Heidrick & Struggles International Inc (HSII) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Heidrick & Struggles first quarter 2007 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded.

I will now turn the conference over to Julie Creed, Vice President of Investor Relations. Ms. Creed, please begin.

Thanks, and good morning, everyone. Thank you for participating in our first quarter conference call. On today's call from Heidrick & Struggles are Kevin Kelly, our Chief Executive Officer, and Eileen Kamerick, our Chief Financial Officer and Chief Administrative Officer. Kevin is going to start by discussing some of the operational and financial highlights of our first quarter, and Eileen will review the financial results in a little more detail.

As a reminder, there are supporting slides available for you on our website at www.heidrick.com on the Investor Relations home page that are going to accompany our remarks today. As always, we advise you that this call may not be reproduced or retransmitted without our consent. Also, we will be making forward-looking statements on today's call and ask that you please refer to our Safe Harbor language that's contained in our news release dated today, May 2, 2007 or on slide two of our presentation.

And at this point, I'll turn the call over to you, Kevin.

Thank you, Julie. And thanks to all of you who are taking the time to participate in our call today. As Julie mentioned, I'm going to first highlight the quarterly results and then I'll come back after Eileen's presentation to give you more insight into some of our current initiatives and how we see 2007 to date.

Now, if you are following along with the slides we've posted on our website, I'm going to start with slide number three. We had a great revenue quarter. Net revenue of $143.1 million was up 41% year-over-year and up 8.2% over the fourth quarter. Even if we took out the contribution from former Highland Partners Consultants of approximately $14 million in net revenue, organic year-over-year revenue growth would have been around 27%. And the growth came from all three regions. Americas was up 49.5%, Europe up 20.2%, and a record net revenue in Asia Pacific was up 66.9% year-over-year. All of our key growth drivers and operational metrics contributed to improved topline results in the first quarter.

Turning to slide four. Consultant headcount at March 31 was 414, up 24% compared to 333 at March 31, 2006, and up about 7% sequentially.

Turning to slides five and six, executive search confirmations were up 32.6% year-over-year and were up 24.6% sequentially. The average fee per executive search increased to $96,300 or 5.3% higher than the average fee per search in the first quarter of 2006.

Moving to slide 7, we are pleased to report that despite having added 81 consultants in the last year, annualized revenue per executive search consultant remains strong at $1.3 million. This is actually an increase from last year's first quarter and fourth quarter levels of $1.2 million. Enabling our new consultants to get up to speed as quickly as possible and improving the productivity of all of our consultants generally has been and will continue to be a very high priority for our Company.

Referring to slides eight and nine, first quarter operating income almost doubled over last year to $16.3 million from $8.4 million last year. Our first quarter operating margin increase from 8.3% to 11.4%.

And as shown on slides 10 and 11, net income of $10.1 million was up 70% over last year's first quarter net income of $5.9 million. Diluted earnings per common share increased to $0.53 compared to $0.30 last year.

With that quick overview of our great first quarter, I'll turn the call over to Eileen to give you some more detail on the quarterly results.

Thanks, Kevin. Looking at slide 12, revenue before reimbursements or net revenue of $143.1 million increased 41% year-over-year and was up 8.2% sequentially. The impact of foreign currency exchange rates accounted for approximately 5 percentage points of year-over-year growth in the first quarter.

As Kevin mentioned, net revenue associated with former Highland Partners Consultants represented approximately $14 million in the quarter. Because the HP Consultants and their teams are now fully integrated with our team, with many shared searches, we will no longer provide the approximate net revenue with the consolidated or regional level. Be assured, however, that our expectations for the contributions of this acquisition as a whole have been exceeded.

Turning to slide 13, salaries and employee benefits expense in the first quarter was $98.4 million or 68.7% of net revenue. This expense was up $28.2 million or 40.2% year-over-year. Fixed salaries and employee benefits expense increased $18.3 million and performance-based compensation increased $9.6 million. At the most basic level, this year-over-year increase in salaries and employee benefits expense was a function of the 21% year-over-year increase in our worldwide headcount, including a 24% increase in consultants.

Higher expected net revenue levels for 2007 also translate into higher bonus accruals and, as a reminder, the increase over last year also reflects $1.2 million of quarterly expense related to retention RSU's and retention cash bonuses for former Highland Partners Consultants.

Total stock based compensation expense in the quarter was $7.6 million compared to $4.9 million in last year's first quarter. This increase is primarily a function of a greater proportion of a consultant's bonus being paid in RSU's. It also reflects that we are in our third year of this program, referring to our strategy whereby a portion of consultant's and management's bonuses, 10% to 20% depending on the level, is paid in the form of restricted stock units that vest over three years.

We are very pleased with how the increase of equity based compensation programs has been received by our employees. We have been meeting with our consultants and other employees around the world to further educate them on how shareholders view the business, how we compare to our competition, and against other investment alternatives in the human capital space, and how our valuation is driven by a combination of business and operational metrics and how they can individually and collectively drive results.

Turning back to slide 12, general and administrative expenses in the quarter were $28.4 million, an increase of $5.7 million compared to last year's first quarter; but a decrease of $1.4 million compared to the fourth quarter. As a percentage of net revenue, G&A expenses decreased to 19.9% compared to 22.4% last year, which reflects our ongoing efforts to reduce operating expenses. Considering our acquisition of Highland Partners last October and a year-over-year revenue growth rate of 41%, the year-over-year increase in absolute dollars is within our expectations. If we can maintain G&A in the low 20% of net revenue level or lower, we will be quite pleased.

First quarter net income increased 70% to $10.1 million and diluted earnings per share were $0.53, reflecting a quarterly effective tax rate of 45.1% after discrete items. The discrete items in the first quarter primarily related to our ability to incorporate one of our largest branches, Japan, where we will now realize the benefits from a more efficient tax structure in that country going forward.

Needing to slides 14 and 15 -- cash flows and balance sheet items. Cash flow used in operating activities was $68.4 million in the first quarter compared to $35.3 million in last year's first quarter. The year-over-year increase reflects the fact that we paid all of the 2006 bonus to our employees in March 2007 as opposed to the 2005 bonus when we paid a portion to employees in December and a portion in March. The cash, cash equivalents, and short-term investments balance as of March 31 was $151.3 million. The decrease compared to December 31, 2006, again reflects a payment of approximately $98 million in cash bonuses in March 2007.

In the first quarter, we repurchased 286,318 shares at an average price of $47 for a total consideration of $13.5 million. There is $25.2 million remaining on the $50 million authorization by our Board.

Looking at regional results, please turn to the Americas results on slide 16. Net revenue of $83.4 million in the quarter was up 49.5% year-over-year and up 13.2% sequentially. Strong confirmation trends in this region really helped drive revenue growth in the quarter with every office and every practice group achieving revenue growth. Productivity and average fee per search also contributed to positive year-over-year results.

Operating income in the first quarter was $16.7 million, up 70.5% year-over-year and an increase of 26.7% sequentially. The operating margin for this region improved to 20% compared to 17.5% in last year's first quarter, and 17.9% in the fourth quarter of 2006.

Turning to slide 17, first quarter net revenue in Europe of $42.6 million was up 20.2% year-over-year, but down 6.4% sequentially. In the quarter, the positive impact of foreign currency exchange represented approximately 11 percentage points of the year-over-year revenue growth. The London office had a great quarter and was the primary driver of revenue growth in the EMEA region.

From a practice standpoint, the health-care, consumer and industrial groups were the largest contributors to net revenue. Operating income increased 34.3% in the quarter and increased 67.4% sequentially. The operating margin was 8.9% compared to 8% in last year's first quarter. Consultant headcount in EMEA in March 31 was 129, up 14% over last year, and we have five consultants who have just started or are expected to start in the second quarter.

A few weeks ago, we launched the fifth edition of our biannual European corporate governance report. This report has covered Europe's top 300 companies over the past eight years and provides a unique perspective on Europe's progress towards improved corporate governance. The press and media coverage has been very impressive, as has the reception from our clients and potential clients. I'd encourage you to visit the homepage of our website to review a copy.

Turning next to slide 18 in the Asia-Pacific region, this region turned in another record quarter with $17.2 million in revenue, up 66.9% year-over-year and up 30.9% sequentially. All but two offices in this region turned in at least 42% year-over-year growth, so we are quite diversified there in terms of revenue production.

With the completion of the acquisition of RENTONJAMES in Auckland, New Zealand on January 2, the contribution of the Highland Partners acquisition and an extensive hiring campaign in the Sydney office, the Australian, New Zealand area showed year-over-year revenue growth of 80% in the first quarter. Operating income of $4.4 million was up 71.3% year-over-year and the operating margin was 25.5% compared to 24.8% last year.

Consultant headcount was 52 at the end of the quarter, up almost 24% compared to a year ago and up almost 16% from December 31. Hiring in this high-growth region will remain a key priority during the next two quarters.

As we head into May, we continue to see good business trends and continuing demand for executive search and leadership consulting services. But as we have reiterated to you many times, we run this business on an annual basis because so many of our consultants and our clients also manage their recruiting plans on an annual basis. This is the primary reason that we went to an annual guidance in 2006 and because it is becoming the standard in terms of good corporate governance.

As such, despite a strong first quarter, we are reiterating our expectations to achieve net revenue of between $560 million and $580 million in 2007, representing growth of between 17% and 21% over 2006 net revenue. We are aiming to achieve an operating margin in 2007 of approximately 13%. This operating margin objective reflects several known costs today.

In the second quarter, at the beginning of June, we will hold our Worldwide Partners meeting. We expect the meeting will cost approximately $3 million, but we believe it is critical to our business development efforts and key to driving revenue growth through new practice and key account initiatives. Kevin will tell you a little bit more about our plans for this meeting in just a moment.

And as we announced a few weeks ago, Tom Friel will be retiring as Chairman of our Board on May 24th. In the second quarter, there will be a onetime non-cash charge of approximately $1.2 million associated with the vesting of Tom's outstanding equity in recognition of his 28 years of dedicated service to the Company.

Net income and earnings per share are expected to reflect a full year effective tax rate of between 42 and 48%. We know this is a fairly broad 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 onetime impact on our tax rate in 2007, but which we expect will have a positive impact beginning in 2008. We will continue to keep you updated each quarter on these initiatives and their anticipated impact on the effective tax rate going forward.

For 2007, we are expecting to generate free cash flow between $70 million to $75 million before stock repurchases. We have approximately $25 million available on our share repurchase authorization and we are continuously looking at all options that will maximize our ability to increase shareholder value.

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

Thank you, Eileen. I'd like to give you a very brief overview of a few of the initiatives we're looking at in 2007. On our last quarterly conference call, I told you about some of the actions we're taking to accelerate our growth globally and to increase profitability. I think that our first quarter results demonstrate that these initiatives are working and we'll continue to focus on making sure that these trends continue.

As I mentioned at the beginning of the call, we were able to increase productivity rates to $1.3 million in annualized net revenue for executive search consultants in the first quarter. This is a positive sign, given how much hiring we did last year. But like many of our other metrics, this productivity number can vary from quarter to quarter, and we know that our work is not done.

One of the keys to accelerating our revenue growth as well as increasing profitability is to continue with our onboarding, training and development programs. Providing our consultants with the support and training along with the right tools and systems is critical to our ability to achieve our goals.

Another driver of more profitable revenue growth is our ability to function as a single global firm. This is something that we are pursuing through a number of initiatives, all aimed to encourage and to enable the people in all of our regions to work more closely as teams within practices instead of teams within regions. With this structure, we will be better aligned with our global clients in a stronger position to serve our key accounts.

Let me explain further what I mean by this. While one of this Company's key assets is our worldwide presence, we cannot risk becoming just a collection of countries. We must serve clients as one global firm. You've heard us talk about our focus on global key accounts, but let me give you some context of how that program has developed.

In 2003, we had 31 global clients who billed more than $1 million. In 2006, we had 62 global clients who were billed at this level and we are now well on track to have 100 global key accounts this year. Our $1 million accounts are great, but $5 million and $10 million accounts are even better. Driving our business with more focus on practice teams in our global accounts instead of through regional teams will help us be better aligned with our clients.

This leads me to some key rationale for hosting our Worldwide Partners meeting in June. We realize that $3 million is a substantial expense in the second quarter. However, we see this meeting as a key investment in our people and in our firm with an incredible potential for return. Last year alone we added 81 new consultants. Since we held our last Worldwide Partners meeting in November 2004, we have added about 115 new consultants. This increase is the result of a very deliberate focus on hiring as well as our acquisition of Highland Partners.

Our business is one of people, networking and connections; and part of enabling our consultants to become more productive is to provide them with opportunities to network and connect within our own Company. The Worldwide Partners meeting allows our Practice and Global Account teams around the world to engage face-to-face. We know that this investment results in new business. Last year, for example, we had our practice managing partners from EMEA attend the Asia-Pacific regional meeting. And as a result of this interaction, 14 new joint searches were created among these teams.

Now, there are many other examples of how our regional meetings have resulted in expanded relationships that lead to new business, but for now, let me just assure you that maximizing the return on our investment in a Worldwide Partners meeting is what is driving our agenda. We look forward to giving you a summary of the meeting on our second quarter conference call.

I'll close by saying that we are very pleased with the record performance we achieved in many parts of our business in the first quarter, and I believe that our continued focus on our key initiatives and our attention to good execution will help ensure our growth and success going forward. Thanks for your time today and at this point in the call we'd welcome your questions.

(OPERATOR INSTRUCTIONS). Tobey Sommer, SunTrust Robinson Humphrey.

Eileen, I was wondering if you could comment on your -- the ultimate goal of the tax planning strategy in terms of where you expect it to hit the tax -- the rate and what kind of visibility you have in terms of getting there and the effectiveness of some of the strategies you're deploying?

Sure, Tobey. I mean I think what we're really driving towards is a best-in-class tax rate for a professional services firm. And with a firm like ours that's international in a number of jurisdictions, that's a tax rate that's most likely in the high 30% sort of area. So we're expecting that we probably won't hit that in 2008, but certainly that's our goal over time. And we expect to have a beneficial effect in the tax planning strategies that we're undertaking in 2007 for 2008. But really the standard is one set by well-run, well-managed public professional service firms that are global, and that would be saying something like the 38 to 39% long-term.

Thank you. And then I think you mentioned on recent calls taking a look at where you are positioned within business services and in the executive search area and looking at ancillary industries and evaluating whether or not you may have interest in incorporating that into your business. Could you give us an update on that and just share some thoughts there?

Sure, Tobey. We continue to look for a way we can return -- give a better return to our shareholders. We are looking at -- continuously looking at ways to grow our business whether it's through acquisitions or whether it's organically. So that's something that is a key focus of ours as we speak.

Is there anything you can share with us in terms of outcomes from your evaluation? Any kind of metrics in terms of percentage of revenue that you hope to generate over time as a long-term goal, perhaps outside of the executive search area or anything in that regard?

Well, Tobey, we look at all of these opportunities. We want to make sure they're providing value to shareholders. We have a business that we think is a very beneficial business to shareholders in that we've been able to raise our margins and provide value to shareholders through obviously the increasing EPS and buying back stock. We want to make sure that when we buy businesses they meet those same financial criteria that we use in our own business. But we're also evaluating them strategically to think about in what ways we can deepen our relationships with our clients. So, in terms of having targets as to what percentage of our revenue we expect to be nonsearch, we don't have those targets now, but we do have very strong financial discipline around what we're looking at, and a very good strategy about how we can think about ancillary services to serve our clients.

So far it looks like the acquisition has been integrated very well. You're seeing great revenue growth in margin expansion. Just curious, is there an opportunity of, over time, do you think to get the operating margins even higher than the 13% target that you have for this year?

Oh, I think it's certainly our intent over time to, again, drive towards the standard of well-run professional services firms, which, by and large, is certainly in the area of an operating margin of 15% or a little bit higher. That's certainly our goal long-term.

Thank you very much. I'll get back in the queue.

Matt Litfin, William Blair and Co.

You mentioned that your average fee per search was up 5% year-over-year. But that was down sequentially and from the prior couple of quarters, so is that just first quarter seasonality? And if so, what causes that and what assumptions are embedded in your 2007 revenue guidance for average fee per search?

That number in terms of our average fee per search bounces around quite a bit. It's a very important metric to us. Some of it has to do with frankly just the regional mix. Asia performed so strongly that that's going to have a defect on our average fee per search. Asia is a very strong region for us, but their average fee per search is lower, certainly than the Americas business and lower also than Europe. So that's going to make a difference.

And we are fairly conservative in thinking about and modeling the average fee per search. It will move around quarter to quarter, but we look at it and model it and pay attention to it and it's something that we focus on. But certainly the regional mix will have a difference. I don't think it's necessarily a phasing effect from first quarter. I think it's just a mix of results in this instance from the regions.

One thing to think about, Matt, is from a geographic standpoint, we've increased revenue outside the U.S. to 45% over the last couple of years. And although we're moving up the food chain in every country in which we operate in terms of average fee per search, it still has an impact, as Eileen mentioned, particularly when you're working in countries like Singapore, Jakarta, India, Poland, et cetera.

Eileen, how much backlog amortization from the Highland Partners acquisition did you expense in the quarter, if any? And what are you expecting there for the next couple of quarters?

We had some amortization in terms of -- you're talking about amortization in terms of backlog of searches that they had? Are you talking about amortization of intangibles, Matt? Let me make sure I understand your question.

The searches.

That was fairly di minimus. That's run through our system and you shouldn't expect much more of that in terms of the books that they brought with them and searches that were in process when they came over. That really shouldn't have much effect on our revenue or earnings going forward and it had really a di minimus effect in the first quarter.

What we found is that their time to complete a search is about the same as ours, which, on average, is about 165 days. And that's actually -- that revenue is recognized not ratably over that period. The majority of it's recognized in the first couple of months. So if you assume they brought a backlog over and we closed October 2, most of that would have run through in the first quarter that they came over, i.e., fourth quarter of 2006. And by now, it's all but completely run through the system.

Okay, that's helpful. Next question, given your very large cash balance, the somewhat minimal share repurchase activity and the success you've had in acquiring Highland Partners and RENTONJAMES here, and I guess the fragmented nature of the industry as well, given all of that, has your appetite for acquisitions increased as we go forward? And could you just give us a comment on how the acquisition pipeline looks today?

Matt, we're looking at three ways to grow. We're looking at growth from a geographical perspective, as we did with RENTONJAMES. We're looking at growth in terms of recruiting individuals who are going to help us from a practice perspective across the globe. We are always looking at our practices and where we can do better to serve our clients. We're looking at -- we're consistently looking at acquisitions, having just adjusted the Highland acquisition and RENTONJAMES. Yes, absolutely, we're looking at things on a constant basis, but we want to make sure it makes sense for us as an organization we don't deviate too far from the core business and we give a great return to our shareholders.

And I would just add to Kevin's comments, no, we didn't repurchase a lot of stock, but we were really blacked out for most of the quarter because we had obviously our fourth quarter results. We didn't have that much time before we, again, went into the end of the quarter. So that's really the issue. It's not that we're not committed to the stock repurchase, because we are.

No, understood. But even if you did the rest of your authorization today, which I know you couldn't do, it would still be a small percentage of the existing cash balance. So I just wondered if you have any comment at all on how the acquisition pipeline looks today?

Sure. I mean, we look at things all the time. We have a dedicated person who looks at exactly acquisitions in the pipeline and refreshes that. In fact, Kevin and I meet with him frequently. We're meeting with him this week. And we talk to people in the regions about ideas for acquisitions. We talk to a number of bankers and other people who come to us with potential acquisitions.

As you know, Matt, you've got to look at lots and lots of things to be able to come up with one or two things that work. And we have dedicated resources to that and we're very focused, and the executive team is very focused on the pipeline and continuing to improve our prospects for having successful acquisitions.

That's great. And one more if I might. Could you comment on trends in turnover of your searchers during the quarter?

Yes. In terms of the quarter, this is typically a quarter because we pay bonuses on the first -- in March, in the first quarter of the year. We really didn't see turnover that was higher than our historical average. By and large, as I think I've told you before, Matt, we've got people who leave here to go to competitors at a rate that's less than 5% historically. That was the rate in 2006. That continues to be the rate. We have lost some people, but it's not higher than our historical average; which, as you know, for professional services is really a very low turnover rate.

Yes. Thank you very much.

Michel Morin, Merrill Lynch.

I was wondering, Kevin, on -- regarding Europe, if you could talk a bit about the growth rate that we're seeing there. It seems like it slowed a bit in the first quarter. And also, you made some points about the single global firm and I was wondering in terms of the incentive compensation structure, is that really uniform throughout the organization? And in particular, in Europe, are people incented to the same degree as they are in the U.S. and elsewhere? Thank you.

Good question. If I talk -- let me talk about Europe specifically. And having just come this week over from London and having met two clients over there, I could shed some light on what's going on. I'll address this in two ways. One, I'll talk about financial services, which you know is our largest practice as a firm. A lot of the financial services firms came into 2007 after a fairly bullish 2006 thinking is the market in 2007 going to be the same as it was in 2006? So they were somewhat cautious in terms of hiring out of the gate like they usually are because financial services historically start hiring in October through February.

Now what we're seeing is that they realized they were a little slow off the mark this year and we are starting to see, particularly in financial services, an increase in demand because they're trying to play catch-up now, having missed the first couple months of the year. And given that they just paid bonuses, there's an issue there in terms of trying to get individuals and seats. So we saw somewhat of a slow start in financial services.

Overall, if I talk about the other industrial practices, what you are seeing is that having talked to a senior hiring manager last week, he says, Kevin, internally we're very overwhelmed. We have an issue where we're looking at 40 to 50 hires or senior hires across the board, and trying to engage with search firms in getting our contracts back to them is taking much longer than it historically has.

So a lot of the internal processes of our clients has gotten in the way of getting some of the contracts back at a much faster pace. So we're fairly optimistic in terms of what we're seeing in Europe. Morale is higher than it's ever been in the history of the firm. And as I also mentioned before, just as another point to add onto that, we had discussed I think in one of our last meetings about the fact that it takes up to seven to nine months to get somebody onboard in Europe because of gardening leaves, et cetera, particularly when you pull out a top class consultant from a competitor.

We've done that and we have a series of consultants, a couple of free consultants, particularly in Germany, starting over the next couple of months that we're really focused on recruiting over the last year. So, very optimistic in terms of our growth potential in Europe still. We're in a very good place over there and it could come full circle.

In terms of answering your question on compensation, yes, the Europeans -- we have one global compensation plan and that's how they are paid. They're paid the same as our colleagues in every other region.

Great, thank you. That's very helpful. And then just if I could also on the confirmation trends, on a month-to-month basis, obviously March was extremely strong, but April is below what we've seen in the first three months of the year. Is that just the lumpiness nature of the business?

Yes, and I think also, Michel, that has something to do particularly in Europe with the holiday, with Easter and with Spring break. So, yes, I mean, that is an essential lumpiness of the business. And that's why, again, one of many reasons why we don't try to manage this on a quarterly basis and we don't give revenue -- or we don't give guidance on a quarterly basis. It's a little bit of lumpiness.

Great. Thanks very much.

Clint Fendley, Davenport.

Thank you. Kevin, I wondered if you could speak to the type of financial incentives that you're using in order to encourage the increased teamwork in global cooperation?

Any time we try to drive global accounts, and -- excuse me, global key accounts in global practices, it's more of we have two ways to compensate individuals. One's through the origination, one's through the execution. So, at the end of the day, they're incented to share searches across the globe because no matter which country these searches executed in, consultants in any other part of the world will be reimbursed for that. So it's been the same as it has been for a long time.

We are looking at -- having spent a lot of time with clients and asking them over the course of the last four months how we can better align ourselves with them as an organization, we are looking at different ways to look at how we pay and -- or compensate key account managers and/or practice leaders, but that's in the early stages right now. But again, from the origination standpoint, if you originate a search in New York and it's executed in China, both the originator and the executor get a piece of that. So that's how we drive the type of behavior that we look for in the organization. And at the end of the day, we also have about 7 to 10% discretionary pull this year that will be used for those types of behaviors as well.

Thank you. That's very helpful. And I know you've talked in the past about the possibility of lowering the days to complete a search in order to better penetrate some new verticals. Could you speak to whether this involves really reengineering your search process or would it be better solved maybe by hiring consultants with, say, deeper but possibly narrower Rolodexes?

I think it's more the former versus the latter, Clint, because I'll give you a specific example. If you look at private equity today -- and our private equity practice is up in a big way year-on-year, just given the global markets -- but when the private equity firms come to us and say, look, we need a CFO, we say great. Historically it would take three to six months to deliver on that search. Well, guess what. They want somebody in the seat tomorrow. So it's how do we reduce cycle time and deliver at a much faster pace to our clients? Because that is what they're looking for from a search firm in today's environment.

So no longer is it the three to five month timeframe that we can actually deliver a candidate with. It's now, how can you deliver somebody to me in 24, 36, 48 hours. And that's something right now we're continuously focusing on and we're starting to see that -- drive that through both our private equity practice and a couple of the other industrial practices as well.

Thank you. That's helpful. And then Eileen, I assume the $1 million acquisition payment represented part of the $15 million contingency on Highland Partners?

I'm sorry, which payment are you referring to?

I believe on the cash flow there was a $1 million that was flowing through for -- under the acquisition line.

Yes, I'm sorry, that's for New Zealand. That's related to the RENTONJAMES acquisition.

Can you comment at all on your expectations regarding, I believe it was $15 million of contingency for Highland Partners then? Does that run through the end of 2008? And how is that tracking?

Sure. That is based on their origination credits and it's a very simple earnout. I mean, when we do acquisitions, we typically try to do it in an earnout structure for a number of reasons. It aligns people's interest in the companies that we buy with the companies; it also mitigates the risks. Obviously when you buy professional services businesses, you're really buying the people and their contacts and their client base. And so you want to make sure that you retain them for as long as possible so that you have a chance to integrate them into the firm.

So in terms of that $15 million contingency, that is spread over two years, 2007 to 2008, and it's based on the origination credits of the former Highland Partners partners. At this point, they're really doing very well, so I would expect that, given that they continue this pace of production, that we would in fact be paying debt earnout payment. But we're in the first quarter of an eight quarter earnout sort of cycle, so it really depends on how they perform over the next seven quarters before I can ascertain that.

There is a payment, presuming they hit their targets at the end of this year and then there's a second payment at the end of 2008, but together, they cannot exceed $15 million.

Great. Thank you.

Mike Carney, Aperion.

Kevin, your strategies are well stated and understood, but can you -- when you talk about global accounts, can you tell us how you're measuring that? I'm assuming one of the ways would be the number of -- well, the number of confirmations or some type of measure of cross border. And so has that been up already or give us some comments on that.

Sure, Mike. The way we measure that is one, by revenue per client, and two, by the number of search engagements across the globe. And maybe I can shed a little more light on that having spent the last four months talking to clients about how -- instead of going out and telling clients what they need, we've gone out and talked to clients about how we can better serve them globally. Most of our large North American clients have pretty aggressive expansion plans in both Asia-Pacific and other parts of Europe. And have said to us, look, how do we work together to drive both of our businesses in these regions? I mean, having just been through Asia and most parts of Europe, at numerous CEO dinners, the number one challenge for most CEOs was getting the people they need to grow their business. So working with them for example out of North America to figure out what their hiring needs are in Asia and being ahead of the curve, so they don't have to wait until they have a problem in those regions and/or they lose somebody in those regions. So we understand what they're doing from a strategic standpoint, so we can then engage our consultants across the globe to serve them better and get a greater share of wallet if you will.

What they've told us is, look, we give you a portion of our business, but you're also leaving a lot on the table. And that's what we're really focusing on right now with the key account program.

So are the cross border engagements, are those up?

Absolutely. So our cross border engagements are up and we're seeing it threefold. You're seeing it number one, with European companies looking to expand in Asia Pacific. You're looking at North American or American companies looking to expand into Europe and Asia-Pacific, and for the first time -- and I think we've discussed this before -- we're also starting to work with some of the Asian companies, the Chinese, the Korean, and the Japanese companies who are looking to expand both in North America and in Europe.

Okay, thanks. And then also, it looks like the legacy Heidrick U.S. consultants, they did a tremendous job this quarter, the first time in many years. And so other than the fact that obviously management has changed, but has anything else really changed there?

Yes, they did a fantastic job this quarter and they should be congratulated and we'll congratulate them again later on. But I think that what you've seen is a couple of things. More focus [then] communication through some of the key accounts and practices across North America, number one. Number two is, as we mentioned before, we are a little laid off the mark in terms of recruiting and we recruited heavily at the end of 2005 and 2006, and those consultants have gotten up to speed. And we have, as I mentioned early on in the comments earlier, we have a great onboarding program now that engages these individuals in the organization from both a practice and an office perspective. And if I take that a step further and why the key account program is great, it's because it also engages these new consultants across the globe which promotes that connectivity day one when they start in the firm.

And then also, I noticed that you've continued to do some significant hiring, I'm assuming because the number of consultants are up. Is that promotions or is that continued heavy hiring in the U.S.?

It's a combination. We're specifically targeting, as I mentioned earlier in terms of growth, we've taken a holistic view at all of our practices. We want to have more of a well-balanced portfolio of practices across the globe, so we've focused our attention on some of the practices that where we need to grow, whether it's health-care, whether it's consumer goods, whether it's industrial, and even places in financial services. We specifically targeted individuals that we feel can add value right away to the organization in those areas, number one.

Number two is, yes, we just had 19 promotions as well. We promoted 19 partners in the course of the last seven, 10 days.

So that would be for the second quarter?

No, those numbers would be contained in the first quarter numbers. If you'd like to, Mike, I can take you through; if you want to call me later I'll take you through a roadmap from one number to another in terms of promotions and hiring. I think to Kevin's point, we hired a lot of people last year. We're being a little more strategic around our hiring now and really focusing on getting the people that we hired up to speed.

Okay. And you also mentioned, Eileen, that hiring is a key priority in Asia-Pacific the next two quarters. Is that -- I guess just explain why did you say the next two quarters? Is it just because that you've got a goal for the next two quarters to continue to ramp up? I've noticed obviously you hire pretty aggressively there the last couple of quarters, so --

Well, first of all, I think that the limitation in terms of hiring -- and Kevin knows this better than anyone as someone who ran the region for many years -- is frankly finding the right people in Asia. And secondly, in terms of how we hire, we do so fairly thoughtfully. And so in terms of building our program for this year, it's really to focus on bringing people in early in the year so they can be as productive as possible to meet our goals. We have a long-term commitment to hiring in Asia, but we focus on balancing growth with profitability. And part of that is frankly staging our hiring. So that sort of management of these professional services business is always thinking about what additional costs you can add and if you can't match that with revenue, at least trying to phase that and manage it so that you can hit your profitability goals as well.

Great. And one more on Tom's vesting in the second quarter, how much is that charge going to be?

It's approximately $1.2 million. And it's a non-cash charge. It's early vesting of equity.

Early vesting. Okay, thanks.

Mark Marcon, Baird.

Congratulations on the great results. With regards to North America, obviously we've had a leadership change over there at John Hopkins. Have there been any changes that have been implemented in terms of how you conduct business in North America since John joined? Or should we expect to see any major changes or how should we think about that?

To answer that question is there hasn't been any yet, but we are in the process of implementing some in the next four to six weeks. So I would stay tuned in terms of -- I've alluded to some of it. It's more aligning ourselves with our clients in terms of practices and focusing more heavily on key accounts and trying to drive some of our new $2 million, $3 million accounts up to $5 million and $10 million.

Great. So any positive impact from that hasn't been seen as yet, but could be seen in the future?

Correct.

Okay, great. And then with regards to the folks that you've brought on and the approved onboarding, how should we think about productivity ramping up for your -- within North America? Obviously there's regional differences, but if we think about North America and we think about the productivity in terms of annual fees per consultant, what would your goal be over the next couple of years?

It's hard to really state that because when we give you an average revenue per consultant, that's an average worldwide. Actually the averages you would assume in the U.S. is higher because the fee per search are higher. And we have lots of people who are annualizing at rates that are much, much higher than our average revenue per consultant. We don't have a target for that, but really a lot of our margin expansion has come from productivity. And we're convinced that we could expand productivity in the Americas and elsewhere well beyond where we are now.

First of all, one of the drivers is the average fee per search. As we move further up the chain, as Kevin mentioned, we get higher fees per search. As we use technology to leverage the expertise of our consultants, they can do more searches. So that kind of holistic model that we have suggests that there's really a lot of expansion to go, both in this region in the Americas and in other regions in terms of driving revenue per consultant.

I know that at various times we've gotten close to our historical highs. At the moment because we've hired so many people, we're not there, but in the past we've been at 1.4 or above. I certainly believe that we can drive beyond that and we have individual consultants who are annualizing, particularly in the U.S., but also in other regions at much higher levels than that.

That was precisely my point is that because you've had faster growth in regions such as Asia-Pacific, the overall number is being masked. And so I was trying to get a better perspective and kind of a like for like market where we could get a better perspective in terms of the productivity improvements.

Well, as I said, I know that our annual fee per search or annual revenue per consultant, I should say, in the U.S. is certainly higher than that 1.3 number, but there's room for expansion beyond that. We typically don't break that down regionally and those numbers will move around quite a bit. But there's ability here to leverage the higher fee per search here, but also just to increase the ability of our consultants to do more searches. All of that drives that revenue per consultant number.

Great. And are you seeing -- we've obviously gotten mixed signals with regards to the economy. Within North America, have you seen any -- your results certainly wouldn't indicate this, but are you hearing any concern from any clients anywhere in North America about softness or pulling back?

Not yet, Mark. I mean, what we saw -- I mentioned Europe earlier in terms of [their] clients were fairly cautious coming into the new year because, as you know, most organizations tend to hire first quarter. and so they tended to be more cautious this year and some of them, particularly in Europe, are playing catch-up now. So our view is that we continue to believe that 2007 and going into 2008 will be a fairly buoyant search market. So the short answer is no, we haven't seen anything or heard anything from clients so far.

Okay. And financially --

And I would just add to that, Mark, I mean, we think that there are secular trends that transcend whether or not you have a consumer recession for our business. Someone gave a speech in this industry talking about the war for talent and he said the war for talent is over. Talent won. There's enormous demand because of the demographic shifts. The growth in demand for talent outside of the U.S., the aging workforce, a number of the things that we've discussed I know in meeting with you, that we don't think that necessarily consumer recession as such or some consumer pullback would affect. So there's very strong secular trends continue to drive our business.

With regards to -- a housekeeping question, Asia-Pac, what was the organic constant currency growth rate there?

Let's see. I can get that for you. 63% on a constant currency basis.

Great. You mentioned with the cash building potential for acquisitions, Heidrick made a number of acquisitions prior to 2001, some of which had mixed results and obviously we had a cyclical downturn which impacted things. But what are some of the lessons that have been learned from the acquisitions that were viewed as being less successful that you would apply on a go forward basis?

Well, I think a couple of things. In terms of we used those lessons in thinking about how to plan Highland Partners. We were very careful in really looking at the culture of Highland, seeing whether or not it fits with Heidrick. So, from sort of a strategic standpoint, and then we were very disciplined in thinking about how to come up with a structure that really aligned the key driving revenue drivers, people who drove revenue in Highland Partners with Heidrick.

And then we were very disciplined about the integration process including the fact that we brought in Ernst & Young to help us in terms of setting up an integration program office. We had milestones. We were quite disciplined in terms of hitting the mark and thinking carefully about how to bring the Highland Partners into our offices and into our practices so they could be as successful as possible as early as possible. Because at the end of the day, integrating those people into our business is the means by which they will really feel as if they're welcome. They'll stick. It will work and the integration will be a success. And I think you're seeing the results of that.

So I think that thoughtfulness about the structure, the financial structure, first of all, and secondly, thinking hard about how to make the cultures work, how to integrate the people into our business, are really the lessons that learned from those acquisitions in the past that we apply to Highland and we would certainly apply going forward to any acquisition.

And then last question, the primary financial benefit from the financial services merry-go-round that typically occurs late in the first quarter, are you going to see the bigger impact in the second quarter in terms of your results?

Well, you'll, as always, I mean you're right; the merry-go-round has begun, so you'll see a lot of movement particularly in the next couple of weeks in financial services. So, yes, I believe we'll see the impact of that in the second quarter particularly in both Europe and North America.

Great, thank you.

We do have a follow-up question or comment from the line of Michel Morin. Your line is open.

Thanks. A very quick one. Is there anything in the corporate expense line this quarter that might be a bit unusual? And I guess maybe, are there still any remaining integration costs from the acquisition that flowed through the results this quarter?

Yes, Michel, there's about $400,000 of integration costs that flowed through there. We also had some professional fees that were high that will not recur, that have to do with some FIN 48 planning that we were doing and some other areas that we were looking at. So those will not be recurring. So the professional fees in particular were high. We'll have some integration costs, but those are really going to be more di minimus, even in the $400,000 that we had this quarter.

Great. And then on the buyback, just as a follow-up to an earlier question, is it fair to assume that buybacks are part of your D&A by now?

Well, given that this business throws off an enormous amount of cash, at this point we certainly think that that's a very effective way to return it to shareholders and we've made a commitment to always have an open authorization. I think it's something that has been very appealing to our shareholder base and I think it's fair to say it is part of our D&A now.

Great. Thanks very much.

Ladies and gentlemen, we have reached the limit to our allotted time for today's conference. I will now turn the conference back over to Mr. Kelley for any concluding remarks.

I'd just like to close today's call with a couple of comments and just reiterate a couple of things that Eileen and I mentioned earlier. One is our continued focus on training and development of our individuals and onboarding. Two is the focus on how we make our consultants more productive; and three is our continued alignment with our clients through refocusing our key account program as well as our practices.

So, thanks for your time today and I hope you all have a great day.

Ladies and gentlemen, this does conclude today's conference. We do thank you for your participation. You may all disconnect at this time. Good day.