Korn Ferry (KFY) 2008 Q4 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 will conduct a question-and-answer session and 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.

And with that I'll turn the call over to Mr.

Burnison.

Please go ahead, sir.

Thank you, Leah.

Good morning and thank you all for joining us.

This morning we're pleased to announce that fiscal 2008 was a very good year for the Company.

In fact, the best in the Company's 38.5 year history.

I'm proud of our colleagues and their achievements over the last year.

Beginning with the credit crisis in the U.S.

last summer the macroeconomic climate surrounding our business has been challenging.

Yet, despite these conditions fiscal 2008 was a banner year.

Thank you to our colleagues and clients around the world.

Through the collaborative efforts of Paul, our board, our leadership team, and my fellow Korn/Ferry colleagues we have a differentiated vision, mission and strategy to create a diversified talent management organization, the top of mind brand in human capital, known to be a firm that transforms the lives of those we serve, linking talent and strategy to drive sustainable value for our clients.

Today's Korn/Ferry comprises three growing and thriving businesses.

We were once again rated number one in executive recruitment.

Futurestep ended the year on a revenue run rate of almost $125 million and revenue from our leadership development business was up 63% with improving bottom-line results.

Our fourth quarter run rate was almost $860 million with Mexico, with $200 million of which coming from Futurestep and our leadership businesses.

And in fact, on a run rate basis, the top line from Futurestep and leadership development combined are the equivalent of about 80% of our total firm just five years ago.

The progress has been absolutely outstanding.

In fiscal 2008 we reached new heights in the industry never attained before.

Revenue was up 21%, earnings rose 12%.

For the quarter, fee revenue reached another all-time high, a little over $208 million, up 16% over the prior year and 3.5% sequentially.

EPS came in line with consensus at $0.36 per share.

If you look at our business segments, the executive recruitment posted its strongest year ever, generating almost $680 million in revenue for the year.

The combination of our brand, footprint and the high caliber of our consultants and colleagues paved the way for these outstanding results.

We're also pleased with the steady increase in productivity in average fees for the year.

Annualized revenue per consultant was a little over $1.3 million and in the quarter our average fee per assignment was $96,000, up 13% over the prior year.

The growth from a sector perspective was also equally impressive.

Industrial for the year was up 29% -- I point out that for the quarter, compared to the prior year, it was up almost 40% -- life sciences up 17%, technology up 17% and financial services, despite the impact of the credit crisis that I mentioned earlier, was up 9% for the year.

In the Futurestep are, we achieved our best year ever; $111 million in fee revenue and operating income of $8.5 million.

And during the fourth quarter Futurestep achieved its highest revenue mark in the history; $31 million in revenue, with a 9.5% operating margin.

Our business in Futurestep has now posted 18 consecutive sequential quarters of growth and that's due to the emergence of a global labor pool.

In a lack of a qualified talent for replacement, the demand for Futurestep's services remains very, very strong.

And most importantly we made great progress in the year, moving that business to an outsourcing model.

We implemented Six Sigma delivery methodologies.

That helped the quality of our engagements around the world.

We also in the quarter in Futurestep opened a global research center in Shanghai for our global and Asia-Pacific RPO clients.

The center is going to provide research, sourcing and other services for our clients.

It's a key part of our strategy for competing in the global RPO market.

For the year 2008 our leadership business generated over $61 million in revenue.

For the quarter revenues were $17 million, almost a $70 million annualized run rate.

The Lominger results have been very impressive, with $5.7 million in operating earnings for the year, a 26% operating margin, and a contribution of $0.08 to EPS.

As important as the financial results were the numerous initiatives and investments that we've made in the business over the past year to continue to transform this industry and the firm, to create a multi-billion dollar diversified HR services business.

First and foremost was the launch of the KF Advantage.

The KF Advantage takes our intellectual property that's been developed over 30 years of research and really uses that for the framework, the chassis, for how we do search around the world.

It provides consistent standards for us to talk to clients, to differentiate ourselves and to talk internally and most importantly, it will provide consistent standards for us to train against.

It's made a difference in the marketplace.

We're winning work as a result of it.

And it also helps to integrate our leadership development business into the flagship search channel.

We also unveiled a new go-to-market message.

The Art and Science of Talent represents really the evolution of Korn/Ferry to a true talent management provider.

Everything from our website to our collateral materials to our advertisements embody the Art and Science of Talent look and really present our firm with a sophisticated feel and really reflects our evolution and journey to creating a diversified HR services business.

As we move into next year our goals are going to be very consistent with our KF one strategy.

Number one we're going to continue to create a differentiated platform for our executive recruiting business.

We're going to institutionalize how we go to market.

We're going to elevate our brand, penetrate underserved markets and add consultants to fill niches and existing gaps.

We're going to utilize the KF Advantage.

We'll roll out Phase II of that.

Use the proprietary tools there to enhance and improve our engagements, client service and further drive differentiation in the marketplace.

We're going to roll out a new technology platform that's been in the works for over 18 months.

And finally, we're going to invest in emerging markets around the world, such as the brick economies in the Middle East.

Second, we're going to improve scale in our non-search businesses.

For Futurestep we're going to continue to move that business to a world-class outsourcing model.

For our leadership business we're going to continue to bring our solutions offerings and tools to really drive growth in that business.

The market's demonstrated strong interest in our employee development, performance management, on-boarding and the other consulting offerings that we have in that business.

This year is going to be a year in that business for us to scale and drive profitability.

We're going to continue to attract and develop the best team of professionals in the industry.

We're going to provide consistent training and career development opportunities for all of our colleagues around the world and we're going to support them with leading technology and proprietary tools.

And finally we're going to continue to pursue strategic possibilities to unlock future growth for this great firm.

Fiscal 2008 was a very solid year for our firm, particularly given that the economic climate, at least in the United States, has been uncertain over the last three quarters.

Moving forward we're going to continue to manage the business in balance with the economy but with a focused eye towards long-term transformation.

Our goal is to create a multi-billion dollar diversified talent management organization and create the top of mind brand in human capital.

I've got absolutely no doubt that the future will hold even greater things for Korn/Ferry.

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

Steve?

Thank you, Gary, and good morning everyone.

This has been an excellent year from a growth standpoint and today we are pleased to announce another record quarter of revenue for Korn/Ferry International.

As Gary stated, fiscal '08 fourth quarter fee revenue grew 16% versus the final quarter of fiscal '07 to a new all-time industry high of $208.2 million.

On a sequential basis revenue grew 3.5%.

For the year, revenues improved by 21% to $791 million, the most ever reported in our industry.

Korn/Ferry's fee revenue has now grown sequentially each quarter for almost a full five years.

This is our 19th consecutive quarter of revenue growth dating back to July of 2003, with fee revenues growing at a compound annual growth rate of approximately 22% over this period.

Fiscal '08 fourth quarter EPS was $0.36 per share, up $0.06 year over year on a GAAP basis, flat with the as-adjusted year-ago quarter, and down $0.01 sequentially.

For the year EPS grew 12.3% from an as-adjusted $1.30 in fiscal 2007 to $1.46 per share this year.

As Gary mentioned, this is also a record level of earnings for us.

Fiscal '08 fourth quarter operating earnings were down 15% year over year and 5% sequentially.

For the year, as we have continued to invest in our business, operating earnings were up approximately 6%, somewhat less than the increase in revenues.

Our operating margins were impacted during the year by the following costs that were incurred during the year, but have expected benefits in the years to come.

We invested to improve executive search productivity, most significantly in a comprehensive assessment tool called KF Advantage.

This tool is aimed at more accurately aligning client needs with the specific scientifically tested leadership characteristics of candidates.

We expect this tool to favorably impact cycle times, client satisfaction and ultimately revenue per consultant, a key driver of profitability.

We invested in a new go-to-market message program called the Art and Science of Talent.

This branding is aimed at communicating the breadth of our service offerings as well as the advances we are making in combining the historical art of talent identification with the science of assessment and training.

And we also had costs during the year for severance to improve our productivity.

The combination of these investments totals approximately $8.5 million or $0.12 per share for the year, and that's about 110 basis points of operating margin.

Also included in our expenses for the quarter and the year are increased productivity bonuses that reflect our strong revenue results.

Operating margin in fiscal '08 fourth quarter was 9.7%.

In the prior-year fourth quarter, operating margin, excluding non recurring charges, was 13.3%.

Let me now discuss headcount.

The number of executive search consultants at the end of the year was 514, down four consultants from the third quarter of fiscal '08.

Revenue per consultant was $1.3 million for the year, an improvement of 9%.

The number of consultants at year end in fiscal year '07 was 490, so on a year-over-year basis, consultant count is up 24 or approximately 5%.

We are prudently managing the business, and while optimistic about the prospects for all of our (inaudible) businesses we believe we must carefully monitor productivity and efficiency efforts during this period of economic uncertainty.

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

Fiscal '08 fourth quarter fee revenue reached $177.5 million, an increase of $20.4 million, or 13% year over- year, and $4.5 million, or 2.5% sequentially.

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

Fiscal '08 fourth quarter North America fee revenue was $97.9 million, up $6.5 million, or 7% year over year, and 3.3% sequentially.

In North America we gained ground during the quarter in industrial, technology and consumer markets, but lost ground sequentially in other areas.

For the year, the North America financial services practice was off less than 5% and was flat sequentially in the last quarter, primarily due to year-end engagement upticks that are not expected to recur.

We expect continued challenges in the financial services market broadly in the short term, but view it as a very attractive opportunity for us over the medium term.

Underlining market conditions in Europe remained strong in our fourth quarter.

Europe fee revenue grew 21%, or $8.7 million versus the fourth quarter of fiscal year '07, reaching $50 million.

On a sequential basis Europe grew 8%.

Year over year, 16 of 20 local country markets have improved, with all major specialty markets growing, led by industrial at 61% year over year, consumer goods at 23%, technology at 20%, and financial services at 6%.

The Asia-Pacific region has had an excellent year and growth for the year was almost 30%.

In the last quarter of the year Asia-Pac revenues were $23.3 million, an increase of 17% over the prior year's fourth quarter and off sequentially by about $2 million, driven by weaker demand in India, Japan and Korea.

For the year our Asia-Pac revenues totaled $95.9 million, up more than $20 million over the prior year.

Greater China, up 45% year over year, India up 61% year over year, and Australia, 37% year over year continue to be key growth markets for the Asia-Pacific region.

In Latin America fiscal '08 fourth quarter fee revenue improved by 37% year over year.

For the year Latin American revenues reached $25.6 million, an improvement of 47%.

We are the clear market leader in Latin America and aim to extend that lead in the coming year.

Fiscal '08 fourth quarter executive search operating earnings were $27.3 million, off on an adjusted basis by $4 million, or 12.6% year over year and down $1.7 million, or 6% sequentially.

Consolidated executive search operating margin was 15.4% and was off 450 basis points versus the fourth quarter of fiscal '07.

Sequentially, executive search operating margin dropped 140 basis points, driven primarily by incremental productivity-related bonus demand, and our continued investment in consultants and process improvements in our core search practice, as well as our leadership development solutions division.

Now let's talk about Futurestep.

Futurestep had a strong quarter and is really making progress in its RPO strategy.

Futurestep's fiscal '08 fourth quarter fee revenue improved over $8.1 million, or 36% versus the fourth quarter of fiscal '07, and $2.6 million ,or 9.1% sequentially, reaching $30.7 million.

Futurestep has now grown in 18 consecutive quarters.

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

Fiscal '08 fourth quarter sequential fee revenue growth in North America, Europe and Asia-Pacific were 15.5%, 5.7%, and 5.5% respectively.

Futurestep's fiscal '08 fourth quarter operating earnings were $2.9 million, up $900,000 sequentially.

Operating margin was 9.5% in the quarter, and we believe the business is achieving the sort of scale we need to create operating leverage over time and that should lead to sustainable margins at or above 10%.

Now let's turn to the balance sheet.

At quarter end our worldwide cash balance was $389 million, up approximately $91 million sequentially.

We had a typically strong fourth quarter of cash collections.

After paying bonuses in the first quarter we will have excess liquidity for operations or acquisitions, a position we think prudent, given the economic environment.

That said, we intend to opportunistically return cash to shareholders through stock buy backs in fiscal 2009.

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

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

We have data from May and revenues and confirmations have been encouraging, which is important because the latter part of Q1 tends to be seasonally weak.

Because of seasonal weakness and economic uncertainty we estimate that first quarter fee revenue will likely range from $190 million to $200 million and diluted earnings per share will likely range from $0.28 to $0.32.

This estimate assumes that exchange rates stay where they are and it also anticipates a typical seasonal slowdown in July and into August in Europe, and to a lesser extent North America and Asia-Pac as clients, candidates and our people enjoy the summer months.

From a macro standpoint it is very tricky to determine which way the world economies are going.

The U.S.

economic news has not been encouraging for three quarters, but our revenues have held up well.

Our people are focused and they're enthusiastic about the coming year and we aim to continue evolving our talent management solutions to meet client needs.

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

(OPERATOR INSTRUCTIONS).

Our first question is from the line of Josh Vogel from Sidoti & Company.

Please go ahead.

Hey, good morning.

Thank you for taking my call.

Is it possible to break out amongst each region the average bill rate increases year over year in Q4 and maybe on the year?

We historically have not done that, Josh, and we don't have that data in front of us.

I will tell you that over the last several quarters, going back -- going back, say, 17, 18 quarters ago, our average fee was -- globally was $55,000 and today it's almost $100,000.

We've consistently moved the average fee up, which reflects one of our strategies, to elevate the brand.

It's been a fairly consistent rise in average fee, though, across the globe, Josh, and in the emerging markets, in China, Latin America we've seen a steady rise and I think we'll -- we'll continue to see that.

Okay.

And shifting over to Europe, are France and Germany about 50% of your European revenue?

I think it's -- if you look at France and Germany, it's going to be a little bit less than that.

The UK is probably -- off the top of my head -- 30% or so, and so France and Germany would not be 50% together.

But clearly, those three countries are greater than 50% of our business.

However, we're in 23 countries and we're seeing phenomenal growth in the Middle East, Central and Eastern Europe, and we're making investments in those parts of the region.

Okay.

But with France and Germany particularly, can you just discuss any macro trends you're seeing there or just how these markets are holding up?

They're holding up pretty well.

If you look sequentially in the quarter, actually Germany was up sequentially in the fourth quarter versus the third quarter.

France was down slightly.

Wouldn't read anything into that.

We've had a phenomenal year in France.

Our team there really did a great job.

And the UK was actually up in the quarter sequentially.

Okay, great.

And financial services you guys mentioned was up 9% year,over,year.

If you were to break out the vertical, how much of the financial services is overseas and can you maybe break down in the quarter between the U.S.

and Europe what the financial services sector did?

It's -- financial services is -- if you look overall as a percentage of the Company it's less than 20% and if you look within the financial services sector, North America represents slightly less than 40% of the financial services business.

If you look by sector it's equally well balanced.

Consumer is 22%, the investment and commercial banking is 18%, asset management's probably about 17%, insurance is about 17%, real estate's 18%, and capital markets and wealth management's probably 8%, 10%.

So that's how the portfolio would be distributed.

Okay.

Was financial services up year over year in the U.S.

last quarter?

No, it was flat.

I think we said that in our prepared remarks.

Okay.

Sorry, I missed that.

And just two more quick ones.

Of the 24 consultants that were added year over year, which regions were most of those consultants added or was that broad-based?

Broad based.

And lastly, on the balance sheet, the non current marketable securities -- I think it's about $20 million -- is that the auction rate securities?

Those are some auction rate securities that are complying with our contractual interest payment, so we're continuing to hold those.

We're going to hold them and they're for sale at par but we're not going to sell them below par.

As I mentioned we have plenty of liquidity.

We think we have modest excess liquidity actually at this point, which as I said, is going to be our mode for a while until we see which way the economies are going.

But we've reclassified those as we signaled during last quarter to long term because it's difficult to know when that market's going to open up.

Great.

Of course.

Josh, let me tell you, the France and Germany are about 22% of the business in the region, the UK is 25%, so those three countries slightly less than 50% of our business, which shows the growing nature of the emerging markets over there.

Okay.

That's helpful.

Thank you very much.

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

Please go ahead.

Hi, this is Frank in for Tobey.

Wanted to ask just if I could get a little more color on what you're seeing in terms of financial services, search demands, and how you're measuring that and looking at factors going forward there?

Well, I think the financial services market, if you look at, say, capital markets or investment banking and everything and you read in the paper, I think those are going to be challenging sectors for the next few quarters.

But we have a fairly balanced portfolio and have a pretty good commercial banking business, insurance, real estate, and those businesses are holding up very, very well.

The one thing I'd add too, and we've mentioned this in the past, is our exposure to financial services is less than some of our competitors, and so the news in the press is obviously pretty negative on financial services.

It's been a challenged sector to be employed in.

But when you look at the breadth of markets that we serve, the upside for us we think is pretty strong and over the medium term we believe that we have the opportunity to increase the size of our financial services practice across the globe.

Okay, great.

And going forward, what are you looking for as far as expected growth in consultant headcount into '09 and what are your plans there?

We've modeled out some growth for next year.

It is focused in some of the areas where we have opportunities.

It's some major markets where we see significant opportunities, but we're going to be pretty careful about it.

The growth will likely be in line with our revenue growth and we just go out one quarter in terms of where we think the business is headed.

But as we watch the evolution of our business over this year we'll be continuing to look for talent because the most important asset that we can build during this period of potential economic headwinds is to continue to build the talent base of our companies that we continue to help clients build their talent base.

Okay, great.

And lastly and I'll let someone else jump on after this.

We're seeing some data coming out that's seeing some moderation in CEO turnover.

What are you seeing in terms of CEO turnover, and any noticeable difference in terms of verticals or regions or anything like that?

We have not seen necessarily a slowdown.

If you look at the average tenure of CFOs and CEOs, publicly traded companies in the United States, it's certainly statistically down in a very big way over the last several years and we haven't seen anything in the last three or four months that would be contrary to that but, again, a month or two doesn't make a trend.

All right, great.

Thanks so much.

Next question will be from the line of Mark Marcon from Baird.

Please go ahead.

Good morning.

Gary and Paul, to the extent that you're on the phone as well, congratulations on the year, tremendous job relative to when you guys took over.

Thank you.

Paul will definitely be on the phone and he appreciates that, Mark.

Thank you very much.

I don't think many people appreciate how much you guys have done.

So having said that, this was a very good year, very good progress strategically.

Obviously the one area that people are a little concerned about -- obviously you're getting the shorter-term questions about financial services, but how should we think about the operating margins?

One of the key challenges in this business is obviously your consultants are all in the habit of placing people.

They view themselves as being producers and sometimes at the peak of the market is when they become the most demanding from a compensation perspective and it seems like that's what we're seeing in some of your operating margin trends, particularly in North America.

And so I'm wondering how are you going to deal with that, because it looks like demand is still good now but clearly there's mixed macro signals and it's possible that people are going to start demanding more comp just as things are starting to head down?

We don't view it that way.

That's obviously a possibility, Mark, and we're very mindful of that.

Our brand is reinforced every day by the colleagues that we have around the world.

And today is a much different Korn/Ferry than yesterday and tomorrow's Korn/Ferry is going to be even better and more robust.

Today 22% of our business comes from solutions and services outside the flagship business.

I guess our view is that if people join us for money they're going to leave for money, and we hope that we are building a platform that is intellectually stimulating, that our colleagues are developed, that we're providing a platform that can drive more sustainable value to our clients, linking value and strategy, and ultimately we really believe that we're actually going to create a business that can create lifetime career opportunities for our colleagues and opportunities for our colleagues to rotate among the different businesses.

Now, I'm not going to say that compensation is not important, because it is and we're very proud of what we've done over the last six to seven years for shareholders, as well as for our colleagues.

So we don't -- I hear your concerns, but we have a lot of very, very tenured employees and consultants.

I was just with a partner two days ago who has been with our Company for 31 years, so it's less transient than you would think, Mark.

Okay.

Then how should we think about the North American margins for this year?

You ended up having a nice healthy 14% year-over-year increase in revenue in North America, margins contracted and basically for an almost $50 million revenue increase you ended up with a $1 million operating profit increase.

How should we think about that?

Was that LDS and can you split that out and can you split that out in terms of what the impact from LDS was?

Well, Mark, I think you should look at a couple things.

First is, as I mentioned during the prepared remarks we did make some relatively significant investments in our future that all run through current P&L.

So you have to include in your thinking about $9 million worth of investments in the business that run through P&L that are expected to have benefits to our business into the future.

You then also have to look at the investments we're making in some of these newer businesses and it's not just LDS.

It's LDS and Futurestep really beginning to make some impact on our top line and not yet making all the impact that we expect out of them at the bottom line.

Futurestep in the quarter and trending into the new year is reaching the sorts of margins that they have expected and that we expect for them long term.

LDS is not quite there yet, but it's made progress during the year, so it's a net profitable business for us at this point including Lominger.

The consulting business is still a work in progress, but part of that is scale and part of that is more discipline around our pricing and our go-to-market strategy, et cetera.

And then fundamentally the executive search business is a very profitable, strong cash flow business.

It is impacted, as you mentioned, by compensation and we have to manage that in a balanced way.

But we're expecting that over time we're going to build a diversified platform of businesses that has sustainable margins, that are higher than what we reported in this fourth quarter.

Whether that's this next quarter or this year, I think people are going to judge that based on what we've said, but we're looking at growth of a business over the long run into a multi-billion dollar platform with sustainable strong margins.

Yes, and the other thing too, Mark, is that the North American business gets a bit penalized because some of the initiatives that we're talking about and some other things don't get fully allocated out.

So I think what you'll find in the first quarter is the margins will pop back up in North America.

Okay.

And that's what I was trying to get at in terms of understanding LDS and some of the other investments, is I think what happens is a lot of investors look at your trends just in terms of what they see in the segment ops and they -- most people aren't appreciative of all the various investments and so I was just trying to get a sense for -- if we just looked at core executive search within North America, could you give us a sense for, roughly speaking, how margins are trending there?

Yes, again, I -- margins have increased.

I will tell you that we have been proactively managing the business, so for example, last August we put in place some contingency plans.

We saw the headwinds in the United States and so we started to actively manage the workforce, so there's some costs going through there to more proactively do that.

There's also investments that we've made in the KF Advantage, the Art and Science of Talent, and again, those don't get necessarily pushed out to the regions.

So then as Steve said, you've got the leadership business.

So the core North American executive search business, if you look at the margins, certainly have not deteriorated.

Okay, that's good to hear.

And Gary, you were one of the early leaders within the industry to sound the alarm about maybe things are going to get a little tough.

You actually sound more positive on this call than you have recently.

Is it your sense that maybe things aren't going to be that bad or how are you thinking about things?

Well, you don't know.

None of us have a crystal ball.

We are -- we're committed to building a long-term, sustainable business here.

I do not think there's a labor bubble.

I would be very, very surprised.

In the United States, as you know, in this last expansion produced the least number of jobs per month on record since World War II.

As we visit clients we just do not sense that there is a labor bubble.

Having said that, I think that there's going to continue to be some headwinds, at least in the United States, over the next couple quarters.

And then finally -- and then I'll jump back off -- but can you give us a sense for what the bonus accrual is for this quarter and what the expected payout is when the bonuses get paid so that we can think about what the excess cash will be after the payout occurs?

We accrued about $48 million this quarter, Mark.

We're going to pay out north of $165 million and we're going to have plenty of cash after that to continue to invest in the business.

As we disclosed in our financial filings, some of our cash is allocated to long-term investments for our people, et cetera.

But even after that we've got north of $100 million of investable cash after appropriate reserves for working capital, et cetera.

And as we mentioned we have two significant opportunities during this coming year.

One is that to the extent there are economic headwinds and valuations of attractive acquisitions come down we're in the market and looking actively at how we can address adjacent markets that would be relevant to our clients.

And then secondly, we will opportunistically be returning cash to shareholders through the buy backs.

So we're very comfortable with the strength and soundness of our balance sheet at this point.

Great.

I'll hop off and jump back on.

Thank you.

Next we go to the line of Ty Govatos from CL King.

Please go ahead.

How are you?

Just some number questions.

And by the way, let me add some congratulations.

Over the last five years you've done a spectacular job.

Any indication of what the tax rate might be for this coming year and cap expenditures?

We have budgeted 38.5% in tax rate for next year and our CapEx will be a little bit down from this year but kind of in the same ballpark.

I don't want to make it too granular, but we continue to invest, as Gary said, in our technology infrastructure.

We got a few other things that we need to do, but CapEx as a percentage of our revenues is still pretty small.

Okay.

Any reason for the lower tax rate in the fourth quarter?

Yes, most of the benefit we received is for below the line sorts of things.

So it's capital loss benefits, et cetera, that come out of some of the investment programs that we have.

So when you look at our rate going forward we're trying to do it more on an operating basis.

We don't completely control what happens below the line, so a 38.5% rate we think is pretty representative of what you should expect out of operations.

Okay.

Thanks an awful lot.

You're welcome.

Next we go to the line of Kevin McVeigh from Credit Suisse.

Please go ahead.

Thank you.

Hi, Steve.

Hi, Gary.

Hey, Kevin.

Steve, quick question.

If you said this I apologize, but what was the net impact of all the investments in North America in the fourth quarter on operating margins?

Well, I gave it for the whole business and it was about $8.5 million through the year.

We didn't break it out in the quarter.

The impact on our margins for the year was north of 100 basis points, so we have seen -- we're going to continue to make investments like that.

You just have to be comfortable with the fact that we're going to try to balance the investments with appropriate levels of profitability.

Okay.

And then in terms of the guidance into the first quarter, can you give us a sense by region what you'd expect on the top line and then from a margin contribution, as well, just directionally?

Well, I'll put it this way, as we've said we're most focused on what's happening in the North American economic climate and we expect flat to maybe a little bit down in the U.S.

economy.

We're hopeful that that won't be the case, but everyone reads the papers and it's a little dicey.

We would expect Europe to retain some strength, although it has considerable seasonality in it going through the summer, and then Asia-Pac is probably the toughest one to answer.

If it's decoupled from the U.S.

economy we think it's going to be up.

If it's not decoupled, which is hard to gauge right now, it could be flat or down a little bit.

So this is, from my perspective, a really difficult environment to predict in because each day we receive incremental data points that seem to move markets and we're watching it as carefully as anyone.

But we're bullish on our opportunities going into this year, but also trying to communicate some appropriate level of caution.

Okay.

And then not to belabor the margin question, but when you highlighted the increased severance to increased productivity that was outside of the $8.5 million, right?

That was separate.

That was part of the $8.5 million.

That was part of the $8.5 million.

Okay.

Just to be clear, it's severance and related costs so some of it -- the majority of it is in comp but some of it's in our SG&A, as well.

Okay, and that's where the bad debt would come in?

Not necessarily the bad debt but other costs of moving people out of the business, legal costs, et cetera.

It's the ongoing costs of making certain that on average we continue to improve the overall productivity and talent of our workforce.

Okay.

And then you were pretty clear in terms of capital allocation, but you only bought back about $6.5 million of stock in the quarter, given where the stock was, does that position you to do a larger type acquisition if the right opportunity presented itself or is it just a function of keeping the balance sheet as liquid as possible?

First of all, we bought no stock back during this quarter.

We bought -- how much back during the year?

$56.5 million.

$56.5 million during the year so we've been -- we think we've been fair to our shareholders in terms of returning capital to them.

But I think your last point is really where we are, is we are retaining some excess liquidity and it's for a couple of different potential uses and one as you mentioned is acquisitions.

It doesn't mean necessarily that the size of what we're looking at has changed, but we certainly are actively looking for adjacent spaces that we can be relevant in.

And then part of it has been that as a new CFO I just wanted to make certain our balance sheet was incredibly rock solid through this period and so it's my fundamental conservatism, I guess, which caused us to slow down a little bit.

So I'm comfortable with some excess liquidity in the short run.

Great.

Thanks for the clarification.

Next we go to the line of Clint Findley from Davenport.

Please go ahead.

Thank you.

Good morning, guys.

Good morning.

Gary, I wondered if you could talk a little bit about how the competitive environment has changed at Futurestep and also just the RPO market in general in light of the slowdown that we've seen?

How is pricing holding up?

Would you expect that we'll see increasing consolidation in coming months?

Well, we believe first and foremost it is a multi-hundred million dollar opportunity.

I think it's going to continue to gain traction around the world by clients.

I am very proud of our team to continue to move the business towards that outsourcing model and slowly get away from single search, particularly, in the U.S.

I think there's less players than the hype in terms of RPO.

There's certainly -- we've seen three or four sales of "RPO" companies that we looked at, as well, and quite honestly, we just did not believe the valuation was justified and so we didn't pursue that.

We will continue to grow the business organically, to continue to focus on quality, to do things one placement at a time.

We've put in Six Sigma methodologies.

We've put in a global research center in Shanghai.

We're going to continue to grow that business because we do view it as a multi-hundred million dollar opportunity for us.

So it's safe to say you've not seen the valuations come down, then?

We haven't seen anything in the last -- Clint, it's really been four or five months or so and it just did not make any kind of sense to our team, given the -- given those businesses and given the economic outlook and so we were just unwilling to go there.

Could you talk a little bit maybe even, Gary, about some of the brick economies, the competitive environment that you're seeing there and how it might have changed here recently?

Yes.

I've had the pleasure of being in every region since our last call.

I was in Brazil two-and-a-half weeks ago.

The mood is -- I met with probably 50 CEOs.

Mood is very enthusiastic.

Country has investment-grade rating.

I think you're going to continue to see companies make investments in Brazil.

We do not, by the way, have a Futurestep offering per se.

That's something that we will start in Brazil.

We have great plans for our business in Brazil.

China, as well, we are aggressively looking for adjacent offerings in that market.

We're looking to bring in people.

India was actually down in the quarter, but it doesn't reflect anything systemic in the country; still had phenomenal growth there.

And Russia is another area that we continue to make investment in and see very, very good growth.

And then finally, the Middle East.

We're opening our second office in Riad there very soon and that represents a big opportunity for us.

So I think if you look globally 80% of the world's population is in emerging economies and as companies continue to tap those growth adjacencies, tap the consumer in those countries, they're going to need people to manage that labor arbitrage and our growth, our movements are going to mirror our clients.

Thank you.

And next we go to the line of Andrew Fones from UBS Securities.

Please go ahead.

Good morning.

This is Jim filling in for Andrew.

Last quarter you said that your guidance for Q4 assumed a steady state for fee per search.

Is that still true?

Is that still how you're thinking about that?

Fee per search, you mean the average fee?

Yes.

Yes, it's something we only guide out quarterly but we do not -- we don't forecast that type of growth in the average fee because it's very hard to forecast that.

That is based on, number one, our strategy of moving the business upstream over time, so it's not something that you can really guess on a monthly or quarterly basis.

Secondly, it's impacted by wage inflation around the world and the level of compensation.

That's very, very hard to predict.

So we take a much more conservative view in our quarterly outlooks that we give you with respect to average fees.

Okay.

And as far as -- do you see any changes in the trend of fee per search by region in the fourth quarter?

No, we've seen a consistent and steady rise across the globe.

Okay.

And then just a couple of quick numbers questions.

Do you have the CapEx and cash flow from operations for Q4?

Yes, hang on, we're going to have to pull that out.

Okay, thanks.

And our next question is from the line of Michel Morin from Merrill Lynch.

Please go ahead.

Hi, this is [David Ridleylane] filling in for Michel.

Steve, you spoke about the trend of engagements in May.

Could you talk a bit about the engagement trends by month in the quarter and into May?

I'm sorry, you're asking for granular information on month by month?

I mean, as I said, May was encouraging.

We're not going to disclose the dollar amount but we're encouraged by it.

And then our expectation is that we get further into the summer we'll begin to see some slackening, not due to the market but more just the fact that during the summer people begin to take some time off.

So I don't know if I'm answering your question exactly right but that's what we expect.

I guess I was -- I guess what I was trying to get at was we're sort of flat year over year on the number of engagements and did that turn negative on a -- towards the end of the quarter or was it steady throughout the quarter and turn up in May?

I'm just trying to get a sense of the trend there.

It was pretty good through the quarter -- pretty flattish through the quarter and pretty flattish into May on a sequential basis.

Okay, and just one last one.

Could you you elaborate on those year-end engagements in North America financial services that you do not expect to repeat?

What type of engagements are --?

What happens is at the end of the year our people are out closing out engagements and they tend to get what we call upticks, which is an adjustment in our fees based on the final compensation the candidate gets from a client and those upticks go immediately into our revenue but they are not predictable and they're not necessarily going to recur.

So some of the strength you saw in financial services relative to what you would have expected is because of upticks in the fourth quarter and so what we're trying to be transparent about is that that's what typically happens towards the end of the year and you shouldn't necessarily use that as a proxy for what might happen in the future.

Got it.

Thank you very much.

Let me -- the CapEx for the quarter was $4.2 million, $17 million for the year, and our cash flows during the quarter were extraordinary.

We had about $90 million of net increase in cash during the quarter, which is typical in our fourth quarter, once again as we try to close out the year.

And we have a follow up from Mark Marcon from Baird.

Please go ahead.

,Wondering, do you have the same currency growth rates for Europe and Asia-Pac and Latin America or what the contribution from impacts was?

The constant currency in Europe for the quarter was 9%, the constant currency for Asia-Pac was almost 10%, Latin America is smaller.

Year-over-year currency -- our constant currency growth was about 16% for the whole firm.

Great.

And then we've talked about this before but just wanted to get the latest thinking and this discussion occurred before Steve joined.

During an economic downturn, if thing -- and I completely agree with Gary, we didn't have the labor market bubble that we experienced during the last upsurge back in '99 and 2000 -- but assuming that we have a retreat that is more consistent with prior downturns, where do you think -- what's the lowest level of margins that you would expect to be able to maintain during a downturn?

Is that something that's answerable?

You've talked about it before but I don't know if it's changed.

Well, I'll tell you, we'll go back to what Paul and I -- as we said several years ago, our goal has been to outperform the industry in good times, as well as in not so robust times.

And our goal and what we've said before is that in an economic downturn, that's obviously not a depression, but in any kind of other economic downturn we would maintain mid to high single-digit operating margins and that is our goal.

If you look back at Korn/Ferry's 38.5 year history, excluding the last recession, the business has been down about 8.5% in the other recessions and it's bounced back almost 30% in the year after the recession.

And so I think that would be more typical of something that we're seeing today versus something that's much more pronounced and severe.

Okay.

And then whenever we get through the other side of this valley -- you're making investments now, clearly in a number of different areas -- where would you hope that the margins could get to?

Well, we've had the margins at 15+ % and north and that's where we would want -- and in fact, if we -- look, if we wanted to say let's not make any investment and let's just run this Company for a quarter on a quarterly basis these margins today on the platform would be up by several hundred basis points, so I'm very, very confident in that.

Yes, and I think we've said that publicly before, Mark, is that our goal is to have 15% plus operating margins on a kind of normalized set of factors.

So we're going to see that through not just the continued growth of our search business but the maturation of Futurestep, the maturation of LDS and then whatever other incremental adjacent services that we add over time as we continue to build the platform.

Can you talk a little bit about what you think the geographic platform is going to look like?

Obviously, growth around the world, particularly the emerging markets --?

We're all going to be Chinese.

(LAUGHTER)

No, I think that we are going to -- today half the business comes from outside the United States and I wouldn't be surprised over the next several years that that percentage is going to increase.

In other words, our business outside the U.S.

is going to increase and that's what we're planning for and that's what we're making investments.

There's exciting things happening and we're going to seize those opportunities that are out there.

And then last, this is just a tiny detail question but I think it impacts the margins.

Can you talk a little bit about the difference between what the reimbursable expenses are relative to what you're reflecting as the actual expense?

So when we take a look at that, there's a delta there, for this year it was about $11 million --

Yes.

-- that hurt your margins and I'm trying to understand what's driving that.

A portion of that is the cost of sales having to do with our Lominger products.

So as we continue to see strength in the Lominger business -- we're not fundamentally a product business, we're fundamentally a services business and so we have to find a place for cost of sales of inventory and that runs through that line.

Then if you take that component out, there is a little bit of a disconnect between the cost that we incur and the amount that we're able to charge back to clients.

Some of that is contractual and some of that is discipline and so it's not something that we're unaware of and it's something that we continue to look at.

And yes, it does have a modest negative impact on our margins and so we continue to look at how we can get the most out of that line.

Terrific.

Thank you.

Mr.

Burnison, we have no further questions.

You may continue.

Well, thank you and I first want to say thank you to our shareholders for believing in the Company in the terms of what we're trying to build, but more importantly, to our colleagues for joining us on this journey, for creating a firm that can link talent and strategy for our clients to drive sustainable value.

And I'd also like to thank Paul for his continued support, stewardship and leadership of this firm.

We're very, very proud of what we've done.

We have much more to do and much more to go and we're very, very excited.

So thank you for joining us and we'll talk to you next quarter.

Ladies and gentlemen, this conference is available for replay for one week starting today at 11:00 AM Eastern daylight time and running through June 18th at midnight.

You may access the AT&T executive playback service by dialing 1-800-475-6701 and entering the access code 926386.

International participants may dial 320-365-3844.

Additionally, the replay will be available for playback at the Company's website, www.kornferry.com, in the investor relations section.

That does conclude your conference for today.

Thank you for your participation and for using AT&T executive teleconference.

You may now disconnect.