Korn Ferry (KFY) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Korn/Ferry International conference call.

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

Later, we will conduct a question-and-answer session.

As a reminder, this conference is being recorded.

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

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 release relating to this presentation, and the Company's annual report for fiscal 2009, and in the other periodic reports filed by the Company with the SEC.

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

Burnison.

Please go ahead, Mr.

Burnison.

Thank you.

Good afternoon, everyone, and thanks for joining us.

Today, I'm pleased to report our third consecutive quarter of sequential fee growth.

In fact, in the last six months, our business is up 28%, which is almost double the industry growth rate of 14%, as recently reported by the AEC, which is our trade organization.

We had growth in just about every market sector and line of business, and we achieved $147 million in revenue.

We recorded positive operating earnings, and our balance sheet remains pristine with $251 million in cash and marketable securities.

The mood today is obviously among CEOs is a lot different than it was a year ago.

The freefall is over, but leaders around the world are really trying to figure out what the new normal is.

Although the economic climate is still murky, our business is up substantially from the cyclical lows a year ago.

Year-over-year we're up 8%, while the industry is down 12%.

We continue as an organization to look forward, accelerating our strategic initiatives, capitalizing on our strong balance sheet, adding to and retaining talent in the Firm, all while balancing investment and profitability.

Despite the tenuous economic environment however, over the last several quarters, our business new depth and breadth.

In December, we closed our acquisition of SENSA solutions, the US federal government leadership and organizational consulting firm.

The integration is progressing smoothly and this new addition is a great platform for us to serve a market that's been traditionally underserved.

We continue to build solutions that enable our colleagues to broaden the conversation with clients, and that in turn differentiates our firm.

It all begins with how we go to market, driving an integrated solutions-based client service approach.

At the same time, we're elevating and extending the Korn/Ferry brand to create the top of line brand at human capital.

Our strategy for capturing further top-of-the-house mindshare and relationships is driving a significant rise in our Board-related consulting assignments.

We're extending our brand through both online and offline marketing initiatives.

The second issue of our new quarterly periodical, the Korn/Ferry Institute Briefings on Talent and Leadership was just issued last week and is available to more than 35,000 executives globally.

We also continue to scale both our leadership and talent consulting businesses, as well as Futurestep, our outsourced recruiting business.

Today, 25% of the Firm is generated from these businesses.

If you look at our top five accounts, three of them are integrated solutions, buying multiple services across our various lines of business.

Our leadership business for the quarter was almost $19 million, and now represents nearly 14% of our company.

Activity for Futurestep gained 4% sequentially, due to strong activity in North America and Europe, and revenue was almost $18 million.

We've got a strong focus on large RPO assignments, which is our long-term strategic focus for our Futurestep business.

We're continuing to be steadfast in pursuing transformational opportunities, along the broad HR spectrum.

We're going to continue our systematic approach to M&A, aimed at making investments that accelerate Korn/Ferry's transformation as a leading global provider of differentiated human capital solutions.

Finally, we're advancing Korn/Ferry as a premier career destination.

We're continuing to add top notch, high caliber talent, as evidenced by 14 new consultants, who joined the Firm this quarter.

While we're encouraged by what we have achieved, in fact in about nine days I'll be here eight years and I think I've never been prouder of this organization, particularly going through this great recession.

And we know that managing the macroeconomic environment is sure to remain challenging, but regardless of the economic climate, we're looking forward.

We're excited and we're optimistic.

We've got a rock solid balance sheet, a focused and differentiated business, reasons to talk to clients throughout the entire year, and most importantly, passionate employees who are catapulting Korn/Ferry to take share and faithfully serve our clients across the globe.

Indeed, we are accelerating through the economic turn.

With that, I would like to turn it over to our CFO, Mike DiGregorio Mike?

Thanks, Gary.

Good afternoon, everybody.

Today, we're very pleased to announce another quarter of growth and improved profitability.

As you probably know from the numbers published this morning, key numbers, fee revenue for the quarter grew nearly 8% year-over-year and 5% sequentially to $146.7 million.

Consolidated fee revenue and the number of newly awarded assignments are now up 37% and 48% respectively from the low point just nine months ago.

Additionally, the recovery continues to be very broad-based, with all of our major operating regions and divisions posting positive growth in the quarter on both a year-over-year and sequential basis.

Profitability trends have also improved, as the full benefit of our restructuring initiatives has begun to be realized.

Excluding all the restructuring-related charges and recoveries in the current and prior periods, third quarter consolidated operating earnings grew by $1 million sequentially to $6 million, with a 50-basis point improvement in operating margin to 4.1%.

On the same basis, fiscal 2010 third quarter consolidated operating earnings improved $400,000, or 8% year-over-year.

Our firm remains the most liquid and well-capitalized in the industry with over $251 million of cash and marketable securities at the end of the third quarter.

Finally, excluding all the restructuring and related charges and recoveries in the current and prior periods, as well as the benefit of a nonrecurring credit to tax expense recorded in the quarter, third quarter earnings per share were $0.11, an improvement of $0.03 year-over-year and $0.02 per share sequentially.

On the same basis, and including the one-time tax benefit, third quarter earnings per share were $0.17.

Now I'll turn the call over to Gregg to review our operating segments in a little more detail.

Thanks, Mike.

Starting with our executive recruiting segment, consolidated third quarter executive recruiting fee revenue improved to $129.2 million, up $5.9 million or 4.8% sequentially and up $12.5 million or 10.7% year-over-year.

On a constant currency basis, executive search fiscal 2010 third quarter fee revenue was up $5.1 million or 4.2% sequentially, and up $6.5 million or 5.6% year-over-year.

As previously stated, third quarter sequential and year-over-year fee revenue growth was broad based, with all major operating regions higher.

The number of newly opened assignments was up 6.6% in the three months ending January 2010 versus the three months ending October 2009.

Sequentially, the industrial and life sciences specialty practices grew the most, up 11%, and 23% respectively.

In the North American region, third quarter fee revenue was up $1.9 million or 3% sequentially, and up $3.2 million or 4.8% year-over-year.

Sequential growth was strongest in the life sciences and industrial practices, which were up 13% and 11% respectively.

Despite year-end holiday seasonality, [we reconfirmed] assignments grew 6% in the third quarter versus the second quarter.

Market conditions in Europe remain stable in the third quarter with fee revenue growing $1.3 million or 3.6% sequentially to $36.6 million.

On a constant currency basis, Europe third quarter fee revenue was up $1 million or 2.8% sequentially, and up $3.2 million or 10.5% year-over-year.

Ten of 19 individual country markets grew sequentially in the third quarter, led by the UK and France, up 7% and 8% respectively.

On a specialty market basis, all major practices except financial services were up sequentially.

Market conditions improved the most in Asia-Pacific regions, where fee revenue was $2.9 million or over 21% sequentially, reaching $16.5 million.

On a constant currency basis, fiscal 2010 third quarter fee revenue grew $2.6 million or 19.3% sequentially, and $1.6 million or 12% year-over-year.

Seven of 11 Asia-Pacific country markets grew sequentially, led by Australia, up 31%, Hong Kong, up 51%, and Japan, up 43%.

All major Asia-Pacific specialty practices were up sequentially, led by financial services, up 40%, consumer goods, up 21%, and industrial, up 9%.

In South America, fee revenue fell $300,000 or 4.7% sequentially to $5.8 million, due primarily to holiday seasonality.

Measured on a constant currency basis, Latin America third quarter fee revenue was up 5.8% sequentially and off 11% year-over-year.

At the regional level, three of seven individual country markets were up sequentially, led by Brazil which was up $350,000 or 13%.

The total number of executive search consultants at the end of the third quarter was 483, down 14, both sequentially and year-over-year.

The average fee per search was approximately $72,000 in the third quarter and was essentially flat sequentially and down 20% year-over-year.

Annualized third quarter fee revenue production per consultant grew 7% sequentially to approximately $990,000.

Excluding all restructuring charges in prior periods, consolidated third quarter executive search operating earnings were $18.5 million, up $2.2 million year-over-year and up $3.6 million sequentially.

The consolidated executive search operating margin was 14.3% compared to 14% in the third quarter of fiscal '09 and 12.1% in the second quarter of fiscal 2010.

Now turning to Futurestep, fiscal third quarter fee revenue grew for the third consecutive quarter, reaching $17.6 million.

Measured on a constant currency basis, third quarter fee revenue was off 19% or $3.8 million year-over-year, but up 2.8% or $450,000 sequentially.

Geographically, sequential business trends were strongest in North America and Europe, where third quarter fee revenue was up 5% and 25% respectively on a constant currency basis.

Futurestep remained profitable in the third quarter, with consolidated operating earnings of $190,000 or a 1.1% margin, excluding a $300,000 benefit in the third quarter from a lease-related restructuring expense recovery charged off in a prior period.

I'll now turn the call back over to Mike to discuss our outlook for the fourth quarter of fiscal 2010.

Thanks, Gregg.

Based on recent monthly new business trends, the global demand for our services is steadily improving.

Given these trends through the month of February and factoring in a slight improvement in new business awards driven by normal year end incentives, fiscal 2010 fourth quarter fee revenue will likely range from $145 million to $155 million, and earnings per share will likely range from $0.10 to $0.16 per share.

That concludes our prepared remarks.

And at this time, we would be glad to answer any questions you might have.

(Operator Instructions).

Your first question comes from the line of Tobey Sommer of SunTrust Robinson.

Please go ahead.

Thank you.

I had a question for you about the integrated customers -- you said, I think, three of the top five.

What's been the path for those customers to buy multiple services from you?

Are they historically executive search customers and then they move out from there?

Or have any of them arrived at that integrated status via Futurestep?

Thanks.

Yes, Toby.

It's actually been both.

It's been through not only the flagship business, but it's also been through both our leadership business, as well as our RPO business has led to search work.

Actually, we've seen it both ways.

Thanks.

I had a question for you on guidance.

If I'm doing the math right, the sequential confirmations were up 6% or 7%, but the fee revenue guidance doesn't quite get to that level.

Is there something about the mix where the average fees may be down a little bit in the April quarter?

Or am I doing my math -- is my math off?

Tobey, this is Gregg Kvochak.

I think our January confirmations were just slightly lower than our December.

And our February confirms were similar between January and December.

They have been very steady.

Given those trends, mid-range of guidance at [$150 million] would assume that those types of trends remain for the remaining two months of the quarter.

Thank you.

And just had a question for you about productivity with the acquisition you made in 2009.

Have you seen a substantial -- have those consultants increased their annualized productivity in terms of revenue at a greater pace than the Firm average?

Yes, I think if you look -- you're referring, Tobey, to the investment that we made in Whitehead Mann.

Correct.

If you asked me today, I would tell you I'm most optimistic about our European and Asian businesses in terms of what we can do over the next several years strategically.

And so the colleagues that we have brought in have not only helped to change the strategic course of this firm, but also culturally.

And that's had a dramatic impact on our business, for example, in the UK.

Thank you very much.

I'll get back in the queue.

Next question comes from the line of Andrew (inaudible) of UBS.

Please go ahead.

Hi, this is Meg O'Connor in for Andrew.

My first question is on head count.

Do you -- can you provide any trends in hiring for Q4 in 2010?

And on that topic, are you targeting a particular revenue per consultant annually before you start hiring?

When you say -- let me just clarify, Meg, when you say head count, are you talking about our head count?

Yes, consultants.

We typically -- we don't give that out publicly.

This is a professional services firm and the life blood of our firm is our people.

And so we're continually promoting from within and looking at the outside.

It's a constant balance of recruiting people into the Firm and unfortunately, at times, counseling people out.

I think we've walked that balance extremely well through this great recession.

If you look at our productivity, if you look at it on a per-consultant basis, if you look at the height of the last cycle which you can appreciate wasn't that long ago.

It was about 16 months ago, where we were producing the most revenue and cash flow in the Company's 40-year history.

Our revenue per consultant was something like $1.3 million.

It's about -- you could look at it and say there's 30%, notwithstanding any other structural changes, any strategic initiatives, but just on the pure math.

Okay.

Thank you.

And then does your guidance assume a particular bonus per consultant?

Or if you don't want to provide that, that's fine.

Essentially, generally speaking, the bonus trends, typically you can see what we've done historically at different revenues levels, so they are not inconsistent with what's happened historically.

Okay.

And one last one, do you have bonus accruals for the quarter?

The bonus accrual was roughly $17 million in the third quarter.

Thank you.

The next question comes from the line of Kevin Mcveigh of Macquarie.

Please go ahead.

Great.

Thanks.

Nice job.

Gary, I wonder if you could just give us your thoughts overall.

A year ago, credit was so tight.

There was so much uncertainty, and here we are, tremendous bounce off the bottom.

As you think about the cycle and the up cycle, how quick do you think we'll get back to peak earnings?

And obviously, what you've done internally is going to be generating I think a much higher margin going forward.

Just thoughts on peak earnings, when we get back there.

As you think about the Company going forward, what's the contribution from the leadership, consulting versus either the core search business, and how do the margins play out?

That's multifaceted question.

I think number one, our orientation going back 24 months ago was to preserve the brand, position the Company for growth and accelerate through the economic term, and really seizing opportunity in the volatility that has been around us.

And that is still our orientation, that despite the economic climate, we are looking forward.

We are looking outside.

We are driving an integrated go-to-market strategy.

We're extending the brand and elevating the brand.

We're driving initiatives around client excellence.

We've got a coherent M&A strategy, and we've got a people strategy.

Our focus is to absolutely outperform the market and optimize this great company that we have.

In terms of predicting the future, that's very difficult to do.

In my conversations with other business leaders around the world, I think that it's a little bit -- in terms of what I touched upon in my prepared remarks, the free fall is obviously over.

But I think that leaders around the world are, particularly in the western world, trying to figure out what the new normal is.

There's obviously historic levels of unemployment in western economies around the world.

There's enormous amounts of stimulus, and the rates are generally pretty low.

The banking system is certainly a lot better, but credit is still tight.

It's really hard for us to predict exactly what the next 24 months, for example, are going to be like.

But our orientation, regardless of the climate, is to seek opportunity.

Okay.

Then if you could just help us directionally, the mix of the business through the next up cycle in terms of search versus non-search services?

Again, we have a strategic plan.

I've never shared those percentages publicly.

Again, our strategy is quite simply based on the premise of broadening the conversation with clients.

And not just about how a board or CEO finds great talent, but how they more effectively and efficiently deploy it, develop it, keep it and pay it.

And so today, a quarter of the Firm represents those solutions and services.

We are very passionate about systematically continuing to build and buy those reasons to talk to clients throughout the whole year.

Clearly, that percentage -- our expectation is going to be higher, but we also expect our flagship search business to outperform the market.

Great.

If I could just ask one more, in terms of the cash on the balance sheet, how much is available for buyback?

And at this point, given where we are, are you considering the buyback reactively reengaged?

Or is that something that's still before the Board?

We have -- in terms of authorized, we have $35 million of buyback.

And that's -- that is something that is a conversation that we have with the Board on a regular basis.

I think if you look around the world today, there is still a bias for liquidity and that is our orientation that we do have that bias.

Secondly, would be to invest in our business.

That would be the second view.

But I think if you look back over the past eight years, for example, I think we've got a very good track record of both returning cash to shareholders, as well as investing in the business.

We intend to continue those.

Great.

Thank you.

And the next question comes from the line of Mark Marcon, R.W.

Baird.

Please go ahead.

Good afternoon, Gary, Mike and Gregg.

Just wanted to ask about Asia-Pac, could you talk a little bit about -- you had nice growth there.

How should we think about the margins intermediate to longer term coming out of Asia?

Because certainly sounds like there's a lot of growth there, just wondering about the margins.

Generally speaking, we expect to be able to deliver sustained, profitable growth and improving margins on a steady basis, as the business continues to improve.

I think -- I'm sure you know in the last cycle, the growth overall in the Asia-Pac market was outstripped the overall Company growth.

We believe the potential is there to do that again, especially as we start leveraging some of these additional services, seeing a lot of receptively.

At the same time, as we've talked before, we're not just looking at the revenue line and expecting that to solve all the problems.

We've got to continue to be efficient, so we are -- we have looked at and continue to look at reducing costs on a steady basis and we will continue that effort.

It's the combination of those two programs that gives us a lot of confidence that we'll continue to see very steady improvement and movements up in profit and profitability.

When we think about that from a longer-term perspective, should we expect that Asia-Pac should be able to get back into the mid teens?

Yes.

We do believe that medium term as the business recovers, definitely we can hit those margins and improvement.

Great.

Can you talk a little bit about Whitehead Mann?

I was just wondering, how should we think about EMEA in terms of -- I know you've integrated Whitehead Mann so it may be difficult.

But roughly speaking, what would the contribution from Whitehead Mann this quarter?

Or how should we think about that and thinking about year-over-year trends on an organic basis?

I don't think we should -- our strategy was to integrate it so it is very much part and parcel of our UK business and also a platform for growth more importantly throughout all of Europe.

I'm very optimistic about that market.

And when you look at our UK business as a percentage of our European business market, Mark, I want to say it's 35% -- 35%, 40%, something like that today, Mark.

Okay.

Great.

And what was it about a year ago?

Substantially less.

Like more in the 20% range?

Yes.

Okay.

Great.

And then how should we think about fees going forward?

Obviously there's been some compression.

Obviously there's some mix shift between different practices and different geographies.

But if we look at things on a -- more on a same track, same geography basis, how should we think about that trending?

And how should we think about productivity and how much capacity we currently have in the system?

I don't see any structural shift in terms of the fees and the like.

I think that one can reasonably anticipate those two increasing.

The other thing, too, when you look at our average fees, the way we run the calculation, it includes our leadership business.

And in fact, if you pull out the search business, as some of our other competitors do, the fee is actually significantly higher than what we report here.

But I don't think there's anything structural.

Obviously you're going through a time right now where CEOs had to focus on cash and there was some wage deflation around the world.

But I don't think there's a structural shift there.

Okay.

Great.

And then last question, and then I'll jump back in the queue, you mentioned, Gary, liquidity, returning cash to shareholders.

How should we think about potential acquisitions?

It seems like you're probably still digesting Whitehead and still fine tuning LDS.

But I don't want to put words into your mouth so just trying to figure that part out.

We've essentially done seven over the last three years or so.

We've just -- we've continued to have a very systematic process and we're going to continue that.

We're looking for high quality solutions and services that differentiate this business and help to what any CEO thinks about almost during the entire day, which is their people and their people's strategies.

I don't think that the playbook has changed in terms of what we've done in the past.

We're continuing with the same orientation.

The same thing from a capital perspective.

Our view is we have to strike the right blend between returning cash to shareholders, investing in the business, and also we just -- you're still in a situation where credit is certainly -- it's a heck of a lot better than it was a year ago, but it's still tight.

The time you raise money is when you don't need money.

We're just trying to balance -- really trying to balance those three things, Mark.

Great.

Thanks a lot, Gary.

Next question comes from the line of Ty Govatos of CL King.

Please go ahead.

How are you?

Good.

Two questions.

I'm not sure I heard right on consultants.

They are down 16 sequentially, but you said you hired 14?

Yes, that's exactly right.

You can guess what the difference is.

We --

You're really down about 30 and the 14 are new hires or promotions?

No, those are new hires, Ty.

Again, I think in a professional services firm, part of the management care is to make sure that you're promoting from within, that you're adding talent from the outside, and that you're critically looking at your workforce all the time.

And that's what we're doing.

This is the third quarter you've done this.

Is there anybody left to hire after this?

Couldn't resist.

Refresh my memory, the 7.5 million long-term cash, is long-term like?

A lot of it has to do with the investment in the E-cap programs, the long-term programs, the E-cap.

Okay.

That's all I needed.

Thanks an awful lot.

I appreciate it.

Thank you.

We have a follow-up question from the line of Tobey Sommer, SunTrust Robinson.

Please go ahead.

Thanks.

Was hoping you could give us a little color on the market share gains that you say the Company's been achieving.

Maybe if you can put some context on whether you think you're taking more of that from boutiques versus some of the other larger competitors that can operate on a global scale.

Thanks.

Really hard to say truthfully.

It's a relatively -- if I just talked about the executive search business, it's a -- today it's probably about a $7 billion industry, five firms approximately have 35%, 40% of that market.

It's very difficult to pinpoint where it's actually coming from, but we do benchmark it against what the trade organization says is the overall growth for the industry.

Thank you.

Then this may have been in the release.

I apologize because I think I missed it.

The total bonus accrual through the first nine months, just so I can get a sense for cash.

Almost $50 million.

$50 million.

And to get a spendable cash number, would we take the $251 million less that and the deferred compensation plan?

Yes, exactly.

Yes.

And you should end up, Tobey, with $140 million of investable cash.

Perfect.

Thank you so much.

The next question comes from the line of (inaudible) of Credit Suisse.

Please go ahead.

Hi.

I have a quick question on just the verticals.

Are there any trends that you would highlight that we should be aware of equity to look to in the next quarter and also the next year?

I'm sorry.

Could you -- I missed the first part of that.

Just highlighting any trends by vertical that we should be aware of, any strength or weakness that we should be aware of as we look out into the next quarter and also the next fiscal year?

It's -- our business does -- we follow our clients and our business does mirror the global economy.

And if you just look broadly speaking, the life sciences and healthcare part of our business continues to grow and is almost recession-proof.

I shouldn't say that, but it's just -- we've got a fabulous business there.

And our industrial business as well, is well over 25% of this firm and we continue to see interesting trends there.

Okay.

Then going back to the productivity per consultant, the peak of 1.3 as you hit the last cycle, is there any reason to believe that we couldn't potentially exceed that as the recovery takes shape?

There is no reason to believe that.

Okay.

All right.

That will be all.

And we have a follow-up from the line of Mark Marcon, R.

W.

Baird.

Please go ahead.

Hey, Gary, with the environment getting a little bit better, how should we think about the competition for producers?

We've noticed a number of press releases that have come out, where you've named some new people who are fairly heavy hitters who have joined the Firm.

How do we think about that in terms of you competing relative to the other global players, or even from the 2% of the talent and are people being rational in terms of how much they are spending?

I can't speak for others.

We are very rational.

Hopefully we've demonstrated that over the last eight years, that we do everything we say we're going to do.

We're very, very mindful of the profitability and cash flow and that's the key to this business.

I don't see any unique trends going on, bidding wars or anything like that.

The truth is, we've got a -- if you look at our consultant ranks, we have many, many, many long-standing tenured employees, partners in this firm.

That's what we're proud about, that we both -- we can promote from within and we can also reach to the outside.

I don't think we're -- we're not unlike any other business, Mark.

Great.

Yes, I wasn't referring to you.

I was referring to your competitors and just wondering if you were seeing any change in behavior from them.

We're concerned about our own game.

We're concerned about what we're doing and we can't control what others do, but we sure can control what we do and that's what we're going to do.

Okay.

Great.

Thank you.

It appears there are no further questions, Mr.

Burnison.

Thank you very much.

It's -- another quarter down.

It's my 33rd, I think, quarter here.

As a leadership team, as an organization, we are extremely proud.

We're not what we want to be, but we're not what we used to be.

There's plenty of work ahead, but this is an organization that is absolutely looking forward and that's the hallmark of this firm.

I look forward to speaking to you again, and thank you very much for your time.

Ladies and gentlemen, this conference call will be available for replay for one week starting today at 4:00 PM Eastern Standard Time and running through the day March 16 at midnight.

You may access the AT&T executive playback service by dialing 1-800-475-6701, entering the access code 149035.

International participants, dial 320-365-3844, and again, that access code is 149035.

Additionally, the replay will be available for playback at the Company's website, www.KornFerry.com in the Investor Relations section.

And that concludes our conference for today.

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

You may now disconnect.