28 July, HSII announced its Q2 results . The world's premier executive search and leadership consulting firm does honor its name: they are struggling. A loss ? Is the pope a virgin ?

The company posted a Q2 loss of $0.93 per share versus earnings per share of $0.72 a year ago. The venerable soothsayers or analysts ruling the the realms and depths of the financial markets got it quite wrong: they expected only a $0.12 loss. Ouch.

The loss of Heidrick accounted this quarter for $15.8 Mio, versus a profit of 12.7 Mio in Q2 the previous year. Revenue fell 45%.

Cash and cash equivalents at June 30, 2009 were $64.6 million, compared to $96.4 million at March 31, 2009 and $146.1 million at June 30, 2008. On a positive note, June 2009 apparently was the first month in the year where no cash was lost. Cross fingers the blood letting is stopped.

Furthermore, although the average revenue per executive search was $102,700 compared to $122,200 in last year's second quarter, these high average fees give the Heidrick CEO room to maneuver: the number of consultants did not drop significantly, 380 this time of the year compared to 408 last year.

"Market conditions remain volatile and uncertain and this is impacting our ability to accurately forecast," Chief Executive L. Kevin Kelly understated in a statement. We can all agree with Mr. Kelly. Even if the crisis is over, the recovery might prove to be painful.

Reuters reported that UBS raised its outlook on 4 US employment stocks.

NAME RIC RATING

New Old

Heidrick & Struggles International (HSII.O) Neutral Sell

Korn/Ferry International (KFY.N) Neutral Sell

Robert Half International Inc (RHI.N) Buy Neutral

Manpower Inc (MAN.N) Buy Neutral

What does this mean ?

Staffing companies became "Buy", while the two leading executive search firms are now "Neutral". Yawn. Yes, the market is "steadying", and the overall outlook of opinion makers turns optimistic.

I was in a conference last week in Istanbul featuring Prof. Steve Hanke on the Economic Crisis, its causes, effects and the so-called "New World Order" resulting out of it. Professor Hanke, a former economics advisor to US presidents, saw light at the end of the tunnel - though he started his speech claiming that 95% of what you read about economics is wrong.

Yes, the overall psychological mood, the absolutely necessary requirement and ingredient for economic recovery, is improving. Now what about the upgrades of the venerable analysts? A "Sell" simply means get rid of the stock, the upgrade to "Neutral" is an upgrade to an euphemism saying just the same. Don't spend your dimes buying those stocks.

My take is that the pain for Korn Flakes and Heidrick & Struggling will continue, and worsen. Both will undoubtly report results that trail behind the "steadying" market. Furthermore, that market itself is by far not a return too good ol' 2006 and 2007. In this light the neutral rating says more about the mindset of the analyst themselves, and reflects a cautious consensus the worst is behind us.

In my previous post I outlined how Heidrick blew away analysts' expectations. The company disclosed a much higher loss, one that was higher than the most pessimistic analyst dreamed to imagine. Besides a loss, Heidrick experienced a sharp revenue drop, and brutally hemorrhaged cash.

The question now is what can be expected for the remainder of 2009. Though I do not have a crystal ball, a broad trend can be discerned. Let's start with the folks of Heidrick.

I quote Mr. Kelly, CEO of Heidrick during the conference call of yesterday:

Even if the level of first quarter search confirmations persists through the remainder of the year, our goal at the operating income line is to run the business at a minimum of breakeven, excluding restructuring charges.

For this the firm will need to cut further costs dramatically; and this will only be possible by laying off people, even closing down offices. The firm for that purposes expects to rake up an additional 6 to 10 Million USD in restructuring charges.

Mr. Kelly again:

Search confirmations hit a low in December and showed a modest but steady improvement through March. However, the improvement was not as strong as we had anticipated and operating losses in each region were a result of a cost structure that, despite cost-cutting initiatives, was not supported by first quarter revenue.

Based on the above we can expect another slight loss excluding restructuring charges. I reckon  when the results of this quarter (Q2 2009) will show how the low of December carried itself through in January and February, ticking up slowly in March.

Therefore part of the revenue of Q1 was generated by Q4 of 2008; as assignments usually take 3-4 months to conclude. The full extent of the pain will become clear in Q2 2009. A small amount of new search assignments in Q2, combined with a further drop in overall search fees (depends how Heidrick will be able to resist slashing prices), does not bode well for Q2. The operational loss will probably between 30 cents and 50 cent per share, with another 40 to 50 cent.

My penny and guess for this quarter is a total loss in the neighbourhood of 80 cent.

In previous posts I casted doubt about the "patting ourselves on the back" optimism press-released from the Executive Search heavy weights Heidrick & Struggles and Korn Ferry.

The results for Heidrick are in, and it is now officially Heidrick & Struggling. The average earnings estimate, predicted by analysts of 3 cent per share turned out to be a whopping  loss of 115 cent per share, going far below the most pessimistic assesment.

How does this translate in real figures?

• A loss of 18.9 Million USD compared to a profit of 7.1 Million USD for Q1 2008. The loss includes restructuring charges.
• A drop of 41.8 % in revenues, most of it in the US (40%) and Europe (46.9%). Consolidated net revenue for the quarter was 89.1 Million USD, down from 153.1 Million USD compared to Q1 2008.
• A drop of 38.4 % in search assignments
• Productivity-billing per consultant dropped significantly, from 1.5 Million USD to 900K USD

One particular alarming item on the balancesheet is how the trend is reflecting in liquidity: Cash and equivalents at March 31, 2009 were 96.4 Million USD, compared to 234.5 Million USD at December 31 2008. Ouch! In one quarter cash reserves dropped roughly 60%.

The average fee also dropped, but not significantly, from 106.700 USD to 98.900 USD - which seems Heidrick is not cutting prices to pull in more searches.

The company already cut expenses by 15% to 126.1 million USD for the quarter, and is now forced into more aggressive cost-cutting initiatives for the rest of the year. Heidrick cut its work force with 11% in January, plans to cut headcount by an additional 8% to 10% in May, and will trim base salaries by 5 percent through a combination of salary cuts, unpaid days off and reduced working hours. As a result the company expects to run another restructuring charge up to 10 Million USD for the next quarter.

My take is that Heidrick will post another loss of the same magnitude the next quarter. I will look into that in more detail tomorrow.

The musings of analysts on Korn Flake (KFY) - from Zacks Investment Research:

Korn Flake's third fiscal quarter will end 31 April, and analysts see a the company reporting a loss, with a likelihood to return into the black at the end of its fiscal year.

My take is that its loss will be below the estimated average, and Korn will continue to bleed into the next quarter. That's my cautious estimate based on the fact that the firm has the majority of its revenues in the US and Western Europe, two markets where hiring is not yet following stock markets trends. The freeze has definitely not yet turned into a thaw. But again, that's my bet.

The coming earnings conference call will yield more insights on how Korn will fare for the reminder of the year.

Now let's have a look at Heidrick & Struggeling (HSII)

Although earnings estimates for both firms follow similar trends, Heidrick is rated by analysts following the firm as a strong sell; while Korn is still regarded as a stock to "hold" on to. IMHO this an indication of a smell in the air that worse is still to come, an omen not yet picked up by those reading the tea leaves on Korn's future fortunes. Heidrick will announce its first quarter results soon, on Tuesday 28th April.

I bet my penny both Korn and Heidrick will sink further in the dolldrums, and the impact of the crisis in the US and Western Europe will catch up with their balance sheets and analysts alike. Note that a major source of inordinate fat fees completely imploded, i.e. banking, private equity and venture capital which made up a large share of billing in their New York, London, Frankfurt and Hong Kong offices.

Spring will be interesting. Stay tuned.