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Executives

Julie Creed - Vice President of Investor Relations and Director of Workplace Strategies

Tracy R. Wolstencroft - Chief Executive Officer, President and Director

Richard W. Pehlke - Chief Financial Officer and Executive Vice President

Analysts

Timothy McHugh - William Blair & Company L.L.C., Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Kevin D. McVeigh - Macquarie Research

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Heidrick & Struggles International (HSII) Q4 2013 Earnings Call February 25, 2014 10:00 AM ET

Operator

Good day, everyone, and welcome to the Heidrick & Struggles Fourth Quarter and 2013 Quarterly Conference Call. [Operator Instructions] For opening remarks and introductions, I will turn the call over to Julie Creed, Vice President of Investor Relations and Real Estate. Julie, please go ahead.

Julie Creed

Good morning, everyone, and thank you for participating in Heidrick & Struggles' Fourth Quarter and 2013 Conference Call. Please join me in welcoming Heidrick & Struggles' new President and CEO, Tracy Wolstencroft; and Rich Pehlke, Heidrick & Struggles' Chief Financial Officer.

As a reminder, we're going to be referring to supporting slides that are available on our website at heidrick.com, and we encourage you to follow along or print them. As always, we advise you that this call may not be reproduced or retransmitted without our consent.

In today's call, we're going to be using the terms adjusted EBITDA and adjusted EBITDA margins. These are non-GAAP financial measures that we believe better explain some of our results. A reconciliation between GAAP and non-GAAP financial measures can be found on the last page of our press release, as well as on Slides 7 and 22 in our supporting slides.

Throughout the course of our remarks, we're going to be making some forward-looking statements and ask that you please refer to the Safe Harbor language contained in our news release and on Slide 1 of our presentation. The slide numbers that we'll be referring to are shown in the bottom right-hand corner of each slide.

And with that, I'd like to welcome you, Tracy, and I'll turn the call over to you.

Tracy R. Wolstencroft

Thanks, Julie, and good morning, everyone. Before we discuss the results, let me just start by saying how excited I am to be here and to be leading Heidrick & Struggles as CEO. Beyond the opportunity to grow a company with an unparalleled reputation for serving the top talent needs of the world's leading organizations, this job aligns with how I spent my entire career as part of a professional services firm renowned for helping its clients achieve their objectives.

I spent the first 3 weeks meeting the people of Heidrick & Struggles, listening to and learning from hundreds around the world about our business and just as importantly about our clients. It has been extremely energizing.

A number of people have asked what attracted me to this opportunity. A couple of thoughts. First, the brand of Heidrick & Struggles is strong. All of you know that. It was a magnet for me in my decision.

Second, I believe in the search business, particularly in the global economy that is increasingly complex. The desire and the need for leadership matters today more than ever. This is good for our business and this is good for our firm. I believe there is a significant opportunity to increase the value and impact of our Heidrick brand by taking our client relationships to an even deeper level.

Third, I enjoy the challenge and the reward that comes from working with people. Throughout my career, I have learned that clients are best served when people, ideas and capital come together. For me, the most important part has always been and remains the people. It is the dimension that gives me the most. When the people equation is right internally and externally, good ideas follow. What matters is connect with our clients as people, earning their trust and through that trust, developing ideas and solutions for their particular situation. With that perspective, you can see why being a CEO at Heidrick is an attractive opportunity for me.

Now internally, it is no secret that our company has experienced challenges during the past several years, especially as it relates to its own people who have left the firm. However, I am even more focused on all of those who stayed. Strength, in my opinion, is what remains, and I have felt that strength among the many people I have met. Spending time with our people has made me appreciate the depth of the opportunity.

Specific to our people, I've spent particular time coming to know Jory Marino who, many of you have come to know, is our interim CEO during the last few quarters. Let's take a quick moment to thank--you will not find a more consummate professional or someone who thinks and feels more passionate about Heidrick than Jory, and I look forward to working closely with him in the future.

Now let me turn it over to Rich to give you our financial results.

Richard W. Pehlke

Thanks, Tracy, and good morning, everyone. I'm going to spend just a few minutes on the fourth quarter results as they are covered in detail through our press release and the slides. As you know, our quarterly results can reflect quite a bit of variability, so the trailing 12-month results should provide a clearer picture of our business.

Turning to Slide 2, we had a good fourth quarter. Consolidated net revenue for the fourth quarter was $118 million, up 14% from the fourth quarter of a year ago. On a constant currency basis, revenue was up about 15%.

Revenue came in higher than we expected for a few reasons: first, search confirmations were higher than we had anticipated, up 2% sequentially compared to Q3. As you can see on Slide 3, this is the first time in 4 years that search confirmations in the fourth quarter were higher than the third quarter. Second, as shown on Slide 4, the average fee per search was a bit higher. And third, our uptick exceeded our expectations. Upticks, as you may recall, are fees received after a search has been completed. These fees represent a true-up from the retainer agreed upon at the start of the search and are adjusted for the final compensation arrangements.

Following the acquisition of Senn Delaney at the end of last year, we began providing adjusted EBITDA and adjusted EBITDA margin comparisons, non-GAAP financial measures which we believe more appropriately reflect our core operations.

Referring to Slides 5, 6 and 7, adjusted EBITDA in the 2013 fourth quarter improved to $7.4 million and adjusted EBITDA margin was 6.3%. This compares to the adjusted EBITDA of $2.3 million and adjusted EBITDA margin of 2.2% in the 2012 fourth quarter.

Improving profitability continues to be a key focus. We're pleased with the progress we've made over the course of this year, especially in light of the revenue levels of our core search business, but we know there continues to be room for significant improvement.

Referring to Slides 9 through 11, our annual results. Consolidated net revenue in 2013 was $462 million, up 4% or $18.2 million. This was primarily driven by the inclusion of $24.8 million of revenue from our Culture Shaping services provided by Senn Delaney, which were offset by a decline of $8.9 million in Europe.

Referring to Slides 12 through 13, consultant turnover was higher than we had planned for 2013. There were an average of 317 consultants in 2013 in our Search and Leadership Consulting business, compared to 342 consultants in 2012. We ended 2013 with 293 consultants. But as a result of our hiring efforts so far this year, to date, that number has already risen to 302 with more in the pipeline who should be on board shortly.

Productivity of our consultants improved to $1.4 million compared to $1.3 million in 2012. Specific to Executive Search, our core business, you'll see on Slides 14 through 15 that the number of search confirmations and the average revenue per search were essentially the same as the prior year. Also specific to search, you'll see on Slide 16 that our largest industry practices in 2013 were Financial Services and Industrial, each representing 25% of search revenue.

On Slide 17, you'll see that Financial Services was down 1% year-over-year and Industrial was down 3% compared to the previous year. Healthcare & Life Sciences, as well as Global Technology & Services were both up 4%, partially offsetting the declines in our 2 largest practices.

Our Culture Shaping services provided by Senn Delaney performed just as we had planned. The $24.8 million of revenue that we recorded for 2013 would have been $28.9 million had Senn Delaney reported on a stand-alone basis. But as you'll recall, we have been limited in the amount of pre-acquisition deferred revenue that we were able to recognize as a result of purchase accounting. The total amount that we did not [ph] recognize in 2013 was $4.1 million. As a result of the revenue deferral, our reported results show Senn Delaney as dilutive to Heidrick & Struggles in year 1. In 2014, we expect Senn Delaney to be accretive in all financial measures.

In addition to performing in line with our expectations from both the revenue and margin perspectives, we also think the ability to speak culture will allow us to introduce a new dimension to our client relationships in the future.

Referring now to Slide 18, salaries and employee benefits expense was $319.5 million, representing 69.2% of net revenue. Compared to 2012, salaries and employee benefits expense increased $10 million or 3.2%. In the past, we've explained the variance to the prior period based on the differences in fixed and variable compensation components, and this information is still included on Slide 19. But the year-over-year increase in 2013 is also explained by the addition of Senn Delaney, which added $16.6 million of revenue, as well as $3 million of severance expense for our former CEO and the increase of $11.7 million in variable compensation. The combination of these factors were partially offset by a $21.3 million decline in fixed compensation expense in our core business during the year.

On Slide 20, general and administrative expenses in 2013 increased $13.1 million or 11.5% to $126.9 million. The increase primarily reflects $12.5 million related to the Senn Delaney business. As a percentage of net revenue, G&A declined to 28.5% of net revenue compared to 29.8% in 2012.

Looking at Slide 22, adjusted EBITDA for 2013 increased to $39.7 million from $35.1 million in 2012, and adjusted EBITDA margin rose to 8.6% compared to 7.9% in 2012. As I indicated earlier, we're pleased with the progress we've made over the course of the year, but know there is still room for improvement.

On Slide 23, our cash position is strong and we have ample financial flexibility to continue to invest in and grow our business. Cash generated by operating activities was $44 million in 2013 compared to $12.5 million in 2012. Cash and cash equivalents at December 30 was $181.6 million or $146.1 million net of our debt position. Our cash position built throughout the year as we accrued for bonuses which were paid out in the following year.

Including this month, March and April, we will be paying out approximately $95 million for variable compensation or deferred bonus payments. This compares to approximately $87 million paid out in early 2013. The $95 million includes approximately $10 million related to the portion of consultant bonuses that were deferred in the years 2010 through 2012, and that is comparable to the same amount paid last year at this time.

The balance of $85 million in variable compensation relates to 2013 performance, and it compares to $77 million paid in -- for 2012 performance paid earlier this year. As Tracy said earlier, it is the strength of this firm that remains which is why we're going to be paying out more than last year. Although there were fewer consultants in 2013, they were more productive, with many achieving record years. Holding revenue in our core Search and Leadership Consulting business is essentially flat.

And while we're pleased with the trends and improvements we saw in the fourth quarter, the opportunity for growth is ahead of us and there is much work to be done. Our Executive Search backlog is shown on Slide 24, and monthly confirmation trends are shown on Slide 25. Following a good fourth quarter, especially December, we're forecasting first quarter net revenue of between $110 million and $120 million. The factors which we base our forecast on include our current backlog, confirmation trends for Executive Search and Leadership Consulting, as well as our anticipated fees, expectations of our Culture Shaping services, the number of our consultants, the current economic climate and stability in currency rates.

And with that, I'll turn the call back over to Tracy.

Tracy R. Wolstencroft

Thanks, Rich. Let me conclude by saying that I recognize -- we recognize as a team that there are challenges, but there is also strength and opportunity. And there is much work for Heidrick & Struggles to do to earn the top share of mind in search and leadership. We need to rebuild where we've drifted, we need to focus the attention on our core business of Executive Search and capitalize on the improving economic conditions. I have a strong sense of urgency to move this company forward and to grow. My top priority is our people, communicating with as many people as I can, getting to know them and establishing or re-establishing confidence. We must ensure that we have the very best consultants and that they have the resources to provide clients unparalleled service and value. And we must foster collaboration, trust, teamwork and the ability to embrace change. It also means attracting and, in some cases, re-attracting great talent and training, developing and retaining that talent.

We execute our client work very well. We need to manage our own business just as well. So I'll reiterate the enthusiasm for what lies ahead. The business and mission of Heidrick really matters, particularly in a world where the demand on leaders is constantly changing and changing fast. This is a great time to add value by [technical difficulty] on talent and leadership. We have a leading global brand and exceptional clients and professionals who simply want to win. All of that motivates me.

Why don't we pause there, turn it back to you, Debbie, and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Tim McHugh with William Blair.

Timothy McHugh - William Blair & Company L.L.C., Research Division

I guess, first, before, I guess we look forward, just in the fourth quarter, turnover or at least the headcount trends in North America seem to have really picked up. I guess, can you talk to, was it uncertainty about the management team or anything specific you're seeing? And I guess, can you give us what turnover ended up being for the year? I apologize if you gave it; I missed it.

Richard W. Pehlke

No, the turnover for the year was roughly about 20% in terms of our core business. And I think certainly, some of the noise around the activity in mid-to-late 2013, Tim, certainly impacted some of the turnover in the fourth quarter, which was a bit unusual. And so I think that had something to do with it. Clearly, we think it was interesting as the year picked up, and things got a little bit better economically. In terms of the marketplace conditions, I think we saw things settle down a bit.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And when do you -- when do the bonuses get paid? Is that still -- I guess, I'm trying to understand the headcount being up since year end, if that's post-bonuses or pre.

Richard W. Pehlke

Sure. Everything is pre-bonus right now. As I indicated in my remarks that we have 3 cycles of payments that impact our cash in the early spring. There's deferral payments that come out, as well as in both February and April time frames, and the major bonuses are paid in March.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And Rich, one more for you. Just the SG&A topped up here relative to, at least, what I was expecting. I guess, was there anything unusual in there? And I guess, I know you don't guide, but just from -- I guess from the full year level, is that a number you can bring down on an absolute basis? Or is it something as you hope to grow the business you can leverage going forward?

Richard W. Pehlke

Sure, sure. Let me start with the latter first. It's absolutely a number we can lever. I think you know me well enough by now that it always drives me crazy when SG&A goes up. And when we normalized for Senn Delaney, it still went up just a touch. We're still at the lowest level on an annual basis, we're basically kind of flattish with last year, really, and still at the lower level than we've been, like, in 6 years in total G&A as a company. So we certainly can lever it up. I think it's a reflection on a percentage of revenue basis of the fact that we need to build the revenue base back up to where we believe it can be. There were a few factors that increased G&A year-over-year. We spent a little bit more money in Professional Services, both at the practice level in terms of out in the operations throughout the corporate level during the course of 2013 that reflected some of the activity that was going on at a strategic level. But at the end of the day, I think that number can stay stable, if not, come down a little bit. The year-over-year comparisons were also impacted slightly by the increase in our database expenses, which moved from capital to expense during the course of 2013 when compared to 2012. But I feel relatively good about the level, Tim. I think the issue here becomes it's a very leverageable base, where we can get a lot more revenue out of it. If we thought that the revenue was going to stay down at this level, we'd take more cost out.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then, Tracy, just I know you've had all of 3 weeks, so it's unfair to expect you to have all the answers here, but I'm going to ask the question anyway. I guess you talked about basically the need to better retain and attract talent as one of the cornerstones of what you need to do. How do you -- or I guess, just some thoughts on the context of the business with margins that are also kind of subscale relative to what you would like them to be. So I guess, how do you balance those and go about trying to do both of those things at the same time? Or is it one that you're going to have to be willing to dampen margins for a while to bring more headcount, and maybe long-term, bring margins back up?

Tracy R. Wolstencroft

So good question, Tim. Before I hit that one head-on, let me just offer a little bit more perspective around this issue of turnover because it also relates to what you're saying, which is, to me, there were 3 issues that this company and its people had to absorb in 2013 which made the turnover number less than favorable. One is, the CEO stepped down; two is, the company contemplated a strategic transaction that would have changed the very nature of the ownership of the company; and third, people had to wait to learn who and when was the new CEO coming. Those 3 things combined created an environment that was the opposite of confidence inspiring. And that has a lot to do with, my own perspective, had a lot to do with why people left in 2013. So to answer your question about the issues and how do you get growth with margins is they have to start with the people. It's the most important driver of the business. And as we think about growing our people, both the people that we have, as well as the people that we will attract to the firm, what we're looking for is who can deliver value with that margin that you're talking about. A lot of what I'm doing right now is connecting with our people around the firm. I will be -- by the end of March, I will have -- I will have visited in addition to many offices in United States, I will have visited Asia and Europe. In every one of those stops, what I'm focused on is our people. In some cases, giving them confidence that, for the reasons I described in 2013, it got a little wobbly, but also reminding them that strength is what remains here. And what I feel is a group of professionals because I said they want to win, and they know to win means addressing the issue you're describing which is, it's not just growth, it's profitable growth.

Operator

We'll take our next question from Tobey Sommer with SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

I just had 2 questions. Could you give us a little more color about the upticks that you saw in the quarter, and whether that can help you with your average search fees going forward? And I'm curious what you may be hearing from customers about their plans to enter new markets or launch new products in 2014. In other words, is there a change in the sales growth-related initiatives at clients that you're hearing about?

Richard W. Pehlke

Sure. I'll start with the upticks, Tobey. And we've talked about this in previous calls as well. The nature of some of the relationships we have with some of our clients on a contractual and financial basis have seen some changes over the last year in particular, because there's been different elements, pricing structures and clearly, we've seen the price for talent go up and for -- and quality talent go up, so maybe changes in the expectations of the search, et cetera. So we actually think that upticks are going to be a slightly increasing part of the overall equation as we go forward. We take that into account when we look at each quarter's revenue based upon how fees are coming in relative to the confirmations and how deals are structured. So it's an important part, and it represents a relatively decent percentage of the overall revenue contribution. But it certainly can vary quarter-by-quarter. And it's one of the things that can drive the variability of our business because our revenue recognition is very different on upticks versus our normal fees. We tend to recognize the normal fee over the course of about 5 to 5.5 months in a varying percentage, and upticks get booked right away. So obviously, if we end up getting a lot of upticks in the quarter or a higher amount of upticks, it can move our revenue by a couple of million dollars, for example. So we -- but at the end of the day, the good news about upticks is that it usually reflects high-quality work, and the fact that we've done an outstanding job for our clients and they really got the answer that they want and it's recognized in the adjustments of the fee. Relative to the other part of the question that you talked about, in terms of some of the clients, and I'm sure Tracy will want to weigh in on this as well, we've said that confidence in capital investment is a key driver in our business. When you're dealing with finding leadership talents at the top of the house, it's not as much a labor discussion as it is a confidence in investment discussion. Some of the strength that we're seeing -- if you think about where we're strongest in our business right now, we're very strong in our CEO board practice. We're winning a large share of large company CEO leadership searches across the globe, and that's where our brand remains extremely strong and it's very impressive. We're also very strong in technology, one of the hottest spaces in the global economy today. And that's one of our practices that's doing very well. We have spots of strength and spots of moderation in some of our bigger practices like Financial Services and Industrial, because you see those as, a, they're large employers, number one; and number two, you'll have different sectors that will be hot and cold based upon how they're moving their investment dollars, and they're still significant parts of our business. So we're working hard to make sure that we're well positioned in some of our industry verticals where, certainly, we see capital investment flowing. We've got to get bigger in some of our practices and we've talked about this historically. We need to be bigger in Life Sciences, for example, which is growing well for us, but it just needs to be a bigger piece of our pie. Geographically, Americas is our strongest region. We still think our leadership position in Asia Pac will grow, and we actually think that some of the -- Tim referred to this in one of his questions, we've actually seen the on-boarding of some of our newer consultants who we've hired at the end of last year, and some of those newer consultants are contributing greatly both in our international markets, as well as the U.S.

Tracy R. Wolstencroft

Tobey, it's Tracy. I would just add that what I'm listening for when I'm meeting with people and one of my senses of urgency here is to meet with people and to meet with clients, to get an even better feel for your question. But what I'm listening for in particular, is where do we have presence, where do have size and where do we have scale, and where does that connect with the opportunity. And I have no doubt that we will be -- where? I can't say right now, but I've no doubt we will be adjusting that balance between where we have size and where we have scale when we think about how we address the client opportunities out there.

Operator

We'll take our next question from Kevin McVeigh with Macquarie.

Kevin D. McVeigh - Macquarie Research

If you think about -- and I know it's kind of early first couple of weeks, but if you think about areas of the organization, be it geographically or regionally, any particular thoughts as to where you focus first, number one? And then number two, do you debate bringing in a kind of marquee hires in to help kind of change some of the sentiment that's been out there for the last couple of years?

Tracy R. Wolstencroft

So the way I think about that, Kevin, is each part of the world, if you think about the Americas, you think about Asia, you think about Europe, I'm concentrated for a different reason, right? America is -- the Americas is where the core is. You've seen the numbers. You know that's the engine room with respect to our performance. When you look at Asia, there is a growth opportunity there. And when you look at Europe, there is the overall market itself away from Heidrick or any professional service company, there is increasing confidence about what will be a turnaround in Europe. So for all 3 regions, I'm looking at them with a different eye. Obviously, in the Americas, it's how do we hold where we are and how do we grow it. In Europe, how do we best prepare ourselves and position ourselves for a turnaround in Europe. And in Asia, how do we balance what is still significant capital investment, significant expansion on the part of multinationals, but at the same time, be thoughtful about what's happening in their own markets with respect to growth. So it's difficult for me to say one versus the other, which is why I'm getting around to all of them as soon as possible.

Kevin D. McVeigh - Macquarie Research

Understood. And then the only other question was, Rich, given the incremental leverage on the SG&A, is there an opportunity there to corner some of that savings on the SG&A line and maybe turn that up into compensation in terms of boosting the payout ratio as you lever the revenue, if we're able to fix that kind of SG&A kind of where it is?

Richard W. Pehlke

Well, a couple of things. First of all, we've sent the message loud and clear. The investment in the core business is absolutely priority one, and there's no lack of ability to do that. And certainly, in terms of financial flexibility, I think we have more flexibility ahead of us. The one thing I would push back a little bit on the premise of your question is, our challenge has been, we've generally paid a pretty high percentage of our revenue in compensation but haven't always gotten things for the buck. And so from a standpoint, the good news about our results this year is that we're able to flip more from fixed to variable, which at the end of the day, rewards our best people and the people who produce and drive productivity and client relationships and all the good things that make us strong. And the formula is really driven that way, and our formula has actually worked quite well for us in some of our geographies. It worked exactly as according to plan, which is why one of the reasons our quarterly results vary a lot because we sometimes have to boost the compensation to reflect the performance, and certainly, it kicked in, in the fourth quarter of this year. We're actually able to reward our people on the revenue levels that we achieved quite well, even achieving better margins. So the message we're sending is, a, profitable growth is good and we're all going to share in it; and b, there's no lack of ability to invest in good people, but the absolute thing there is investing in the right people. And so we'll -- you'll continue to see our compensation as a percentage of revenue run slightly at the high end of the market. We believe we're premium brand and that's where it should be. But at the end of the day, we want to make sure that internally, we structure that so that it's as flexible as possible to drive the right behavior performance.

Kevin D. McVeigh - Macquarie Research

Understood. And then if I could, one more, and if you had kind of highlighted this, I apologize, but Tracy, you'd said you kind of debated a strategic transaction that would have changed the ownership structure. Can you just give us a little more color on what that would have been?

Richard W. Pehlke

No, no. What he was referring to is what happened before he came here, which was last year, when we went through the strategic process prior to Kevin's departure where the board and the company was in discussions and we closed that down midyear.

Kevin D. McVeigh - Macquarie Research

Understood.

Richard W. Pehlke

That's what he was referring to.

Tracy R. Wolstencroft

I was referring to it as what created -- speaking to the firm and the people had a lot to absorb in 2013.

Kevin D. McVeigh - Macquarie Research

Understood.

Tracy R. Wolstencroft

That's behind us.

Operator

[Operator Instructions] We'll go next to Kevin Steinke with Barrington Research.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Tracy, I wanted to follow up a little bit on Asia, which you referred to as a growth opportunity, although for Heidrick, the growth has slowed from where it was several years ago and the margins have come down. And I'm just wondering, given the experience you've had in Asia, is reinvigorating that business a function of increasing presence, size and scale, as you also mentioned earlier in the call.

Tracy R. Wolstencroft

I'd say, it's 2 overall comments, Kevin. It is, one, making sure that we have a presence and a group of professionals who can help our clients around the world where they have growth opportunities, and I'm talking specifically about multinationals who have a presence in Asia but, if you will, are headquartered outside of Asia but are investing in that continent. And we have to do that right and we have to do that for our existing clients. The second leg of growth is to develop what I'll refer to as the indigenous companies in relationships with indigenous clients inside Asia itself. And that, as all of us see, there are very, very significant companies inside Asia who, themselves, are expanding around not only the region, but around the world, and that also speaks to a growth opportunity. So it's really managing, if you will, both those clients who we already have, who are looking to expand in Asia, as well as cultivating more relationships with those who are indigenous to Asia as they grow their business in the region around the world.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay, great. And you referred to in the earnings release this morning and also the press release announcing that you were joining -- discussed fostering teamwork and collaboration. And just wondering your thoughts on how you go about doing that and how that ultimately translates into growth and profitable growth for Heidrick.

Tracy R. Wolstencroft

Sure. As I said, the dimension that I see here, I felt it as I was thinking about the opportunity, and now I feel it even more that I've landed here, is the strength that remains. And the opportunity to foster more teamwork is really related to where do we see trends that are happening in one industry sector that we can integrate or learn from in other industry sectors? Where do we have business success in certain regions or with certain clients or certain practices? Rich mentioned CEO and board practice, where can we take the best of what we do in those markets and in those industry groups and share it? In a word there's room for increased communication. As I mentioned in response to the earlier question, there was quite a bit of distraction happening in 2013 at Heidrick. That is behind us. And what I've seen in my Professional Service career is there's nothing like great execution to sell a brand. And part of that great execution is driven by an integrated approach to solving client problems, and those are some of the methods I think about when I think about teamwork.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Rich, just a couple of questions in terms of the G&A. It sounds like you can leverage some investments that you made in terms of the proprietary database. Just also wondering now that you're past the comp from the Senn Delaney acquisition, can -- will the cost from that also come down in terms of the earn-out accretion, retention awards, amortization, as you move throughout 2014.

Richard W. Pehlke

No, that stays pretty much constant over the first 3 years because it's an earn-out structure. And again -- so actually the comparable year-over-year are basically flat on that side. Let's revisit for a moment. That's a pretty good business with about a 30% operating margin, and is operating on plan. And actually, if we can get a little bit more of some of the things Tracy just touched on in terms of collaboration and cross-pollination and coordinated marketing, we actually can build that business even faster than their internal plan, so we're hopeful we can get some of that done. On the G&A front, I think there's a couple of key things that will drive the improvement there one way or the other. First of all, obviously, revenue growth. We can run a lot more revenue through the system and not increase G&A in any measurable way. So it's highly leverageable, and I feel very good about it. Then second of all, we're still too Professional Services dependent as a company. We've taken a lot of steps to clean up some of the stuff that drove things, like audit fees and some of our outside Professional Services firms and are -- which are largely related to either legal, accounting or finance and some marketing-related activities. So we've taken some steps to bring that down. And we're hopeful that, again, either through the leverage of the revenue side or not relying so heavily dependent on those types of services, we can also control that number a little bit. So a little bit of hygiene on our level can actually bring it down a little bit, but not overly big. Because again, for the size and scale of business and reach of doing business in 100 countries, it's not that bad of a G&A base. And the key components are certainly expenses related to serving clients and don't become billable or real estate and Professional Services. So at the end of the day, I feel pretty good about where it is, we're getting a lot more leverage and improvement out of our technology platforms and technology is pretty tough to stay current with on a daily basis because it changes so rapidly. But we've made some improvements that I think give us some proprietary edge, and we're going to see some higher leverage of that over the course of the next 12 months.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay, great. And last question for me is, December, -- or I'm sorry, yes, the fourth quarter was good from a revenue perspective and confirmations picked up, and that seemed to continue into January based on your slide but maybe a bit of a downtick in February. Is that just kind of normal volatility, or are you seeing anything in the environment there?

Richard W. Pehlke

Yes -- no, it's kind of normal volatility. I think the encouraging vibe that we got at the end of the year and the start of this year is that there's a lot of activity out there. As we've commented on over the last, probably, 18 months, activity has been busy, and sometimes it ebbs and flows in terms of proposals start and stop. But there's no question that our base is busy and we're encouraged about that. And -- but at the end of the day, you got to post it. It's got to turn into reality, and so we're encouraged. But the start of the year is always kind of the weakest point. But I think the start we had in January and what we've seen so far is somewhat encouraging and is reflected in our estimate.

Operator

We'll take our next question from Ty Govatos [ph] with TG Research.

Unknown Analyst

Rich, I hate to do this to you. Do you have any idea, even a remote guess, as to what the tax rate will be this year? I could ask you within 3 decimal places.

Richard W. Pehlke

I'm trying to keep it within 3 numbers, Ty. I was encouraged by the fact that the improvement -- that we saw some improvement in the U.K., especially where we were able to benefit in the fourth quarter from the reversal of a valuation allowance. Look, the good news is, is that -- and I've said this many times, our cash effective tax rate is much more normal than our book rate. Our tax rate will ebb and flow a bit dependent upon what we do in Europe, and Tracy touched on it. If we can get -- if we can start to get profitable growth in Europe, not only will it have a seismic effect on our book tax rate, but it will release cash flow. And so we're highly, highly focused on it. But I fully expect that it'll still stay in that mid-50s to mid-60s range until that starts to happen.

Operator

[Operator Instructions] And everyone, we have no other signals in queue at this time.

Tracy R. Wolstencroft

Debbie, thank you very much. Thanks, everyone, for your questions and your interest. We look forward to further conversations down the road.

Julie Creed

Thank you.

Operator

Ladies and gentlemen, we thank you for your participation. This does conclude today's conference. Have a great rest of your day.

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