Heidrick & Struggles International Inc (HSII) 2011 Q2 法說會逐字稿

Welcome to the Heidrick & Struggles 2011 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. After management's opening remarks, we will open the line for Q&A. (Operator Instructions) At this time, I'd like to turn the call over to Julie Creed, Vice Department Investor Relations. You may begin.

Good morning, everyone, and thank you for participating in Heidrick & Struggles second quarter 2011 conference call. Participating with me on the call today are Kevin Kelly, Chief Executive Officer, and Rich Pehlke, Interim Chief Financial Officer. As a reminder, we will 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 1 of our presentation. Also note that our slide numbers refer to the slide numbers in the bottom right hand corner of each of your slides.

And now I'll turn the call over to Kevin. Please start on slide 2.

Thanks Julie. Good morning everyone and thank you for joining today's call. We are pleased and encouraged by our strong results in the second quarter of 2011.

Net revenue in the quarter of $142.8 million was up 13% compared to last year and up 24% sequentially. The Americas had a great quarter—up 18% year over year and up 21% sequentially. Europe and Asia Pacific reported modest net revenue growth year over year, benefited by currency fluctuations and the weakening of the U.S. dollar. Sequentially without material impact from foreign exchange, Europe reported 25% growth over Q1 and Asia Pacific reported 28% growth compared to Q1.

From a practice perspective, the Industrial and Consumer practices were the key drivers of reported year over year growth, up 42% and 33%, respectively. The Financial Services Practice was the largest contributor to sequential growth, up 33% compared to Q1. The Industrial and Consumer practices also achieved great sequential growth.

Looking at slide 4, net revenue from Leadership Consulting Services increased 50% year over year, 46% sequentially, and represented just under 9% of total net revenue in the quarter.

Slide 5 shows monthly confirmations, or signed contracts for executive search and leadership consulting projects. Monthly confirmations in 2011 continue to track ahead of 2010 levels. May was actually the highest month we have achieved since March of 2007 and the second highest in 10 years.

Slide 6 is a look at quarterly confirmation trends specific to executive search. Second quarter search confirmations were 12% higher than last year's second quarter and 15% higher than the first quarter. Executive Search confirmations in the first six months of 2011 were 5% higher than the first six months of 2010 when we saw strong volumes at the beginning of the recovery some of which related to pent-up demand.

Turning to slide 7, we ended the quarter with 386 consultants, up 43 compared to the end of last year's second quarter and up 14 compared to March 31st. The increase in the second quarter includes several new hires, but mostly reflects our annual partner/principal promotions. Globally, our voluntary turnover through June 30 was less than 4%. And, as you know, we've made considerable investment in hiring and developing new consultants and their support teams over the last year. We expect this investment to contribute favorably to our top and bottom line as the balance of the year plays out.

Looking at slide 8, productivity, as measured by annualized net revenue per consultant, improved to $1.5 million in the second quarter, compared to $1.4 million during last year's second quarter and compared to $1.3 million in the first quarter. Of the consultants we hired in the last 18 months, 10 are already among our top 150 billers, and three are in the top 60. We are very pleased with the continued productivity gains but know there is still room for improvement. For example, production for those that we hired or promoted in 2010 is approaching $1 million a year in average annualized revenue. So there is still plenty of opportunity for increased revenue and productivity.

On slide 9, general pricing and average fees per search are trending in the right direction, and we don't see any downturn in the near future. Keep in mind that the average revenue per search is calculated by search revenue in the quarter divided by search confirmations in the quarter and can therefore be a little misleading as revenue lags confirmations each quarter. Therefore, we also provide you with the average revenue per search on a trailing 12-month basis.

Turning to slides 10 & 11, during the quarter we achieved profitability at the high end of our forecast. Operating income in the quarter improved to $10.3 million and the operating margin improved to 7.2%.

Before I turn the call over to Julie, I'd like to introduce you to Rich Pehlke, our interim CFO. Rich has done a great job for us since arriving mid-May and having served as the CFO at other professional service companies, including Grubb & Ellis and Hudson Highland Group, Rich hasbeen able to take afresh look at our company and our operating structure and provide valuable insight and guidance. Our search for a permanent CFO is ongoing, but nearing a close.

Now Julie will give you an update on some of the key line items and then Rich and I will go into more detail on our outlook.

Thanks, Kevin.

Our press release and our slides posted on our website this morning provide you with all the key financial and operational results of our second quarter. But, as usual, I'll give you some additional insight on two of the key line items on our income statement.

Starting with slides 12 and 13, salaries and employee benefits expense increased by $13.2 million, or 15.4% year over year. Excluding the negative impact of $5.5 million due to exchange rate fluctuations, salaries and employee benefits increased by 9%.

Fixed compensation expense accounted for $7.2 million of the increase, and mostly reflects the increase in base compensation, employee benefits and payroll taxes resulting from a 12.8% year-over-year increase in employee headcount, as well as merit increases.

Performance-related variable compensation accounted for the other $6 million increase as a result of higher bonus accruals related to higher net revenue.

Turning to slide 14, general and administrative expenses increased just slightly from last year's second quarter. But if we excluded a negative impact of $1.5 million due to exchange rate fluctuations, G&A expenses decreased $1.1 million or 3.4% in the second quarter.

There were a number of increases and decreases that netted out to the reported increase of approximately $400,000 in the quarter. The increases generally reflected professional services fees including the outsourcing of a portion of our IT and internal audit functions. There was also an increase in travel related expenses for new business development. These increases were mostly offset by non-recurring expenses we had in last year's second quarter, like our worldwide partners meeting and impairment charges associated with intangible assets related to prior acquisitions. Premise-related expenses also decreased in the quarter by $600,000 year over year.

Relative to the first quarter, G&A was up slightly, but we attribute much of this to the timing of expenses associated with new business initiatives. As Kevin mentioned, confirmations in May were the highest level we've achieved since March of 2007.

Now I'll turn the call over to you, Rich.

Thanks Julie. And thanks, Kevin, for the kind words. Good morning, everyone.

As Kevin noted, second quarter operating results were higher than forecast and revenue is still on track to meet the annual plan. Operating income and operating margin were at the high end of expectations in the second quarter, but we still have much work to do over the balance of the year.

Slide 15 shows quarterly search confirmations, and slide 16 shows our backlog. Our confirmations continue to trend above 2010 levels, and our backlog increased sequentially. Both are very good indicators of continued progress. But as those of you who follow us know, our third quarter is generally a lower seasonal quarter and confirmations tend to trend downward on a sequential basis from the second quarter. Looking at slides 18 and 19, our current forecast is for third quarter revenue of between $134 and $144 million, or 6% to 14% year-over-year growth.

Our forecast for third quarter operating margin is between 6% and 8%. Revenue is the biggest driver in whether we hit the top or bottom of this range, but you also know that the mix of consultants who generate the revenue definitely impacts operating margin.

We are maintaining our forecast for 2011 net revenue between $515 million and $545 million in revenue. In arriving at this forecast we expect to see continued strong growth in our Industrial and Consumer practices. We are encouraged that Financial Services will also have a better second half. But you can't pick up a newspaper without reading about sketchy macro sentiment and the sluggish recovery. There still is a great deal of political and economic risk throughout our regions, so we remain guarded about our outlook within this range.

We are narrowing the range of our full-year margin guidance to 6% to 8%. The full-year margin has mostly been impacted by higher fixed compensation expenses. But we believe that the investments we are making to generate revenue in the future has been the right strategy, and improving productivity will now be key to improving our margins and will remain our primary focus through the balance of the year.

General and administrative expenses, although not as much of a lever on operating income compared to salaries and employee benefits, will be a key area of focus. We have made considerable investments in some key areas of infrastructure throughout 2010 and, to a lesser extent, 2011. Some of this is to catch up in some of our back office operations in our IT platforms. The Company has set out a goal to take significant cost savings out of G&A in 2011. And while there has been progress, I see further opportunities to reduce costs in the future period.

If you turn to slide 22, cash provided by operating activities was $17.6 million compared to $23.8 million in the 2010 second quarter. We ended the quarter with $103.1 million in cash and cash equivalents, up from the $92.2 million at the end of March and compared favorably to the $92.6 million at the end of last year's second quarter.

We will see positive operating cash flow during the remainder of the year. We expect 2011 free cash flow, net of increases in accrued bonuses and capital expenditures, of between $25 million and $40 million. We now expect 2011 capital expenditures to be in the range of $13 million to $19 million driven by changes in our real estate locations as well as the new IT search platform. In the first half of 2011, CapEx was $10.2 million.

And with that, I'll turn it back over to Kevin.

Thank you, Rich.

I spent the first half of June in Europe visiting a number of our offices, and I had the opportunity to meet with employees, clients, and potential clients. It was great to spend time with so many of the new hires we've made over the last year as well as with the consultants I've known for years. The morale is definitely higher than it was a year ago at this time, and productivity is improving, and business, in general, is moving in the right direction.

In every internal meeting I emphasized the importance of our onboarding process for new hires and driving productivity. I also underscored our need to take out costs, and we all shared numerous examples of how leadership consulting was effectively integrating with search, including a number of great success stories in our European area. These are our priorities for the rest of 2011.

The Industrial and Consumer practices were the biggest contributors to year-over-year revenue growth in the second quarter and in the first half of 2011. The Financial Services practice reported a much improved second quarter compared to first quarter, but year-over-year comparisons for the first six months of 2011 were still challenged. With first half results, the Industrial Practice and Financial Services Practice now both represent 26% of our total net revenue, and we still see great growth opportunities for the Industrial Practice for the remainder of 2011. So with that brief update, we'll open it up for questions now. Thank you very much.

Operator?

(Operator Instructions) Tim McHugh, William Blair & Company.

I first wanted to ask about -- you mentioned, in terms of the expenses, G&A expenses. Can you give us updated thoughts on bringing those down? Previously, you talked about bringing them down on an absolute basis not just a percentage of revenue. And kind of what you're assuming for Q3 and Q4 in regards to that, and then even more on a longer-term basis as well?

Good morning, Tim. This is Rich. How are you?

Good, how are you doing, Rich?

Good. Yes, I don't have a specific forecast for where I want the level to be for third and fourth quarter, but, directionally, you're absolutely right. While we did a good job of making sure the growth in G&A certainly was at a much lower rate than revenue growth, we still have some work to do there.

I think it's a combination of a couple of things. Number one, I think we're still not as efficient as we should be in support of our operations in terms of just our general processes. There's been a lot of change over the last year in some of the initiatives the Company put in place that just have to be refined and I think will result in lower absolute dollars.

Number two, I think we could still have some improvement to make in the real estate side. We've done a pretty good job there, and as you know, as some of the things come off, depending upon rent rolls and other strategic changes, there might be some opportunities to solely take some further dollars out of that as well. It's still a tough marketplace in commercial real estate. I know that's spaced very well, but I think we can take some more dollars out of there over the next year or two.

Directionally, you know, we certainly would like to get that number from the mid-20s down to 20% or lower, but it's not going to come in one quarter or two.

And then -- well, if we look at the annual guidance, the implication is a much better margin in the fourth quarter, even to get to the lower end of the range is a much better margin in the fourth quarter versus what you're guiding to the third quarter. What changes there as we get to Q4 versus the second and third quarter? You seem to be implying a relatively similar level of revenue across the last two quarters of the year.

Right. Well, it's a combination of further operating leverage off the revenue increases. We think that we're going to see some gains in some of the weaker regions that got off to a tough start of this year. And, again, some combination of just bringing down expense dollars, going forward. So I think it's a combination of all of the above.

Okay. And then, Kevin, can you touch a little bit more on the Financial Services practice? Your commentary that you expect the year to perhaps have a better second half and kind of compare that to the headlines that we see and read about some of the investment banks cutting staff and being more cautious in hiring? Just kind of contrast what you see there, given all your experience in that sector?

Sure. First of all, what you've seen is, you know, the last couple of years have been a little strange, vis--vis Financial Services, in particular. Historically, Financial Services would get busy in November, continue to be busy through June, slow down a little in the summer and get busy in the October timeframe again.

If you recall, last year we had -- Financial Services was like a hockey stick in July and really took off. We had a slow first quarter this year, but it also, Tim, rebounded fairly significantly in the second quarter. What we have done as a firm is we have really focused on -- as you see, you mentioned that most of the large global investment banks were releasing earnings this week have been fairly -- I guess they've been fairly challenged. So we've spent a lot of time looking at the infrastructure, looking at back office, looking at boutiques -- helping international banks, securities firms, and boutiques grow internationally. So I think it's a matter of where -- we have a very entrepreneurial group in the Financial Services practice globally, and they've done a fantastic job of really helping a number of different types of Financial Services organizations grow over the course of the last quarter, and we'll see some of that momentum continue throughout the rest of the year.

Will we see somewhat of a summer slowdown that we have historically? Probably, yes, because, as you know, it dilutes the bonus pool as you start recruiting in July and August. So we believe that in talking to our global head of Financial Services, Daniel Edwards, that we will see probably some momentum again the second half of the year. But we probably will see a summer slowdown.

Tobey Sommer, Suntrust.

Thank you. I was hoping you could give us a little bit more color on the last couple of quarters of consultant additions. Where are you sourcing your consultants from now when you hire externally versus the internal promotions?

Tobey, what we've done over the course of the last two years is, first of all, we work with the global practice leaders to define opportunities. And that could be from a geographic standpoint or from a practice or a functional standpoint. So then we overlay that with our needs. Our budget, vis--vis hiring, and then we look at mostly search boutiques who have the expertise that we're looking to acquire.

So, roughly, 80% of all of the hires that we make come from boutiques, search boutiques, and the other come from, for example, consulting firms. A lot of our leadership consultants have come from the major strategy consulting firms that you know by name globally. If you look at this year, 37 people were hired, 25 are new to search, and 12 are experienced. So it's getting that balance of both search experience and new to search to cover certain industry sectors and also dovetail with our integrated leadership consulting strategy.

So I think you indicated in your prepared remarks that headcount additions, by and large, are done for the year. Is that right?

That's accurate. We went through the promotion cycle, as I mentioned, and we also are working with the practice leaders. Yes, if we come across somebody that's going to be accretive right away, we'll look at adding that person. But, for the most part, it's getting the balance right of moving those out that aren't as productive and bringing those on that could add value. But I'd say, as of today, most of the recruiting or heavy recruiting for the year is finished.

Okay. Just one numbers question, and then a last thing for me. The free cash flow, I think you said $25 million to $40 million. Is that subtracting the dividend payments as well? Or -- ?

No.

Okay. And then, Kevin, my last question to you is it seems like the compensation and headcount is -- that situation has stabilized, and you're now growing. How do you think about your cash balance and strategically using that to your advantage to help fuel additional growth?

Well, I think we mentioned on the last call, we always want to make sure we have a proper return to our shareholders. But currently, we are looking at ways to do that, Tobey, and we are looking at are there potential acquisitions, particularly in the leadership consulting area that can really help us grow and scale that business at a much faster pace than hiring organically. And I think that's one of our key priorities right now.

And, Tobey, this is Rich. I think from the standpoint of overall cash flow and liquidity, the combination of our cash flow generation, our balance sheet, and the fact that we just renewed our credit facility, we have ample gunpowder that, should we find the right opportunity to grow the business either to work on our organic growth or acquisition, we'd have no trouble doing that.

Operator?

Giri Krishnan, Credit Suisse.

Kevin, could you maybe speak to bi-vertical? I guess we look at [confirms] in July obviously trending up. Could you speak to whether it's a continuation of what you've been seeing in terms of industrial and consumer? Specifically, in the industrial sector, have you seen some indicators worsening on a macro level, but yet you were seeing stronger growth? Could we maybe get a little bit more perspective on that?

Sure. I mean, if you look at each and every industry sector in which we operate, take industrial (inaudible), it's the automobile group or the alternative and renewable energy sector -- commodities, et cetera. We are seeing continued growth, and the growth is happening globally, which is a good thing. And I believe that two things are happening. Number one, organizations have been using this as an opportunity to really upgrade their talent, particularly leadership talent. And, simultaneously, you have organizations looking to capture market share in new markets, and we're helping -- or we're well positioned to help them do that. So that's what we're seeing in the Industrial practice. And, quite frankly, if you look at one of the areas for investment for us, going forward, it's how do we continue to grow our industrial practice because our global head, Werner Penk, who runs this practice is fairly optimistic about the outlook for the industrial practice for the remainder of the year.

Okay. And we've heard some other [forums] mention the quick rate is also going up, i.e., more candidates willing to switch gears, et cetera. Are you seeing any of that at all?

Well, what you're saying, and this dovetails with our leadership consulting strategy, we are helping a lot of organizations with their retention needs -- also succession planning and development. If you look at the share prices of many organizations, what's happening is you have many executives that were much more expensive to become cheaper, primarily because their personal or private equity portfolios that are tied to the organization in which they work have come down dramatically. So they're looking at this as an opportunity to move to a different organization and share on the potential upside with that new organization, vis--vis equity plans.

So retention on one hand is an issue but also succession planning development, but you do see this market is one where individuals who once would not look at moving or looking at dipping a toe in the water, so to speak.

Okay. And last quarter you mentioned pricing. You were seeing some upticks. Do you see any of that this quarter at all?

Yes, we're still seeing fairly consistent increases in the number of upticks we've gotten, but simultaneously we are also seeing an increase in the average retainer that we're getting. So I think they're both trending upward. There is still some uncertainty out in the marketplace, so consultants want to hang onto their -- excuse me, not consultants, clients, want to hang onto their cash as long as they can, but we are seeing that in the back end of a search.

Okay. And maybe one last -- with respect to the leadership consulting business, for the rest of the year, should we -- what is sort of implied in your full-year guidance for revenue? And could you update us on, perhaps, around the margin for (inaudible) of that practice?

We haven't really disclosed that yet. We're still -- what we have seen is an increase first quarter for the last couple of years has been somewhat slower in leadership consulting and then ramped up. And we're continuing to see that ramp as of this month.

Mark Marcon, R.W. Baird.

In the Americas, you had a really nice performance, particularly on the margin side. I'm wondering how sustainable is that margin in the Americas? It's the highest it's been in several years.

Good morning, Mark. This is Rich, how are you?

Good, Rich. Good to talk to you again.

And nice to speak with you again. You know, it has been a nice (inaudible) to the Americas. It's been a good thing to see. I think from the standpoint of sustainability, we're hoping to keep it that way, for sure. Clearly, one of the things that we're working hard on is driving sustainability to the operating margin, and that's part of a blend of the overall comp expense relative to turning more of the variable (audio break) over time. And, clearly, in peak years, it's been even higher than it is today. So we still think that that's attainable.

In the near term, we've got to drive that operating margin in some of our other regions right now, and we're focused on that as well. But we think it can be sustainable.

And the leadership development -- which geographies does that primarily fall into?

It falls into, I mean, essentially we have a good spread across both North America, Asia Pacific, and Europe. So it really covers all the regions, Mark.

Okay. And what are the areas that you would expand into that you're not currently covering? How would you augment your current practice with additional acquisitions?

Well, a lot of it has to do with delivery and scale. And when I talk about delivery, you know, given that we work with a lot of CEOs and boards and assessing executive teams, as you think about it, we have a natural salesforce of 350-plus consultants that can go out and engage with clients at the senior level and sell leadership consulting. A challenge we have right now is if we went out and started having every single consultant in the organization selling all of our services, then we'd have a delivery problem and some not-very-happy clients. So that's what we're grappling right now.

So we have a select number of well-trained consultants -- not only leadership consultants but executive search consultants in each region who are going out and selling these products and services to CEOs and boards. It's how do we scale the business so it would be using an acquisition to help us grow and scale the business?

I see. So what you're basically saying is you have to ration the ability to sell it right now because of the delivery constraint and, hopefully, you'd be able to supplement that?

That's exactly right. It's a great problem to have, but now we're figuring out the leverage and the scale.

Okay, and then the other thing is, it looks like the consultant base grew nicely. What can you tell us in terms of the competitive (audio break) of activity in terms of poaching, stability, things of that nature as it relates to the overall industry?

Well, I can say that we have great people. If you look at our promotion process this year, we had a number of consultants get promoted to both principal and partner. We have had historically and probably been the best at developing our own people. Some of the top producers in our organization have grown up in the firm, so we'll continue to develop our people. We'll continue to hire externally as well, but when you have great people in the industry, it's great when you have great people. But the downside of that is you're going to have competitors trying to go after them. And, you know, after midyear, bonus time midyear, you always have -- just like your industry, Mark. I'm sure the phones -- I know the phones are ringing with some of our consultants. It's how do we continue to -- you know, when we have a great brand and working on developing them and retention is a key focal point for us as well. So I know the phones are ringing but, I think, this year compared to last year, 4%. There's been very little turnover.

Great. And is it your sense that the phones are ringing as much as they did last year? Or just that they're ringing as much, but you're doing a better job at retaining them?

We're not always the first to know.

Yes.

But I would say it's probably a normal level of activity. It's hard to gauge that.

Okay. And then with regards to the balance of this year and thinking longer term, how should we think about both Europe and Asia Pac particularly from a margin perspective?

The Asia Pacific margin will continue -- it will bounce back. I mean, we did a lot of hiring there to keep up with client demand. I mean, we still see that client demand. It's also challenging -- when you have a region that grows 50% in the year, it's tough to sustain a 50% growth year, year in and year out. But from a margin perspective, as Rich just mentioned, there is still an upside in Asia and, as you know, there's a lot of upside as our consultants get up to speed.

I mentioned in the comments earlier, I think what's fantastic for us is, given all of the new hires, we're almost at an all-time high in terms of productivity at $1.5 million. And for the new hires, we're at $1 million. And I think that shows that the onboarding process and integration process for us is really working, and it's been a key focal point.

And if you look at that $500,000 gap, as I mentioned earlier, there is still a huge upside, and a lot of that is going to fall to the bottom line.

And just going back to Asia Pac, I mean, it is tough to sustain the growth, and you had a really tough comp a year ago. The comps were also tough in the third quarter. Should we anticipate that maybe that part is still going to be kind of flattish on a year-over-year basis before ramping back up next year?

Well, we don't comment specifically on regions by quarter. But you're absolutely right. The comps in Asia Pac, it's going to be a tougher comparable period just because of the rebound that happened in 2010. And in Europe it's more a case of we've got to get a lot more aggressive in our smaller countries relative to looking at our expense ratios relative to revenue.

Back to Asia Pac, rather, as well, you know, the fact that we have a lot more new hires in Asia Pac, it certainly has been an area of investment. We should see productivity start to ramp up in there as we get through the balance of the year, as well. And that should help.

And we also, Mark, if you recall, our Japan, or Tokyo business, has been off significantly this year.

Sure. Going back to Europe, at this point do you feel like you have all the holes plugged in in terms of -- or a couple of countries that got [raided] last year -- are we all set now in the major geographies in Europe?

I'd say we're about 80% there. There are still a couple of countries and a couple of industry sectors -- I mean -- the functional practices, we still have tremendous opportunity. Not just in Europe but globally. We still have some upside in industrial and technology and, quite frankly, now that I'm thinking about it, Mark, I think we have upside in pretty much every country in which we operate over there. But from a recruiting standpoint, I'd say we're about 80% done.

I was just wondering what the tone is from your consultants over there just in terms of what we read in the papers every day. Is there any sort of impact that they can denote with regards to confidence, hiring plans, et cetera?

Well, I just spent a couple of weeks in Europe visiting about nine cities. And I would say that morale is probably the highest it's been in a while from the country standpoint. I mean, Germany seems to be -- the Germans seem to be very optimistic. Italy -- even though if you look at Italy, Spain, Ireland, et cetera, obviously, Greece, you know, there is a lot of angst and uncertainty there from a macroeconomic environment. But I'd say in the key markets we still have great morale and still a lot of potential.

I mean, as Rich mentioned, where we need to look at investing or how do we ramp up places like Russia? How do we ramp up Poland? So there's a couple of opportunities there that we have but, other than that the morale is very good -- once, sitting in the Paris office, they were joking with me that this is the busiest they had been in a long time, and the clients like to dump all the work on them before the clients go on a vacation and expect it done by the time they get back.

So I would say that, overall, things are picking up over there.

Kevin Steinke, Barrington Research.

Just following a little bit on Europe, and you touched on this a bit. But it sounds like getting back to positive operating income in Europe will be a combination of both addressing G&A expenses as well as just continued improved productivity on your recent hiring there. Is that correct?

That's pretty much the case, that's correct.

Okay, and of the hiring you did in the first half of the year, I don't know if you will comment on this or break it up, but were you able to add any leadership consultants, and it sounds like the hiring environment is still pretty tough there. But were you able to add any?

Yes, in leadership consulting we hired -- you know, Kevin, I don't have that breakdown right now. I apologize. We can circle back by that. Out of the 37, I'd have to go back and get a number for you. So I can get back to you with that.

Sounds good.

But to answer your question, yes, we've hired leadership consultants in every region in which we operate.

Okay, lastly, the proprietary search system that you've been investing in -- I believe that was scheduled for a summer rollout here. Is the spending on that done, and has it been rolled out? Or where are you in that process?

It's in the very early stages of being rolled out. We're in the test phase now of taking small groups working with it. And we should be up and running late third quarter, early fourth quarter.

Okay, and once that's fully up and running, do you have any expectations on how long that will take to really contribute to improved consultant productivity?

Well, clearly, we want to make sure that it is an enhancement to productivity both in terms of lowering our operating cost but also making our people more efficient and, certainly, a tool that helps them generate more revenue. That's why we're being very cautious and making sure we work with the field on a day-to-day basis right now in the trial phase. I think it will have pretty strong impact right away.

Tobey Sommer, SunTrust.

Thanks. Kevin, I just had a question relating to you guys perhaps taking warrants. We're in another period where tech companies are coming public with pretty nice valuations. And I recall, not too many years ago, that benefiting the Company. Is that still a practice that you are using in this market?

Tobey, yes, it is, but it's minimal. I mean, it's not as great as it was, obviously, during the tech boom, but there are still some clients. We've seen venture capital activity pick up in the first and second quarter of the year, but it's not as -- I don't think it would make a huge impact on -- well, you never know, but I don't think it would be a huge impact given the way it's constructed today.

(Operator Instructions) Mark Marcon, R.W. Baird.

Just one follow-up question. Are there any expense items that you would expect to drop off or be reduced in the fourth quarter relative to the third?

If there is anything at all, it might be some professional services relative to that system development. But from a material standpoint, Mark, there's nothing that is that big.

Okay, great. I would like to follow up offline.

Okay, all right.

I am showing no further questions at this time.

All right, well, thank you very much for joining the call today. I'd also like to thank all of our consultants globally and all of our staff globally for a great second quarter. I appreciate all of the support, and I hope you all have a great rest of the day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the conference, and you may now disconnect. Everyone have a wonderful day.