Korn Ferry (KFY) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Korn Ferry International conference call.

(Operator Instructions).

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

Gary Burnison, please let me read a cautionary statement to investors.

Certain statements made in the presentation today such as those relating 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 and 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 in the Company's annual report for fiscal 2010 and 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 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 conference over to Mr.

Burnison.

Please go ahead, Mr.

Burnison.

Well thanks Brad, and good afternoon to everyone.

Today I am pleased to report our seventh consecutive quarter of growth which marks a year-over-year improvement of 27%.

That is really across the board in nearly every market sector and line of business.

We achieved $187 million in fee revenue for the quarter and we had an operating margin of 11%.

Our ongoing success in what I would describe as an uneven global economic recovery and clearly multi-speed labor cycle, in other words skilled versus unskilled, developing versus Western economies is a true testament to our strategy.

The strategy is anchored around our firm helping clients better attract, deploy, develop and reward their workforce through the delivery of enterprise-wide talent management solutions.

We're simply trying to own the talent agenda of our clients.

This quarter was met with prominent assignments, global organizations, using all three of our firm's business offerings.

I think we continue to strike the right balance between cost containment and making investments to fuel growth.

We have driven an integrated go-to-market approach, we have accelerated marketing initiatives and we've systematically evaluated opportunities that could differentiate us.

It's clear that the caliber of our employees combined with our unique intellectual property differentiated approach and prominent brand are paving the way for us to indeed broaden the conversation with our clients.

At the same time, we're elevating and extending the brand to create the premier organization in global human capital.

The top of the house we continue to make great strides driving deeper relationships in the C-Suite with organizations, for example, with more than $1 billion in revenue.

Our CEO, President engagements were up 69% year-over-year and our Board assignments were up 46% year-over-year.

We're continuing to increase the mind share at the global 2,000 with our Board effectiveness succession offerings that are truly being embraced by clients.

We continue to scale our leadership in Futurestep businesses.

Our leadership offering for the quarter was about $25 million which is up 36% year-over-year, and like I said, clients are increasingly turning to us for leadership development, succession planning, enterprise learning, and overall we see a long runway for this business which is probably overall about a $15 billion to $20 billion addressable talent solutions market.

I think we're just well poised for the future.

Futurestep had a good quarter.

The top line improved sequentially, about 10% year-over-year.

It was up substantially around 30% or so.

Fee revenue came in at about $23 million.

As , we continue to look at transformational opportunities along the broad spectrum, and we're going to continue to make prudent investments that differentiate our professional services business.

Last but not least we're advancing our firm as the premier career destination in the industry.

To practice what we preach, attracting the brightest talent with career-long dedication to professional development, utilizing the same tools in intellectual property that we use with our clients.

We absolutely remain committed to developing our talent in the right roles at the right time to grow our business and deliver unparalleled service to our clients.

I have got to tell you that I am enormously proud of our organization, the caliber, the commitment of our employees has never been higher, and as I have recently articulated to our employees around the world, we have got to continue to keep our feet on the ground, but our eyes on the stars.

We have to continue to anticipate and navigate the present while further positioning ourselves for the future for the outcome of today does indeed determine the starting point for tomorrow.

So with that, I would like to turn it over to our Chief Financial Officer, Mike DiGregorio.

Thanks Gary, and good day everyone.

Fiscal Q3 results reflect the seasonally slower year-end holiday period.

Overall market demand remains steady, and we achieved our seventh consecutive quarter of sequential fee revenue growth.

Third quarter fee revenue grew to $186.5 million, up $1.1 million or 1% sequentially, and up 27%-plus year-over-year.

New business trends were also stable in the quarter.

The number of newly opened combined executive recruiting and leadership and talent consulting assignments in the third quarter was 1,914, seasonally down 3% sequentially, but up 14% year-over-year.

Profitability also remains steady in the quarter as we maintain control over discretionary spending while adding incremental consultant and execution staff on a select basis.

Our third quarter operating earnings were $20.5 million with an 11.0% operating margin.

Excluding a small restructuring charge adjustment in the third quarter of fiscal 2010, the current year third quarter consolidated operating earnings of $14.5 million were up 24% year-over-year with a 690 basis point improvement in operating margin.

On a sequential basis, excluding restructuring charge adjustments recorded in the second quarter of fiscal 2011, consolidated operating margin as reported fell 80 basis points.

However, excluding the net impact on compensation expense of equity market driven gains in our [ECAP] and COLI portfolios in both quarters two and three, consolidated third quarter operating margin was essentially flat at 11.4%.

Our third quarter ending cash and [marketable] securities position improved by $39 million versus Q2, reaching $304 million.

Excluding cash and marketable securities, dedicated to deferred compensation arrangements, and for accrued bonuses, the current investable cash balance is approximately $132 million.

Excluding all restructuring charge adjustments and other nonrecurring gains recorded in the third quarter of fiscal 2010, third quarter earnings per share grew by $0.19, or over 170% year-over-year to $0.30.

Finally, excluding all restructuring-related charges in the second quarter of the current year, third quarter earnings per share as reported were down $0.03 sequentially.

However, adjusting for the net impact of equity market returns in the [ECAP] and COLI portfolios in both the second and third quarter of fiscal 2011, third quarter earnings per share were essentially flat sequentially at $0.28.

Now turning the call over to Gregg to review the numbers in a little more detail.

Gregg?

Thanks, Mike.

Starting with our executive recruiting segment.

In a seasonally weaker quarter, consolidated third quarter Executive Recruiting fee revenue reached $163.1 million, down only $923,000 or less than 1% sequentially and up $34 million or 26% year-over-year.

On a constant currency basis, executive search fiscal 2011 third quarter fee revenue was down $1.8 million or 1% sequentially, and up $34.8 million or 27% year-over-year.

On a specialty practice basis and compared to the second quarter, growth in the consumer goods and technology practices were offset by seasonal weakness in the financial services and industrial practices.

In the North American region, third quarter fee revenue improved approximately $1 million or 1% compared to the second quarter, and $28.4 million or 35% year-over-year, reaching a record $95 million.

Similar to the consolidated world wide trend, growth in the consumer goods and technology practices were offset by seasonal weakness in the financial services and industrial practices.

Newly confirmed assignments in North America were flat in the third quarter of fiscal 2011versus the second quarter of fiscal 2011.

In Europe, fee revenue improved in the third quarter despite the slower seasonal effects of the year-end holidays.

At actual rates, Europe's fee revenue grew $2.6 million or 7%, reaching $40.1 million.

On a constant currency basis, Europe's third quarter fee revenue was up $2.5 million or 6.7% sequentially, and was up $5.6 million or 15% year-over-year.

Ten of 17 individual countries grew sequentially in the third quarter lead by France and Switzerland which were up 53% and 21% respectively.

On a specialty practice basis,the technology and life sciences and health care practices improved sequentially and were up approximately 29% and 40% respectively.

After a strong second quarter, fee revenue in Asia-Pacific decelerated in the third quarter falling to $20.4 million, due primarily to holiday seasonality.

On a constant currency basis, fiscal 2011 third quarter fee revenue was down $4.2 million or 17% sequentially, and was up $2.9 million or 18% year-over-year.

On a specialty practice basis, growth in the consumer goods, industrial and life sciences practices was offset by weakness in the financial services practice.

Third quarter results were also seasonally slower in South America.

Measured on a constant currency basis, South America's third quarter fee revenue was down approximately $890,000 or 10% sequentially, but up $1.9 million or 32% year-over-year.

Brazil was down approximately $940,000 or 17% versus the second quarter.

The total number of executive search consultants at the end of the third quarter was 474, flat sequentially, and down nine year-over-year.

The combined executive search and leadership talent consultant average fee per assignment was approximately $80,000 in the third quarter, and was up approximately 3% sequentially and 11% year-over-year.

Annualized fee revenue production per consultant was flat sequentially in the third quarter at approximately $1.29 million (sic - see press release).

Excluding restructuring-related adjustments recorded in the second quarter of fiscal 2011, consolidated third quarter executive search operating earns were up approximately $2.9 million sequentially to $29.1 million.

Likewise, excluding all restructuring related adjustments in the third quarter of fiscal 2010, consolidated third quarter executive search operating earnings were up $10.6 million or 57% year-over-year.

The consolidated executive search operating margin was 17.8% in the third quarter compared to 14.3% in the third quarter of fiscal 2010, and 15.9% in the second quarter of fiscal 2011.

Now turning to Futurestep.

Futurestep was the firm's fastest-growing operating segment in the fiscal third quarter.

Consolidated Futurestep's fee revenue grew nearly 33% year-over-year, and nearly 10% sequentially, reaching $23.3 million and has now grown for seven consecutive quarters.

Measured on a constant currency basis, third quarter fee revenue was up 31% or $5.7 million year-over-year, and up 8.2% or $1.7 million sequentially.

Geographically, sequential growth was strongest in North America at 16% while at constant currency the Asia-Pacific region was up 2% and Europe was up 5%.

Futurestep's profitability also improved in the third quarter.

Excluding all net restructuring-related adjustments in the second quarter of fiscal 2011,Futurestep's operating earnings improved approximately $200,000 sequentially with a 30 basis point margin improvement to 5.4%.

On the same basis, Futurestep's third quarter operating earnings improved $1.1 million compared to the third quarter of fiscal 2010 with a 430 basis point margin improvement.

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

Thank you, Gregg.

As we begin fiscal Q4, new business awards are modestly improved.

February confirmations were flat compared to January in North America, but up in Europe and Asia-Pacific.

Assuming relatively stable economic conditions for the remainder of the quarter, fiscal 2011 fourth quarter fee revenue will likely range from $183 million to $197 million, and earnings per share will likely range from $0.30 to $0.36 per share.

This guidance assumes foreign exchange rates remain at or near current spot rates.

That concludes our prepared remarks.

We'll be glad to answer any questions you might have at this time.

(Operator Instructions).

Our first question comes from Tim McHugh from William Blair & Company.

Please go ahead.

Yes.

Hi, guys.

First, I just wanted to ask about the hiring plans and the headcount.

What is your thought process at this juncture?

Are you looking to grow that more aggressively?

Are you still in a position where you are focused on driving revenue per consultant up further?

Well, I think in this type of business the time to invest is winter.

And we're not in winter, so several months ago we pulled the accelerator off in North America.

We're looking to continue to make investments outside the United States selectively.

We don't guide out headcount or anything like that.

People, employees that's the life blood of our firm.

I think we have done a very good job of promoting people that we have and also bringing in people from the outside and assimilating them.

So I would say it's kind of a steady state here.

There's nothing that has changed here in March from when we spoke in December.

Okay.

And the voluntary turnover trends as we look at the headcount.

Is that stable or is there anything going on there?

No, it's very low.

I mean, you can see our number of consultants is around 475 or so.

We had a handful of hires, and a handful of leavers.

It's very, very low.

Okay.

And then on financial services, you said it was seasonally weaker in third quarter there.

Have you seen signs of that improving?

I know Heidrick has recently made comments that they saw some seasonal weakness towards December and early in January as well.

Yes, in terms of client visits when you look at our -- let me step back a second, and you look at financial services.

During our third quarter we were down about $6 million or so sequentially over all in financial services.

When you peel that back, almost all of that is attributable, or at least the majority is attributable to Asia.

In terms of client visits and the like in Asia, very recently within the last three weeks, we don't see any kind of sign that would suggest that there's a slowdown there.

Okay.

Thank you.

And we have a question from the line of Tobey Sommer with SunTrust.

Please go ahead.

Hi, I wanted to ask a little bit about Futurestep.

You has a nice growth quarter there sequentially.

How much visibility to do you have there going forward, and could you remind us the seasonality of the segment?

Well, the visibility in the Futurestep business is not a lot different than the search business.

Quite frankly we're trying to continue to position more of that business in to project-based business, outsourcing business, and I think we have done a very good job of doing that over the last couple of years.

So the growth there in Futurestep was broad-based.

It was across every region.

We have been awarded a number of very big mandates too.

The commonality would be to fill out knowledge worker positions across the world, particularly in the developing parts of the world, and we see that trend continuing.

We see continued demand for knowledge workers.

All right.

Great.

And you mentioned in South America, Brazil is down a little bit more.

Can you give us any color on there?

What were the drivers?

Do you see in any signs of civilization?

Again, when we look at this quarter we really attribute a lot of the sequential comparisons to theseasonality.

We closed our firm, for example, the week between Christmas and New Years given the sacrifices that employees had made in the Great Recession and asking them to take furloughs and the like.

So we closed our world wide -- closed down for a week officially which really means a lot of people were gone for a week and a half, two weeks, and I think that has held true with clients as well.

And I think more than anything if you are trying to draw any kind of sequential trends that would be the big headline there.

Okay, and a couple of quick numbers questions.

In the guidance, what do you have your tax rate assumption and share count?

Tax rate for the fourth quarter should be approximately 39%, and fully diluted shares should be around $47.1 million.

Thank you very much.

And we have a question from Mark Marcon from Robert W.

Baird.

Please go ahead.

Hello, everybody.

Hey, how are you?

Good.

Thank you.

I was wondering if you could just talk a little bit more about Asia-Pac.

Was the (inaudible) (technical difficulty) entirely due to financial services?

Or were there any other segments that seemed to be slow?

I was just trying to figure out if it was entirely due to that.

It was entirely due to that.

In fact industrial was up in Asia-Pacific, consumer was up in Asia-Pacific.

Technology was about the same as the prior quarter.

So literally, Mark, the decline sequentially in Asia-Pacific was substantially anchored in the financial services business.

And why would that have slowed down as much?

Let's exclude the seasonal factors, but on a year-over-year basis just the pace of growth slowed.

Why would that be?

Well, look, I used to be in an investment bank.

It wasn't that long ago that it was either Shanghai, Mumbai, or bye-bye, right?

So during the [Great] -- the [depths] a couple of years ago there was quite a bit of moving people around to those places.

And so I thought -- so that happened.

The hiring was very aggressive.

The first thing that came out was financial services.

It's clearly an industry that tends to somewhat over hire and over fire to some extent.

From the conversations that we have had with clients, Mark, there's really not anything systemic.

I think that a lot of them had some challenges with the bonus pools and all of that, and so maybe that went in to thinking the middle part of last year.

Yes, that's about as good as I can put my thumb on it.

Okay.

And you mentioned that you had some client visits that I took from the way that you phrased your comments that maybe we were going to see a rebound in activity out of the financial services?

That it was a hiatus, or is it more of a -- we'll continue to see the rest of the practices grow other than financial services?

Again, Mark, we're talking -- let me again make sure we're talking about Asia-Pacific.

Exactly.

So if you look at our sequential decline in financial services, it was largely due to Asia.

Europe and the Americas was pretty similar for all intents and purposes.

So as far as we can tell, we would expect the financial services in Asia-Pacific to be better next quarter than compared to the third quarter.

Great.

And then can you talk a little bit about the North American margins?

Because if I understand it that's where the leadership -- where you may have a bit of a drag from leadership.

In addition to that we have kind of the weird dynamic as it relates to the [ECAP] program.

So if we were to strip -- and it was helpful to understand the total perspective, but could you give us the North American margins in terms if we were to strip out those effects?

(Inaudible) (technical difficulty) Gregg?

Yes, all in obviously Mark, it's 22.8% in the third quarter, and pretty much most of the ECAP and COLI would go against North America.

Right.

I'm sorry the COLI actually would go against corporate.

Right.

So there is about $1.4 million of negative impact, compensation impact, associated with the ECAP program that resides in North America, so you could refigure the margin assuming that those expenses were not part of their expense base.

Okay.

(Inaudible) (technical difficulty) million dollars.

How should we think about leadership in terms of where -- it would still be a bit of a drag.

So how much of a drag, how close to an inflection point are we on that?

If you look at the operating margin right now for that offering, it's about single-digit operating margin.

The business today is running at about $100 million run rate as of the third quarter globally, and it's mid-single digit operating margin in that business.

Okay.

Great.

And then how should we think about productivity levels on a go-forward basis?

You mentioned we're probably -- the best time to hire is in the winter, and it certainly paid off for you, when -- I mean, some of the moves that you made were just perfectly timed.

How should we think about productivity levels on a go-forward basis from here?

Is there much room to take up the productivity or production per consultant or how should we think about that?

Well, we continue to look at ways to increase productivity through process, so we'll always do that.

The reference point that I have is that it wasn't that many quarters ago that the average fee as we report it here was $93,000, and this quarter we're at $80,000.

It's essentially it's up 10% year-over-year, but we're still off by 12% or so where we were a few quarters ago.

And in my mind looking out longer term, there's no reason why that past marker shouldn't be surpassed in terms of our organization.

Completely agree.

Thanks a lot for the color.

And we have a question from Kevin McVeigh from Macquarie.

Please go ahead.

Great.

Hey.

Real nice job.

Mike or Gary, want to talk a little bit about the margins.

You guys are doing a real nice job on the margins overall, and as we think about peak margins in the next up-cycle?

How should we think about that relative to history?

We going to exceed that or just from a margin perspective overall?

If we don't exceed it, I'm going to be disappointed.

I mean, there were a couple of quarters in the last bull market, if you will, whatever you want to call it, where the Company we had 14.8%, 15% operating margins.

There's nothing that has changed in our business that would suggest that those certainly couldn't be achieved, and I think we can do better than that.

And in terms of -- obviously still generate a fair amount of cash.

Any thoughts on use of capital given -- clearly the macro concerns are behind us -- and from an M&A perspective buyback -- any thoughts on any changes in that Gary?

No, our first priority is to invest it in the business by far, and we're systematically looking at opportunities and very careful about that and how we do it.

Quite frankly, the cost of that is keeping some dry powder more than we obviously would need, and so our bias is to invest it in the business, and we're aggressively looking for -- really, it's around four categories.

It's how a CEO attracts people, how he or she deploys a work force, develops and/or rewards a work force.

So those would be the four buckets, if you will, of opportunities that we look at.

Great.

Thank you.

And we have a question from Gary [Krishnan] from Credit Suisse.

Please go ahead.

Hey, guys.

Had a couple of quick questions.

One, I think you spoke to certain specialty practices where you saw strong growth this quarter.

Are we basically expecting a continuation of the same in Q4?

And maybe as a follow-up to that, how much of the strength is driven by maybe search becoming more prevalent in an industry practice versus just business conditions just getting better?

I'm sorry, can you provide some more color on the second half of your question?

Yes, by vertical as you look at what is driving strength across the verticals.

Are there any verticals where you are seeing just search becoming just more prevalent, and hence you're seeing that growth?

I'm trying to make a distinction between that and just overall business conditions getting better by vertical.

No, that would be pretty hard for me to make some general statement on that.

If you look our industrial business is clearly a strength of this Company.

It's almost 30% of the firm.

Our leadership in Futurestep businesses as well, have a disproportionate share in the industrial area.

If you look at it by geography, we continue to invest in the developing world.

We have been doing that.

We'll continue to do that.

So there hasn't been any kind of a shift that would make search more prominent in fast-moving consumer goods, as an example, versus investment banking.

We haven't seen anything like that.

Okay.

And I think the last quarter you spoke about the big RPO contract you had won.

Could you maybe update us on how that has been proceeding?

And has that begun to generate meaningful revenue this quarter?

No, it really has not.

We are in the implementation phase as we speak, and in fact the mandate in terms of the number of positions has been substantially increased over the past few months, so that's that.

That is a multi-year endeavor hiring thousands of knowledge workers, and we have got -- that's a common theme, if you will, in our outsourcing business, in our Futurestep business.

Right.

Okay.

Thank you.

And at this time, there are no further questions.

Please continue Mr.

Burnison.

Well listen, I thank everyone for attending this call.

In many respects it's hard to determine if it's late fall or early spring given what is happening in the Middle East, but we are absolutely bullish on our opportunities over the next two to five years and in transforming not just our firm but our industry.

And that's what we're doing, creating a company that can deliver enterprise-wide talent management solutions to our clients.

So we again, thank you for your time, and we look forward to speaking again.

Good afternoon.

Ladies and gentlemen this conference will be available for replay for one week starting today at 12 PM Eastern and running through the day March 16 at midnight.

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

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