Heidrick & Struggles International Inc (HSII) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Heidrick & Struggles 2008 fourth (sic - see press release) quarter earnings conference call. (OPERATOR INSTRUCTIONS.)

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

Good morning, everyone, and thank you for participating in Heidrick & Struggles' 2008 first quarter conference call.

Today's participants on the call are -- we're split between Paris, where we're holding our European Regional Meeting, and in Chicago. From Paris, in addition to myself, are Kevin Kelly, the Chief Executive Officer, Rob Hines, the Chief Operating Officer of the Americas, and Catherine Baderman, our Vice President of Finance and EMEA. And in Chicago and available for Q&A, are Eileen Kamerick, the Chief Financial Officer and Chief Administrative Officer, and Jim Andrejko, Vice President and Controller.

As a reminder, there are supporting slides that are available on our website at heidrick.com that accompany our remarks today, and we encourage you to follow along or print them. And, as always, I advise you that this call cannot be reproduced or retransmitted without our consent.

Also, we'll be making forward-looking statements on today's call, and ask that you please refer to our Safe Harbor language that's in our news release and also on slide 1 of our presentation.

And, at that point, I'll turn it over to you, Kevin.

Thanks, Julie. And thanks to all of you who are taking the time to participate in our call today. If you are following along with the slides we've posted on our website, I'm going to start with slide 3.

Net revenue in the first quarter was $153.1 million, up 7% compared to last year's first quarter. The Americas region was down about 7% compared to last year. Europe's revenue was up about 14 on a constant currency basis, and Asia Pacific's net revenue increased approximately 22% on a constant currency basis.

In the Americas the decline was expected due to the weak backlog we had going into the year as a result of December confirmations and to a softness in a couple of subsectors within the Financial Services practice. Namely, in Consumer Finance and in Capital Markets and Investment Banking. But there were great results in other subsectors, like Insurance and Asset Management, as well as other practices, like Life Sciences, Technology, and Business and Professional Services, which achieved at least 15% YOY growth.

Turning to slide 4, consultant headcount at March 31st was 408, compared to 386 at the end of December, and 414 at the end of last year's first quarter. But already in April, we've made some significant key new hires in every region, especially in the U.S. where we've made additions to the Consumer, Technology, and Industrial practices, as well as in Financial Services.

We are also making excellent progress in our search for a new Chief Financial Officer. The volume of recommendation for candidates from our own consultants, as well as from some of you, has been tremendous, and this has helped us quickly canvas the market.

And while we continue to actively identify and develop qualified candidates, we are now in the process of interviewing a select few to be considered for the short list. Now, it's hard to say exactly when we expect to have the position filled, but I'm excited by the interviews I've personally conducted thus far, and believe we are well on our way to a final decision.

Turning to slides 5 and 6, executive search confirmations in the first quarter were essentially the same as last year's first quarter, but were up 26% sequentially. On a monthly basis, February confirmations were in line with what we were expecting when we reported our fourth quarter results on February 26th and March was about the same as February.

Given that Easter and spring breaks were in March this year, we were very pleased with the March confirmations. And, as you can see from our slide, April is tracking to be ahead of March, as well as ahead of last year's April.

Moving to slide 7, productivity or annualized revenue per executive search consultant remains strong at $1.4 million, and increased in every region compared to last year's first quarter. This level is down just slightly from the fourth quarter levels of $1.5 million, but not surprising given the additions to consultant headcount.

Looking at slide number 8, the average fee per executive search increased in every region YOY, and consolidated it was $106,700 or about 11% higher than in the 2007 first quarter. The average fee per executive search which is calculated based on net revenue has been the lowest in the first quarter in each of the last four years.

Referring to slides 9 and 10, first quarter operating income was $10.9 million compared to $16.3 million last year. In the first quarter operating margin was 7.1% compared to 11.4%. While these results were lower than what our analysts were modeling for the quarter, I would remind you that we budget and guide on an annual model, and our first quarter results were only slightly off but within planning given the investments we've been making the last two quarters.

And recall that in each of the last four years our first quarter operating margin has been the lowest. And this is for a number of reasons, including traditionally lower revenue levels in the first quarter, bonus accruals based on full year expectations for higher revenue, and increased fixed cost for new hires typically made in the first quarter. These expenses get leveraged throughout the year on higher revenue levels.

But now I'll go back and discuss the two key line items. Turning to slide 11, salary and employee benefits expense in the first quarter was $110.6 million or 72.2% of net revenue. This expense was up $12.2 million or 12.5% YOY. Fixed salaries and employee benefits expense accounted for $7.8 million of the increase, and performance based compensation accounted for $4.5 million. The increase in fixed expense was a function of the 5% YOY increase in our worldwide headcounts, specifically in Asia-Pacific, where we have been investing in new hires to take advantage of a robust market. This also reflects the previously disclosed charge of $1.1 million in the first quarter.

The increase in performance based compensation, as you know, is largely driven by higher expected revenue levels for 2008 that translate into higher bonus accruals, but which do not necessarily match quarterly revenue levels, so making a higher accrual for bonuses during what is historically our lowest revenue quarter negatively impacts the operating margin.

Total stock based compensation expense in the quarter was $6.6 million, which is down compared to $7.6 million in last year's first quarter, and reflects a change to our 2008 compensation program.

Starting with 2008 bonuses, which are payable in 2009, the portion of consultants and management bonuses that was previously paid in RSUs will now be paid in cash and still deferred over three years. The accounting treatment will not change, so it will be neutral to the P&L.

As you know, we've been developing a strong culture of employee stock ownership in recent years, and I'm pleased at the way our consultants have embraced stock ownership as a means of aligning their interest with those of the outside shareholders. But as we look ahead at the equity programs we've used to drive shareholder alignment, including the availability of shares to support those programs, we believe that in order to continue to support our goals, you must change our program mix in recognition of the importance of maintaining a substantial pool of shares.

Accordingly, beginning in 2008, we will shift our 15% to 20% bonus deferral from RSU's to cash for consultants and management. Fortunately, the other equity based programs will continue as before.

Turning to slide 12, general and administrative expenses in the quarter were $31.7 million, an increase of $3.2 million compared to last year's first quarter, but down slightly from $32.1 million in the fourth quarter.

As a percentage of net revenue, G&A expenses were 20.7% compared to 19.9% last year. The YOY increase is mostly a result of new leases and lease renewals since the end of last year's first quarter, including Dubai, Moscow, Geneva, New York City, Hong Kong, and Tokyo, but also an increase in premise related costs. These offices are in emerging markets, high growth areas, where we need to increase our space, or in cities where increasing real estate prices were working against us.

In Asia-Pacific, in particular, the investment in leases has had a significant impact on their margin, but this infrastructure will now be leveraged on the higher revenue levels we are planning for. On a consolidated basis our goal continues to be to maintain G&A in the low 20% of net revenue or lower.

Looking at slides 13 and 14, largely as a result of the lower operating income in the first quarter, net income decreased to $7.1 million and diluted EPS were $0.38, reflecting a quarterly effective tax rate of 40.3%. This compares to an effective tax rate of 45.1% in last year's first quarter, which reflected the incorporation of our Japan branch.

Moving to slide 15, cash used in the operating activities was $116.5 million in the first quarter, compared to $68.4 million in last year's first quarter, and primarily reflects higher bonus payments.

The cash and cash equivalents balance as of March 31st was $142.8 million. The decrease compared to December 31st, 2007 reflects the payment of approximately $135 million in the first quarter. There will be an additional payment of approximately $13 million in April for our payroll taxes in non-U.S. countries related to the 2007 bonus.

Looking at regional results, please turn to the Americas' results on slide 17. Net revenue of $77.3 million in the quarter was down 7.3% YOY. The decrease reflects the weak confirmations that we saw in December, which translated into lower backlog going into January, as well as the decrease in specific areas of the Financial Services practice.

As we look to the second quarter, we note that the Americas achieved its third highest month of confirmations in January, and February and March were good, too. April confirmations reflect the same trends we are seeing on a consolidated basis.

Operating income in the first quarter was $11.7 million, down 29.7% YOY, and the operating margin was 15.2% compared to 20% in last year's first quarter. In addition to the decline in revenue, the operating and the operating margin -- operating income and the operating margin were impacted by the increase in lease expense most significantly by the New York Office lease.

Turning to Europe on slide 18, first quarter net revenue in Europe of $52.9 million was up 24.2% YOY, or about 14% on a constant currency basis. All but one country, our smallest, Poland, achieved YOY revenue growth, but France, Germany, Switzerland, and our newest markets, which include Dubai and Moscow, were the largest contributors to the growth. Operating income increased 38.5% in the quarter, and the operating margin improved 10%, compared to 8.9% in last year's first quarter.

Turning next to slide 19, in the Asia-Pacific region, this region turned in another quarter of record revenue, $22.9 million, up 33.6% YOY, or about 22% on a constant currency basis. To put their growth into context, Asia-Pac's annual revenues in 2003 were not even quite $22 million. Almost all of the nine countries that make up this region contributed to YOY growth, with Australia, Hong Kong, Mainland China, being the largest drivers.

Operating income of $2.7 million decreased 37.8% YOY, and the operating margin was 11.9% compared to 25.5% last year. As mentioned, the decrease in operating income and resulting operating margin generally reflect the investments we have made in this growing region over the past year, including salary and employee benefits, associated with increasing total headcount by 25% and consultant headcounts by 35%. The timing of these hires, as you know, means additional fixed cost without corresponding margin as they get up to speed. We have planned to hire a few more in second quarter, but as in the past, the majority of the hiring will be done in the first half of the year.

The decrease in margin also reflects higher infrastructure cost related to leases for new and existing offices since last year's first quarter, including Hong Kong, Tokyo, Singapore, Shanghai, Sydney, Bangkok, Chongqing, Melbourne, and Mumbai. We will now leverage the new hires and associated infrastructure to drive revenue and more will fall to the bottom line. And, to be explicit, we expect the margin to expand in this region going forward.

So what is our outlook for the rest of the year. Based on our plans for each region and the metrics we monitor, we are comfortable reiterating our guidance for net revenue of between $650 million and $670 million in 2008. The first quarter operating margin was only slightly below our plan and our forecast for revenue, combined with the additional cost management initiatives we are working on, give us comfort in reiterating our target of an approximate 13% operating margin for the year, excluding any large extraordinary items.

We still expect that net income and earnings per share will reflect a full year effective tax rate of between 38% and 42%, and this includes our plan to incorporate one more branch office in the first quarter -- fourth quarter, excuse me. As we head into May, we continue to see good demand for executive search and leadership consulting services. Confirmations in April look very good, and we are expecting that our YTD confirmations will be ahead of last year's for the first four months.

From a regional perspective, Americas is still seeing some softness within our Financial Services practice, and we expect that to continue in the second quarter. But there are many other examples I can point to of regions, industry, or functional groups in the United States that are seeing record results so far this year, and I think sometimes they get overshadowed by what you hear about the Financial Services industry.

One area in the U.S. that turned in record results in the first quarter is Houston. And recently on CNBC's Squawk Box the anchors referred to Houston, as the Abu Dhabi of North America, with climbing oil and gas prices fueling infrastructure growth, employment, and expansion in industries even outside the oil and gas industries."

The Houston Office turned in a record first quarter and is hiring to meet demand in areas like alternative and conventional energy, energy infrastructures, such as engineering, and construction and energy technology.

Our Technology practice also achieved great results in the first quarter. In fact, worldwide, the Technology practice had its best quarter in the last four years. We are seeing an increase in overall demand for searches, and we are achieving a higher win rate in competitive pitches. We attribute this to the increase in tenure of our top producers in the Technology practice, excellent search, execution and placements. This, in turn, is helping us recruit experienced technology search partners to Heidrick. We're getting more advanced in competitive situations, and we are winning a disproportionate share of the work.

And our win/loss record for Fortune 1000 CEO searches is something else to mention. For the first six-month period that ended in March we are proud to report that we achieved a 48% market share for the 27 known Fortune 1000 CEO opportunities, including United Rentals, Georgia Gulf, McDermott, Freddie Mac, XL Capital, and Corn Products. Business in Europe and Asia-Pacific continued to grow and improve, and combined these regions represent 50% of our business.

Today, I'm speaking to you from our European Regional meeting in Paris, and I'm leaving this meeting incredibly enthusiastic about the outlook for this region. I could give you numerous examples of practices and countries that are growing more profitably than ever, but in particular I wish I could convey to you the momentum of our business in the Middle East. While small today, with less than $5 million of revenues, this region doubled in 2007 and is expected to almost double in 2008. We have done 90 searches in the last two years, 90% of which were at the C level.

In addition to hiring new consultants, we have sent two of our top consultants to this region, one from the UK, and one from the U.S., to help capitalize on the opportunities here, and our potential in Moscow is just as exciting.

In March Asia-Pacific hosted its regional meeting in Hanoi, and I can tell you that the energy and enthusiasm of our employees there is exciting, as well. We've invested heavily in this region over the last year in order to meet and exceed the growing demand for our services, and we absolutely believe that there will be a higher return. We have numerous examples of U.S. multinationals, especially in the Financial Services sector, who are giving us searches in Asia-Pacific despite layoffs in the States. And what is more encouraging to me is the increase in searches being initiated by companies based in Asia-Pacific that are turning to Heidrick & Struggles to help them hire and retain executive talent in an increasingly competitive market.

We will continue to invest in growth of our business, and this is the time for Heidrick & Struggles to gain market share and become a leader in every practice and in every region. We learned a lot from the last slowdown, and one thing we learned was to not stop investing in strategic new hires, and I don't want to make the same mistake this time. So even despite the potential softness in certain areas of Financial Services, we are using this as an opportunity to hire in order to improve our market position.

As of today, we are still proceeding with the investments that we discussed with you on February 26th, the investments in our business, which we believe will have a significant and positive impact on our growth and in the productivity of our consultants, including a new search system and a new office in New York, both amortized over many years. If we were concerned that we could not meet our commitments to shareholders, we would reconsider delaying or mitigating these investments.

We, as a Firm, are proud of the cost structure that we have worked so hard on to improve over the last three years, and continuously review all of our variable costs in order to prepare for any worsening of the economic landscape.

In light of the first quarter's margin, several [shortened] cost management initiatives were initiated. As you know, I've been in executive search since 1992 and in three key regions, and have seen a number of global recessions, and this is not like 2001.

I'll close by reiterating that given the demographic and secular drivers, I believe this is a growth business. And although we do not have a crystal ball to predict what the economy will do, I do believe that continued focus on our key initiatives in each region, investment in areas of opportunity, and an ardent focus on costs and good execution will help ensure our growth and success going forward.

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

(OPERATOR INSTRUCTIONS.)

Our first question comes from Andrew Fones with UBS.

Yes, thank you. First, on margins, I think looking back historically the -- your margin in Q1 has been about 290 basis points below the average for the year, over the last four years. You had a 7.1% margin I think in Q1. So looking at your 13% guidance for the year, you mentioned cost management initiatives. Can you quantify those and explain what you're looking at? Thanks.

The cost management in each specific region or I mean consolidated?

Well, in each region would be great. Thanks.

Well, as you know, we guided towards an annual and a consolidated operating margin, so we don't guide to regional and probably won't go into all that much detail. I mean clearly it was the Americas that saw the softness, so we have more initiatives in there, and in Asia-Pacific a lot of the margin decline was the result of investments. So each region has slightly different issues.

I think if you look back, you know, and we put a slide in there to show you, the margin is the lowest in the first quarter, and has been for the last four years. Typically, in the first quarter of our total operating income for the year we've earned in the first quarter anywhere from 14% to 19% of the total operating income.

Yes, I think -- I guess why my comment was based on kind of the operating margin in the first quarter and the usual seasonality we may see, you know, we should expect about a 10% margin for the year, so do you think -- what I'm trying to do is understand whether it's reasonable to assume a 300 basis point improvement in margins from these cost initiatives, and what these initiatives are? Thanks.

Andrew, it's Eileen Kamerick. Let me also give you a sense of that. The 300 basis points that you're referring to, if you look at our margin for the last couple of years, actually I don't think that's a good extrapolation. One of the things you have to remember is that on our revenue recognition model we had a very weak December in terms of confirmations, and as you know the business rebounded quite well in January. Well, you didn't see that weak revenue in the fourth quarter, but it affected our first quarter. And the first quarter is critical in terms of making specific hires in order to set-up for the rest of the year.

To give you a sense of that, you know, our backlog going into the second quarter is $16 million higher than it was going into first quarter, so we expect to have significant growth in terms of revenue on a quarterly basis. But because we have to look at the space, this business, on a full year basis we set-up our hiring for the first quarter. So you had the conflicts of two things. One, you had a fairly weak confirmation trend in December, and then you also have the normal hiring and costs that you have in first quarter.

So extrapolating sort of 300 basis points, we have in the past had a margin as low as 6.5% in the first quarter. And we tell you that, in fact, our first quarter is the lowest, both in terms of revenue and in terms of margin. So I think you should expect that the margin would not just extrapolate by 300 basis points, but that there would be certainly our strong faith that we would be able to hit our full guidance for the year of a 13% margin on the revenue metrics that we've given you.

Okay. Thanks. And then in terms of the initiatives that you're undertaking, would you be looking at headcount? Is this mostly on the G&A side, or can you just give me a couple of details? And then I had one other question which was can you explain what other net was this quarter? Thanks.

Eileen, you want to get the second part, and I'll get the first?

Sure.

So on the cost side, Andrew, it's -- and you'll see this happen over the next couple of weeks, as we did last year, we go through, interview all underperforming staff, so it's taking out underperforming staff across the globe, be it at all levels of the Firm, working on not hiring any new revenue producing staff, looking at making sure that our T&E budgets are held to, as well as expenses. So it's a holistic overview of all of our expenses as an organization, as well as moving out underperforming people.

And on the second part of it, Andrew, that's a good question, and it has to do with our U.S. dollar balances, so you've got an FX affect. And then intercompany loans that are denominated in dollars and it's sort of 50/50 on both of those.

And just so you know, we have set-up a finance company in Europe, where we're managing our cash and managing our exposure to currencies, and we're working on doing that in Asia, as well, but that's what that $1 million is, is really U.S. dollar balances, and then intercompany loans that are denominated in dollars, the FX affect.

So should we expect that $1 million to come down in Q2 and beyond?

Yes, you should expect that.

Thank you.

Our next question comes from Kevin McVeigh with Credit Suisse.

Hi, it's Kevin McVeigh. I wonder if you could, following up on Andrew's question, if you could provide a bit more of a roadmap in terms of how we'll achieve the 13% operating margin for the full year, on a quarterly basis how that plays out, and then if you could help us directionally, how the regions will contribute, i.e., the Americas, Europe, Asia-Pacific?

So for the last -- Kevin, I'll start, and then maybe Eileen can extrapolate -- if you look at the last four years, the average in the first quarter has been between, in terms of earned operating income, has been between 14% and 16%. 2007 was higher than normal because we had the acquisition of the Highland Partners, so we saw an inflow of revenue in Q1 of 2007. So we're confident that at this point in time, given the trends we're seeing in the marketplace and the investments that we've made early in Q1, that the revenue growth will help achieve that margin of 13% -- approximate margin of 13%.

Yes, and I'll add a little bit to that. I mean you know that we don't provide quarterly guidance, and Kevin is exactly right. I mean what you're looking at and looking at a YOY comparison is you had a first quarter where we overachieved on revenue, and we had about the same sort of level of spending, in general, in the first quarter. You have the opposite here.

Although our confirmation trends have been very strong in January, January was our third highest confirmation level in the history of the Firm in January, and we see very good trends going through the first quarter and into April. Because of our revenue recognition model, when we start the quarter with a lower backlog, and we started this quarter with about a $7 million lower backlog going into first quarter than we had going into fourth quarter, we can manage costs in terms of the variable nature of our cost model, but not for every quarter.

So we're not going to defer hiring and defer the cost -- the expenses that we have to set-up the year in first quarter, only because we're going to have a slightly different phasing in revenue. But as we go into the second quarter, again, our revenue backlog is about $16 million higher than it was going into first quarter.

So if you compare first quarter of this year to last year, everyone looks at the margin the first quarter of 2007, which is 11.4%. We never have a margin that high, and the reason for that is we had a stronger backlog and we overachieved on revenue. You have exactly the inverse here, but we think we're set-up for a very strong rest of the year. We're focused on our costs, and as Kevin said to the extent that there are concerns about meeting those commitments, we still have a cost structure that is about one-third variable, where we can manage that cost structure to be able to meet those commitments.

As Kevin mentioned, we expect to see margin expansion in Asia, in particular. That's a very high growth business, and we have to build some infrastructure and do some hiring to be able to take advantage of that. Europe is performing well, and as you can see, I mean we've had 10 points of margin expansion over the last few years, and we expect that we'll have -- we'll see revenue come back in the Americas. And we're starting those initiatives now in terms of cost containment, so we're confident that we can make all of this work.

I wonder if you could just -- how was Financial Services relative to your expectations? Because it seemed like on the fourth quarter conference call that there were a lot more offsets, or my sense was that Financial Services that might have been cushioning some of the areas of concern, but it looks like the numbers came in a little weaker than what I would have expected.

Our Financial Services practice continued to grow both in Europe, to a great degree, and Asia-Pacific. As you may recall, and this came up on the last few calls, we're looking at this as an opportunity in North America to capture market share in all segments in which we operate. And today, and we had transferred a couple of consultants overseas in Financial Services, but simultaneously we only saw weakness in two areas. One was the consumer and retail banking sector, and the other was investment banking and capital markets.

We still see demand in asset wealth management and in parts of -- as we talked about in the last call, you see a need, particularly in these markets among investment banks, for legal and compliance and risk managers, so we are seeing demand there, and we're trying to capture the demand. We're also looking at this as an opportunity to grow and expand our Financial Services practice in certain segments of the market, as well.

So there was a bit of softening in North America, but some of that I attribute to the backlog that we've discussed. And when you go out and talk to consultants in the field, if you recall, I think the calendar worked against us last year because it was a short month at the end of December -- excuse me, mid-December, 16, 17, was one of the last working days. We lost 13 days of bringing in confirms in December, so it did impact somewhat. But I also gave the example on the last call, where we had one investment bank, that the client wrote-off $12.2 billion and give us 35 searches in capital markets in Hong Kong in January of this year, because they need to continue to grow internationally, as well.

And just to add to that, I mean in terms of Financial Services, apart from North America, Financial Services in the first quarter is up in every region.

Okay. And not to belabor this, but just kind of given the macro weakness we're seeing, is there anything in the business that kind of offers you more optimism? My sense is you'd be a little more cautious, just given the macro outlook overall. Is there anything that's offsetting that?

Well, Kevin, you know, I've read some of what many of you have written this morning, and I don't -- I'm very comfortable reiterating guidance, and I just spoke about the fact that we're in Asia-Pacific and we see the demand. And in the many individual conversations I've had with you, I've talked about the fact that, and Eileen just mentioned this, we see tremendous opportunity in Asia-Pacific, we'll see margin expansion there. The opportunity there for us is working for those Korean, Chinese, Japanese companies that are going to expand. We have huge opportunities here, being in Paris at the European meeting, where morale is the highest it has ever been.

I've talked to many of you about Germany and France, and how we restructured and rebuilt those. And, as you recall, we're seeing significant growth in those markets, and not even to mention Moscow, Dubai, Central and Eastern Europe. So that coupled with the fact that I'm convinced in North America that even though we saw somewhat of a softening in Financial Services, we don't have the market share we should, and we're using this as an opportunity to capture market share. So I think the demographics trends, what I just described, we're still optimistic about what we're seeing and the need for executive search globally.

Okay. Thank you.

Our next question comes from Tim McHugh with William Blair & Company.

Yes, first, I wanted to ask about the revenue per search. You mentioned it's seasonally always lower in the first quarter. I was wondering if you could just talk about that seasonality as well as the factors that impacted that this quarter, whether Financial Services falling off had an impact or any changes in where the revenue came from from a regional perspective?

Well, it's also -- I mean, Tim, it's a great question. In terms of seasonality, we have, when we go out and do an engagement we usually charge 33% upfront, and due, again, to the backlog in January, increased number of confirmations and -- excuse me, backlog in December, from December, as well as increase in confirmations in January, February, and March, we haven't seen a lot of the upticks, what we call upticks come through, and that's where you true-up a search to make sure that you're getting that 33% based on the first year's income. So that has something to do with the decrease in average revenue per search in the first quarter.

And, Tim, this is Julie, because it is a calculation, it is based on net revenue which was lower in 1Q but higher confirmations in 1Q and thus you get the $106,000. So it's also been the lowest in the first four quarters. It was down in every region, so it wasn't specific to any region or any practice.

Okay. And then you mentioned that operating income relative to your expectation, at least, was slightly below. I was wondering where -- if you could comment on where it was -- where that slight variance from your plans was, as well as how if you looked at confirmations through the first four months, how does that compare to what you had probably expected as you initially gave the guidance?

Sure, I'll be happy to address that, Tim. I mean, first of all, we budget throughout the year, and typically we would expect again to see a lower first quarter margin. I think the disconnect here is that everyone looked at the first quarter margin of 2007, it was 11.4, and they only brought that down slightly. That over -- that was really an over performance on revenue. In this instance, we had the inverse.

So without commenting on our budget, I mean we have a budget that in the first quarter would necessarily have a lower margin, because for all sorts of reasons. There are costs associated with professional services, like FICA and other things. We hire in the beginning of the year to make sure that we can meet our revenue goals, all of that. So we would expect that that would be the case. And, as Kevin mentioned, and given what we see in the acceleration of the business, we're confident that we can meet both the revenue and margin commitments that we've made.

Plus, Tim, you know, if you'd look at the number of investments we've made, I mean we're growing as an organization. Over the last couple of years, 18 months, we've hired I think more than any other firm at the search level, consultant level, and we've just grown out of office space. So we had -- I rattled off a list of -- whether it was Chongqing, Hong Kong, Tokyo, Australia, and then parts of Europe, as well as our New York lease, we had to invest in our infrastructure to support our growing consultant base.

Okay. And then, lastly, can you comment, at all, on how London is faring in this turned environment? There's obviously concerns about the UK macro environment, and I know that's one of your larger European offices.

Sure, I'll let Catherine Baderman, the CFO of Europe is here, so I'll let her -- she's based in London, I'll let her cover that one.

Hello. London, basically, still continues to be a very important piece of the European network. It's a very sizable office, one of the largest offices in the world. It is one of the only offices in Europe that is really focused and drives its strength through its practices. We're still seeing good performance. We're seeing strong development in all the practices that work out of London, and we're still very positive that there's more growth to be had there.

The challenge in London as we look at the broader picture of the infrastructure is we, too, are very tight on space, and we're having to be imaginative and creative about how we keep our costs down in what is a very expensive place to do business, whilst growing that business at the same time.

Okay. Thank you.

Our next question comes from Michel Morin with Merrill Lynch.

Yes, good morning. I just wanted to follow-up to one of the earlier questions. In terms of the confirmation trend, is that also kind of consistent across the regions? And is there anything that's changing in terms of mix of these new confirmations that might have an impact in terms of revenue per fee going forward -- revenue per --?

Michel, a couple things. One of the confusing things about Financial Services is the fact that everyone views any downturn as affecting the revenue per search. And I think that we have discussed before that in Financial Services all our searches, or the majority of our searches are capped, anywhere at the $350,000 or $500,000 level.

So before, when you historically had an investment banker making $2 million, the perception was we'd get $700,000 or $750,000 out of that, when in actuality we were capped at $500,000 or $350,000, depending on the size and scope of the search. So those caps are still in place, and they haven't really impacted the revenue per search in Financial Services, nor do we see that happening.

As you also recall, one of our goals as a Firm is to have a broader group of industry and functional practices, hence, the investment over the last 18 months in life sciences. We invested heavily in going out and recruiting top class talent in life sciences, and you've seen the results there.

Technology, as you recall, used to be our primary practice in Heidrick & Struggles, going back to '99 and 2000, and we had fallen off from $150 million practice to about $75 million, and we've made significant investments around the globe in recruiting and acquiring top class talent there. So the long version is that we're going to continue to look at all of our practices and invest in them, and the trend we've seen is across the globe and in all industry practices.

And, Michel, if I could just add to that. If you look at the variance in our first quarter in terms of fee per search from the prior quarter, it's always relatively significant. It's for all the reasons that Kevin has laid out. In 2006 it was 13%, in 2005 it was 14% going from fourth quarter to first quarter. So that's a very consistent trend. To Kevin's point, you haven't seen the upticks because of the way that the backlog worked in these quarters. So we would expect that our fee per search would be down in first quarter.

However, if you look over the last four or five years, I mean the value and real kind of beauty of the business model in search is that there's clearly pressure in cash comp, and you look at the average fee per search YOY, and it's gone up in those years at least 5% to 10%. So it's a growth driver in and of itself, and we see that in all of the regions. In places, like Asia, that are now maturing, where cash comp is becoming more commensurate with other parts of the world. In the U.S. where there's still a tight market for high level executive talent, there's a real focus and driver on cash comp, and we're the beneficiaries of that. So a decrease in the first quarter from the previous quarter is very typical in the last few years in our business, even at times when financial search market was very robust.

Great. That's very helpful. And then the sequential uptick in confirmations in the first quarter, I think was up 26%. Is that kind of across the board, I think you alluded to that, Kevin? Is that -- did I hear that correctly?

Yes, it's across the board.

Okay. And then last year you had a worldwide partners meeting, is that something that you are going to be passing on this year, and is that something that would help in terms of the year-on-year comparisons, from a cost perspective?

Michel, what we've decided to do, every other year we'll have a global partners meeting. This year, as I talked about earlier, we're having regional ones, hence, the meeting in Hanoi for Asia-Pacific and the meeting here in Paris.

Great. Thanks very much.

You're welcome.

Your next question comes from David Feinberg with Goldman Sachs.

A question on seasonality. The slide that you present on 23, that shows over the last four years, first quarter has been your weakness in terms of revenue and margins. There was a version of that slide that you showed in the previous earnings releases where back in '02 and '03 that was not the case. Has something changed in the last few years, because -- and perhaps I was confused. I thought at least historically you'd made the point that there wasn't as much seasonality in your business, and that there was variability. Have you --?

David, I mostly drop those prior two years off, because we had had four years in a row where it was consistent, and it was just a very crowded slide with five years plus this quarter. That's literally the only reason I dropped it. It has been four years in a row now where at least the first quarter has not been our best quarter. Two, three, and four are still, as you can see by this slide, somewhat up for grabs in terms of seasonality, when holidays fall, but that's the only reason.

And also, just to add to that, 2002, 2003, this business was recovering from a very significant downturn, so the seasonality -- I mean I think Julie's point is it's very difficult to generalize about seasonality, except for the fact that the first quarter is usually the weakest quarter. But in '02 and '03 you had this business accelerating out of a downturn, so it's probably not good years to use as an example.

And it sounds like you would still characterize this as a business that's accelerating as we go through the year?

Certainly we see that trend. I mean my comment on backlog and on confirmations, the strength of confirmations that we see in April, very significant increase in backlog, yes.

Great. Two more questions. We have the net number in terms of hirings in each of the regions, of consultants. Can you give us an idea of [gross] in terms of what the attrition was in each of the regions relative to your hiring rates?

Well, YTD?

Sure.

Well, YTD, after bonus payouts, we've lost one person in North America, two or three in Europe, and one in Asia. So it's been very -- I'll have to get those percentages for you, David. But we've had a little turnover this year, but what you will see, as I mentioned before, and the numbers may vary on the next call is that we do now, as an organization, we started last year, look out at -- look at moving the bottom performers out of the Firm.

And now, and that conversation or that occurs now during the second quarter?

Correct.

David, we only lost six total in all of the first quarter.

Great. And then the last question, it's clear that, or that you -- that Heidrick sees growth opportunities in Asia and that morale is high in Europe. I was just curious if you could give a little more color on the Americas? Financial services was weak. As the confirmations have progressed, is there any other areas perhaps that haven't begun declining but where things have started weakening in the U.S.?

Well, what we do is we've been telling our consultants not to read the newspapers, primarily because every day you pick-up a newspaper and there's an investment bank or an organization making job cuts, and as we've said before we need job churn, not job creation.

And what I keep -- when I talk to our guys on Wall Street, and in New York, or other offices across North America, we keep looking for the storm clouds that are going to impact us, but we just have not seen them at this point in time. And we have an opportunity as we've analyzed our business, whether it's diversity, energy, asset management, to name a few, we are going to go look at capturing market share there, because we don't have the market share we believe we should in North America.

And then one last question, as it relates to the low turnover or the low attrition rates with the hiring that you did in the first quarter in all regions, are these new -- typically, because we saw the series of press releases, primarily related to the U.S., are the individuals you're bringing on board, are they consultants with existing experience or people you're bringing in from industry? I am just trying to get a sense of how many folks that are already in executive search field are joining Heidrick & Struggles during this period of economic uncertainty?

Well, as you may recall, and I'll describe this in a few of the previous calls, David, we've analyzed this probably more than anyone given the amount of hiring we're doing, and we know that it takes 12 months for somebody to get up to speed, who is new -- 12 to 15 months for somebody to get up to speed who is new to search. So we've made a concerted effort to go after individuals, either from boutiques or direct competitors, that have a book of business that can hit the ground running, particularly in these markets. And, again, it's in those areas that we think we can add market share.

And just one last question.

Oh, I should mention also, and Julie just reminded me, that some of those hires were promotions. We went through the promotion process year end, so.

So I would say in the first quarter was a mix of promotions and experience search.

And the reason that we're focusing on, I should mention part two of that, is we are focusing on developing our own people more than ever, primarily because with them in the first year depending on region, they are $300,000 to $500,000 more productive in their first year as a consultant.

Great. I'll pass it on. Thank you very much.

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

Good morning. First of all, Eileen, it's been great working with you. Congratulations on taking the next step in your career. A terrific job over the years that you've been with Heidrick.

Well, thank you very much, Mark. That's very kind.

With regards to the Americas can you tell us what percentage of the Americas is Financial Services?

You know, we typically don't go into that much detail regionally, but the breakout of Financial Services regionally is about the same as the aggregate number, Mark. It's about one-third of our business. It varies at any given time, sometimes it's 30% to 35%, but it's not significantly different by region.

Okay. And are your Financial Services confirms picking up in the Americas?

Well, I mean there are a couple of segments of Financial Services that have continued to show real strength, asset management and insurance, in particular. And I will defer to Kevin in terms of talking about sort of the other aspects or the vectors -- the verticals, I should say, of Financial Services in the U.S.

Mark, they've been pretty flat YOY, but again what happens in Financial Services is we see as the year goes on into March, April, May a significant increase in revenue due to upticks in Financial Services, primarily based on the average fee per search that we get at the beginning of the year as bonuses are paid. So year on year they've been flat. Again, we transferred two Financial Services consultants to take advantage of markets overseas last year, but we've just added six, seven more in North America over the last two weeks.

Okay.

That's as a whole, Mark, too. And, again, if we went to subsector by subsector, which we're obviously not going to go into that much detail, but as we've said, there are certain subsectors doing great.

Okay. And then with regards to the overall revenue guidance for the year, is it your expectation that the -- what's going into that overall assumption? Are you assuming that the Americas are going to be down or flat, or up? Can you get to the overall revenue guidance if the Americas are down?

Well, again, it's the short month in December and the backlog, and the trend we're seeing in confirmations, and it's our ability to go out and do recruiting at the beginning of the year and capture market share, that we'll see that increase in revenue pick up over the next three quarters.

So the assumption is the Americas would be up?

No, I mean --

Yes. Sorry, Kevin.

No, I was going to say we're not assuming -- we're assuming that we're going to continue to capture market share and invest in the business, and we're not predicting a significant downturn in North America. A lot of what we attribute to in the revenue in North America in the first quarter, again, was the backlog last year.

Okay. And what do you assume -- I mean currencies are important nowadays, are you assuming that currencies stay current -- at current levels, or --?

Yes, Mark, let me answer that. Yes, I mean we're basically assuming that the currency would stay -- that the U.S. dollar would stay about where it is. We haven't assumed any further weakening as a means of reaching our revenue targets, so we're pretty conservative in terms of not trying to look to revenue, or excuse me, to currency as a means of making our revenue targets.

Okay. And then can you talk a little bit about the sensitivity of the margins? You know, if for some reason or other the macro environment gets worse as some people assume and that that maybe has some impact on your business, could you talk a little bit about what the sensitivity of the margins would be if revenue were to be flat with the year ago levels or even decline?

Well, I mean we certainly think that we can manage the variable cost structure in this business to hold onto margin. I mean just to give you a sense of that, if you look at going into first quarter, again, I said that our backlog was down by about $7 million going into first quarter, as compared to what it was going into fourth quarter. You know, this is still a relatively sensitive business in terms of that. If, in fact, we'd had that $7 million more in revenue our margin would have been significantly higher.

So the issue is, and one of the reasons why we've gone to annual guidance is that our margins can change fairly dramatically based on confirmation trends, just based on the timing of confirmations, given our revenue recognition model, which is why trying to extrapolate trends, particularly from the first quarter on margin is really not a good idea, because when we overachieve on revenue the conversion rate on that additional revenue is so high and increases our revenues significantly.

You know, if we were flat, which we don't expect to be for next year, I would expect that we could certainly hold on to a significant piece of our margin, and we would, of course, defer things and manage our variable cost structure as we needed to to be able to meet that commitment.

And can you talk a little bit about the -- I just want to make sure I understood this correctly. Did you mention that in terms of part of the bonuses it's going to be more towards cash comp and away from RSUs?

Yes, and the reason for that, Mark, is that I think you may remember that last year in our proxy we asked for shareholder approval of our new global share plan, basically because we were out of equity to, in fact, award our partners and executives.

And one of the problems that we had or issues was that institutional shareholder services felt very strongly that we were sort of in contradiction to a couple of their recommendations. And, specifically, what they called a shareholder value transfer test, where we were transferring by their estimate about 16% and they wanted us to be at more like 10%. They also thought that our burn rate which was around 7% should be more like 3% or 4%.

Just as a little bit of background to this, the reason why the equity that we hand out, that those numbers are so high, is because that we have asked our partners, as a means of building an equity culture within the Firm to defer 15% of their bonus and to receive it instead in restricted stock units that vest over three years. And the reason for that is that it builds the internal equity culture where people care about the stock price, understand how it's driven, are invested in the stock. And it also is a retention vehicle because it vests over three years.

Our argument to ISS was that we're not just granting this equity. People are really paying for it with their bonus dollars, by deferring that cash, and receiving equity. And we thought that that should be taken into account in terms of how they calculate our burn rate, and the shareholder value transfer test. They did not agree. And in order to be able to have an equity program to motivate our partners and our executives, we went to our shareholders and asked them to approve the plan, even though ISS was not in favor of it. And in order to get them to approve it we agreed to reduce our burn rate.

The only way to do that, because we're growing so much, and as a result our bonus expense is growing, was to move out of granting people RSUs as part of their bonus, and instead go to deferred cash, so that people will receive -- our partners will receive 15% of their bonus in cash that will be deferred over three years. We will still continue to grant equity in other programs, but we simply did not have enough equity to be able to continue that RSU program.

Got it. And then can you talk a little bit about the types of people that you've been hiring in Asia-Pac? Nice ramp there. Certainly, I think any reasonable person would agree that that's a terrific place to invest. Can you talk about are these folks experienced? How long would they take to ramp-up? How big can Asia-Pac get over the next couple of years?

Mark, it's Kevin. The short answer is we have gone aggressively after certain markets that are growing. We've hired a number of consultants across the region in Financial Services. We've looked to capture market share in technology. We've moved two consultants, pardon me, one consultant from North America who covered technology and business and professional services to Shanghai, so we've had some internal transfers, but we've -- leadership consulting, we've hired some individuals who have experience in leadership consulting. But we've looked at aerospace. So we've looked, again, at the segments of the market that we didn't have coverage or demand from our clients. A lot of the growth we're seeing in Asia, vis-a-vis hiring of consultants, is a demand we're seeing from our clients, So and we'll continue to do that.

So a lot of it has been looking at specific individuals with high books of business in Asia, but simultaneously hiring individuals from consulting firms because there aren't a lot of global organizations or global search firms that are out there. So that hopefully helps you -- helps give you a little color on that.

So it's -- it sounds like it's a mix of experienced consultants -- search consultants, along with other professionals that have the profile that typically works well, and maybe 50/50 in terms of that breakout?

I don't have the exact figure, Mark, but look at, specifically, in an industry like gaming, that's new, in Macaw, right?

Yes.

There's no other search consultants in the region covering the gaming industry, so we have to go into consulting firms.

You mean there aren't experienced gaming search consultants in Macaw?

Not yet, but we're looking at them right now. If you know of any, by the way, please shoot me an e-mail after. I'd love to hear about them. But it's, again, looking at certain segments of the business that are growing.

Asia is still a new business when it comes to executive search, so there aren't many firms we can pick from. But I have to say that, and of course I'm biased having spent nine years out there, we have the best firm in Asia-Pacific. And because of our brand we've been able to attract some of the top talent from other firms over the last three to four months.

Mark, in the first quarter it was split pretty much 50/50.

Okay. And then how -- I mean how big do you think Asia can get over the next few years? It certainly doesn't seem like the macro is slowing that we're seeing in the western world is impacting in any dramatic fashion over there.

I think as we covered before, the huge growth will come, and we're starting -- we're on the cusp of it now, when we start working. The Japanese have never used executive search. They need it now after a 17-year recession. The Chinese, we're starting to do work for them in Europe and Asia. So the Koreans, as well. So we'll see a lot more growth come out of Asia when we start working more for those domestic companies. But we still believe, given the demand there, that we'll continue to grow.

Okay. Thank you.

You know, given our commitments here and our respect for your time, we'll take just one, whatever the last person in the queue is. All right, Kevin?

Yes, our next, our last question comes from Clint Fendley with Davenport.

Thank you. Good morning. Most of my questions have been answered. If I could circle back to Catherine. And I wondered if there was any color that she could provide as to how the confirmation trends within Financial Services in London are holding up currently?

You know, Clint, I don't think we're going to get that specific in terms of confirmations in specific cities, but -- and Catherine can add color on the region, but we've said that the confirmation trends in each region are pretty similar to the consolidated the way they're flowing in.

And I think that what I would add is the picture that you're seeing in London and across Europe is consistent with what Kevin has described, so although you can be seeing perhaps a little bit of softness in some specific areas, you're also seeing some pretty strong business going on in other areas within the Financial Services sector. And, again, I would say that the compliance, the legal side, infrastructure, that sort of area, we're seeing pretty strong demand for.

Yes, I sat through the Financial Services practice meeting this morning, here for their European region, and I'm very bullish in passing around work and working together as a global region, a lot more, so they're getting more and more used to passing around work and spreading it into subsections that are doing well, and there are plenty that are.

Okay. That's helpful. And then a final question here. I mean when we looked earlier to slide 23, you sort of characterized that Q2 and 3 and 4 are truly up for grabs as to which ends up being the strongest. I mean based on your current confirmation trends, I mean where should we sort of expect the deficit pick-up to occur as we look at the operating margin for the remaining three quarters here?

Well, let me respond to that, Clint. I mean, again, we're not -- we try to guide you on an annual basis, because this is a business that we run annually. We hire people annually, we manage our costs annually. Obviously, we're seeing very strong confirmation trends, and as I said before, a very good backlog going into second quarter.

If you look historically, second and third quarters are typically very strong, both revenue and margin quarters. But our commitment is to be profitable and meet our commitments, regardless of the levels of revenue.

Having said that, we do see strong trends, we do see the business accelerating from where it was in December, and obviously we see that in the backlog. So all of that, you know, given our cost structure should result in very good margin trends really for the rest of the year.

Okay. Thanks, Eileen.

So in wrapping up, I'd like to thank you all for your time today, and I hope you'll hang-up at least feeling some of the enthusiasms we are about our business as we look ahead into 2008 and beyond. I'd like to thank Eileen, who will be moving on from Heidrick next week. We wish her well in her new endeavors. And I look forward to meeting many of you in person in the coming months. I hope you have a great day.

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