Korn Ferry (KFY) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you

for standing by and welcome to the Korn/Ferry

fourth quarter earnings release teleconference

call. At this time all participants are in a

listen-only mode. Later we will have a question

and answer session and I'll give you instructions

at that time. Should you require assistance while

you're on this call, simply press zero and then

star, and an operator will come onto your line to

assist you.

As a reminder, this conference is being recorded,

and it will also be replayed. You may stay on the

line at the conclusion of the call for the replay

information.

Before I turn the call over to the chairman and

CEO, let me first read the precautionary statement

to investors. Certain matters to be discussed

during this conference call will constitute

forward-looking statements within the meaning of

the Private Securities Litigation Reform Act of

1995. Although the company believes the

expectations reflected in such forward-looking

statements are based on reasonable assumptions, we

can give no assurance that such expectations will

be attained. Participants on this call are

cautioned to consider the risks related to our

assumptions and expectations and not to place undue

reliance on such forward-looking statements.

With that, I will be turning the call now over to

the chairman and CEO of Korn/Ferry, Mr. Paul

Reilly. Please go ahead.

Good morning. And thank you

for the opportunity for me to review the fourth

quarter in our past fiscal year. You know, we have

just kind of put to bed probably the most difficult

12 months in the history of the executive search

business. First we had the dot-com explosion, the

war on terrorism, and maybe the icing on the cake

has been the many corporate issues and scandals

that have hit the press recently. As a result of

these three major events, this past year was just

really devastating to the recruiting business.

Maybe the silver lining on the bright side is we've

seen the high end of our business pick up. A lot

of demand for CEOs, CFOs, board members, and

presidents, given the environment. But in the

volume segment of our business, vice-presidents,

senior vice-presidents, clients have gotten a

little gun-shy and have been slow to fill positions

and have put some positions on hold.

Although it is clear that, you know, our business

in the global economy has stabilized, there are no

clear signs that a recovery has really begun. A

lot of people have asked me about my timing in

joining a year ago and said, "You know, do you

think your timing was bad?" I think in retrospect

being here almost a year, the timing was perfect.

You know, as a company we are able to move quickly

in anticipation of this declining demand. We made

some very tough decisions midway through the fiscal

year that really prepared us for the flat market we

find ourselves in right now. We are the first

major search firm to aggressively reduce our

workforce and to cut our overhead.

Over the past 12 months we cut over one-third of

our global head count, closed many offices, shut

down our job direct subsidiaries, co-located almost

all of our Futurestep offices within Korn/Ferry

locations, and consolidated our back-end functions

such as finance, marketing, HR, and IT. As a

result, we have cut a full 100 million plus out of

our cost structure. And when the economy returns,

rel reap the benefits. Our modeling shows that

just with the 10% rise in revenue, our operating

margins would hit 15%. We have also strengthened

our balance sheet and put our financial house in

order. I'm extremely pleased to announce that

we're able to complete a private placement deal

with Friedman, Fleischer and Lowe, which we announced

last week. This is a very favorable deal for us in

which FF and L thus invested $50 million: 40 million

in convertible subordinated notes, and 10 million

in convertible preferred stock.

As a result of the investments, we have paid down

our bank debt, which was costing us prime plus

3.75%, and now sit with 100 million in cash and

only 10 million in bank debt.

Our loan agreement with B of A is up in November,

and we are ready to begin the process of

renegotiating the loan now.

One thing to note on the deal with FSL is that

there are no onerous terms. There are not any veto

powers nor did they have the opportunity to reset

the conversion price even under severe conditions.

But more importantly, they are a great strategic

investor, and I look forward to two of their

partners serving on our board of directors.

After their announcement, eight of our 12-member

board will be outsiders. It appears that the

market likes this deal, too. On the day we

announced, the Dow registered a triple-digit

decline, and our two publicly traded competitors

are each down while our stock was up 9%.

We established a deal with FFL for a number of

reasons. To begin with, we wanted to resolve our

loan agreement before November, and we wanted to

lock in more favorable terms on debt given this

market. Secondly, we wanted to establish a long-

term strategy, the strategy we established back in

December, and we wanted to continue to fund that

strategy despite the near-term volatility in the

marketplace. Our long-term goal is to be the

global provider of a full range of human capital

solutions. That means we both need to broaden the

range of our product offerings and deepen the

relationships we have with global clients.

We now have executive search, middle management

search, management assessment, and executive

coaching.

And in the past six months, we have begun building

an infrastructure for true global account

management and integrated account services, much

like investment banks and accounting firms have

done over the past ten years.

I also want to stress the psychological benefits of

concluding this private placement. First, as an

outside investor, they clearly endorse our strategy

and our direction, which I think is important to

all of us. From a fiscal point of view, we

absolutely could have moved forward without this

equity investment. We could have tightened our

belts, reduced our long-term investments, and we

would have had sufficient cash to meet our

operating needs.

But this is not just a brick-and-mortar business.

Our assets are very talented professionals, an

incredible global network, a brand well known in

the marketplace, and technology second to none.

This cash infusion provides our people with the

confidence to know that they can focus on their

client and on the marketplace and not worry about

the day-to-day fluctuations in the stock market,

demands on cash flow, or our balance sheet. It

will also aid us in our aggressive recruiting

effort to continue to add market-leading producers

to our organization.

We made a decision last summer that we would commit

to paying a minimum bonus plan for this fiscal

year, and we have lived up to that commitment. Our

consultants know that for fiscal year '02, they

will be receiving a cash bonus that is somewhere

between 50% as a minimum and higher for the bigger

producers. We felt it was important to make this

commitment to our consultants in this worst

economic climate to keep them focused on the market.

I think taking this stand with our people will

serve us well in the future.

We are now putting the finishing touches on a

compensation plan for the coming year with Towers

Parents, and while I can't provide any of the

details of that plan on this call I can tell you

that philosophically it's in direct alignment with

our long-term strategy and focuses on the

profitability of our business.

Our senior management team and I continue the task

of transforming a culture molded by 30 years of a

highly successful partnership into a public company

that rewards global account management, cross-

selling, cross-border sharing of assignments, and

fiscal transparencies of public markets.

Compensation drives behavior. Behavior defines the

culture. And culture defines the brand. Our new

compensation program must reward performance,

meaning build and collect, but it also must reward

customer satisfaction, account management,

teamwork, and the appearance of corporate values.

We will establish the clear metric for each of

these soft areas as we roll out the plan and we'll

transform our culture into the human capital firm

of the future.

It will not happen overnight, but we are well

underway, and actually despite this difficult 12

months, I am thrilled with the progress that we've

made during horrendous economic times.

I'm employing to let Gary Burnison now take you

through the financials butter I want to leave you

with the message that we have made it through the

toughest of times and I've never been more excited

about what lies ahead. We've cut our costs,

installed a new management team, developed a long-

term strategy, and strengthened our balance sheet.

Although the near-term economic environment is

uncertain, we are in solid position to take

advantage of the eventual economic upturn -

rebound when it happens.

Next, I would like to introduce Gary Burnison, our

new CFO. I think it is a testament to Gary, our

finance team and our strong financial control

culture that with a new CFO, this is Gary's 90th

day, a new auditor, Ernst and Young in April, that we

could close this new equity investment and report

earnings on time. I will now turn the call over to

Gary. Gary?

Thanks, Paul. Good

morning. I'd like to go through a few highlights

of the quarter before getting into the details of

the quarter. We're pleased to report that the

operating loss per share was 12 cents, which was in

line with guidance, excluding nonrecurring charges

of 8.9 million, or 23 cents a share. Five million

of the 8.9 was previously announced and related to

restructuring charges, mostly in Europe. And there

was an additional four million noncash impairment

charge.

More importantly, our core executive search

business, on an EBITDA basis, doubled quarter over

quarter to 6.2 million, or 7.6% EBITDA margin. As

we announced last Friday, we closed a $50 million

private placement with Friedman, Fleischer and Lowe,

the San Francisco-based private equity firm. As

Paul indicated, we're extremely pleased to have the

firm - and, more specifically, Tully Friedman,

Spencer Fleischer, and David Lowe - as strategic

partners to you, our shareholders, and our

management team. The private placement was 40

million of convertible subnotes and 10 million of

convertible preferred stock. Both are convertible

into common at a conversion price of 10.25 per

share, and if converted, would represent about

11.4% of our outstanding common stock, or

approximately 4.9 million shares. Point out that

the convertible notes are tax deductible. In

addition we issued warrants to purchase

approximately 273,000 shares, common shares at an

exercise price of $12 per share.

Upon completion of the offering and subsequent

pay-down of bank debt, we'll have cash on hand of

about $100 million, and remaining bank debt of 10

million, which I intend to pay in the next 30 days

or so. The transaction has clearly fortified our

balance sheet, more importantly, given us fantastic

strategic partners and provides sufficient

liquidity to satisfy our operating requirements.

Next I'd like to point out, as announced in our

earnings release, we changed our method of

accounting for our subsidiary in Mexico from the

consolidation method to the equity method.

Historically we've consolidated the results of the

Mexico operations based on our effective control of

the business. Even though our ownership and voting

interests was slightly blow 50%, I want to put this

in context that, one, this will not have any impact

on EPS, cash flow, or equity, and it represents

about 3% of our revenue.

Although we believe that in substance we control

the business, we do not technically or legally have

over 50% interest.

So prospectively, we'll deconsolidate the Mexico

operations and pick up our share of the income from

Mexico below the line is equity and earnings in

unconsolidated subs.

As I said, this change won't affect the EPS, cash

flow, or equity. It will have the effect of

lowering revenue, EBITDA, and operating profits.

We'll adjust our historical financials in this

year's 10-K to reflect the change.

In Appendix A of the press release we've shown the

impact of this change on selected line items

historically, and let me point out an example of

this. Our fourth quarter revenue on a consolidated

basis would have been $93 million. With Mexico

deconsolidated, the revenue is $90 million.

Likewise, our fourth-quarter EBITDA would have been

3.3 million under the consolidated approach, 2.6

million under the new equity approach. Note that

there's no impact to EPS.

For the remainder of my comments I'm going to focus

on the - the discussion will be focused on the new

presentation basis. In other words, with Mexico

deconsolidated. Consolidated revenues for the

fourth quarter of fiscal year 2002 were $90

million, which was essentially flat sequentially,

down 38% compared to the same quarter in the prior

year.

Revenues for 2002 were 394 million, compared to 636

million in fiscal 2001. That was down about 38%

year over year.

As I indicated earlier, the consolidated net loss

for the quarter excluding special charges was 4.3

million, or 12 cents per share, which was in line

with our prior guidance for the fourth quarter.

Compared to a loss per share for the prior

sequential quarter - in other words, our third

quarter of fiscal 2002, fourth quarter loss showed

an improvement of seven cents from a loss per share

of 19 cents in the third quarter. This sequential

improvement was due to lower GNA expense before

depreciation, amortization, realized as a result of

our restructuring initiatives and a lower tax

provision.

As I talked about earlier, the fourth quarter

results reflect total assets impairment and

restructuring charge of 8.9 million, which is

comprised of 4.9 million, mostly for the downsizing

activities in Europe as planned and an additional

four million noncash charge relating to the write-

off of a nonstrategic investment which we believe

is permanently impaired.

Accordingly, the consolidated net loss for the

fourth quarter was 13.3 million, or a loss per

share of 35 cents.

The balance sheet at the end of Q4 reflects 39

million of bank debt and approximately 66 million

of cash. Happy to report that subsequent to

quarter end, we received a tax refund of $17 1/2

million. After the $50 million private placement,

which should result in about 46 million of net

proceeds, and again paying the bank debt down to 10

million will have cash on hand of about $100

million, prior to the payment of approved bonuses

in July of 2002.

The net accounts receivable at the end of Q4 was

approximately 55 million, down from about 58

million at the end of Q3.

Let me review the business units in detail now

starting with core executive search.

Revenues for executive search for the fourth

quarter were 81 million, which is up about a

million dollars on a sequential quarterly basis,

ending the year with 347 million in core executive

search revenue.

On a geographic basis, sequentially quarterly

revenues increased 5% in North America, and 30% in

Latin America, of course on a much smaller base

with respect to Latin America, and decreased 8% in

Europe and 3% in Asia-Pacific.

Fourth quarter EBITDA before nonrecurring charges

was 6.2 million for our core search business, or an

EBITDA margin of 7.6%, compared to EBITDA of 3.2

million for a margin of 4.1% for the prior

sequential quarter. So you can see the EBITDA

almost doubled sequentially.

Operating profits for Q4, again for the core

executive search business, excluding special

charges, were 2.7 million, for a margin of 3.4%,

compared to a nominal operating profit in the prior

sequential quarter.

The number of executive search consultants at

quarter end was 443, with a reduction of 26 from

the prior quarter, down 118 from the prior year.

Average fees per engagement remain relatively flat

at 65,000 sequentially. The number of engagements

also remained relatively flat on a sequential

basis. However, our revenue per consultant

increased about 7% sequentially, or an annualized

fourth quarter run rate per consultant of about

$720,000.

Futurestep revenues for the fourth quarter were 8.9

million. That compares to 9.7 million in Q3 of FY

'02.

Fourth quarter EBITDA before charges for Futurestep

was negative 3.6 million, compared to EBITDA loss

of 2 million for the prior sequential quarter.

That's primarily due to lower revenue in the

quarter.

Let me now comment on our outlook. Although we

believe there are indications of a stabilizing

economic environment, the continuing global

economic uncertainty continues to provide us with a

challenging environment. As such, first quarter

fiscal year 2003 revenue will likely be in the

range of 81 to 86 million. And, by the way, on the

old basis, if we would have consolidated Mexico,

that's about 85 to 90 million.

And the operating results will be break-even to a

loss per share of six cents.

Those conclude management's remarks. I'll now turn

it over to Ken so he can begin taking your

questions. Thank you.

Ladies and gentlemen, if you wish

to ask a question, please depress the one on your

touch-tone phone. You'll hear a tone indicating

you've been placed in queue. You can remove

yourself from queue at any time by depressing the

pound key. And if you're on a speakerphone, for

clarity's sake, please pick up your handset before

you ask your question.

And the first question comes from Mark Allen from

Sun Trust Robinson and Humphrey. Please go ahead.

Hey, good morning, guys. Nice job

managing in a terrible environment. This question

would deal with essentially a little bit more color

in the high end business relative to volume price

and mix, and you mentioned that the C-level

searches were kind of picking up while kind of the

level below that was not. Can you provide any kind

of additional color, you know, relative to, you

know, percent - how that mix is shifting around

between the C-level and the other?

Let me - I don't think we

have the exact numbers with us. You know,

obviously there is a lot fewer CEOs than there are

VPs and SVPs. So even though that makes up, it's

still a small percentage of the overall business.

The good news is often from our standpoint is those

changes usually result in the next level of

changes. What we're seeing, though, is still a

very, very cautious environment where people are

slow to let go the position so, you know, the

activity is there but people are just not making

that next round of hires. You're seeing a very

stable, you know, we're under cost pricing

pressures, we've always been all year, but the

pricing has held very firm, we've held it very

firm, and the market has respected that, and so I

think what you're seeing is a flat volume and a

flat C-level right now, and given the environment,

we don't see, you know, short-term a lot of

change. It's very, very uncertain.

You're saying your fee percentage

per search, you're holding that. Is there any

delta on the compensation levels, you know, if you

go kind of position by position, is there still

inflation in wages?

You know, I don't think -

Compensation.

You know, I don't think we're

seeing as much. Obviously at the high level

there's still a lot of competition for people.

But, you know, I'd say overall it's still pretty

flattish and the fee structure is pretty flattish

right now in this environment.

Is the - is the environment in

your opinion, are you guys seeing more I guess what

would be called forced turnover, you know, as a

function of the economy, companies making changes

due to performance issues?

You know, I think, you know,

we all read - I mean I think one of the perils of

being in my job is, you know, you get rated on how

the company does. Part of that may be management,

part of that may be the environment. So we're

clearly seeing more turnover there than we have in

the past, in looking for people that - you know -

you know, to make the next step. But again, you

know, if you look at total number of searches,

those number of searches are insignificant compared

to the rest of the market. They're more exciting,

they're interesting, but the volume business that

really is the heart of the business is the second-

level business where there's many more positions.

And your sense is there is pent-up

demand because people are just sitting on that now?

Oh, yeah, it's very clear, if

you talk to the consultants in the marketplace, and

we've seen this now for throughout this calendar

year, although they've let more searches go

beginning the first of the year, there are an awful

lot of people that want to fill positions, and

because of the economy and uncertainty as you watch

the stock market, they're just very slow to fill

them.

Thank you, and good luck next

year.

Yeah. And one additional

comment that's interested me. If you look over the

last three recessions, what you've generally seen

is the first, you know, year is a slightly down

year. This has been unusual, this recession. Then

a flat year. And then, you know, the last three

recessions it's been, you know, pretty big recovery

about 30% jump in our business. And my guess is,

you know, we're going to slug out through the

recession however long it lasts and then it will

pop back up. I just don't know when that is. We

don't have indications at this point that that

recovery is underway.

Okay. Thank you.

Our next question comes from the

line of David Billick at Morgan Stanley. Please go

ahead.

Good morning. You guys mentioned

a little bit about bonus compensation this year.

Can you give us some color in terms of, one, how do

you determine what's kind of like the metrics you

use to determine an executive recruiter's bonus,

and then separately, in terms of the aggregate,

what you expect the total bonus payments to be in

July in terms of cash and how much in terms of

equity.

We have, David, I think it was

end of last year that we expected about $45 million

of bonuses in cash, and that number still holds.

That's our expectation of the payment in July.

This year under our cash bonus system, most of that

was - the cash portion was really determined under

a build and collect schedule, that is how much did

you bill and bring into the company. The options

portion is based on, you know, other factors such

as not just build and collect, but teamwork,

collaboration, value, contribution to the

enterprise. Because of our stock swap that we did

this year, we will not be issuing options until

September, late September because of the - you

know, the six-month and a day rule for stock swap.

So we are still working with our compensation

committee to finalize kind of that option payment.

We're still looking at it.

Great. In terms of Futurestep,

maybe if you could just discuss a little bit more.

It seems that the sequential decline in revenue was

less than the sequential decline in the operating

profits. Could you talk a little bit about what's

going on there and how Futurestep has either met or

not met your expectations thus far?

Yeah, let me, David - it's

Gary - let me just talk, on the sequential change,

there were some - several ones, I would call them

one-time items that were recorded in the fourth

quarter that made that comparison that you're

talking about. You know, revenue was down, you

know, bye-bye seven or $800,000 sequentially. But

as you pointed out, EBITDA was probably down, you

know, a million and a half or so. Probably half of

that was due to the revenue drop, but there were

some one-time items in there.

I think that, you know, we've

undergone a significant change with Bob McNabb

running Americas and Asia-Pacific. You know, Bob

was CEO of course (unintelligible) a hundred-

million-dollar business, and Bob has been doing a

great job of revamping our business in the

Americas, and just, you know, an almost impossible

market today. Executive search is tough, but

middle management search is really a tough business

right now and he's made great progress both in the

revenue growth and restructuring the business.

Europe is a concern. I mean Europe is still going

through some of the sort-out, although the

executive search business has been surprisingly

steady to us over these past few months, middle

matting has been hit pretty hard and I think you'll

see a decline in our European based business and

therefore why we went through the restructuring

that we did last quarter.

David, I'll point out one

other thing, too. In terms of the restructuring

for the fourth, we had mentioned it's about $5

million. Two and a half of that was for severance

and two and a half was for facilities, and if you

look at the reduction in employees in total, it's

about 150 employees, 90 of those were in executive

search, mostly Europe, but 60 were in Futurestep.

Hmm. Thanks a lot.

Thanks, David.

And the next question comes from

the line of Mark Marcone as Wachovia Securities.

Please go ahead.

Trying to, you know, take a look

at your future guidance in terms of, you know,

revenues of 81 to 86 million going forward, and I'm

assuming that what you would probably expect is

that you're going to have - would you expect that

kind of the same sort of trends would hold, in

other words, you know, that maybe we see another

decline in Europe, maybe North America core stays

kind of flat, continue to see a decline in

Futurestep, you know, and I decline in Asia-Pac.

I'm just trying to from a regional perspective can

you give us a little color in terms of

expectations.

I think that, Mark, that

obviously predicting the global economic world

right now is tough for anybody. We probably at the

beginning of the year had expectations of a little

quicker pickup in North America but we have found

in this quarter for it to be a little flattish.

So, you know, given the feeling in the market

overall, we see it kind of flattish, although, you

know, there's hope that it will pick up later in

the year, but who knows. So we're - although

we're looking for some pickup later, we are

managing, from a cost standpoint, from a business

standpoint, to a flat revenue.

Europe has been a surprise to us. Honestly, we did

expect some further decline in the executive search

business, just based on the economy, but it's been

holding very well, and its confirmations, contracts

have been doing surprisingly well. Futurestep has

been a concern for us in Europe and shows some

softening. Asia has been pretty flattish, you

know, really most of the year and continues to be.

It's a tough environment. We've got great market

position, and they seem to be doing well. And

obviously, you know, we've done what - Latin

America, Mexico's done very well, but obviously

South America has been a troubled economic

environment. It's just not a very big part of our

business, but there are some countries there where

it's hard to do any business right now, so that's

kind of the global picture, and I just think that

given the uncertainty we're just trying not to be

too aggressive in our expectations of what could

happen.

Okay. But I mean if - was

generally about right in terms of, you know, what I

mentioned before in terms of how we might - you

know, obviously we've got to kind of model this out

by region and if we had to that maybe, you know,

assuming that North America would be flat and, you

know, Europe might be doubt and Futurestep might be

down and Asia-Pac might be down just a teeny bit

would probably be the best way to go, or...?

Well, it's Gary. It's

Gary. I think that one thing is that in our fourth

quarter, North America just had a fantastic

quarter. They were up a couple million dollars -

Right.

- sequentially. You know,

it's - you know, part of the that could have been,

you know, kind of going into a new year, pent-up

demand. You know, it's possible that that, you

know, could go down a little bit. And, you know,

the rest I would say is just relatively -

relatively flattish. I will say that Europe, you

know, in May was - you know, had a pretty good -

had a pretty good month.

Mark, I think that everybody

coming through the cycle, it's just hard to

predict. We've been predicting, you know - I

think that the one trend is that Futurestep in

Europe will be down. Everything else has looked -

you know, our outlook is relatively flattish plus

or minus.

Okay. I'd like - I'd like to ask

a really positive question, but first I'd - could

you give us kind of the monthly sequential, you

know, kind of how the trends went by month across

the quarter?

It's very hard because the -

you know, you get -

I know it's bumpy. I'm just

trying to discover -

It's very bumpy. You get a

big bump in January and you get a big off certain

times of year, and then we had, you know, with an

April close, the first two weeks of May are slower,

but there's obviously people rush to close business

at the end of the year. So I mean the indications

I think for seven weeks going forward aren't much,

but for the past quarter, what would you say, it's

been pretty level, actually.

I would say if you look at

our conformations in March, you know, in May, the

first couple weeks of June, just look at our weekly

conformations, you know, they're pretty much

running at the same level that they were in, you

know, April. In terms of the monthly, I don't have

that breakout here in front of me.

Okay. I was interested in what

you said before about early - you know, you've

obviously done an exceptional job in terms of

rationalizing the costs under really tough

circumstances, and you mentioned that, you know,

potentially if you could get a 10% increase in

revenues, if I heard this right, that you - you

could potentially end up with 15% operating

margins? Is that right? And then if that's the

case, is that off of your current run rate, or off

of what you're doing - what you did on an

annualized basis? In other words, would it be, you

know, 10% increase off of an annualized run rate

off of the fourth quarter of 90 million o would it

be off of your annual production this past year?

This is a very revenue

sensitive business, as I think all service

businesses are. You know, it's - it's hard to cut

costs, you know, in any business, but do you it,

but the truth is we're very leveraged from an

operating standpoint. If you look at revenue per

consultant, I mean we have 30% plus capacity just

based on a existing consultant not even hitting our

high historic levels, both in terms of number

searches per consultant and revenue per

consultant. So, yes, if you look at just our run

rate now, 10% increase in revenue would deliver 15%

operating margins on a consolidated basis. So the

leverage is there, we've been over it a million

times. we've looked at it three or four ways and

we come up with the same answer. There's huge

leverage in the business but, you know, to get a

10% increase we've either got to steal great market

share or get a little help from the economy.

Is that 10% off of the 90 million

or 10% off of what you did during the year?

It would be 10 - 10% off

the - you know, off the 90 million with Mexico 93

million, something like that.

Okay. Great. Thank you.

If there are any further

questions, now is the time to press one. We have a

question that is coming from the line of Kelly

Flynn at UBS Warburg. Please go ahead.

Thanks. Could you give more

detail about what you're seeing across various

industries, with particular interest in financial

services and technology?

Yeah, Kelly, I would say that,

you know, first, the growth industry for us, and

probably for everyone, has been health care and

not-for-profits. I wish it was a bigger part of

our business, but those businesses have been very,

very robust and continue to show kind of high

resiliency in this market. Quarter by quarter

sequentially, actually financial services and

consumer markets showed pretty good increases. I

am concerned, you know, the kind of double-digit

increase quarter on quarter. Obviously I think the

financial services market, especially when you take

in investment banking and corporate finance is

still a very iffy market. I mean you get some

hires and you get layoffs and you hear people

saying they're not hiring. So I'm very cautious on

that segment. But the consumer piece seems to be

solid, the strictly piece was off slightly but it

had done better last year than the other segments

had. But, you know, just the retail and consumer

part has done well. You know, technology is just

tough. It was - it was about flat quarter on

quarter, slightly down, but it's just - you know,

it was battered last year and don't see huge signs

of recovery there yet.

Okay. Also, just to sort of

follow up to that, do you have any - based on your

observation from historical patterns, do you have

any views on which of the industries that you just

spoke to are likely to show pickup first? I guess

excluding health care.

You know - yeah, I think this

economy has surprised everybody. You wouldn't

expect consumer to be doing well in a recession,

but obviously it's done both from an economic

standpoint. From a business standpoint it's done

well. Health care shouldn't be a surprise. You

know, people get sick, and do - you know, use

health care services no matter what the economy is,

so we should expect that. I obviously believe

that, you know, probably the industry that's had

the biggest swings historically for us has been

financial services. It's been an industry that

cuts very quickly and hires very quickly. And, you

know, I think the technology recovery is going to

be, you know, slower, but I think those are two

industries that, once they hit whatever that return

point end will hire aggressively, but I think it

will be kind of slow until they feel like there's a

return. And that's why we're being cautious in the

outlook.

Okay. And then a different

question for the Q1 guidance. Can you give us some

indication as to whether or not that assumes

basically constant head count?

Whether it seems what,

Kelly?

Constant. Where does it stand for

consultant count? Does it assume approximately the

same that you ended with?

Yeah. That's - that's

correct.

Okay. And then also on that issue

it seems that you said your consultant count on

average was down 26 through the quarter, but that

didn't foot with the number that you gave in your

press release last time, which was 493. Can we

assume that that difference relates all to Mexico?

Yeah.

Okay. Okay, great. Thanks a lot.

Thanks, Kelly. We continue,

too, I mean for the audience, if you look at our

business, we really sized it, 1998 calendar year

roughly we were this size, our support staff, our,

you know, corporate everything is about size for

that revenue run rate. But we do have more

consultants than we had then. So we clearly have

the capacity with an economic upturn to handle the

business. Although we have fewer consultants we've

been very aggressive, you know, both counseling the

people that we felt weren't long-term players and

retaining the people, you know, that we thought

were. And so we still have capacity.

And are you through, Ms. Flynn?

Yes, I'm done, thanks.

Thanks, Kelly.

Our next question comes from the

line of Stefan Mixtu at Tight Place Capital.

Please go ahead.

Hi. Good morning. A couple

questions. Just back to this upside, you know, the

earnings leverage on the turn, what is that - what

does that imply about kind of where you're - are

your break-even costs now about somewhere around

this kind of mid-eighties million per quarter? Is

that kind of the cash cost of running the business

now?

Well, I mean if you - if you

look, if you were to assume that if you exclude

bonus for a second, and if you were just to take

all the other costs, you know, our fixed cost

structure there is, you know, probably around, you

know, 73, 75 million, something like that,

excluding depreciation and amortization.

Okay. And then excluding any kind

of bonus accrual, you're saying?

Yeah. Yeah, that's exactly

right.

Okay. And a piece of that is -

is in - Is Futurestep still really standing on its

own, or is that - is that more - is it the

revenue just separately reported but the

infrastructure more consolidated, or integrated?

A little bit of both. I

mean we do treat the revenue and directly charge

expenses as directly charged to Futurestep and the

company, but we do have a shared services agreement

for infrastructure where they pay their, you know,

kind of fair share of the general infrastructure

costs and any specific items that they have that

are unique to their business.

Okay. And is there - do you have

some time frame by which you think Futurestep can

get to break even and then eventual profitability?

The question is a market

question, honestly. I think the break-even is now

in the mid-forties. And again, there's leverage in

the model. You know, Bob McNabb has been - done a

great job with changing the model into really doing

what I would call your bulk hiring or outsourcing

of middle management hiring. But, you know, there

is - he's made great progress. We've signed a lot

of pretty large contracts, and there are a lot of

them that are kind of agreed to and on hold. And I

think he needs a little bit of market help. So I

think the question on timing is when does the

market return, because we've taken the costs out of

the business.

Right. Okay. And then in terms

of the - you know, you said about 45 million of

cash payments for bonuses in July and earlier you

had said that you're targeting about a 50% cash

payout of bonuses, does that imply, then, you'll be

issuing options, you know, if the stocks hit at

these levels, you'd be issuing somewhere around

five million options in September to cover the

equity portion of the bonuses?

There's no way we'd ever

considering issuing five million in options. Let

me answer the first part of your question first is

that the bonus plan basically said that under our

typical build and collect schedule, that you earn a

bonus. We would pay at the low end 50% of that

bonus in cash, but the truth is, if you don't earn,

you know - if you don't deliver north of 700,000

in revenue, the bonus is essentially zero in the

calculation anyway. Our top producers were

guaranteed an increasing percentage up to 100% full

payout, which - which a single producer hit this

year. So on average it's much more than 50%. No,

we have separated the cash from the options fees.

We are not using options to make up the shortfall

in the cash feeds at all. The option feeds is

still under the old formula.

Okay. So what's the rest of the

bonus, then? In other words, if the 45 million is

- maybe I'm misunderstanding, but if the 45

million is targeted at a 50% payout, you're saying

the rest of that bonus either wouldn't - isn't -

the consultant is not entitled to it because they

didn't hit a, you know, prescribed level, or - you

know what I'm saying? What's the rest of the

bonus, then? How is it satisfied?

The cash - this is - our old

system is very complex, and I'm happy to go into it

but we're also getting away from the revenue system

in place.

Okay.

But under the old schedule it

said that you were entitled to a claim on a bonus

pool. You didn't absolutely get paid no matter

what, based on profit, that if you generated

X-dollars of revenue, that you were entitled to

X-dollars of payment against a bonus pool. That

bonus pool could be higher and they got more or

that bonus pool could be less and they got less.

What we said this year because of the uncertain

market and want to go retain our top producers is

we wanted to set a schedule that said at the low

end we would pay you 50% of your cash bonus which

was basically 70% of your total compensation -

Okay.

- and up to a hundred

percent, and that 30% of the compensation was in

stock options. We are not making up that shortfall

in the bonus pool. We're saying that, you know,

because there was no bonus pool, and there were no

profits, you do not get those bonuses. And it's no

different than our competitors have done.

I see what you're saying. Okay.

Do you have some sense of how many options you have

to issue, then, in September to satisfy any

obligations under the bonus pool?

No, we're still working on

that but it's not anywhere near the number you're

seeking.

Okay. And then lastly, did you go

back historically and find, when was the last time

that revenue per consultant was this dismal, and,

you know, what does that kind of imply as to where

we are in the cycle?

First, apples to apples.

First, compared to the other people in the

industry, we count our prepartners principals as

consultants. Most firms only count their

partners. So first, if you look apples to apples

and compared us, we have many more people we

classify as consultants versus our competitors. So

that's number one. We use a principal category

which is a prepartner, we count them as consultants

because they do have revenue goals in their numbers

which is half of what their consultants - the

partners make. At the peak that number was near a

million dollars a consultant. That was our best

year ever. Now, again, versus our competitors,

that's probably a million four or some number like

that on an apples-on-apples basis. So, depending

on what you want to compare it to, let's make sure

we have the right denominator.

Okay, that's fair.

Okay? But apples to apples,

we're about 700 and change versus a million at the

peak, and I would say that if you go back through

history it's always been in the eight-plus range.

This is - this is the worst year for us, at least

that I know of.

So you probably go - got to go

back more than a decade or something to get to

these levels?

Yeah, I think you have to go

back - I think you could go back 30 years since

the beginning of this business and never see a

decline like this, ever. So I mean this has just

been an unusual event.

Okay. All right. Well, good luck

on the turn.

Thanks.

Next we go to the line of Dan

Ditler as Lehman Brothers. Go ahead.

Yes. Do you have any planned

further restructuring or asset impairment charges

for the first quarter of fiscal 2003?

No, we see no restructuring,

and we see no impairment charges. We've been

pretty aggressive in writing things down as we see

any potential impairment. And again, this

impairment was a noncash item.

Great. Thank you very much.

And we have a follow-up question

from Mark Marcone as Wachovia Securities. Go

ahead.

Futurestep, what percentage of

that is - is Europe? In other words, how much of

Futurestep's revenues come from Europe at this

point?

Yeah. Quite a bit, Mark.

If you look in the fourth quarter, we did about $9

million of revenue in Futurestep, you know, about

seven of it was from Europe.

About six.

About six, I'm sorry. Then

the other million was Asia. And so if you look,

it's six - six Europe, a million of Asia, and a

couple million bucks for North America.

Okay. And do you anticipate at

some point that the Europe portion is going to

stabilize, or...? You didn't sound very

optimistic.

No, I - we absolutely do. I

mean it's an economic cycle. If we didn't think it

would we'd have a different view of the business.

But, you know, obviously the middle management has

been hit. I just don't know - I think we're going

to see not a, you know, eclipse in Europe but I

think we're going to see some downward drifting

over the next few months.

Okay. And then Mexico, does it

fit into Latin America or North America?

Latin America.

Latin America?

Yes.

And would you be so kind as to at

some point in the future provide us - you did a

great job with regards to the Appendix A, you know,

for the overall deal. Would you be able to give us

those numbers for - on a quarterly basis going

back from Mexico, or for Latin America?

We will obvious when will we

file, you know, to reclassify the whole - you

know, historically so you'll have all that

information, but we'll be able to give it to you.

Okay. Thank you very much.

And next we go to the line of

Seth Rosen at Imminent Capital. Please go ahead.

Hi, guys. I've got two margin

questions. The first is just a clarification of

what you said before. I wanted to make sure I

understood. I thought you said that based on the

90 million of revenue, if you had a 10% revenue

increase, you'd see 15% margins. I think that

implies over 100% incremental margins, so I must be

doing something wrong there. And then the second

question on margins was you mentioned you have

thirty%-plus capacity, if you will, for the

consultants. I'm wondering, you know, if you get

back to, you know, maybe 90 to a hundred percent

capacity, given the aggressive cost cutting, what

you think EBITDA margins for the company would be

in that type of environment.

Let me answer your - your

first question in terms of the incremental change.

You know, the marginal payout on the increase in

revenue would be very small, so, you know, again,

which is 93 million, which is the old basis, you

know, you're talking a revenue increase of $10

million. Substantially all of that would fall to

the bottom line. Secondly is that we went through

this restructuring in our fourth quarter, and that

is going to produce, you know, annualized savings

this year of probably almost $10 million. And so,

you know, just those two alone you can easily see

how you get there.

Okay.

I'm sorry. What was your -

Just the long-term margins if you

get - given the aggressive cost cutting, if you

get back to, you know, a more normalized revenue

consultant - revenue per consultant that implies

90 to 100% capacity utilization, what type of

operating margins or EBITDA margins you think the

business should be able to do.

Well, you can see, I mean

right with that example of a 10% increase, there is

just, you know, we've got a lot of muscle, got a

lot of talented people in this organization. I

don't see any reason why we can't be 15 to 20%

operating margins.

Okay. Great. Thanks.

And next we go to the line of

David Billick at Morgan Stanley. Go ahead.

Hi, guys. It looks like you've

done a lot of work of people looking at history and

people getting at capacity issues and growth coming

out. Even in the second half of the nineties that

searches per consultant rose pretty rapidly partly

due to the Internet boom as search per consultant

went from 15 per year to 18 from 1997 to 2000 down

to 16 in 2001 and about 11 in fiscal 2002. Given

that there were - I guess there were some

complaints about the quality of service people

we're getting kind of towards the end of the boom.

When you're talking about capacity, what do you

think is a normal level of searches per consultant

that can be done per year on average? Long

question. I hope it made sense.

No, I think one is it's

going to vary by region. In North America it's

going to be less. Some other parts where they do

- where the fees are less but do you more

searches. But overall in the system, you're

absolutely - we have done a lot of modeling and

have looked extensively at the business say in the

summer of '98, before the - if you want to call it

a bubble. And we realistically think that, you

know, system-wide we should be able to be, you

know, around 15 engagements, you know, 16

engagements per consultant. We don't see why -

why we couldn't do that. Obviously now that varies

from region to region. North America would be less

than that, other parts of the world would be

slightly higher.

Thanks. That's a big help for

modeling purposes.

Yeah, and Dave, you know, from

- what we've done is we've gone back and

normalized years, too. We've look at '97, '98,

'99, 2000 before things have boomed up where there

was more steady state business. And those numbers

of searches per consultant hold, we're not looking

for, you know, just 15 searches at 65,000 average

fee gets you to the million dollars, which is a

very profitable level, so you don't need record

numbers to be a very strong business.

Great. Thank you.

Once again, press one if you have

a question.

I think we're at the top of

our time line, so if there's one more question,

Kim, we can take.

Okay, there is no one in queue

now.

Okay. Well, great. We'll

just make a closing comment, then. You know,

obviously I think we've managed our costs very

tough in this market. We're optimistic about our

future, but it's a very cautious environment, so

we're going to manage our costs tough, keep our

people motivated and focused and, you know, we're

going to have to wait for this economic return and

do what we can to take market share during this

downturn. So with that I thank you for your time

and, Kim, I'll turn it back to you for the replay.

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