Korn Ferry (KFY) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Korn/Ferry third quarter earnings release conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session and instructions will be given at that time.

If you should require assistance during the call, please press zero, then star and an operator will help you off line.

As a reminder, this conference is being recorded.

Before I turn the call over to your host, let me first read a cautionary 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 obtained.

Participants on this call are cautioned to consider the risk related to our assumptions and expectations, and not to be placed undue reliance on such forward-looking statements.

I would now like to turn the conference over to Korn/Ferry's chairman and CEO, Mr. Paul Reilly.

Please go ahead, Mr. Reilly.

Thank you.

Good morning, and thank you for joining us.

This morning, I'm going to share some highlights of our fiscal year 2003 third quarter which ended January 31, 2003, and then I'm going to turn the call over to Gary Burnison, our chief financial officer, who will provide more detail on the financials for the third quarter.

I know this statement will come as a revelation to you, but the global economic environment for this past quarter has been characterized by uncertainty, certainly as most of the year has been for most businesses.

The brewing pressure in the Middle East and the anxiety around the impending war has taken its toll on the capital markets and the labor markets.

What we're seeing in the marketplace are a great number of clients who have dramatically downscaled their cost structure over the past two years and who are now beginning to selectively fill critical openings.

Because of the threat of war, however, and economic uncertainty, many are holding off on launching multiple searches.

In certain sectors such as entertainment, higher education and life sciences, we are seeing companies move forward and filling strategic positions that have been on hold for almost the last year.

In other sectors however, there are still a number of companies in a wait and see mode.

The truth is, many of our clients seem to reflect our own situation.

They have dramatically reduced costs, they're cash positive and they are poised for expansion.

\We firmly believe that once the geopolitical situation rights itself, robust demand for human capital will re-emerge.

In fact, if you look over the last two recessions, after the recession ended, our business grew at over 30%.

The long-term demographic trends remain firm, and thus the war for talent has really yet to begin.

The good news is that we see pockets of improvement in important areas of our business.

Most notably, our New York office is showing promising progress with confirmation levels in November and December running ahead of the first half of the fiscal year.

I am pleased to say we have right sized our business for the current level of demand.

We continue to operate in a cash positive mode in this difficult environment, thanks to quick and aggressive cost reduction measures.

In fact, while our fiscal year to date revenue is down $52 million year over year, EBITDA is actually up by almost $12 million.

More importantly, we are encouraged that the progress we are making at establishing long-scale, long-term global relationships with big clients.

We have made a concerted effort to focus on these large clients, assembled the best teams from all regions in the world to service them and to provide a range of products and services.

As a result, we continue to sign preferred provider agreements with a number of the largest (inaudible) companies in the world.

We have also had notable new assignments in this past quarter, including a high profile engagement with the recently formed U.S. public company over -- accounting oversight board, which was created in conjunction with the Sarbanes Oxley Act.

We initiated this engagement with seven senior level searches.

Other notable wins include a major contract with a major medical devices company for Futurestep to potentially provide over 100 engineering sales and marketing executives over the next 12 months, as well as senior executive searches and CEO searches for a large number of large clients.

It -- I think it is also worthwhile to note that in December we officially launched and begun our operating -- operations as the first foreign recruiter to be granted a joint venture permit in mainland China.

We're extremely well positioned for growth there and have been a leader there for many years and where we see demand is expect --ultimately expected to be quite strong.

This past quarter, we have also rolled out -- begun to roll out our new search assessment product which incorporates our industry-leading assessment technology into the executive search process.

This new tool developed over three years puts our recruiters can statistically use a validated model of our candidates that can be matched against profiles and specific jobs of companies.

These assessments allow our clients to look beyond the candidates' interviewing skills and reveal how they truly think and behave in difficult work situations.

We believe this tool provides Korn/Ferry with a significant competitive advantage in the marketplace and more importantly provides tremendous added value for our clients.

The training for the product has already begun in many markets.

The test market is finished and we are aggressively rolling it out to all regions this year.

As we look forward, it remains difficult to forecast demand given the challenge of the impending war in Iraq.

Until that situation is resolved we expect demand to be relatively flat.

We will of course continue our aggressive business development efforts and maintain strict cost control.

However, you cannot cut your way to prosperity.

The focus has to be on the market -- growing our revenue and growing our market share.

And that is where our energy lies today.

Our cash position and balance sheet continue to be strong with more than 68 million in cash on hand and we are operating in a cash positive mode.

I'd now like to turn over to Gary Burnison the call who will review the financials in more detail.

Gary?

Thanks, Paul.

Good morning, everybody.

Let me start with a few highlights before getting into the details for our third quarter which just ended January 31.

Overall, we achieved 200,000 of operating profit and 4.2 million of EBITDA on fee revenue of 75.5 million.

Remember that these amounts do not include our operations in Mexico, as they are picked up net below the line.

Sequentially, as forecasted, fee revenue was down only slightly, about 5% from 79.6 million in our second quarter, yet operating income in EBITDA remained essentially flat.

This reflects the benefit of our reduced cost structure and increased efficiencies across all of our business lines attributable to our ongoing streamlining initiatives.

Our third quarter loss was 7 cents per share, an improvement of 12 cents compared to the prior year third quarter and in line with guidance.

EBITDA as I mentioned was 4.2 million, an improvement of 3.5 million compared to the prior year third quarter.

As a reminder, we have about 16 million of depreciation per year or 43 cents per share, almost 11 cents per quarter pre-tax.

A lot of that is -- results from the heavy spend we made during the go-go days.

The improvement in year over year EBITDA was achieved despite an 11.2 million or 12.8% decrease in fee revenue in the current quarter compared to the prior year third quarter.

G&A declined 6.7 million or 29% compared to the prior year third quarter comp and benefits declined 8.9 million or 14% compared to the prior year third quarter.

There were also two other events in the quarter which I want to point out.

First, we recognized the 1.6 million gain related to a litigation settlement of a former subsidiary.

This amount, however, was substantially offset by a restructuring charge recorded as a result of revised estimates for previous facilities related restructuring initiatives.

In other words, there was no net impact to the P&L.

Second, we replaced our prior credit line with a 30 million dollar facility from a new lender.

The balance sheet as of January 31st as Paul mentioned reflects 68.4 million of cash and cash equivalents.

AR decreased 2.7 million to 48.4 as of January 31 from 51.1 as of October 31, 2002, in other words our second quarter of this fiscal year.

Total number of colleagues in the firm was approximately 1,550 as of January 31.

Let me review the business segments in detail now, starting with executive recruiting.

Note that the following discussions of our results reflect the business segments without allocations of corporate overhead and are on an adjusted basis as applicable.

Executive recruitment's fee revenue for the current quarter was 68.2 million, which was down slightly at 3.6 million or 5% sequentially.

Operating income slightly improved sequentially to 8.4 million, a 12.3% margin.

EBITDA also improved slightly sequentially to 11.7 million, a 17.1% margin.

North American fee revenue declined about 3 million sequentially.

Adjusted operating income decreased 2.7 million, resulting in a decline of the adjusted operating margin, that's almost 13% from 18% in our second quarter.

Despite the sequential decline in Europe fee revenue of 500 grand to 18.7 million, adjusted operating income increased sequentially by 2.5 million resulting in an increase of the adjusted operating margin to 13.7%.

Of the 2.5 million improvement in operating income about 1 million relates to realized fx gains.

Asia Pacific fee revenue was about flat.

It declined 200,000 to 8.6 million.

The operating margin was 11%.

South America fee revenue slightly increased by 300,000 or 18% sequentially to 1.8 million.

Operating income in EBITDA in South America were about break even in the quarter.

The average fee per engagement in annualized fee revenue per consultant remained relatively flat sequentially, 61,000 and 664,000 respectively.

The number of engagements decreased 85 or 7% sequentially and the number of consultants was 406 as of the end of the quarter.

Futurestep fee revenue was 7.4 million for the quarter, a slight decrease of 400,000, or again 5% sequentially.

Despite the decline in fee revenue though, both adjusted operating loss of 1.3 million and adjusted EBITDA of negative 814,000 improved 500,000 and 300,000 respectively on a sequential basis.

Let me now comment on our outlook.

Fiscal fourth quarter fee revenue will likely be in the range of 71 to 77 million.

Loss per share will likely be 3 cents to 9 cents.

Those conclude our remarks.

I'll turn it over to the operator so we can begin taking your questions.

Thank you.

Thank you, Mr. Burnison.

Ladies and gentlemen, if you wish to ask a question, please press the one on your touch-tone phone.

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One moment for our first question.

And it comes from the line of Mark Martin (ph).

He's from Wachovia Securities.

One moment, please.

Go ahead, sir, your line is open.

Good morning, Paul and Gary.

Hi, Mark.

Can you tell us how much was accrued for bonuses this quarter in the previous quarter and then what your expectations are for total bonus accruals for the year?

8.7 million in this quarter, Mark, which is consistent with the last quarter.

Year to date we have accrued about 29 million or so in bonus.

In the fourth quarter, accruals really going to be dependent on profitability.

Our comp model is partly based on an individual's productivity, but it's also based on the profitability of the firm and on a region by region basis.

Okay.

Given your -- if we were in the midpoint of your guidance where would that kind of come out roughly?

Oh, I would think it's going to come out -- somewhere for the year, I would say you're looking at a bonus accrual of probably 34 to 39 million, something like that.

And how much will --what's the payout schedule for that?

What do you mean?

We pay in mid July, in the U.S. and in August in most other places in the world.

August.

Okay.

And this full amount will be paid out the 34 to 39 at that point in time?

That's typically how we pay out.

Okay.

Great.

Can you give us a feel for the -- for what cap-ex was in the quarter and what you anticipate it will be for the year?

Very little, Mark.

It was 400,000 about in the quarter.

That's -- you know, that was slightly higher, but it's -- you know, the good news is we've got the technology infrastructure and the brick and mortar, so our cap-ex going forward for the foreseeable future is going to be very limited.

Okay.

What will it be for the year about?

It will probably be about a million, 1 million three, something like that.

And any anticipation for '03?

What's that?

Any indication for fiscal '04?

It will be in the same amount, Mark.

Great.

A pretty big delta between your D&A and cap-ex.

That's one of the things.

Obviously, we're running this business to be cash flow positive, cash EPS basis, but we have a heavy burden from the spend in the past and that's going to stop.

I don't know if you listened to the Heidrick call last week, but they mentioned pricing pressures at the lower end.

Are you seeing any of that?

Yeah, Mark, I'd say what we'd see is at the high end you see no price pressure, it doesn't even come up.

But as you get down into the lower end, I mean, people try to negotiate, you know, on expenses or a little bit on fee.

It's clearly at the lower end.

I will tell you from my member DAFC, at our trade association last year, all the veterans who have been around said, hey, who are you kidding?

This has happened every recession.

When it picks back up, it goes away.

So the good news is our average fee is holding.

So there's no doubt that clients are -- in these down times and when our businesses are off at the low end are trying to negotiate as hard as they can.

And I think the industry is doing a good job of holding the line.

But there is clearly pressure at the low end.

Okay.

Can you give us -- obviously it's hard to predict obviously how things are shaking out geopolitically, but can you give us a sense for the -- the sense that you're getting in terms of the pent-up demand?

Just a little bit more color there in terms of the pent-up demand that you're seeing and then - and how quickly you think that might -- once things get resolved based on what you're currently hearing when you'll anticipate a real pickup?

Mark, that's the hard thing.

We see a peak in interest.

We thought the quarter results were pretty good considering the holidays.

We had what I call a protracted holiday period this year.

But, you know there's a lot of activity.

The consultants are talking to a lot of clients, and the problem is that it's just people are being very, very cautious on the spends.

You know, we almost -- they talked about hiring people, sometimes they even asked for a commitment letter which is our contract, and they don't sign it.

And they wait.

And that's been going on now for three to four months, and what we've seen in the U.S. and Asia particularly is that the demand is pretty flat.

I mean, it hasn't gone down anymore.

So it looks like we're at the bottom and the question is when is the release.

A lot of people with clients they say are ready to go, but haven't gone.

We see a lot of preferred provider agreements that we have with clients and all of a sudden they say, we're going to hire and they just are holding off.

When that pops, I don't know.

But all I can tell you from past trends and from talking to companies, I believe there's a huge pent-up demand.

Last two recessions, the next year -- the year of the recovery we had 30% growth in our business and I have no reason to believe that won't happen again.

I have no idea when it will happen though.

Got it.

Can you give us a sense of, you know, what the early read is on February?

February is, you know, if you look over the last, you know, four or five months, you know, it's been fairly consistent.

As we sit here, in the final week of February, we're about the same place we were over the last several months.

So, you know, no real trends.

Mark, let me point out one other thing you were asking, your questions were getting at kind of cash flow.

Let me point out that also that's what's going to be running off is a cash drain resulting from acquisition payments.

I know that you know back in '99 we did a string of acquisitions, and some of those were structured where the sellers carried back paper.

In this quarter, we made about 5 million of cash payments related to those acquisitions.

We have one more real slug to go.

That's in the current quarter we're in now.

That's about 4 million and after that, it's basically done.

So when you look at this whole year, we will have paid -- when it's all said and done, probably 16, 17 million bucks for past acquisition payments and that liability, that burden is going to be off our heads too.

Okay.

What do you anticipate, Gary, the minimum cash level that you'll have after bonuses are paid?

Oh, I think we'll probably be in the kind of mid 50s, something like that could be slightly higher.

We've got some very interesting things we're doing on the tax side where I expect we're going to pick up, you know, a pretty good size refund here in May.

So I would think it's going to be at least that level.

Great.

I'll hop off now and come back with some additional questions.

Thanks.

Thank you.

Our next question comes from the line of Chris Gutic (ph) of Morgan Stanley.

Please go ahead, sir.

Thanks, Paul and Gary.

Gary, just a follow-up on the two non-occurring, when you look at the adjusted income versus the operating income reported, four different line items were modified and I'm wondering if you can explain specifically the North America, Europe, Futurestep and corporate all being modified?

Yeah.

That's a good question, Chris.

If you look, North America -- well, let me first step back and say, you know, overall there was no net impact to the P&L.

We did pick up about a million six from a litigation settlement from a former acquisition we did, and that was offset by additional reserves we took on some facilities that we had previously provided for.

There were -- if you look at the swing between North America first, between the actual operating income and then the adjusted, there was actually a positive pickup in the quarter in North America for some prior facilities that we had resolved for - two facilities that we had reserved for.

So that's the difference there.

On Europe, you've got the opposite.

There are two properties in London where we felt it was necessary given kind of the current market conditions to increase the amount of reserves we had on those properties.

And the same for Futurestep.

The -- one of the two properties in London is actually a Futurestep property.

And that's the same case where we increased the reserves.

So when you look at the real estate, Chris, we've subleased now -- eliminated about 300,000 square feet of space, believe it or not, over the last 18 months.

And if you look today at the real estate, there's really, you know, four properties that we're actively working to sublease excess space.

Two are domestically and two are in London.

And that's really kind of the final yard here in terms of real estate.

Okay.

Then based on the restructuring activities taken over the last several quarters, how much cost savings on an annualized basis have you yet to realize?

That's kind of part one.

Part two, given the lingering weakness in the macro outlook, how much additional cost saving opportunities would you still see?

For the most part, the -- you know, the cost savings, the initiatives in terms of the - resulting from the restructuring have pretty much manifested themselves in the numbers.

In terms of the future, I mean, that's obviously something that we're actively looking at and I would expect that we're going to continue to streamline our processes, particularly in the corporate back office areas.

Yeah, Chris, I think the major cuts -- you know, we have been kind of the leader in the industry of adjusting our cost base.

And I think those major cuts are through, unless there's another sign of longer term economic weakness or, you know, some event that requires it.

We believe we have done a great job of cutting costs.

We are positioned in our capacity for about 30% growth.

Traditionally before the Internet bubble, our consultants have carried about 30% more assignments than they have right now.

So we think we have the capacity in the system.

You know, we have really all A and B players, you know, at the worst on the team.

We have a strong team and so we're positioned -- we're cash flow positive even after bonus accruals and we're positioning for an upturn.

And you just can't cut your way to prosperity.

So I think we are where we are for the most part.

We'll continue to streamline, take some costs out.

We're continuing to do that, but really through more processed improvement than broad level cuts.

Unless our outlook of the future changes, I think that's where we are until there's a turn.

One final follow-up, on the corporate line, in particular, in the quarter on an adjusted basis, 6.9 million was up quite a bit relative to where you've been for the last three quarters.

Was there something lumpy in there or -

Yeah.

We put some reserves in there, Chris, for a couple kind of unusual items.

But I thought it was best to reserve it.

So it was up and you'll see it go back down in this quarter.

Great.

Thanks guys.

Thank you.

Our next question comes from the line of Andrew Folnase (ph) of UBS Warburg.

Please go ahead.

Hello.

I'm Drew (inaudible) for Kelly Flynn (ph).

I was just wondering if you could detail where you think the cash balance should end out at the end of the third quarter?

Well, I think that at the end of April 30, which is our fourth quarter, I think we'll probably end at least in the mid '70s.

Could be slightly higher.

Okay.

And then also perhaps if you could detail for us perhaps in North America and in Europe the effect if any, of the holidays and, you know, if you can kind of give us an indication there of where you think your revenues would have been, you know, without the holidays perhaps?

I know it's difficult.

It's impossible to say.

I mean, it's -- I would say that December was stronger than maybe most Decembers would have been, especially given the holidays.

January often has been a very, very strong month, it probably wasn't quite as strong.

But then again with the new year's holiday really going into almost the 5th, you know, it was a shorter month.

So, you know, I look back over the years and some Decembers are up and some Januaries up, vice versa and it's hard to see much of a pattern.

Okay.

Thanks very much.

Thank you.

Ladies and gentlemen.

If you wish to ask a question, please press the one on your touch-tone phone.

Our next question comes from the line of Steve Cole (ph) of Matador Capital.

Please go ahead, sir.

Good morning, guys.

I wanted to ask two questions.

Paul, if you could speak --right in the beginning of your prepared comments, you spoke about establishing long-term scale relationships with large clients and assembling the best teams around the world to I think satisfy those relationships.

Could you give us a little bit more color in terms of how many such relationships exist?

The advantage to the client for entering such a relationship and how formalized is it, what percentage of revenues do they account for?

Then I have a brief follow-up.

Steve, it varies by client.

Some of it is proprietary.

But the goal in this industry --I mean, if you look at historically at this business, it's been a lot of one-on-one relationships of clients and people.

But what we have done is tried to institutionalize those relationships, to take accounts that operate on a global basis and give them a different value proposition.

It's to say we'll serve you globally.

Not only do we have the lead person that will really coordinate the global activities but you'll have a full-time dedicated team -- we take them through training, we put them through a different reporting mechanism, a different compensation structure for the leaders.

Our goal is really to own those clients from a search and other products that we serve perspective.

So we're going to companies that first have that attitude and you know, we're finding that, you know, the better we execute on a global basis, the more and more we win more of their work.

So we have a client for example in that program, we've probably gone from a 10% share not in our top clients, to being amongst, you know, our very largest client this year where we probably have 50% share.

I'd like to see 80% share of their global search works.

So that is the program.

We have instituted it last year, we're seeing great growth from those clients.

Great --client satisfaction is up and we're continuing to work our way at it.

We've made the program also a regional program and we're selecting the clients we want to do business with and we're trying to earn the relationship.

So they're going very, very well.

It's still early.

But I believe it's part of the change that's happening in this industry.

How do you decide, Paul, which ones to select when you talk about clients being willing - you know, about bridging this I guess idea of having a single person that has that relationship and then presumably that person if they're on that account, are they willing to expand and let other folks come in, or do they view that as their territory being infringed, or how does that work?

I mean, it's a little of both.

Some embraced it, thank goodness someone has done something to make my life better.

Others need more convincing one way or the other.

That's the way it works.

How do we pick the accounts?

We pick it from a brand and position standpoint we want to do business with.

We go through a very detailed analysis about their propensity to use search.

Some companies use less than others.

Their desire for vendor relationships that are, you know, more of a partnership and strategic than they are just a supplier.

And, you know, we analyze those and we go after them.

And some we're successful at, not everyone says great let's do it.

Some are longer term, some have come on board very, very quickly.

Last question on this.

Longer term, do you have a target that you like to cover over the course of the next few years or how do you -- you know, or how should we view success or not success in that initiative?

Well, I have some very strong internal targets we haven't published in terms of the multiplying of these relationships.

But it -- mainly because we think it's the strategic difference in how we're approaching the market.

Not just that we're doing it but how we're doing it.

So I have grown relatively quiet but we have strong strategic goals.

But, you know, the truth is in our business we'll always -- you know, it should be a balance of the global strategic relationships that we count on and local execution of companies that are regional or local that provide a lot of our revenue today that serve as training grounds for our people.

They help us keep a geographic footprint to serve.

So this won't be about being one or the other.

I think a successful organization will be both.

Last question just on bonuses.

I know, Gary, you addressed the total accrual or expected accrual at the end of the year.

One quick question just on the makeup of the things.

What percentage is tied to the individual performance versus the corporate performance today, and is that different from last year?

Well, you know, it is.

We've -- you know, we're in the process of evolving to a different kind of compensation model.

That's something that we typically haven't given out in terms of what percentage is based on the individual versus the firm.

I think we're going to keep it that way.

You know, I will say that obviously that, you know, greater than 50% is probably --you know, always going to be dear to the individual to the growth of global accounts and clients, wallet share, all of that.

We're in the middle of a transition where we had a model that was pretty much based on historically individual performance with some what I call profit modifiers to a program that's really based on firm profitability totally.

And those two contribute to it and, you know, obviously for two reasons.

One, we're transitioning and we announced it would be a three-year transition.

Secondly, obviously given what happened in the marketplace we're in a place where we'll keep and make sure our best people are paid for producing as we manage the profits.

And it's going to be a transition year for us as will next year, but there will be a much greater percentage next year based on, you know, firm profits and, you know, by the time we're back in full operating mode it will be a totally profit-based model.

But we can't switch to it this year and really accomplish what we want to accomplish.

Certainly appreciate it.

Thank you.

Thank you.

Our next question is a follow-up from the line of Chris Gutic of Morgan Stanley.

Please go ahead.

Thanks again.

A couple quick follow-ups.

Paul, can you give us a sense where the current run rate revenue from the coaching and assessment product and what you'd expect on the assessment side over the next year or two?

What kind of revenue opportunity you'd see there?

Again, that's something we haven't put out or segmented.

So I'm really -- the way we have it kind of structured in our business, I really don't want to put those numbers out right now.

I would just say that we've positioned it, we're growing.

You know, the coaching business is a -- is a strategic alliance.

The assessment business we own and run.

So, you know, even for coaching I'd have to sit there.

I don't have it offhand.

I'd have to gross up the business.

And, you know, to tell you what those real run rates are -- we have signed a couple of major contracts since last month with joint assessments in coaching which seems to be the real fit, coaching really works with assessment.

Both seven-figure contracts.

One in the Middle East region even with the impending war was interestingly signed a few weeks ago.

So as a business -- as the business develops a little bit more and becomes more significant, we'll start breaking them out.

But they're a small part in growing.

Right.

Paul, in your prepared remarks you talked of some new large contract wins and I think your comments in the past have suggested that even for large volume contracts you're not necessarily providing significant price concessions, but clearly the customers must expect some type of reduction.

As you win more of these larger contracts can you give us an update on what type of pricing terms that these customers are getting for these bulk purchases can?

Yeah.

You know, first you have to separate.

The bulk purchases or what I call the managed service contracts or almost outsourcing contracts for Futurestep business and they're based on a very different pricing model than the search models.

The search models a third of the fee of the cash comp, plus the expenses.

The new Futurestep model is actually going and being paid to management fee to be on site and then paying on a retainer basis a -- you know, an execution of the people that we're hiring.

So the -- it is very, very different.

That is a volume-based business versus a margin-based business.

And the reason is you cannot compete successfully in the middle market on one-on-one searches if that's your living.

Your competition is not offering anything.

What we've come is we've offered a brand new service that we don't think anyone is offering here and that's managed recruiting or managed outsourcing, you know, to take hundreds of people and fill positions.

So it's totally different pricing than the executive research business.

Great.

Then Gary, it looks like your interest expense was up a bit sequentially, unless I missed it in your prepared remarks, did the debt balance go up in the quarter?

I'm sorry, Chris.

What was that?

Yeah.

Your interest expense was up a bit sequentially.

I'm curious what happened with your debt balance?

The debt balance.

The debt and we have convertible debt, convertible preferred.

Nothing happened there.

We have drawn nothing under the bank lines.

Off the top of my head, Chris, I don't know.

All right.

Thanks, guys.

Thank you.

Our next question is from the line of Arnold Arsener (ph) of CJS Security.

Please go ahead.

Good morning.

A question about your sequential revenue comments.

Wouldn't you normally expect to see a good pickup in the current quarter versus the prior quarter?

Well, but you've also got, you know, November and December which are I think obviously holiday months.

And the way that the holidays fell this time, it was almost like in many parts of the world in the middle of December, people shut down for two weeks.

So that's not entirely accurate in terms of the picture you've painted.

Well, that's my point.

Wouldn't you expect to see normally a good pickup on this quarter when everybody is on all eight cylinders?

You mean quarter four?

Quarter four.

It's just that everything in the markets is very flat.

The good news after many, many quarters of sequential losses and revenue, it's clearly flattened out and I think everything obviously -- America is obviously uncertain, but it's a small piece of the business and Europe is uncertain.

I think especially with the unemployment in Germany and France.

So but the rest of the business is -- we're not -- you know, it's going down.

After many quarters of seeing drop-offs, it's clear to me that we've hit the bottom.

The question is when it picks up and I can't tell you when that happens.

When people feel comfortable enough the business is moving, they'll start recruiting again.

But they're not doing it.

You know, there's not a significant pickup right now.

I would call the outlook very flat-looking for the time being.

When you look at your revenue numbers coming in, typically as you said a third a third a third.

In the revenue guidance for the current quarter, how much of that would you call the first third?

Meaning how much of it is the end of a contract?

Well, you know, I think the backlog has been pretty stable.

I mean it's -- again, when we say that November and December, January, February are pretty flattish, you know, so are receivable, so are backlog and everything.

We don't see any upward trends.

Everything has been pretty flat.

A little more specifically, what are you seeing in technology spending at this time?

Well, it's funny, for the quarter, technology is actually up, but I would call it in from a base that's been battered.

I would say that companies are still skittish.

I think that you have companies that are -- that have delayed projects, delayed projects that are spending a little bit more.

We're moving a project forward ourselves to keep -- we think we have a very competitive -- one of our strategic advantages is our technology, so we've put a project off and are rolling it out this quarter.

And I think companies are doing that, but I don't see any long-term trend there yet either.

So very uncertain marketplace and I think that and financial services are still the toughest marketplaces out there.

Thank you.

Thank you.

And our next question is a follow-up from the line of Mark Martin of Wachovia Securities.

Please go ahead, sir.

Can you remind us how much of your European business is France and Germany as opposed to other segments?

Well, when you look at our --when you look at our European business and you look at, you know, France, Germany, Italy and the U.K., I mean those are obviously probably 70% of our business.

Of the European business.

And if you took France and Germany, Mark, I'm going off the top of my head, they're probably half or so of that 70%.

I would guess.

The U.K. is our biggest business there.

I think that when we talk about France and Germany, it isn't just the numbers there.

But Germany is very important to continental Europe.

It's a big exporter of business.

So while it's down, you know, you question what's going to happen in the rest of Europe, and that's the big uncertainty.

The U.K. economy seems to be going fine.

But they're an export economy of services very much like we are in a lot of ways.

So it's just a very uncertain fixture there.

I think Germany is the big question, Mark.

So it sounds like, you know, if we were to take the midpoint of your current guidance, I mean, the places where we'd make some adjustments would basically be predominantly in Europe and Latin America in terms of a potential for a sequential decline, is that fair?

You know, Latin America may be where it is.

It's already experienced a decline.

The partners there are amazing.

We have a lot of partners that have been there 20 years.

Mexico is doing well.

South America is struggling.

But I think they've -- you know, I think we've already booked in between the devaluation of the currencies and the down-ness of the business.

They probably are bottomed and they seem to be fighting and hanging in there.

I think Europe is the question of you may see some more sequential declines there.

I don't see them anywhere else.

Okay.

Can you talk a little bit about the -- Paul, the assessment program that you mentioned which is proprietary?

If I recall correctly, it's originated with your Futurestep effort.

Yep.

And if I recall correctly, it started with some studies at USC in terms of their -- in terms of some professors who came up with some assessment techniques.

I'm wondering is that something that you've actually started applying on the executive search area already or is it something you're going to do?

First, your memory is pretty good, Mark.

The technology was created by Futurestep where people under the old Futurestep model, which was an Internet-based business, had to take an assessment -- a test in order to register.

What we found was, you know, between our Korn/Ferry database and the Futurestep database of some two million professionals that we were able to get a large number of people who had taken the test at all levels, even CEOs of big companies, taking it out of curiosity.

What we did is using two professors from USC and a group called Decision Dynamics, were able to statistically validate certain thinking styles, decision styles and career motives that are taken place in this test against the fit for jobs with amazing statistical accuracy that people that succeeded in certain jobs and certain industries had very similar profiles.

Those were very successful.

We have actually test marketed over the last year in our search business, and this is something we've spent a lot of money on through Futurestep.

I don't think this is something that can be created, take years to recreate.

And we found the clients loved it.

You know, some are leery of assessments.

Some have tried it and some believe in it.

The organizations use it, but the success during the test marketing has been extremely positive.

So we're starting to -- at our partners meeting which was a huge success, we had people very excited.

We're rolling it out across the globe and we'll be using it as one of the legs of our search.

You have assessment that our professionals do, who are experts at it, and they interview people.

Background checks, and this will be the third leg is actually using the test as an assessment measure.

When you said it's been successful in terms of where you've rolled it out, how do you measure that success?

Is it in client acceptance or the performance of the candidates post -- post transitioning to a new position?

Well, since it's relatively new, we don't have a long-term test of saying, you know, since we've used it in search it's worked.

We clearly have a three-year history that it's worked for people who were assessed and went on to jobs.

But the clients seem to love it.

The candidates although some are leery, they all have taken it.

And we've even used it on a few CEO assignments where it's gotten to the -- you know, the soft cultural aspects of you have two or three candidates that have the skill, but who's the right person with the right characteristics to really drive the change in the company?

And even in CEO jobs, the tools become very useful and so we really measure it in the client acceptance of it.

Our acceptance in the history of the model.

It doesn't take that -- it doesn't add that much to the actual placement time, does it?

No.

We're finding it actually -- the test itself, the on-line version versus our full assessment is about 45 minutes.

What we're finding is it actually helps shorten the cycle time because we're able the get the finalist through the testing and it helps focus the interview questions and sometimes really play switch candidates which we should concentrate on more than others.

Great.

And I want to switch over to a follow-up question with regards to the operated -- the operating income for Futurestep as well as the expenses for corporate in terms of the -- what shows up as the GAAP and then the adjusted.

It looks like there's a pretty big similarity between the difference in the loss of Futurestep versus the increase in -- in other words, the reduction in the loss of Futurestep relative to the increase in the corporate expense.

Are those related, Gary?

No.

The Futurestep is due to the additional reserves I thought were necessary on a property in London that was leased several years ago for Futurestep.

If you look at the quarter here for Futurestep, the cash burn EBITDA was 815,000 negative for the quarter.

Operating earnings was negative 1.3 million.

So we're continuing to work on that with the help of our colleagues around the world.

In terms of the corporate, you know, those two were not linked.

We put up some reserves in the quarter at the corporate level that I thought were necessary for a couple of nonrecurring items.

So what you'll see next quarter is that that corporate expense will be lower by a million bucks or so.

Great.

Thank you.

Thank you.

And our next question comes from the line of Dan Ditler (ph) of Lehman Brothers.

Good morning.

A couple of questions.

First is regarding the Futurestep business.

Obviously, with Futurestep Korn/Ferry probably has a larger reliance on the middle market than possibly in the entire company's history.

I wanted to gauge your acceptance to the product, and if it still remains strategic for you to grow the business?

Well, let me first on the numbers.

It's again a bit of a transformation from the Futurestep two or three years ago to today.

If you look in this quarter like I said, the cash burn was 800,000 which clearly is not acceptable, but it certainly is much better than it's been in the past.

If you look on the challenges of that business, overall -- actually Asia Pacific Futurestep was profitable in the quarter.

North America was almost profitable.

And the burn really arose from a very difficult situation in Europe.

We're in about 12 countries there and when you actually look at Europe, nine of those countries are profitable, but with the larger economies there, you know with 10 or 11% unemployment in Germany and France, it's a difficult situation.

I'd say our reliance on Futurestep -- I don't think the business is a larger percentage than it was a year or two years ago.

It's about the same percentage, but I think the business is fundamentally different.

Bringing Bob McNabb was our signal to the marketplace that it's going to change.

We clearly are replacing a lot of single individual searches with large contracts.

That's the transformation of the business as we make that switch.

Again, Asia, you know, and North America we have seen the results and, you know, through Bob's first year here we had him focus just on Asia and North America just because of -- there's only so much you can cover at once.

And now he is getting in and working with Europe.

So we expect that transformation to continue there, but the European markets are a tough market right now.

But Bob's made progress even in the very, very tough market in the U.S. and Asia.

Understandable.

So would it be fair to say that strategically speaking Korn/Ferry is committed to continuing to grow the lower end of the search market?

No.

I'd say that we are committed to doing a number of things.

One is being the very best executive search and growing it.

Secondly is taking out a number of products and services including management assessment and coaching and managed services, middle management outsourcing, which is really what Futurestep's business now is.

Right.

Okay.

Great.

Thank you very much.

Thank you.

And ladies and gentlemen, if there are any additional questions or comments, we ask that you press the one at this time.

Operator, I think we're at the end of the hour now anyway so I'd like to thank everybody for joining the call.

Obviously, it's no surprise, it's a tough and uncertain economic environment.

But because we took cost cutting early, I'll tell you our organization -- we just had a great partners meeting and the whole meeting was focused around, you know, taking market share, focusing on major accounts and being very strategic about the future.

I think we had a very positive, upbeat meeting in a very, very tough economy.

So we'll continue to manage costs, but our focus is on generating revenue as it should be this time.

So thank you and we'll talk to you in the next call.

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