Korn Ferry (KFY) 2006 Q4 法說會逐字稿

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  • Operator

  • 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 will conduct a question-and-answer session.

  • As a reminder, this conference is being recorded.

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

  • Certain statements made in the presentation today 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, investors 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'll turn the call over to Mr. Reilly.

  • Please go ahead, Mr. Reilly.

  • Paul Reilly - Chairman, CEO

  • Thank you, Julie, and good morning, everyone and thank you for joining us a little earlier this time as we report from our board meeting here in Chicago.

  • Last year at this time, I had the opportunity to tell you that Korn/Ferry had just completed an impressive fourth quarter and for the year had obtained the highest profits in our firm's history.

  • Today I'm pleased to report that once again we have surpassed our records from last year and have reached a new level of profitability.

  • Unquestionably, fiscal year '06 was a strong year for Korn/Ferry.

  • In terms of revenue, our performance improved 15.6% above last year at 523 million.

  • I'm further pleased to say that we recorded 76 million in operating earnings.

  • With an EPS of $1.09 which excludes the one-time benefits, we achieved a 21% improvement in profitability over last year and have obtained the highest level of net profits in the firm's 36.5-year history.

  • Over the past several months, we have made significant progress against our $50 million stock repurchase program.

  • Moving forward, we will continue to create further positive shareholder value in addition to remaining financially sound.

  • Gary Burnison will go into further detail on our repurchase program in his remarks.

  • In terms of the fourth quarter, fee revenue reached an impressive 145.3 million, up 12% sequentially.

  • Operating earnings in the core business search totaled 29.4 million and despite commentary to the contrary, we have once again improved our margins to a near record 23.2%.

  • We are, however, disappointed to report that after 11 quarters of consecutive revenue and seven straight quarters of profitability, Futurestep posted a $1.4 million loss in the fourth quarter due primarily to several one-time write-offs of receivables as well as personnel costs and continued infrastructure investments.

  • Futurestep did grow 30% for the year and turned a profit for the full-year.

  • With the outsourcing trend still in high demand, Futurestep continues to hold enormous promise going forward.

  • I am confident that Futurestep will continue to be a significant, profitable engine for the firm in 2007.

  • Despite the FutureStep loss, quarterly EPS came in at a record $0.31, up $0.04 from the third quarter.

  • Fiscal '06 was a terrific year of growth across each of our seven major executive search industry sectors, with three markets posting double-digit growth rates.

  • Resulting from heavy demand from manufacturing, energy, defense and others, our industrial market led the way at 29% over last year.

  • Financial services recorded an impressive 23% improvement, fueled in large part by commercial investment banking, asset management and wealth and insurance and risk management.

  • Life sciences was up 13%.

  • From a geographical perspective we experienced significant growth across every region.

  • The demand for talent was driven primarily by strong North American activity up 15%, Asia-Pacific grew 13%, and Latin America posted an amazing 45% year-over-year improvement.

  • Strong fourth quarter confirmations [and] overall positive year-end uptick activity helped drive our record performance.

  • In addition, many of our internal key metrics also rose during the year.

  • Most notably partner recruitment and productivity were up significantly.

  • Gary Burnison will add more color in his comments.

  • For the coming year, we are looking for continued growth in Asia and all of our regions.

  • Asia is currently operating at all-time highs.

  • We expect that China and India will remain strong and continue to drive the region.

  • Due to the combination of long-term demographic trends, along with the robust economy, we believe that the cycle for global organizational expansion, retention and development will continue for the foreseeable future.

  • Now at three [three] straight months of U.S. job growth, the U.S. economy has added over 5.3 million jobs.

  • Unemployment has fallen from 6.1% to 4.6 in the U.S. during this period.

  • The demand for talent is rapidly approaching levels not seen since the dot com days.

  • Talent issues are at the top of mind with CEOs I speak to every day.

  • Attracting and developing people is what keeps them up at night, more so than attracting new companies or developing new products.

  • With the Fortune 500 anticipating they will lose half of their senior management to retirement in the next five years, we are extremely well positioned to help clients not only attain new talent, but through Leadership Development Solutions also help clients develop and retain their workforces.

  • During fiscal '06, we made significant investment in our Leadership Development Solutions.

  • In recent months, we have spent a good deal of time recruiting highly specialized consultants with niche (indiscernible) backgrounds in organizational development, executive compensation and HR consulting.

  • As of today we now have 37 dedicated consultants in our LDS group.

  • Whether it be a management assessment project, an executive compensation engagement or a newly hired CEO coaching assignment, our LDS team interfaces at the highest levels of organizations.

  • Not only does this make Leadership Development Solutions a strong growth business for the firm, but also supports our cross-selling efforts as well as our up market and talent management brand extensions.

  • Just this past week, we were named by Business Week as one of their Top 100 Hottest Growth companies, and we are honored by this distinction.

  • As I look ahead to this new fiscal year, we will continue to follow our strategy to achieve superior results.

  • By focusing on growing market share, providing unparalleled client service, offering a variety of unique and compelling solutions, and recruiting and retaining the most qualified and dynamic professionals in the industry, I am certain that Korn/Ferry will once again not only lead the industry, but also set a new standard.

  • I would like to take this opportunity to personally thank our board directors for the year of tremendous counsel and support and recognize each and every employee of the Korn/Ferry family.

  • Without them, this record year would not have been possible.

  • And with that, I'd like to turn it over to our COO and CFO, Gary Burnison.

  • Gary Burnison - COO, CFO

  • Thanks, Paul, and good morning.

  • Today we are pleased to report record earnings for the fiscal year we just completed as well as another exceptional quarter of growth for Korn/Ferry.

  • In fact, the 145 million of fee revenue generated in the quarter is the highest level achieved in nearly five-and-a-half years.

  • Including Mexico, revenue was nearly 150 million for the quarter.

  • We have now grown the top line in ten out of our last 11 quarters.

  • More importantly, profits continue to rise as well.

  • EPS, excluding a one-time tax benefit of 6.5 million, reached a record $0.31in the quarter.

  • For all of FY '06 fee revenue grew 15.6% to almost 523 million.

  • And EPS, excluding all non-recurring benefits, reached an all-time record, $1.09, up over 21% over the prior year.

  • As important, we have continued to make key investments in people, training, and technology in all of our businesses to ensure that we deliver unsurpassed client excellence.

  • Despite these investments, our quarterly operating earnings grew 10% sequentially to a record 20.6 million.

  • For all of FY '06 operating earnings grew 16% to 76.2 million while our operating margin improved to 14.6%.

  • Our cash balance improved over $46 million sequentially, reaching 278 million.

  • Through June 1st, we have repurchased $28 million of Korn/Ferry stock in connection with the $50 million stock repurchase program that we announced last December.

  • The number of executive search consultants at quarter end was 440 while our annualized revenue per consultant improved 12.5% sequentially to over $1.1 million.

  • Now let me review the business segments starting with executive recruiting.

  • Fee revenue was 126.7 million and up 15 million, or 13.5% sequentially, and for all of FY '06 up $54 million, or almost 14% year-over-year.

  • Quarter four confirmations in revenue were up in three of our four operating regions.

  • North America fee revenue reached 70.2 million in the quarter, and for all of FY '06, our North American business grew $33 million or almost 15%.

  • The industrial market at 29%, the financial services market at 20%, and the consumer goods market at 11% were the fastest-growing segments year-over-year in North America.

  • In Europe, revenue improved at 36.3 million.

  • For the year, Europe grew almost $10 million, or 8.7%, led by the U.K. and France.

  • Asia-Pacific finished a record year with quarterly fee revenue of 16 million and total fee revenue for the year of nearly $58 million.

  • For all of FY '06, Asia-Pacific grew a little over 13% led by continued strength in China and India, where year-over-year fee revenue grew a combined 25%.

  • In Latin America, fee revenue was up nearly $5 million, or 45% for the year.

  • And again, that excludes Mexico with Mexico's numbers are even more impressive.

  • The executive recruiting operating margin improved to 23.2% in the quarter reflecting continued improvement in productivity.

  • For our Futurestep business, revenue grew over 30% for the year led by Asia at 37%, North America at 30%, and Europe at 27%.

  • We are, however, disappointed to report that after ten consecutive quarters of profitability, Futurestep recorded an operating loss of 1.4 million in the quarter, primarily due to several non-recurring personnel-related expenses and the write-off of certain receivables.

  • For all of FY '06 Futurestep's operating earnings were 3.5 million, or almost a 5% margin.

  • Let me now comment on our fiscal '07 first quarter outlook.

  • Assuming constant FX rates, we estimate quarter run fee revenue will likely range from 138 to 145 million and diluted EPS will likely range from $0.28 to $0.33 per share.

  • Including FAS 123 option expense to be recognized for the first quarter time in quarter one, diluted EPS will likely range from $0.26 to $0.31 per share.

  • That concludes our remarks.

  • I'll now turn it over to Julie so we can begin taking your question.

  • Operator

  • Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from the line of Mark Marcon with R.W. Baird.

  • Please go ahead.

  • Mark Marcon - Analyst

  • Good morning and congratulations on the excellent results over the entire year.

  • I was wondering with regards to FutureStep, could you give a little bit more detail with regards to the one-time charges, specifically the receivables write-off?

  • And then, how quickly do you think things can turn around over there?

  • Paul Reilly - Chairman, CEO

  • Mark, I think it's very simple, if you look at FutureStep it grew at 60% and 30% year-on-year.

  • And we talked about earlier that we were afraid that the market was stripping our delivery resources, so we started beefing up a couple of quarters ago.

  • Truth is, I think we just outstripped our ability to deliver and we fell behind in some of our deliveries and our contracts.

  • We've caught up, now.

  • The outlook looks very, very good for them and that resulted really in the write-offs is that we just got ahead in the market versus the delivery side.

  • I think we've got it back in balance and we expect a very good quarter for them.

  • In fact, we've got a good start so far this year.

  • Mark Marcon - Analyst

  • When you say that, do you mean that basically the business came before you were ready to deliver against it?

  • Paul Reilly - Chairman, CEO

  • Yeah, you know, basically, and I think we’ve had some people in the sales organization a little aggressive and we made some people changes to make sure that we always matched our delivery with execution.

  • We always -- we say here both in all of our businesses if we can't deliver it, don't sell it.

  • And I think we've got the people adjusted and back in balance, and again, I think we've got a very, very good start one month into the year to have it back in shape.

  • Mark Marcon - Analyst

  • So for next quarter next year, how should we think about growth as well as profitability within Futurestep?

  • Paul Reilly - Chairman, CEO

  • Well, I think if Mark, number one they will be profitable in the first quarter.

  • Number two, the loss is almost entirely due to one-time items.

  • For FY '06 we grew the business at 30%.

  • You know, I would be surprised if we were to surpass that growth rate.

  • It's possible, but we're obviously quite focused on client service and client delivery.

  • And in May we've had a great start in terms of placement activity for a number of global clients.

  • But I would be a little bit surprised, Mark, if it would be north of 30%.

  • Mark Marcon - Analyst

  • And then with regards to the core executive search business, can you talk a little bit about what your plans are for expansion in terms of the consultant headcount and how far you think productivity can go?

  • And how you're balancing the expansion of your consultant headcount with, you know, right now everything is going well in your business, but obviously the markets are concerned about a potential slowdown in the future, how you're balancing that out.

  • Paul Reilly - Chairman, CEO

  • Well, we're obviously quite careful in terms of when we add people, I mean our cost base is essentially people and real estate.

  • And we're obviously quite mindful that the economies go through cycles.

  • We are going to continue to aggressively grow that business, probably organically, and we're going to continue to add talented consultants.

  • We typically, Mark, don't give out numbers in terms of what our targets are, but I can tell you that we are still aggressively bringing talent into this firm, and despite the employment numbers for the past couple of months, at least in the United States, we still see our clients adding employees.

  • Gary Burnison - COO, CFO

  • I think it's important to note that in the economy, two things.

  • One is, I know people have been concerned about the employment numbers, Mark, as you look at them but if you average them, we're still at a healthy rate.

  • I think there's some adjusting going on.

  • Secondly, we have a velocity benefit in our business that, you know, at almost 2% unemployment for white-collar workers, there is nobody out there.

  • So every time someone moves there's another opening, and there is just a lot of activity in that market.

  • Back on the strong -- clients are still aggressive at the senior level, and sure, some day that will end, but right now it looks very, very good.

  • Paul Reilly - Chairman, CEO

  • In terms of leverage, Mark, we still believe we have leverage, and you can see that this past quarter what happened sequentially, and we had, clearly we even have more capacity.

  • Part of that is also due to our average fees and we think we've got room to expand there as well and we shouldn't lose sight of that.

  • But the thing that I find interesting is that when we arrived here at Korn/Ferry, we looked at the prior recessions and excluding the last one, the executive recruiting business was only down about 9% in the prior two recessions.

  • So we certainly don't see that today, but at the same time we're obviously running, trying to run a profitable business, a growing business, and even in any kind of downturn, we're going to maintain high single-digit margins, Mark.

  • Mark Marcon - Analyst

  • Perfect.

  • Last question, and then I'll jump off and let somebody else ask a question.

  • Can you talk a little bit about the confirmation trends that you saw as the quarter progressed and what you're seeing into these months?

  • Paul Reilly - Chairman, CEO

  • Confirmation trend has been positive.

  • You know, we have a good backlog going into the new year, and the last couple of months, confirms have been solid around the world, Europe and the United States, Canada, Latin America and Asia.

  • And again, despite the employment t numbers over the last couple of months in the United States, we haven't seen that.

  • Mark Marcon - Analyst

  • Have they actually been picking up or staying at a high level?

  • Paul Reilly - Chairman, CEO

  • I was -- in May, it was actually slightly higher than April in North America, slightly.

  • Mark Marcon - Analyst

  • Perfect.

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from the line of David Steinberg with Goldman Sachs.

  • Please go ahead.

  • David Steinberg - Analyst

  • Hi, can you gentlemen hear me?

  • Paul Reilly - Chairman, CEO

  • Yes.

  • David Steinberg - Analyst

  • Question.

  • Trying to follow up on the last question there.

  • If you look at the -- you talked about having a good backlog, you want to quantify it in terms of visibility, how far out it takes you throughout fiscal '07?

  • Or if you're not comfortable quantifying it, maybe giving us some impression in terms of how backlog is today versus other points in the cycle previously?

  • In other words if it's six-months visibility now how that compares to last time you were in a similar position?

  • Paul Reilly - Chairman, CEO

  • Well, our backlog is probably a little bit like yours in terms of visibility.

  • We can generally see out a quarter or so with a high degree of probability.

  • I would tell you that the backlog is very, very strong.

  • Obviously now we're starting to go into the summer months.

  • In July, in the Nordic areas people go on vacation.

  • So we're obviously heading into that time of the year, but we're very, very encouraged about what we've seen over the last several months.

  • David Steinberg - Analyst

  • So it sounds like you do expect a little bit of seasonality this year in terms of a slowdown in the summer.

  • Gary Burnison - COO, CFO

  • We're always cautious.

  • The problem is European vacations, starting in the Nordics in July.

  • U.S. vacations, although the last couple of years have been isolated to August, doesn't always happen.

  • So we're cautious on this month after our year-end.

  • This quarter tends to be a little more unpredictable.

  • So it looks very, very good but we start going into the summer slowdowns, which is typical of our business especially in Europe.

  • David Steinberg - Analyst

  • Are you seeing any evidence of like World Cup effects at all in, at a European business or other parts of the world?

  • Paul Reilly - Chairman, CEO

  • I don't think so.

  • I guess it's going to depend on who's going to win.

  • We'll see what countries pick up here so maybe it will be Germany's year.

  • David Steinberg - Analyst

  • Wonderful.

  • Thank you.

  • Paul Reilly - Chairman, CEO

  • Thank you.

  • Operator

  • Thank you.

  • The next question is from the line of Kelly Flynn, UBS.

  • Please go ahead.

  • Unidentified Speaker

  • Hi, this is Matt for Kelly.

  • Can you talk about some of the trends in Europe specifically U.K., France, and Germany?

  • We saw an acceleration in Q4 so general business trends in the region?

  • Paul Reilly - Chairman, CEO

  • Well, I think that accurately describes it.

  • Our European business has performed absolutely fabulously over the last two-and-a-half, three years, and if you look at over the last couple of quarters what you just said we saw, as well.

  • In other words we did see an increase in business in France, in the U.K., as well as Germany.

  • So our -- what we've seen is exactly the trend that you pointed out.

  • Unidentified Speaker

  • Okay.

  • Do you have a constant currency growth rate for Europe?

  • Paul Reilly - Chairman, CEO

  • If you look on a quarterly basis, fourth quarter this year versus fourth quarter last year, U.S. dollars was about 18.5%, but local currency was about 30% or so.

  • Unidentified Speaker

  • Okay.

  • Thank you.

  • Gary Burnison - COO, CFO

  • Thank you.

  • Operator

  • Thank you.

  • We'll go on to the line of Clint Fendley with Wachovia Securities.

  • Please go ahead.

  • Clint Fendley - Analyst

  • Yes, good morning.

  • Congratulations on the quarter, guys.

  • With regard to the Futurestep business, I wondered when you think about your longer term growth expectations, if you could maybe discuss your real estate costs relative to the Futurestep business and how that infrastructure build-out can be -- how that's affected by your existing core recruiting business?

  • Gary Burnison - COO, CFO

  • It's interesting.

  • When we got here almost five years ago we had separate facilities for Futurestep and executive search and high-cost facilities, really, fairly much for both of them.

  • What we did is we're very aggressive in downsizing space in the reception, almost half a million square feet we subleased.

  • But we used Futurestep to move into the executive search offices to give them expansion space.

  • So what we do now is, as we find the space that's tight in a building, we'll move Futurestep into lower cost space and allow our executive search and LDS business to grow into the more expensive space.

  • So it's been, very, very good for us and it actually helps us average down the costs as we've expanded.

  • Now, we're very tough on real estate, we still remember getting rid of it.

  • So [as] we have criticism from our partners, we may be sardining them a little bit into space, but we're okay with that, so the Futurestep expansion has actually been on an average real estate basis, it's been averaging down our cost.

  • Paul Reilly - Chairman, CEO

  • Clint, we're still, I mean, we're incredibly bullish on this opportunity.

  • The market size is probably $15 billion globally.

  • This was a hiccup, we've got a great team, great management team, great leader.

  • We're going to continue to grow this business and we still believe it's a multi-hundred million dollar opportunity for us.

  • Clint Fendley - Analyst

  • And finally, could you maybe discuss some of the challenges, Paul, of growing this business culturally against your core executive search business?

  • Paul Reilly - Chairman, CEO

  • Yeah, I think, first, our partners, and we just finished a partner survey, are great believers in our strategy.

  • We're amazed that in a cultural transformation like this, usually it takes a long time for people to really believe.

  • But I mean our partners are well behind our strategy of becoming, you know, a human capital solutions firm and Futurestep is part of that.

  • So they understand it.

  • They are different businesses, we manage them differently, but they interact at the point of clients and they cross-sell.

  • In fact over half of the partners last year said they cross-sold Futurestep opportunity.

  • So it's becoming very integrated.

  • Now, they are different cultures we do have conflicts from time to time as any service lines would have in any company so we manage that, but the partners understand the value to the Korn/Ferry brand.

  • And more important, what we've proven is the value to the customer is that people find when they bring in these other services that the customer's much more happy.

  • And it also gives us multiple contact points which deepens our relationships with clients.

  • So this whole strategy around LDS and Futurestep isn't just about growing revenue and making money, I mean, that's obviously part of it, but it's also about deepening our relationships with clients and customers so that they're stickier to us.

  • And we see every day that that pays off and our partners see it pay off.

  • So we're getting good traction with it.

  • Clint Fendley - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • We'll go to the line of Mr. Tobey Sommer with SunTrust Robinson Humphrey.

  • Go ahead.

  • Unidentified Speaker

  • Good morning.

  • This is actually Mike in for Tobey this morning.

  • Just had a quick question on the headcount addition.

  • Considering you guys have been adding headcount pretty regularly, just wondering if you could comment on the hiring environment and how, what kind of difficulty or ease you're seeing in finding new consultants?

  • Paul Reilly - Chairman, CEO

  • Well, the market as a whole, if you ask our search people, it's gotten tougher.

  • I mean the market is, companies generally are doing well, options are in the money, you know, so it's taking I think our industry a little longer to close, but it's also making us more valuable to clients.

  • From an internal standpoint, we have the same thing.

  • We have people that in other firms are doing well and even if they think it might be a better place to move, they're pretty productive where they are.

  • So, in that extent you find it harder to move people.

  • But I think what we position ourselves with people in the industry, the search industry, is we're a different business.

  • We have a different strategy, I think we've shown we're executing it differently than anyone else.

  • And people that are attracted to that environment, you know the multi-product human capital solutions business like our platform and we're able to convince them more as a spiritual sell not a dollar sell.

  • We're not buying people.

  • This is the place to be.

  • What we are also seeing is their industry hires as a percentage of recruiting's gone way up.

  • In the downturn we hired maybe less than 20% of our people from industry.

  • Today it's probably half or more.

  • We're getting people out of industry and we get great track records, using our proprietary assessment tool and putting our own people though it we've been very, very fortunate that we're able to predict pretty accurately how these people will do.

  • And people coming from outside a search have done very, very well in our environment.

  • Unidentified Speaker

  • Just a quick follow-up on that.is, now that you've seen a pickup in those coming from industry, are the ramp times staying the same, pretty comparable?

  • Paul Reilly - Chairman, CEO

  • The ramp times right now in good markets are quicker so I mean that we find good people in up markets are ramping up quicker than we've expected.

  • Our view is that it takes someone a good two years out of industry who doesn't have search experience to get the business.

  • But we're finding some people within a year being extremely productive.

  • And the -- because I -- hopefully because of the people we're picking and because of the market we've been very pleasantly surprised.

  • We're willing to make a bigger investment than we had to make on those folks.

  • And they're great long-term investments for us.

  • Unidentified Speaker

  • Great.

  • Thank you very much.

  • Operator

  • Thank you.

  • Our next question comes from the line of Mike Carney with Aperion Group.

  • Please go ahead.

  • Mike Carney - Analyst

  • Good morning, good quarter.

  • Back to Futurestep.

  • When we talk about the three different regions, can you describe if there's a difference in growth that you're looking for in any one of those?

  • Paul Reilly - Chairman, CEO

  • Well, we clearly have a big opportunity in Asia, particularly in greater China, that we haven't fully seized yet that we will.

  • That is, that's obviously kind of screaming off the page.

  • The other thing, too, is here in North America.

  • We have a very big opportunity, as well.

  • I'm not going to discount Europe because we have an absolutely thriving business there, but that business has been, I would say, more established for some time.

  • But, you know, the United States, Canada and Asia are great opportunities for us.

  • And as I said, this is probably a $15 billion market opportunity compared to the executive search, which is probably a $6 billion market opportunity.

  • Mike Carney - Analyst

  • And Gary, I think you mentioned that the personnel costs were non-recurring.

  • Is that in Futurestep?

  • Is that getting rid of people or adding people?

  • Gary Burnison - COO, CFO

  • We -- no, we made some changes within the business several months ago and those costs reflect that.

  • Mike Carney - Analyst

  • Okay.

  • And then, also, would outsourcing be still 50% of the business or somewhere around there, or is it increasing as a slice of Futurestep?

  • Gary Burnison - COO, CFO

  • Well, that's a fair representation.

  • We obviously want it to become even higher.

  • And strategically that's the way we're trying to take that business around the world.

  • Mike Carney - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Thank you.

  • We'll go to the line of Ty Govatos with C.L. King.

  • Please go ahead.

  • Ty Govatos - Analyst

  • Congratulations on the quarter.

  • Sorry if I missed this.

  • Could you tell us what the bonus accrual was in the fourth quarter?

  • Gary Burnison - COO, CFO

  • Yes, Ty.

  • No, you did not miss it.

  • It was almost $30 million.

  • Ty Govatos - Analyst

  • Okay.

  • Could you give us an idea, should that accrual stay pretty much constant relative to revenues this coming year?

  • Gary Burnison - COO, CFO

  • No, you know, the bonus is solely dependent upon the profitability of this firm and the fourth quarter was a tremendous quarter for Korn/Ferry and the bonus expense reflects that.

  • So it's absolutely tied to profitability.

  • Ty Govatos - Analyst

  • Okay.

  • Any idea on the Cap Ex and tax rates this coming year?

  • Gary Burnison - COO, CFO

  • Cap Ex was a little over $10 million for this past year, and I would expect that it would probably be in the same area going forward.

  • Our tax rate for trailing 12 was about 36%, and I would expect that to be 40% next year.

  • Ty Govatos - Analyst

  • Okay.

  • Thanks an awful lot.

  • Very good quarter, again.

  • Gary Burnison - COO, CFO

  • Thanks, Ty.

  • Operator

  • Thank you. [OPERATOR INSTRUCTIONS] And we'll go to the line of Mark Marcon with R.W. Baird.

  • Please go ahead.

  • Mark Marcon - Analyst

  • Sorry if I missed this before but how much exactly were the one-time charges that ended up impacting Futurestep?

  • Gary Burnison - COO, CFO

  • Almost the entire loss, Mark.

  • Mark Marcon - Analyst

  • So it would have been breakeven if you hadn't had the one-time charges?

  • Gary Burnison - COO, CFO

  • Yes.

  • Mark Marcon - Analyst

  • I mean breakeven would be less than what you've been doing before.

  • How should we think about that?

  • Paul Reilly - Chairman, CEO

  • Yeah, and obviously that's not acceptable for us, either.

  • Several months ago, Mark, we made some changes, exited certain client relationships and that's the reason why you see breakeven.

  • Even taking out the one-time charges.

  • Again, that business will be profitable here in the first quarter, Mark.

  • Gary Burnison - COO, CFO

  • Mark, I bet you can see by our look forward range even going into the summer, obviously we've got some, you know, we've got hope and some optimism in there.

  • But part of that is we expect Futurestep to be profitable.

  • And it will continue to be profitable.

  • It's been an interesting business that, I think, a few years ago people asked me would it ever break even and then how much money would it make.

  • And it is a good, steady business, it is there now, and we expect it, just like the rest of our businesses, to be profitable going forward.

  • Paul Reilly - Chairman, CEO

  • And, you know, Mark, listen, the reality is, we're continuing to learn.

  • And some of these contracts are quite complex.

  • When you're hiring several hundred people in a lot of different countries around the world, you know, it's not always easy.

  • And certainly over the last, you know, year-and-a-half as we've seen this kind of growth and this kind of opportunity, we're becoming more sophisticated, as well.

  • And, you know, that's part of the reason, too, why you see that.

  • Gary Burnison - COO, CFO

  • I want to point -- the charges were a handful of, you know, a handful of companies where we adjusted based on really kind of delivery.

  • But we have a lot of, most of our engagements are going very well and very happy clients, and we continue to add new relationships and added maybe our most significant relationship this last quarter in the history of the Company.

  • So we continue to be bullish on it, but we had a hiccup and we're all over it, and I think we've got our hands on it and we expect it to be good going forward.

  • Mark Marcon - Analyst

  • So what sort of a target rate should we think of in terms of a longer term target rate for Futurestep?

  • Gary Burnison - COO, CFO

  • In terms of the profitability?

  • Mark Marcon - Analyst

  • Yeah, in terms of margins.

  • Gary Burnison - COO, CFO

  • I've always thought it would be between the staffing industry and the search margins.

  • I mean we have seen, Mark, margins in that business that were quite high, 15, 16, 17%.

  • And, you know, I would like to think that we're going to get back there.

  • Mark Marcon - Analyst

  • Back to that 15 to 16%?

  • Gary Burnison - COO, CFO

  • But again, I think in the long term, Mark, I would forecast the margins to be between staffing and executive recruiting.

  • That's how I would look at it.

  • Paul Reilly - Chairman, CEO

  • I think if we keep the growth rate up, Mark, we can get double-digit to get way up there in profitability.

  • If we slowed it down and normalized it, fine, but we have to continue to invest in that business as it grows.

  • Mark Marcon - Analyst

  • And the tax rate jumping up to 40%.

  • What's the reason behind that?

  • Gary Burnison - COO, CFO

  • Well, we've been quite, I think we've been quite efficient in terms of taxes since we've come here.

  • And, you know, we've used all of our benefits and the like and we're just going to be a normal taxpayer here.

  • Mark Marcon - Analyst

  • And the -- when do you pay out the bonuses?

  • Gary Burnison - COO, CFO

  • We principally pay them in July.

  • Mark Marcon - Analyst

  • And where would you expect the cash balance to be after that?

  • Gary Burnison - COO, CFO

  • Cash balance will probably be 180 million or so.

  • Mark Marcon - Analyst

  • And obviously Asia-Pac is growing phenomenally well.

  • Is that something that you think you can sustain or do we do kind of a stair step function where we have that big jump and then we kind of sit at this level for a while and then jump up again?

  • Paul Reilly - Chairman, CEO

  • Mark, we've been vested, thanks to our forefathers, we've been in Asia very, very early and operated in mainland China for 12 years, and India 10 years, and we've taken to be very aggressive in those markets.

  • In India we've doubled our fee earners over the last year and it's still very profitable.

  • China, we've, you know, really added significant talent where multiples larger than our competition on the mainland, and you know what, they're busy as can be.

  • And I'll tell you, as long as the Indian-China markets get going, our issue is getting enough people to execute on the demand so far.

  • So absent a major downturn in India and China, we expect Asia to be very robust and the rest of our markets have been very good there, too.

  • So we're still very bullish.

  • You know, right now, if we look at confirmations and trends, we're pretty positive in all of our regions.

  • Now we know that can change and we have to manage it every day, but we, you know, sitting today we feel pretty good.

  • Mark Marcon - Analyst

  • And one last housekeeping question.

  • Share count, what should we use for the coming quarter?

  • Gary Burnison - COO, CFO

  • 47 million or so, Mark.

  • Mark Marcon - Analyst

  • Terrific.

  • Thank you very much.

  • Operator

  • Thank you.

  • And we'll go to the line of Mike Carney with Aperion Group.

  • Please go ahead.

  • Mike Carney - Analyst

  • On those margin targets, Gary, do you think that the RPO business would typically be a lower margin business excluding scale compared to single searches at Futurestep, right?

  • Gary Burnison - COO, CFO

  • No.

  • The RPO business should give us higher margins because principally what you're doing to the extent that you're placing similar positions, right, you're placing more than one person at a time, there is some economic scalability in that model.

  • So what it really comes down to is the mix on the contract.

  • To the extent you're placing similar positions, those could be quite lucrative for us.

  • Paul Reilly - Chairman, CEO

  • Right now, the margin, the opportunity in the mid-term, executive recruiting is very profitable, staffing is very competitive and almost commoditized.

  • There is just a hole in people able to recruit middle management, which is somewhere between staffing, which is more [fungible] positions in general and executive recruiting which is very specific.

  • Middle management is a blend of both of those.

  • And we're just in a spot right now that's been pretty well unserved.

  • And, you know, over time, I'm sure others will get in it, but we're able to command good pricing on those engagements today.

  • Mike Carney - Analyst

  • And then on LDS, Paul, assuming you can grow that business like you want, the margins on there would be similar to other professional services?

  • Paul Reilly - Chairman, CEO

  • Yeah, they're consulting type of, other types of consulting margins.

  • So although the margin may be lower than executive search, it still should be good and very sustainable, little less fluctuation in those businesses.

  • Mike Carney - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Thank you.

  • We have no further questions.

  • Paul Reilly - Chairman, CEO

  • Great.

  • Well, obviously, appreciate your support and as last year we had a record year, this year we had a record year following.

  • And as I'll tell you, we don't take it for granted, we're working hard and we want to push the business to new heights and we're going to continue to push for more gains and profitability while improving our quality, continuing to expand our other services as we've successfully done.

  • And, you know, hopefully be returning more and more profits to shareholders.

  • So appreciate you joining us this morning, and we'll talk to you soon.

  • Operator

  • Thank you.

  • Ladies and gentlemen, this conference will be available for replay for one week starting today at 11:30 a.m.

  • Central Daylight time and running through the date June 13th at midnight.

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