Feb 24, 2009
Executives
Julie Creed - Vice President, Investor Relations L. Kevin Kelly - Chief Executive Officer Scott J.
Krenz - Chief Financial Officer
Analysts
Josh Vogel - Sidoti & Company Analyst for Tobey Sommer - SunTrust Robinson Humphrey Kevin McVeigh - Credit Suisse Clint Fendley - Davenport & Co. Joe [Alcary] Analyst for Mark Marcon - Robert W.
Baird & Co.
Operator
Good day ladies and gentlemen, and welcome to your Heidrick & Struggles fourth quarter 2008 quarterly conference call. At this time all participants are in listen-only mode.
Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) I would now like to introduce your host for today’s conference call, Ms.
Julie Creed.
Julie Creed
Good morning everyone and thanks for participating in Heidrick & Struggles’ fourth quarter and year end 2008 conference call. Participating on the call today are Kevin Kelly, Chief Executive Officer and Scott J.
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 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 our Safe Harbor language contained in our news release and on Slide 1 of our presentation.
Now I’ll turn the call over to you, Kevin.
L. Kevin Kelly
Thanks, Julie, and thanks to all of you who are taking the time to participate in our call today. If you are following along with the slides we’ve posted on our website, I’m going to start with Slide 2.
Market conditions around the world deteriorated more than we expected in the fourth quarter but the 2008 net revenue of $615.9 million declined only 0.6% from 2007 and the operating margin was 9% compared to 12.8%. 2008 was not the year any of us were expecting, but we managed quite well given the circumstances.
Our geographic diversification was important to 2008 results. The Asia Pacific region, now 16% of our mix, grew net revenue by 27.3%, offsetting declines in the Americas and EMEA regions, whose economies were more severely impacted by the credit crisis and resulting recession.
By industry practice, referring to Slide 4, revenue growth in 2008 was achieved by the industrial business and professional services, life sciences, technology, and education not-for-profit practices, but their growth was offset by declines in the financial services and to a lesser degree, consumer goods practice. Continuing with Slide 7, we confirmed 4,812 executive searches in 2008 down 6% from 2007.
The average fee per search increased 7% to $122,600 compared to $114,900 in 2007. The increase in average fee per search was driven by double digit growth in Europe and the Asia Pacific regions and growth in the Americas region as well.
In addition to an increasingly competitive market for top talent, the increase in average fees per search was driven by our continued focus on working at higher levels of an organization. Focusing our work at the top level of any organization is very important to us.
51% of our revenue in 2008 came from searches at the board and CEO level. The balance of our revenue largely came from [fall among] work as a result of our success at the top.
Looking at Slide 8, productivity, which we define as an average revenue per executive search consultant, was $1.4 million in 2008 down just slightly from $1.5 million in 2007. The decline was a result of a higher number of consultants during the year but essentially the same revenue levels.
Turning to slide 9, consultant head count at December 31 was 419 and voluntary turnover in 2008 was very low at 6% compared with 16% in 2007. Today our consultant head count is approximately 395.
This reflects the global head count reduction announced last month, annual promotions which occurred in January, and new hires made since the end of the year and higher growth regions or practices where we continue to invest for the future. Now I’ll turn back to the fourth quarter results in Slide 10.
Net revenue in the fourth quarter of $134.9 million was down 12.1% compared to last year’s fourth quarter and declined 14.8% sequentially compared to the third quarter. On a constant currency basis, net revenue in the quarter was only down approximately 6% year-over-year.
Executive search confirmations in the fourth quarter were down 16.9% year-over-year and down 23.1% sequentially. We saw slowing confirmation trends in every region this quarter and in almost every industry practice group.
Although we saw slight improvement in January confirmations, they were not what we were hoping for. At this point, February confirmation levels appear to be slightly lower than January.
Fourth quarter revenue was hampered by slowing confirmations in the back half of the year and the 2009 first quarter revenue will be negatively impacted by the continuation of weak confirmations into February. Referring to Slides 13 and 14, fourth quarter operating income was $5.1 million compared to $18.2 million last year.
In the fourth quarter, operating margin was 3.8% compared to 11.9%. Despite reductions we made to salary and employee benefits in savings, general, and administrative expenses, we could not fully offset the effect of a decline in net revenue.
With that brief overview of 2008 and the fourth quarter, I’ll now turn the call over to Julie to go into a little more detail on some of the key line items and regional results.
Julie Creed
Thanks, Kevin. Turning to Slide 15, salaries and employee benefits expense in the fourth quarter was $98.8 million, down 4.4% year-over-year.
Variable or discretionary compensation declined $11.4 million in the quarter, mainly as a result of lower revenue and operating results. This was offset by higher fixed compensation of $6.9 million as a result of a 6.3% increase in head count since last year’s fourth quarter and in particular search support staff.
Total stock based compensation expense in the quarter was $6 million, an increase of $1 million compared to last year’s fourth quarter which benefited from a higher RSU forfeiture rate. Turning to Slide 16, general and administrative expenses in the quarter of $31 million declined 3.3%.
This decline reflects our cost savings initiatives as well as the absence of professional services fees incurred in last year’s fourth quarter but was partially offset by an increase in bad debt expense in the quarter. Looking at Slides 17 and 18, net income in the quarter was $5.3 million and diluted earnings per share were $0.30, reflecting an effective tax rate of 27.9%.
The lower rate in the fourth quarter reflects the favorable settlement of a European tax audit and the release of tax reserves associated with the expiration of certain tax related statutes of limitation for prior years. Now I’ll briefly review our regional results in the fourth quarter.
Please turn to Slide 19. In the Amercias region, net revenue in the fourth quarter declined 14.7% year-over-year and was down 16.6% sequentially.
Education, not for profit, and technology practice groups achieved double digit revenue growth in the quarter but they were offset by declines in the other practices. Fourth quarter operating income declined 47.1% year-over-year and the operating margin was 11% compared to 17.8% in last year’s fourth quarter.
The decline in operating income and operating margin is mainly the result of a lower revenue level but also reflects higher fixed salaries and benefits for additional search support staff and higher stock-based compensation related to performance and service based awards as compared to last year’s fourth quarter. In Europe, net revenue in the fourth quarter declined 16.1% year-over-year and declined 9.1% sequentially.
On a constant currency basis, net revenue only decreased about 3%. Every industry practice saw year-over-year declines reflecting the economic impact on our clients in this region.
Operating income in Europe decreased 63.4% and the operating margin was 8% compared to 18.2% in last year’s fourth quarter. The decline in operating income and the resulting operating margin in the quarter reflects a combination of lower net revenue, higher salaries and employee benefits expense, and higher bad debt expense.
In the Asia Pacific region, net revenue increased 9.2% year-over-year but decreased 19.6% sequentially compared to the third quarter. On a constant currency basis, net revenue grew approximately 18% year-over-year.
Operating income declined 60.4% and the operating margin was 2.7% compared to 7.3% last year. The largest factor that negatively impacted operating income and the resulting operating margin in the AsiaPac region was an increase in salary and employee benefits reflecting an increase in total head count of approximately 17% year-over-year including an increase in consulting head count of 43%.
As you know, this translates into additional fixed costs without corresponding margin as each consultant gets up to speed. Now I’ll turn the call over to Scott.
Scott J. Krenz
Thanks, Julie. The current state of the economy makes forecasting especially difficult.
We believe that when market conditions improve, our clients will turn to us for their talent needs, but it is difficult to precisely predict when this will happen. As of today, we are forecasting 2009 net revenue of between $450 million and $500 million and an operating margin of between break even and 5%.
Of course these numbers exclude any impact of restructuring charges which may be taken in 2009. It is important to note that our forecast assumes a pick up with confirmations in the second half of 2009.
Our forecast also reflects a consensus estimate for foreign currency rates. The volatility in the currency markets only adds to the difficulty in forecasting.
So while this is our forecast today, the unprecedented uncertainty and volatility in the global economy raises the possibility that our 2009 outlook could change materially as the year unfolds. On January 15, we announced a restructuring plan to reduce overall costs and improve operational efficiencies.
The restructuring included a head count reduction of approximately 12% or somewhat more than 200 employees. This was spread across every region and every level of the company.
We expect annual savings of approximately $31 million from this head count reduction. This will also result in a first quarter restructuring charge of approximately $20 million, substantially all of which will be cash.
In 2009 we are anticipating lower G&A expense as a result of current and planned cost savings initiatives. In January we shared our long-term goal to cut real estate expenses and support costs by approximately 30%.
This will be achieved by closing or consolidating some of our offices and adopting new technologies and processes to improve productivity in such areas as accounting, procurement, and human resource administration. This won’t happen overnight, but we do expect to see some progress in 2009.
We will share our progress with you as the year progresses. Our financial position remains solid.
Net cash provided by operating activities was $65.7 million in the fourth quarter and our cash balance was $234.5 million at the end of the year. Turning to Slide 20, in March, we anticipate paying approximately $130 million in bonuses as well as the final earn out payments of the $11.6 million to Hudson Highland and $800,000 related to the 2007 acquisition of Renton James.
In 2009, we are planning capital expenditures of between $17 million and $21 million. The majority of this will be invested in our new search system.
The budget for the new search system has not increased but the timing has changed, pushing more of the investment into 2009. We did not repurchase any shares of our common stock in the quarter; however, we did continue to invest in our business where we saw opportunities to enhance our market position.
Our strategy has not changed. We have brought on several experienced consultants this year and expect to continue to prudently acquire new talent.
We will also look for ways to accelerate our capability to deliver a broader range of talent management solutions. Strategic hiring, training and development, and acquisitions have been and will continue to be part of executing this strategy.
With that I’ll turn to Kevin for the close.
L. Kevin Kelly
Thank you, Scott. Given the unprecedented turmoil in the economies around the world, our business has slowed.
We know that we are in a cycle and that organizations will more actively look to us to help them expand or upgrade their management teams. The timing of when they’ll do that is still unclear.
We will continue to evaluate our cost structure against expected revenue levels but our actions have to be balanced with how to best position our company for improving market conditions. This is a delicate balance.
Last month we shared our plans to more aggressively focus on growing our leadership advisory services. Turning to Slide 21, you’ll see that growing this business means expanding our service offering from executive recruiting to something much more broadly defined as talent management.
It is a very logical extension of our search business. Not only focusing on the acquisition of talent which is executive search, but retention and development assessment and succession planning.
There is so much more to talent management and we’ve either been giving it away for free or letting somebody else do the work. But I just want to be clear that this is a five year goal and during that time we have no intention of shrinking our executive search business.
Our intention is to grow both businesses while expanding our leadership advisory capabilities in order to offer a more holistic talent management solution. We have a 56 year history of helping organizations manage their talent needs in times of both prosperous and retrenching economies.
We believe that we have arguably the strongest brand in our industry and we are highly diversified geographically and from an industry practice standpoint. I know that our company will weather this storm and be better because of it.
At this point we’d be happy to take any questions that you might have.
Operator
(Operator Instructions) Your first question comes from Josh Vogel.
Josh Vogel - Sidoti & Company
I was curious, we are seeing the fixed portion of the compensation increase and I was wondering what you’re targeting as metric to get to in 2009.
L. Kevin Kelly
You’re exactly right. It has increased it.
That’s part of the process of managing a professional services company in a downturn. As revenues decline, it’s just hard to stay ahead of the curve and we attempted to regress at least a portion of that in January when we reduced staff here, but it does have an impact through the year.
As to what the target is for the metric, clearly it’s too high at 70% but we probably are thinking of something which historically is more between 65% and 70% would vary from year to year.
Josh Vogel - Sidoti & Company
Okay, great, and I think you guys have stated in the past that you’re looking to decrease stock based comp expense going forward. I was wondering if you had a target for that in ’09.
Julie Creed
In 2009 our budget rate now is approximately $19 million for stock based compensation and that would be down from this year was --
Josh Vogel - Sidoti & Company
$25. Switching gears a little bit, of the 48 consultants let go in the restructuring, was it mostly across the Americas and Europe or was it just the Americas, just Europe?
L. Kevin Kelly
It was across the board. We went through systematically and took a look at those consultants… Anytime you have to let people go, it’s not fun nor is it good for you that the organization and/or those individuals you let go.
So we were very stringent in the process of making sure that those individuals that we did let go in the restructuring were those that weren’t performing over a period of time, and usually that time was between 18 and 24 months. It was across the board, it was in all four regions.
Josh Vogel - Sidoti & Company
Okay and lastly can you just remind us what the bonus payment was last March?
L. Kevin Kelly
About $140 million.
Josh Vogel - Sidoti & Company
But you had about 30 less consultants?
L. Kevin Kelly
I think you’re right. It was somewhat higher last year then we’re anticipating paying out this year, the $130 million this year.
Operator
Your next question comes from Tobey Sommer.
Analyst for Tobey Sommer - SunTrust Robinson Humphrey
Good morning, this is Frank in for Tobey, how are you? I wanted to ask a little bit about the average fee per executive search that crept up and I guess in your prepared remarks you talked about double digit growth in Asia and Europe and growth in the US.
Could you give us some color on a sector basis of kind of drivers of that increase?
L. Kevin Kelly
I can’t address it by industry sectors but I can just say that we’ve, starting the end of 2004, 2005, we made a concerted effort across the European region to move upstream in terms of working more at the top and it’s paid off. Same in Asia Pacific.
You’ve seen compensation increase given the supply and demand issue of talent in the Asia Pacific region and we’ve continued to focus in North America and Latin America, so I think in aggregate it’s just more of a focus on making sure that we work at the senior level across the globe in every industry and practice in which we operate. That in conjunction with some of the comp increasing primarily in the Asia Pacific and the emerging markets has driven that average fee per search up.
Analyst for Tobey Sommer - SunTrust Robinson Humphrey
What are your thoughts on uses of cash going forward? There were no repurchases this quarter.
Can you talk a little bit about how you view repurchases versus continued investments and other use of cash?
Scott J. Krenz
I think there’s a couple things to consider. First of all, and probably foremost, is as I probably belabored in my comments, this economy is different from anything we’ve seen and I think everybody who’s out there is trying to be as cautious as they can and that goes with cash as well.
Our view is that until we have a little more clarify on what is happening with the global economy, we will attempt to husband our resources and our cash which I guess is a backhanded way of saying that it’s unlikely we will be repurchasing shares here. We’ve opened the fact of that possibility but I think in this market we have been quite clear that maintaining our cash balances is a top priority for us.
As it relates to acquisitions, and Kevin will probably want to follow up a comment here, we have done traditionally as you know a number of small acquisitions. I would not shut that out as a possibility in ’09 but certainly we are backing away and again generally in keeping with maintaining our cash balance, unless something is incredibly compelling, we probably would not consider it at this time.
That won’t stop us from acquiring individual high producers out there that we find in the marketplace. As to broader acquisitions, we have stated I think publicly now that particularly in the area of the broader talent management leadership advisory, we would be interested in looking at something which might be more sizable than what we’ve traditionally done but it’s definitely at the sort of looking stage, don’t expect anything imminent here.
L. Kevin Kelly
I was just going to say evaluations have come down and those organizations in the search industry that don’t have a global footprint are probably hurting more so than those that have a global footprint and if there’s an opportunity and it makes sense, of course we want to be prudent, but we would look at organizations that help us capture marketshare and use this as an opportunity to capture marketshare and marketshare globally either by region and/or by industry practice so I think otherwise that we want to make sure that we in this market hang on to our cash.
Analyst for Tobey Sommer - SunTrust Robinson Humphrey
If I could squeeze one last one in, you talked about bad debt being up a little bit. Are you seeing anything on the collections in terms of delays or issues there and can you talk about that?
L. Kevin Kelly
The answer is it’s been remarkably good in terms of DSO. I’ve been surprised at how well our collections have held up which I think is by the way for any of our consultants who are listening on the call is a real testimony to how hard they’ve worked to bring cash in as well here.
So that’s held up pretty well. When we look at the bad debt expense and what we’ve left is reserve we’ve pushed that up somewhat from 5% to 7% of our balance simply because again in an uncertain market with the economy the way it is, we just wanted if we were going to err to err on the side of being more prudent than aggressive here so that’s drifted up a little but it doesn’t reflect any specific issue or any specific problem area.
It’s more in anticipation of generally what we see in the economy and trying to be prepared for it.
Operator
Your next question comes from Kevin McVeigh.
Kevin McVeigh - Credit Suisse
Thanks for framing out some ’09 guidance. I just want to spend a moment on that if possible and realizing that the visibility is very, very limited, I wondered if you could just give us a sense of contribution across regions as you think about the revenue range.
Scott J. Krenz
We have not broken it out with that level of granularity in the past and probably will not do so now. However, I think Kevin was pretty up front about sharing the results from ’08 and in a broad sense, we expect that to continue and Asia continues to be a focus of investment and growth for us and at the moment the US and EMEA tend to be suffering relatively more than the rest of the world in this.
Kevin, is that fair?
L. Kevin Kelly
That’s correct although you do see some parts of Europe continuing to grow as well so I think from our perspective, we want to use this as an opportunity to continue. We don’t want to pull back in regions growing like Asia Pacific but we expect Asia to keep growing.
We expect North America and Europe to fall back somewhat but overall I think we want to use this again as an opportunity to figure out ways to grow our business in a down market.
Kevin McVeigh - Credit Suisse
It sounds like you’re expecting a pick up in confirmations in the second half of ’09. What would it take in terms of any type of metrics we could look at for that to happen?
I guess as you think about a pick up in the second half of ’09.
L. Kevin Kelly
I would say… I’ll let Scott finish off here. First of all, what we’re hearing from our clients across the globe is that they expect to hit the button on recruiting again somewhere in the third or fourth quarter.
As you said earlier in your comments, we don’t have much visibility right now but this is what we’re hearing and our consultants are hearing on the ground from their practice, be it either from the practice leaders and/or geographic heads, so at this point in time that’s what we’re going to see. In terms of what we need to hit as a bogey each month or each quarter, I’ll let Scott convey that to you.
Scott J. Krenz
Again the interest is not getting too granular here. We’ve seen a fall off which we said starting probably November-ish, we saw a fairly significant fall off in confirmations and that carried through December and frankly it’s carried through January and February here as I think we’re in the heart of the darkness here.
All of our conversations with the consultants out there and with the various regional and practice heads would indicate that there is a… they sense a pent up demand in the market that a lot of things have not been canceled, they have been sort of postponed as people similar to us I guess are sort of waiting for some clarity out there. So we bank that in.
At the lower end of our range, 450, there is some pick up but it is pretty modest. Sort of a little more robust pick up in the back half gets us to the higher end of the range and that really is what’s driving that range is our attempt to predict and forecast the back half of the year.
But I will tell you as Kevin said in his remarks that we expect the front half and probably specifically the first quarter to be relatively weak compared to what we see in the back half of the year.
Kevin McVeigh - Credit Suisse
Scott, do you have a sense of a range of free cash flow in ’09 assuming obviously that there was a range on those margins are pretty wide?
Scott J. Krenz
The nice thing is that this continues to be a cash generating business and I guess the other thing I’d remind everybody as we manage the year that a very substantial portion of our expenses and his compensation and most of that is discretionary in nature so we do have levers we can pull during the year depending on how we see the outcome. Now in terms of the free cash flow, your number.
I think we’re thinking of numbers that range at the lower end sort of in the $25 million to an upper end of somewhere $50 million, maybe a little short of that sort of range of free cash flow. That would assume sort of the normal cash generating capacity of the company with a couple of other things to note here.
Obviously we pay bonuses in the first quarter here which will be approximately $130 million and as I said, we also have a couple of these earn out payments to make just short of $12 million for Hudson Highland and just short of $1 million for Renton James. So that’s going to depressor the front end of the year as well as we pay out that cash.
Operator
Your next question comes from Clint Fendley.
Clint Fendley - Davenport & Co.
One other follow up question on the cash flow. Any expectation for pension plan contributions in ’09 or 2010?
L. Kevin Kelly
Nothing of significance. We have a few things around the world but that’s not a big issue here for the company so that’s not going to impact us in any significant way.
Clint Fendley - Davenport & Co.
Scott, could you provide some more detail on the other net line item number for the quarter? The $1.2 million?
Scott J. Krenz
On what, the cash flow or on the P&L?
Clint Fendley - Davenport & Co.
On the P&L.
Scott J. Krenz
As you can imagine, everybody’s pushing pieces of paper around here because we have more analyses than you could shake a stick at here. So which line, you’re talking the other income line or?
Clint Fendley - Davenport & Co.
Yes, the other line for $1.2 million.
Scott J. Krenz
$1.2 million…
Clint Fendley - Davenport & Co.
While you’re looking, I guess Kevin, also on the assumption of the pickup for confirmations for the second half of the year, I wondered if you could provide a bit more color as to when you might be expecting those confirmations to pick up? I guess especially considering both the lag effect that the confirmations have on revenue as well as the accretive nature for the revenue impact here?
L. Kevin Kelly
It’s interesting because a lot of it right now is anecdotal and that’s when we go to and I talk to our global practice leaders and regional heads who are constantly in the trenches talking to their clients so what we’re hearing across the globe, and we haven’t seen any significant fall off in Asia and Europe has been fairly strong given the economic environment. It’s primarily here in North America that our clients are predicting an uptick in confirms somewhere in the third and fourth quarter and that’s a consistent message that we’re hearing.
Now having said that, the only caveat is I think every day we wake up and something else surprises us in these markets so I don’t think whether it’s us or any other organization out there we have visibility beyond the next two or three months.
Scott J. Krenz
Just to get back to you the specifics on that line item, now I don’t feel so bad as to why I couldn’t recall what was in that line. It’s one of the most mundane things of everything.
It’s an FX impact. It’s almost all FX impact on inter-company loans.
Trying to test me there, and you did.
Operator
Your next question comes from Joe [Alcary].
Joe [Alcary]
There’s been a lot of focus on executive compensation recently and I know in certain situations your fees are capped so the impact here could be muted, but I was just wondering how you’re thinking about executive pay limits as it relates to your business.
L. Kevin Kelly
That’s a great question and that’s something I always want to reiterate so I appreciate you asking it. Two things.
I’ll address financial services first. Financial services is quite interesting for us because the perception is with the significant fall off in comp vis a vi investment banking capital markets etc., it’s going to drastically impact our business.
But what we have particularly when it comes to financial services is caps anywhere between $350,000 per search and $500,000 per search so even though a banker may end up making significantly less money be it down $5 million to $2 million to $1 million. Our caps kick in so it doesn’t hit the top line as much as it’s perceived to have been historically.
Secondly on CEO and executive comp, particularly the $500,000 I think cap that’s been put in place, as of this point in time it’s a very finite number of institutions that actually is impacting and the same thing holds true when it comes to CEO and executive comp. Most of the senior searches we do are capped at about $1.5 million and that’s based on the first year’s guaranteed income that could be both equity and cash so the fall off in executive comp we don’t believe is going to have a significant impact at this point in time on our business and that holds true globally.
But primarily it’s impacting or will impact the United States in terms of these finite number of organizations particularly I guess the financial institutions and some of the car companies but we don’t see that at this point in time really impacting our business.
Joe [Alcary]
In your prepared remarks you had mentioned still seeing solid demand in certain practices and/or regions. Just wondering if you could provide a little more color there.
L. Kevin Kelly
Sure, we still see demand across Asia Pacific, our technology practice has still been robust. Parts of life sciences.
The alternative and renewable energy space continues to grow for us. The education and non-profit practice continues to grow as well.
Believe it or not there is demand across different areas or segments of financial services as well so that hasn’t completely fallen off a cliff. So overall we are seeing clients, some clients still looking at this as an opportunity to upgrade.
Some need to grow their business geographically and/or by product. Simultaneously what we’re seeing, we’ve talk about this for the last couple of years, you’re seeing Asian companies using this as an opportunity to come into America and capture marketshare be they Chinese companies, Korean companies, and even some Japanese organizations.
Joe [Alcary]
Finally, historically you provided backlog number at the end of a given quarter. Just wondering if you could provide that number as well as your tax rate expectation for 2009.
L. Kevin Kelly
Julie will give you the backlog. Tax rate is probably going to be somewhere between 38% and 40% going forward here.
Obviously we had some gyrations in the fourth quarter which Julie spoke to here which kept the rate low this quarter as we finished up some audits and we had some things hit statute of limitations and we released some reserves but 38% to 40% sort of on an going forward basis.
Julie Creed
The backlog at the end of December was $39.2 million.
Operator
Your next question comes from Jeff [Mueller].
Analyst for Mark Marcon - Robert W. Baird & Co.
Good morning, it’s Jeff [Mueller] from Baird in for Mark Marcon. Kevin, I was wondering if you could speak a little bit about what you were hearing from your clients and what you were seeing on the tech front that led to your decision to over the long term increase the exposure to the advisory and the tech related revenue.
L. Kevin Kelly
Let me first define tech related revenue. When I talk about tech related revenue, it’s more of driving productivity.
I mean you all ask me consistently do we want to increase our consultant head count from 400 roughly to 450 to drive revenue. I would rather keep the number at 400 but have our consultants generate $1.7, $1.8, $1.9 million in revenue, so really driving productivity.
So our investments in technology are primarily around building communities of executives, having access to global communities of CFOs, CIOs, CEOs, etc., that really help our consultants be better, faster, more efficient, thus driving productivity form $1.4 to $1.6 to $2 million because we believe we can continuously focus on improving our delivery mechanism and helping our clients get that talent at a much faster pace, thus again improving productivity. On the leadership advisory front, maybe I can give you an example.
What we’re seeing particularly in this market and even over the last couple of years is our consultants go out and have conversations with CEOs and executives or boards, primarily around do they have the right talent in place and it’s not just the acquisition of that talent meaning conducting an executive search, but what happens is we then have conversation and dialogue around retention. So one specific example, recently is we did a major CEO search where there were three internal candidates the client had provided to us and said, “Can you benchmark those three against Heidrick & Struggles three external candidates?”
So during the course of that search, we found three external candidates. The internal candidate got the job as CEO and the first thing he said was, “Hey, wait a second, I have two great people in the organization, can you help craft a retention plan for us because one of these individuals could be my successor.
Oh, by the way, because I’m a new CEO, I have a new strategy that I’d like to embark on. Do I have the right leadership team to help me execute and get there so can you assess them?
If not, can you help me develop a plan that will get them there? Finally, I’m a CEOO who’s new in the job.
I have a diagnostic period. Can you help me work with the board on an [on boarding] plan?”
So not only do we have historically given that away for free, but now we’re actually getting paid for these services that we’re offering. So for example, we go out and get a $1 million fee for that search and then there’s another $700,000 fee throughout the rest of the year to help with the retention, help with the assessment, help with the development, and help with the [on boarding] plan, so in conjunction with that, I would say that we’ve had calls from numerous of the strategy consulting firms and there is a gap between what they do advising on strategy and what we do in executive search vis a vi all of those things I just mentioned because when they talk about strategy, it always comes back to the leadership and do they have the right leadership in place.
So this is what we continue to see in the market and I believe personally and I know our organization believes that this is the evolution of the search business going forward.
Analyst for Mark Marcon - Robert W. Baird & Co.
Scott, after you strip out the cash reserve for bonus payments, the earn outs, and the restructuring or severance payments in Q1, I have that you have about $75 million in net cash. Is that in the ballpark?
Scott J. Krenz
That’s probably a little low but –
Julie Creed
It doesn’t include what we’re generating in the first quarter –
Scott J. Krenz
Yes, but I’d put the number between that and $100 million, somewhere in that range.
Analyst for Mark Marcon - Robert W. Baird & Co.
What are the head count expectations? Obviously AsiaPac was up fairly materially in Q4.
Do you anticipate continuing to add net heads from there after the restructuring that just took place and then generally speaking for the company as a whole, do you plan to add net heads during the year?
L. Kevin Kelly
I would say that Asia Pacific was unique in that our clients are really driving our investment in the business out there be it through real estate or be it by adding consultants out there who have the expertise that our clients need. Overall, what we’re looking at, and this is across the globe, are there opportunities to pick up search consultants with expertise in areas that we don’t cover right now?
So I think it’s going to be somewhat proactive on our part in making sure that we look at areas that we can actually invest in and grow but simultaneously be cognizant of the fact that we have to watch our cost structured going forward and only make prudent investments in our business for the foreseeable future, so I guess it depends on who we find in a particular region and/or segment but we don’t have ambitious plans to grow our headcount by X number this year.
Scott J. Krenz
I’ll go a step further. We have… having just reduced the work force by a little over 200 people here, in conjunction with that we’ve instituted a hard hiring freeze across the company.
The exception of that has to be approved by the senior operating committee of the company and it’s largely focused around one, as Kevin said, bringing on board strong producers that we feel will add to the overall I guess competitiveness of the company as we turn around here and the occasional one where we replace a person or we just have a crying need for a special thing, but there is overall a hard hiring freeze here.
Analyst for Mark Marcon - Robert W. Baird & Co.
One last question. Could you quantify what the bad debt expense was in the quarter?
Scott J. Krenz
Hang on one second and we’ll get it for you. If you want to continue on we’ll figure that one out.
Julie Creed
Can we get back to you on that one?
Analyst for Mark Marcon - Robert W. Baird & Co.
Yes, we’ll follow up with you offline for that one.
Operator
There are no further questions at this time.
L. Kevin Kelly
I’d like to thank every… First of all, I’d like to thank all of our consultants and our employees across the globe who continue to do great things on a daily basis and I want to thank you all for taking the time to join our call today. Have a great week.
Operator
Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect.