Korn Ferry (KFY) 2008 Q3 法說會逐字稿

Welcome to the Korn/Ferry International conference call.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

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

Gary 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, sir.

Thank you, Kathy, and good morning, everyone.

Today we're pleased to announce our results for the third quarter and discuss our outlook for the business ahead.

At the end of this month, I'm going to celebrate my sixth anniversary with the firm.

It's quite remarkable to look at the tremendous progress we've made in growing this business over the past 24 quarters from essentially a monoline firm doing less than $300 million annually to today's Korn/Ferry with three growing businesses producing approximately $825 million of annualized fee revenue, including our business in Mexico.

Our recently completed third quarter was no exception with revenues up 22% versus a year ago.

As we look to the future, Korn/Ferry will continue to evolve to reflect and address the profound changes occurring in the human capital landscape.

It's clear to me that leading companies, in light of the demographic trends and skill shortages, are increasingly concerned by the investments induced by the talent war.

Indeed, talented and skilled employees are the world's most precious commodity and this perspective has significantly changed our business.

Executive search is no longer simply about finding talent.

It's about attracting it and ensuring the best fit between the company and the executive.

And secondly, it's no longer just about recruiting top people, but also the need to more effectively and efficiently deploy, develop, retain and reward these professionals.

These critical factors have influenced our business model and have driven our success year-over-year and this, in fact, is tomorrow's Korn/Ferry, a diversified talent management provider.

For our third quarter and for the first time in the history of Korn/Ferry and the industry, consolidated fee revenues tipped $200 million, a remarkable milestone.

Up 22% from the prior year, fee revenue has now improved sequentially for 18 consecutive quarters.

Our third quarter was fueled by sequential improvements in all of our businesses.

EPS was $0.37 a share, an improvement of 12%.

From a geographic perspective, our business in EMEA rose 22% in the quarter.

Demand throughout the region has been solid, with strong performance in France and the Middle East.

Due to a supply of heavy confirmations, EMEA has a solid pipeline moving into the fourth quarter.

Asia-Pacific was up 36%, generating a little over $25 million in fee revenue, and the business was led by improvements in India, Japan, Korea and Singapore.

Our North American business achieved almost 95 million in revenue, up 14%, driven primarily by our industrial and life science sectors.

Korn/Ferry strives to be an innovator of this industry.

As executive recruiting has evolved with greater emphasis being placed on how we can help ensure that the candidate is the best fit for both the position and the organization, Korn/Ferry has responded by the development and launch of the Korn/Ferry Advantage.

It's a framework supported by a set of proprietary tools that's providing us with a common approach to executive recruitment.

It allows our clients to define the critical leadership competencies necessary for success.

It also enables us to integrate our leadership business into our flagship executive recruiting.

It's now operational around the globe and client reception has been very strong.

Dozens of searches have been awarded in which the KF Advantage was noted as the deciding factor for choosing Korn/Ferry.

Process has been effective in winning engagements at all levels, including several high profile CEO searches.

Turning to Futurestep.

Activity in the middle market and outsourced recruiting segment remains solid.

Futurestep has now achieved 17 sequential quarters of revenue growth.

For the third quarter, Futurestep generated fees of $28 million, up 26%.

And also during the quarter we secured our most significant recruitment process outsourcing win to date.

In Asia, we've signed a five-year contract with a multi-national, helping our client with their recruitment activity, initially expected to fill over 2000 positions.

Albeit the largest, this assignment is just one of many considerable outsourced recruiting engagements that Futurestep is now performing and it's indicative of how we intend to grow and scale our business.

Revenues for our leadership development solutions business also continued to grow in the quarter.

Through the first three quarters, the business recorded 44 million in fee revenue with a positive margin.

Lominger results have been particularly strong with year to date revenue of 17 million at a 27% margin.

Importantly, we are seeing an increasing level of referrals between our leadership business and our search team with a greater emphasis on joint consultative solutions.

Although we, too, read the newspapers, our business has yet to see any significant deterioration due to any recessionary anxiety.

Irrespective of developments in the economic environment, we will continue to pursue a strategy to evolve and transform this industry and Korn/Ferry.

During the quarter, we recruited additional top flight consultants to the team, made significant progress on our KF Advantage initiative, and saw further proof from our clients that there's an increasing demand for the full array of solutions we offer.

We're going to remain focused on our operating model.

We will avoid any unnecessary spending, yet we are going to retain the resources necessary to pursue our long-term vision.

We're going to continue to optimize the search business, creating a differentiated platform, while focusing on quality, leverage and scale.

We're going to grow our leadership consulting capabilities and we're further going to reposition Futurestep in the RPO space which, in the long-term, will drive further margin improvements.

Finally, we will explore additional emerging markets for expansion opportunities, enhance our culture through the promotion of our core values, and increase sense of community and the training and development of our colleagues.

The company is in great financial condition and we are absolutely well positioned for long-term success and ongoing value creation for our shareholders.

With that, I would like to turn it over to our Chief Financial Officer, Steve Giusto.

Steve.

Thank you and good morning, everyone.

Today, we are pleased to announce another good quarter of revenue growth for Korn/Ferry International.

As Gary stated, fiscal '08 fee revenue grew 22% versus the third quarter of fiscal '07 to a new all-time high of $201.2 million.

On a sequential basis, even though the quarter included the normally slower holiday period, revenue grew 2.7%.

Korn/Ferry's fee revenue has now grown sequentially for 18 consecutive quarters dating back to July of 2003 with fee revenues growing at a compound annual growth rate of approximately 21% over this period.

Our earnings have also grown.

Fiscal '08 third quarter EPS grew $0.04, or just over 12% versus the third quarter of fiscal '07.

Earnings per share on a sequential basis were flat.

Fiscal '08 third quarter operating earnings were down 1% year-over-year and 17% sequentially, and our operating margin for the quarter, 10.5%.

Included in our operating expenses during the quarter were approximately $1.9 million of reserves and accruals aimed at reducing our cost structure.

Settlement charges are for cash outlays in the form of severance and the like that have no associated future benefit and, therefore, have been accrued currently, although they will be paid out in the future.

Absent these charges, our operating margins would have been 11.5%, 100 basis points higher than reported, but still 1.5 lower than the previous quarter due primarily to incremental bonuses as a result of our strong growth.

We may have other similar charges in the future as we work to make our operating model more profitable over the long run.

While we do not consider this type of charge unusual or material, we believe disclosing steps we are taking to rationalize our cost structure and improve our results in the future is meaningful information for investors.

Operating margin in the fiscal '08 second quarter and in the prior year third quarter were both 13%.

Included in our income for the third quarter is approximately $3 million of realized gains on the investment portfolio underlying certain long-term compensation programs we maintain on behalf of our employees.

It is typical for investment managers to close out certain positions at the end of the calendar year and we were the beneficiaries this year of positive investment returns when this end of the year activity occurred.

These gains are included in our P&L below the operating margin line as they are not a part of our fundamental operations and it's difficult to predict whether we will benefit at this level again next year.

Now let me review the business segments in a little bit more detail, starting with executive recruiting.

Fiscal '08 third quarter fee revenue reached $173 million, an increase of $30 million, or 21% year-over-year, and $4 million, or 2.3% sequentially.

All executive recruiting operating regions grew versus the third quarter of fiscal '07.

Fiscal '08 third quarter North America fee revenue was $94.8 million, up $12.6 million or 15.4% year-over-year and essentially flat sequentially.

In North America, we gained ground in consumer, education, and healthcare but lost ground sequentially in other areas.

The North America financial services practice grew almost 14% year-over-year but was down 6.6% sequentially in the quarter, a result not unexpected given the state of the financial services industry.

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

Europe fee revenue grew 22.2%, or $8.4 million, versus the third quarter of fiscal year '07 reaching $46.3 million.

On a sequential basis, Europe grew 10%.

Trends into the fourth quarter are encouraging and year-over-year, 12 of 19 local country markets have improved with all major specialty markets growing led by industrial at 42%, life sciences at 24%, technology at 14%, and financial services at 8%.

The Asia-Pacific region also continued its growth trend in the third quarter of fiscal '08 with fee revenue reaching $25.3 million.

Asia-Pac third quarter fee revenue was up $6.7 million, or 36% year-over-year, and 2.7% sequentially.

Greater China up 16% year-over-year.

India up 101% year-over-year.

Australia, up 37% year-over-year.

Continue to be key growth markets for the Asia-Pacific region.

In Latin America, fiscal '08 third quarter fee revenue improved over $2.3 million, or 53% year-over-year.

In the second quarter of this year, Latin America had remarkable revenues and sequential growth of almost 50%.

Thus, on a sequential basis in the third quarter, the region was down 12%.

Fiscal '08 third quarter executive search operating earnings were $29 million, up over $1.7 million or 6% year-over-year and down $3.9 million or 12% sequentially.

Consolidated executive search operating margin was 16.8% and was off 230 basis points versus the third quarter of fiscal '07.

Sequentially, executive search operating margin dropped 270 basis points driven primarily by incremental productivity-related bonus demand and our continued investment and consultants in our core search practice as well as our leadership development solutions division.

Let me now discuss head count.

The number of executive search consultants at the end of the third quarter was 518, down five consultants from the second quarter of fiscal '08.

Third quarter annualized revenue per consultant was over $1.29 million and is up 11.5% year-over-year.

The number of consultants in Q3 of fiscal year '07 was 485, so year-over-year consultant count is up 33, or approximately 7%.

Now let's turn to Futurestep.

Futurestep's fiscal '08 third quarter fee revenue improved over $5.8 million or 26% versus the third quarter of fiscal '07 and $1.3 million or 5.0% sequentially, reaching $28.1 million.

As Gary said, Futurestep has now grown in 17 consecutive quarters and all geographies grew on a year-over-year basis.

Sequential fee revenue gains were achieved in Asia-Pac and Europe while North America was essentially flat.

Fiscal '08 third quarter sequential fee revenue growth in Europe and Asia-Pacific was 12% and 3% respectively.

Futurestep's fiscal '08 third quarter operating earnings were $2 million, up $0.5 million sequentially.

Operating margin was 7.2% 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 turn to the balance sheet.

At quarter end, our worldwide cash balance was $298 million, up approximately $56 million sequentially.

We had a good quarter of cash collections and also slowed our buyback activity during the quarter.

We are committed to ongoing returns of capital to our shareholders and believe that our stock is a compelling investment, given the market discount across the broad services sector.

However, we also believe it is prudent during this period of economic uncertainty to retain greater financial flexibility, and we also believe valuations of companies we might be interested in acquiring may be coming down and we want to be ready to move opportunistically.

We returned over $6 million of cash to our shareholders in the quarter by repurchasing approximately 400,000 shares and through the end of the third quarter, the firm has now repurchased approximately 2.9 million shares of common stock with total cash proceeds of approximately $56.5 million.

There is now approximately $43.5 million remaining of the $50 million share repurchase funds authorized by the board of directors in October of 2007.

At quarter end, approximately 25 million, or less than 10% of our cash and marketable securities portfolio was invested in option rate securities.

In the last two weeks, a number of originators have experienced option failures on a portion of their securities and we, like many others, have securities subject to these market conditions.

This has not effected our overall liquidity and we do not expect any liquidity issues due to this market condition.

If the market does not recover, we will assess the need for any mark to market of these securities at year end but, to be clear, these option rate securities we own are backed by AAA municipal bonds or pools of federally backed student loans and are paying interest as scheduled.

We do not anticipate having the need to liquidate any of these securities below par.

Let me now comment on our outlook for the last quarter of the fiscal year.

We have completed the first month of the fourth quarter and revenues in confirmations have been good.

If that trend continues, we estimate that fourth quarter fee revenue will likely range from $195 million to $210 million and diluted earnings per share will likely range from $0.34 to $0.38.

This estimate assumes that exchange rates stay where they are and that we continue to perform better in terms of revenue than would be inferred from reading the somewhat dire economic forecast from the business media.

This is a tricky market that we are addressing with optimism, focus and some degree of caution.

That concludes our prepared remarks and we would be glad to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from the line of Tobey Sommer with Suntrust Robinson Humphrey.

Please go ahead, sir.

Thank you.

I had a question for you about the accruals related to streamlining.

You mentioned they weren't unusual.

I was wondering if you could give us some color as to whether they are larger than they were a year ago and kind of what variation you've had in those accruals on a quarterly basis recently.

Tobey, what we're trying to do is we're trying to create a cost structure that is efficient enough to generate the sorts of mid-teen margins that we expect over the long-term.

And in this quarter we didn't achieve that.

Part of that is because we established some new reserves aimed at beginning to rationalize the cost structure.

I mean historically, the search industry has been kind of a boom and bust cycle and we're trying to break that cycle.

So what we're trying to do is be proactive about addressing our cost structure, even though our business continues to be very strong.

So what we're doing is actively managing the cost structure to make certain that as we proceed through this next year, we are prepared for all eventualities and that we have the most efficient cost structure we have.

And the reason we put it the way we did is that there could be other instances across the globe where in order to reduce costs over the long-term, we have to incur costs to make that happen.

And so we just thought it was good disclosure to let you know that.

Absolutely, thank you.

That's helpful.

From a geographic perspective, were those measures focused in one particular region, or were they spread across different geographies?

No, they were across the region.

Okay, and then you mentioned the cash balance.

I was wondering if you could give a little bit more color as to what sort of -- what's the spendable cash versus the bonus accrual included, et cetera, in kind of, if you could elaborate with a little bit more color on the types of investments you're holding?

Thank you.

Yes, we have somewhere between 110 and by the end of the year, probably 150 of really truly investable cash.

We think that's modestly more than we would need just to keep running the business.

But as we mentioned, we want to maintain some financial flexibility through this period.

In terms of the, what was your second question, Tobey?

I'm sorry.

The types of investments that you're holding with the cash balance.

Well, it's a range of things.

As I mentioned, a small component is in option rates and then it's other money market funds, treasuries.

So we have a very conservative cash portfolio.

Could you just mention in your prepared remarks, if you, did I apologize, I didn't jot it down, what portion you have in--

A little less than 10%.

Thank you.

Then the last question and I'll get back in the queue.

You mentioned financial services up I think double digit year-over-year on the quarter but down kind of mid-single digits sequentially.

I was wondering if you could comment what your expectation would be on that particular segment for the April quarter.

Thank you.

Well, the financial services business, as you would expect, sequentially it's down, given everything that's happening and there's a couple sectors that are depressed, particularly in North America and the UK.

And those are investment banking and capital markets.

If you look from a geographic perspective sequentially, Europe was down, North America was down, but Asia was up.

So overall the business sequentially was down about 9% year-over-year, obviously it's up 16, 18%.

Thank you very much.

And as a percentage of revenue, what does it represent currently?

Thanks for all the color.

Sure.

Financial services is about 21% of our overall firm.

Is that all, Mr.

Summers?

Yes, I think he got off, Kathy.

Okay.

Thank you.

Then we'll go to Josh Vogel with Sidoti and Company.

Please go ahead.

Good morning, thank you.

I have a couple head count questions here.

Of the, the decline of the five between Q2 and Q3, which region or regions did that take place in?

Well, we've never given that out and it was, it was down 5 on a base of 516 or 520.

What we're doing and what we have been doing is to continually look at our work force and to make sure that we're optimizing our operating model and that we continually cancel out nonperformers and we did that in the quarter and we'll continue to do that.

Okay, and are you still looking to add consultants in all regions then, as we look forward?

Yes, absolutely.

I mean the life blood of a services business, as you know, is people.

Our brand is our people and our colleagues around the world were incredibly proud of the 2600 employees we have and absolutely.

We are, we are aggressively looking to add to our own talent mix, but at the same time we have to make sure that we are optimizing our operating model and that we take a candid look at our consultants.

And we've done that now for six years and we'll continue to do it.

Okay, and is it possible, if you have a vertical or a market that's underperforming, how easy is it to transfer a more mature consultant into a new market or vertical?

It's certainly, it's tougher.

There's no question about it.

As this business continues to evolve, clients are expecting content knowledge around an industry.

The good news for us is that the portfolio is incredibly balanced.

Both geographically, half our business is outside the United States, but also from an industry perspective.

If you look at the overall firm today 21, 22% of the company is in financial services, 24% is in industrial, 15, 17 is in technology, life sciences is 17, 18, consumer is 17, 18.

So it's a very, very balanced portfolio.

But as the years progress here, clients expect content knowledge around industry verticals and sectors within industries.

Okay, and of the 33 added year-over-year, were those promotions or new adds, if you break that out?

It's a combination of both, and this -- when we start our new fiscal year, May 1, we will announce a new set of promotions.

We're just going through that process right now, but it's a combination of both.

Okay, and two more quick ones, if I may.

I know that your share buybacks slowed a little bit last quarter and, you may want to take advantage of some of the discounts out there.

But is something like a dividend, a one-time or a quarterly dividend a possibility here?

You are sitting on a ton of cash.

Look, we're constantly looking at what the best use of our capital is.

We're retaining some in the business right now because we think there are going to be opportunities over the near term that may come our way.

If we don't use the capital in that way, we will continue to look at the best way to return capital to shareholders and the manner in which we do that may change over time, but we haven't declared a dividend obviously and it would require substantial discussion at the board level to decide if that was what we were going to do.

For the moment, if we were to return capital, it would be through a buyback.

I hope we've demonstrated our commitment to investing our excess cash and capital in a very prudent manner.

And if you look back now over the last two, two and a half years, we have repurchased probably about $130 million or so, I'm probably off a little bit, in stock and have returned that directly back to shareholders.

We've also deployed excess capital via three acquisitions and I will tell you that those acquisitions, I'm very proud to report that they have performed above expectations.

We've integrated them into the business and they are absolutely driving incremental value.

And at the same time, if you look back at our performance over the last 24 quarters, I think we've also committed that we have delivered very consistent operating earnings to shareholders.

So we try to think of this as a very balanced approach and that's how we're going to continue to view it.

Okay, great.

And just lastly, can you comment on the trends you saw in February and also with your, your revenue guidance, does it assume any strength or moderation in any specific regions?

Thank you.

Yes, no, thank you.

It basically assumes that the trends are going to continue.

EMEA has been very, very strong, particularly on the continent.

Middle East business that we've got has been performing very, very well.

Asia, as you would expect, has been on fire, and in North America, despite what you read in the newspapers, we continue to see good, good activity.

And so that's what we're kind of basing this next quarter's guidance on.

Great, thank you.

Next question is from Andrew Fones with UBS Securities.

Go ahead, please.

Hello.

I had a question about seasonality.

Looking back over the last five years, I think revenue has typically increased about 10% sequentially Q4 over Q3 and your confirmation or your searches have grown about 12%.

Given your comments how February's shaping up, would you say that you feel as though February's kind of in line with what you have historically seen sequentially based on that seasonality or would you say that it's just kind of holding up versus what we saw in Q3?

Thanks.

Andrew, I would say it's holding up.

If you look at the past several years and you look at our Q4, you're right in terms of your comments about the sequential growth, but when you actually look at that, a lot of that's been driven by financial services.

And as you know in the investment banking capital markets world, a lot of activity begins to happen at the end of a calendar year then really people move around at the beginning of the year.

And so to some extent that uptick has been driven by financial services and, quite candidly, we just don't see that in capital markets and investment banking, at least as it relates to North America and the UK.

Okay, thanks.

I was wondering if you could tell us approximately what proportion of your executive search revenue comes from sea level and board level searches?

Well, that really depends on how you define it.

It's all in the definition and we've defined that certainly in our annual report.

I would tell you that the majority of our business, clearly more than 50% is in some way in the sea level or board suite around the world.

You can't just look at average fees to draw conclusion on that, given that our business is so broad geographically and the compensation levels and Latin America, parts of Asia, are just not what they, not what we experience in the United States, for example.

Okay, thanks.

One final one, in terms of the fee per search, that continues to remain very strong.

Can you talk about what some of the drivers are there, and what your thoughts are perhaps as you look at your guidance?

Thanks.

Well, it, it absolutely, if you look back over the last 12 to 16 quarters, we have demonstrated that we are absolutely committed to continuing to migrate this brand to the top of the house and clearly part of that increase in average fee is really based I think on at least three things.

One is an implicit strategy to move the brand upstream.

Secondly is that if you look in some of the emerging economies, there is inflationary pressure on wages given the talent shortages.

That has driven it.

Then the final piece is that if you go back in time, there was a shift away from equity to cash and that's had an impact.

So I think it's at least those three factors, if you look at least our average fee growth.

Thanks.

And then if you could just perhaps give us some thoughts about what's simplistic in your guidance.

Thanks.

What's simplistic in the guidance is basically steady state, in terms of what we have seen this last quarter in anticipation that that is going to continue.

Okay, thank you.

Next we have Kevin McVeigh with Credit Suisse.

Please go ahead.

Hi, Gary and Steve.

Hi, Kevin.

How are you?

Good.

Good.

Hey, how important is the month of February to your total fourth quarter in terms of contribution, February versus March, April?

Do you have any type of analysis that looks at how much that contributes to the quarter?

Oh, that's like saying if you score two points in the first quarter, is it more meaningful than two points in the fourth quarter?

I, in a basketball game, I will tell you that looking at the business over the last several years, our fourth quarter has been driven to a large extent by financial services and the activities around capital markets and investment banking and candidly we just don't see that level of activity.

With respect to February, that's just a tough thing for me to answer, Kevin.

The one thing I would say, Kevin, obviously if it were not good, that would be problematic.

The fact that it was okay was helpful.

I mean you don't want to be behind in the first quarter, so the fact that we're off to a decent start in our fourth quarter is, is encouraging, but I think anybody that is in business services has got to be operating with, as we said in our prepared remarks, some optimism because the world doesn't look as bad as what the papers said.

But also, some caution because of what the newspapers are saying.

So we think our pipeline is decent.

Our backlog is decent.

And we hope that that trend continues through the quarter and into our next fiscal year.

Great, and Steve, in terms of the percentage of financial services, it was helpful you gave overall, but can you give us the geographical breakdown, how it's weighted, the financial services sector, how much is North America, South America, Asia-Pacific?

I would say that I'll do this off the top of my head and Steve can look at it.

I would say that 30, 35% of it, something like that, is in North America.

Is that right, Gary?

Of the total.

Of the total.

Of the total, yes.

Let us get that, okay?

Why--

We don't have it in front of us.

We would just be guessing and that would not be wise.

Why don't you ask another question or we'll put you in the queue and we'll come back and answer that.

Okay, and then my final question, not to belabor that incremental accrual, I know it relates to flexibility, but was that related to real estate closings --

No, no, that's mostly people costs.

Mostly people, okay.

Thank you.

Next question is from Mark Marcon with RW Baird.

Please go ahead.

Good morning, everybody.

I apologize.

I'm on the road and got on the call a little bit later due to some communication problems, but so I apologize in advance if these questions were already asked.

But in terms of the -- I heard one -- this is a follow-up to one question.

Do you plan to add in North America to your financial services practice?

Sure, absolutely.

I mean we, I believe, again, that a little counter intuitive.

Volatility creates opportunity.

The financial services industry is absolutely a center piece of the world's economy, and for us it represents about 21% of our business and so candidly I think the next two, three quarters are going to be very, very challenging in the capital markets and investment banking area.

We've seen a pickup in ops and risk officers and audit and insurance.

But we have to -- again, the life blood of our firm is our people, Mark, and we have to continue to be aggressive in bringing talent into this company.

Then we also have to be very candid about the consultants that we have and continue to make sure that we cancel out people that aren't performing.

When you're talking about adding in that particular area and being opportunistic, you're referring to areas that may be emerging or you're talking also about established areas like traditional investment banking?

It would be both.

We certainly have a very immediate interest in alternatives and asset management, those kinds of areas, but, sure, we also would want to strengthen our investment banking and capital markets businesses, Mark.

What if those businesses end up being in a two-year decline?

I mean obviously that's not something that we want, but, but I mean it's possible.

I mean you just -- all you have to do is read some of the more thoughtful pieces about what's occurring economically and what's different about this downturn relative to others, and you could come to a reasonable conclusion that maybe things are going to be tough for some time, not two or three quarters.

Well, Mark, I think that's a fair comment, but we're not operating the business that way.

We're operating the business more optimistically than that, but as we said, we're trying to do it with some caution and we're trying to be careful about our spending and other things like that just because you don't want to get hit by the truck you didn't see coming.

But obviously in our revenues it just doesn't seem like we're seeing that yet.

And then with regards to particularly financial services, we just see that as a long-term opportunity where despite the breadth of our business we have some opportunities to expand and so we'll see what the economy throws us in terms of curve balls, but we're optimistic about our opportunities in that space.

Yes, Mark.

I mean we -- you and Steve and I and Greg here, we've all been through a number of cycles and, as Steve said, he said it very eloquently, that's not how we're managing the business.

We are building here a diversified HR services business.

It's going to be the top of mind brand in human capital.

And you've got to have a little bit of a longer outlook.

I would say, Mark, if I could, Kevin asked a question about the financial services mix and I had said it was about 30% in North America.

It's about 40% overall financial services, is about 40% or so North America, 30% Europe, 20% Asia, and the balance in Latin America.

How much cash do you expect to have after the bonuses get paid out, and when does that happen?

We expect to have about $370 million of cash or so at the end of the year.

Our bonus -- I don't want to tell you exactly what we think our bonuses are going to be for the end of the year until the end of the year, but we'll pay out a substantial portion of that in July and that will leave us with 150 million-plus investable cash when all is said and done, after you consider other calls on our cash.

So I mean we're a very well capitalized business, a solid balance sheet, the sort of financial condition you want to be in at any juncture of the cycle, but certainly with the concerns that you raised, it's good to have a solid balance sheet.

I would also, Mark, back to your earlier question about investment banking and capital markets, I would say that as you know overall we have a very balanced portfolio.

But even within financial services, our historical, the amount of business we have in investment banking and capital markets, I mean quite candidly, we can add to our capabilities.

If you look at financial services, it's even extremely balanced from a sector perspective.

And what's your expectation with regards to, to the margins in North America from a longer-term perspective, if we look out towards next year and things are "normal"?

Well, I mean if things are normal, we expect our overall operating margins across the company to be in the mid teens.

We've achieved those margins for some time.

We see some opportunity to continue to leverage the operating model and some of the things that we mentioned in terms of rationizing our costs are aimed at accomplishing that.

But we're going to have to wait and see.

I wouldn't want to promise margin expansion in the face of your comments about the economy.

If we believe you, Mark.

Now, we don't necessarily believe that point of view, but we're trying to be, as we said, proactive about managing the cost structure to achieve appropriate returns on capital and that requires constant diligence.

Okay.

I just meant simply just in North America.

I mean that's the most obvious area.

Are you thinking that it can get back into the low 20s or --

Sure.

But I wouldn't -- I don't know exactly when that will be, Mark.

I'm not going to give you a quarter that that's going to happen, but I mean the North American market is about half of our revenues, more or less.

It's important to our success and it is a very strong financial performer.

So we expect great things from them.

I just meant whether or not this last quarter was an anomaly that is going to reverse itself or whether or not this is going to be something that is--

Well, I would say this.

Over the course of this year, our people across the world and in North America have been performing very well and so there is, as we mentioned, some incremental demand for bonuses that comes out of that.

That, that is a process that is an annual process and so we see some opportunity for a little margin expansion in the fourth quarter, but we also have to make certain that, as Gary has alluded, that we do the right things to continue to retain our very best people.

And part of what has happened is that the very, very high performers in the business have been doing very well and that kind of mechanically creates incremental bonus demand that we need to accrue for.

Thank you.

We'll go next toTy Govatos with C.L.

King.

Please go ahead.

How are you?

Couple of numbers questions and then a question about Future Step.

Bonus accruals for the quarter and CapEx for the year?

Just in Future Step?

No, bonus accruals corporate wide?

The total bonus accrual was 44 million, 44 during the quarter.

It's 118 for the year.

Okay.

And CapEx was 4.7 million in the quarter, and what is it year to date?

13.

13 million year to date.

Continue to run pretty much at that rate in the fourth?

Yes, yes.

Okay.

On Future Step, I wasn't sure if I heard you right.

You intend to reposition Future Step, or just--

No, no, no.

We have been focused on the RPO space for some time.

If anything, it's more of an intense focus in that area because we believe the scale of those sorts of engagements and the margins implicit in those sorts of engagements are where we would like to be over time.

So that's our intent with regards to RPO.

Okay.

I see.

Roughly, what is the percentage of RPO as a percentage of Future Step?

It's less than 50% of the business, Ty.

Okay.

That takes care of me, thanks.

And a terrific quarter.

Thank you.

Thank you.

You have a question from Michel Morin with Merrill Lynch.

Please go ahead.

Yes, good morning.

Actually just following occupy that last question.

Future Step, Gary, did you also say that your expectation longer term is there's also room for future improved margin performance?

We hope sew, Michel.

This is -- as we've talked about, our Future Step business, we really believe this is a multi-hundred million dollar opportunity.

We also believe that the market for outsourced recruiting is very, very new and it's developing, and in some places, we're actually helping to create the market and as we take on bigger, more consultative solutions for our clients, we believe that implicit in that is much more profitable engagements.

Okay, and then switching gears, also following up a little bit on what Mark was asking about in North America, the margins there.

If I heard you correctly, the accruals were -- did not impact any region more than any other, and so there wasn't anything out of the ordinary in North America that impacted margins this quarter.

We added some people there and we've added bonus there.

So that's not unusual, but that's sort of that's what happened.

And then finally, I think on your leadership development practice, I think you said that it was profitable.

I want to make sure that the numbers you provided at the very beginning included Lominger, so I think you said 44 million, if I'm not mistaken.

Yes.

That does include Lominger, yes.

Okay.

So the ex-Lominger business today is still losing money?

Not in the quarter.

Not in the quarter, Michel.

Not in the quarter.

Yes.

Okay.

If you look overall at our firm today on a run rate basis, we're doing about $825, $830 million of fee revenue, and about almost 200 million of that comes from outside of our search businesses.

Run rate basis, Future Step is about 120 million, 118 million, and our leadership business is about 65 million or so, run rate basis, Michel.

Which includes Lominger.

Great, thank you.

We have a follow-up from Tobey Sommer with Suntrust Robinson Humphrey.

Please go ahead.

Thank you.

You mentioned a couple of times that perhaps you are positioning yourself with some cash as you see potential acquisition targets, multiples come in.

I was wondering if you could comment as to whether you're looking more at other boutique executive search firms or to add and diversify the business as has been the strategy in recent years.

Thanks.

Yes, while our strategy is absolutely not changed.

We're not doing anything different today than three years ago with respect to corporate development.

We have a very -- we're pragmatic, practical.

We have looked over the last several years in adjacent markets to executive recruiting and we've also looked in the recruiting area.

So, no, our strategy hasn't changed.

Gary, in terms of the composition of any deal you would look for, given where we are with some uncertainty at least in the headlines, with the composition or the way you structure a deal change with more on an earn outside or anything like that?

It would really depend.

Again, we're kind of debating something that's very philosophical and intellectual.

We don't have anything on the table.

It would really depend on the nature of the business, and in any acquisition it's really not, the financial piece is obviously important, the strategy's important, but the biggest strategy in an acquisition is the culture and that's the same for our clients.

And that's why we believe we have a phenomenal opportunity in our leadership business because putting companies together is, sure, it's about the strategy and it's about how you structure it, but first and foremost it's about how you get people to work together and that's all about culture.

So that really drives a lot of our thinking when we're looking at possibilities like that.

Thank you very much.

We also have a follow-up from Mark Marcon with RW Baird.

Go ahead, please.

Gary, can you talk a little bit about the types of people that you would try to bring in in terms of level of experience?

Are they requiring guarantees to come on and how quickly they can potentially ramp?

Yes, that -- we've been again pretty consistent with that as well.

If you look overall, we've probably brought on in the last 42 months or so a little over a couple hundred consultants.

Half have search experience, half don't.

Today, as we're looking at it and let's just take the search channel, which is 80% of our business today, we would tend to err towards people that have search experience.

Our bias has probably moved a little bit more back towards, towards that, but in some emerging markets, we don't have that luxury.

And so it will vary, but generally we've got a bias today for the flagship business to bring in consultants that have proven search experience.

In terms of your -- we just don't.

We're not going to get caught newspaper a guarantee game, Mark.

We haven't and we're not going to.

It's unfair to the consultants that we have in our firm and it's just not in line with the culture that we're building.

Good.

So there are no -- you're not giving them any guarantees per se or nothing that's overly material?

There's no outright guarantees.

Certainly I'm not going sit here and talk about everything, but overall in terms of the philosophy, we tend to shy away from outright dollar guarantees.

Okay, terrific.

Thank you.

Mr.

Burnison, we have no further questions.

Please go ahead with your closing remarks.

Well, thank you.

It's -- thank you for the questions.

Thank you for taking the time to listen and have interest in our company.

We have a fabulous company here and it's certainly, you pick up the newspapers every day and it's going to be a challenging next few quarters I think, but we have got a firm here that we're building for the long-term.

We've got a great brand and we operate in almost every geographic center around the world and it's really overall an industry that is being driven by skill shortages, demographic trends and globalization, and we believe we're at the epicenter of what a leading company really needs to get right.

And that's their people strategy.

So we're extremely bullished on our firm and what we're building here and we thank you for your interest.

We'll talk to you next time.

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