profitable growth worldwide but especially to continued margin improvements in Europe.

Shortly after assuming my role in September, I announced new leadership changes in all our regions. Gerry Davis, who has been a key producer and manager for the last eight years at Heidrick & Struggles, was named the Regional Managing Partner of the Asia Pacific region. And in Europe, I named David Peters as the Regional Managing Partner, who is very qualified to continue the job that we started in the European region a little over a year ago.

David turned around our London office, our firm's largest office worldwide, which went from being one of our greatest risks in 2001 to one of the strongest performers in the two years under his leadership. He is a strong driver of positive culture. He already has the hearts and minds of our leaders in EMEA, and he is completely aligned around our vision.

And, because I have named two regional managing partners for Asia Pacific and EMEA, Jeff Scherb, who moved his family from the states to London to assist me with running both regions as COO, will be returning to the United States at the end of the year to retire. We wish him the best and thank him for his role in our success in Europe.

Another priority for us is realizing the successful integration of Highland Partners, which Eileen discussed above.

So we have a big job ahead, and I'm very excited about it. I've spent the better part of my business life in leadership roles and speaking to those in senior leadership positions of one kind or another. I have come away with certain observations about what it takes to get things done. It comes down to competitive spirit and a desire to win, where everyone wins - employees, clients and shareholders alike.

To get there, we all have to get behind one mission. That mission is to accelerate our growth globally, to seize market leadership at every opportunity and in every market which we serve, and to show a solid return on investments we've made in our people and business over the last year in a way that rewards everyone.

Let me give you a few examples of our plans for growth that I mentioned earlier. First, by capitalizing on our assets, I mean, leveraging all our intellectual capital in new and creative ways and, two, by better leveraging the global relationships that we have with the C-suite.

Secondly, to accelerate our growth, we must tap the talent of strategic hires that we have made in the last year as well as those who joined us from Highland Partners. Talent management is a vital competitive advantage for us and consequently a key priority for me. To get a return on our investments, we need to lead with an integrated approach to recruiting, on-boarding, performance support and coaching, and learning and development for all our people. To that end, I have appointed our first-ever Global Head of Talent, Amanda Alexander.

My third focus is aimed at accelerating our growth and to differentiate Heidrick & Struggles through innovation - that is, to challenge ourselves to find new and better ways to do things. Towards this effort, we have already established a team that is tasked with innovation in some very key areas of our business.

We are well positioned to grow. There are many demographic and other trends that point to a very robust market for our services. You can't pick up a paper without reading about the global war for talent. The October 7 cover story of "The Economist" magazine is just one example of an article that discusses the trends that are making talent the world's most sought-after commodity.

So it all comes down to this. We are already underway in what I can only describe as a big next step in the history of Heidrick & Struggles. It's based on some very simple propositions. One, we see huge opportunities to grow, and we will seize those opportunities, just like we have already done with our acquisition of Highland Partners. Two, we will be very focused on performance that produces measurable results for employees, clients and shareholders alike, year after year.

We've already shown record performance in parts of our business, and through continued focus on our key initiatives and good execution, we expect this will continue.

Now, here's what you can expect from me - a continued focus on margin improvement, not just in Europe but across the globe, a continued focus on making sure this acquisition is a win/win, and a focus on accelerating our top line growth, especially in our Americas region.

Thanks for your time today, and I look forward to meeting all of you. In the meantime, we would welcome your questions.

Operator. [OPERATOR INSTRUCTIONS]. Our first question comes from Matt Litfin with William Blair.

Good morning, and congratulations on the strong September quarter. Looking at slide 7, last year, it appears that confirmations dropped off considerably beginning in November and, as I recall, going through January-- from the October levels. I wondered; is that a seasonal pattern that you expect to see reoccur this year, or was there a specific reason that that occurred last year that you can point to?

Matt, let me answer that, and I'm sure Kevin will have something he wants to add as well to give some color. There isn't any consistent seasonal trend, as you know, since you've followed this stock for some time. It used to be that, actually, fourth quarter was a relatively weak quarter; but that has been a seasonal trend that's been overcome in the last couple of years, where it has been, on occasion, our strongest quarter. We do not see that weakness in confirmations in October confirmations. We aren't anticipating it in terms of November confirmations. So, we don't expect to see that pattern repeat this year.

Okay. As you have owned Highland for the past month, what metrics are you monitoring to judge their success, and how are those tracking against your hopes and expectations?

We're really using the same metrics we use for our own business, which is fee per search, productivity levels, confirmation levels. Certainly, there's been some time spent in terms of training people on our systems. These are all experienced searchers, so it's not as if they need to be trained how to conduct search but, really, how to just work within the Heidrick system. So, there's been a little bit of ramp-up time on that. But we've been very encouraged not only by the productivity of the Highland partners who've come over to become Heidrick & Struggles partners but the fact that they're working together with a lot of the Heidrick partners to win searches on a combined basis. That's the real upside, we think, for this opportunity in the acquisition.

Last question, if I could. Are there other Highland Partners out there? Do you expect industry consolidation to accelerate? If so, why would that be?

Matt, I guess the short answer is we look at opportunities, both to grow organically and through acquisitions all the time, but it has to make sense for us as a firm and for our shareholders.

There's nothing that you see about the industry today that requires more consolidation, such as new developments in information technology and databases and more advantages going to the global firms?

Well, I think that, certainly, the firms with global network have an advantage. I think it's going to be difficult for anyone to build another global network because it's just so costly. It's difficult to do. I don't see, although I could be proven wrong, another global executive search network being built. But it's still a very highly fragmented industry, and there are an awful lot of players who do very well without that global network. So, I do think there is an advantage, which we've talked about before, in terms of being able to serve the needs of multinational clients when you have an international network. I think that inures to Heidrick & Struggles as well as our closest competitors. But I certainly think there's a niche for people who do not have that kind of network. This is an industry that's growing very quickly, so the kind of boutiques are doing well in addition to the international network players. But it's highly fragmented, so the consolidation that you're talking about sort of goes on continuously in terms of people looking at small niche acquisitions. Whether or not that would bring a wave of broader consolidation is kind of anybody's guess.

Thank you.

Our next question is from Mike Carney with Aperion.

Good morning. Congratulations on the quarter. I've got a couple of questions. First, Eileen, what intangible amortization are you assuming annually now with the Highland Partners?

Specific to the Highland Partners?

Yes. Total or increased.

In terms of-- Let me talk first about the amortization of both the cash bonuses and the RSUs. We would anticipate that those-- only part of that's intangible. It's not really intangible; it's the equity, sort of non-cash component of it. We would expect that the amortization of that amount would be about $1 million a quarter going forward. In terms of the intangibles associated with Highland Partners, we have a range on that, Mike; but we haven't exactly tied it down because we're still working through our purchase accounting with our auditors.

Okay. It's going to be significant, though; right, or material?

Well, I don't think it will be material because we don't see that there are significant intangibles that need to be amortized. For example, the trademark would not be a significant intangible to be amortized. The employment contracts are not such that they have to be amortized in such a way that it would be significant.

Customers, though? Customer lists? Or, are those not significant?

We wouldn't expect it to have a significant effect on our results. Most of the purchase price allocation will largely go to goodwill. We can give you a better sense of that when we report fourth quarter earnings because, as you know, it can take as much as a year to finalize your purchase accounting, although we expect that we'd have pretty good visibility on it by fourth quarter earnings.

Okay. Also, the increase-- Well, one more detail question here. On the partners meeting, has that been pushed back? I think you may have talked about that before, but I can't remember.

We are not having a worldwide partner meeting this year in 2006. I know that we plan to have a worldwide partner meeting next year. But that cost will not be in our P&L in the fourth quarter, Mike.

Okay. So, it won't be in the fourth quarter, but do you know what quarter it will be in?

We haven't planned for it yet for next year. We're budgeting for next year. When we give you guidance for 2007, we'll give you a sense of which quarter to expect that expense.

Okay. Also, the revenue guidance-- the midpoint is increased by $15 million. Some of that is probably some upside from this quarter. But that still seems to imply that the consultants from Highland Partners are ramping up, basically, completely in the fourth quarter. Is that correct?

The guidance that we're giving you for the full year-- Obviously, since you have 345 through the first nine months, that will get you to the number for the fourth quarter. That's our sense of our own internal forecast, layered on top of it the productivity levels of the new partners from Highland who are now on the Heidrick & Struggles platform.

How quickly to you think that the consultants from Highland Partners can get back to their past productivity level?

Mike, with any new hire, it takes anywhere from 9 to 18 months. We project that anywhere from 3 to 6 months, the Highland Partners should get fully inculcated in the system here. It's going to be different because you're looking at 48, plus or minus, consultants across the globe. It depends in which country in which they operate and how quickly we integrate them into the practice and office structure.

Kevin, I think you mentioned in October-- you mentioned something about confirmations in October. Can you repeat that - what you expected for October?

What I mentioned is that it's too early to tell, given this is the last day of the month. But, we are estimating that we see the trend of confirmations being fairly in line with what they've been over the last-- or, I guess, steady over what they've been over the last couple of months.

Okay. Over the last couple of months-- not October of last year.

No; the last couple months of 2006.

Okay. One final question. You expect 10% new consultants in 2006; is that on--? That's not including the Highland Partners' consultants, I assume?

Yes; that's right. We'd expect net 10%, and we're tracking towards that at the end of the third quarter.

Okay; excluding the new Highland Partners?

Yes.

Okay. All right. Thank you very much.

Our next question comes from Michel Morin with Merrill Lynch.

Eileen, I just wanted to first clarify that the $1.2 million was really a one-time catch up.

Yes; it was. It's really a three-quarter catch up. But there is a cost going forward in terms of people who become eligible to retire at any given time. It's an age and service combination. But, yes; it's a one-time catch up.

Right. Going forward, it's a much, much smaller number.

Yes. Q4, there will be an amount that's about the same because some people become eligible to retire at that point. But, after that, it should be a smaller amount. Some of that has to do with just, frankly, the makeup of the consultants that we have, Michel.

Okay. Then, just on the Americas' growth rate, are we talking the business is lumpy here, and there are some ups and downs? Or, was there more of an execution issue? Or, maybe, was it distraction from the Highland Partners acquisition?

I think the short answer is that we didn't capitalize in the downturn of the market as well as our competitors two or three years ago. We've fixed that by recruiting 27 consultants over the last 18 months. What you'll see is that it will take anywhere from, as I mentioned before, 9 to 18 months to get them up to speed. We also need to focus on our technology practice, on our life sciences practice and also our private equity practices. We see a lot of opportunity there as an organization.

Okay. Finally, in Europe, very solid trends there. Is there anything that you may have noticed that's changed in a particular country, either at the macro level or in terms of the demand you're seeing from any of the verticals? Either by vertical or by country, is there any major change in trend there recently?

I think from a macroeconomic perspective, Germany's picking up. We see most of our offices performing extremely well there. You have central and eastern Europe right now, which is an emerging market we're focusing on. They're seeing significant growth. You're seeing growth in Russia as well. But, overall, whether it's the UK all the way across to Italy or up to Moscow, most of our offices in EMEA are performing and doing a great job. A lot of that I attribute to, one, the market's picking up, vis a vis executive search, and, two, a lot of the things that we've done as an organization these last 18 months to make sure that we're supporting our consultants in every which way we can to get them out in the market and serve our clients on a global basis.

Great. Thank you.

Our next question comes from Mark Marcon with R. W. Baird.

Good morning, and congratulations to you, Kevin, with regards to your new position. I was wondering with regards to Asia Pac-- obviously, a tremendous performance there, particularly in terms of productivity picking up. Can you talk a little bit about what the key drivers are there, and to what extent is the strong performance, particularly on the margin side, sustainable?

Let me talk about the margin a little bit, and I'm sure Kevin will want to talk about the market. We have a very strong management team in Asia. They have grown that business and grown it profitably very successfully. Mark, you know that the margin kind of moves around quarter to quarter, dependent on many things, including bonus accruals and revenue levels. Would I expect to see a 30% or 30.7% margin every quarter going forward? No. But that's a very profitable region, and I think it will remain profitable. There's enormous growth opportunity for us there. And, the team there is very focused on continuing to deliver on a model that really has a high level of profitability. So, I think, certainly, margins in the mid 20s to higher are sustainable long term, even with very high growth rates in the Asia Pac region.

Mark, thanks. I'm a little biased, but I think we have some of the best people in Asia Pacific out of any search firm. We spent a lot of time investing in them over the last three years, bringing them together, focusing on teamwork, collaboration and what it takes to get out into the market and serve clients. I think it shows that through getting great people into the firm, you'll see an increase in revenue and service around our clients. I think that's what you're seeing in Asia Pacific right now, and that's something that we need to focus on or continue to focus on in other parts of the world.

You clearly mentioned the Americas as an area for improvement. Were there any practices--? It sounds like maybe tech was a little bit lower than expected. Is that a correct assumption?

That's a correct assumption. I think I just mentioned this a couple of minutes ago. The three areas that we need to focus on are the technology practice, life sciences, which-- by the way, we've come a long way in life sciences-- and private equity. At the same time, we also need to focus on how we leverage the engine over here in North America and drive our large U.S. accounts into places like I mentioned before - Europe, central and eastern Europe, Moscow, as well as Asia Pacific. I think through doing that, you'll see a lift in the U.S. business as well.

Okay. What specifically can you do in the tech practice or in the life sciences practice to improve things? It looks like you've added to headcount fairly significantly, but we haven't seen the productivity come through.

Well, we've added in both over the last couple of months. As I mentioned earlier, sometimes, even if you come from another top search firm, it can still take you three to six months. So, we project starting in January to see a little upswing in regard to the hires that we've made over the last two or three months.

I think the other thing I'd say, Mark, is the productivity rates, even with pretty robust hiring, are still about the highest levels ever that Heidrick's had, over $1.4 million. So, I take your point that you'd like to see that at higher levels; but, actually, we're very encouraged by the fact that we've been able to really sustain that productivity, even with a lot of new hires.

Got it. But, primarily, just in terms of accelerating the growth in the Americas, it's primarily going to be a function of seasoning. I just want to make sure I'm correctly interpreting it.

In terms of getting people productive who we've hired, I think it's a number of things Kevin mentioned. First of all, there are key verticals where we feel that we still have talent gaps that we need to fill. That's why he'd mentioned Amanda Alexander as our Global Head of Talent to make sure that we fill those. Certainly, the people who we've brought on board we have to make sure that they succeed and are successful and successful on our platform, both the Highland Partners people who've come over and are now Heidrick & Struggles partners and the people who we've hired. So, there's an enormous capacity for revenue growth over the next couple of quarters to the extent that we can deliver and execute on really delivering the kind of productivity that that talent can bring to the firm.

Great. Then, with regards to, essentially, the guidance for the fourth quarter, since we already have the first three quarters, can you talk a little bit about the impact, more granularly, in terms of Highland? In other words, in terms of revenue expectations, in terms of the agreement that you signed-- Those Highland partners should be able to continue their old searches; shouldn't they, the ones that haven't been fully completed? Or, are those being terminated? In other words, how should we think about their productivity coming over?

Secondly, on the real estate side, you're obviously going through a lot of integration. Can you talk a little bit about the one-time integration expenses that you're assuming for the fourth quarter?

Sure. First of all, in terms of productivity - whether or not the Highland partners can bring over their searches, they're continuing their searches for their clients. Whether or not that's revenue that inures to us depends on where they were in the search. But we hope that as they come over and work with our practice groups that, obviously, their practices will continue to prosper and grow. So, to Kevin's point, we think that they can be up to speed in terms of their reasonable and recent level of productivity at the next couple of months.

In terms of the costs associated with integration, really, the costs break into a couple of buckets. One of them, a major bucket, is really the meetings that we need to have in terms of getting our practice people together with the Highland partners. We do have some information technology integration costs. We have some real estate costs. So, we're expecting, net of the synergies that we'll get in the fourth quarter, that it will be close to $800,000 in terms of costs. In addition to that, as I mentioned before, we have the amortization of the cash stay bonuses and the RSUs that we granted to each of the Highland partners. That's, again, about another $1 million. So without, really, many of the synergies in the fourth quarter, although we're moving quickly on the real estate, you'll have about $1.8 million in additional costs associated with that.

I haven't run through the math yet; but if we didn't have Highland, would you be achieving your 12%?

We feel very confident that we would achieve a 12% operating margin. As I noted, actually, we're at a 12.1% operating margin through the first nine months; and we were really spot on to be able to meet or exceed that in the fourth quarter.

Perfect. Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from Tobey Sommer with SunTrust Robinson.

Good morning; it's Mike Fitz on for Tobey this morning. I just wanted to start off with a quick question for Kevin. You mentioned that they may be looking at some creative ways to grow the Company. I'm just wondering what your appetite is for, maybe, branching out into some alternative services. And, if you have an appetite for that, maybe you could discuss what some of those may be.

Let me give you four quick examples - finance, for example, regarding how we make money. How do we make money from our assets - our people, our knowledge management center? How do we leverage our relationships across the globe? I mentioned private equity earlier in terms of delivery and cycle time. There's a disconnect today with the private equity. They want top-class executives anywhere in the world in 24 hours. How do we create the ability to go out and service our clients and give them what we need versus going back to, as I mentioned earlier, the business model that's 53 years old that takes three to four months to deliver on? Again, to your point, Mike, innovation-- does it make sense? Asking our clients what is it that they want-- are there different product offerings that we can explore? That's something we're taking a look at now. We may come back, and there may be an answer that everything we're doing today is what we're supposed to be doing. But we're at least exploring whether or not there are creative or innovative ways to drive this business.

Moving on to a detail question, I'm just wondering if you could discuss the geographic breakdown of the Highlands Partners, kind of a mix between the Americas and Europe and Asia.

Sure. It was largely a U.S. business, so these are just rough numbers. For 40 of the consultants were in North America. Then, there were 2 in Australia and about 5 or 6 in London. Earlier, I said that they had an office in Tokyo, and I misspoke. Actually, it was in Toronto. So, most of the real bulk of the business was in North America.

Okay. Then, one last question, if I could. Could you just discuss some of the hiring environment and what you're seeing when you're out looking to add consultants?

We're consistently looking at hiring top-class people around the globe. Right now, I think we're seeing some great individuals, both from search and on search backgrounds. We'll continue to focus on across the globe, as I mentioned earlier, particularly in Asia Pacific as that market is growing, and also EMEA as that market is growing as well, on adding consultants where it makes sense.

Thank you very much.

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

I think, Kevin, you answered my innovation question. I just have one other question on the partners meeting. When did you decide not to do the partners meeting? Was that a function of the acquisition?

Let me answer that, and I know Kevin will follow on with it. I think, really, that was a decision that Tom made during the transition of him moving to be Chairman and the search for a CEO. He felt it was appropriate to really allow that partners meeting to be the new CEO's meeting. It wasn't clear how long that search would take; and, given that, we really decided that it would make sense to move that into next year so that the new CEO could make that his or her new meeting-- their own meeting. Now Kevin has the opportunity in 2007 to really put his stamp on the firm with that meeting.

Kevin, I assume the meetings are going to go as they used to go?

Yes; they will. Over the course of the next couple of weeks, I'm sitting down with the operating committee and some other consultants across the globe, and we're going to come up with a date that makes sense for everyone. We'll come up with that date probably somewhere in the next couple of weeks.

But, basically, there's no plans to change up how you do the meeting or get rid of it, basically?

No; not at all. No; it's important to bring everyone across the globe together and talk about the direction we're heading as an organization. That's something we'll continue to do.

Okay. Thanks.

I would now like to turn the conference back over to Kevin Kelly.

Again, thanks to everyone for getting on the call. I look forward to meeting you. In the meantime, have a great Halloween.

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