Korn Ferry (KFY) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Korn/Ferry third quarter fiscal year 2014 conference call.

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

(Operator Instructions).

We have also made available on the Investor Relations section of our website at Korn/Ferry.com a copy of the financial presentation that we will be reviewing with you today.

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 call today such as those relating to future performance, plans and goals, 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 caused not to place undue reliance on such statements.

Actual results and future periods may differ materially from those currently expected or desired because of 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 2013, and in other periodic reports filed by the Company with the SEC.

Also, some of the comments today may reference non-GAAP financial measures such as the constant currency amounts, EBITDA and adjusted EBITDA.

Additional information concerning these measures including reconciliations to the most directly comparable GAAP financial measure is contained in the financial presentation and release relating to this call, both of which are posted on the Company's website at www.kornferry.com.

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

Please go ahead, sir

Thanks, Rachelle, and good afternoon, everybody.

I avenue got here with me Bob Rozek, our CFO, and Gregg Kvochak.

First, I would like to thank you for taking the time to listen to our results and earnings call here.

I'm extremely proud of this organization.

Our absolute performance, our relative performance.

I think that this is clearly a transformative time for Korn/Ferry and we're becoming a firm that's not only known for talent management, but talent intelligence.

A firm that helps the CEO to link their business strategy with their talent strategy.

This quarter was a good one for us.

We reported about 21% growth year-over-year, 14% organic growth year-over-year on a constant currency basis.

Revenue was about $242 million, or $970 million quarter annualized.

EBITDA was $140 million on an annualized basis.

The margin was 14.5%,that was up 200 BIPS year-over-year.

EPS was $0.43.

We continue to see steady, strong growth across all of our market sectors, our global industry areas, they're up double digits year-to-date organically.

For us, as we look forward, we think there's a lot of runway left here.

The environment today is one where growth is slow but change is fast and you've got to really create an organization that's nimble, it's agile and an organization that can really link up business and talent strategies, and I think that's the firm that we're creating to accelerate the growth of our clients and really become the single source for leadership and talent consulting services.

Our flagship business search leads the way.

It had another very good quarter.

It was up about 11.5% on a constant currency basis.

Our leadership business was up as well.

It was about $62 million or so in fees,call it $250 million on an annualized basis.

It was up 15% year-over-year organically, constant currency and it was profitable with an EBITDA margin of 14.5%.

We continue to win notable engagements in that business from talent strategy design to leadership development, succession management, workforce performance and diversity and inclusion.

Our Futurestep business had a strong quarter.

It was up 18% year-over-year.

It was also up sequentially about 13%.

The RPO work was up 15%, and as we talked about in the past, certainly the last call, and even the one before that, that we were really starting to build a pipeline and it was certainly very heartening to see that pipeline work its way through revenue in our third quarter.

With that, I think I'm going to turn it over to our CFO, Bob Rozek, and then Gregg can go through a little more detail.

Bob?

Thanks, Gary.

Good afternoon, everybody.

Similar to Gary, I'm incredibly proud of what our folks at Korn/Ferry have accomplished this quarter.

I think the overall environment remains challenging and yet our employees come to work every day continuing to drive our strategy and really fighting for growth.

The global demand for our industry-leading talent management solutions continues to gain momentum.

In our third quarter despite the year end, holiday seasonality, we achieved record revenue for the Company.

Constant currency our consolidated fee revenue in the third quarter grew $40.2 million, or 21.1% year-over-year reaching $242.2 million with growth in all of our operating segments.

Also measure on a constant currency basis.

Our fee revenue improved $3 million, or a little bit over 1% sequentiallywith growth in both executive recruitment and Futurestep which offset the expected seasonal weakness in the L&TC segment.

Additionally on an organic basis, excluding fee revenue from the acquisition of PDI Ninth House, our consolidated fee revenues were up $25 million, or 14%, year-over-year net as well within constant currency.

And in the third quarter nearly 41% of our total fee revenues was generated in services outside of our core executive search offering and our overall growth continues to outpace many of our major industry competitors.

As expected, the executive search new business awards were seasonally volatile in the third quarter.

Confirmations were sequentially down in the months of November and December due to holidays but rebounded strongly in January.

Our executive search new business confirmations in the third quarter were down approximately 3% compared to the second quarter of fiscal 2014, but our new business was up nearly 9% when compared to the third quarter of fiscal 2013.

In L&TC, the new business awards were similarly slower in the third quarter with new business being down approximately 7% compared to the second quarter, but it was up 75% year-over-year aided by the acquisition of PDI Ninth House.

And in Futurestep our new business award in the third quarter were lower than the record level we achieved in the second quarter, but Futurestep's backlog continues to strengthen and it did that in the third quarter with total new business up about 38% compared to the third quarter of fiscal 2013.

Profitability was also strong in the quarter.

Excluding all restructuring and integration charges in the third quarter of fiscal 2013, our adjusted EBITDA improved $10 million, or 40% year-over-year to $35.2 million in the third quarter.

Compared to the second quarter of fiscal 2014, our adjusted EBITDA slipped about $1.4 million, or 3.8%,and it was really due to lower market driven gains in the portfolio of assets tied to our deferred compensation plan in this quarter, relative to what we experienced in the second quarter.

As Gary indicated, the EBITDA margin was 14.5%, and that compares to 15.4% in the second quarter of fiscal 2014, and 12.5% in the third quarter of fiscal 2013.

By segment, the sequential profitability improvement was mixed.

Search, the EBITDA margin improved 140 bases points due primarily to the stronger fee revenue.

In L&TC, our EBITDA margin was down 100 basis points primarily as a result of the seasonably lower fee revenue.

In Futurestep, our EBITDA margin improved 290 bases points sequentially as the revenue that we expected to occur as a result of the second quarter wins was recognized in the third quarter.

On a GAAP basis, our fiscal 2013 third quarter operating earnings were $27.3 million, with an 11.3% margin.

Excluding restructuring integration and management separation charges in the second quarter of fiscal 2014.

And in the third quarter of fiscal 2013, our operating earnings were up $2.1 million, or $8.5% sequentially, and up $11.1 million, or 68% year-over-year with margin improvement of 70 basis points, and 330 basis points respectively.

Our financial position continued to improve in the third quarter with ending total cash of marginal securities of $377 million, and that's up about $62 million compared to the second quarter of fiscal 2014,and up $11 million compared to the third quarter of fiscal 2013.

Excluding cash and marketable securities reserved for deferred compensation arrangements and for accrued bonuses, our current invest-able cash balance is approximately $161 million, up $34 million, or 27% compared to the second quarter of fiscal 2014 with approximately 28% of this cash residing in the US.

After considering working capital need, our net invest-able cash is now approximately $86 million.

Finally, excluding all restructuring, integration, management separation charges in the prior quarters, third quarter diluted earnings per share were $0.43, an improvement of $0.02, or 5% sequentially, and $0.12, or 39% year-over-year.

As a result of a positive conclusion of an IRS audit, the third quarter was benefited by about $0.04 per share.

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

Thanks, Bob.

Starting with our executive recruitment segment.

Despite year end holiday seasonality, global revenues for executive recruitment segment improved in the third quarter.

Consolidated executive recruitment fee revenue in the third quarter was $144 million, up $4 million, or 2.9% sequentially, and up $13.5 million, or 10.4% year-over-year.

Measured at constant currency, third quarter consolidated executive recruitment fee revenue was up 2.4% sequentially, and up 11.6% year-over-year.

Regionally, also at constant currency, North America was up 2.9%, Europe was up 11.3%, while Asia-Pacific and South America were down 6.8%, and 13.9% respectivelyon a sequential bases.

Year-over-year, also on a constant currency basis, North America grew 9%, Europe grew 13.5%, Asia-Pacific was up 17.8%, and South America was up 12.7%.

Sequential growth in our executive recruitment specialty practices was mixed in the third quarter.

Worldwide growth was strongest in our financial services practice, up 17%.

Technology practice, up 17%.

And our consumer goods practice, up 15%.

While our life sciences and healthcare and industrial practices were down 4% and 13% respectively.

Financial services accounted for approximately 19% of all executive recruitment fee revenue in the third quarter.

Up approximately 240 basis points from the second quarter of fiscal 2014.

Year-over-year, also at actual rates, all of our specialty practices grew in the third quarter with the exception of the industrial practice.

Financial services was up 29%.

Technology was up 22%.

Life sciences and healthcare was up 21%, and consumer goods was up 6%.

Worldwide the industrial practice was down 13%, year-over-year in the 30 quarter driven primarily by softer market conditions in North America and South America.

The total number of dedicated executive recruiting consultants worth-wide at the end of the third quarter was 429, up 39 year-over-year, and up 17 sequentially.

Annualized fee revenue production per consultant in the third quarter was approximately $1.37 million, compared to approximately $1.32 million in the third quarter of fiscal 2013, and $1.35 million in the second quarter of fiscal 2014.

The number of new search assignments opened worldwide in the third quarter was 1,233, up 8% year-over-year, and down 5% sequentially.

Consolidated executive search EBITDA in the third quarter was $33.5 million, with a 23.3% margin.

Excluding restructuring integration and management separation charges in prior quarters, EBITDA in the third quarter improved $8.6 million, or 34.8% year-over-year with a 420 basis point improvement in margin.

This improvement was driven primarily by higher consultant productivity, and lower fixed and variable G&A expense.

On a sequential bases, improved consultant productivity drove a $2.8 million, or 9.2% improvement in EBITDA, with 140 basis point improvement margin.

Now, turning to our leadership and talent consulting segment.

In the third quarter of fiscal 2014, worldwide fee revenue for L&TC was $62.2 million.

Measured on a constant currency basis, L&TC's third quarter fee revenue was seasonably weaker sequentially by $4.1 million, or 6.2%, with fee revenue lower in every region except Europe.

There were approximately 5 less working days in the third fiscal quarter compared to the second fiscal quarter.

Year over year, on an organic bases, excluding the fee revenue from the recent acquisition from the PDI Ninth House, L&TC's fee revenue was up 15%.

Regionally, North America accounted for approximately 69% of total L&TC worldwide fee revenue in the third quarter, compared to 71% in the second quarter fiscal 2014.

At the end of the second quarter, there were 125 dedicated L&TC consultants compared to 129 in the second quarter fiscal 2014, and 149 in the third quarter fiscal 2013.

Professional staff utilization dropped to 61% in the third quarter, and was adversely affected by less working days during the year-end holiday season.

Compared to the second quarter of 2014, L&TC's third quarter EBITDA fell $1.2 million, or 12%, to $9 million.

EBITDA margin in the third quarter was 14.5%, compared to 8.4% in the third quarter of fiscal 2013, and down 100 basis points sequentially.

Due primarily to seasonally weaker fee revenue.

Finally, turning to Futurestep's which generated an all time high of $35.9 million of fee revenue in the third quarter.

Measured on a constant currency basis, Futurestep's third quarter fee revenue was up $6.1 million, or 20% year over year, and up $3.8 million, or 12% sequentially.

On a regional bases, measured sequentially at constant currency, North America was up 15.6%, Europe was up 22.1%, and Asia Pacific was down 2.5%.

This improvement was primarily attributable to the recognition of revenue associated with the large increase in RPO projects secured by Futurestep over the past two quarters.

Driven by this fee revenue growth, Futurestep's profitability also improved in the third quarter with EBITDA margin up 290 basis points sequentially to 12.2%, from 9.3% in the second quarter.

I will now turn the call back over to Bob to discuss our outlook for the fourth quarter of fiscal 2014.

Thanks, Gregg.

As projected, our overall monthly new order trends in the third quarter were relatively consistent with our historical patterns.

To start the fourth quarter, February new orders are also in line with our expectations, roughly equivalent to what we saw in January.

Assuming world wide economic conditions, financial markets and foreign exchange rates remain steady.

Our fiscal 2014 fourth quarter fee revenue is likely to range from $240 million to $250 million, and diluted earnings per share are likely to range from $0.35 to $0.41.

That concludes our prepared remarks, and we'd be glad to answer any questions you may have.

Certainly.

(Operator Instructions).

Our first question comes from the line of Tim McHugh, of William Blair.

Please, go ahead.

Hi, this is Stephen Sheldon in for Tim.

Thanks for taking my questions.

First, it was a really strong quarter for Futurestep and it finally broke out of it's prior revenue range.

Can we think about the contribution this quarter as the sustainable level to build upon moving forward?

We have to have economic tail winds so it's certainly hard to predict any kind of consulting business out too far.

We would hope, given the market opportunity that Futurestep competes in, that this business will be multi $100 million opportunity.

We have big hopes.

Our Futurestep team is a great team.

It's fired up.

It's got a lot of services that it anchors around it from employer branding, to technology.

I would certainly hope that this will be sustained for sure in this quarter and moving beyond.

We've got bigger goals for that business.

Margins in the business also moved up sequentially but were still down some year over year.

Is that still from the drag of the set up cost from the large RPO wins last quarter, and what is your expectation for margin for Futurestep?

It is.

If you're thinking like I am, that this is a bigger opportunity for us, we're going to have to invest to really create scale.

A couple quarters ago they really shot up high in terms of the margin.

It was great to see this come back.

We said it would, it did.

And we would expect it to at least be at this level.

Lastly, the improvement for the executive search service in Europe, was there anything in particular that you're noticing from your clients that drove the improvement?

Did you see any change in their sentiment during and exiting the quarter?

No change entering or exiting.

There has continued to be this slow recovery that you know about.

I would say that our team in Europe across all of our businesses is incredible.

It's the best team in the business.

We certainly saw strength in France and the UK in this quarter.

Particularly sequentially, which is really good to see.

Okay.

Great.

Thanks.

(Operator Instructions).

You have a question from the line of Kevin McVeigh, of Macquarie Research.

Please, go ahead.

Great.

Thanks and nice job.

Can you give us a sense on the Q4 guide.

It looks like given the amount of the revenue bead and I would think what's probably seasonally stronger quarter, are we just being conservative there, or is there anything across any of the regions that had us come in the way we did from a guidance perspective?

No, there's no change.

There's no subtleties or anything like that.

Kevin, this is Bob.

If you go back to the comments we prepared, you'll note that we were up about 17 search consultants on a sequential bases.

And the increased highering cost, it takes those folks a little bit of time to ramp up, and that's really what you see being reflected in our guidance.

The continuing investment in the head count and trying to drive our strategy forward.

As we think about the ramp in contribution, Bob, is that six months or so as we would start to see the revenue come in from those folks?

Yes.

It's generally a 6-12 month ramp period for folks to really get up and running.

Some come with the book of business day one, and some start a little bit slower.

Got it.

Gary, as Futurestep and L&TC continues to scale, how is that changing the approach to the business from a client perspective?

Is it more holistic?

Are we still leading with the search or (inaudible).

Has that morphed at all just given how much those business are scaled?

It's absolutely morphing and it's going to market as (inaudible).

We do it top down by industry.

There are leaders assigned to accounts that could be from any part of the organization.

They're responsible for driving activity.

That's the opportunity for this Company.

We have much bigger opportunity to drive more penetration in our clients, for sure.

As you think about Financial Services at 19% of total Search, how should we think about that going forward?

Those search consultants that came on, were they any particular vertical expertise?

No.

Probably less of the mix was Financial Services.

It's great to see.

It's encouraging to see.

Overall as a portfolio, FS, Financial Services represents about 16% of the Company.

As you said, on the Executive Search side, it's 19%.

And gosh, Gregg, I think that got down to a low of what?

16%.

It's nice to see that ramp up several percentage points.

It's certainly encouraging.

Super.

Thank you.

The next question comes from the line of Tobey Sommer, of SunTrust.

Please, go ahead.

Thank you.

Good afternoon.

I'll start out with a capital deployment in a balance sheet efficiency question.

I've brought this up in prior calls.

The cash, luckily, keeps piling up.

Are you seeing opportunities here to grow the emerging segments, and do you have a goal to increase them to some sort of larger percentage?

In terms of a larger percentage, we'd first start with client demand and pull.

We think that there is no one brand that a CEO thinks about when it comes to town, and that's what Korn/Ferry is going to be.

There is a big, big market opportunity there.

We're going to have to continue to invest in terms of intellectual property, more scale, more depth, and more capability to fully seize that opportunity.

So that's first and foremost.

We think about it from that perspective.

Tobey, this is Bob.

I would just add to that, the thing to focus on as well is where that cash sits.

As we talked about, 28% of it on what we call our net invest-able resides in the US.

To the extent that builds up significantly, and it's over seas, it would be a very high cost to bring that back.

One of the things we're paying very close attention to, there was a tax reform and simplification act that was drafted up and in connection with that.

They're looking at some dividend receive deductions of about 95%, which would be significant in terms of our ability to move that cash freely across the system.

As Gary said, we're very focused on investing back into the business, but also we want to see how all the variables play out externally as well, and what we actually have at our disposal.

That makes sense.

I wanted to ask, within Futurestep, the backlog that you describe, is the preponderance of that backlog RPO like work, or is it spread among the various services conducted within the segment?

The backlog, I'll use that term loosely here, it's really not firm backlog as you would think on government fixed priced contract.

But it's contract value that we have signed up, and that really relates to the RPO business.

Okay.

Is it your feeling that the sales force is up and running, and has traction, and the intermittent hunting, working projects, this fits and starts may be a thing of the past for Futurestep?

Byrne Mulrooney, the President of the business, really has a phenomenal cadence going in the organization right now.

The sales force is up and running, they actively manage their pipeline.

He sets aggressive targets for them, from a total contract value perspective each quarter.

Quite honestly, the organization's really rallying around his management system right now.

Okay.

My last question has to do with internal investments that you've described from time to time about trying to capitalize on the intellectual property and potentially develop some other data and analytics, potentially recurring type revenue streams.

Is there much in the way of investment that we don't see in coming years that may develop into some new businesses for the firm?

Yes.

You absolutely don't see it, that's a good point.

We've got a whole host of social scientists in the Korn/Ferry institute, and that's exactly what they're working on.

Big data, talent analytics, predictive analytics.

An example that we're bringing to market right now is around cultural dexterity.

With the affordable care act in the US, and patient care, and the like, we've got a great product that we're actually rolling out this quarter that we invested in several quarters ago that just kind of runs through the P&L that you really don't have any sight on.

So, yes.

There is an awful lot that is going through this P&L towards that IP with the hope of monetizing, productizing, stuff that's really sticky.

Thank you, very much.

Thank you.

The next question comes from the line of Josh Vogel, of Sidoti & Company.

Please, go ahead.

Thanks.

Good afternoon, everyone.

What percent of your consultants do you find are at a mature level, versus the one's that have more upside?

What I want to get at is, how much upside you have to productivity, and what is your optimal productivity target?

It's interesting, because when you actually look at the people, the number of people that have responsibility for business origination, it's about 650 people.

As we report here to you, we've got 429 classically defined as Search.

You've got 125 classically defined in L&TC, and you've got almost 100 in future stuff.

Conceptually, on a run rate basis, you're at 1.4 million, 1.5 million, something like that.

I believe that there is a significant upside to that on a revenue per consultant basis.

If you look at any kind of traditional professional services firm, you would find the revenue per partner per originator would be substantially higher than those metrics.

Now, this is an organization that in many ways is a start-up within a big brand and we've brought so many different capabilities and people into the organization that I can't exactly tell you when, but I can tell you that those metrics in a classic services business would be substantially higher.

I don't see any reason for us not to achieve those same metrics, it's just a question of time.

Okay.

That's helpful.

I'm sorry if I missed it, but can you talk about the acquisition pipeline, or your appetite there?

What markets, or sectors, you would be targeting?

We're very systematic, very steady.

We're always looking at ways to differentiate the brand.

Make the brand more elastic.

Give our folks reasons to talk to clients throughout the whole year.

We continue to do that.

We're very interested in employer branding, talent communities, touching passive candidates.

We're very interested around predictive analytics relative to executive success.

We're very interested in developmental capabilities.

We're very interested in terms of strategic capabilities that could be tied with the people strategy.

Quite candidly, also, organizations that give us more depth and scale just in terms of people.

Okay.

Lastly, Bob, I think you talked about a favorable IRS audit.

As we go forward, should we expect the tax rate to normalize back in the mid 30% range?

Yes.

I would think for this year, probably 34% is a good number.

Long term, in the 35% range is probably a good number.

Okay.

Great.

Thank you very much.

Thank you.

It appears there are no further questions.

Mr. Burnison, back to you for final comments.

I wanted to say first and foremost, thank you to our investors for taking the time to listen to this, for patience and seeing the strategy take hold.

I also want to thank our employees and their passion around purpose, around changing peoples lives and around accelerating the destination of our clients.

And I want to thank our board.

With that, we will talk to you soon.

Have a great evening.

Okay.

Thank you.

Ladies and gentlemen, this conference call will be available for replay for one week starting today at 6:30 p.m.

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

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