Korn Ferry (KFY) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Korn/Ferry International conference call.

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

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

As a reminder, this conference is being recorded today, Tuesday, March 7th, 2006.

Before I turn the call over to our host Mr. Paul C. Reilly, Chairman and CEO, let me first read a cautionary statement to the investors.

Certain statements made in the presentation today will consist of forward-looking statements within the meaning of the Private Securities Legislation (sic) Reform Act of 1995.

Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, visitors are cautioned not to place undue reliance on such statements.

Actual results in future periods may differ materially from those currently expected or desired, because of a number of risks and uncertainties which are beyond the Company's control.

Additional information concerning such risks and uncertainties can be found in the Company's Annual Report for fiscal 2005.

With that, I will turn the call over to Mr. Reilly.

Please go ahead, sir.

Great.

Good morning.

And thank you all for joining us.

This morning, we' wee pleased to report the results of our third quarter for fiscal year 2006.

During the quarter, fee revenue rose 3% sequentially, and nearly 11% over the prior year, to $129.6 million.

EPS rose $0.02 to $0.27 per share, excluding a 1-time loss recovery.

The good news is that we're seeing sustained hiring activity across every region and sector, with surprising strength in North America, which was up 16% year-over-year.

The job market is being driven by strong corporate profitability and a continued CEO confidence.

Last week, the Business Roundtable issued its quarterly CEO Economic Outlook Index.

And they report the index had the second highest reading in its 3 year history. 85% of the Business Roundtable members said they expect higher sales in the next 6 months.

And more importantly for our business, 43% of their members expect to add jobs in the next 6 months.

These statistics reflect the conversation I had with a broad spectrum of CEOs in January at the World Economic Forum in Davos, where I noticed a dramatic change in attitude, with regard to talent. 2 years ago the mood was cautious with hiring, and many waiting to see what was going to happen.

Last year, CEOs were adding head count gradually, in line with recovering profits.

And this year, the consensus was that acquiring and keeping good talent was the most challenging thing they had to face in the upcoming years.

This bodes well for Korn/Ferry.

We conducted an internal client survey last fall, which found that while our brand is most associated with Executive Search, the majority of our clients would also be open to acquiring other talent management services from us.

In other words, our brand gives us permission to provide a wider array of services, which validates our long-term strategy.

In line with the strategy, we have taken advantage of the current robust market to continue invest heavily, not only in Executive Search, but all of our non-search offerings.

In the last quarter, Futurestep opened new offices in Madrid and New Delhi, and next quarter we are scheduled to open in Germany and Czech Republic.

They also launched a new technology platform called Futuresearch, which is designed to support the expanding outsource recruiting business.

In our Leadership Development Services, we added professional staff in Shanghai, Los Angeles, New York, and Buenos Aires last quarter to expand our global client coverage.

In Executive Search, our global consultant head count is up 10%, where we've added 38 partners, year-to-date. 20 in North America, 10 in Europe, and 8 in Asia, where we expect to see continued solid growth.

I think it's important to note, that even with the addition of these new partners, our revenue per consultant continued to average over $1 million.

From a sector perspective, our global industrial markets was up 11% sequentially, fueled primarily by North America and Europe.

And the consumer markets rose 4% sequentially globally, again driven by North America and Europe.

Of particular note this quarter, were the signings of 2 different $1 million management assessment projects and the strong recovery of our Latin American operations, which were up 20% sequentially.

Futurestep continues to see unabated demand for its recruitment process outsourcing services.

Our focus on Futurestep now, is to bolster its infrastructure, in order to service global demand.

This business that grew 50% last year, is up another 32% in the current fiscal year.

We continue to invest in all of our business, with our head count up 190 employees across the firm year-to-date.

On a final note, I'd like to add that 2005 came to a close with our competitors announcing year-end results.

And by our industry sources, it is apparent that Korn/Ferry has strengthened its position as the number 1 firm in terms of worldwide market share, both in terms of percentage growth, and absolute growth in all of our businesses.

I am proud of our worldwide Management Team for this accomplishment.

As we look forward, we are optimistic about the year ahead.

I'd like to turn things now over to Gary Burnison, our Chief Operating Officer and Chief Financial Officer.

Gary?

Thanks, Paul.

And good morning, everyone.

We're pleased to report another quarter of growth for Korn/Ferry .

In fact, our recently completed quarter, represents 9 out of 10 quarters of improving top line performance, fueled by all of our businesses.

Fee revenue grew nearly 3% sequentially and 11% year-over-year, reaching $129.6 million, and with our great operation in Mexico, 134 million.

We have continued to make investments in all of our businesses to ensure unsurpassed client service around the world.

Net income, excluding a 1-time benefit, reached $12.1 million in the quarter, an all time record for Korn/Ferry .

Earnings per share, excluding the 1-time benefit, improved $0.02 sequentially, to $0.27 per share.

Including this 1-time benefit, which was a partial loss recovery of 4.5 million associated with the sale of an asset previously written-off, earnings per share were $0.37.

Our operating margin was 14.4%.

Our cash balance improved almost 44 million sequentially, reaching approximately $232 million.

We ended the quarter with 436 Executive Search consultants, while our revenue per consultant was flat sequentially, at an annualized rate of slightly over $1 million per consultant.

I will now review the business segments, starting with Executive Recruiting, where fee revenue was almost $112 million, and up 2.7 million or 2.5% sequentially, and up 9.1 million or almost 9% year-over-year.

Confirmation then revenue were up in 3 out of our 4 operating regions.

In North America, fee revenue reached $64.4 million, an improvement of 2.6% sequentially, and 16.3% year-over-year.

In Europe, fee revenue improved 1.1 million, or 3.9% sequentially, reaching 28.9 million.

Revenue grew the fastest sequentially in France, Germany, and The Netherlands.

Asia Pacific's quarter 3 fee revenue declined 760,000 sequentially, or 5.1%, but was up 6.1% year-over-year.

Underlying market conditions remain strong in Asia Pacific, as the sequential revenue decline is primarily attributable to January holiday seasonality.

Latin America fee revenue improved to 4.4 million, and was up 20% sequentially, and over 52% year-over-year, with the majority of this growth coming from Brazil.

The consolidated Executive Recruiting operating margin was 22%.

Now turning to Futurestep, fee revenue improved 1.1 million or 6.7% sequentially.

Compared to last year, Futurestep's fee revenue was up over 25%.

Fee revenue in North America and Europe were up sequentially, while Asia Pacific fee revenue was relatively flat, again, primarily due to holiday seasonality.

Futurestep's operating earnings and margins slipped 90 basis points sequentially to 7.8%, reflecting the continued investment in execution infrastructure.

Let me now comment on our fourth quarter outlook.

Assuming constant FX rates, we estimate fee revenue will likely range from 131 to 136 million, and diluted EPS will likely range from $0.27 to $0.31 per share.

Including a forecasted 1-time tax benefit to be recognized in the fourth quarter, diluted EPS will likely range from $0.37 to $0.45 per share.

That concludes our remarks.

I will now turn it over to Patty, so we can begin taking your questions.

[OPERATOR INSTRUCTIONS] Michel Morin, Merrill Lynch.

A couple of questions.

First, I was wondering, you made that comment about the G&A expense in your press release, talking about there fewer meetings.

So just wanted to understand kind of what happened there, and whether or not that level of G&A spending is something that we should view as sustainable.

Or maybe if there were maybe some expenses that have been delayed and pushed back a bit.

And then secondly, can you comment on the buyback, and any progress you have made there, in buying back any shares, either during the quarter, or to date in the current quarter?

Thank you.

Well, in terms of the the G&A, we continue to operate all of the businesses very, very lean.

And we're obviously -- there is a balance between investing for long-term growth, and delivering leverage to the bottom line.

Year-to-date, the G&A expense is about 18%.

Last year it was 18.7% for all of our last fiscal year.

There is absolutely nothing that we're pushing off or delaying, or anything like that.

However, in our second quarter, last quarter, we did have a series of global partner meetings, and the G&A was unusually higher last quarter.

But we continue to try to eke out as many efficiencies as we can.

In terms of the share buyback, from the time we announced it through today, we have repurchased about $1 million of stock.

Mike, I wanted to say that I think that when Gary talked about the meetings being down because of unusual activity last year, I mean we're still investing.

We have a record amount of training being held.

Our operations are very, very solid.

We just had a 1-time blip last year, because we had 3 big regional meetings that fell in -- .

Right.

Okay, and then the consultant head count of about 10%, is that the kind of number that you would feel comfortable looking out over the next year or 2?

Well, when you say 10, you mean 10% growth?

Yes.

We don't publicly disclose that.

We again, are both, from a top down and bottoms up perspective, strategically trying to round out our own talent offering, and we're aggressively bringing talent into the firm.

I think we see, Mike, as we've continued to look over the last few years, to be recruiting.

We continue to around the globe, just coming back from Asia and Europe, we have a lot of people in the pipeline.

But again, we have to get the right people in.

So we don't use a quota system.

We make sure that they're exceptional people, and if we can convince them this is the right place for them, we bring them in, both from industry and from competition.

Or we, if we can't find the right people, we don't.

We've just been very fortunate over the last couple of years to attract a lot of high-quality people to add to our existing high-quality people.

Great, thank you.

Clint Fendley, Wachovia Securities.

Paul, the fees per average assignment were down sequentially for the first time here in a while.

Have you seen any slow down or pause in your Financial Services practice?

And could you also discuss the seasonality that you might expect for this vertical?

I think that first, if you look year-over-year, our fees are up.

And we had a lot of confirmations last quarter.

And generally when you have that, you get a little bit of averaging down and it doesn't include the upticks when we make placements over.

So I think if you look at the growth of average fees, they've been growing for the least 2 years.

And I think what you are going to see -- what you saw this quarter, was an anomaly.

But backlog looks very strong.

Fee revenue looks very, very strong, all over the globe.

So I think we will see continued -- we have a focus on moving average fees up slowly, with the market, and we continue-- expect to continue to do that.

With seasonality, I think you have seen what we really had is a third quarter, which often can be a slow quarter, because of December in the U.S. and Europe, and January in Asia with Chinese New Year, was actually a pretty good quarter.

I think you have seen results from other companies, and our service business being off a little bit in the quarter, we had a very strong quarter.

So we're very pleased with the results, and I think it shows the strength of our business.

Any quarter is unpredictable for us.

Summer, and because of Europe, and the third quarter because of all the holidays.

And then the Financial Services business is still very, very strong, Clint, around the world.

Okay.

And you have continued to add, obviously, to your head count here.

Can you talk about your expectations as to the timing for the fee contribution, as well as the near-term impact on margins?

I think you're seeing the margins -- baked into the margins.

I'm very pleased that with our head count, which we have now been aggressive, if you look at our growth over the last year, been aggressively adding head count.

And what we don't want to do, is short change the business.

We could have slowed down head count for lots of profitability, but we said we're investing in what we see as still a very strong growth opportunity in Executive Search, and particularly in Futurestep and our Leadership businesses.

So, very often those partners take a year-plus to get up to speed.

We've been very fortunate that they've been doing well.

And I think we'll see that we'll continue to invest as long as we see opportunity in those businesses.

In Futurestep, we're focusing -- you have seen aggressive hiring.

We're really focusing on delivery, because there is so much demand out there.

But we have to make sure that we're able to deliver against the expectation of our clients.

We can always ramp that down and profitability will go up.

But that hasn't been our game plan right now.

We'll continue to invest while we see there are needs.

How much harder is it to get experienced hires from the industry, in this current market?

Well, you know, it's definitely harder in up markets.

We continue to not pay guarantees.

We continue to recruit people that want to be here, because they want to be here.

So we feel very fortunate so far.

But obviously, there are a lot of recruits that will say, "yes, we may think this is a better platform or place, but I'm doing pretty well right now, I don't know if I want to move."

So, you get a little bit more of that in up markets.

So even though its more difficult, and we see it being harder, the results have still been pretty good.

So, maybe we're fighting harder or working harder at it, but it is more difficult.

It's more difficult for our clients to track people, which is good for our business.

And we see the same result, but so far, the results have been good.

And we continue to have a good pipeline.

And could you update us on your thoughts as to a smaller acquisition for Futurestep, in order to strengthen its infrastructure here?

Well, as you know, we have looked, and we will continue to look for ways to scale all of our businesses.

The Futurestep business, we honestly believe that that is a multi-hundred million dollar opportunity for us.

The middle management recruiting market is at least 10 to $15 billion globally.

Customers don't have great solutions, in terms of global providers.

As Paul said, that's a business that's increased 50% a year, over the last several years, under Bob McNabb's leadership.

And we are quiet bullish strategically on that business, and how it fits in with our overall vision of being a diversified HR solutions provider.

We are looking at ways to scale that business, as well as our Leadership Development business.

We certainly -- there is nothing in the works and the plans right now.

But we continually look for ways to do that.

And the key there is finding the right leverage fit.

There are lots of things to acquire.

But if we made that kind of move, it would have to have a good leveragable fit and cultural fit into our businesses.

So we will continue to look, and if we find the thing, we'll act.

And if we don't, we'll continue to grow organically with the results -- good results we've had today.

And I think over the last 27 months, if you look at the flagship business, Executive Recruiting, we have probably brought in 116 partners.

We have 436 or so, today, and as we looked at talent, the number 1 -- one of the number 1 considerations we look for is cultural fit.

And it's the same thing in terms of any kind of investment we would make.

Okay.

And then finally, Gary, here, could you talk about any other investments you might have on your balance sheet, similar to the gain that you had this quarter?

No.

We don't.

That was an investment that was made several years ago, right after the Company went public.

We wrote that investment off completely.

It would be hard for me to imagine that we have others where there would be that kind of loss recovery.

I think that's really the only one of any kind of material significance, Clint.

Okay, thank you.

Kelly Flynn, UBS.

Thanks, a couple of questions.

Just on Europe, when you touched on the sequential growth rate and cited some improvement in particular countries, but it was pretty weak from a year-over-year growth perspective.

Can you give a little more color on that?

And Paul, just interested in your general macro comments.

You mentioned being in Davos.

What is your general view on Europe?

Most of the data points come out of France and Germany, suggesting that they are picking up pretty nicely.

Are you feeling what you're hearing from customers is consistent with that?

Thanks.

I will give you the general overview, and I'll let Gary give you a little bit of the numbers.

But, I know Kelly, you're always interested in the European numbers.

France continues to be surprisingly strong for us.

And I just -- you look at the internal economy numbers.

And I can't tell you -- I guess it just shows I don't understand economics.

But it's a strong business, it continues to grow.

It's been solid.

And despite its internal unemployment rates and growth rates, it continues to grow.

Probably part of it being an energy neutral country.

But we've had great result there.

Germany, although the results lagged a little bit, they have picked up most recently.

The positive -- it's amazing how positive German CEOs are.

And I've always said I don't quite understand it, given the economics.

And some of you look at the employment -- you look at the demographics and the aging and the issues in Germany.

But since the elections, even though they weren't as smooth as they hoped, German CEOs seem very, very optimistic in their business.

And our business is picking up.

And it's the number 1 consulting market, if you look at the big consulting firms, the McKenzie, Bain, BCG.

Munich is their first or second office for 2 of them, and largest in the world.

There seems to be a interest in services, and those 2 markets -- now broadly, I think Europe has been strong.

And we're seeing a resurgence in it again.

We had a very strong December.

January is off a little bit.

But Europe, the holidays are always more up and down.

And the start into the quarter, it looks very, very solid.

So, Gary, I don't know if you want to share any particular numbers or -- ?

Well , I think that number 1, you need -- our second fiscal quarter is a big holiday time in Europe.

So when you look at our second quarter, which ended in October, both France and Germany were down considerably, number 1.

And so, when you look at the rebound in our quarter 3 which ended in January, part of that rebounded -- part of the rebound reflected the seasonality that was present in our second quarter.

The other thing that is impacting the top line comparisons a little bit, is the FX.

The negative variance in terms of FX rates.

And so that masks some otherwise real growth as well.

And then finally, if you recall last year, in both our third and fourth quarters in Europe, we had several very, very large engagements, which drove up the numbers in both those quarters.

I think the business is incredibly healthy.

It's operating very, very profitably, and we're bullish about the future there.

Do you have the constant currency growth rate, as you calculate it?

I don't, right off the top of my head, Kelly.

Okay.

No problem.

And then on the tax rate, I know that the charge kind of screws things up -- I mean the gain rather.

But it looked like even X that, it was lower than what it was in the second quarter.

What do you expect -- is that true?

And then what do you expect your tax rate is going to look like in the final quarter?

I think it may have been 100 basis points or so.

But I think X that item, Kelly, it was probably 36ish.

Yes, we were calculating 35, but yes.

But if I recall, we still for next year we plan on close to 40%.

That's what we're planning for, to the extent that we can be better in terms of our tax planning strategy, that's great.

But that's what we're planning on.

Okay.

And then just one final one, kind of following-up on the questions about whether or not it's getting more competitive on the hiring front for you.

Can you talk about just the comp ratio, maybe sort of generally what you're expecting for the fourth quarter?

And I think Gary, since you have been onboard, you have kind of had some thoughts that have evolved about what percentage that ratio should settle out at.

Could you just kind of update us on your views on sort of longer-term where that should be?

And whether or not that view has changed as a result of things getting a little more competitive?

Thanks.

Well, as part of the strategy that we have, we're trying to create a diversified HR solutions firm.

And to the extent that we're successful with that, that will impact our comp ratios.

Today, the non-executive search part of our business represents about 16%.

We would like to more than double that over the next 3 years.

To the extent that we can do that, particularly with the outsourced solutions subsidiary we have, Futurestep, the comp ratios in that business, we think we can drive down.

So some of the answer to your question, Kelly, depends on whether whether we can pull off the vision and the strategy here, which we think we can.

We do think with the Futurestep business, it's a multi-hundred million dollar opportunity.

If you look last year, the comp ratio for the firm was about 65%, or so.

We're probably looking this year to settle in, it will probably be around 66%.

Something like that.

I would think that long-term, we can keep the comp ratio at that level.

But that again, assumes that we can drive the non-executive search part of our businesses.

I think actually, Kelly, if you took the business today, and steady-stated it.

You took out the new hires, or you brought the hires down to replacement mode, versus a growth mode, you wouldn't see that percentage going up, it'd probably be going down a little bit.

We have not been paying more for people.

The market for us has not been such that we have had to -- it hasn't been what is happening in investment banking.

So I think that actually, that even the little creep up you're seeing is just aggressive hiring getting into that a little bit ahead of revenue.

I don't see anything in the search business that's saying that the pure cost of recruiting is going up.

I guess if the market gets more volatile, and that could happen, but I also think that you would get corresponding growth and fee revenue.

Our clients, more and more, are using Search.

And I think as the market tightens, they will use Search more and more.

So I think we can control that percentage.

That's a great point.

But actually -- well, Gary, but what you said.

You said you think you can keep the comp ratio the same, assuming you're able to execute on the goal of increasing your other services as a percentage of sales.

That does imply that you think the Search ratio will go up.

Is that fair or -- ?

No, I mean, I don't know if that's the case or not.

Okay.

All right.

We continue to -- we try to create a culture here, of being a great, premier career destination.

We try to reward our colleagues around the world.

And we have changed the comp system, clearly, over the last 4 years to reward not only what is produced, but how it's produced.

But I don't see that kind of pressure in the business.

We certainly don't see it today.

Okay, great.

Thank you very much.

Mark Marcon, William Blair & Co.

I joined a new firm.

It's Mark Marcon from R.W. Baird.

Hi, Mark.

Congratulations. [laughter]

Several questions, and I apologize in advance, I'm on the road.

So I missed a couple of the prepared remarks.

Can you discuss a little bit, how you feel you're capacity is, among your established consultants.

So if we take out the people that have been added in the last 6 months, how much excess capacity do you have with your current consultant base?

Well, Mark, I think it's hard to take out the people we've added, as part of that [inaudible].

I just meant in terms of your established producers.

Do they still have room to go up, or are they kind of tapped out at this point?

I think there is some room.

Obviously -- I mean, there are people that are busy to the gills, and there are people that I think have room.

So on average, we still have room.

The reason we've been adding, is because we think that we need -- we want to have the capacity part of our success over the last couple of years, is been we've been good at adding capacity in advance, so that we're not tapped out.

And we will continue to do that.

So I think we have capacity in the system.

I think we need to continue to recruit for the market activity that is apparent.

And I think if we stopped recruiting, we would -- if you're froze it today, there is some room for capacity.

But at some point in a year, we would probably fill it up.

So we'll continue to recruit for market opportunity.

Okay.

And as we think about the different regions and kind of the outlook.

I was wondering, can you breakdown your overall revenue guidance, just in terms of the areas that you would expect to see the strongest growth?

I would imagine you're probably looking at something similar to what you have seen in the second and the third quarter in terms of North America, and Asia-Pac continues to be pretty strong on a same currency basis.

Is that kind of the way that you're seeing it?

Or are you expecting any meaningful shifts, in terms of the trends that we've [inaudible] in the regions?

If you just look at backlog, I would say that all 3 regions are doing well and in good shape.

So we expect, if you look at the growth in our guidance over third and fourth quarter, the ranges that all of the regions will contribute to it.

And I wish we were scientific to know which countries and every month, what they would produce.

Sure.

But I will say, we do not see a weakness in any of our businesses.

We've -- the 1 area that was probably down for a little while, was Germany as an economy.

But it's coming back up in numbers.

And I don't see a place where I can tell you that we don't see improvement, or an area of the world we're not worried about right now, in terms of its performance and capacity.

So again, we've been investing, and I will tell you, the numbers -- we've been investing ahead of the curve.

We've added a number of senior client partners in Shanghai, where we're by far the market dominant firm.

And we're adding resources there, and my last trip, we were interviewing a bunch of people.

And it seems like everywhere we go, if we get good people, the business grows.

So I don't see something that we're particularly worried about in terms of performance.

I think if you had to bet, you would say the North America business and the Asia economies are steadier.

You'd make a bigger bet on them, just on a beta, than you would in Europe, just because it's a little more uncertain.

But the European numbers look very, very good.

And the U.K. was fairly steady, as well?

Yes, I think the U.K. has had good results.

And it's a big Financial Services market, so you will get, because of contracts, big up and downs, because we do get big assignments.

So that impacts it a little bit.

But I think if you took a trend line, it's been steady.

Great.

And then as it relates to Europe, you were probably up by about 1% on a same FX basis, does that sound about right?

I don't know, Mark, I will check that.

If you've got another question, I'll -- .

Okay.

All right.

Great.

And with regards to Futurestep, how is the initiative going?

I know it's been a big push internally to get your existing Executive Search consultants to help to cross-sell Futurestep.

How is that initiative going?

Are you seeing results from that?

And can you talk a little bit about what sort of trends we should expect out of Futurestep, because you have obviously been making investments there.

The spend has gone up.

At what point do the revenues -- and obviously they've been quiet strong.

But it looks like the expense growth has outpaced revenues here in the short-term.

When will we see a catch-up from that?

Mark, I think that the simple answer is yes.

There is much more acceptance of Futurestep, and there are a lot of advocates in the Executive Search partners for Futurestep.

And like any other multiproduct firm, you can't say it's 100%, but we're very pleased with a lot of partners taking the lead on that.

Especially in our major accounts, where it happened.

The issue for Futurestep right now is a delivery issue.

We have been building up, because there is such huge demand, that frankly, no firm can fill.

We think we're a leader in our space.

And so our focus has been to add resources so that we can execute.

And frankly, we have turned down some work, just because of capacity.

We want to make sure we can deliver.

So the result is a couple of quarters ago, we said what we're going to do is invest, hire people.

We've done that.

We're training them.

And I don't think there is an issue with the market.

In fact, the market continues to be bigger and grows more, and it's a huge need.

So we're focusing on delivery.

And my guess is we will do that for a few more quarters before we really unleash it.

We have continued to sign some great deals, and we're just really focused on getting enough backlog and experience to be able to execute other deals before we sign up clients.

So I still think we have got a couple of quarters before you're going to see rises back to margins.

It's a very profitable business.

We just want to be able to go after the very big, complex global outsourcing arrangements.

And we have to be able to have the capacity to do that around the world.

Is the pricing for those big, complex global ones as attractive as the deals that you have done [inaudible]?

Yes.

I think the pricing has been very good.

I think the issue for companies is just the execution and delivery.

So, the pricing and the margins of the contracts themselves have been very solid.

The only -- the pressure you're seeing on margins is just on hiring, with the number of people we brought into that business in a very short period of time.

That's what's impacting the margin.

How many people have you brought into Futurestep?

This year we have probably brought in about 70 or so people, Mark.

We're close to 370, something like that.

In terms of your question, some quick math that hopefully we've counted this right.

But with FX, the European business, year-over-year, was down a little over 7%.

Without the FX, it was actually up year-over-year, a little over 1%.

Yes.

Okay, that's what I thought.

Your math was absolutely correct.

How about that.

In terms of -- so it sound like in terms of Futurestep, by the time that the second quarter ends up fitting, that's probably when we should start seeing a bit of a ramp.

I'm talking about your second fiscal quarter, we might actually see the employment of this capacity build.

When revenue starts catching capacity.

That's the only market I will tell you, if the market conditions tend to be as strong, we'll continue to hire and invest.

I just think that's such a great long-term business And so I'm not going to -- I would say again, steady state, that maybe accurate.

But we're not going to -- we're going to make sure we staff for the long-term growth.

And when business is up and we're short again, we'll continue to invest.

So, and I think it's a great strategic business for us.

We can get the margins back easy, by just freezing the hiring.

But we're not going to do that.

Or slowing down the hiring, at this point.

Okay great, and then last question.

Just on the share buyback, you still have quite a bit to go.

Any reason why you didn't buy back more?

Well we purposely wanted to go at it in a rather measured pace.

We've looked at some other competitors and the like, and how they went about it.

And I think we were deliberate, and as we first announced, that we want to be quiet measured about how we did it.

Okay great.

Thank you very much, and congratulations on the progress this year.

Tobey Sommer, Suntrust Robinson Humphrey.

This is actually Jack [inaudible] in for Toby this morning.

I was just wondering if you could give us a little more color on the supplies?

You look at the new consultants, including the split between those with Search experience from industry, as well as what you have in terms of internal promotions?

Well, the internal promotions we do once per year.

And I'm going absolutely off the top of my head, but I want to say we promoted 15 to 20 partners last year.

I want to say again, that's a year ago.

We're actually going through our promotions process again as we speak, right now.

So we'll see what it will be over the next few months.

In terms of the ratios of new consultants, it's about 50/50 in terms of those from other search firms, and those from -- that have broader operating experience right out of industry.

The industry piece has continued to grow and so as we have expanded the markets and -- the people we have gotten from industry feel very lucky.

They have actually surprised us how quick they have come up.

So that 50/50 is the recruiting percentage.

That would exclude our promotions.

But every year -- at the end of every year, we go through 2 things.

We do have people that are -- go through the system, that we counsel, and we have people that promoted internally.

And that's the cycle we go through at every year-end at bonus time.

Great.

Thank you very much.

Ty Govatos, C.L.

King & Associates.

A couple of small questions.

The bonus accruals in the recent quarter?

The bonus accrual, Ty, was almost $25 million.

Okay, some additional questions trying to track down the European operations.

You said you had some fairly large engagements last year in the third and fourth quarter.

But the year-to-year comparison, the third quarter, the operating profits seemed way up, vis-a-vis the first, second and the fourth quarters.

Was there anything else in there besides any major contracts?

No, not off the top of my head, Ty.

As you ask that question, I can't think of anything that was particularly unusually large.

Okay, the other thing, and I didn't quite get this, and I know you mentioned it.

Of the 4 million in currency translations on top line, about 3 million were against Europe?

Right.

That's all I had.

Thanks again.

[OPERATOR INSTRUCTIONS]

Well great, if there is no more questions.

I appreciate everybody -- .

You actually do have 1 further question.

Okay, we'll take 1 more question.

Mark Marcon, Robert W. Baird.

Paul and Gary, South America.

I know it's small, but it's been tremendous lately.

What do you attribute that to?

It is a number of factors.

We've had new leadership, we recruited a few years ago.

We had a series of partners retiring, who were very senior.

So we have been recruiting against the retirements, as they went out of place.

And we did that during a downturn in the South America economies as a whole.

And again, our timing has been pretty good.

We brought in great new people, and the markets recovered.

Both.

And again, the timing of bringing the people in before, and getting them up to speed with us.

And then the market turning up.

So, it's both more capacity against a better market, and mainly in Brazil.

I will tell you, throughout Latin America, we have a tremendous franchise.

When you include Mexico, to look at all of Latin America, it's really quite impressive, Mark.

That's great.

And in terms of after you pay out your bonuses in the first fiscal quarter of '07, how much cash, excluding the impact of any acquisition that you might make, how much cash would you anticipate having?

And let's assume that you're not buying back any stock.

Yes.

I would probably say it's 170 million or so, Mark.

Terrific, thank you very much.

Great.

Well, once again, we'd like to thank you all.

We're very optimistic about the future, and we're working hard every day to continue to deliver results.

We're optimistic about the fourth quarter, but don't take it for granted.

So we will continue to invest in all of our businesses, and we appreciate your support and patience.

So, with that, Patty, I'll turn it over to you for the replay information.

Thank you, sir.

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