Heidrick & Struggles International Inc (HSII) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Heidrick & Struggles third quarter 2009 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 2009 third quarter conference call. Participating on the call with me today are Kevin Kelly, Chief Executive Officer, and Scott Krenz, our Chief Financial Officer.

As a reminder, we'll be referring to supporting slides that are available on our website at Heidrick.com, 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'll be making forward-looking statements on today's call, and ask that you please refer to the Safe Harbor language contained in our news release and on slide one of our presentation.

I now will turn the call over to you, Kevin.

Thanks, Julie. And thank you for joining today's call. In our last call, I said that the second quarter could best be described as a stable -- as stable, and that we hoped it was the start of a recovery for our business. I would describe the third quarter as a continuation of those themes, with even more evidence of a recovery. Now, how gradual or steep the recovery looks for our business is the big question. But Heidrick & Struggles has moved from a hunker-down and ride-out-the-storm mode to an execute-and-action mode.

First, let me give you some of the highlights from the third quarter, which are the basis of my comments. Year-over-year comparisons still show the impact of the very deep economic recession, but the sequential improvements we saw in the second quarter continued into the third.

Starting with slide two, third quarter net revenue of $103.5 million was down 34.6% year-over-year, or about 32% on a constant currency basis. Net revenue was up 11.2% sequentially compared to the second quarter, or about 2% on a constant currency basis. America's revenue declined 37.7% year-over-year, but improved 5.4% sequentially. Europe was down 36.9% year-over-year, but was up 14.6% sequentially. And Asia Pacific declined 20% -- 20.7% year-over-year, but increased 21.8% compared to the second quarter.

Slide three is a monthly view of all confirmations, both executive search and leadership consulting projects. July was the best month so far this year, August a bit lower than expected given summer holidays and September was better than August. And with four days left in October, we are expecting a month at or near 400 confirms, our second-best month to date.

Looking at slide four, you see the quarterly trends in executive search confirmations. I think the trend by quarter is a bit clearer. We bottomed out in the first quarter, and are on an upward trend. Third quarter search confirmations were up 17% compared to the second quarter.

Turning to slide five, total head count on September 30th was 1,395, down 21% year-over-year and down 2% compared to June 30th. Consultant head count at September 30th was 365, down 12% year-over-year and down 4% compared to June 30th. The sequential decline reflects consultants who were let go in May as part of a workforce reduction, but did not actually leave until the third quarter, as well as some resignations. Year-to-date, voluntary consultant turnover is under 5%.

Looking at slide six, productivity -- in the third quarter productivity, defined as total annualized net revenue divided by the average number of consultants in the quarter, was $1.1 million compared to $1.5 million in the third quarter of 2008, and up compared to $945,000 in the second quarter. The year-over-year decline largely reflects much lower revenue in this year's third quarter and our decision to keep additional capacity. As revenue improves, so will productivity.

Turning to slide seven, the average revenue per executive search was $97,300 compared to $127,200 in last year's third quarter and $102,700 in the second quarter. Because this number is calculated as search revenue recognized in the quarter divided by search confirmations in the quarter, the decline reflects the fact that revenue lags signed confirmations.

Referring to slides eight and nine, I'm pleased to report third quarter operating income of $6.7 million and an operating margin of 6.5%. Yes, a year-over-year decline, but a huge improvement compared to the first and second quarter results. This primarily reflects our success in controlling costs in a challenging environment. More importantly, many of our actions will provide benefit on an ongoing basis.

So now let me turn the call over to Julie for an update on some of the key line items, and then Scott and I will go into more detail on our outlook.

Thanks, Kevin. Now looking at slides ten and 11, salaries and employee benefits expense of $68.2 million decreased $40.4 million, or about 37% year-over-year. Of the decrease, $23.8 million reflects lower performance-related variable compensation, which is largely a result of lower revenue and operating results. And fixed compensation declined $16.6 million, mostly as a result of reduction in global head count, which is 21% lower than last year, but also reflecting the firm-wide salary reduction of approximately 5%.

Total stock-based compensation expense in the quarter was $4.4 million, a decline of $1.8 million compared to last year's third quarter. This decline largely reflects the shift in deferred bonus compensation from RSUs to cash that we made last year.

Salaries and employee benefits expense was 65.9% of net revenue, compared to 68.6% in last year's third quarter.

Turning to slide 12, general and administrative expenses in the quarter were $28.6 million, a decrease of approximately $200,000 from last year's third quarter. The decline does reflect the impact of our continued cost-savings actions, but those savings were offset in the quarter by higher fees for professional services, primarily related to our ongoing process improvement projects.

Looking at slides 13 and 14, net income in the quarter was $4.4 million, and diluted earnings per share were $0.25. The effective tax rate in the quarter was 39.2%, which reflects an adjusted full-year expected annualized tax benefit rate of approximately 24.8%.

Now I'll turn the call over to Scott.

Thanks, Julie. I would agree with Kevin. Based on third quarter results, the general trends in the business and conservations with clients, we have moved beyond stabilization and into recovery and action. The toughest part of my job remains forecasting how quickly the recovery will take hold.

Looking at slide 15, our cash position is stronger. Our ending cash balance at September 30th was $75.3 million, up $10.7 million compared to the end of June. Twenty eight percent of this cash, or about $21 million, is in countries that would require us to do some work or pay taxes to repatriate. Net cash generated by operating activities was $12.1 million in the third quarter. This includes a one-time retention payment of approximately $5 million related to a past acquisition. We expect to continue to generate positive operating cash flow for the remainder of the year as we rebuild our cash balances. We anticipate generating approximately $20 million in free cash flow in 2009 and ending with a cash balance of about $90 million.

As a reminder, we define free cash flow as cash flow from operations, excluding cash restructuring payments and minus capital expenditures, and importantly, less changes in accrued bonuses at the end of the year.

Two thousand nine has been a challenging year from a cash standpoint. We paid $127 million in bonuses in March related to our strong 2008 performance. That payment occurred in our weakest cash generating year since 2001. In 2010, the situation will largely be reversed. Despite this, I still anticipate running the Company and paying bonuses with cash generated by operations and cash on hand.

With two months left in the year, we believe net revenue for the fourth quarter will be in the range of $103 to $108 million, resulting in 2009 net revenue of between $389 million and $394 million. Given third quarter results, which reflect such strong improvement in operating income and margin, we believe that excluding the restructuring and impairment charges, break-even operating income for the full year is achievable at the high end of our revenue guidance.

Before I turn it over to Kevin, I want to briefly touch on 2010. Those that have been following us for many years know that we have never discussed next year this early. But another initiative we've been working on is a better forecasting model of our business. We aren't 100% there yet, but I believe that we've made good progress for developing a new multi-variable forecasting model that gives us much better visibility a year or more out. It's not perfect, and we are still testing, but the model has been fairly accurate predicting past known outcomes, and including our just concluded third quarter.

So am I ready to give to any '10 guidance? Not yet. We have a lot of work left in completing our 2010 planning process. What is important, and the reason I wanted to share this is that what we are seeing in our model is consistent with all the positive trends we've seen in the third and now fourth quarter. It validates our belief that these positive trends will continue into 2010. We need to complete our planning process before I can talk about operating margin for 2010, but our long-term goal remains the mid to high teens. The cost and productivity initiatives begun in 2009 -- Project Velocity, the real estate initiative, consultant productivity -- are all designed to get us there. But, obviously, we need to get revenue back on track first.

Kevin, I'll turn it back to you to close.

Thank you, Scott. We remain cautious about the slope of a global economic recovery, but I'm eager to talk a bit about 2010 because I'm excited about the work we have done on our strategy to become the world's first leadership advisory firm.

Take a look at slide 16. We have done much more over the last year than improve our cost structure. We have put a considerable time -- we have put considerable time and effort into analyzing the market opportunity for executive search and leadership consulting and our strategy to integrate the two in order to provide clients with a new level of impact and value. As a leadership advisory firm, we deliver much more than premier executive search. We evaluate, identify and communicate key risks related to an organization's senior talent, and help our clients manage those risks.

In 2009, we moved beyond our statement of intent. We are now bringing real value to clients with our integrated approach. And I urge you to read some of our client's success stories on our website. While leadership consulting today represents only 7% of our revenue, what is exciting is how much we were able to accomplish in a really tough year. We are actively building our expertise and capacity in talent mapping, testing and assessment, succession planning, merger and transaction integration, on-boarding and executive development and coaching. And in 2010, we plan to aggressively grow this business and deepen the relationship with our clients.

One of the more pleasant surprises to emerge from the strategic work we have been doing is the realization that the opportunity in high-end executive search is much larger than any have thought. By broadening our client relationships through our Strategic Partner Program, which now represents more than a quarter of our revenue, continuing to develop certain geographies such as Central and Eastern Europe, China and the Middle East, and aggressively pursuing more than 2,500 companies Heidrick has not traditionally served, we intend to grow our core high-end executive search business.

You've heard me say in the past that we want to be a billion-dollar company by 2014. I believe that executive search has the opportunity to be roughly $700 million to $800 million of this goal, and that leadership consulting represents a $200 million to $300 million opportunity.

I know there have been questions about how I would accomplish this growth, and we believe that it will be largely organic. We believe that strategic hiring plus our own training and development initiatives are the most effective ways to achieve the growth we believe possible. Does this mean we won't look at acquisitions? No, but they'd have to align well with our strategy and our culture.

I can't predict how quickly the economy and our business will recover, but I can assure you of one thing. We are better positioned as a Company today to take advantage of a recovery and make an impact on our clients' senior management teams than ever before.

At this point, we'd be happy to take any questions that you all might have.

(Operator Instructions.) Our first question comes from Ken McHugh.

Ah, yes. Sorry, I guess that's me. Just wanted to first ask about the expense rate, both as we move into the fourth quarter relative to your guidance. So when you're saying break even, are you assuming basically -- or should we assume the expense run rate remains relatively unchanged in Q4 versus Q3?

And then, probably a bigger picture question for you, Scott, is as we move into 2010, how should we think about the incremental profitability from the revenue? How much do you need to start flowing into bonuses or potential new hires as revenue recovers versus how much should we assume starts to fall through to the bottom line?

Well, thanks, Tim. The -- a couple of things -- one, out in the fourth quarter, yeah, I think that the rates will largely be the same on the expense side. I think we've done a pretty good job this year, as Kevin mentioned in his remarks, of managing expenses and keeping them under control. And it has been a balance, I'd like to point out, between maintaining capacity so that we can respond to a recovery continuing to invest in certain things, because we did not stop everything. We continued to invest in rebuilding our infrastructure and improving our efficiency. And we continued to invest in leadership consulting. So that's been the challenge of balancing those. I think we've done a darn good job, which is -- you see in the third quarter. And I'd expect that to continue into the fourth quarter.

As we move into 2010, we start seeing the real payoff of this work. We're beginning to see the expense reductions, the more efficient operations of our infrastructure. We won't be completely done in 2010, but we should be a long ways there on that project. We continue to see an improvement in the use of our real estate portfolio. That's probably going to take a little longer than perhaps we had thought before, simply because the sublease market is so weak. We're taking things cautiously because we don't want to add extra expense. But it is still generating a significant benefit to the Company.

And probably the most important thing is productivity. There are a number of initiatives we continue to work on to improve the productivity with which we serve our clients to provide them even better quality service, but at the same time do it more efficiently. Getting back to the roughly $1.5 million of revenue per consultant is not out of the range of believability. And our target is certainly to be well above that, the $1.8 to $2 million. And we continue to work on that.

So we've really come through 2009 I think very well, in the sense that we've obviously gotten through this year. We've turned around the P&L from the first and second quarter with losses which were dismaying to one where we have a shot here at being break-even for the year and lays a lot of foundational work to really drive margin in 2010.

Okay, if I can just follow-up maybe in a little different way, the gross margin here in the quarter of 34% or so is -- it was obviously very strong and is better than I can remember it being for a while. Is that a -- given the changes you've made, is that just a new kind of sustainable level? Or would you -- is there a target gross margin, I guess, that you would try and aim for?

Well, we certainly have a target gross margin, but not one I'll probably discuss publicly. Yeah, that's sustainable. I mean, we are -- and there's nothing unusual here. We have I think really deflected the productivity line upward and positively here. And that's been what we've been working at all year. So we'll continue to do that.

Now we have a little bit of a benefit here as we go forward in that -- just the way our compensation plans work. We do have a somewhat higher realization from revenue to the bottom line because of just the structure of the compensation plans. But largely speaking, as we go forward, we would expect to continue to do better than we have in the past. And we've really I think permanently laid the groundwork for much better performance going forward.

Okay. And then the last question I'd have would be the revenue per search. I know you said there's a delay between the confirmations. But, I guess, given the strength in financial services and even the currency trends you saw, I would've thought you'd see better trends there. Is there anything underlying it other than the timing delay in terms of pressure on billing rates or pressure on compensation rates that you're seeing in the marketplace?

Tim, it's Kevin. I hope you're well. The -- it's a timing issue. And whereas we used to see a huge increase in financial services engagements starting the end of the year into the first three or four months, we really started to see that in July, August of this year. And we're seeing that trend continue through October. So you'll see a delay there in terms of the average revenue per search given the up-ticks, particularly when it comes to financial services.

Okay, thank you.

Our next question comes from Mark Marcon.

Good morning. Just wondering if we could talk a little bit about the fee per search. I'm just wondering, is that being impacted also just by a geographic mix element as well?

Mark, it's Kevin. Historically, you had seen, given the work we've done in Central and Eastern Europe such as -- countries such as Poland or Singapore, Thailand, et cetera, that would actually skew the average revenue per search. But we have seen an increase for the revenue per search across some of those geographies, as well as the demand for executive search continues.

I think a big piece of it is -- in the question Tim just asked -- has to be with financial services and the up-ticks that we see when we close a search. I think as we spoke about before, you see initially, or had seen a lower retainment -- or, excuse me, retainer -- and then more on the back end. And that trend is, although we're increasing the retainers, we're still seeing that trend continue into -- or had seen it continue into the third quarter.

And as it relates to financial services, obviously things are -- seemed to be getting better there for the last few months. Do you have any sense in terms of how sustainable that could be? And how are you -- what sort of dialogue you are having with your clients? Or how much of it is just due to pent-up demand that when the hiring freezes went in place it just got lifted?

Some of it, as we discussed I think going back to January, February has been pent-up demand. You had seen companies, for example, if they lay off 1,000 people, they're not going to hire 1,000 back. They will hire 500 back. So it's a matter of getting them in place prior to the beginning of January so they can hit the ground running in 2010. So it's a combination of market needs. It's a combination of pent-up demand that we're seeing right now.

And you're right, we have seen a very positive trend in our financial services practice over the last three months.

Great. And then, can you talk a little bit about -- you articulated some goals for margins when we head back towards the next peak, whenever that may be. How are you thinking about things in terms of mid cycle? What sort of progress should we see here? In other words, is the margin story that we're seeing here in the third quarter, is that partially due to bonuses that were paid a little bit earlier in the year and that you don't have to make as many adjustments for? Or could we see margins continue to improve as the recovery unfolds?

Well, our cost mark -- as Scott pointed out I think both in his remarks and his earlier statement, I think we're better positioned than any time in the history of Heidrick & Struggles in terms of our back office and our cost initiatives such as Project Velocity. What you'll see is continued. Can we pinpoint exactly where it's going to fall? Not yet, but we will continue to see margin expansion. And our goal, as we pointed out earlier, would be the mid to high teens. We think that is definitely achievable.

How fast that happens, there's a lot of variables. But the biggest variable there is is just how fast revenue comes back. And I'm not sure where we're yet comfortable about predicting that going forward.

Just to make sure that it's clear here, because I may have misunderstood, the $127 million in bonuses that related to 2008 we mentioned paying really affects cash. It's not a P&L item at all. That was recognized in the P&L in 2008. Our bonus programs are programs that have not changed between 2008 and 2009. Any changes merely reflect the lower amount of revenue and stuff during the year.

Understood. I was just trying to think of -- just since we're probably not going to get back to prior peak right away, I was just thinking if we ended up with something that was mid-cyclish -- like the revenue you generated in 2002 was $478 million, in 2005 was $412 million -- at those points in time you were able to generate operating margins that were in the 11% range. It sounds like you've put in place some operational improvements. I guess what I'm wondering is, if we get to revenue levels that are consistent with those levels, given the operational improvements that you've put in place, it is -- would it be unrealistic to expect that the margin should get to those levels or potentially even better?

Well, what's exciting about this time, Mark, is that we did -- we cut last time 2002, 2003 and did not continue to invest in our business. We made a concerted effort -- and we do have a lot of great people in the firm. And we made a concerted effort to maintain capacity in the system so we -- when the market does pick up, we'll hit the ground a lot faster. That coupled with the cost savings, I think we're fairly excited about what we can achieve, depending on the revenue line. So I wouldn't say it's unseasonable to get to somewhere a little above those margins that we hit before.

Great. Thank you.

Our next question comes from Tobey Sommer.

Thanks. Along the same vein, I was wondering if you could talk about productivity as measured by annualized revenue per consultant, and I guess the prior peak of about $1.5 million? I'm wondering if you've had any changes in the structure or ability of the consultants to deliver services and generate revenue that may lead you to believe that that peak could be surpassed with this cycle?

We -- it's been a continued focal point of ours for the last couple of years. We have consultants, I think as we've discussed before, Tobey, who've gotten up to $7 million and $8 million. And we believe that on average our collective goal would be to shoot for the $2 million mark that Scott referred to earlier through investments in -- without increasing leverage, but through investments in some of the back-office technology that we're putting in place today, how we become much more efficient, simultaneously making sure that our consultants have what they need in terms of the arrows in their quiver to embrace some of the new products and services that we have such as leadership advisory. Hence, the continued investment in training and development of our leadership advisory program. So through a combination of both the executive search and leadership consulting model, we believe that it will be feasible to get the majority of our consultants up to close to $2 million.

Our goal is, we will continue to look at investing and recruiting across the globe. However, we don't want to go out wholesale and hire 50 to 75 consultants, because again, we still have capacity. If we can keep and maintain a consultant population around 400 plus or minus that bring productivity up, that would be our collective goal.

Thanks. And that kind of dovetails into my next question. Although maybe not whole-hog on hiring new consultants, would you anticipate being able to selectively add and increase the base over the next bunch of quarters? I've got to imagine now that you've seen some growth, good performers at some boutique players may see this as a real attractive platform.

Oh, you're absolutely right. I mean, we have continued to look at recruiting throughout the year. We are -- we have started adding some consultants based on an evaluation of our practices and where we can build and bolster strength and geographies again, such as some of the emerging markets. So we'll continue to do that and invest in the business. Yes, primarily you're looking at boutiques. There's a lot of boutiques that have had -- have struggled without the global platform over the course of the last 12 to 18 months. And you're absolutely right, it's a great place for us to attract quality talent.

Two last questions, then I'll get back in the queue. You cited in your prepared remarks 2,500 companies that you've not targeted in the past. I wonder if you could give us some more color on those?

And, Scott, wondering if you could comment -- or Julie -- on the potential currency impact reflected in your fourth quarter guidance? And maybe just refresh my memory on when you lapped some of those significant headwinds. Thanks.

Sure. So in terms of the 2,500, what we did is a full-scale evaluation of each and every market in which we operate and each and every practice based on the geography, particularly here in North America, but we did in Asia-Pacific, Europe and Latin America as well. And we found that there have been a number of clients, or potential clients if you will, where there has been no engagement through Heidrick & Struggles, which gave us a -- or gives us a huge opportunity not only to build on the client base that we have today, but also to capture market share in an environment that's been somewhat unstable. So that's what led us to believe that through the analysis that we've spent the last year on that there is huge opportunity for us to capture market share. Hence, the number of $700 million to $800 million as we invest in our executive search business.

Scott, you can --

Yeah, as to currency, that's been sort of one of these Pyrrhic victories. Obviously, the weakness of the US dollar has helped us during the latter part of this year. I'm not sure if that's good long term, but it certainly is helping our revenue numbers. We don't spend a lot of time trying to guess which way currency is going. So we've essentially assumed in the fourth quarter flat with what we saw in the third quarter.

Thank you.

Our next question comes from Andrew Fones

Yes, thank you. First of all, just on the guidance for Q4, I think that you -- it sounds as though you're looking for break-even at the high end of your guidance range. My assumption is that would be an operating income of around $11 million or $12 million in the fourth quarter, or about an 11% operating margin. Is that right?

Yep, that's the math.

Okay, thanks. And then I was wondering, in terms of -- you said that you hoped to finish the year with about $90 million in cash. I was wondering what your assumption would be for kind of bonus payouts in the first quarter if you come in perhaps roughly in line with your guidance in the fourth quarter in terms of operating results? Thanks.

Well, I don't think I want to get into it at this point with giving specific bonus numbers, not for the least reason that we need to take that to the Board of Directors. And ultimately they're the people who make the decision. But it's consistent with -- the plan is consistent with the proportion to what we've seen in the past. I mean, we have not changed the plan in any material respect here. So it's generating the same sort of results you'd see -- you saw from 2008, just a much lower level of revenue here going forward.

The one thing I would say -- and I want to underscore it -- is this Company has been in a good position in that it's been able to pay our bonuses and pay our compensation out of what we generate in cash here without having to borrow. And I don't see any scenario where that would not continue and we would have to borrow in any way to fund our bonus payouts.

Okay, thanks. And then, in terms of the 2010 guidance, the billion dollars in revenue, assuming that kind of mid to high teens operating margin, I guess you'd be looking at something of the order of $10 a share in earnings on today's account. Is that the math there?

Andrew, that was our goal by 2014. I'd love to hit that in 2010, but that's --

That's not our guidance for 2010.

No. I'm sorry, 2014.

Right. Right.

Yeah. Okay.

I wouldn't call it guidance, either, Andrew, if I could tweak on that word as well. I think it's opportunity. It's a goal. I wouldn't call it guidance at this point.

We have not -- I think we've clearly said that from everything we've seen is that trends we're seeing right now we expect to continue on into 2010, which is good news. We're not ready to give guidance, and did not give guidance for 2010. The billion-dollar aspirational goal -- you can do the math there, and if we can hit it, again that's certainly what our aspiration is based upon -- the opportunity we now see and how we've defined it. Yeah, we'd produce a big number for EPS. And that would be our goal. I don't think there's anything in our plan here we've seen as we look forward which would indicate that margins would be significantly different pursuing this in growing to a billion-dollar company. But that's a long ways off, and there's a lot of swings and roundabouts, I'm sure, between now and 2014.

Okay. And then, in terms of leadership and getting to your goal of $200 million to $300 million of revenue, that implies a pretty healthy growth rate over the next five years. You've seen growth close to that, I guess, over the last few years in that business. But is there anything you'd like to kind of point out in terms of what gives you confidence of seeing that continue over that period and seeing this leadership business, I guess, scale to a quarter to a third of the size of your search business? Thanks.

I think it's a combination of things. I think it's primarily driven by what our clients are asking for. I mentioned before they're -- they may go out and lay off, Andrew, 1,000 people and rehire 500. So a lot of the questions they're asking us is, how do we get more out of the employees we have today? The investment that we've made in leadership consulting training over the course of the last 12 to 18 months has shown that our consultants, if given the ability and training, can sell anywhere from $200,000 to $500,000 apiece in leadership consulting, and are excited about the opportunity and the demand that's there from our clients. So simultaneously, I guess the third leg would be looking at other organizations and recruiting in those individuals who can help us build and grow that business. So it's really a three-pronged approach.

Yeah, I would just add Kevin laid out six areas that we're focusing on in leadership consulting, all of which are very, I guess, supportive of the core search business. They all work very well together. We didn't just fall into those six areas. There's a great deal of thought behind what areas in this space we wanted to focus on. And we wanted to focus on things which really were fully integrated into the talent, the leadership advisory process and managing a company's senior talent going forward. There isn't a single one of those areas which is hypothetical. In every one of them, we currently do business. We currently have clients that we provide those services to. So it really is looking at -- and we've spent a great deal of time in 2009 looking at those particular engagements, the success that we've had there, what hasn't been successful and focusing this in a way that now it really is a matter in 2010 of starting to scale it up to achieve those aspirational goals.

Okay, thanks.

Our next question comes from Mark Marcon.

I've got a follow-up on that and the longer-term goals. It sounds to me like if we stay somewhere around the 400 consultant mark, we've certainly seen lots of instances in the past of getting the productivity up to $2 million per and beyond that on the search consultants. Just wondering if you can give us just a little bit more color with regards to leadership development and how we should think about that building up? And how you think about the revenue model -- or how we should think about the revenue and the operating margin level in that particular segment of the business?

Yeah, so you're talking about leadership consulting, the business, not sort of building leadership within--?

Right, leadership consulting. Correct.

Okay. You know, right now, as I've said before, the margins in leadership consulting are not significantly different from what we see in the search business. Going forward, I think there are some opportunities there. Again, 2008 and 2009, these have been periods where there's been a lot of what I'll call experimentation. We've done work for clients. We've seen what value we get there. And we're seeing the pricing models mature here as we move forward, and I think will continue to do in 2010. So at worst, I would not anticipate leadership consulting as growing bringing down the margin in any way. I think there is the opportunity for it to help improve the margins.

Mark, another way to think about it is, these engagements aren't three to five months like executive search. They're anywhere from six months to three years. So you see a recurring revenue stream come with those engagements as well, which is what we really like and what we've been striving for as an organization.

So the model would basically be that you would have an engagement of some form or other, and then you would basically end up with -- would it typically be a fixed fee or a time and materials kind of situation in terms of the revenue?

It's a case-by-case basis. Some are monthly, some are project-based. So we get some for a six-month project. We get some on a monthly basis, depending on what piece of the six products and services that we offer to a client earlier, or a combination --sometimes it's -- actually, the majority of times it's a combination of both leadership consulting and executive search.

Yeah. We're provided, though -- I can't say never, because I haven't looked at every single engagement, but time and materials is not the direction this is going. And if we do it, it slipped by somebody here. We are not bidding these on a time and materials basis. They're bid on a -- as an engagement, a price for providing a fixed service -- a fixed price for providing a fixed service to the client.

Great. And can you talk a little bit about the consultants? You mentioned -- it sounds like the majority of the decline going from Q2 to Q3 in terms of the ending consultants was due to the actions that you took earlier in the year. The voluntary turnover, how is that going?

It's been less than 5% this year. And yes, Mark, the majority of departure this year at the Firm has been through actions that we've taken around the globe.

Which has some implications on productivity as well, because as you go through this process, we've made I think quite extraordinary efforts to retain our more productive people. So I say with some confidence that the consultant base we have today is much more productive in total than the consultant base we had in 2008 or 2007. And that's something that now that we're there, again there are a number of initiatives in Human Resources and in our recruiting function to make sure that we maintain that.

I mean, there's always some shifting and some fine tuning, but do you generally feel like you have the right core in place to go forward at this point? And that probably the increases that we see in terms of the overall consultant count would just basically be on the margin?

Yeah. I'm sorry, Mark, you're talking about in terms of a capacity going forward to drive revenue?

Yeah, in terms of your leadership -- your executive search consultants, if you feel like the consultants that are currently in place are really the core team and you think you've got it right sized at this point and that you have the right people in place, and while there might always be some fine tuning on the margin, where essentially we have the table set?

We do. And I am very happy with the quality of individuals that we have in the firm. It's -- as we went through the first two reductions, it was very difficult. It's never easy in any organization at very difficult times. But I would say that the team that's here and the team that's here today is a great group of individuals that will help us execute the strategy going forward. And we will look to add on both in leadership consulting and executive search as we invest in both businesses going forward. But right now I'm very happy with the team.

Terrific. Thank you.

Our next question comes from Tobey Sommer.

Thanks. I had a question about guidance and your philosophy about that. Given the real historic decline we've seen in the economy as well as in your own business and kind of lack thereof of visibility, wondering if -- how you think about that as we work our way into maybe a more stable and recovery setting, whether in the context of kind of the recent experience you may just revert to quarterly guidance as opposed to prior years in which you really gave an annual kind of outlook?

Yeah. I think we'll think through that. Let me back up a step here. I -- we have struggled with this concept that you have little or no visibility beyond a quarter or so in this business. And it's not something which, I guess, we've accepted. So we've been working really hard. And there's a group of very smart people, much smarter than I am, that have been working very hard for many months now to answer that question. And I think one of the things we've found is that we can't answer that question, that we've now started to really fine tune. And it's probably not ready for prime time yet, but it's not very far away from being ready for prime time in ability to forecast and look out much more effectively than we have in the past.

Our goal here is to have 12 to 15 months' visibility at any -- at any point out ahead of us, and to do a much better job of providing guidance to everybody who's on this call, but also to inform ourselves as to what -- how we should execute hiring plans, where we should invest in the business. Amongst other things, when this model we're preparing was tested against the current downturn, it was less accurate, as I think you'd always expect when things are changing dramatically, but not markedly so, and would have predicted this downturn for us. And so, I think we're able to validate this. And how we translate that into the information we give you I think is still something we're going to discuss and debate here. The bottom line is, we want to provide much better and more informative information, though, to the investment community. And I think we're well down the road in being able to do that.

Thank you very much. That was helpful.

Our next question comes from Andrew Fones.

Yes, thank you. Just had a follow-up on the guidance question. I guess at the high end of the range, it looks as though you're assuming about $4.5 million of revenue increase. But by my math, it suggests you're looking for about a $5 million sequential increase in operating income. I was just wondering where you're expecting the continued cost savings to come out of, and whether it's more of a continued flow through of some of the cost cuts we saw earlier this year or a reflection of some of these ongoing savings you've been discussing, or a combination of both? Thanks.

It's all of that. There are lots -- whenever you get down into the specifics, there's an awful lot of moving pieces here. We do know that the cost structure within a certain -- within a quarter is pretty fixed. I mean, there's going to be some additional compensation relative to bonuses. But particularly in a period like this, that's probably less than we've seen in the past, just given where people are in the bonus plans. So what -- when we look at it and sort of look back, if we can hit the high end of that guidance -- $108 million -- with a fair wind behind us, and if some of the other things we're working on within the Company all line up in a row, we could be at break even. And so that's what I said when I said it's achievable. And I can say this, that we're probably not going to be far off under any circumstances. And that's having weathered a pretty serious storm here. If you will recall some of our prior calls, we've had some write-offs and stuff we've talked about in prior calls. And we've managed to get by those as well to I think produce what is a pretty good result. So at the high end, $108 million with a fair wind behind us, if all the little pieces line up, we could be break even.

Thank you.

Our next question comes from Ken McHugh.

Yes, just wanted to follow up on some of the questions where people were asking about the margins and your comments that you hoped to get to mid to high teens margins eventually. Is there -- is there a revenue run rate where you would -- you say that you could reach those margins. I know you keep saying somewhat the margin recovery depends on revenue. I'm just wondering if there is a size where you would expect to be able to achieve those margins?

You know, I've tried not -- you're always so wonderful at getting information out of me, Tim. I think when we were -- when we were at 600, 620, we were roughly 13% as a margin. We're going to be better than that. We have done a lot of things on the cost structure here which are going to carry over. So there's nothing that I see which would not indicate we get back into that range where we are going to be higher than what we've achieved in the past.

When we -- I think in a couple of months here we'll probably be able to talk about 2010 a little more specifically here once we get through our planning process, and probably at that time answer the question I think much more specifically than I am right now. But committing to it is just so dependent upon the planning process, our investment decisions for next year and a number of other things that, other than saying if you go back and look at us historically, we should be -- at any point in that recovery path, we should be better than you've seen in the past.

Okay, thanks.

Our next question comes from Mark Marcon.

Just a couple of more follow-up questions on the margin question. One just is, we -- I was wondering if we could bracket the fourth quarter? You did mention that we hope we can get to break even at the high end of the revenue range. How should we think about it if we end up towards the lower end of the range? Can you give us any color there?

We'll still have a significant result for the fourth quarter. The fourth quarter will be significantly profitable. If you want to look, we came into -- the low end of the range is 103. We came into 103 in the third quarter. And there's nothing to indicate it would be markedly different if we came into that end of the guidance.

So basically the third quarter would be a good barometer for that?

Yeah. Yeah. Now maybe a little better than that, because there were some cost issues in the third quarter which we took -- yeah, we had some one-time costs in the third quarter, which are baked into that $6.7 million result. So even at the low end, it's going to be a bit better than you saw in the third quarter, which is why I said at the high end we'd get to -- we'd get to break even. Because that $6.7 million has some other things we took care of in the third quarter here.

Can you elaborate on that?

No. There's so many swings and roundabouts in this thing that it's -- it gets very specific.

Okay, but just there were a few one-time deals?

Yeah.

All right.

So you can expect even at the low end it to be better than you saw in the third quarter. Now that obviously assumes we don't have similar issues in the fourth quarter. And that's why I'm a little cautious about it.

Sure.

Yeah, there's a lot of things to look at, particularly when you come to a period where -- and this has been a significant downturn. I mean this --

Sure.

Even under the best of circumstances here, we're down 30% in revenue. So we've taken a look at a lot of things here internally when you put that sort of pressure on a firm.

Okay. And then, as it relates to -- as it relates to the second half of this year when we look at the third and the fourth quarters, is there -- when we think about the bonus accruals that were made for the third and the fourth quarters, is there anything that's artificial about those in terms of their scope that would say well, maybe they're a little bit low just because the first half of the year was below expectations, and so, therefore, there's continued makeup for that? Or how do we -- in other words, if we were running at these sorts of levels next year, would the margins that you're implying for the second half of 2009 be reflective of that sort of margin potential?

There's a lot of questions in that question.

Right.

One, just to say flat out no, we're not playing any games with bonuses. There's nothing artificial. It is the plan. It's really -- it's based upon a consultant's productivity and what they actually produce. And as I said a couple of times here, there have not been any changes in that plan from last year. So there's nothing artificial about the compensation levels.

The -- if we talk about next year, and if we -- as you said, we've maintained this level going into next year, we probably should see somewhat, again, better margins than we see this year, simply because the initiatives, whether it's in real estate or our core infrastructure or other things, continue to generate more and more results as we go forward. And I've said that our goal is to get $10 million out of the core infrastructure. That's still our goal, and to get about $10 million out of real estate efficiency. And that's still our goal. So we're going to see more of those become a reality in 2010. So even if we stayed at the level we've seen here in third and fourth quarter, we should be able to do better margin-wise next year.

Terrific. Thank you.

There are no further questions at this time.

Well, listen, thank you all for joining the call today. As I think we conveyed on this call, we're excited about what we'll put in place in 2009. We believe it gives us a great foundation as we go into the fourth quarter and 2010. And I'd like to say a special thanks to all our employees around the globe who have continued to perform in a very difficult and challenging market. So thank you. And I hope you all have a good day.

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