Heidrick & Struggles International Inc (HSII) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the 2007 Third Quarter 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 follow at that time.

(OPERATOR INSTRUCTIONS)

I would now like to introduce your host for today's conference call, Ms. Julie Creed. You may begin ma'am.

Good morning, everyone, and thank you for participating on our third quarter 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 begin by discussing some of the operational and financial highlights of our third quarter, and then Eileen will review our financial results in a little more detail. Kevin will finish the call with some comments on our business initiatives before we open up the call for Q&A. As a reminder, there are supporting slides available on our Web site at heidrick.com in the Investor Relations section that accompany our comments today and we encourage you to follow along or print them.

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

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

Thanks, Julie and thanks to all of you who are taking the time to participate in our call today. Before I give you a quick overview of some of the highlights of our third quarter, I would like to recognize our employees worldwide for another quarter of strong performance. Last year at this time, when I took over as CEO of Heidrick & Struggles, we told you that our goal was to accelerate revenue growth, while improving our operating margin. And this is exactly what we have done this year.

Now, if you are following along with the slides we have posted on our Web site, I am going to start with slide number three. We had a great revenue quarter. Net revenue of $162.9 million was up 30.7% year-over-year, and up 1.8% over the second quarter. Every region contributed to year-over-year revenue growth. Americas was up 20.8%, Europe up 38.2% and Asia-Pacific up 55%. In fact, if you turn to slide five, with Asia-Pacific and Europe turning in record revenue quarters, we hit a milestone with 50% of our net revenue coming from outside of the America's region. Achieving this geographical mix has been a long-term goal for our Company, and one that we believe is of substantial benefit to our shareholders because of the revenue and margin diversification that it provides the Company.

We will continue to reiterate that traditionally, our business does not consistently enjoy sequential quarterly growth. Market conditions can fluctuate from quarter to quarter and also, the timing of when searches are won, like a few large searches at the end of a quarter, can have a significant impact on results. So, while we are encouraged by this quarter's results, we focus more on annual results and metrics.

In the third quarter, all of our key growth drivers and operational metrics contributed to improved year-over-year results and support our belief in the long-term outlook for our business.

Turning to slide six. Consultant headcount at September 30 was 393, up approximately 15% year-over-year and although down slightly from 398 at the end of June. Although we made some key hires in Asia-Pacific in order to invest in this fast growing region, we do not typically hire aggressively in the third and fourth quarters. And, as is common in other industries like investment banking, we have already initiated the process of hiring consultants that we are eager to get on board in the first and second quarters of 2008.

Turning to slides seven and eight. Executive search confirmations in the quarter were up 13.6% year-over-year, and are up 21.3% year-to-date for the first nine months. And at this point, with one day left in the month, we expect October confirmations will be higher than August and September and comparable to July confirmations.

On slide nine, the average fee per executive search increased 16.1% to $125,500 in the third quarter. And through the first nine months, the average fee per executive search was $110,300, up 10.4% over the same period in 2006.

Moving to slide ten, annualized revenue per executive search consultant hit another new record of $1.6 million. You have heard us say many times in the last year that improving the productivity of all our consultants has been a very high priority for our Company, and while this number can also fluctuate from quarter to quarter, we are very pleased with the progress that we have seen as a result of our initiatives.

I would like to highlight slides 11 and 12. These are records for our Company and something we have been driving towards for three years through various operational improvements. Third quarter operating income increased 44.9% to $25.5 million and the operating margin was 15.6%. Through the first nine months, our operating margin was 13.2%. Balancing revenue growth with profitability, given the investments we want to make in growing the business, has been and will continue to be the highest priority for our Company.

And as shown on slides 13 and 14, reported net income was $16.1 million and diluted earnings per share were $0.84, reflecting an effective tax rate of 39.4%, as well as a significant improvement over 2006 third quarter results.

With that overview of our third quarter highlights, I will turn the call over to Eileen to give you more detail on the quarterly results.

Thanks, Kevin. Looking at slide 15, net revenue of $162.9 million increased 30.7% year-over-year. The impact of foreign currency exchange rates accounted for approximately 4 percentage points of year-over-year growth in the third quarter. Revenue associated with the former Highland Partners consultants was about $16 million in the quarter. As you will recall, when we acquired Highland Partners from Hudson Highland Group in October 2006, we made an initial payment to them of $36.6 million. Hudson Highland Group is also eligible to receive earnout payments, based on the acquired consultants achieving certain revenue metrics in 2007 and 2008. The total purchase price, including the $36.6 million paid at closing and the 2007 and 2008 earnout payments, will not exceed $51.6 million. Given the revenue performance of the Highland Partners acquisition over the last year, which has been in line with our expectations, we would expect to disburse to Hudson Highland Group an earnout payment next March of approximately $4 million. Should the revenue performance continue in line with expectations through 2008, the earnout payment in early 2009 would be approximately $11 million.

Turning to slide 16, salaries and employee benefits expense in the third quarter was $106.6 million, decreasing to 65.4% of net revenue. Fixed salaries and employee benefits expense increased $10.8 million, or 19.5%, which is largely a function of the 17% year-over-year increase in our worldwide headcount, including a 15% increase in consultants. And performance-based compensation increased $12.1 million, or 42.7%, mostly reflecting the increase in the number of consultants hired over the last year and higher net revenue levels for 2007, which, in turn, translate into higher bonus accruals.

Turning back to slide 15, general and administrative expenses in the quarter were $30.8 million, an increase of $7.3 million or 31.1% compared to last year's third quarter. The increase is generally related to operating expenses associated with higher net revenue levels and higher discretionary spending. But there are a few specific items that resulted in this year-over-year increase that I will discuss because they also affected margins at the regional level.

First, there was a $3.1 million increase in fees for professional services of which $2.1 million relates to certain consulting assignments in Europe, which required third party expertise and $1.0 million of legal costs incurred in the Asia-Pacific region for litigation related to our hiring of some key consultants in the Hong Kong office. Worldwide, premise-related costs increased by $2.2 million year-over-year due to new offices and new lease agreements for existing offices. In the Americas, one of the remaining two consultants from our 2000 acquisition of a firm called Lynch Miller Moore O'Hara retired from the firm. This triggering event prompted a review of the remaining customer relationship intangible asset and resulted in an impairment charge of $1.0 million. Another $800,000 of the increase in expense is associated with our acquisition of Highland Partners, including the amortization of intangible assets and costs related to the transitional services agreement. Finally, there was a negative impact of $1.7 million to the G&A line due to exchange rate fluctuations. As a percentage of net revenue, G&A expenses were 18.9%.

Third quarter reported net income was $16.1 million, and diluted earnings per share were $0.84, reflecting a quarterly effective tax rate of 39.4%, after discrete items.

Turning to slide 17, I would like to briefly highlight our first nine months results. Net revenue of $466.1 million increased 34.6% compared to the first nine months of 2006, including approximately $46 million associated with former Highland Partners' consultants. Salaries and employee benefits expense increased 34.4% year-over-year, in line with net revenue growth. Our general and administrative expenses were up 28.2%. Operating income of $61.3 million increased 47.7% year-over-year and the operating margin improved to 13.2%, from 12% in the same period of last year. We are very pleased with these improvements year-to-date and believe that we are well positioned to meet our annual operating margin goal of approximately 13%.

Moving to slides 18 and 19, cash flow and balance sheet items. The cash, cash equivalents and short-term investments balance as of September 30 was $218.2 million. The increase compared to June 30, 2007 balance of $180 million primarily reflects additional accrual of consultants' bonuses to be paid early next year. Net cash provided by operating activities was $62.8 million in the third quarter, which primarily reflects the increase in net income in the quarter and higher accrued bonuses based on the increase in net revenue in 2007 as compared to 2006.

On slide 20, you have seen that we were aggressive in repurchasing our shares in our trading window of August and September. In the third quarter we repurchased 685,557 shares, at an average price of $43.50, for a total of $29.8 million spent. We exhausted the $12.7 million that was remaining on the $50 million authorized by our Board in May 2006, and we began buying under the new $50 million stock repurchase plan authorized by the Board in May 2007. As of September 30, 2007, $32.9 million remained of that authorization.

On September 20, our Board of Directors approved the initiation of a cash dividend. Initially, we plan to pay $0.52 per year, or $0.13 per quarter. The first quarterly dividend payment will be made on November 16 to shareholders of record as of November 2, 2007. And our use of cash in 2007 for this dividend is expected to be approximately $2.3 million. Our financial performance has improved considerably over the last few years and we are generating sufficient cash today to return cash to shareholders through this dividend while continuing to repurchase our shares and invest in our business.

Looking at regional results, please turn to the Americas results on slide 22. Net revenue of $82 million in the quarter was up 20.8% year-over-year. Through the first nine months of 2007, the Americas region has increased net revenue 32.2%. All of the key revenue drivers contributed to growth in the Americas; confirmations, consultant productivity and average fee-per-search all increased year-over-year.

Operating income increased 15.2% in the quarter and was up 30.7% for the first nine months, both driven primarily by the increase in net revenue. The operating margin in the third quarter was 21%, compared to 22% in last year's third quarter. And for the first nine months, the operating margin is 21%, or comparable with the same period for 2006. Two things that notably impacted the third quarter margin were the $1 million of expense related to the impairment of an intangible asset associated with the acquisition of Lynch Miller Moore & O'Hara that I discussed earlier as an impact to overall general and administrative expenses. The other was an increase in premise-related costs of $600,000 in the Americas region for new offices and new lease agreements for existing offices.

Turning to Europe on slide 23. Third quarter net revenue in Europe of $58.4 million was up 38.2% year-over-year, and for the first nine months was up 29.9%. In the quarter, the positive impact of foreign currency exchange represented approximately 9 percentage points of the year-over-year revenue growth, and for the nine-month period it represented approximately 10 percentage points. Confirmations, consultant productivity and average fee-per-search all contributed to the year-over-year net revenue growth.

Operating income increased 84.9% in the quarter and is up 74.5% for the first nine months. The quarterly operating margin improved to a record 18.5%, compared to 13.8% in last year's third quarter, and is at 14.3% for the first nine months. Obviously, we are extremely pleased with these results and the improvements made in this region, but as with our consolidated results, we remind you that they can be uneven from quarter to quarter and that we are managing the business on an annual basis.

Turning next to slide 24 and the Asia-Pacific region. This region turned in another record quarter, with $22.5 million in revenue, up 55% year-over-year, and up 62.2% for the first nine months. In the quarter, the positive impact of foreign currency exchange represented approximately 8 percentage points of the year-over-year revenue growth, and for the nine-month period it represented about 6 percentage points. Every country in this region contributed to year-over-year growth. Revenue growth was driven by an increase in confirmations, and increases in average fee-per-search and in productivity.

Operating income of $4.9 million was up 10.7% year-over-year, and the operating margin was 21.9%, compared to 30.7% last year. The operating margin was negatively impacted, in part, by the investment in new hires made in this region in the last year. Total employee headcount is up 41% year-over-year, and consultant headcount is up about 53%. And as you know, new consultants are typically not fully productive for at least a year, depending on their background. In addition, the margin was negatively impacted by approximately $1 million in legal fees related to litigation surrounding the hire of two very key consultants, which I discussed earlier as an impact to general and administrative expenses. Finally, there were higher infrastructure costs, including lease expense, related to this region's accelerating growth.

I will review our guidance for 2007, starting with slide 27. We are optimistic about the business trends we are seeing for executive search and leadership consulting services. Based on our strong performance in third quarter, we have increased our 2007 net revenue guidance again to between $600 million and $610 million, representing growth of between 25% and 27% over 2006 net revenue. We recognize that this implies lower sequential fourth quarter revenue, but there are a number of things to keep in mind. One is that we want to reiterate the inherent unevenness of our business. Two is that, while we don't have confirmations finalized for October, it's been a very solid month, better than August and September levels, and comparable to July levels. We are seeing a buoyant market for executive recruiting, worldwide.

We still expect to achieve an operating margin in 2007 of approximately 13%. We expect that net income and earnings per share will reflect a full-year effective tax rate of between 35% and 42%. This rate reflects our year-to-date tax rate of 28.9%, plus our plan to incorporate our U.K. branch in the fourth quarter. As a reminder, the year-to-date tax rate is low because in the second quarter, we released valuation allowance related to our foreign tax credits, resulting in a tax rate of 2.3% for that quarter. The incorporation of our U.K. branch, in the fourth quarter, will result in a discrete tax charge and a fourth quarter tax rate of approximately 70%. The U.K. is our largest office and is currently one of our most profitable offices, so although there is a sizeable tax effect on our corporate tax rate in the fourth quarter to incorporate the U.K., it will lower our tax rate going forward. Again, we expect that our full year tax rate will be between 35% and 42%.

For 2007, as a result of our increase in guidance for net revenue, we are expecting to generate free cash flow of between $80 million to $85 million, before stock repurchases and the cash dividend. We have approximately $32.9 million available on our share repurchase authorization. We will pay our first dividend on November 16, and we are continuously looking at other options that will maximize shareholder value.

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

Thank you, Eileen. Our third quarter results further demonstrate that the initiatives and investments that we set forth last fall at this time to accelerate revenue growth and improve profitability have been successful. Looking forward, I am truly excited about being in this business. We are in the enviable position of being a leading, global provider of executive search services in a market where the secular drivers are all in our favor. We are one of the very few companies with a global footprint that is able to execute searches for companies who are expanding worldwide. While traditionally, this meant helping U.S. or European multinationals go abroad, it now includes Asia-Pacific based companies who are expanding to Europe or the Americas.

One of the headline news items that you probably heard or read about on October 16 was, the first baby boomer files for social security benefits. The woman who filed for social security benefits was the first of nearly 80 million Americans born between 1946 and 1964 who will retire and leave the workforce over the next two decades. RHR International claims that America's 500 biggest companies will lose half of their senior managers in the next five years or so. The number of people entering the workforce will not replace those that are leaving. And while these statistics give many companies and government agencies reason to panic, we see the situation as nothing but opportunity.

In addition, we have the arrival of the Generation Ys, those born in the late 70s to mid 90s who are expected to have an average of 14 jobs by the time they are 38. So combine the boomers with the Generation Ys and we can tell you that there will be a substantial impact on how companies compete for talent in order to grow and succeed. And this is a global issue, not just specific to the Americas. Our clients have already started to source talent across the world as local pools have started to dwindle. This will only become more pronounced and our clients want a partner with global reach.

Talent is like oil, a precious commodity that is increasingly scarce. So one of the ways that we are trying to enhance our business model and position ourselves for the future, is pursuing strategic partnerships with organizations that can provide us added intelligence about, and access to that talent. We have recently announced two partnerships and are in dialog with others.

The first was a joint study with The Economist Intelligent Unit. The study tracked where executive talent is most readily found today and where it will move or migrate to in five years time, using a series of quantitative metrics. If talent is the oil of our future, we need to pinpoint the hotspots, identify the reserves and know how fast the pipelines can get up and running. We are doing this. The press and media interest in the results of this study from countries around the world has far exceeded our expectations and further raised the awareness of demand for talent and Heidrick & Struggles' ability to find it.

We also are leveraging our strategic partnership with the World Economic Forum. We are supporting their prestigious Young Global Leaders program by assessing more than 300 of their candidates under 40, and giving us access to this community of next-generation talent. In September, I spoke at the summer version of Davos, which was held in Dalian, China, and can attest to the fact that finding the right senior talent to manage the growth of global companies was top of mind for most every CEO that I met.

So, how do we capitalize on this worldwide demand for talent? As I mentioned in the second quarter, we believe that we can capture more of this market by providing a unified global team. By shifting our focus from a geographic orientation to one that is practice-driven, we can better leverage our diversity and market intelligence to improve client service. We believe that this approach is a key competitive differentiator and are pleased with the reception that our clients have shown us thus far. We are also providing more leadership consulting services to our clients, both before and after searches are won. It's more integral to our business than ever before and has helped us win several high-profile CEO searches.

We are very pleased with our performance in the third quarter and year-to-date, and I hope you get a sense for how positive we are about the long-term outlook for the executive search business.

Thanks for your time. And at this point, we would like to open it up for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Andrew Fones from UBS.

Yes, thanks. Hi, guys. Great job this quarter. I wanted to ask about confirmation trends. Looking at the confirmation trends through Q3 in October last year, they were kind of fairly steady quarter-over-quarter through the period. I think this Q3, it looks as though you saw confirmation trends weaken through Q3 and then you have seen quite a pickup in Q4. I was wondering if you could talk about which practices perhaps saw some softening through Q3 and which have driven the pickup in Q4 please?

Yes. Sure, Andrew, we would be happy to talk about that. Thanks for your nice comments. Yes, we definitely saw in September some softening in confirmations, that has rebounded in October. And I am sure your question is pointed at financial services. We have seen fairly consistent results from financial services. It seems to have rebounded in October but, in particular, we saw very strong results in some of our other practices. We saw some very good sequential growth in industrial, which was up about 19% and technology, which was up 21%. So, we have seen some strong growth from other areas including financial services, but we did see some softening in confirmations in September and we have seen a rebound in that in October, as Kevin mentioned.

Sorry. So, which practices softened in kind of September and which actually rebounded?

Well, I mean we saw all over softness in confirmations really in September.

Okay.

So, we have seen a rebound that's really across our practices in October. But, in general, we saw a slowdown in activity in September. Now having said that, we had very strong activity in July, very strong, it was really the peak for us. That continued through August and there appeared to be a little bit of a slowdown in September but that's rebounded.

Okay, thanks. And then, second question. In terms of the impact of the acquisition, as we annualize that, as we look through your pricing metrics, where should we see impacts, could that impact revenue per consultant or are there any things that we should be considering as we look at the fourth quarter?

Well, they are really entirely integrated into our business. Our focus was really to make sure that the Highland Partners felt welcomed and integrated into our practices. And so, it's very hard to differentiate them from the rest of our consultants. We are giving you a sense of the revenue that they are producing. But, their metrics was very similar to our consultants. So, there is nothing in particular. We did call out that we continue to have some additional expense. We have a couple of offices that we didn't have previous to the acquisition. But other than that, in terms of affecting any of the lines on the P&L, there shouldn't be any significant impact. We are very pleased with the acquisition. It has, in fact, at least met if not exceeded our expectations and we are thrilled with the people who came over from Highland Partners. They have been an enormous success story for us.

Thanks. And then a final question on hiring. You mentioned that you have kind of, you are underway now with initiating your hiring plans for '08. Can you walk us through what your plans are there please?

Well, first -- Andrew, it's Kevin. Let me just remind you that over the last 24 months, we have added 150 new consultants. So, we added about 50 through the acquisition, promoted 50, and went out and recruited 50 as well. And as we have mentioned previously, our key objective is to drive productivity or revenue per consultant; that's one of our key focal points. The second piece is, historically, we haven't aggressively hired in the third and fourth quarters, very similar to investment banks. Number one, you have to make sure that there is a balance between investment and margin; and number two, we don't want to dilute the bonus pool. So, we have a plan in place to recruit through all practices next year and fill in the gaps we have across the globe, be it energy, asset management, diversity, media and telecom. So, we have a proactive recruitment plan in place, who we have been focusing on that for the last three months to get individuals in place early January or first quarter of next year.

Thanks.

Our next question comes from Tobey Sommer with SunTrust Robinson.

Hi, it is Tobey Sommer. I had a question for you. If you look at the growth that you have seen in confirmations, how would you characterize, and perhaps break it down between turnover driven growth and economic expansion and/or global expansion of your clients into new markets where perhaps they need new office heads or have new product launches and need people to manage those kind of processes. Thanks.

Well, it's a very good question, Tobey, and we do have some visibility into that. As I have said a couple of times, I know when we have met, we don't necessarily need job creation, we just need job churn to be able to develop revenue. And the churn in the executive suites has certainly been an advantage for us in terms of the tenures of C-suite executives being shorter, in general, that's been an advantage. But in addition, in a variety of our countries and in the regions, we see the opportunity to expand, particularly in Asia, as Kevin has mentioned before, most of the work that we are doing now in Asia for multinationals and not for local companies. So, there is still an opportunity for us to get further expansion into markets like that. It's difficult to make a general statement regarding how much of this is related to churn but, for example, the CFO jobs are now, have a higher rate of churn than they have traditionally and we have seen our CFO practice grow significantly. And part of that is certainly the demand as people change jobs more rapidly than they have in the past.

To follow up, if you were to look at the Asia-Pacific region specifically, would you be able to more precisely quantify the two different buckets, is global expansion perhaps a larger driver there than the turnover? Thanks.

Well, Tobey, it's Kevin. We have a huge opportunity in Asia-Pacific and we are just on a cusp for the first time. If you look at it roughly, if I exclude Australia and New Zealand, about 98% of our business out there is driven by multinational companies looking to expand. The opportunity for us now, as I alluded to earlier, is to help Chinese companies who are looking to expand, Korea and the Japanese for the first time in 17 years, given they are out of a recession are looking to expand internationally and what they are finding is they just don't have the talent to do that. So, there is tremendous upside for us there as well.

Thank you. And then just a couple of housekeeping questions, and I apologize because this may have been in your slides. If they were, then I perhaps overlooked it. The -- what's the geographic breakdown of the contribution from the Highland Partners acquisition?

Well, in general, we haven't given that, Tobey. But just to give you sense of it, there were 48 partners who came over. The lion's share of those people were in the Americas. There were a few in Asia and a few in Europe. But, the majority of the revenue and -- of the partners are resident in the Americas.

What was the number of former Highland Partners consultants with the firm, most recently either at the end of quarter or even today?

We haven't given that number. We have gone through in terms of our plans and made an assessment as we do, and Kevin has mentioned this before. We are a performance driven organization. We have asked some people to leave over the last year. We continue to hire and focus on really driving for performance.

Thank you very much.

Our next question comes from Chris Oh with J.H. Whitney Investments.

Hi. Just a question on the impact of currencies on operating income. Just -- what was the impact there?

There is not significant impact to, on the exchange rates, to operating income. And the reason for that is most of our expenses that are affected by exchange rates are in countries where the revenue is affected by exchange rates. So, there is really very little in terms of -- maybe 2%, something like that. But, in general, our expenses and our revenues match in most of these countries. It's untypical for it to have much impact in terms of our business overall.

Right. So, just doing the numbers really quickly, it looks like you said that revenues in Europe and Asia grew 29% and 40% year-over-year, which would imply a currency impact of $3.9 million and $1.1 million. And then, just taking these same operating margins that you reported of 19.8% and 23.1% in Europe and Asia, it looks like you are kind of getting to like a $1 million impact in operating income, is that the right way to think about it?

Well, it's one way to look at it. I think it's fairly de minimus. It's at that rate or lower.

Okay. And then, just a quick follow-up question on the confirmed executive searches. So, would it be sort of fair to say that most of the decline sequentially from the last quarter was really coming from your September month?

Well, September was a weaker month certainly than July and August. I mean again, trying to read the tea leaves on confirmations is very difficult. I understand that the analysts see this and people follow this stock, as leading indicator on the stock. But again, you are talking about a period that one is vacation. So, we see a typical kind of softness, in at least in a couple of the months of the third quarter. July was very, very strong; August was fairly strong; and then, September, yes, we did see some softening and then we have see a rebound. It's difficult to try to extract a trend from one month.

Got you. Okay, thank you very much.

Our next question comes from Clint Fendley with Davenport.

Thank you. First question for Eileen. On slide 27, I recognize that you made the case that there is no discernible trend and that you are managing the business on an annual basis. But, it would appear that your first quarter revenue is generally your weakest quarter, while the fourth quarter is generally your strongest. Obviously, your revenue guidance for this fourth quarter would suggest that this trend would not hold in '07. I mean, what are your thoughts on the seasonality between the fourth and the first quarters?

Clint, it's a very good question, but it's a very difficult question to answer. I mean our revenue recognition model and when we in fact confirm engagements or such that you can have lumpiness in this business. And in general, we used to say that the fourth quarter wasn't as strong. It's only the in last couple of years that the fourth quarter has been this strong in terms of revenue growth. Typically, you would say you are in the holidays, there is not a lot of hiring going on as people get to the ends of their budget. So, it's very difficult for me to give you a sense of what are the seasonal trends in this business. I think in general, market demand has really overwhelmed seasonal trends. So, again, I would just point you towards the fact that we are running this business in terms of on annual basis. The other thing that affects our revenue is that we have upticks, which can drive revenue and are really very difficult for us to forecast. So, if we do a couple of very large searches like CEO or other major searches, those upticks can add to revenue at the end of a quarter and are pretty difficult to forecast. It's why this business rather lumpy on a quarterly basis; but on a full year basis, all of that smoothes out.

Does your bonus payment affect this any and would there be any effect from going from two bonuses to one here recently?

Well, the reason why we have gone to one bonus is that we are aligning our internal revenue producers with our shareholders. They are paid a portion of their bonus in stock. We want them to think like shareholders and like owners and they do. And they are point not only on revenue but on profitability, and as a well run public Company, should really wait until you have final year results before you pay bonuses. There is always a question of whether or not people will slow down in order to start booking in the next year. But in general, that means that you will be paid that bonus a year later. So, I don't think it has a major effect, no.

Okay, thank you. That's helpful. And final question. I guess, you have indicated that your private equity and VC exposure is probably about, I guess, between 6% and 7% overall. Can you give us an idea of what that would be if it included work for your portfolio companies such as your work with Chrysler?

We actually don't break it down that way. But, we have been very happy with the results from our private equity practice, even through the credit crunch. And if you look at it, with billions of dollars of investments out there, the best way to get a return for stakeholders is by having solid leadership in place. So what I can say across the globe is we are seeing huge demand within our private equity practice.

Okay, thank you.

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

Good morning and congratulations on the particularly strong results out of your international operations. Just wondering, with regards to Europe, obviously, very strong margin improvement there. Can you a little bit more about what you are seeing in Europe, what's driving that, and what does this portend for the future in terms of how you think about the European division?

Well, Mark, it's Kevin. If you recall two years ago, 2.5 years ago, when we first went to Europe, we talked about 2006 being the foundation year for growth in 2007. And we systematically went out, analyzed our business across the region, we focused on the region as a whole, breaking down country-specific silos, we integrated the business with North America and Asia-Pacific, playing on the strengths of our U.S. business to drive -- to drive revenue into Europe as well, and we did a great job of recruiting high-caliber people. And it's time -- if I go back to the end of 2005, going into 2006, we recruited over 30 people as well promoted numerous consultants as well. They are now getting up to speed and really performing well. So, I attribute a lot of that to the strategy of going out, looking at our holes, filling those holes with high-caliber people, looking at -- and we will continue to look at acquisitions and we have continued to look at hiring over there as well. So, the significant improvement, we have also seen, is the integration with the rest of the firm where historically EMEA has been run as a siloed operation.

Can you talk a little bit more about which practices and which geographies you are seeing the strengths in? And how trends were going going into the fourth quarter? And finally, how do you think, I mean the margin performance was so strong. How does that bode for as we look out towards '08, '09, and the future in terms of what the potential margin profile in Europe would be?

Well, I will take the easy question and I will pass it to Eileen the second on the margin. How about that?

I figured that.

Thanks, Kevin.

The short answer is we are seeing growth across all practices. I mean our life sciences practice has done extremely well. Financial services continues to have some record months over in EMEA. Our industrial practice, consumer goods, they were across the board. I touched upon private equity before. A couple of things to bear in mind. The countries hardest hit by the restructuring in 2005 were Germany. Germany at one point in 2001 was roughly a EUR60 million business. We finished last year at about $25 million, $27 million. We made a significant effort to go out and recruit. But additionally, one of the learnings for us was that it takes anywhere from 9 to 12 months to get consultants onboard in places like Germany and we have systematically gone out and filled the ranks in there. Simultaneously, France was also hard hit in terms of the restructuring in 2005. We have gone out and recruited there. So, if you think about the countries that are going to drive revenue, the U.K., Switzerland, France, Germany, Italy, you are seeing significant improvement across the board in all practices because, again, we are focused on the recruiting there. Simultaneously, we are seeing growth in places such as Central and Eastern Europe, Russia and now the Middle East. So, it's across all practices. Simultaneously, looking at France and Germany, we still have tremendous upside in France and Germany and again, the emerging markets, the Russia, the Middle East and Central and Eastern Europe.

And then, Mark, I am happy to talk a little bit about the margin. Yes, they had very good performance this quarter. Again, this is one quarterly margin that we don't give our margin targets or give quarterly guidance. So, this is one point in time. But again, we are running the business on an annual basis. To Kevin's point, we see real opportunities in some markets that we have rebuilt, particularly Germany. The U.K. is really hitting on all cylinders and doing very well; it's now our largest office. And we have also been very encouraged by the average fee-per-search has increased pretty dramatically in Europe. And I think that's as a result of the quality of people we have hired and in fact that we have moved further upmarket. So, all of those things, and also the fact that the health of major European economies is quite strong. All have pended in our favor. So, we think there is real opportunity in terms of growing the key businesses there, adding some good people and continuing to move upmarket.

Historically, you have talked about a high-quality professional services firm should generate margins on a consolidated basis of around 15%. In order to get there, what would Europe have to do? It looks like you could potentially, if this trajectory continues, it looks like you might be able to get there next year.

Well, I mean, we are not going to give margin guidance now for next year. Obviously, when we come back in fourth quarter, we will give everyone a sense of what we expect to attain in terms of 2008. If you look at public professional services firms, typically their margins in Europe, their operating margins are lower than in the U.S. and we have talked about before why that's true. It is because it is not one homogenous market, it's a more expensive place to do business because of social cause and other reasons it's more difficult to get the kind of size and scale that you have in a large U.S. market. That having been said, we think it's reasonable to think that over time, we could get to that high teens in terms of operating margins there on an annual basis. And a lot of that would be as a result of what we are doing in France and Germany, in particular Switzerland and some of the smaller markets. The U.K. already has a very robust margin, and controlling costs and driving revenue across that platform.

Can you talk a little bit about, obviously, this is a topic that comes up quite a bit. What do you -- Kevin, you have great contacts in financial services. Can you talk a little bit about what you are hearing about future of hiring plans, particularly in light of the most recent news that we have gotten from some of the largest financial institutions in the world?

Sure. It's interesting. As you know, we have had a -- we have had an interesting two or three months in financial services. But, if you look back -- and again, Mark, I did grow up in the financial services practice here. If you look at the trends that we saw in 2001, 2002, and although you have some organizations laying off at the lower end, Eileen touched upon this before and it's becoming our mantra, we don't need job creation, we need job churn. And at the senior level, you consistently, particularly as we go into bonus season, you see the need for high-level talent. And then you have simultaneously, organizations, we have been approached by clients across the globe who say this is a great opportunity for us to go out and grab senior-level talent from competitors because we have the ability to pay and give any uncertainty out there, particularly again bonus times -- if you looked at fixed income, bonuses being -- predicted to be flat to down versus 2006, you have organizations with the ability to go out and attract senior-level talent from competitors and use this as an advantage to leapfrog. So overall, across the globe, in all four regions in which we operate, we are still seeing a fairly buoyant search market. So, part two is that if you recall, we have a three-month retainer program. So given that our retainers are paid over three months, historically, the time we get busy is the end of October/November because bonuses are paid in February and March and so most of the large investment banks want to make sure that they have individuals lined up to join after the bonus cycle and they know ahead of time who they are going to pay what type of bonus to, so they understand if there is going to be any fallout in the organization. So, this is the time -- we always see a low in the summer but this is the time of year that we really get busy. So, we are still very optimistic with financial services, particularly as we head into the fourth quarter.

You don't think that we are going to have much of an impact from all of these write-offs and all these companies having -- are basically going to have a tough time making their numbers?

No, you see it -- you see it in the -- and again, at the senior level, you are still going to need talent. You see it in just one product area, I mean you see it right now across the globe whether it was UBS, Merrill, to name a few, Bear Stearns, you are going to lose people in the credit area, CDO area -- the credit -- fixed income credit areas, yet simultaneously there is other areas -- other banks look at this as an opportunity to grow and expand. I mean it is opportunistic as it sounds, I mean it is a huge opportunity for some of these firms. So, will there be fallout, will there be layoffs? Absolutely. While simultaneously they will still be recruitment at the senior level.

And we have seen that in terms of some of the European and Canadian banks using this as an opportunity to attract talent and some of the hedge funds have used this as an opportunity to hire traitors and actually, there is a fair amount of press around that in terms of people using this as an opportunity to upgrade their talent.

Great. And then, the last question and then I will hop off. What was the net hires for this quarter? And then in other words, how many new people did you hire this quarter in terms of non-consultants?

Well, certainly, as I mentioned earlier, Mark, we don't -- we have hired a few. I don't have the number right in front of me but we can get that. We have hired 15, so we hired 15 in this quarter. And if I reiterate what I mentioned before, the last thing we want to do is go out and make significant hires in the third and fourth quarter, very similar to you all in the banking -- excuse me, in investment banking, for the obvious reasons. And I mentioned before we have hired, we have hired a lot of people and we are also going through a promotion process right now where if we are going to promote people internally in the organization which is -- one of our key objectives is developing our own, we want to make sure there is room for them to grow in the organization as well. So, we do have a very active recruitment program in place right now for the beginning of next year and I think you will different numbers going into end of Q1/Q2 next year.

Thank you.

Our next question is from Tim McHugh with William Blair.

Yes. Let me add my congratulations to you as well. Looking at the -- you mentioned the hiring or lack of for the third quarter because of seasonal trends, touching on the turnover, can you talk about whether there was a continued focus on calling out underperformers or if there is any change in terms of the voluntary turnover rate?

No, in general, our voluntary turnover is trending and when I say that, I am really focused on, Tim, people who are leaving to either go to our competitors or to start their own firm, which I think is for the analysts and investors the most important number. That is still below 5% and that has trended below 5% for the last several years at Heidrick. We lose some people through retirement or other reasons, but terms of what I think of is the key metric for what you are looking for, people who are leaving to compete against us either in their own boutiques or with our competitors is less than 5%.

Okay. And then, the slowdown in confirmations in July and the pick up in October --

No, not in July, Tim. It was really in September -- July was very strong.

Yes, sorry about that. The -- we have hinted around it but was there significant differences on a geographic basis, particularly U.S. versus Europe and Asia-Pacific?

Well, there was some softness in the U.S. in September, I think it would be fair to say. We went back and looked at our financial services practice confirmation trends and there is no particular trend either regionally or monthly; it is sort of all over the place. Certainly, September was maybe not quite as strong in terms of financial services, but, again a month doesn't create a trend and we seeing rebound of that in October. I would say the one weak point particularly in September was in the Americas, but in general confirmations worldwide were a little slow in September.

Okay. And then, lastly, for Eileen, if I could touch on the slideshow you had put up says bonus accruals for the year of $118 million -- $125 million payments in early '08.

Right.

Does that correlate to the $104 million thus far this year of bonus accruals?

Let me give you a sense of what we think the bonus will be. This is based on the guidance that we have given you. We expect to pay a bonus in first quarter of next year of around $130 million. $122 million roughly of that would be cash and about $8 million worth of that would be RSUs because again, a portion of our consultants and also management's bonus is paid in RSUs.

So, would that imply, if I were looking at the gross margin for the fourth quarter, $80 million or so of bonus accruals would be your expectation at this point?

At this point given what we have accrued so far, I think that's about right.

Okay, thank you very much.

Your next question comes from Michel Morin with Merrill Lynch.

Yes, good morning. I just wanted to hone in a little bit on the Americas. If we are doing the math right, it looks like on an organic basis your growth rate is fallen to about 2% in the quarter. So, first of all, I want to make sure that we are in the right ballpark here and if you can elaborate a bit on what the key drivers are there because I think in the prepared remarks, you said that everything was up in terms of the key metrics and I am wondering if that would still be true on an organic basis?

Michel, I don't know where you are coming up with 2%. If you look at year-over-year, we are at a 20% growth rate and we have then about 10% of our revenue this last quarter was based on Highland Partners, most of which was in the U.S. as I mentioned. So, we are not seeing organic growth [that is] as weak as what you are looking at in your model.

Okay. All right. Will double-check to that there then. And secondly, were there any big searches that would have had a noticeable effect on the quarter in any given region in this quarter?

Well, we have significant upticks typically throughout the year. There is no one enormous search that affected any region, no.

Okay. And then just finally, on the G&A items that you went through, can you elaborate a little bit on the $2.1 million that you in Europe and also on the rent expense ticking up I think in Asia?

Yes, let me the latter question first. The rent expense in Asia is as a result of a couple of new offices. First of all, we have an office in Auckland that we didn't have last year. We also have some new leases that we had to enter into because our leases were expiring, for example in Tokyo and in Sydney. So in general, we are seeing commercial rate levels moving up and so that is going to be a cost that we have to try to control as well as we can. We have someone full time on staff who spends a 100% of her time managing our real estate. We are very focused on that. One of the things we are working on is working on having people work virtually, so that we can really mitigate our lease expense as best we can. So that's really the answer in terms of Asia. In regard to the matter in Europe whereby we needed to retain the services of the third-party consultant, I think you are asking sort of how this flows through the P&L, is that your question, Michel?

Wondering what that was? It seems like a big number.

Well, we were contracted with one of our clients to provide some overall services in the leadership consulting area and we needed to retain another consulting firm to work with us on that. So, the amount that we paid to that firm was $2.1 million.

Okay.

Working in concert with them.

Right. Okay, great. Thanks very much.

Our next question comes from Mike Carney with Coker Palmer.

Hey, good morning. Eileen, a quick follow-up on the lease. What was that in Asia-Pacific? Was there -- I missed that point.

Yes, I will be happy to give you -- the leases that are new or either new locations, for example [Xuancheng] in Asia and also Auckland in New Zealand are just new expenses for us because we have offices there that we didn't have in third quarter last year. We renegotiated in Tokyo, Shanghai and also in Sydney, so we had additional lease expense in that region.

Got it.

On a year-over-year basis.

And also, you had -- what was the revenue impact from Highland that you mentioned?

The revenue impact for Highland across the entire firm was $16 million. There were only a few consultants in Asia and a few in Europe, so most of the revenue would have been in the Americas.

All right. Okay. And also, Kevin, if you continue to kill it in all the regions, you even had much stronger growth in the Americas than you have ever had and yet you have clearly got rid of a lot of consultants recently that probably weren't performing so -- for a while, you were having double-digit consultant growth. As we move into 2008, is -- if things were to stay the same now for the next couple of months, and -- would your goal be to go again get back to double-digit growth in consultants in the Americas or would it be a lower or higher?

I think if you look at it this way, we went from average revenue per consultant from 1.3 in the first quarter, 1.5 in the second to 1.6. And as I mentioned before, Mike, we did hire aggressively over the last two years, more so than any of our competitors. So, our key goal is to drive revenue per consultant while simultaneously, and I mentioned this in the last call for the first time, moving those individuals out after an 18-month, 24-month time horizon that aren't performing. So, that's part one. Part two would be, yes, I mean we are going to be proactive in terms of recruiting and we have gaps in our business and we think we can capture more market share, particularly in North America, again in the energy sector, in the asset management sector, and the media and telecom sectors while less focusing on our diversity practice as well -- there is a few other holes that we are looking as well. So, long story short, there is probably around 5%, I think is the number that we are looking at next year.

Okay, got it. And then also, have you transitioned most of the management structure to the operating practices and if so, is that -- I mean would you say that that is one of the reasons why you have seen continuously much better growth than historically?

We are focusing, having gone through a whole strategic review and interviewing somewhere around 45 to 50 clients across the globe, we have shifted the matrix -- we have tilted the matrix to be heavily skewed towards the practices and primarily coming back to the average revenue per consultant, we found that those individuals who focused on one key practice or on a strategic partners program had a higher revenue per consultant than those who are more generalist or worked in one of more practices. So that's the key focal point that -- excuse me, that's the key objective of moving towards the practices, plus the clients, and I mentioned this before, described this as a more of a collection of countries and we wanted to serve them better across the globe, but it seems to so far well received.

Okay. And so, I understand. Would you have a practice group leader that is primarily -- who is global that's going to have the primary responsibility for someone not in his country or region?

Absolutely. He works, for example, Graham who runs the Life Sciences practice works in conjunction with David Peters who runs our European region, as well as Manoel in Latin America and Gerry Davis in Asia to make sure that we are staffed appropriately in those regions, and from account -- our key account perspective, we are covering the appropriate accounts.

Okay, got it. Thanks.

If there is no more questions, may be I will just say a last couple of words.

There are actually two more questions.

Okay.

Our next question is a follow-up question from Tobey Sommer from SunTrust Robinson.

Thanks. I was wondering if you could describe in whatever metrics you would decide, the difference in profitability for financial services searches versus the rest of the book of business?

Typically, Tobey, we don't go into that level of profitability by practices. And understand that there are higher fees on the financial services practice but we pay higher bonuses as a result of there being higher fees. So, that mix of business is advantageous because it does drive high fee-per-search, but we are paying bonuses on it and we have an ascending sort of percentage takeout on our bonuses. So, typically, our searchers who are driving a lot of revenue in financial services, are receiving a larger percentage of that revenue. So, it all kind of balances out.

Are you saying that the incremental margin on growth in financial services searches is not higher than the rest of book of business?

No, in general, we don't go into that level of profitability in talking about our practices. The financial services practice also sort of melds in with our private equity practice in terms of placing people in portfolio companies. We are really looking at the business more holistically than that.

Okay. I understand you are, but is it -- without talking about specific numbers, does it makes sense that it is more profitable?

It may be -- it depends on how you would want to allocate costs against financial services. In typical -- typically, their fee-per-search is higher than our other searches, but not always.

Okay. And then, I was wondering if you could give us any color on the leadership services, sort of what trends you are thinking about there that may impact the growth in that business in 2008 -- or in coming quarters not 2008 specifically? And the extent to which you may have opportunities to add to that business to give it more breadth whether that's through organic hires or acquisition? Thanks.

Sure. We are very bullish on that business. It is a very important part, particularly of our Board and CEO practice and we have been able to frankly win and succeed with a number of major CEO searches as a result of it. It's part of the broader strategy that Kevin has put in place to have a more consultative relationship with our clients, less transaction focused and as a result, it has been very successful. We have built out our capacity both in Asia and in Europe and EMEA and we have a very strong group of people in the U.S. So, we think that there is a real opportunity there and it drives our brand further upmarket. So, it is really a very virtuous circle in terms of our ability to serve our clients not just on locating at searches and needs that they have, but looking more holistically at their human capital needs. So, we are -- again, we are very bullish on that part of the business and certainly we feel that we should continue to invest in it.

Last question on that particular subject. Do you expect to, at any point, articulate goals for growth in that segment and/or percentage of revenue outside of the core executive search business? Thanks.

I think it remains to be seen given how big the business is now, it is now only about 4% to 5% of our revenue. As it grows, we will certainly take that into consideration.

Thank you very much.

Our next question is a follow-up question from Mark Marcon from Robert W. Baird.

Typically, you have more upticks in the fourth quarter than the other quarters, just as everybody is trying to line themselves up for bonuses?

No. That's not true, Mark. It is really very difficult to generalize, to have more upticks in fourth quarter than other quarters. What we see however is that upticks are becoming a larger part of our business and my personal view of that is that you have an inflationary wage environment and enormous demand for high-level talent. And so, typically, what will happen is that they will want to hire someone at a senior level that the client thinks that they can do that at a certain price point and it takes more than that. That results in an uptick to us. And if you look at our average fee-per-search, it is going up the last couple of years about 10% or more year-over-year and some of that is clients sort of lagging indicator about what it will cost to hire a talent which results in our pricing a search at one level and then completing it another level, which results in an uptick. So, it is very hard to generalize whether or not three are more upticks in one quarter than another.

Just with regards to the trends that you are seeing, particularly in the 50% of your business that's outside of the U.S. and how strong that has been and it sounds like the tone would suggest that things continue to be strong. And looking at that vis-a-vis what the implied guidance is for the fourth quarter, given your annual guidance, how should we think about that? Because I mean you did a lot better than what we expected based on your annual guidance for this quarter and I am wondering, are you trying to be conservative as it relates to the --?

No, we are trying to give a sense -- again, we have gone back, as you know, Mark, to an annual guidance and to give you as much visibility as we have in what is still a very highly transactional business. I am laughing a little bit because when we came out with our initial guidance of $560 million to $580 million, no one believed it. We have now raised our guidance twice and are now at $600 million to $610 million and your question about whether or not it is conservative is sort of ironic. We are trying to give you the best sense possible of our view in the business at this time. It is not a business that is readily forecastable on a quarter-by-quarter basis both in terms of top line and bottom line. So, we are giving you our best sense of what we think it will be for the full year. And again, we really want to point people towards annual guidance. This isn't a business that you should invest in or look at on a quarterly basis because trends or when searches come in can both affect the top and bottom line.

Okay. And then, as you look towards next year, you have had nice improvements in productivity. How much further do you think you have to go with regards to increasing the productivity per consultant?

Well, there is still an opportunity for people to do more searches than they do now. We get an automatic sort of uplift in productivity by the fact that the fee-per-search has increased 10% year-over-year and Kevin's very focused on investing in tools to make our people more productive. So, we certainly think there is room and a number of our consultants are annualizing well in excess of that average.

Right. Thank you.

There are no further questions at this time.

Thanks. Well, let me leave you with just a few quick thoughts. The first is that we are proud about the results that we have delivered to you so far this year. And we have consultants and employees around the world to thank for executing on all the operational initiatives that we have been engaged in over the last few years.

The second is that we hope we have given you a sense of our positive outlook for the executive recruiting industry in general, and for how we at Heidrick & Struggles are positioned to leverage the worldwide demand for talent.

And finally, we are committed to growing our business and increasing shareholder value. We will continue to invest in our core business through hiring and productivity initiatives and tools. We will continue to forge strategic partnerships that further our ability to identify and nurture talent; and we will continue to evaluate potential acquisitions.

I want to thank everyone for their time today and I hope you all have a great day. Thank you very much.

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