Heidrick & Struggles International Inc (HSII) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your fourth quarter and year-end 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. You may begin, ma'am.

Thank you, and good morning. Thank you all for participating on our fourth quarter and 2006 conference call.

On today's call, from Heidrick & Struggles, are Kevin Kelly, Chief Executive Officer, and Eileen Kamerick, our Chief Financial Officer and Chief Administrative Officer. Kevin will start by discussing some of the operational and financial highlights of our fourth quarter and the year, and then Eileen will review the financial results in a little bit more detail. We will then discuss our outlook for 2007 and some of our growth and profitability initiatives. As a reminder, there are supporting slides that are available on our website at heidrick.com to accompany our remarks today.

As always, we advise you that this call may not be reproduced or retransmitted without our consent. We'll be making forward-looking statements on today's call and ask that you please refer to our Safe Harbor language that's contained in our news release, dated today, February 27, which was widely disseminated by the various news wires and other media this morning. The same Safe Harbor language is also on slide two 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 time to participate on today's call.

As Julie mentioned, I'm going to first highlight the fourth quarter and annual results, and then I'll come back, after Eileen's presentation, to give you a bit more insight into some of our 2007 initiatives.

Now, if you are following along with the slides we've posted on our website, I'm going to start with SLIDE number 3.

We had a great revenue quarter. Net revenue of $132.2 million was up 31.3% year-over-year and up 6.1% over third quarter. Even if we were to exclude revenue associated with our acquisition of Highland Partners of about $13.7 million, organic growth would have been at 17.7% year-over-year.

And although we maintain that our quarterly revenue trends are historically uneven, it's worth noting that this is the first time in the last five years we've achieved five sequential quarters of revenue growth. The growth came from all three regions -- Americas was up 23.7%, Europe up 44%, and Asia Pacific was up 36.1% year-over-year.

Of more significance to us, because our quarterly results can often be uneven, and because of the way we manage our business and provide guidance, is our full year revenue growth. 2006 net revenue of $478.5 million increased 16.1% over 2005, or 12.7%, without the contribution from Highland Partners.

All of our key growth drivers contributed to improved top-line results in 2006. First, turning to SLIDE 5. Consultant headcount at December 31 was 388, up 23% from 315 at the end of December 2005. This includes the addition of 48 consultants who came with our acquisition of Highland Partners. One of our key initiatives in 2006 was to increase the number of our consultants, and we believe this investment will help us to accelerate profitable growth in 2007 and beyond.

Turning to SLIDE 6. We signed contracts for 4,447 searches in 2006, up 9% compared to 2005. And our average fee per executive search in 2006 increased to $101,100 -- or 4.1% higher than the average fee per search in 2005. Now, as you know, the average fee per search can fluctuate from quarter-to-quarter, but we have been making a concerted effort, especially in Europe, to pursue more C-level work. In fact, average fees per search in Europe improved 13.5% over 2005.

Moving to SLIDE 7. Despite having added 75 net additional consultants to our ranks in 2006, the annualized revenue per consultant remained strong at $1.3 million. We are focused on helping our new consultants get up-to-speed as quickly as possible, while at the same time helping even our experienced consultants find ways to improve their productivity. This has taken on even higher priority given our acquisition of Highland Partners, since improving productivity amongst this group of consultants will further improve our returns on this acquisition.

Referring to SLIDES 8 through 11, our reported fourth quarter operating income was $8.5 million, representing a 6.5% operating margin, and our reported 2006 operating income was $50.0 million representing an operating margin of 10.5%. Now, as we explained in our release of February 7, the annual operating margin was below our guidance of 11 to 12% after we realized severance expense in the fourth quarter of $4.4 million, as well as some higher than average G&A expenses. If we were to exclude the severance expense taken in the year of $5.3 million, which we would consider to be more reflective of our core operations, then our operating margin would have been about 11.7%. I am disappointed that we did not meet our targeted operating margin for 2006, but I firmly believe that the actions we took in the fourth quarter are going to better position us to accelerate growth, more profitable growth, in 2007 and beyond.

The revenue contribution from Highland Partners, about $13.7 million in the fourth quarter, was right inline with our plan. But the integration implementation is ahead of where we expected to be right now. In the fourth quarter, we accelerated integration costs to achieve synergies earlier than we had planned. More specifically, the practice integrations are complete, all real estate moves and consolidations are complete, and there has been no consultant attrition to date. We anticipate that the total integration spend will be slightly less than our original budget. And notably, this acquisition, which we were initially modeling to be $0.04 accretive to our 2007 results, is now expected to be about $0.08 to $0.10 accretive, assuming planned revenue levels.

Now, with that quick overview of some of the key metrics, I will turn the call over to Eileen to give you more detail on the quarterly results.

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

Looking at SLIDE 13, revenue before reimbursements, or net revenue of $132.2 million, increased 31.3% year-over-year, and was up 6.1% sequentially. The impact of foreign currency exchange rates accounted for approximately 4 percentage points of year-over-year growth in the fourth quarter.

If you turn to SLIDE 14, Salaries and employee benefits expense in the fourth quarter was $93.9 million, or 71% of net revenue. This expense was up $27.2 million or 40.8% year-over-year. This increase reflects several items. Generally, salaries and employee benefits expense was up because our worldwide headcount was up by approximately 20% in 2006 and because higher net revenue levels mean higher bonus accruals. There was also approximately $12 million of compensation-related expense for the former Highland Partners' employees in the fourth quarter. As a percentage of their net revenue, this is quite high, but that is because they remained on their former compensation plan through the end of 2006. It also includes $1.2 million of quarterly amortization related to RSUs and retention bonuses, and some effects of purchase accounting. As of January 1, all employees are on our compensation plan. Additionally, there were one-time severance costs of $4.4 million which flowed through the fourth quarter, as well as $1.5 million of non-cash expense related to the adoption of an RSU retirement policy which we adopted in the third quarter.

Total stock-based compensation expense in the quarter was $6.5 million compared to $3.5 million in last year's fourth quarter. This increase is primarily a function of a greater proportion of a consultant's bonus being paid in RSUs -- this year 15 to 20%, whereas last year, it was 10%. The increased use of equity-based compensation has been a conscious decision aimed at further aligning the long-term interest of our consultants with our shareholders.

As a percentage of total salaries and benefits expense, fixed compensation increased to 71%, from 66% in last year's fourth quarter. Discretionary expense, or bonus expense, represented 29% of salaries & benefits expense, compared to 34% in last year's fourth quarter. Fixed compensation was higher on an absolute and relative basis as a result of the increased consultant and other employee headcount, but also reflects the severance expense in 2006 and the increased use of equity compensation. Discretionary compensation, or bonus expense, increased in absolute dollars as a function of higher revenue levels in 2006.

Turning back to SLIDE 13, General and administrative expenses in the quarter were $29.8 million, an increase compared to last year's fourth quarter and higher than what we had been averaging in the first three quarters of 2006. As a percentage of revenue, G&A expenses decreased, to 22.6%, compared to 23.8% last year. Approximately $3 million of the year-over-year increase in G&A is associated with the G&A expenses of Highland Partners and $2.8 million related to higher spending on non-rebillable travel expenses, fees paid for professional and advisory services for new tax and accounting rules, legal fees, and marketing.

While there will always be a certain level of G&A associated with having acquired 48 Highland Partners and their teams, the amount will fall in line with our levels during the course of 2007, as we finish rationalizing redundant administrative functions and finish the transitional services agreement with their former parent, Hudson Highland Group. As for the higher G&A spending from Heidrick & Struggles in the fourth quarter, while we believe much of the spending was one time in a nature, relating to travel following Kevin's appointment as CEO in September and the closing of our largest acquisition in October, we have put additional initiatives in place to control costs around non-rebillable travel and unbudgeted spending, and we remain focused on ensuring that our cost containment initiatives continue to be successful.

Corporate expenses increased by about $4.2 million in the quarter. Of this, $2.4 million relates to costs associated with the acquisition of Highland Partners, the majority of which relate to integration costs and fees incurred under the transitional services agreement. The remaining cost was primarily the result of increased fixed salaries and employee benefits expense, including some of the previously referenced severance expense.

We reported net income in the fourth quarter of $6.8 million and fully diluted earnings per share of $0.36. These results reflect a fourth quarter tax rate of 26.5%, after discrete items. The lower than expected fourth quarter and annual effective tax rates were primarily a result of our ability to benefit from foreign tax credits, as well as our identification of refund opportunities related to certain items in the U.S. tax return filings for the 2003-2005 tax years. 

Turning to SLIDE 15, I'd like to briefly highlight our full-year 2006 results. Net revenue of $478.5 million in 2006 was up 16.1% compared to 2005. Excluding the contribution from the former Highland Partners consultants of approximately $13.7 million, net revenue would have been up about 12.7% over 2005.

Moving down the income statement, for the year, salaries & benefits were $328.7 million, up 20%. Of this expense, approximately 68% was fixed and 32% was variable, or bonus-related, compensation. As a reminder, we have consolidated interim and final bonus payments for our consultants into one payment, which will be made next month. This allows us to calculate bonuses more precisely based on full-year results. In the first quarter, we will issue bonus awards of approximately $113 million, including approximately $99 million in cash and about $14 million worth of restricted stock units.

General and administrative expenses of $99.4 million were up only 5.3% over 2005 and, as a percentage of net revenue, decreased to 20.8% from 22.9% in 2005. We remain focused on cost controls to leverage our G&A costs and our goal is to continue to keep G&A close to 20% of net revenue on an annual basis.

As you know, we were tracking at a 12% operating margin for the first nine months of 2006. Our reported operating income of $50.0 million and a 10.5% operating margin reflect costs associated with our acquisition of Highland Partners, as well as the other fourth quarter items that I discussed a moment ago.

Net income of $34.2 million and diluted earnings per share of $1.81 reflect a full-year effective tax rate of 38%. 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.

Moving to SLIDES 17 & 18, cash flows and balance sheet items. Cash flow from operating activities was $60.4 million in the fourth quarter, compared to $19.4 million in last year's fourth quarter. And for the year, cash flow from operations was $99.8 million, compared to $33.4 million in 2005. The cash, cash equivalents and short-term investments balance as of December 31 was $220.8 million.

The increase in operating cash flow and the large cash balance at the end of the year, principally reflect the fact that we did not pay out any portion of our consultants' bonus in December, as we have in the past. We will now pay bonuses for the calendar year in March of the following year.

As a reminder, two significant uses of cash in 2006, to increase shareholder value, were $51.7 million in share repurchases and our initial payment of $36.6 million for Highland Partners.

Looking at regional results -- please turn to the Americas results on SLIDE 19. Net revenue of $73.7 million in the quarter was up 23.7% year-over-year. Excluding revenue associated with Highland Partners of $10.9 million, Americas' fourth quarter revenue was up 5.5% over 2005 revenue.

Operating income in the fourth quarter was $13.2 million, up 17.6% year-over-year. And the operating margin was 17.9%, compared to 18.8% in last year's fourth quarter. For the full year, revenue in the Americas of $265.4 million was up 11.2%, operating income was up 7.1%, and the operating margin was 20.3%. The decrease in the fourth quarter and 2006 operating margin primarily reflect the fact that our total headcount in the Americas region increased 27% during the year, including the net addition of 53 search consultants.

In addition to the increase in fixed salaries and employee benefits, the Americas 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.

In January, we announced a new regional managing partner, John Hawkins. John was at Russell Reynolds for 10 years where he led that firm's global Health Care Sector and was later tapped to lead the global Board of Directors and CEO Practice. In 2001, John co-founded a specialty pharmaceuticals company and served as Executive Vice President of Corporate Development and External Affairs. John has successfully built businesses. He has the right combination of knowledge of search and corporate management experience to accelerate our revenue growth and profitability in this region.

Turning to SLIDE 20. We are very pleased with the continuation of good improvements in the European region. Fourth quarter revenue of $45.5 million was up 44% year-over-year and up 7.5% sequentially. In the quarter, the positive impact of foreign currency exchange represented 12 percentage points of the year-over-year revenue growth, and Highland Partners represented approximately $2.3 million of revenue. All countries within Europe contributed to good revenue growth in the quarter.

Operating income increased 21.9% in the quarter, and the operating margin was 5%. Excluding severance expense of approximately $2.9 million in Germany, which we believe better represents core operations, the operating margin would have been about 11.4%.

Looking at Europe's financial results on an annual basis, this region made a lot of measurable progress. Revenue was up 21.9%, operating income was up 94.5%, and the operating margin was 9.1%, compared to 5.7% last year. If we were to exclude the severance from annual results, the operating margin would have been approximately 10.9%.

The countries in this region have really come together as a team; and their progress is something they can all be proud of. But there is still much more opportunity in this region. David Peters, the new Regional Managing Partner, is committed to continuing the initiatives that Kevin and his team started on almost two years ago. They have a number of projects in place intended to accelerate top line growth, while continuing to improve operating margins.

Asia Pacific --turning next to SLIDE 21 and the Asia Pacific region, this region had another very strong quarter, with $13.1 million in revenue, up 36.1% year-over-year. Revenue associated with Highland Partners represented approximately $500,000. 2006 revenue of $49.5 million represents a 25.4% year-over-year growth rate in this region.

Fourth quarter operating income was up 11.3% year-over-year, and the operating margin was 25.6%. For the year, operating income was up 27.7% and the operating margin was 26.8%.

Consultant headcount was 45 at the end of the fourth quarter, but we have three new hires that have already started or are scheduled to start in the first quarter, as well as two consultants who joined us as part of our acquisition of Renton James in New Zealand, announced in January.

We also recently announced opening our third office in mainland China, in the heart of Chongqing, a major industrial base in southwest China in order to capitalize on the demand for executive search in this country.

Gerry Davis, who has been a key producer and manager for the last eight years at Heidrick & Struggles, was named Regional Managing Partner of this region at the end of last year. He has been instrumental in driving these initiatives and many more.

Looking forward in this region, we see continued growth opportunities in every country. Our biggest challenge in this region is to continue to hire new consultants, both experienced and new to search, to keep up with the growth, and this is one of this region's key initiatives in 2007.

Looking into 2007, we are seeing good business trends and continuing demand for executive search and leadership consulting services. If you refer to SLIDE number 24, January confirmations were at the highest level we have seen since June of 2002, and although we have not closed out the month of February, confirmations look good for February, as well. We expect to achieve net revenue for the year of between $560 million and $580 million in 2007, which represents between 17% and 21% growth over 2006 revenue.

As you know, we were tracking towards a 12% operating margin before our acquisition of Highland Partners. With actions taken in 2006 to accelerate this integration, we can focus on realizing maximum value from this transaction in 2007. Additionally, one of the key synergies was triggered on January 1 when all of the Highland Partners consultants moved to our compensation plan. With that said, we are aiming to achieve an operating margin in 2007 of approximately 13%. This operating margin reflects several scheduled costs and quarterly trends that we can tell you about now.

In the first quarter, our margin tends to be lower than our annual margin because, as with most professional services firms, fixed costs for things like social security hit in the first quarter. We also traditionally see incremental marketing spend in the first year [sic] which helps generate revenue throughout the year.

In the second quarter, we will hold our worldwide partners meeting at the beginning of June. We expect it will cost approximately $3 million for this meeting which will be very comprehensive in terms of training and, more specifically, to realize the synergies of our global key accounts and our practices in order to drive revenue and increase productivity.

Let me remind you that we are in year three of our initiative to award a portion of consultants' bonus in RSUs. Total equity based compensation expense in 2007 is expected to be between $30 million and $35 million and recognized fairly evenly throughout the year.

Net income and earnings per share are expected to reflect a full-year effective tax rate of between 42 to 48%. We know that is a fairly large range at this point, but we operate in a large number of countries around the world, and we are currently engaged in several tax planning strategies that could have a negative one-time impact on our tax rate in 2007 but a positive impact beginning in 2008. We will keep you updated each quarter on these initiatives and their expected impact on the effective tax rate.

For 2007, we are expecting to generate free cash flow of between $70 million to $75 million, before stock repurchases. We have approximately $39 million available on our share repurchase authorization, and we are continuously looking at all viable options that will maximize our ability to increase shareholder value.

With that review of the fourth quarter, the year, and our financial goals for 2007, I'll turn the call back to Kevin.

Thank you Eileen. I'd like to drill down a bit into some of the initiatives that we are focused on in 2007.

On our last quarterly conference call, on October 31, I shared with you our mission 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. I also discussed some of my thoughts for how we planned to accelerate growth, and I said we would initially focus on three things -- capitalize on our current assets; leverage the talent of the strategic hires we've made in the last 12-18 months, as well as those we've acquired; and differentiate our firm through innovation, meaning challenging ourselves to find new and better ways to do things.

Since our last call, let me tell you about some of the changes we've made as well as some specific initiatives in these three areas of focus that are going to help us drive profitable growth in 2007.

One, we added 75 net new consultants in 2006 alone, and we need to ensure that they are successful. As a start, I told you in October that I'd appointed a Global Head of Talent who is overseeing recruitment and development across the firm. We are very proud that we were able to maintain the productivity rates, in terms of revenue per consultant, that we enjoyed in 2005. But we know there is opportunity for improvement and know that improving productivity in the firm will be one of the keys to accelerating our growth in 2007.

Two, we are in the process of a fresh review of our firm's 53 year-old business model and the potential market we could serve. We are taking a thorough look at our business, our competitors, and markets adjacent to our search business to define our opportunities for growth, within and beyond our core business. And already this project has created new energy in our firm.

Three, we spent a lot of time in the fourth quarter reinvigorating two of our practices that I believe hold enormous growth potential for our firm -- our Global CEO and Board practice, as well as our global private equity practice -- and believe that we have a stronger offering going into 2007 with cohesive teams driving both.

Fourth, we've changed our tack on leadership consulting. My instinct is that this business has important strategic potential and that it should be a faster growing part of our business. So instead of managing it as a separate business, we have integrated the leadership consulting services into each practice and region so that these consultants are completely aligned and working side-by-side with the executive search consultants where there is greater opportunity for growth and profit.

Finally, it goes without saying that, along with these programs to drive revenue, we must stay focused on improving our operating margins. Achieving the target that we have set for ourselves will be a function of a number of initiatives working in tandem. First, we know that we must diligent about keeping G&A expenses as low as possible as a percentage of net revenue. A second key to enhancing our margins is to ensure that all of our consultants are working at the highest level of productivity that they can. A third driver is to continue to pursue, on a worldwide basis, more 'work at the top.' There are other drivers -- some are built into our business -- like the leverage inherent in our business model at higher revenue levels and the synergies that are still to be realized from our acquisition of Highland Partners.

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.

Thanks for your time today. And at this point in the call, we'd welcome any of your questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from Mike Carney.

Good morning. I wanted to ask a question. Eileen, I think you had mentioned that the RSU expense in '07 would be $30 million to $35 million. Is that correct?

The total equity expense, equity compensation expense. That includes options, as well. Our option expense this year is about $2.8 million. It's going to be approximately that next year.

Got it, and also, Kevin, you had mentioned an improvement in the CEO and Board in the private equity practice or an alignment. What was that?

Well, in brief, it's an -- I wouldn't say an improvement. We're focusing on a global basis. Through our numerous searches we did last year with globalization, we had numerous searches out of the U.S. where they were looking for board members from both Europe and Asia Pacific. So we're taking a more integrated approach to this practice globally to realize the synergies.

Okay, and then on the private equity practice it's the same? Or is there some new initiative there?

Well, it's the same. In addition to that, we're also looking at, as an organization, how we reduce cycle time in the search process to really benefit our private equity clients. As you may or may not know, when they're looking for executives, they want them yesterday. So we're trying to figure out a way that we can take a look at our business model in terms of cycle time.

Right, okay. And also, Eileen, can you speak to -- basically you're looking for lows 20s in the G&A in '07, so that's about what the trend had been for '06, excluding the fourth quarter. So really to get to the little bit higher operating margin in '07, you're looking for the salary and employee benefits line to come down slightly. Is that correct?

Yes, that's part of it, but also there are a couple of levers here, Mike. I mean, there's an opportunity to increase margin, obviously, in EMEA, which we've been on a track to do year-over-year. There's also an opportunity to increase margin in the Americas. We can leverage our fixed costs, but a big part of, frankly, expanding margin in all of the regions, but particularly in the Americas where we've hired lots of people in the last year and where the majority of the former Highland Partners are resident in the U.S., is frankly to get our people more productive. So that's just leveraging the fixed salary expense by making our consultants more productive. They win; we win; the shareholders win. So if they drive more revenue, we can get some leverage on those fixed salary costs. So it's not just leveraging G&A. It's having our consultants being more productive and particularly margin in EMEA and in the Americas.

Okay, thank you.

Our next question comes from Clint Fendley.

Yes, good morning. Kevin, I wondered if you could provide some more color on your comment on the examination of the core markets that you serve. Are you exploring the possibility of expanding your service beyond executive search here? Or were you merely referring to some of the reduced cycle time that you were hoping to gain with some of your private equity clients?

I think the short answer, Clint, would be both. We're trying to -- as I mentioned before, we're taking a hard look at our 53-year-old business model and trying to figure out how we can go to market and deliver to our clients at a faster, better, and more efficient pace. At the same time, we're taking a look at some of the other assets we have in the organization to see if it makes sense to look at ancillary businesses and/or products.

Okay, and could you talk, maybe, a bit about your longer-term leverage relative to your operating margin. How has it changed post the Highland acquisition here?

When you're talking about operating leverage, you mean in terms of fixed G&A costs? Or what's the question exactly?

I guess more inline with getting to the 13% operating margin that you've set out for '07.

Well, let me talk a little bit about Highland Partners. I mean, we talked about the fact that we had originally said it would be about $0.04 accretive next year. We think it's going to be more like $0.08 to $0.10 accretive and the reason for that is that we've moved very rapidly to take steps to integrate the business. Really that business is not a separate business anymore. All of the consultants are working in the same offices with their colleagues who are legacy Heidrick & Struggles consultants. So a lot of the G&A and also the real estate expense will fall away, and we're going to see very significant synergies associated with the legacy Highland Partners business in 2007. So that certainly is -- the synergies is one of the means by which we'll achieve that margin.

But as I said before, we have hired a number of people, particularly in the Americas, but in Asia and in Europe, as well, and we have fixed salary costs associated with those people. The extent to which we make those people and our legacy consultants more productive, that will give us leverage on those fixed salary costs, as well. So in terms of margin expansion, one of the major levers here, and one of the, frankly, investment hypotheses around buying Highland Partners was to, frankly, drive their level of productivity.

On average, they were doing fewer searches per year than the legacy Heidrick consultants, and to the extent that we can expand that and have them do more searches and at a higher fee level -- although their fee level was commensurate with Heidrick's; it's one of the reasons we were attracted to the acquisition -- all of that will both benefit them in terms of making more money but will also make the deal more accretive and have a better return for us. So there are a number of levers here in terms of reaching the 13% margin.

Thank you. That's very helpful. And Eileen, let me make sure I understand you correctly. If the tax planning strategies that you're talking about result in significant one-time charges, should we expect your tax rate to exceed the high end of your guidance range?

No. No, and let me elaborate a little bit on the tax planning. We have a couple of tax structures that are not particularly advantageous, particularly as our foreign operations have become more profitable. Specifically, we have some branches overseas that when you have losses, they're great because they flow back to your U.S. tax return. But now we've improved our businesses. They're more profitable. That's not a particularly tax effective means to have your business structured.

As a result, we're looking at means by which we may incorporate some of those branches. They could have a one-time negative effect on the effective tax rate. We don't expect that it will exceed 48%, and in fact, we hope that we'll, through tax planning, be able to bring that effective tax rate down, but we did want to alert you that we need to do this in order to ensure that we have a good effective tax rate, as low as possible, going into the future.

And as we look at the future in 2008 and beyond, I mean, is there still some possibility of recapturing some of your NOLs?

Yes. I mean, we have a $33 million dollar balance of NOLs, so there certainly is an opportunity for that, and I think longer term the most well-run professional services firms have an effective tax rate that's in the low 40s to high 30s, and that's where we're targeting. We're certainly focused on tax planning as effectively as possible.

Okay, and then final question here. Your restricted cash balance, what is this for?

Yes, there is about $7 million in restricted cash balance, and that is associated with litigation that we disclosed in our 10-Q earlier this year that has to do with a Spanish tax audit that is ongoing, and we were required to post an amount in that $7 million range in order to move forward in terms of contesting that litigation.

Okay, thank you.

Our next question comes from Michel Morin.

This is actually [Elliot Brook] here for Michel. Returning to the margins, do you think you can achieve the 13% margin goal if revenues come in at the low end of the range for 2007?

Yes, we have a model that we think makes sense. We still have a third of our costs that are variable, and that model is such that we think it's effective at $560 million that we'll be able to reach a 13% operating margin.

Okay, great. And the $1 million other expense, can you comment on that?

That is literally FX expense associated with some inter-company loans that we have in place.

Okay.

And you'll see that swing fairly regularly on a quarterly basis, just depending on FX rates.

Okay, and finally on the share buyback, was there a reason for the slowdown in repurchases this quarter? And is there plans to accelerate that?

Well, we always look to return cash to shareholders in the most effective means possible. As I said in 2006, we actually spent $51.7 million on stock repurchase. We're very focused on making sure that we return excess cash in the business to our shareholders. So we intend to do that in the future.

Okay, thank you very much.

Our next question comes from Matt Litfin.

Yes, a follow up on the tax-planning question. Is it possible that the moves you're describing for 2007 could potentially bring you to that long-term goal in the high 30s/low 40s-type tax rate in 2008?

Yes, it's possible for 2008, and we'll give you more visibility on that, Matt, as we go through the year and perfect that tax planning.

Great.

I can't forecast to that right now without knowing more, but we'll certainly give you more visibility to that throughout the year.

I just wondered if it long term was --

Four years away or more immediate. No, we certainly hope to accelerate that to get within the range that's really considered best practice for well-run public professional services firms.

Okay, great. And you mentioned that 15 to 20% of compensation in 2007 will be paid in the RSUs. Can you remind us what is the vesting scheduled for the four-year RSUs, and when are consultants allowed to sell that stock?

They vest over three years on a pro rata basis -- a third, a third, a third.

Okay, and can you, maybe just in tandem with that question, can you talk a little bit about trends you're seeing in terms of turnover? Obviously no Highland Partners consultants have turned over, but can you talk about your turnover and maybe compare it to what you're seeing in the industry?

Sure, I mean, I can give you just sort of the basic statistics, and then I'm sure Kevin will elaborate. You know, on a voluntary basis in terms of people who have left to go to other top tier or boutique firms, which is what I'm most concerned about and Kevin, as well, that remains below 5%, and that's the statistic that we're most concerned about. So our historical average, I think you know, Matt, is about 5% or less. That continues to trend at that level, and compared to other professional services firms, I will tell you, I think that's really a very low level, and we're continuing to see about that level.

The only thing I'd add, Matt, is that we really focus on retention, particularly in high growth areas -- I mean Europe, Asia Pacific, and even North America. We spend a lot of time making sure that we take care of the consultants that are driving revenue and profitability for the organization. So retention is key for us, just like our clients.

Great, thank you.

Our next question comes from [Jeff Mueller].

Good morning. It's Jeff Mueller in for Mark Marcon. I was hoping that you could drill down on your 2007 guidance, maybe talk a little bit about what type of headcount additions you're assuming or what type of productivity improvements you're assuming.

Well, in terms of headcount -- I think Kevin will want to address this, as well -- but we're really focused on being pretty strategic about where we hire. In the past, we've said that we wanted net headcount additions of about 10%. Given the fairly dramatic increase in the number of consultants that we've brought on in the last year, our real focus is to try to get the people who we have as productive as possible. And to that end, we have a productivity rate, which we measure as revenue per consultant, of about $1.3 million. We think there's certainly room to expand that to $1.4 million or $1.5 million, which would be really dramatic in terms of the effect on the P&L.

So in terms of hiring, I think Kevin's view is we're really going to focus on key niches where we want to drive growth in areas like life sciences and I know a couple of practice areas, particularly in Europe where we see a real opportunity.

And just to add to that, as we've discussed before, we hired numerous consultants in 2006, and as we've spoken about, historically it takes anywhere from 12 to 15 months for consultants to get up-to-speed. And what we're excited about is that most of those individuals we hired at the end of 2005/beginning of 2006 have really hit the ground running in 2007, and as Eileen mentioned, we're not going to go out and probably add 10% this year. We have targeted specific individuals in those practice areas where we see tremendous growth potential, particularly in Europe and North America.

Just to be clear, is that $1.4 to $1.5 -- is that your target for 2007?

Well, that's certainly what we would aspire to. We see the possibility of being able to get to that level or even exceed it. As you know, in terms of our business model, we had some uplift just from pricing, as well, and we have annualized in the past at $1.4 or almost $1.5 million.

Right.

That would be a very significant profit lever for us if we could bring all of our consultants up to that level. That's only an average. In the past, I mean, we've had people who've well-exceeded that, but obviously we have people under it. So to go back to Kevin's point, a lot of what we're doing in terms of training and on-boarding and productivity measures are a means of bringing the people who are below that average further up the curve and, frankly, allowing the people who are at the average to exceed it.

Okay, and then there was some talk about additional compensation expense related to the Highland Partners acquisition that more one time in nature. Is that just due to them being on their old bonus system? Or is there something else going on there?

No, there's -- really it's a couple of things. First of all, it's their old bonus system. There's the fact that there were a number of administrative and other corporate people who are sort of transitioning through, so we still had that expense. We did have some effect in terms of our purchase accounting, and then finally, there is an ongoing expense of about $1.2 million per quarter that has to do with the amortization of the RSUs and cash bonuses that we put in place for the Highland Partners consultants. That will move through the P&L every quarter for the next three years. They vest over the next three years as a retention mechanism.

Is there any sense that you can give us for how much you expect the Highland compensation component to decline by, you know, looking out to Q1 or Q2, as you continue to transition some of the administrative people?

If you look at that business, I mean, on a standalone basis -- but again, we've fully integrated it. We expect that business, by the end of this year, to be at margins that are comparable to our business. And really an awful lot of the synergies, we've moved forward, so I would not expect them to be significantly below our operating margins in first and second quarter. It's a little bit of an artificial question, because it's not a separate segment. It's not run as a separate business. We've moved those individuals in with teams from Heidrick, and they're operating really -- we're operating as one firm.

It's going to be difficult for us to really pull that out. We can give you a sense of what revenue is being generated by the former Highland Partners, but other than that, we've really moved out the cost structure, and we expect that that revenue will come in at margin that's commensurate with the rest of our business.

Okay, thank you. I'll jump back in the queue.

Our next question comes from Mike Carney.

I just wanted to follow up on the hiring. Kevin, you just mentioned North America and Europe, but I thought it seemed that Asia Pacific you would have hiring probably above 10%, if you could find the people, and in North America and Europe it'd be less. Is that correct?

Mike, absolutely. The challenge in Asia Pacific is it's a nascent -- the search business is nascent, and therefore, it's tough, as I mentioned earlier, to find search consultants. So a lot of time we have to hire new to search consultants. In Europe, we did a lot of hiring in 2006, as we did in North America. So what we're doing now, in addition to that, as you've seen, we've made an acquisition of Highland Partners. So as we look out in 2007, we're going to focus specific industry practices where we believe there's tremendous growth for us as an organization. So yes.

Okay, thanks.

Our next question comes from Tobey Sommer.

Thank you. I think you commented about the expectations for the volume of searches and maybe your pricing expectation for '07 that you implied in your revenue. But could you hit that again if you haven't? Thank you.

Well, there are a number of components that make up our revenue. First of all, in terms of how we budget for this, we do this from the bottom up. And this year, in particular, and Kevin may want to comment on this, we really budgeted through our practice. Although we have a regional administrative structure, most of our revenue is really driven through the practices. So in looking at the budgeting for this business, we think that what we've projected in terms of revenue is very reasonable.

Just as sort of a back of the envelope, Heidrick & Struggles, on a standalone basis, would have had revenue this year of about $465 million or so. If you assume that Highland Partners was say $45 to $50 million of revenue, and you assume that you retain all of those people and hold onto that revenue, you would have been at the year for about $515 million. We're projecting to that $560 to $580. We're very comfortable with that given the very granular budgeting exercise that we've done. It suggests a very reasonable level of growth that we can manage and manage profitably.

So when we look at how to build up a model of how we're going to grow there's certain pricing assumptions. We don't depend upon those, and we monitor our confirmations both by practice and by region on a day-by-day basis to see that we are actually on target in terms of the revenue that we need for the month, the quarter, and the year.

Okay. Could you give us a little bit of color on the consultant growth, which was up nicely year-over-year, even X the acquisition? Maybe just describe what proportion you're getting from internal promotions, hires from people with industry experience in executive search, and then maybe from vertical industries, as well. Thank you.

Well, in general we typically hire about of the third of the people that we bring in from the outside. Our experienced executive searchers, about two-thirds of them are new to search, and then of that group, there's a certain percentage, say 10 or 15%, who are internal promotions.

Is that consistent with what happened in 2006? Or is that just generally over time?

No, I think that's consistent with what we've done in 2006, and it's really our plan going forward. Those numbers can move around a little bit, but by and large, you want a mix. I mean, hiring people who are experienced searches is typically more expensive. Hiring people that are new to search is less expensive but somewhat riskier because they haven't done search before. So you're taking a bit of a gamble on whether or not they can succeed on our platform. It's one of the reasons why we've invested a lot in training and on-boarding to give those people the best possible opportunity to be successful.

So it's a balance. You couldn't hire all of your new consultants as established searchers. It's very expensive. On the other hand, you have to mitigate your revenue risk that you have with hiring new to search people with hiring established searchers so that you have some mix and have some certainty around the extent to which you can drive revenue and remain profitable. But it's really a mix of trying to get a sense of who you can bring on and how quickly they can be productive.

We're very conservative in budgeting revenue against new hires, even established people, because you bring searchers on from another platform, it takes them a little while to get up-to-speed. So we're quite conservative in assuming not much contribution for our new to search and our newly hired consultants.

To put it in perspective, in 2006, we hired 19 experienced search consultants. Now, just to put that in perspective, you need to understand that they could have come from boutiques similar to the Highland group. In addition to that, we hired 37 new to search consultants, and if I break it down by region, we have to look for new to search consultants in Asia Pacific, again, because it's a new business out there, and particularly in some of the new markets we enter and in Europe, as well, we have to focus on new to search consultants.

Thank you. That's very helpful. Looking at turnover within the business, I think -- I mean, you talked about around 5% voluntary turnover. Is that among the consultants? And if so, could you give us a sense for what it's like for the overall business outside of the consultants, as well? Thank you.

Outside of the consultants, you're talking about staff and associates?

Yes.

By and large, we don't track that particularly closely. We put a new plan in place to make sure that we hold onto our best and brightest in terms of the associate ranks. But in general, we've had a similarly favorable experience in terms of turnover among our support staff, as well.

It would just be like any other organization. We want to -- in a performance-based culture, we want to make sure that at every level, whether it's an EA, an associate, or a consultant, that we have the best individuals that we possibly can.

Thank you. I'll ask one last question. It looks like you're going to generate an awful lot of cash this year and in the prospects for 2008, probably, as well. Kevin, when you look out at the business several years, anything different that you would expect in terms of the revenue mix? If we're out in 2009, 2010, and you look at Heidrick, do you think that there'll be any substantial changes?

Well, unfortunately, I don't have a crystal ball, but I would image in that there will be a difference in terms of mix of revenue, whether it's leadership consulting. I mentioned before, we're always looking at new opportunities for us as an organization on how to get a better return for shareholders. So whether that is figuring out, again, how to drive cycle time, how to -- in terms of offerings, products, and services; in terms of brand, how we can be better or better position ourselves to clients; in terms of finance, how do we make more money.

So we're consistently looking at way to reinvent this business and then, again, capitalize on the assets we have as an organization. So the short answer is, yes, I would believe that in three to five years even you'd see a different mix in terms of our revenue. Can I pinpoint specifically at this point what that would look like? Unfortunately, I can't.

Thank you very much.

There are no further questions at this time, and I would now like to turn the conference back over to Mr. Kevin Kelly.

I would like to close today's call with just a couple of comments. We have just reported our fifth sequential quarter of revenue growth and are off to a great start in 2007. We are on our way to the successful integration of the largest acquisition in our history, and although G&A was up in the fourth quarter, we've been holding the line on G&A on an annual basis and have every intention of continuing on this path. We invested heavily in 2006 in new hires and are now committed to realizing the highest productivity from our consultants that we possibly can in order to realize the profitable growth objectives that all of us -- this management team, our employees and our shareholders -- want to achieve.

So thanks for your time today, and have a great day.

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