Korn Ferry (KFY) 2008 Q2 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.

As a reminder, this conference is being recorded.

Before I turn the call over to your host, Mr.

Gary D Burnison, let me first read a 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 2007.

With that, I'll turn the call over to Mr.

Burnison.

Please go ahead, Mr.

Burnison.

Thank you, Laurie and good morning, everyone.

Today, I'm going to divide my remarks into three sections.

First, our second quarter performance.

Next, our strategy.

And finally, our outlook for the business in the coming months.

Overall, our business has performed very well during the second quarter and first half of the fiscal year.

I'm pleased to report that fee revenue for the second quarter has set a new record, totaling $196 million.

An improvement of 26%, over $800 million on an annualized basis with our operations in Mexico.

EPS for the quarter came in at $0.37, an improvement of 19% over last year.

Our operating margin for the period was 13%.

Performance in the quarter was driven by all business lines and regions, with the exception of EMEA, which encountered modest and normal seasonality on a sequential basis but was up 28% year on year.

North America was up 24% over the prior year, Asia-Pacific also generated strong growth, up 35% from last year, and Latin America turned in an impressive 75% improvement in the top line at $7.5 million.

From a markets perspective, our industrial market had a great quarter on a global basis, up 13% sequentially, led by aerospace and defense and energy.

Healthcare was also strong, up 20% sequentially.

It's interesting, despite the setbacks in the U.S.

financial services industry, our global financial market was up 13% sequentially, driven by consumer banking services and real estate.

The activity was fueled by improvements in Asia-Pacific and Latin America.

Our combined leadership development solutions business, which includes Lominger and LeaderSource, posted an impressive 52% year-over-year growth and is on almost a $60 million run rate.

Lominger continues to outperform our expectations.

During the quarter, the business achieved $6 million in fee revenue, which is up almost 75% year on year with an operating margin of almost 30%.

In the middle market, Futurestep, our outsource recruiting subsidiary, posted revenues of $27 million, which is up about 30% over last year.

During the period, we won several major outsourcing engagements in the Futurestep area.

It's clear to me that there's customer pull for these solutions, and they also serve to differentiate our flagship business, Executive Recruiting.

We believe that the opportunity to scale our non-search businesses is significant.

Having just completed a month on the road, I can tell you that the spirit and morale of this firm has never been higher.

The transformation of Korn/Ferry as a diversified HR solutions provider is proceeding as planned.

Our vision is to be the global premier provider of talent management solutions.

Our mission is to the be the top in line brand in human capital, known for unsurpassed quality, where the most talented people come to work.

Our strategy is creating additional opportunities for our colleagues to call clients throughout the year, driving deeper, more sustainable relationships, yet vital to our vision is to remain the undisputed provider of executive recruitment.

In an effort to further institutionalize our go to market strategy and differentiate our Executive Recruiting business, as well as further integrate our leadership businesses into our flagship business and our Futurestep business, during the quarter we launched what we're calling the Korn/Ferry Advantage.

It's a framework that's supported by a set of proprietary tools that will provide us with a common approach to recruiting.

The KF advantage will ensure consistency for our interview process, client reports, job specs and our go to market execution.

It will also enable us to further leverage and scale our flagship business and provide consistent standards which we can use to train all of our colleagues around the world.

Beyond the KF advantage, we're continuing to develop new offerings that we can monetize to drive growth and scale.

These solutions include an on-boarding offering that can be attached to an executive recruitment project or delivered on a stand-alone basis, a team development application, and a solution to help define strategic business goals, assess overall organizational capabilities, and align the expectations and objectives of an organization's management team.

It is absolutely clear that we are transforming Korn/Ferry.

Moving forward, we will continue to pursue further integration between our business units to unlock greater leverage and scale.

Our performance so far this year should make our colleagues feel proud.

That said, the colleagues at Korn/Ferry set high standards for our performance.

I'll tell you that today, we are stronger than ever.

Our business is widely diversified around the world, as well as through the variety of talent management solutions that we offer.

Although cautious about the macro environment in the United States, we are going to remain focused on seizing opportunity in any kind of economic climate.

Our vision and strategy is focused and the company is in rock solid condition.

With that, I'd like to turn the call over to our new Chief Financial Officer, Steve Giusto, for a more detailed review of our business.

Steve?

Thank you, Gary and good morning.

Today we are pleased to announce another quarter of positive results for Korn/Ferry International.

As Gary stated, fiscal '08 second quarter consolidated fee revenue grew over $40 million, or 26% versus the second quarter of fiscal '07 and $10.5 million or 5.7% sequentially, reaching $195.9 million, our highest revenue quarter ever.

Korn/Ferry's consolidated fee revenue has now grown sequentially for 17 consecutive quarters, dating back to July of 2003, with fee revenues growing at a compound annual growth rate of approximately 23% over this period.

Our earnings have also grown.

Fiscal '08 second quarter EPS grew $0.06 or over 19% versus the second quarter of fiscal '07 and a $0.01 sequentially, reaching a record high of $0.37.

Additionally, consolidated fiscal '08 second quarter operating earnings grew over $4.2 million, or 20% versus the second quarter of fiscal '07 and $300,000 or 1.1% sequentially to $25.4 million.

This profitability was achieved while we continued to invest in people and prophecies, designed to drive long-term growth and fulfillment of our strategic objectives.

Operating margin in fiscal '08 second quarter was 13%.

In the prior year, second quarter operating margin was 13.6%.

And it was 13.5% in the first quarter of this year.

The number of Executive Search consultants at the end of the second quarter grew to 523, up 7 consultants from the first quarter of fiscal '08.

Second quarter annualized revenue for consultant was over $1.26 million, and is up 12.5% year over year.

The overall growth in head count across the globe reflects our optimism about the opportunities we see for continuing to expand our core Executive Recruiting business while broadening our reach in non search businesses.

That said, we must carefully balance headcount growth with profitability to make certain that we are achieving acceptable returns on our investments in people.

While we are pleased with the overall operating results for this past quarter, we believe there is room for improved profitability and productivity as we continue to grow our revenues.

Now, let me review the business segments in a little more detail, starting with Executive Recruiting.

Fiscal '08's second quarter fee revenue reached $169.1 million, an increase of nearly $34 million, or 25% year-over-year, and $9.3 million or 5.8% sequentially.

All Executive Recruiting operating regions grew versus the second quarter of fiscal '07, and we achieved sequential fee revenue gains in all operating regions except Europe, which is typically slower during the latter part of the summer.

Fiscal '08 second quarter North American fee revenue was $94.9 million, up $14.8 million or 24% year-over-year, and up $7.5 million or 8.6% sequentially.

In North America, sequential fee revenue gains were driven by the industrial healthcare and consumer goods markets, up 22%, 20% and 13% respectively.

And as Gary mentioned, despite the ongoing impact of the current credit crisis on some financial institutions, the North America financial services practice grew over 7% sequentially in the quarter.

Underlying market conditions in Europe remained strong in fiscal second quarter.

Europe fee revenue grew over 28% or $9.2 million versus second quarter fiscal year '07, reaching $42.1 million.

Summer is always challenging in Europe, and as expected, revenues were down 6% sequentially.

Last year the sequential decline during summer was modestly lower.

Trends into the third quarter are encouraging, and the region recently had its highest booking day of the year.

Year-over-year, 17 of 19 local country markets in Europe have improved with all major specialty markets growing, led by consumer goods at 40%, life sciences at 29%, technology at 28%, and financial services at 21%.

The Asia-Pacific region also continued its growth trend in the second quarter of fiscal '08 with fee revenue reaching an all-time high of $24.7 million.

Asia-Pacific second quarter fee revenue was up $6.4 million or nearly 35% year-over-year and $2 million or 9% sequentially.

Greater China, up 28% year-over-year and 1% sequentially, India, up 125% year-over-year and 15% sequentially, and Australia, up 85% year-over-year, and 33% sequentially, continue to be key growth markets for the Asia-Pacific region.

In Latin America, fiscal '08 second quarter fee revenue improved over $3.5 million, or 88% year-over-year, and $2.4 million or 48% sequentially, to $7.5 million, driven by growth in Brazil, Argentina, Chile and Colombia.

Consolidated fiscal '08 second quarter Executive Search operating margins were $32.9 million, up over $6.3 million or 24% year-over-year, and up 1% sequentially.

Consolidated Executive Search operating margin was 19.5% in the quarter, and was essentially flat versus the second quarter of fiscal '07.

Sequentially, Executive Search operating margin dropped 100 basis points, driven primarily by our continued investment in consultants in our core search practice as well as our leadership-development solutions division.

Now let's turn to Futurestep.

Futurestep's fiscal '08 second quarter fee revenue improved over $6.2 million or 30% versus the second quarter of fiscal '07.

And it improved $1.2 million or 4.7% sequentially, reaching $26.8 million.

Futurestep has now grown in 16 consecutive quarters.

All geographies grew on a year-over-year basis.

Sequential fee revenue gains were achieved in North America and Asia-Pacific with Europe down marginally due primarily to summer vacation seasonality.

Fiscal '08 second quarter sequential fee revenue growth in North America and Asia-Pacific was 11% and 9% respectively.

Futurestep's fiscal '08 second quarter operating earnings were $1.5 million, down $600,000 sequentially, primarily due to a write-down of accounts receivable on our RPO assignment.

Operating margin was 5.7% in the quarter.

The management team at Futurestep is focused on continuing to generate solid revenue growth while making progress on operating margins, which we believe can be in double digits over the medium term.

Now, let's discuss the balance sheet.

At quarter end, our worldwide cash balance was $242 million, down approximately $3 million sequentially due primarily to share repurchases in the quarter.

Operating cash flows during the quarter totaled $30 million and the firm returned over $35 million of cash to its shareholders in the quarter, by repurchasing approximately 2 million shares.

Through the end of November of fiscal '08, we have now repurchased during this year approximately 2.84 million shares of common stock, with total cash returned to shareholders of approximately $55 million.

And there is now approximately $45 million remaining of the $50 million share repurchase authorized by the Board of Directors in October of 2007.

Our goal is to judiciously return cash to shareholders while maintaining adequate balance sheet strength to protect the company in difficult times and to allow us to address strategic opportunities to expand the company.

Finally, let me comment on our fiscal '08 third quarter outlook.

We have completed the first month of the third quarter and revenues have been good.

If that trend continues, we estimate that third quarter fee revenue will likely range from 190 to $200 million and diluted earnings per share will likely range from $0.34 to $0.39.

This estimate assumes that exchange rates stay where they are and it also anticipates that because Christmas and New Year's fall on Tuesday this year, the period right around the holidays will be a little slower than usual.

But with that as a back drop, we are optimistic about executing our business well through the third quarter.

That concludes our prepared remarks.

I've asked Gregg Kvochak, who has the most experience in terms of dealing with financial questions on our company to join us for the Q&A, which we will take at this time.

(OPERATOR INSTRUCTIONS).

One moment, please, for our first question.

And our first question is from the line of Josh Vogel with Sidoti & Company.

Please go ahead.

Hey, good morning.

With your fee revenue guidance of 190 to $200 million, could you give us any color as to what kind of strength or growth you're expecting in North America that's built into that guidance?

Well, I mean, in terms of the outlook, we're basically assuming that the market conditions are going to stay essentially as they are today.

We do have, as Steve mentioned, this year, the way the holidays fall, you've got Christmas and New Year's falling on a Tuesday, so we do believe that there's going to be some seasonal cyclicality this year.

Our whole thought process is that while the revenue guidance is relatively flat, the beginning of the quarter was quite good and we're hopeful that we can work through the seasonality that comes with Christmas and New Year's and then with the Chinese New Year in Asia and move aggressively into the generally stronger fourth quarter of the year.

Okay.

And can you just discuss the trends across all your regions that you saw in November?

I would say that the -- it was fairly broad-based.

Asia and EMEA continue to be robust.

I'll tell you that the new business in EMEA in November was as strong as we've seen it this fiscal year and in North America it -- , the level of new business confirmations was right in line with our

Okay.

And what about in the financial services vertical, can you just give us a little bit of color, how that performed last quarter in North America and globally?

Despite what you read in the papers, it's -- we were a little surprised that the business was up sequentially, which it was.

But when you think about the diversification of our financial services business, that's actually, it makes sense.

We have seen - there's obviously been a slowdown at the bolts bracket in terms of capital markets and investment banking.

However, this time of year is generally not a robust time for hiring in those segments of financial services.

We have seen activity from the second tier, third tier firms that are being very opportunistic with respect to talent and the volatility that's been happening over the last several weeks.

Europe and Asia in financial services performed very well.

Asia was up sequentially.

And North America was up, actually, on a sequential basis, and so what we've seen is that although there's been a decline in bold bracket investment banking, at the MD level, as well as capital markets, that there's been a little bit of a shift and we've seen a pick-up in insurance, infrastructure, risk, as you can imagine, risk positions, as well as real estate.

So that's what we're seeing today in the financial services landscape.

And just to add one thing, as we have less exposure to financial services than some of our competitors, which cuts both ways, we actually like that exposure to be higher because we think that long-term financial services is is an extraordinarily good market.

But while you have chaos going on in those markets to have less exposure it is unfortunate in the short run but in the long run we're very bullish on the opportunities to grow that bracket.

And the European business, I know there's some seasonality there, but the margins were a little bit lighter than what I was looking for.

Is that because of the bulk of your investments were coming in the European region?

I wouldn't say the bulk, but certainly we continue to make investments across the globe and you know, as I mentioned in our remarks, we are pleased with our results but we think that there are opportunities for margin improvement in all our businesses and part of our goal through the remainder of this year is to be very focused on generating strong revenue growth, while continuing to improve the margins.

So that's something that we're going to have to work on and we'll see how well we do at accomplishing that goal.

Okay.

And just lastly, if you strip out that write-down in Futurestep, what would be the segment's operating margin have been?

Less than 10%, just about 8% and we think that the opportunity in that business to get to double-digit margins is right there.

Having said that, we need to focus in order to make that happen.

Okay.

Great.

Thank you very much.

Our next question is from the line of Tobey Sommer with SunTrust Robinson Humphrey.

Thank you very much.

Start out with a question on pricing, if I could, which was very strong in the quarter, both in Futurestep and in the core Executive Search business.

I wondered if you could characterize what the growth was comprised of, because I know it could move a couple different ways, whether it's a mix shift within industries in terms of the some of the demand you saw or moving upscale which has been a process you've been undergoing now for the last several years.

Maybe if you could comment about what apples to apples pricing was like for the same kind of positions in the same industries.

Thanks.

Well, generally, it's hard to generalize, Tobey, but clearly part of our strategy in terms of growing our flagship business, the Executive Search business, is to move the brand upstream.

And as we have demonstrated to our shareholders and to our colleagues over the last 16 quarters, we have done just that.

And so sequentially, I wouldn't characterize the pricing as any stronger, per se.

Our average fee globally this quarter was $87,000 or so.

Which when you look against some of the other competitors, whether they're private or public, is a little bit lower.

But our breadth -- I mean, we're much, much broader.

We're in 40 countries around the world.

Our Latin American business is a dominant business, our Asian business is a dominant business.

So you really have to factor that in when looking at comparables.

But it's at least sequentially, we haven't seen any dramatic shifts in terms of pricing.

But overall, clearly, coming out of the technology dot-com era, you saw a movement away from equity-based compensation into more cash and we have continued to see the war for talent.

And with that, we have seen wages rise, generally, and in some parts of the world it's absolutely red hot.

I mean, in China, for example, there is significant wage growth and the same in India.

And we've got a fabulous opportunity in both of those markets to grow our business over the next three to five years.

Thank you.

Shifting gears a little bit, in terms of the financial services, both globally and in North America, when are typically the strongest quarters from a seasonal perspective for confirmations in that area?

Well, it depends on a segment.

Within financial services, we have six or seven sectors.

But with the -- as you would expect, with the investment banking and capital markets, those tend to be more robust at the beginning of a calendar year.

That generally coincides with those firms' fiscal years.

So then with insurance and real estate, consumer banking, those are pretty consistent throughout the year.

But clearly, in at least those two areas, we'll see activity at the beginning of a firm's fiscal year, which is typically the beginning of a calendar year.

Okay.

Thanks.

And then just wanted to ask you a question on your capital allocation.

You're still, despite the fact you bought back a lot of stock in the quarter, still growing your cash balance.

Any thoughts on changes in the acquisition environment, given perhaps some of the turbulence in the stock market and declining multiples, have you seen any changes among the expectations of potential acquisition candidates?

Yeah, we're pretty active, looking at potential acquisitions and we think that there are a number of opportunities to further transform this business into a broader professional services platform.

Having said that, our experience is that some of the private companies that are for sale actually kind of have unreasonable expectations around multiples and so we continue to be financially disciplined about how we look at these transactions, looking for good, strategic fit and good cultural fit, but at the same time, you know, we don't know that it makes sense for a private company to have a multiple higher than a public company.

Just doesn't seem to make that much sense to us.

So it makes completing transactions challenging, but in a business like ours, it's all people, you should think very carefully about those acquisitions you actually pull the trigger on because they have to fit very well culturally.

But your question was about capital allocation.

We certainly want to maintain enough Balance Sheet strength so that as these opportunities come up, we have plenty of fire power to bring to bear on the marketplace and while we've been aggressive in the quarter in terms of buying back our stock, we also feel as if we do have plenty of dry powder.

Thank you very much.

Our next question is from the line of Andrew Fones with UBS.

Please go ahead.

Hi.

I'd like to better understand the impact of pricing on your revenue growth also and so I was wondering if you can share with us the growth in the number of searches by geography and then also perhaps financial services, and other industries, thanks.

Well, we typically -- we haven't given out the number of assignments by industry on this call.

Andrew, I would just say what I've said earlier is that overall on a global basis, our industrial sector had a fabulous quarter.

As you can imagine.

When you see the demand for natural resources and the like.

So our business is very much followed that trend and we've seized upon it and we have a fabulous industrial business.

We've also seen sequentially increased activity in the healthcare area.

And that's been across the board as well.

And so those two trends definitely stick out on a sequential basis.

Then even despite what you read in the newspapers, our financial services business did well sequentially and I think that's because it's a balanced portfolio and overall we have a very balanced portfolio and within financial services, we saw more of a shift into risk kinds of positions, infrastructure ops, real estate and a pause in capital markets and investment banking at the bolt bracket.

But again, this time of year, people are obsessed with bonuses, as you know and there's not a lot of hiring going on in Wall Street at the bolt bracket firms.

I think that's from a markets' perspective synopsis of the quarter.

Total number of assignment at the end of the quarter was 1878, up 13.5%, so you can probably do the math to figure out the volume and pricing impact on our revenues.

The up 13.5%, was that sequentially or year-over-year.

Versus a year ago, same quarter a year ago.

Oh, okay.

I saw in the press release you had mentioned that you saw a 21% increase in fee per search versus you 25% growth in revenue.

I think in the press release it's referring to fees or assignments billed in the quarter.

What Steve just gave you was the newly opened assignments within the quarter and of course that comparison versus the same quarter a year ago.

Okay.

Great.

Thanks.

And then I guess just finally, touching back on some of your comments there, is there any difference in the level of search for industrial and healthcare, two of your kind of stronger segments, this period versus some of the other segments that were perhaps growing a little more slowly?

No.

Obviously in the capital markets and investment banking area, some of those fees can be quite high, given the compensation levels, and certainly you don't see as much of that in the industrial and healthcare areas.

That's just not the market.

So they're really two completely different worlds.

But then within financial services, when you get into ops and risk and insurance and real estate, it becomes much more consistent with what you see in other verticals.

Okay.

Thanks.

Our next question from the line of Michel Morin with Merrill Lynch.

Good morning, guys.

Just wanted to check -- you've mentioned kind of the areas of strength in the quarter, specifically relative to your own expectations three months ago, are these the same areas where you were positively surprised or were there other segments where you saw much better than expected results?

Well, you know, you pick up the newspaper every day, Michel and you certainly have to question what's happening in the world around you.

An I personally had those questions and more recently, with the charge-off activity at the big universal banks, there's certainly room for pause.

I am a little surprised on financial services, compared to when we last spoke to shareholders in early September, just for no other reason, just reading the newspaper back then.

But then again, we do have a balanced portfolio within financial services overall, if you look at the various sectors within financial services, and a good percentage of the business is in EMEA and Asia-Pacific and Latin America.

And so if you really kind of look at our business, I guess it wouldn't surprise you, per se.

On balance, yeah, I would say that's probably the thing that sticks out in my head.

Okay.

And just I know it's relatively small, but if we look at your performance in Mexico, just the equity gain seems to be -- been a bit lower than what we were looking for.

Has there been a change there at all or -- ?

No, there hasn't.

And in fact, the business has performed exceedingly well and that, combined with our south American business, is really a dominant business in the region.

So there could be something that was lumpy but the business continues to perform.

Okay.

Great.

And then just finally, the write-down at Futurestep, I know that if we go back a year or two there had been a much bigger issue there.

It sounds like this is just a one-off event or it seems like you're down playing it.

Could you elaborate a bit more on kind of what happened here?

Every client situation is different.

In this particular case, we had a result that was unfortunate.

We're not happy about it but I wouldn't consider it systemic or anything that I would point out, other than as kind of a blip in the quarter.

The Futurestep people are growing the business very nicely.

They have some momentum that they're continuing to capitalize on and as I mentioned, I expect that over time, the margins in that business will continue to inch up while the revenues grow.

So nothing in that particular case can be extrapolated the rest of it.

Thanks very much, guys.

Our next question from the line of Mark Marcon with RW Baird.

Please go ahead.

Good morning, everybody and congratulations on a terrific quarter in what seems to be an increasingly tough environment, thanks, Mark.

Gary, we talked about this quite a bit.

How are you going to think about things for the coming year in terms of making investments behind a business, given - the headlines that are out there and the fact that employment does lag a little bit, you know, relative to general business economic activity and can you also talk a little bit about some of -- a little bit more about some of the recent hires that you've made, because you've made some significant ones and is that -- is this just a start or are things going to get tempered a little bit or are you going to kind of wait and see how things play out.

And then I've got a couple of follow-ups.

Well, Mark, there's many facets to your question there.

We are absolutely obsessed with transforming this firm and we are going to create absolutely the top of line brand in human capital and we are going to create a diversified HR services business.

To do that, we have to invest and we are going to do that.

You have to be mindful of the cycle.

There's no question about that.

Which we are.

Nobody has a crystal ball.

We certainly don't.

Our intention is in any kind of downturn to run this business with operating margins in the mid-to high single digit.

I mean, that's our goal.

That's in all of our operating plans that we have.

The lifeblood of any services business is its people and like your business, we have to continually go out and recruit colleagues into this firm and we have to retain the colleagues that we have and so we're committed to that.

But overall, our goal is to round out a set of solutions that help our clients, not only identify talent, we want to help our clients more effectively and deploy, develop, retain and reward their work for us.

In terms of your question about recent hires that have received some press, they have been absolutely what we expected and more.

And so if you look around the world in some of these hires that we've made, they have exceeded our expectations, Mark.

That's great to hear.

So it sounds like even though you've -- you know, you just articulated a personal observation about how things may play out from a cyclical perspective and maybe things slow down a little bit, it doesn't sound like you're going to pull back too dramatically in terms of making investments.

But at the same time, you are committed to under any -- even if we go into a dramatic downturn, still maintaining, even in a dramatic downturn, a mid-to high single digit margin.

Did I hear that correctly?

That's the goal.

Again, Mark, we don't have a crystal ball.

I'll tell you that this firm, we're in our 39th year.

We've experienced four recessions.

Three of those four the business was down between 8 and 10% something like that.

The last one was obviously quite unusual.

We certainly wouldn't see a situation like that.

But like any business, I mean, you know, businesses operate in a cyclical climate and whether our business lags the economy or not, you're in a much better position to say than we are.

But we are absolutely mindful of the world around us and that's -- you know, we are committed, Mark, to running this business to mid-high single digit margins and we -- I kind of believe personally that volatility creates opportunity and we're -- so when you talk about making investments in maybe a down part of the cycle, you have to be opportunistic and you have to have a view towards the long-term.

And I think the thing we've demonstrated to shareholders is that we've done everything we said we were going to do.

And we hope to be able to deliver on that commitment in the future.

And then just to be clear, the mid-to high single digit margin is if we're in a downturn, obviously the margins would be a lot higher in a normal economic environment.

Yes.

I didn't want any confusion there.

And then can you talk a little bit about the specifics on Futurestep or is that something you cannot really talk about?

What do you mean, like who the client was?

Probably not.

No, but what the exact issue was.

You know, no, we're not going to talk about the specific issue.

But, you know, when you're delivering on mandates and some of the Futurestep mandates are literally hundreds of positions you are going to have hiccups along the way and many, many times it's human nature and in a services business is that, you know, you tend to try to always please the client.

Sometimes you overcommit yourself and sometimes you underdeliver.

And that's something that's as a human being in any type of business, sometimes happens and in a services business it happens more often.

Do you think that we should expect situations like this to arise in the future or do you think this issue is -- even though it's part of human nature, it's not going to -- we're probably not going to see things like this again.

I think it's obvious that there will be things like this in the future and there will also be times when we hit the cover off the ball.

That's just part of growing a business.

And just to be clear, this was a combined Korn/Ferry step engagement so it's not as if there is a particular issue that is specific to any one component of the business.

This was a combined effort that in this particular case did not quite meet our client's expectations.

As Gary just stated, the likelihood of that happening in a services business every once in a while is pretty high.

The likelihood that it happens very often is very low.

Our overall level of satisfaction from our clients in all of our businesses is very high and we always are focused on improving in that area.

So we take these issues very seriously when they occur because 100% satisfaction is the goal.

You don't ever get there but that's the goal.

So certainly on an overall basis, this is a completely immaterial event to Korn/Ferry.

It is modestly significant to Futurestep's margins in this particular quarter.

But on an overall basis, this is really kind of a blip.

So you know, we're constantly trying to improve all of our businesses.

Our people are always trying to do the best they can for clients.

Every once in a while we don't meet their expectations but that's not the norm, that's the exception.

I was just trying to get a feel for the frequency.

Last question, just, with your stock trading where it is, I'm glad to see that you're buying back stock and you've got an extremely thoughtful board.

You know, of all the things you could do, I mean, it seems, given your long-term trajectory, how would not buying back -- continuing to buy back stock aggressively at these levels not increase shareholder value to the greatest extent possible at this point.

We look at investments in terms of what our cost of capital is and we try to make investments that return in excess of that cost of capital and one of those choices, obviously, is we think an investment in Korn/Ferry is a great investment.

And we think that -- you know, we're not experts on where the stock should be.

But we do think that we are building extraordinary value over the long-term of this business, and so we will continue, as I mentioned in the prepared comments, to look judiciously at how we can return capital to shareholders, achieve extraordinarily good returns for our shareholders and at the same time leave ourselves well-armed to address any other strategic opportunities that we see that also would return in excess of our cost of capital.

So it's not a single source choice.

We have many opportunities, both in terms of growing our existing businesses, looking at other expansions of our business into the HR space and as you mentioned, buying back stock.

So the management team will continue to look at that actively.

Great.

Thank you.

Our next question from the line of Kevin McVeigh with Credit Suisse.

Hi, it's Kevin McVeigh.

Wondered if you could give us a sense of what type of contribution you would need by region across the $190 million to $200 million in revenue for the third quarter guidance.

Say it again, Kevin.

Steve, just the -- what type of contribution you would need from North America, South America, Europe, to achieve the low to high end of the range in the revenue?

We're assuming overall, I mean, we're assuming overall that the mix of business stays rather consistent to this quarter in terms of percentage mix.

Okay.

That's fair.

Mid-range of guidance would sort of imply flat outlook by region, division.

We do expect a slight uptick let's say mid-range in the Futurestep business.

And Gary, would you frame kind of the environment overall, similar to what it was last quarter?

I mean, it felt like August things were very tight and then September loosened up and then obviously we've had a step down here.

Is the operating environment similar to what it was back then when you reported the first quarter or I guess from a macro perspective overall.

That's a great question.

You're right, in terms of how you you characterize it.

I think that's the psychology of it.

That's how you pick up the newspaper.

It was certainly a lot of concern in August.

Things kind of died down and then over the last several weeks you've seen, as you pick up the newspaper every day, you continue to see questions, particularly as it relates to the U.S.

economy.

And again, we're not economists.

What I can just report to you is what we're seeing and that is in Asia-Pacific continued robust demand.

In EMEA, strong demand.

And in North America, we've seen flattish activity over the last several months.

But again, in line with our expectations, the North American market is obviously a mature market.

And that's really the best that I can report to you.

That's helpful.

And not to belabor financial services, but could you remind us what percentage is North America out of your total financial services business, how much is North America, kind of by region, North America, South America.

I think off the top of my head, Gregg can correct me, but I want to say that 35, 40% of our financial services business is North America.

Is that right, Gregg?

Yes, so 35% or so of the financial services business is North America.

Then broken between Asia-Pacific and EMEA.

And we'll -- hang on one second.

We'll give you those numbers.

Great.

While we're doing that, let me just elaborate just a little bit on your first question.

As Gary said, we're not trying to predict what will happen in the economy because God knows even the economists can't quite seem to do that.

So we are preparing the business for a variety of economic scenarios, including an uptick.

But at the same time we have to be are prudent about how we get returns.

During the quarter we continue to invest in people, we continue to invest in our new businesses or our newer businesses and we're trying to do that in a balanced way so that we can generate solid returns across all segments.

That's helpful.

And Steve, while you're looking that up, I wondered if you could -- what are the first kind of areas of focus you'll focus on now that you're on board and as you look out over the next couple of quarters.

I would say that the key difference between our strategy and others' is that we have expanded our business outside of search into other non-search related businesses and that key to our strategy is continuing to make excellent progress in those areas and I hope to be able to help both the Futurestep and the LDS folks in terms of building out the scale and the profitability of their offering.

Could you remind us how big LDS is right now?

I don't know that -- have we ever disclosed it?

We're on a run rate right now of almost $60 million and I will tell you that's up from -- believe it or not, that's up from $8 million probably three and-a-half, four years ago.

We continue to see demand from our clients for those solutions and we're very, very encouraged by that business.

And I'd say that if you look around the world, consistently it's the business that receives the highest client satisfaction marks.

To answer your question on financial services, of the total, 39% is in the North America region, 32% in Europe, 20% in Asia-Pacific and about 8% or so in Latin America.

Thank you very much.

Our next question from the line of Clint Fendley with Davenport.

Please go ahead.

Good morning, gentlemen, and welcome aboard, Steve.

Well, thank you.

Good to be here.

Gary, when we look at your international revenue today, whether it be Europe or in Asia, would you say that your searches are still driven by the needs of U.S.

based firms and how might that have changed during the past year or so?

No, I would not say that.

But you're talking about 38 countries.

So I don't want to generalize.

But I'll pick some countries.

China, for example, I mean, our strategy there -- we've been there for 13 years.

We just opened our third office on the mainland.

We have four in greater China now.

Our strategy there is to move more and more of the business to local companies, as you could imagine, given the activity that's happening.

So we don't have kind of a rep office mentality when it comes to how we expand geographically.

It's a global business that is executed locally.

The Middle East, for example, is a phenomenal opportunity for us that we started several years ago.

And so generally speaking, when we look at a geography, we do very much have a global view, institutionalize how we go to market, connect it globally, but it is a local office and so our philosophy is not to have rep offices.

If we're going to go into a market, we want to be number one in that market.

And to do that, you have to have a focus on building a local business.

And within Europe, how far away do you think you are from really moving upstream to where you're one of the very top tier firms within Europe?

Well, we consider ourselves to be one of the top tier firms and I will just tell you that overall, even though we've taken this business from $260 million of fee revenue, , four and-a-half years ago, to today, $800 million, still believe that there is just phenomenal opportunity across the board to further differentiate this business and scale it.

Obviously, that's subject to any kind of economic cycles, but you have to look through that.

And EMEA is no different.

We're doing the highest level of business we've ever done there.

We have to continue to make sure that as we do that, we grow the margins and we grow profitably like we do in any business that we're in.

But we have a great opportunity and what we're seeing, for example, in the Middle East, what we're seeing in Russia, what we're seeing in -- it's exciting.

It's really exciting.

And the world has flattened.

There's no question about it.

And you know, we're blessed to have a company that has since its very, very inception, a focus on international business and that's what we have

Thank you.

That's helpful.

Our next question from the line of Ross Berner with Weintraub Capital.

Please go ahead.

Hey, guys, thanks for taking my call and nice job in a tough environment.

I missed some of the call, but just want to see if you get a sense of what you guys are thinking about as it relates to Futurestep and do you still sort of view it as a potential for an independent company at some point in the future and as it continues to grow fairly quickly.

Just maybe tell us what you're thinking about that.

Well, we -- we're growing our businesses.

I mean, we run our leadership development business, we run our flagship business and we run our Futurestep business.

There are CEOs of those businesses, Presidents of those businesses and we expect those businesses to scale independently.

Having said that, the overall strategy of this firm is to create a series of solutions that help our clients not just identify talent, but help them more effectively and efficiently deploy, develop and retain.

The whole strategy of this firm is not to diversify for the sake of diversification but rather to develop solutions and services that enable us to talk to clients throughout the whole year and so whether it's our leadership business or our Futurestep businesses, we believe that those businesses are adjacent to the flagship business and that they will reinforce that flagship business and drive deeper relationships.

So there's no price -- well, I was under the impression that at some point that once it got to a critical mass that you maybe would be of the mind set that it should be a separate maybe entity, public entity or otherwise.

Is that not the think at this point or is that -- I appreciate that it's all part of the same strategy, but at one point there was a view that because it is growing so quickly and the business that's it's in that it's probably a higher valuation type of enterprise.

We're fiduciaries to all of our shareholders, and obviously we need to look at how we can create the most value for shareholders through all the offerings that we provide.

So if someone were to suggest some sort of structure that would allow the value that Futurestep is creating in a business to more effectively be returned to shareholders, I suppose we would consider that.

For the moment, and for the foreseeable future, we see this as a consolidated component of our long-term growth strategy and more importantly, a way, as Gary said, to more effectively serve our clients across the pantheon of talent issues that they face.

Currently we think that the best solution for Futurestep is to continue to grow and grow profitably within the context of a consolidated Korn/Ferry.

Obviously, we would have to consider other alternatives if they were brought to us but we are not considering those sorts of alternatives at this point.

Absolutely not.

Today, 21% of the business comes from outside of Executive Search.

We hope that we can articulate to shareholders the value of those businesses inside the overall umbrella of Korn/Ferry today.

Understood.

Thanks very much for taking the call.

It appears there are no further questions, Mr.

Burnison.

Well, thank you.

I will say that it is a challenging environment, particularly when you read the newspaper.

We don't have a crystal ball.

We are absolutely committed to delivering to our shareholders, like we've done consistently over the last 25 quarters and we have a fabulous opportunity.

We've got a household brand and we're in almost every geographic market around the world.

With that, I wish everybody season's greetings, happy holidays and thank you for participating in this call.

Ladies and gentlemen, this conference call will be made available for replay for one week starting today at 12:30 p.m.

Eastern Standard Time and running through the date of December 13th at midnight.

You may access the AT&T executive play back service by dialing 1-800-475-6701.

Please enter the replay access code 897441.

International participants may dial 320-365-3844.

Again, the access code is 897441.

Additionally, the replay will be available for play back at the company's website, www.KornFerry.com in the investor relation's section.

That concludes our conference call for today.

You may now disconnect.