Korn Ferry (KFY) 2011 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Korn/Ferry International conference call.

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

Later we 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, such as those related to future performance, plans and goals, 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 related to this presentation, in the Company's annual report for fiscal 2010 and in the other periodic reports filed by the Company with the SEC.

Also, some of the comments today will reference non-GAAP financial measures, such as adjusted operating earnings.

Investors should review our reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure contained in the release relating to this presentation, which is posted on the Company's website at www.kornferry.com.

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

Burnison.

Please go ahead, Mr.

Burnison.

So with that thank you, Patrick, and good morning, everyone, and thanks for joining us.

I'm happy to report today that we had a very good quarter as an organization; $0.33 of EPS and operating margin of almost 12%.

Revenue was up 6% sequentially, 32% year over year, but more importantly we're clearly outperforming the industry and our balance sheet is rock solid.

I am enormously proud of this organization when I look back two years ago and think about the beginning of this great recession and now fast forwarding two years to think we're essentially back at peak revenue levels back to October of 2008.

We've made three strategic acquisitions, launched a number of marketing initiatives.

I am proud of Korn/Ferry.

This year we have continued to maintain, I think, the appropriate balance between making investments to fuel growth and cost containment.

We've driven an integrated go-to-market approach.

As I said, we've accelerated marketing initiatives and we've systematically looked at opportunities to differentiate and scale our business.

Our high-end strategy is also working as we continue to be awarded marquee assignments and, indeed, we are creating and seizing opportunities.

We're going to try to keep this momentum up in the months ahead.

But it all begins for us with our clients and how we go to market, driving an integrated solutions-based client service approach and I would say that across all of our businesses by nearly every measure we've raised the over -- the overall quality of our services and solutions.

Delivering a much more consistent compelling approach, we've taken our intellectual property and incorporated it into how we do our business.

At the same time, we're elevating and extending our brand to create the top-of-mind brand in human capital.

And as I said, at the top of the house we continued to be awarded high-level engagements with our clients and it's illustrated by our Board and CEO business, which is up substantially over the prior year.

Our Board effectiveness, the succession planning offerings, the IP that we have are absolutely being embraced by our clients and I see a very long runway for this part of our business.

We also continue to scale both our leadership and our Futurestep businesses.

They comprise about a quarter of our firm and they're operating profitably.

In fact, our leadership group had its best quarter ever.

$25 million of revenue for the quarter, achieving $100 million annual revenue run rate for the first time in the Company's history.

We continue to establish footholds with global clients who are embracing our diversified services and that could be anywhere from leadership development to succession planning and enterprise learning.

For our Futurestep business, our RPO business, that improved nicely 5% sequentially, 26% year over year.

Validating our approach during the quarter, we secured several significant projects.

We also began implementation of a large RPO opportunity, 3,000 hires per year spanning over 50 countries.

We absolutely remain steadfast to pursuing transformational opportunities along the broad HR spectrum and we'll continue to make investments to diversify our revenue mix, create greater, more sustainable shareholder value and most importantly, differentiate our professional services business.

Finally, we are indeed advancing our organization as the premier career destination in the industry.

During the quarter we promoted and added high-caliber talent to our firm.

We also launched a number of initiatives focused on career development and deeper alignment of our talent to our strategic priorities.

And you will continue to see that as our business strategy evolves, so will our talent strategy in order to drive the growth we need and the culture we want and most importantly, at a pace that we can absorb.

Over the last several months, I've had the opportunity to speak with many CEOs around the world and it's evident to me that we're experience a multi-speed labor recovery; global versus local, skilled versus unskilled.

Global enterprises are investing, hiring and expanding while organizations that are more reliant on Western economies for growth, have remained more cautious.

It's clear that there's still some tough sledding ahead.

Nobody can say whether this is going to be a naughty or nice holiday, a naughty or nice Christmas, but I'll tell you, our firm's course has never been clearer.

Our colleagues are galvanized through a common purpose.

We've outperformed the industry by nearly every measure, the caliber of our workforce has never been higher and our strategy of helping clients achieve extraordinary performance through their people is off the launch pad.

With that, we have with me Mike DiGregorio, our CFO, and on the phone Gregg Kvochak, so I'll turn it over to you, Mike.

Thanks, Gary, and good morning, everyone.

Market conditions, as well as demand for our industry-leading talent management services continue to steadily improve around the world.

Despite the seasonally slow summer months we continued to grow in the second quarter.

The second quarter of fiscal 2011 is now our sixth consecutive quarter of sequential growth.

All of our operating units grew sequentially in the second quarter and are sharply higher versus the same quarter a year ago.

On a constant currency basis, fiscal 2011's second-quarter fee revenue grew by $3.5 million, or over 4% sequentially, and was up 33% year over year, reaching $185.4 million.

As the economic environment improves we continue to increase market share and outperform the industry and our major competitors.

New business awards improved in the second quarter, with a number of newly-awarded combined executive recruiting and leadership and talent consulting assignments up 25% year over year and 4% sequentially to 1,970.

Additionally, our firm continues to execute efficiently, maintaining tight control over costs and driving significant improvements in operating leverage.

Our operating profitability has now improved for the sixth consecutive quarter, as well.

Excluding charges recorded in the second quarter related to restructuring activity in prior periods, our second-quarter consolidated operating earnings grew by $2.6 million, or 14% sequentially, to $21.9 million, with an 80-basis point improvement in operating margin to 11.8%.

On the same basis, compared to the second quarter of fiscal 2010, second-quarter consolidated operating earnings improved by nearly $17 million.

Our second-quarter ending cash and marketable securities position also improved by $33 million sequentially, reaching $265 million.

Excluding cash and marketable securities reserved and deferred compensation arrangements and for accrued bonuses the current investable cash balance is approximately $111 million.

As previously announced, in the second quarter of fiscal 2011 we purchased approximately 157,000 shares of our common stock with total cash proceeds of $2.1 million.

There are still approximately $24 million of previously-authorized share repurchase funds remaining.

Excluding adjustments recorded in the second quarter to restructuring charge estimates related to prior periods fiscal 2011 second-quarter earnings per share were $0.33, an improvement of $0.09, or 38% compared to the first quarter.

Earnings per share have now improved for the sixth consecutive quarter.

And finally, excluding all restructuring-related charges and recoveries in the current and prior periods second-quarter earnings per share improved by $0.24 compared to the second quarter of fiscal 2010.

I'll now turn the call over to our SVP of Finance, Gregg Kvochak, to review our operating segments in a little more detail.

Gregg?

Thanks, Mike.

Starting with our Executive Recruiting segment, consolidated second-quarter Executive Recruiting fee revenue improved to $164.1 million, up $9.2 million, or 6% sequentially, and up $40.8 million, or 33% year over year.

On a constant currency basis Executive Search fiscal 2011 second-quarter fee revenue was up $3 million, or 4% sequentially, and up $41.2 million, or 34% year over year.

As previously stated, the number of newly-opened combined Executive Search and Leadership Talent Consulting assignments in the three months ending October of 2010 were 1,970, up approximately 4.2% sequentially but up nearly 25% year over year.

Sequentially the consumer goods, financial services and technology specialty practices grew the fastest and were up 11%, 9% and 7% respectively.

In the North American region second-quarter fee revenue improved $4.1 million or 5% sequentially, and $25.8 million, or 38% year over year, reaching a record $94.1 million.

Sequential growth was strongest in the financial services, technology and consumer goods practices, which were up 15%, 8% and 7% respectively.

Newly confirmed assignments in North America grew approximately 11% in the second quarter of fiscal 2011 versus first quarter of fiscal 2011.

In Europe demand remained relatively stable in the second quarter despite the slower seasonal effects of the summer months.

At actual rates, Europe's fee revenue grew $1.2 million, or 3%, reaching $37.4 million.

On a constant currency basis Europe's second-quarter fee revenue was down only $700,000, or 2% sequentially, and was up $2.8 million, or 11% year over year.

9 of 17 individual countries grew sequentially in the second quarter, led by Germany, Italy and Switzerland, which were up 8%, 165% and 21% sequentially.

On a specialty practice basis the consumer goods and industrial practices improved sequentially and were up approximately 8% and 13% respectively.

After a very strong first quarter, fee revenue in the Asia Pacific region continued to accelerate in the second quarter, reaching $24.1 million.

On a constant currency basis fiscal 2011 second quarter fee revenue grew $2.2 million, or 11% sequentially, and was up $9.4 million, or 70% year over year.

Six of ten Asia Pacific countries grew sequentially, led by China, India and Japan, which were up 10%, 18% and 45% respectively.

On a specialty practice basis the consumer goods, industrial and financial services markets were the strongest sequential growers, up 27%, 22% and 11% respectively.

Second-quarter fee revenue was also up sequentially in South America.

Measured on a constant currency basis South America's second-quarter fee revenue was up approximately $700,000, or 10% sequentially, and $2.6 million, or 42% year over year.

Four of seven individual countries were up sequentially, led by Brazil, which was up 21%.

The total number of Executive Search consultants at the end of the first quarter(Sic-see press release) was 475, down 3 sequentially and down 22 year over year.

The combined Executive Search and Leadership Talent consultant average fee per assignment was approximately $78,000 in the second quarter and was up approximately 2% sequentially and 7% year over year.

Annualized fee revenue production per consultant grew 6% sequentially in the second quarter to approximately $1.29 million.

Excluding prior-period restructuring adjustments recorded in the quarter, consolidated second-quarter Executive Search operating earnings were down $1.5 million sequentially to $26.2 million, partially due to the absorption in the quarter of several extraordinary expenses.

Excluding all net restructuring charges in the current and prior years quarters consolidated second-quarter operating earnings were up $11.2 million, or 75% year over year.

The consolidated Executive Search operating margin was 15.9% compared to 12.1% in the second quarter of fiscal 2010 and 17.9% in the first quarter of fiscal 2011.

Now turning to Futurestep.

Fiscal second-quarter fee revenue grew for the sixth consecutive quarter reaching $21.3 million.

Measured on a constant currency basis, second-quarter fee revenue was up 2%, or $450,000 sequentially, and up 26%, or $4.4 million year over year.

Geographically sequential growth was strongest in North America at 14%, while at constant currency the Asia Pacific region was down 4% and Europe was down 5%, due primarily to summer vacation seasonality.

Futurestep's profitability remained stable in the second quarter.

Excluding all net restructuring charges in the current and prior year's quarters Futurestep's operating results improved approximately $1 million from a marginal profit of $100,000 in the second quarter of fiscal 2010 to a profit of $1.1 million in the second quarter of fiscal 2011.

Futurestep's operating margin was 5.1% in the second quarter.

I'll now turn the call back over to Mike to discuss our outlook for the third quarter of fiscal 2011.

Thanks, Gregg.

New business trends continue to slowly and steadily improve around the world.

The number of consolidated Executive Search and Leadership and Talent Consulting new assignments in November were up approximately 1% compared to October.

Assuming near-term stable economic conditions and factoring in the impact of seasonally-weaker new business awards in the third quarter due to the year-end holidays, fiscal 2011 third-quarter fee revenue will likely range from $175 million to $190 million and earnings per share will likely range from $0.25 to $0.32 per share.

This guidance assumes foreign exchange rates remain at or near current spot rates and that the net earnings impact of financially market-driven returns on our ECAP and COLI investment portfolios are approximately neutral for the third quarter.

That concludes our prepared remarks and at this time we will be glad to answer any questions you might have.

(Operator Instructions) And our first question come from line of [Kevin McVeigh].

Please go ahead, Kevin.

Mr.

McVeigh?

Hello?

Yes, Mr.

McVeigh, your line is open.

Yes.

Okay, thank you.

A great, great job.

Gary, just wanted to drill down a little further on your comments.

As you think about transformational opportunities is that more along the lines of transition with the LTC business?

And as you think about that how big of an opportunity would you consider and just ultimately does LTC become a separate segment at some point in the near future?

How we think of it is how a CEO thinks of their business and a CEO at the end of the day, despite the industry, is in the people business.

Part of that is attracting great people, but a significantly greater piece of it is inspiring, is motivating, is developing, is aligning, is deploying, developing, keeping paying a workforce.

And so we are systematically looking for solutions and services that help our clients more effectively and efficiently deploy, develop, sustain and retain a workforce, and so those would be the categories that we are looking at.

We've been doing that over the last several years and we'll continue to do so.

That would also include the RPO area, as well.

In terms of the opportunity for both those businesses our Leadership business today is $100 million.

Seven years ago that was a $6 million assessment practice.

Half of that -- generally speaking half of the growth's been acquisitive, half's been organic.

I look at both the RPO business and the Leadership business and say that those are multi hundred million dollar opportunities for this firm.

Then in terms of the size of investments and the like, that's -- we're first looking from a client perspective; what would further scale, what would further differentiate our organization to clients.

And secondly, it's culture; how does the firm that we'd be looking at, how does it fit with us culturally.

Great, thank you.

And then if I could, Mike, real quick.

Seems like you tightened up the range on the revenue guidance versus the last couple of quarters.

Is it just more confidence in the outlook or the way the quarter plays out, any thoughts on that?

I think it has a little bit to do with the way things have stabilized over the last few months and given the order pipeline we saw in November and early part of December, a combination of those factors.

Great, thank you very much.

Okay, thank you.

Our next call comes from the line of Mark Marcon.

Please go ahead, Mark.

Good morning and congratulations on the strong results.

I was wondering if you could talk a little bit about the aspirations for margins in the core Executive Search outside of North America.

Obviously the margin performance was quite strong in the US.

How should we think about that longer term across your geographies?

Well, I think a couple things.

Obviously we continue focused on improving margins steadily and obviously as we leverage up the business, because you saw the -- obviously the consultant count hasn't really changed much and so average productivity has moved up quite significantly, approaching record levels of about $1.3 million per consultant, so we're very pleased with that and encouraged.

Believe from dialogue with our clients there's more opportunity there.

At the same time, obviously we need to continue to invest in the business as it grows and develops but we also remain very focused on cost control.

And as we've told you for many quarters, while we'll look to continue to add unique talent going forward at the same time we need to really continue to watch our costs and where we don't reach productivity levels we'll need to make changes.

So I think it's a constant process of really carefully evaluating the business and controlling costs.

So we're very optimistic, we think we still have significant room for margin improvement over the medium and long term.

Mike, could you quantify that to a greater extent.

Just if we think about Europe or think about Asia just the major areas where those ultimately should go to?

Not talking about next 12 months but as the cycle unfolds.

Well, the past is certainly some indication of the future.

I would go back to before the great crash, go back to July of 2008, go back to October of 2008, and our businesses at that point were substantially different than they are today.

But at that point, in both Europe and Asia, we saw 15%, 16% operating margin.

And again, I would emphasize that our businesses today look a lot different than they did back then.

The other factor obviously is, as Gary said, was the growth in the Leadership part of the business, the -- our margins there obviously starting to get significant benefit from leveraging up the scale of that business, so that will be an important contributor to the business going forward in a positive way on margin, as well.

Great.

Can you talk a little bit about the RPO contract.

You mentioned a really large one.

Can you give us a little more color around that?

It's for a big industrial company that like many of those global companies see the tremendous shift in consumerism to the east.

This is a company that needs to hire a significant amount of professional workers, knowledge-based workers, and it will hopefully be a multi-year endeavor where we are helping them in more than 50 countries, potentially fill 3,000 plus positions a year.

So it's one that we just started to implement this quarter and it'll slowly roll out over the next several quarters.

How much revenue from that did we see from this quarter?

Not a significant amount.

Congratulations on that.

And then lastly, can you talk a little bit just about how we should think about the ECAP adjustments for this quarter, just what the puts and takes were?

Yes.

In the net effect -- obviously important in the net effect of the ECAP and the COLI this was a quarter which the financial markets moved up quite significantly so I think the net effect of all of that was probably close to about $0.05 on the earnings.

Gregg, do you have--?

To be more specific for you, Mark.

It was about a $700,000 benefit above the line in operating earnings so we've reported a margin of 11.8% if you would exclude effects of the COLI and ECAP gains it would have been about 11.4%.

And then below the line it was about a $3.1 million gain and so that would be about $0.04 a share, so as Mike said, $0.05 total.

$0.01 above the line -- above the operating line and $0.04 below the operating line.

And going forward you wouldn't anticipate that there's -- obviously it's hard to predict, but the guidance basically assumes no net effect?

That's correct, neutral for the next quarter.

Terrific, thank you very much.

Okay thank you.

Our next call come from the line of Tobey Sommer.

Please go ahead, Tobey.

Thank you.

I was wondering if you could describe the mix of demand on the search side?

Read some reports, at least survey work, that suggested more movement in demand for sales and business development, which may indicate that your customers and corporations generally are moving toward expansion.

Could you comment on that?

It would be so tough to draw any kind of conclusions.

I would say, Tobey, that number one, CEOs are looking at the new normal and so are Boards, so they're saying, okay, we survived this horrific period, what should be the growth strategy going forward and what should the leadership team look like so that's driving a piece of this.

Clearly, the closer that you are to the revenue those positions are in demand.

But quite honestly, they're kind of always in demand.

I don't think we've seen anything that would substantiate your thesis there.

Okay.

On a separate front, I've heard some managements talk about HR departments being gutted and therefore even in a more modest hiring environment needing to rely on outsourced providers.

To what extent do you think that is driving your bid and proposal activity maybe on the RPO side, or to what extent is it maybe something else?

Again, people will always say that.

Certainly there was a great deal of retrenchment in just about every business across all functions, not just HR, so yes, they'll have to look to outside providers.

But again, I don't think you read anything into that.

I certainly wouldn't extrapolate anything off of it.

Okay, and last question for me.

In terms of the new normal could I get an update on your spendable cash position and how maybe your thoughts are evolving on how to deploy it now that you're precariously close to hitting old peak quarterly revenue and throwing off a lot of cash?

Thanks.

I think in general terms our view on that is the same as it's been and we've communicated the last few quarters.

Obviously we've got a good amount of investable cash.

Continue to look at very unique and select acquisition opportunities as we've done over the last few years and continue to have stock buyback opportunities so we will be very selective and judicial in use of the cash for those purposes.

And the number if -- Mike or Greg?

For investable?

Could you tell me a number?

Yes, $111 million, yes.

I'm sorry.

Thank you very much.

Okay, thank you.

(Operator Instructions) Our next question comes from the line of Chris York.

Please go ahead, Chris.

Good morning.

Yes, this is Chris York that's in the queue, thanks for taking my call.

I have a two questions related to headcount.

First are you expecting to grow headcount over the next few quarters?

And then alternatively, are you guys done weeding out underperforming consultants?

Well, we don't disclose anything out more than a quarter.

I would tell you that the lifeblood of a professional services firm is its people and you have to continually with the workforce develop and promote from within, hire and occasionally people leave the organization.

So there's no material plan that would be different than what we've actually done over the last couple quarters.

Sure.

And then on stock repurchases are you guys planning to get a little bit more aggressive over the next few quarters?

We wouldn't necessarily need to be more aggressive.

I think we continue to be very judicial in use of cash, that's one opportunity, and we'll have to look at that and be very opportunistic but at the same time looking at acquisition opportunities.

So very selective in the use of either opportunity.

Okay, great, thanks.

Thank you.

Our next question comes from the line of [Gary Christinan].

Please go ahead.

Oh, thank you, I have a question for Gary.

Going back to your comments about global versus local differences in growth, could you maybe speak to how that influences your strategy and approach for dealing with future growth and (inaudible) for investment?

Well, certainly if you look out and you look out 20 years, two-thirds of the world's middle class will be in Asia.

When we look at our organization, we are very much thinking in those kinds of terms; not just Asia but also all of Latin America and Europe.

So this has been an organization that I think's probably had too much of a bias towards North America.

I think we've demonstrated that we are moving that and directionally we would have a bias towards making this a true global organization.

Okay.

And maybe when you spoke to how you've been gaining share, has that come at the expense of smaller local players, or can you maybe speak to who you're gaining share from in your view?

I think that we're -- that the gaining share thing is kind of a myth.

The truth is that a CEO thinks about people more than they think about anything else and you can do all of this math around sizing and share and all that, I think the share for our firm, for others that do this, is well beyond what we think it is and we're only limited by our imagination.

I'm confident on the way that this firm is headed.

What I can't tell you is the economy.

And again, I think that there's some tough sledding ahead.

Okay, and maybe one last question on what you're seeing with respect to confirmation trends for the month of November versus October.

Any visibility you can give us on what you seeing thus far?

Well, as I mentioned before, confirms were up slightly in the month of November.

And again, we -- as Gary said, it's -- number one, it's holiday season, number two it's still a challenging time.

But generally, we feel very optimistic given the input from our clients.

And this is a quarter where this month, for example, in many places around the world you've got a good week-and-a-half to two weeks off the way the holidays hit this year.

Right, right.

Okay, thank you.

Okay, thank you.

It appears there are no further questions, Mr.

Burnison.

All right.

Well, thank you all for joining us.

I would again say that to us it feels like a Nike Swoosh-like recovery.

I can't predict the economy, we can't predict the economy, but we're going to continue to maintain our focus to not only to preserve but to take advantage of the opportunities that abound and drive growth for our firm and for our shareholders.

So with that, season's greetings and I hope you all have a wonderful holiday season.

Thank you very much.

Ladies and gentlemen, this conference will be available for replay for one week starting today at 11 am Eastern Standard Time and running through December 15, at midnight.

You may access the AT&T executive playback service by dialing 800-475-6701 and entering the access code 183604.

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 our conference for today.

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