Korn Ferry (KFY) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Korn/Ferry's second-quarter earnings release conference call.

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

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

Instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr.

Gary Burnison, CEO.

Please go ahead.

Well thank you, good morning, everyone.

Before we get going here, I do want Gregg Kvochak to read the statements, so Gregg, can you?

Okay.

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.

While 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, in the Company's annual report for fiscal 2011, and in 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 a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, contained in the release relating to this presentation, which is posted on the Company's website at www.KornFerry.com.

Now, I'll turn the call over to Gary.

Good job, Gregg.

Good morning, everyone.

Thank you for joining us.

It's certainly not the end of our fiscal year, but it is the end of a calendar year 2011.

It marks the 10th year that I have been with this Company, and when I think back on this year, this calendar year, I have one word, and that is pride.

I am enormously proud of this organization, of our colleagues around the world, and very grateful to our clients and shareholders.

Today, we reported fee revenue of $200 million.

That is up 8% year over year.

Our profitability was very strong, with an operating margin of 12.7%, and our balance sheet continues to be pristine.

I am proud, particularly in the progress we're making to make this brand synonymous with talent management, really fortifying the image as the firm to turn to for cultivating talent across an organization's attract, deploy, develop, reward, spectrum.

Despite the environment and the equity markets and what happened since August, we are absolutely forging ahead.

We're systematically targeting opportunities.

We're aligning our people and intellectual property to drive deeper and more scalable client relationships.

During this last quarter, which our second quarter of the fiscal year, we generated almost $143 million in our flagship business, executive search.

That includes our leadership and talent consulting offerings, which in that second quarter was up 16% year over year, with revenue from those offerings about $29 million for the quarter.

Our Futurestep business continued to perform very well.

It was up 34% over the prior year, and it had an operating margin of 8%.

Our strategy will continue to revolve around driving an integrated solutions-based go-to-market approach and extending and elevating our brand.

And as importantly as that, we have to continue to excel at delivering a consistent client experience through the use of research-based intellectual property.

We believe that this is a very strong competitive differentiator for this organization.

In this quarter, this upcoming quarter, we expect to hit our 700,000th professional assessed in this Company's history.

In the last three years alone, we have assessed almost 20,000 C-level executives through our intellectual property and leadership assessment tools.

We're going to continue to not only extend the Korn/Ferry brand but also elevate it and that is evidenced by multi-billion-dollar companies that are increasingly looking to us to support them with their talent development at their most critical levels.

In the second quarter alone, we initiated almost 200 CEO Board and succession planning engagements, that is up from the previous quarter.

Our average search fee during the quarter, if you exclude the leadership and talent consulting offerings, that was $113,000, during our second quarter.

Again, following on the notion of IP, intellectual property, in the quarter, our Board and CEO practice launched a new CEO succession offering.

It leverages our search, leadership and proprietary capabilities.

It provides Boards with what we think is the gold standard for succession planning, and helping them achieve sustained growth.

Over the last five or six weeks I have visited many different Korn/Ferry locations, and also saw clients.

And the thing that comes through loud and clear, when you talk to clients, when you talk to CEOs, is that it's much less about the product made, or technology developed and it's much more about the people.

And ultimately, that is a leader's job, not withstanding whatever industry he or she is in, and the more that I speak with our colleagues, the more emboldened I become about our strategy.

There is no question that our commitment to broadening the conversation with clients is now absolutely steeped in our culture.

And indeed, a differentiated and diversified business is taking hold, so with that I will turn it over to our CFO, Mike DiGregorio.

Mike, go ahead.

Thanks, Gary, and good morning, everyone.

Secular demand for our market-leading recruitment and talent management consulting services remains stable in the second quarter despite normal seasonality and the ongoing global economic turmoil.

At just over $200 million, our fiscal 2012 consolidated second-quarter fee revenue was up nearly $15 million or 8%, compared to the second quarter of fiscal 2011 at just over $6 million or 3% sequentially.

Measured on a constant currency basis, our firm's second-quarter fee revenue grew 5% year over year and was off only 2% sequentially.

New business trends were up sequentially in each month of the second quarter, with the total number of newly-opened combined executive search and leadership and talent consulting assignments up 3% both year over year and sequentially to 2,028.

Fiscal 2012 second quarter operating earnings and profitability were also solid at $25.4 million with a margin of 12.7%.

As previously disclosed, fiscal 2011 second quarter operating earnings were negatively impacted by a $2.1 million facility-related restructuring charge in Europe.

Excluding this charge, fiscal 2012 second quarter operating earnings were up year over year by $3.5 million, or nearly 16%.

Additionally, both of our operating segments and nearly all of our geographic regions achieved improved profitability year over year in the second quarter.

Our second-quarter ending cash and marketable securities balance was $318 million, up $27 million sequentially and $53 million year over year.

Excluding cash and marketable securities reserved for deferred compensation arrangements, and for accrued bonuses, the current investable cash balance is approximately $171 million, which is up $61 million compared to the balance at the second quarter of fiscal 2011.

Finally, fiscal 2012 second quarter diluted earnings per share were $0.32, an increase of $0.02 or 7% year over year.

Excluding the negative impact of facility-related restructuring charges recorded in the second quarter of fiscal 2011, fiscal 2012's second quarter earnings per share were down $0.01 or 3%.

However, net earnings in the second quarter of fiscal 2011 were positively impacted by market-driven returns in our ECAP and COLI portfolios.

At this point, I'm turning the call over to Gregg Kvochak to review our operating segments in a little more detail.

Gregg?

Thanks, Mike.

Starting with our executive recruitment segment.

Due primarily to the seasonality of our business, consolidated second-quarter executive recruiting fee revenue was $171.5 million, down $4.6 million, or 2.6% sequentially and up $7.5 million or 4.6% year over year.

Fee revenue growth in all operating regions was down marginally sequentially, but was up year over year.

On a constant currency basis, executive recruitment fiscal 2012 second-quarter fee revenue was down $2.8 million or 2% sequentially, and up $3 million or 2% year over year.

Sequentially, second-quarter fee revenue was down in every major specialty practice.

Year over year, growth was achieved in all specialty practices except financial services and technology, consistent with overall industry trends.

In the North American region, second-quarter fee revenue was $97.5 million, down approximately $900,000 or 1% sequentially, and up $3.4 million or 3.7% versus the prior year.

Sequential growth in the consumer goods practice, up 6%, was offset by weakness in all other major specialty markets.

Newly-confirmed assignments in North America were up 8.5% in the second quarter of fiscal 2012 versus the first quarter of fiscal 2012 and up 7% compared to the second quarter of fiscal 2011.

In Europe, fee revenue was seasonally weak in the second quarter.

At actual rates, Europe's fee revenue fell $3 million or 7% sequentially in the second quarter to $40.3 million.

On a constant currency basis, Europe's second-quarter fee revenue was off $2 million or 5% sequentially, and up $900,000, or 2%, compared to the second quarter of fiscal 2011.

7 of 17 countries grew sequentially in the second quarter, led by Germany and Switzerland, which were up 3% and 6% respectively.

On a specialty market basis, sequential growth in the industrial practice, up 8%, was offset by weakness in all other segments.

Market conditions in Asia-Pacific were also slightly weaker in the second quarter, with fee revenue falling to $25.3 million, at actual rates.

On a constant currency basis, fiscal 2012 second-quarter fee revenue was relatively flat sequentially, and was down $400,000 or 1.6% year over year.

Sequential fee revenue growth was achieved in four of 11 countries in the second quarter, with strength in Australia up 12%, India up 6%, and Singapore up 7%.

On a specialty market basis, sequential growth in the financial services and technology practices, up 7% and 2% respectively, were offset by weakness in all other specialty markets.

At actual rates, South America's fiscal 2012 second-quarter fee revenue was down $300,000 or 3% sequentially, and essentially flat year over year.

Measured on a constant currency basis, South America's first-quarter fee revenue was up approximately $100,000 or 1% sequentially, but off $600,000 or 6% year over year.

The total number of executive recruiting consultants at the end of the second quarter was 462, down 12 compared to the first quarter and down 13 year over year.

Annualized fee revenue production per consultant in the second quarter was down 2% sequentially, but up 6% year over year to approximately $1.38 million.

Consolidated executive recruitment operating earnings improved by $1.3 million or 3.6% sequentially, and were up approximately $10.7 million or 41% year over year, reaching $36.9 million in the second quarter.

The consolidated executive recruitment operating margin was 21.5% in the second quarter, compared to 20.2% in the first quarter of fiscal 2012 and 15.9% after adjusting for restructuring charges in the second quarter of fiscal 2011.

Now turning to Futurestep, which was also seasonally slower in the second quarter.

At actual rates, consolidated Futurestep second-quarter fee revenue was $28.6 million, down $1.6 million or 5% sequentially, and up $7.2 million or 34% year over year.

Measured on a constant currency basis, second-quarter fee revenue was down $1.3 million or 4% sequentially, but up $6.1 million or 29% year over year.

Geographically, sequential growth was seasonally weak in North America and Europe, where constant currency growth was off 3% and 13% respectively.

Futurestep's profitability was steady in the second quarter.

Sequentially, Futurestep's operating earnings were flat at $2.3 million, with a 30 basis point improvement in margin to 7.9%.

Compared to the second quarter of fiscal 2011, Futurestep's fiscal 2012 second-quarter operating earnings improved by $1.2 million or 109%, with a margin improvement of 280 basis points.

I will now turn the call back over to Mike to discuss our outlook for the third quarter of fiscal 2012.

Thanks, Gregg.

Similar to the second quarter, the third quarter of our fiscal year is seasonal, due primarily to slower new business awards during the year-end holiday periods.

November executive search confirmations were down from the year-to-date average in North America, due primarily to the Thanksgiving holiday, which yielded fewer business days in the United States, but flat relative to October in EMEA, and December has gotten off to a decent start.

Additionally, the ongoing volatility in the global economy and financial markets continues to cloud visibility, making accurate forecasting even more challenging.

However, assuming normal year-end seasonality and that economic conditions, financial markets, and foreign exchange rates remain relatively steady, fiscal 2012 third-quarter fee revenue will likely range from $183 million to $203 million and earnings per share will likely range from $0.25 per share to $0.33.

At this point, that concludes our prepared remarks, and we would be glad to answer any questions you might have.

(Operator Instructions).

Our first question comes from the line of Tobey Sommer with SunTrust.

Please go ahead.

Thank you.

I guess you described seasonally, better sequential performance monthly within the quarter.

I was wondering if you could tell us what confirmations of new engagements were like in the month of November.

In the -- first of all, I would say that Tobey, when we talked last in September, obviously there was a great deal of uncertainty.

I would broadly say that, overall in the world, our new business has been rather choppy, like the equity markets.

October in North America was surprisingly strong, up pretty significantly from the prior several month trend.

And in November, in North America, it was down significantly from October, and when you look at Europe, Europe has been surprisingly strong in both October and November.

That's helpful.

In terms of the kind of pronounced improvement that you saw sequentially in the month of October in North America, and then subsequent decline in November, could you give us a ballpark for what kind of percentage moves you are talking about when you say surprisingly strong?

I don't know if we have that right off.

I will tell you that in November in North America, we saw a pretty significant decline in our life sciences and healthcare new business awards, which would be absolutely contrary to the great team we have had and the stellar performance.

When I look at North America in November, I kind of isolated it to that.

That team has been hitting three-pointers for a long, long time.

And when you look at November for some reason, that was surprisingly off which would be contrary to health services being 16% to 20% of this economy.

So, that is why I didn't read anything into the November results, and I would just say that December -- it's early days here, but December is starting off pretty good.

All right, thank you.

Kind of switching gears.

On Futurestep, I think you might have given some data about what your new engagements were like, but I didn't catch that.

Could you tell me what those were like in the quarter.

And then maybe the November new business trend?

No.

You we don't give you.

We never have.

We haven't given new business information for Futurestep.

And I couldn't tell you the trends in November either.

I would just say that the Futurestep business overall was up I think about 34% year over year.

The pipeline seems good.

You expect sequential growth in that business or kind of more stable?

I think, given the fact that you have got Thanksgiving, you have got Christmas.

I would not expect sequential growth.

No.

Last question for me and I'll get back in the queue.

Your cash availability of spendable cash is still holding very strong, even after paying some bonuses.

So what are you thinking there?

It's been a while since you have been able to consummate a deal in terms of an acquisition.

Are you looking more intently at some other way to return some cash to shareholders?

Tobey, we're absolutely mindful of that.

I guess we're like corporate America, that is sitting on trillions of dollars of cash.

We are committed to number one, investing into our business.

We think we have got a huge opportunity.

That is number one.

And then secondly would be returning moneys to shareholders.

And I think at this point, that is probably all I'm going to say.

Thank you.

Our next question comes from the line of Derek Sbrogna with Macquarie.

Please go ahead.

It's actually Kevin McVeigh.

Just go forward on that a little bit.

Correct me if I'm wrong.

Did you buy any stock in the quarter?

No, Kevin, we did not.

Okay, and then, it looks like your legal and professional fees were up about $6.8 million.

That seems a pretty sizable increase.

Was that related to a potential transaction that didn't consummate, and is that what precluded you from buying stock?

Well, to be clear first of all you're talking about the total amount of general and administrative expenses, so yes there is a variety of expenditures there, largely due to the increased legal and other professional fees, but also to a lesser extent, we had noted increase premise and office expenses which was related mainly to timing of leases and also some business development expenses, so we have actually had a variety of expenditures there.

Got it.

And good to see you hiring some folks on the Futurestep side.

Is that just in advance of some wins that are there already or just some catch-up?

In terms of as you say hiring?

Yes.

The pipeline seems good.

We really believe that when you look at that business, the knowledge worker category, the professional-level hires, that when you look around the world, that is going to be over the next five years, a significant opportunity for Korn/Ferry.

And we have gone to a concept of I believe it's seven service management centers around the world, where we're executing the business.

We have made substantial changes to that business over the last couple of years, so hopefully that will pay off.

Okay.

Thank you.

Our next question comes from the line of Stephen Sheldon with William Blair.

Your line is open.

This is Stephen Sheldon in for Tim McHugh today.

I was hoping you could provide some color on consultant head count.

It had been fairly steady for I believe the last six quarters, but dropped slightly this quarter.

What are your thoughts on where that head count is heading in the near-term?

Well, we only guide out a quarter or so, so I would expect that would be probably rather stable to where it is now.

And people are the life blood of this organization.

We are committed to growing from within, and to also selectively bring in change agents from the outside.

That is what we have been doing.

It is what I have been doing for 42 quarters or something.

We're just going to continue with that game plan.

Okay.

Thanks.

Our next question comes from the line of Ty Govatos with CL King.

Please go ahead.

You have answered most of my questions, but what was the bonus accrual for the quarter?

It was a little over $28 million.

To expand on the consultant count, at one point, you were topped out at I guess about 535.

Do you envision during this cycle trying to get back up to that level, or probably more and what we're seeing now, the 460s, 470s?

Well, I think at one point, we had topped out, Gregg, a lot higher than that.

At one point in 2001 or 2002?

I won't even embarrass you by bringing back that subject.

Come on.

We're very proud of this firm and what we have done.

I'll take your word for it.

We're not going to guide out more than a quarter.

I think that for the next quarter, it's going to be rather stable.

I would point you to the productivity per consultant and that is really our focus.

Okay, thanks an awful lot.

I appreciate it.

Our next question comes from the line of Mark Marcon with Robert W.

Baird.

I was wondering if you could talk a little bit more about the productivity per consultant.

It has been steadily going up.

How much more upside do you think we could gets in terms of the productivity per consultant, and what will be the driver?

Will it be just doing higher level searches, or maybe a combination of that, along with selling additional services.

Mark, I think it's all of those.

Honestly, we're absolutely committed to continuing to elevate this brand, and in the quarter, when I look at the average, just executive search.

If I take out the leadership solutions at $113,000, very, very proud of that level of fee.

We're also looking at process improvements within the organization.

But we hopefully, the basis of the strategy is to differentiate this organization and to take the kind of buy it when you need it search business that is rather episodic, and create those reasons and solutions to be out with clients throughout the whole year in between those episodes.

And part of that would be to make the brand more elastic, for those consultants to differentiate themselves in front of clients and deliver broader services.

So I look at it and say it's probably a combination of process improvements, continuing to move the fee up over time, and it does take time.

And having our consultants broaden the conversation with our clients, and do more in between these episodes.

What percentage of the consultants would you say have fully bought in and are actually executing against the plan at this point?

Well, I think aspirationally, when you look at our employee engagement surveys, I certainly wouldn't make definitive statements like everyone, but certainly the needle is pointing that direction to aspirationally, and in the organization, understanding what we're trying to do strategically.

Now, the question that we have to continue to work on is how each person fits in to that aspiration and that strategy.

We have got to do a better job.

We cannot be the cobbler's kids.

We have to continue to develop our organization, and that is what we're committed to do.

Just going back to the productivity, what would you say the top quintile productivity levels are running at now?

It depends what country.

Just in North America.

It varies significantly by country obviously.

You kind of look at run rates.

And again, I don't have numbers right in front of me, but if you look at the last just several months to be at the median, you probably need to be, billing to clients probably around $1.4 million or so, and in that ballpark, again, it could be plus or minus some percentage.

But one thing that is for sure is over the last several years, we have definitely moved that up.

You sure have.

And along those lines, have you actually seen a significant increase in terms of when there is RFP or a bake-off, in terms of the win rate going up materially?

Well, it's hard to look at that win rate, per se.

I only look at, when I look at our client base, and the kinds of services that we are delivering and to see that in our top 50 clients, for example, a very healthy percentage of those, well over 50%, is using two out of our three lines of business.

Great.

Can you just talk a little bit about in North America, in terms of the November decline, in terms of the confirms, was that primarily in financial services or was it broad-based?

No.

We thought it was really around life sciences and healthcare for North America, Mark.

Okay.

How about what are you seeing from a financial service practice perspective in EMEA and in Asia?

Well, I would say that, if you just look sequentially this last quarter both North America and Asia/Pacific, were up slightly.

And Europe was down.

But again, it's just uneven and choppy.

The thing is, our European business, in terms of a new business, October and November, we're actually very good.

Which would be surprising, wouldn't it?

Yes.

It is surprising.

That's why it's hard to one day, one month doesn't necessarily make a trend.

Yes.

You have always been forward-looking and cognizant of everything that is going on.

How do you think it plays out?

Just generally speaking.

Not numbers-wise.

As we go out towards -- beyond this coming quarter?

Well, we only guide out a quarter.

I would only say that, I have said for a long time that this was going to be a Nike swoosh.

Publicly I have said that, going back two years or so.

There's no reason to believe it's going to be anything other than that.

Maybe the swoosh is even more elongated.

Obviously that is -- the caveat there is, subject to any kind of global financial crisis stemming from the Euro zone.

From what you are saying, it doesn't sound like the clients that you have met with have expressed a tremendous amount of concern that is altering their plans.

Well, I think the world is at a crossroads of fear and uncertainty.

And that fear creates paralysis and, clearly in August, when the equity -- you have seen this historic volatility, it does give human beings, and it certainly gives CEOs pause, and we have seen that in the eyes of our clients over the last several months.

And lastly on the leadership development and consulting, can you talk a little bit about the profitability levels that you've been able to get to at this point?

Did you say possibility level?

Profitability level.

Oh, profitability levels.

Well, again, as we talked before, that is a very difficult thing because the reality is they work together, both the search business and the leadership services and so they are constantly working together and feeding business, so as you know, we look at those two together.

But having said that and the business is moving up, we're seeing good increases and obviously it's having a very positive contribution.

Great, thanks.

Anyone else with questions?

Yes.

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

Please go ahead.

Gary, I was wondering if you could comment on group multi-search sales with strategic accounts, and what your approach has been to that, and if there are any changes in the way you are approaching that kind of business?

Thanks.

No.

In group-group, no.

Part of the pillar of the strategy is to drive an integrated go-to-market approach.

Having our consultants broaden the conversation with clients and do more in between these episodes and a piece of that is making sure that we are targeting both global and regional opportunities.

And we have been doing that for the last several years.

We continue to do it.

It's a big focus within the organization.

In fact, we're meeting -- the leadership team is meeting Monday and Tuesday and a big part of our meeting is dedicated to this very topic.

So it's a pillar of the strategy.

Nothing has significantly changed in our modus operandi, there.

Thanks.

Last question for me, I wonder if I could get an update on your evaluation of LinkedIn and social networking as either a competitor and/or tool that you have described in the past.

Breaking apart the commentary, Futurestep versus executive search.

Thanks.

It appears there are no further questions, Mr.

Burnison.

Yes, I'm just going to answer, I think that was Tobey, right?

That was Tobey's question.

Let me just answer Tobey's question, and then I'll conclude.

Tobey, I would say that there is a singular truth, and that is you're generally hired for what you know.

And you're fired for who you are.

And we believe, as an organization, that we have to continue to move this business to understanding who somebody is, and that is why we have a big focus on intellectual property.

And anchoring our Company in intellectual property so that -- not only so that we can deliver broader solutions than simply executive search, or in the Futurestep area.

But as importantly in those core recruiting businesses, that we can figure out who somebody is.

And the days of this industry getting rewarded, getting renumerated for just finding people has been long gone for some time.

With that, I would -- again, I thank everybody for their time.

I thank our shareholders and our clients.

Certainly this time of year is a time of optimism, and should be of celebration, and again, I have enormous pride in this Company and what we have achieved and I just thank everybody for this last year.

And with that, we're going to conclude.

Thank you very much.

And happy holidays, everyone.

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