Oct 28, 2008
Executives
Julie Creed – VP, IR Kevin Kelly – CEO Scott Krenz – CFO
Analysts
Andrew Fones – UBS Kevin McVeigh – Credit Suisse Michel Morin – Merrill Lynch Tim McHugh – William Blair & Company Tobey Sommer – SunTrust Robinson Mark Marcon – Robert W. Baird Clint Fendley – Davenport David Friedberg – Goldman Sachs
Operator
Good day, ladies and gentlemen, and welcome to your 2008 third quarter conference call. At this time, all participants are in a listen-only mode.
Later we will conduct and question and answer session and instructions will follow at that time. (Operator instructions) I would now like to introduce your host for today’s conference, Ms.
Julie Creed, Vice President, Investor Relations. You may begin ma’am.
Julie Creed
Good morning everyone, and thank you for participating in our 2008 third quarter call. Also participating on the call today are Kevin Kelly, Chief Executive Officer; and Scott Krenz, our 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 this call may not be reproduced or retransmitted without our consent.
We will also be making forward-looking statements on today’s call and ask that you please refer to our Safe Harbor language contained in the news release or on slide one of our presentation. And now I'll turn the call over to you, Kevin.
Kevin Kelly
Thanks, Julie. Given what the US and other countries’ economies have gone through over the last year, and specifically in the just the last couple of months, I am satisfied with the third quarter results we are reporting today.
It is not the year that any of us were hoping for but we are managing quite well. If you are following along with the slides we posted on our website, I'm going to highlight a few things about our third quarter and year-to-date results starting with slide 2.
Consolidated new revenue in the third quarter was $158.3 million, down 2.8% compared to last year's third quarter. On a constant currency basis net revenue in the quarter was down approximately 5% year-over-year.
The life sciences, technology, industrial, and the education non-profit industry groups all achieved year-over-year growth in the quarter, but their growth was offset by declines in financial services and to a lesser extent in business and professional services, and the consumer goods practice was flat year-over-year. Net revenue also declined sequentially compared to the second quarter.
But we’ve seen a third quarter decline in the past as a result of summer vacations especially in Europe. And this year the Olympics had a noticeable impact in the Asia-Pacific region.
Turning to slide three, net revenue in the Americas was down 0.2% or essentially flat compared to last year’s third quarter. The technology, industrial, life sciences, and education non-profit practices each achieved double-digit year-over-year growth.
But this growth again was offset by softness in financial services and consumer to a lesser extent. Referring to o slide 4, Europe had a slow quarter.
But it is an especially tough comparison to last year’s third quarter, which was a record for this region. Net revenue in Europe declined 14.6% or approximately 17% on a constant currency basis.
Although the life sciences and consumer goods practices achieved double digit year-over-year growth, it was offset by declines in financial services, industrial and business and professional services. Recall that as of April 2008 our Lisbon office is now an affiliate and this represents $5 million of the year-over-year decline.
Referring to slide five, net revenue in the Asia-Pacific region grew 18.2% year-over-year or about 15% on a constant currency basis. It was the second best quarter in the region’s history and on a rolling twelve month basis we are now the largest executive recruiter in this region as measured by net revenue.
Every industry group except the technology practice achieved year-over-year growth in the quarter. For the first nine months of the year compared to the same period of 2007, consolidated net revenue increased 3.2%.
Net revenue in the Americas region was down 2.9%, up 1.7% in Europe and up 33.3% in Asia-Pacific. As you can see from slide 6 all of our practice groups except financial services achieved growth in the first nine months.
Turning to slide seven, consultant headcount was at 416 at September 30th. We’re still investing in the business by strategically hiring consultants in regions and subpractices that are growing.
In the last year, we have added a net 23 consultants, 15 of which we added in Asia-Pacific. Year-to-date voluntary consultant turnover is still very low, under 5%.
Turning to slides nine and ten, executive search confirmations in the third quarter were down 4% compared to last year's third quarter and decreased 11.8% on a sequential basis. On a monthly basis, confirmations were fairly steady until July and August, when we started this year’s slowdown, some of which was expected.
Because July and August are heavy vacation months, we wanted to wait for September confirms before drawing any conclusions. But when September confirmations didn’t return to the levels we were expecting, it confirmed our thoughts about softening demand and as a result we revised our forecast for 2008.
And although there are only a few days left in the month, October confirmations are tracking very similar to September. Moving to slide ten, productivity or analyzed revenue per executive search consultant was $1.4 million compared to $1.6 billion in last year's third quarter, not really all that surprising given the lower revenue in the quarter.
Looking at slide 11, the average fee per executive search increased to $127,200, slighter higher than last year’s third quarter. And the year-to-date average fee per search is $118,200 up 7.2% compared to the first nine months of last year.
Referring to slides 12 and 13, third quarter operating income was $20.9 million compared to $25.5 million last year, and the third quarter operating margin was 13.2% compared to 15.6%. The decline is primarily a result of lower revenue but also reflects an increase in salaries and employee benefits expense.
Now I'll turn the call over to Julie to go into a little more detail on some of the line items that are key to driving operating income and the regional results.
Julie Creed
Thanks, Kevin. Turning to slide 14, salaries and employee benefits expense in the third quarter was $108.6 million, up $2 million or 1.9% year-over-year.
The increase was driven by an increase in fixed expenses of $9.5 million as a result of a 9.5% increase in headcount since last year’s third quarter. It also reflects higher fixed salaries for associates and search support staff.
The increase in fixed expense was partially offset by a $7.5 million decrease in variable expense or performance based compensation, which largely reflects our lowered expectations for 2008 net revenue and operating margin. Total stock-based compensation expense in the quarter was $6.2 million, which is down compared to $7.6 million in last year's third quarter.
As a reminder, this decrease largely reflects the change to our 2008 compensation program whereby the portion of consultants in management’s bonus that was previously paid in restricted stock units will now be paid in cash, although still deferred over 2 years. Now turning to slide 15, general and administrative expenses in the quarter were $28.8 million, a decrease of $2 million compared to last year's third quarter.
This year-over-year decline largely reflects the absence of several items that we recognized in last year’s third quarter totaling $4.1 million including professional fees, legal fees, and an impairment charge that did not recur in this year’s third quarter. This was partially offset though by an increase in premise related costs for new offices and lease renewals since last year's third quarter, including among others New York, Hong Kong and Tokyo.
But compared to the second quarter, third quarter G&A expense was lower by $4.7 million, and was record low 18.2% of net revenue, which reflects the positive impact of our cost containment initiatives. Looking at slides 16 and 17, net income of $14 million declined 13.3% compared to last year’s third quarter.
The diluted EPS declined only 4.8% to of $0.80 on a slightly lower tax rate and a 9.3% year-over-year decrease in diluted weighted average common shares outstanding primarily reflecting our share repurchases over the last year. Kevin already gave you an insight into the revenue trends in each of our region, so I am going to provide a little color on the operating margin in each region.
Looking at slide 19, in the Americas, third quarter operating income was down 18.6% year-over-year and the operating margin was 17.1% compared to 21% in last year's third quarter. The year-over-year decline in operating income and operating margin is attributed to the increase in salary and employee benefits expense and the increase in G&A expense.
The increase in salaries and employee benefits expense reflects several times including higher fixed expense for search associates and support staff, which I explained earlier as well as for severance expense. The increase in G&A expense is largely related to premise related costs and lease renewals for existing offices, the largest being New York.
Operating income in Europe decreased 26.7% and the operating margin was 15.9% compared to 18.5% in last year third quarter, and the decline in operating income and this resulting operating margin in the quarter is largely the result of the lower net revenue, which Kevin explained earlier. In the Asia-Pacific region, operating income increased $508,000 or 10.3% year-over-year and the operating margin was 20.5% compared to 21.9% last year.
The slight decline in operating margin primarily reflects investments made over the year to grow this region. In the past year, total headcount in this region has increased approximately 26%, including an increase in consultant headcount of 25%.
This translates into additional fixed costs without the corresponding margin as consultants get up to speed. There are also higher infrastructure costs related to leases for new and existing offices since last year's third quarter to accommodate our growth.
Turning to slide 21, I would like to also highlight the 13.1% decline in corporate expenses year-over-year and 20.6% sequentially compared to the second quarter, again largely reflecting our cost containment initiative. And now I will turn the call over to you Scott.
Scott Krenz
Thanks Julie. As we released on October 14th, our current forecast for the year is net revenue of approximately $630 million and an operating margin of approximately 10%.
In our last call, we outlined some of the cost savings initiatives we had implemented. These initiatives have had a significant positive impact, much of which is reflected in G&A.
Most salary and benefits expense is fixed, but there is also a variable or discretionary component that was reduced as a result of our lower expectations for the year. Unfortunately, the full benefit our cost savings has been more than offset by our lower revenue expectations.
As for lowering fixed costs, these are harder to reduce in one or two quarters but remain a key priority. The company has made significant progress in improving its cost structure since the last downturn but there is still more we can do and that we plan to do.
We are in the middle of our 2009 budgeting process. As you would expect, given the considerable economic uncertainties that is not been an easy exercise.
We will not complete this process until approximately mid-December. Therefore at present we are not in a position to provide 2009 guidance.
However, I did want to give you some insight into what we were seeing so far. First and most importantly at present as we look into 2009 we are not seeing a dramatic decline in demand.
Yes, certain countries and practices are slowing, but then others are expected to grow robustly. Other search firms that are not as diversified as Heidrick are weathering this economic storm as well as we are.
This opens the possibility for investment at very attractive prices. This includes both investments in people as well as acquisitions.
But let me assure you, we will be cautious, but we still do not want to ignore this opportunity. Lastly, as we plan for next year, we are maintaining a strong focus on costs.
This means continuing many of the programs we began in 2008, but also taking a higher look at everything from real estate to how we deliver our services. We want to stay as lean as we can but at the same time improve our platform to support future growth.
Our financial position is solid. Net cash provided by operating activities in the quarter was $61 million.
Our cash balance was $183 million at the end of the quarter and we have no debt. We repurchased fewer shares in the quarter in order to conserve our cash in these market conditions.
But we have the flexibility to continue to repurchase shares, pay our dividend, invest in our business where we see opportunities to enhance our growth and market position. Kevin, I will turn it back to you to close.
Kevin Kelly
Thanks Scott. Just a few other thoughts before we open it up to questions.
When we released our second quarter results at the end of July and we reiterated our guidance, it reflected our forecast for the business at that time. As we all know, visibility into the economy wasn’t great and I knew that our top and bottom-line goals will not be easy to achieve.
But I wanted our company to do everything in its power to meet our commitments and so our management team took very specific cost cutting initiatives that based on revenue of $650 million to $660 million would allow us to achieve those goals. Given the unprecedented turmoil in the economy our business has slowed since July and our ability to achieve our original goals for net revenue and operating margin seem unlikely.
I know it is easy to focus on the doom and gloom of the economy, in particular the financial services industry where you all work, but our business has not stopped and the sky hasn’t fallen. As you have seen, confirmations for the month of September were up 9% over August confirmations and October confirmations looked very similar to September.
Achieving $630 million in revenue this year would represent growth over last year and that is something many thought we could not achieve. Fortunately, we are not the same company that we were in 2001.
One reason is that we are much more diversified. We serve our clients in 33 countries, 20 plus industry subsectors, and 11 C-Suite functional practices, many of which will achieve record results this year.
They will achieve records because we have invested in the people to help us gain market share and because there was a shortage management talent throughout the world despite economic conditions. Heidrick & Struggles has been around for 55 years and in that time as today, we have demonstrated strength and resilience.
This is a growing business with demographic and secular drivers that will fuel this company for many years to come. The acquisition and development of leadership talent is not just a business critical situation anymore, it is country critical to each of the world’s major economies.
Organizations around the world need top leadership talent to manage through good times and through bad. And at this point, we are very happy to take any questions you might have.
Operator
(Operator instructions) Our first question comes from Andrew Fones with UBS.
Andrew Fones - UBS
Yes, hi. Thanks, I was wondering if you could give us little more color in terms of the revenue guidance for the year of $630.
What your assumptions are there in terms of currency impact, seasonality, normal seasonality and then you know, kind of any impact you have seen from the recent economic weakness that we are experiencing? Thanks.
Scott Krenz
Andrew this is Scott. I think Kevin can jump in here where he wants.
Let me take a crack at it to start. I think when we put out the guidance of $630 for the year, I mean, we have factored into that the weakness we have seen from the economic conditions and I think that is weakness which we saw manifest itself in the third quarter and that in fact is factored into the fourth quarter, which is pretty much, you know, you know do the math as well as I can flat with the third quarter.
So, it basically is projecting that the level of confirmations and revenues, you know, approximately in line with what we saw in the third quarter. As the seasonality -- as we noticed recently we have in the third quarter you get a lot of vacations and a lot of disruptions, the Olympics this year.
There were lot of those things, which impacted the third quarter, and obviously in the fourth quarter you know, we have got the holiday season but in some respects it was almost (inaudible) with each other which was sort of why we took -- we considered the two to be roughly equivalent to each other. Kevin you want to add anything to that.
Kevin Kelly
I just would add that we still significant growth in certain parts of our business across the globe, be it by practices such as technology, alternative and renewable energy. The practice is up significantly up year-over-year, technology is up 25%.
We see tremendous growth still in Asia-Pacific and lot of the recruits that we put in place at the end of last year and the first quarter of this year will start hitting their stride, and had hit their stride in the third quarter going into the fourth. Central and Eastern Europe, the Middle East, and Russia still are -- we still see high levels of confirms coming through.
So, I think in aggregate put those two things together we are confident right now with that $630 million number Andrew.
Andrew Fones - UBS
Okay, thanks and there was just one other part to that. If you could just comment on your currency assumptions?
Thanks.
Scott Krenz
That after last night. I mean.
I used to trade currency way back in my dim dark past years. In many senses I have given up trying to predict which way it goes.
I mean, that is a tough thing to do. I mean, essentially, you know we have assumed that there isn’t any significant impact in the fourth quarter with where we are in the third quarter and anybody who wants to take a prediction at that, give me a call, because I can make a lot of money of that if I can get it right.
Andrew Fones - UBS
Okay, thanks. And two other questions.
SG&A, I was wondering if you could just kind of talk about how you feel in terms of sustainability of the SG&A. We saw it in Q3 -- whether we should expect that to remain kind of steady.
We could see some further reduction in the fourth quarter or whether it was -- for any reason there could be an increase and then in terms of the share buyback you said you kind of pulled back a little bit on that during the third quarter and I was just wondering what your thoughts were regarding continuing that in the fourth quarter. Thanks.
Scott Krenz
Okay, I -- SG&A, is it sustainable? I think the short answer is yes.
You know, the actions we took are not things which are, you know, the type of things which are rather than panic or change. I mean these are solid business decisions we made to pull back on some things in this economic environment and I think we are confident we can sustain that.
Going forward, as I said we will be looking at impacting some of the very large spend items we have in real estate, you know, continuing to look at travel and how we can make -- be much more effective in our use of travel, continue to look at our IT spend, another large area we spend money on. So, I suspect there is room in the future to actually improve that and that will be our goal.
I am not going to quantify that for a very simple reason and that is that we are not far enough down the path to really have a good quantification other than to know that that it is pretty clear that we have some room for improvement there. As to the share buyback, I think 3 things drove our thinking.
One, in this market as I am sure, everybody on the phone is far more sensitive to it than we are because you live it everyday and this is a market trading not on valuation. There is lot of emotion in it.
I just seemed like we wouldn’t be certainly supporting the stock price. We would be pushing against just almost a Tsunami here of emotions and stuff.
That was one factor. Second factor was it seemed clear to us that the bias was much more down than up and why would we be buying it at $30 a share or $28 a share when we are at $19 today.
It just didn’t seem to be a smart thing to do and then the last thing is what I mentioned in that is there are uncertain times. And you know I think like a lot of companies out here we are husbanding our resources and keeping our cash and I think it is doubly important for us because as I said, you know a lot of firms out there are not doing as well as we are, particularly boutiques and stuff, and it does put us in a position to make judicious investments and spend some of that money to grow this business and really support the platform we have got and Kevin I don’t know if you want to.
Kevin Kelly
No. I think you covered it.
Andrew Fones - UBS
Okay, thanks for that.
Operator
Our next question comes from Kevin McVeigh with Credit Suisse.
Kevin McVeigh - Credit Suisse
Hi, quick follow-up. Scott, you (inaudible) kind of $8 million of benefit from SG&A savings, did you reach that goal, exceed it, and have you undertaken any additional initiatives as you work your way through the fourth quarter?
Scott Krenz
The short answer is yes. I mean that is always sort of a difficult number to do it, because the business is dynamic and it is constantly changing but in the main we are comfortable we are on course to achieve the $8 million.
We haven’t taken any additional actions in the near term here but that doesn’t mean we are not thinking and not, in fact thinking about the other things we should do in this market and in this economy going forward in the next year. Some of those I have mentioned.
Others are -- I mentioned in the script taking a look at how we deliver service, support costs, real estate, just about al the spend items we have got and we will be taking a real hard look at that as we go into next year.
Kevin McVeigh - Credit Suisse
Great, and then in terms of the discretionary comp, it looks like there was a decrease there, how we should think about that for the rest of the year in terms of the bonus accrual. Could it be lower, or -- you know what are your thoughts on that?
Kevin Kelly
At this point, we are confident Kevin with the $630, and like any other strong professional services firm, you know our people are at it. We got to make sure that we do it right for not only the shareholders, but we protect our assets as an organization and we need to continue to look at paying people who perform in this organization to whether at this end of this year as well as take us through 2009.
So, at this point, we don’t have any idea -- excuse me, not any idea, we don’t have any -- our objective isn’t to decrease the bonus pool further.
Kevin McVeigh - Credit Suisse
Great, thanks Kevin and just one other thought. The industrial practice has been pretty strong here, given the way oil has come off do you any incremental headwinds around that or is there any type -- kind of oil price that you think would impact the hiring decisions within all energy or some of the oil services.
(inaudible)
Kevin Kelly
I was going to say not in the ARI [ph] side. So, you know given the volatility of oil, it is no surprise that you know, the other sectors, the alternative and renewable energy sector is massive.
And we are seeing a lot of recruitment in solar, wind, biofuels, and energy efficient types of organizations as well. So, I think it is more than offsetting the drop in oil at his point in time and that is one area of our business that continues to grow and we are looking to expand be it Canada, be it Australia, be it parts of Europe and North America, it is really continuing to grow for us.
The technology practice again in our investments that we made at the end of 2007 have paid dividends. We are up 25% year-over-year.
So, with continued focus as we -- we don’t want to make the mistake that we made in 2002 and just focused on that cost side. We are using this as Scott mentioned, we have a rock solid balance sheet.
We want to use this Kevin as an opportunity to go out either by region and/or by industry and capture market share and we have the opportunity to do that now and invest in some of these industry groups.
Kevin McVeigh - Credit Suisse
Great. thank you very much.
Operator
Our next question comes from Michel Morin with Merrill Lynch.
Michel Morin - Merrill Lynch
Hi, good morning. Kevin I think in the prepared remarks you mentioned or maybe was it Julie, the impact of the Lisbon office in Europe.
Could you similarly mention or go over kind of the impact from recent acquisitions. I think in North America there were a couple, if I have not mistaken, how much did that contribute to the top line and to the confirmations?
Kevin Kelly
Sure, I think we can get back to you, and we have had great results from IronHill, the venture capital group that we brought onboard. In fact, two of the consultants were at the top 30 at this point.
We have really hit the ground running. 75 searched the asset management boutique.
Julie Creed
It was until August.
Kevin Kelly
It was until August but they have started to get some traction as well. And this plays to Kevin questions earlier Michel about, you know, looking at opportunities in sub sectors of our business where we can continue to grow.
I mentioned the effect of Lisbon, it was 6.6% if I recall correctly. It was about $6 million that impacted our results in EMEA.
Scott Krenz
The decline in EMEA would have been if you took Lisbon out of both sides of the equation, it would have been approximately 7% down as opposed to I think 15% down in round numbers.
Julie Creed
So, Michel the other acquisition that we have done today hasn’t been to that level of significance?
Michel Morin - Merrill Lynch
Okay, well I guess, I am asking really if I focus on the worldwide confirmations chart on slide 9, you mentioned Kevin that your decision regarding the outlook being lower few weeks ago was in large part driven by your observation of how confirmations were trending kind of in September but when I look at this chart, it actually looks like you did better than you did a year ago. I am a little bit surprised by that and it looks like October is holding up really well.
So, am I missing something maybe in terms of the mix of new confirmations coming in at the lower fee per search or what else is happening?
Kevin Kelly
Sorry, I interrupted you. Actually, if you look at the average fee per search it is up year-over-year.
What we are seeing in -- August is always a tricky month Michel because you don’t know what is going to impact the number of confirms with the vacations in Europe, with vacations in North America. And so we saw August creep down but then we bounced back in September and we are looking to be fairly consistent in October as well, which hence the fact that we are confident with the $630 figure that we gave you and we have seen over the course of last two or three weeks a lot of activity across the globe.
So, we are just hoping that continues, but you know, these are uncertain times and we don’t know what is going to happen going into 2009.
Michel Morin - Merrill Lynch
Right.
Scott Krenz
Part of the answer is your reference point was last year, which is an appropriate reference point. When were talking we are talking about how it matched up against our expectations in our internal forecast.
So, that was our reference point.
Michel Morin - Merrill Lynch
All right, that is fair. Thanks very much.
Operator
Our next question comes from Tim McHugh with William Blair & Company.
Tim McHugh - William Blair & Company
Hi. Yes.
I wanted to ask first on the margins, better than expected this quarter. So, the question is on the fourth quarter here, you talked about some of the SG&A reductions being sustainable going forward, that implies a fairly low gross margin as far as I can see it in the fourth quarter here.
Is there anything unusual going on there or any other color you perhaps could provide?
Scott Krenz
No, I think the important thing is to note that the third quarter margin is higher than (inaudible) business because we took the discretionary bonus down in that quarter. You know, had we not done that we would have been somewhere around between 9 and 10% versus the 13%, which I think is pretty much more than sort of the normalized margin we are running at that level of revenue.
Tim McHugh - William Blair & Company
Okay, and then was there any severance, the press release mentioned some severance expense in the third quarter, is there anything meaningful there or as we move into the fourth quarter here?
Kevin Kelly
You know, hi Tim, it is Kevin. What are continuing to do if you recall last year 2007 was the first year that we have been taking action on underperforming individuals across the globe and instead of having one hit as we saw in the second quarter of 2008, we have been making a conscious effort to make sure that we are consistently looking at how people perform in this organization and moving in and out accordingly.
So, I think that is what the severance refers to in the third quarter. Moving forward, we will continue to do that and as Scott mentioned in his remarks, we are going to continue to focus on costs and see if there is things that we can do better as an organization going into 2009 given the market conditions.
Tim McHugh - William Blair & Company
Okay, and lastly if I could ask about within financial services, while their practice is down, private equity seems to remain particularly strong for you guys. Can you give a little bit more color on what you are seeing there and how sustainable is that going forward?
Kevin Kelly
Absolutely, what you are seeing is the best way for private equity firms to give a great return to stakeholders is by having the right leadership in place and given the times that we live in different types of leaders can get better results. So, we have seen turnover at the (inaudible) and our private equity practice is continuing to be extremely strong.
I mean, Tim, also our financial services practice was up in Asia-Pacific. So, we are still seeing strong demand out there and financial services firms are using this as an opportunity to -- particularly some of the second tier firms historically, some of the regional banks, and even some of the international firms from Russia, the Middle East, and China are looking this as an opportunity to hire top talent.
Having just come back from China there is couple of organizations that are looking to hire 100 to 200 top bankers from New York if we get them to get over there or London. So, we are still seeing a lot of activity there as well, but continued demand in private equity.
Tim McHugh - William Blair & Company
Okay, thank you.
Operator
Our next question comes from Tobey Sommer with SunTrust Robinson.
Tobey Sommer - SunTrust Robinson
Thanks. I was wondering if you could comment on fee growth which was very good in the quarter, given the relative decline in financial services that is kind of lucrative.
I was wondering if you can give some color kind of how you drove that average fee higher.
Kevin Kelly
One thing to think about in financial services is the fact that despite an investment banker losing his compensation or seeing a decrease in compensation from say $2.5 million to $1.5 million we are capped Tobey. So, most of our financial services searches are capped at $350,000 to $500,000.
So, despite again a decrease we wouldn’t see a significant falloff in pricing in financial services. Part two of your question is, we continue to move upstream and what we’ve seen globally is continued and you have heard us bang this drum for a number of years but we don’t need job creation although we are seeing it in the Middle East and Russia and China.
We need job churn. And you are seeing a lot of job churn at the senior levels of organizations and there continues to be a supply demand issue.
So, we have moved upscale, excuse me, upstream, we continue to move upstream and see the revenue per search increase.
Tobey Sommer - SunTrust Robinson
Thank you. Along those same lines to follow-up in kind of the uncertain economic times and challenging ones as we look into 2009, would you expect that intrinsic turnover rate to maintain itself at the current levels, or would you expect there to be some sort of procyclical decline?
Kevin Kelly
It depends -- it depends again on what we see in the market. Are we going to see other mergers or acquisitions take place.
If so, our leadership in bulk consulting business to take off in terms of assessing the senior leadership teams of these organizations, and then what we are seeing is a tremendous trend or excuse me a trend towards internal versus external candidates, a number of the CEO searches we are doing we will have 2 to 3 internal candidates, and they are asking us provide 2 to 3 external candidates. So, we are getting paid not just for a one-off CEO search but for a two-year cycle of assessing leadership teams of organizations.
You know, going into 2009, I think we will continue to see a trend of activity in the M&A parts of the acquisition front, which again will lead to more search activity across the globe for us. We are also seeing the advent of our Asia-Pacific business starting to export work more to North America and to other European countries and looking for leadership talent to drive their strategy in organizations and we are in the cusp of having that happen.
So, we will continue to see that as a trend going into 2009.
Tobey Sommer - SunTrust Robinson
Thank you. That is very helpful.
Two other questions, I will get back in the queue. On page -- on slide 6, where you have the change in revenue in some of your practices for the full nine months, will you be able to share any highlights for how those practices performed within the third quarter specifically or is that something that I better handle offline?
Kevin Kelly
I think we may be able to take that one offline. You know, as I mentioned in my remarks, every single practice except financial services is up year-over-year.
We would have to circle back to you on the quarter-over-quarter.
Julie Creed
But in the quarter-over-quarter we do highlight for all three regions, which practices were up and which were down. For which region and consolidated in the press release.
Tobey Sommer - SunTrust Robinson
Okay, thank you. And then the last one was, you mentioned the Olympics having an impact on the third quarter and confirmations were up in September and October, specifically in China were confirmations are up in September and October.
Did you kind of bounce back from that pretty nicely?
Kevin Kelly
We did bounce back and I would say not only in China but other parts of -- I can’t even say Northeast Asia, I would say all of Asia-Pacific is and to that degree had a lot of individuals across the globe going to the Olympics. So, you know, we have bounced back after that and our China business continues to remain strong.
Tobey Sommer - SunTrust Robinson
Thank you very much.
Kevin Kelly
You are welcome.
Operator
Our next question comes from Mark Marcon with Robert W. Baird.
Mark Marcon - Robert W. Baird
Hi, good morning. In terms of the October confirms, would that typically be up relative to September?
Kevin Kelly
What you see, Mark it is Kevin .How are you doing?
Mark Marcon - Robert W. Baird
Good. Thank you.
Kevin Kelly
We usually see this time of the year becoming fairly active, specifically across most industry practices and specifically financial services as we move into the fourth quarter they have an idea what bonuses payouts are going to be as we have seen in the news the last couple of days. You know individuals looking at their business and strategy and budgets for 2009, saying okay, what do we need to do to drive growth either across the globe or in a specific vertical in which we operate.
So, they start the recruitment process in October, excuse, November, December time frame in order to get individuals on board in early the following year. So, usually we do see somewhat of an increase in confirms at the last quarter of the year.
And December is something we are focused on as well, and we have some activity going on internally and how do we drive confirms all the way to December 31st, because as you recall, we were short on confirms December 2007, and we didn’t want to have that same. We don’t want to end up in that same situation going into 2009.
Mark Marcon - Robert W. Baird
But it sounds like in terms of October relative to September was relatively flat and that would be suggestive for consistent with the economic environment that we are in. Is that correct?
Kevin Kelly
Well, we don’t know, because usually -- it is tough to gauge. We have 4 days left in the month and Asia-Pacific always is very consistent with our confirms, Europe they have huge flurry of confirms in the last 3 or 4 days and in North America as well.
So, and if I throw Latin America in, there we see the same thing. So, right now we are consistent with September if not a little bit better but we have 3 days, 4 days left in the month.
Mark Marcon - Robert W. Baird
You did a great job in terms of managing the expenses but the one thing I was wondering about is with regards to the fixed costs related to discretionary comps, just a mix there and the change year-over-year, how do you see that trending?
Kevin Kelly
I am sorry Mark. Are you talking specifically about the discretionary component versus fixed or an aggregate?
Mark Marcon - Robert W. Baird
I am referring to slide 14, where the fixed comp is about 70% of your Q3 salaries and employee benefits.
Kevin Kelly
So, how do we see that trending going forward.
Mark Marcon - Robert W. Baird
Yes.
Kevin Kelly
I would say that you know our focus as an executive committee in an organization is to bring that 70% down.
Mark Marcon - Robert W. Baird
So, you would anticipate that next year it should be down a little bit?
Kevin Kelly
Yes.
Mark Marcon - Robert W. Baird
Okay.
Scott Krenz
It is also up I mean the 70% represents a year in which obviously as we have said we have cut back on the discretionary portion of this. So that has an impact on the balance between the fixed and the discretionary.
Mark Marcon - Robert W. Baird
Okay, and you mentioned what the total accrued expenses were but was the actual bonus accrual?
Kevin Kelly
Are you talking about what was reversed or what are you talking about?
Mark Marcon - Robert W. Baird
The specific bonus accrual for this quarter?
Julie Creed
Well, you can see in the slide it was $33 million in cash was the bonus expense in the third quarter.
Mark Marcon - Robert W. Baird
Okay, I saw that, and it said includes bonus, so I didn’t know if there was anything else that was in there. And then what would you anticipate that the bonus payout will be when we get out to March from a cash perspective.
I am trying to figure out what your cash is going to look like.
Julie Creed
Well, I think we’re -- you know, I think if you use the range of you know, $150 million or so give or take you’d be in the right range.
Mark Marcon - Robert W. Baird
And that would get paid out on March?
Julie Creed
In March.
Kevin Kelly
March, yes.
Mark Marcon - Robert W. Baird
Okay great. And then just to make sure I heard correctly your -- for the guidance you’re basically assuming the same FX rate that was the average of the third quarter to be applied in the fourth quarter?
Kevin Kelly
Yes.
Mark Marcon - Robert W. Baird
Okay great. And then what are the areas that you know as you -- it seems relatively obvious that economically things are going to remain challenging for at least the next three quarters.
How are you going to I mean philosophically, you know, manage through that given that there is, you know, there is all sorts of debate in terms of how long we stay in a downturn. It seems like it’s obvious we’re in a downturn.
It is just a matter of how long and how deep. So, philosophically what’re you going to use to kind of guide you through that.
Kevin Kelly
Mark, a couple of things. First of all, going back to your currency comment.
You know we’ll reevaluate you know, on a daily if not weekly basis. I don’t think any of us expect (inaudible) 92, the sterling to go to 150 or the Australian dollar to 60 last night.
So, we’ll reevaluate that and that just happened in the last 12-18 hours. So, you know, we’re on top of that.
Secondly, I’ve spent a lot of time talking to not only our consultants, but our clients across the globe and we know that we’re headed for probably the most significant downturn that was seen in a very long time if not ever, and we want to make sure that we have a rock solid balance sheet as Scott mentioned. We want to continue to focus on driving revenue across the globe, hiring the best people we can and looking at potential acquisitions.
Simultaneously, you know these events also provide tremendous opportunity and we will continue to look at how and if our business is the right size going for what we need. So, we’ll continue to have an ardent focus on our cost by making sure that we continue to be diligent about investing in our business because when this comes back, we want to be well positioned to take advantage of that.
Mark Marcon - Robert W. Baird
Great, thank you.
Kevin Kelly
You’re welcome.
Operator
Our next question comes from Clint Fendley from Davenport.
Clint Fendley - Davenport
Thank you. Good morning guys.
Most of my questions have been answered here. Kevin one question, I mean a lot of talk now about capping executive comp in Europe, and now obviously some extreme scrutiny around compensation in the US.
How do you see this impacting your business going forward here?
Kevin Kelly
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Clint Fendley - Davenport
Thank you.
Operator
Our next question comes from David Friedberg with Goldman Sachs.
David Friedberg - Goldman Sachs
Good morning. Two questions.
In terms of your comments earlier and I think you addressed this several different ways but (inaudible). In terms of September confirmations and then ultimately confirmations coming in below your expectations, can you give us a little bit more color, was that across all regions and all business practices, or were some weaker, in other words were the year-over-year trend that you discussed in the prepared comments, those continued in September, was there any incremental change?
Kevin Kelly
David, it’s tough to gauge because they bounce around every month, I mean, financial services, you know, could be strong in the first two weeks of the month and then, you know, consumer goes could pick up in the last two weeks of the month. I can say from a regional perspective Asia-Pacific continues to be strong, you know, North America and Europe continue to be -- we still see huge demand there.
Latin America continues to be strong as well. So, it’s tough to gauge.
When we say off, it didn’t fall off a clip. So, I just want to reiterate that you know we’re up 8% or 9% from -- September was up 8% or 9% from August given the vacations and we look at October being the same.
Falling off means going from 450 or 440 to 420. So it’s not again falling off a cliff going from 450 to 350, and we’re continuing to see, and our forecast shows that we will see a fairly constant trend vis-a-vis confirmations going into the last three months of the year -- last two months of the year.
David Friedberg - Goldman Sachs
Got you. And then one final question.
You talked about attrition rates running some sub 5%. Do you see any reason why that might tick up here as we head into year end and we look into 2009.
I apologize, I realize you’ve made some comments about ’09, but my connection broke up a little bit.
Kevin Kelly
No, no problem. I think we conveyed this is the lowest attrition in the history of Heidrick.
We have made a concerted effort to look at how we perform as an organization, how our individuals at all levels perform, and we want to maintain, you know, having high quality people in the firm. So, we will continue to move individuals out.
So the challenge is making sure that we can recruit top producers and make acquisitions as quickly as we move those who under perform out of the business and that’s what we’re focusing on going into and striking that balance, David, as we go in 2009.
David Friedberg - Goldman Sachs
Thank you very much.
Kevin Kelly
You’re welcome.
Operator
Our next question is a follow-up question from Tobey Sommer with SunTrust Robinson.
Tobey Sommer - SunTrust Robinson
Thank you. I wanted to ask you a question, kind of about your philosophy of guidance.
In the past couple of years you shifted to annual guidance saying that looking at the business quarter-to-quarter might not be the appropriate way, but I’m just curious in these economic times if you might, as you start doing your planning for 2009 or say finish your planning, how you may approach that. Thanks.
Kevin Kelly
I think we’ve said before that you know it’s easier to, you know, look at the year than it is a quarter. There is just so much volatility in it and I don’t think we’ve had any thoughts of our changing the philosophy from where we are.
Tobey Sommer - SunTrust Robinson
So, even in the fluid market we’re in still maintaining a 12-month expectation.
Kevin Kelly
Yes.
Tobey Sommer - SunTrust Robinson
Thank you very much. I appreciate it.
Operator
Our next question is a follow-up question from Mark Marcon with Robert W. Baird.
Mark Marcon - Robert W. Baird
Hi, with regards to you know upgrading the organization and taking advantage of the situation, obviously you have a terrific balance sheet, a great brand name. Are you able to bring people over to your firm at a lower cost than you used to have to pay or when you look at how you comp somebody or if you’re giving a guarantee, is it possible to change the normal metrics in a way that’s more favorable to the firm, given that you know, the environment is obviously more challenging.
Kevin Kelly
Well, you know Mark unfortunately in this world I think whether you’re a top investment banker or you’re top executive search consultant, if you’re top of your game, this market still provides opportunity and we still see some of our consultants, top consultants in a firm generating $7 million to $10 million in revenue, and likewise in some of the other organization. So, I wish I had a solution or a magic potion to bring these guys over for less money because it would be tremendous for us particularly as we look to capture market share, but we continue to look at competitors to fill gaps that we have in this organization, and we will if we have to we’re not going to overpay in this market, but you know, we need to structure a deal that make sense for the organization, make sense for the shareholders, and also it does not kill our margin.
So, we’ve been very fortunate for the last two years even in a fairly robust search market to bring on some top talent from other organizations, and we’ve structured it such that whether it’s them earning out over a 2 or 3-year period or taking more equity than cash, we’ve structured packages or comp packages in the way that they are beneficial to both us and the individual we bring on board. So as we look to hire going forward, we will make sure that we continue to do it right.
Mark Marcon - Robert W. Baird
Can you talk about what percentage of your consultants would be recently hired and potentially have a more fixed kind of comp structure just because of guarantees as opposed to how much is fluid.
Kevin Kelly
We can -- Mark, I can’t get on to that right now. I don’t have the number in front of me.
But you know given the hires that we’ve made, it’s not as significant as you think it may be.
Mark Marcon - Robert W. Baird
I’m not sure what it is and that’s the reason why I was asking. I am just trying to get a sense for to just how fluid the comp could be?
Kevin Kelly
I’m sorry I don’t have that in front of me, but if you want to circle back later, I can try to dig that up with Julie and Scott.
Mark Marcon - Robert W. Baird
Oh that’ll be great. Thank you.
Operator
Our next question comes from Andrew Fones with UBS.
Andrew Fones - UBS
Yes, thanks. I had a follow-up actually to one of Mark’s questions about the cash filings and where that might be after you have paid your bonuses.
I think, you know, so far you’ve accrued about $109 million in bonuses this year and your cash filing is about 185. So the kind of surplus cash you feel like beyond you due to pay out in bonuses.
Where is most of that located, what countries, and what (inaudible).
Kevin Kelly
Well, that’s an easy one. Most of it is either in our UK finance company or in the US.
As to what it’s invested in like I think a lot of companies we’ve shifted our investments dramatically at the moment, about $100 million or that $180 million cash balance is in government securities in one sort or another and the rest are in cash balances at banks and we’ve made sure that the banks they are in are the ones that are the healthiest out there.
Andrew Fones - UBS
Okay thanks, and then could you give us just the general trends of where you think the cash balance might be as you pay bonuses in Q1? Thanks.
Kevin Kelly
Well lot of that’s going to depend on how the fourth quarter comes in. You know, because that performance will determine how much we would pay out in bonuses, you know we need to obviously discuss that with the board.
So, I mean there are a lot of variables there, but, you know, I wouldn’t expect fourth quarter to be a heck of a lot difference than third quarter in terms of generating cash. We could give you sort of a year end cash balance, and I think we earlier said, you know, the bonus number in the order of magnitude $150 million, and I think you could figure it out.
I’m just trying not to do the math quickly in a piece of paper here and make a mistake. So I heard I can shove it over to you, you can use your calculator.
Andrew Fones - UBS
Okay thanks. Yes, that’s helpful.
And just on currency, you know, as we kind of think about which currencies you have the greatest exposure to. Could you kind of give us a little bit of a rundown there.
(inaudible) Asia you know kind of any significant exposures over there. Thanks.
Kevin Kelly
I mean we are obviously operating in 33 countries. I mean geographically you know that we have a significant business in UK and in Europe.
So, Euro and Sterling are probably the largest single exposures we have got in terms of foreign currency but we also have to keep an eye on all of the fast growing Asian markets that we are in. We look at that all the time.
We try and get the cash, pool them back to where we could put it in our functional currency as quickly as we can and where necessary we have entered into some hedges of pools of cash that we have got stuck out there. So, we are looking at it all the time but it is a very fluid situation but certainly Sterling and Euro are there major exposures.
Andrew Fones - UBS
Okay, thank you.
Operator
Our next question comes from Mark Marcon with Robert W. Baird.
Mark Marcon - Robert W. Baird
Just one more follow on along the same lines in this question. Any payouts for acquisitions that we should think about in terms of cash balances and how it is going to look going forward?
Julie Creed
Not until, Mark not until March of next year.
Mark Marcon - Robert W. Baird
Till march of 2009.
Julie Creed
Albeit it HP and think (inaudible) is also has a small earn out potential too.
Mark Marcon - Robert W. Baird
Any order of magnitude in terms of the totals of those.
Julie Creed
Yes, I think we have just to remind you all, I think based on our projections for Q4, well remember the total amount that we were subject to pay to Highland Partners, subject to their performance was $15 million. In the -- last year we paid I think about $3.4 million.
So, they are eligible to earn up to $11.6, which we would pay out in March of ‘09, $11.6 million?
Mark Marcon - Robert W. Baird
And that is pretty much it.
Julie Creed
Yes. For Highland Partners that is it.
Yes.
Mark Marcon - Robert W. Baird
And for --
Julie Creed
Well, there is some one for (inaudible). It is insignificant.
Mark Marcon - Robert W. Baird
Okay. Great thank you.
Operator
There are no further questions at this time.
Kevin Kelly
Well thank you. I would like to just thank everyone in the organization at all levels for what they have achieved in these uncertain times, I think we have done a great job internationally to make sure that we capture our share of market.
So, I would like to thank all my colleges around the globe and I would like to say that we are looking forward to continued issues revolving around human capital and how the demographics will affect our business going forward and how we capture that market share going forward. So, thanks for your time today and I wish you all a great day.
Operator
Ladies and gentlemen, so this concludes today’s presentation. You may now disconnect.