Korn Ferry (KFY) 2014 Q4 法說會逐字稿

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

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

Following the prepared remarks, we will conduct a question-and-answer session.

As a reminder, this conference call is being recorded for replay purposes.

We also made available on the investor relations section of our website at KornFerry.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 the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although the Company believes the expectations expected in such forward-looking statements are based on reasonable assumptions, investors are cautioned not to place undue reliance on such statements.

Actual results in the future periods may differ materially from those currently expected or desired because of the number of risks and uncertainties which are beyond the company's control.

Additional information concerning such risks and uncertainties can be found in the release relating to this presentation and the Company's annual reports of fiscal 2013 and in the other periodic reports filed by the Company with the SEC.

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

Additional information concerning these measures, including reconciliation to the most directly comparable GAAP financial measures, is contained in the financial presentation and release relating to this call0, 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.

Well, thank you, Kathy.

Good afternoon, everybody, and I'm glad you joined us.

I've got Bob Rozek, our CFO, and Gregg Kvochak here in Los Angeles.

Let me first start out by saying that I am very, very pleased with the results for this last fiscal year which ended in April, as well as the fourth quarter.

I'm very, very proud of this organization and the Company, and I thank our shareholders as well.

As I said, we closed out the year with a really strong quarter, generating about $252 million in fee revenue.

That was up almost 11% constant currency over the prior year.

It was the strongest top-line results in the Company's 45-year history.

EPS was $0.43.

I'd also point out that quarter year-over-year Futurestep was up 20% and LTC was up 10%.

Our balance sheet continues to be rock solid.

We have about $468 million of cash and marketable securities, $211 million of which is in what we call investible cash that Bob and Gregg will get into.

This last 12 months has certainly, as I said, been transformative for Korn/Ferry.

And we are clearly positioning this organization as the premier leadership and talent consulting firm in the world.

And I just would say during the year that we've really, I think, accelerated our journey going from a monoline to a multi-solutions organization today.

41% of our business is generated from outside search.

So we on a run rate basis just the fourth quarter times four, you've got a Company that's doing a little bit over $1 billion in revenue, and on a run rate basis probably about $140 million of EBITDA or so.

And when you look at that $1 billion, again, just taking fourth quarter times four, you find that the search business comprises a little bit less than $600 million or so.

The non-search, the Futurestep and LTC businesses represent a little over $400 million.

For the year, our revenue was $960 million.

That was up 19% on a constant currency basis versus 2013.

And I think, first and foremost, we maintained our number one position in global search.

That is absolutely the door opener for us, it gives us tremendous brand permission, and I'm very, very proud of what we have done there.

As well as integrating these acquisitions.

We've not only integrated them, but we've actually grown those businesses organically.

So LTC, the headline number for the year would suggest it's up 52%, but that includes the acquisitions on an organic basis.

It was up about 9% year over year; again, 10% in the quarter, and it now represents about 27% of our revenue.

And Futurestep as well grew about 12% during the year, that's all organic.

And as I said, in the quarter grew 20%; and that represents about 14% of our overall revenue mix.

So as we start this first quarter and head into fiscal 2015, I'm very optimistic.

I think we are in a formidable position.

We're going to continue to diversify our business.

We're going to continue to create reasons for our organization to proactively dialogue with clients.

We want to make our brand more elastic.

We want to continue to participate in larger, strategic, adjacent markets to executive search.

And, again, not just helping clients get great people but having them work together.

And we are going to drive and integrate a go-to-market strategy during the year.

We're going to use our intellectual property from the Korn/Ferry Institute as a real differentiator around talent and analytics and demand generation and the like.

So I'm looking forward.

I'm very optimistic and excited about this year that's coming up.

And with that, I think what I'm going to do is I'll turn it over to Bob, and he can comment, then over to Greg.

Thanks a lot, Gary, and good afternoon, everyone.

Fiscal 2014 really marks the conclusion of my second full year at Korn/Ferry.

It was an absolutely fantastic year for the Firm.

It was a year in which we achieved many major financial and strategic milestones while continuing to position ourselves for future growth, as Gary just talked about.

As the worldwide economy and labor market have continued their gradual recovery, we remain focused on our goal of adding value to our clients through the bundling of our industry-leading recruitment services with our best-in-class talent management diagnostic and development tools.

Our fourth-quarter and total-year financial results demonstrate our success, and really in my mind continue to validate our strategy.

As Gary said, our fee revenue in the fourth quarter, which was slightly above the high end of our guidance, came in about $252 million, with strong growth across all three of our major service lines.

At constant currency, our fee revenue was up $24.4 million, or 10.7%, year over year and up $9.6 million, or 4%, sequentially.

At constant currency, fee revenue for all of fiscal 2014 grew nearly $155 million, or 19.1%, with 41% that being generated from services other than executive recruitment.

If you adjust for the prior-year acquisitions, our fee revenue for the full year was up 9.3% on an organic basis.

As expected, executive search new business was seasonally strong in the fourth quarter.

Although it was uneven month to month, worldwide executive search new business was up approximately 7% compared to Q3 and up about 10% compared to the fourth quarter of fiscal 2013.

In LTC, new business awards in the fourth quarter rebounded 9% from a seasonal low in the third quarter and were up approximately 6% year over year.

And finally, Futurestep's new business awards in the fourth quarter were flat sequentially but up nearly 27% when compared to the fourth quarter of fiscal 2013.

And for all of fiscal 2014, Futurestep was awarded approximately $85 million of new RPO contracts with $13 million of that coming in the fourth quarter.

Despite recent investments targeted to drive growth in future periods, our profitability remained stable in the fourth quarter.

Excluding all restructuring and integration charges in the fourth quarter of fiscal 2013, adjusted EBITDA improved $6.7 million or 24% year over year to $34.5 million in the fourth quarter fiscal 2014.

Compared to the third quarter of fiscal 2014, our adjusted EBITDA in the fourth quarter was down slightly by about $750,000, or 2.1%, and that was primarily due to investment hiring.

We had some hires in the third quarter which we felt the full impact on in Q4 as well as additional hires in Q4.

We had some incremental training and business development expenses.

And as our top line continues to grow and we have greater consultant productivity, that results in higher variable incentive pay.

Our EBITDA margin was 13.7% in the fourth quarter compared to 14.5% in the third quarter and 12.2% in the fourth quarter of fiscal 2013.

For all of fiscal 2014, adjusted EBITDA was up $40.5 million or over 41%, reaching just over $138 million with improvement across all service lines.

Our consolidated adjusted EBITDA margin was 14.4% for all of fiscal 2014 compared to 12% for fiscal 2013.

On a GAAP basis, fiscal 2014 fourth quarter operating earnings were $24.5 million with a 9.7% margin.

Excluding restructuring and integration charges in the fourth quarter of fiscal 2013, our fourth-quarter operating earnings were $5.6 million or 29% year over -- were up, I'm sorry, $5.6 million or 29% year-over-year with 140-basis-point improvement in margin, and down $2.8 million or 10% sequentially with the margin slipping 160 basis points, again, due to the same three reasons I previously discussed.

And then for all of fiscal 2014, our operating margin on an adjusted basis improved 170 basis points to 10.4%.

As Gary mentioned, our financial position continues to strengthen.

In the fourth quarter, we ended up with total cash and marketable securities of $468 million.

That's up $91 million compared to the third quarter of fiscal 2013 and up $102 million compared to the fourth quarter of fiscal 2013.

If you exclude cash and marketable securities reserved for deferred comp arrangements and for the bonuses that we will pay shortly, the current investable cash balance is about $211 million, up $50 million or 31% compared to the third quarter of fiscal 2014.

And approximately 36%, or $75 million, of that balance resides in the United States.

After considering our working capital needs, our net investable cash is approximately $136 million, with about 25% or $35 million of that sitting in the US.

And finally, our fully diluted earnings per share in the quarter were $0.43.

Adjusting for all restructuring and integration charges in the fourth quarter of fiscal 2013, earnings per share improved $0.11 year over year, or about 34%.

Sequentially, fully diluted earnings per share were flat.

Similar to the third quarter of fiscal 2014, the fourth quarter was benefited by a lower tax rate, which drove a little bit more than $0.04 per share of net earnings.

And for all of fiscal 2014, adjusted earnings per share were $1.60, a year-over-year improvement of about $0.50 or 45%.

I'm now going to turn it over to Gregg, who will go through our operating segments in a little more detail.

Okay.

Thanks, Bob.

I'll start with our executive recruitment segment.

Globally, revenue in our executive recruitment segment was seasonally strong in the fourth quarter.

Consolidated executive recruitment fee revenue in the fourth quarter was $148.2 million, up $4.1 million or 2.9% sequentially and up $11.4 million or 8.3% year over year.

On a regional basis, at constant currency, North America was up 4.3%, Europe was up 1.9%, Asia-Pacific was up 7.8%, while South America was down 17.4% sequentially.

On a year-over-year basis, also at constant currency, North America grew 4.3%, Europe grew 17.9%, Asia-Pacific was up 19.3%, and South America was down 10.6% in the fourth quarter.

For the full year, every executive search region grew, led by Europe and Asia-Pacific, which were up 11.9% and 21.8% respectively at constant currency.

Compared to the third quarter, growth in our executive recruitment specialty practices was mixed in the fourth quarter.

Worldwide growth was strongest in our industrial practice, up 25%.

Life sciences and healthcare practice up 4%; and our financial services practice, which was up 2%, while our technology and consumer goods practices were down 15% and 4% respectively.

Financial services accounted for approximately 19% of all executive recruitment fee revenue in the fourth quarter, which was flat sequentially.

Year over year, all of our specialty practices grew in the fourth quarter with the exception of the technology practice.

Financial services was up 22%, industrial was up 14%, life-sciences and healthcare was up 10%, and consumer goods was up 1%.

Worldwide, the technology practice was down 3% year over year in the fourth quarter, driven primarily by softer market conditions in Europe, Asia-Pacific and South America.

For all of fiscal 2014, all of our global specialty practices grew, led by the financial services and life science and healthcare practices, which were up 16% and 20% respectively.

The total number of dedicated executive recruiting consultants worldwide at the end of the fourth quarter was 432, up 33 year over year and up 8 sequentially.

Annualized fee revenue production per consultant in the fourth quarter was flat sequentially at $1.38 million, compared to $1.37 million in the fourth quarter of fiscal 2013.

The number of new search assignments opened worldwide in the fourth quarter was 1303, which was up 5.8% year over year and up 5.6% sequentially.

Consolidated executive search EBITDA in the fourth quarter was $31.7 million, with a 21.4% margin.

Excluding restructuring charges in the fourth quarter of fiscal 2013, executive search EBITDA in the fourth quarter improved $4.9 million or 18.6% year over year with a 180-basis-point improvement in margin.

On a sequential basis, higher costs associated with investment hiring and higher incentive compensation expense associated with greater consultant productivity drove EBITDA lower by $1.8 million with 190-basis-point drop in margin.

For the full year, executive search adjusted EBITDA was $127.8 million, with a 22.5% margin compared to $99.9 million with a 19.1% margin for all of fiscal 2013.

Now turning to our leadership and talent consulting segment.

Rebounding from a seasonal low in the third quarter, worldwide fee revenue for L&TC improved to $66.3 million in the fourth quarter.

Measured on a constant-currency basis, L&TC's fee revenue in the fourth quarter grew sequentially by $4.1 million, or 6.5%, driven primarily by strength in the North America region, which was up over 13%.

Compared to the fourth quarter of fiscal 2013, also on a constant-currency basis, L&TC's fee revenue grew $6.1 million or 10.1%.

Regionally, North America accounted for approximately 73% of the total L&TC worldwide fee revenue in the fourth quarter compared to 69% in the third quarter of fiscal 2014.

For the full year, and excluding the partial impact of recent acquisitions, L&TC's fee revenue grew $14.6 million or 8.7% organically in fiscal 2014.

At the end of the fourth quarter, there were 127 dedicated L&TC consultants compared to 125 in the third quarter of fiscal 2014 and 133 in the fourth quarter fiscal 2013.

Professional staff utilization improved to 70% in the fourth quarter from a seasonal low of 61% in the third quarter.

Compared to the third quarter of fiscal 2014, L&TC's EBITDA in the fourth quarter was up approximately $1 million or 10.6% to $9.9 million with a 60-basis-point improvement in margin.

Adjusting for restructuring charges in the fourth quarter of fiscal 2013, EBITDA in the fourth quarter was up $3.7 million or 59% year over year with a 470-basis-point improvement in margin.

This improvement in profitability was driven primarily by post-acquisition integration cost savings realized from the restructuring activities initiated in the third and fourth quarters of fiscal 2013.

Finally, turning to Futurestep, which grew for the sixth consecutive quarter and generated $37.3 million of fee revenue in the fourth quarter.

Measured on a constant-currency basis, Futurestep's fourth-quarter fee revenue was up $6.3 million or 21% year over year and up $1.3 million or 3.5% sequentially.

On a regional basis, measured sequentially at constant currency, North America was up 10.2%, Europe was up 8%, and Asia-Pacific was down 12.5%.

For all of fiscal 2014, Futurestep generated the strongest revenue growth, improving $136.8 million of fee revenue, which was up nearly $16 million or 13.1% at constant currency.

Finally, driven primarily by stronger fee revenue, Futurestep's EBITDA also grew in the fourth quarter, reaching $4.8 million with a 13.1% margin.

Now I'll turn the call back over to Bob to discuss our outlook for the first quarter of fiscal 2015.

Thanks, Gregg.

In the fourth quarter.

monthly new orders again were seasonally strong, but we also experienced some unevenness on a month-to-month basis, which is consistent with what we have been seeing in a recent historical patterns here.

Looking forward to the first quarter of fiscal 2015, we expect similar choppiness and expect that new orders towards the end of the quarter will be down slightly due to the beginning of the summer vacation season.

Additionally, as we've previously talked about on a couple of calls last year, we've implemented the common technology systems and invested into those systems, which really were designed to allow us to further integrate the legacy businesses with the recent acquisitions.

Due primarily to the efficiencies we expect to gain from these investments, the other integration actions related to the recent acquisitions, and several other cost savings initiatives, we plan to take additional steps to rationalize our cost structure in the first quarter of fiscal 2015.

We estimate the realized savings of fiscal 2015 associated with these actions to be in the range of $0.08 to $0.10 per diluted share, with the cost of these actions in the first quarter of fiscal 2015 in the range of $0.06 to $0.08 per diluted share.

Now assuming worldwide economic conditions, financial markets, and foreign exchange rates remain steady, fee revenue in the first quarter of fiscal 2015 is likely to range from 240 -- that's $250 million.

And after taking into consideration the cost-saving actions, adjusted diluted earnings per share are likely to range from $0.37 to $0.43, with diluted earnings per share as measured by US GAAP likely to range from $0.29 to $0.37.

So that concludes our prepared remarks.

We would be glad to answer any questions you may have.

(Operator Instructions) Tim McHugh, William Blair.

It's actually Stephen Sheldon in for Tim.

Thanks for taking my questions.

First, I just want to ask about the margin in the executive search business.

It came in a little lower than we expected this quarter, given the level the business had been operating at over the prior three quarters.

So, sorry if I missed this, but I'm just wondering what drove it lower this quarter.

Is it related to bonus accruals or having to spend more to find talent?

Just any color there would be appreciated.

Yes, I think it's actually two things, Stephen.

One is the investment hirings that remain.

So if you look at the debt we put out on the website, you'll note that there is, first, about 12 positions added, senior client partner levels in Q3, so we felt the full effect of those in the fourth quarter relative to where we were in the third quarter, and then there was another eight that were hired in the fourth quarter.

And in addition, as our revenues continue to ramp up, the productivity for each of the search partners grows, and those bonus dollars associated will go back to dollar one.

So that really was a driving force.

Okay.

And it looks like the Futurestep business had another good sequential revenue increase.

So just kind of wondering, is this $36 million, $37 million of quarterly revenue contribution -- is that sustainable?

And could it move up even more from this level?

Whether it's -- listen.

Sustainability will depend, on some respects, on the economic cycle.

But we view Futurestep as participating in a market that is multi-billion dollars.

And we think we've got a multi-$100 million opportunity here.

So we obviously have to have decent tailwinds behind us economically.

I would hope we continue to grow on the foundation we built in Futurestep.

Okay.

And then last, I guess -- the $0.08 to $0.10 of cost savings that you highlighted for fiscal 2015 based on the actions you're expecting to take, should we expect that to be evenly weighted throughout the year, or is it more heavily weighted towards second half of the year?

I would say I would weight it more heavily towards the second half of the year, would be the way I would bake those in.

Obviously as we go through the course of the year as well, we are always looking to continue to bring new talent on and make investments back into the organization.

So some of that could be reinvested back into our results as the year goes by.

Okay.

Thanks.

(Operator Instructions) Mark Marcon, Robert W. Baird.

Fischer Van Handel sitting in for Mark Marcon.

I had a quick question regarding the long-term headcount plan for fiscal 2015.

I was wondering if you could give more color around that plan and where you guys are thinking to add more.

And the capacity potentially that you guys have around the European region.

We don't -- we certainly don't comment on our headcount plans longer than a quarter out.

But I would say that we are always looking to bring talent into the organization and promote talent within.

We continue to believe that today.

So whether in any part of our business we would have an appetite to bring people in and to promote people as well.

And that would also -- if you cut it geographically, you would find our appetite to be very, very evenly weighted all around the world.

Could you discuss a little bit further on the different multi-revenue trends kind of geographically?

I know you said it was somewhat lumpy, but just kind of in regards to the European region versus North America region, were there any significant differences?

Well, I would say that when you look year over year, and we look at our business, for example, with -- take the search channel for a minute, I think that you would have to look at Europe and Asia and say, what a remarkable job we have done.

For sure.

And when you look broader to LTC and Futurestep and how we are integrating those businesses, how we're going to market is one.

You would also have to think about the North American business there and how that's coming together.

So when you look sequentially, we did show growth sequentially.

I think it was pretty broad-based with the exception of South America, as you would expect.

But sequentially, it's pretty broad-based.

Year over year when you look at it, you certainly -- what would come screaming off the page is Europe and Asia.

However, you just can't ignore what we have in North America.

It's just an incredible business.

And I think we have really done a good job of integrating the businesses filling the market outside in.

Thank you very much.

Ty Govatos, TG Research.

How are you?

A couple of numbers questions.

Bonus accrual for the quarter and the year?

Okay.

For the quarter, it was about $41.5 million, and for the year about $145.5 million.

Terrific.

Bob, do you have any guess as to what the tax rate might be for first quarter in 2015?

Yes, we are focusing right now with all of our internal planning about a 34% effective rate on a go-forward basis.

This past year, we had a couple of what I would call more one-time items come up that were positive, which actually drove the rate down.

So we had a settlement of an IRS audit as well as we continue to rebound in some of the outlying jurisdictions.

We've released some valuation allowance, so that results in some positive news into the rate for the current year.

But go forward, I would think around 34% is probably a good rate.

Okay, terrific.

The guidance you gave for the upcoming quarter, $0.29 to $0.37, includes the rationalization cost?

It does.

That's correct.

And the other one -- Gary, sorry to do this to you.

In all the time I've been covering Korn/Ferry, Futurestep has always grown pretty much in step function.

Big surge in volume, and then there's a catch up in cost.

Investment spending to beef up the base.

Is there any reason to expect that to change, or do you get to some point where it's far more scalable further down the road?

Well, we would hope it's scalable; but some, it's the nature of the projects.

I would say that I am very optimistic what Byrne Mulrooney and his team -- we've got a team that's been together for quite a while.

What we are building, there was -- we had quite a bit of success during the year, particularly in the technology life sciences area.

And so we secured a number of contracts going back several quarters ago that really worked their way through.

So I would hope that we can show this kind of expansion of the EBITDA margin, honestly, Ty.

Okay.

If you had to guess, looking out three to five years, do you think the leadership or Futurestep will have higher margins, or should they be just about the same?

I would say, Ty, that if you look at our longer-term view of those businesses, I would say the leadership business is a 15% to 18% EBITDA margin, and then Futurestep is more likely to be in the 13% to 15% range.

Okay, thanks.

I appreciate the time.

Josh Vogel, Sidoti and Company.

Thank you.

Good afternoon, guys.

I may have missed it, I apologize.

But could you talk about the acquisition pipeline?

And if we did see any M&A activity, do you think it would be still more in the LTC space or Futurestep?

Well, we -- really, I don't think anything has changed, Josh, in terms of our game plan.

In terms -- looking for intellectual property, looking for solutions and services that can add scale, looking for those reasons that we can proactively dialogue with clients and help to accelerate their journey.

So from that perspective, really is nothing has changed.

When you look at the landscape, you'll find that the LTC world is more target-rich; and Futurestep, not so much.

Okay.

And when you're looking at your LTC platform, do you see any gaps that you still need to fill, or do you feel comfortable where the business is today and where it can grow to?

No, we see plenty of opportunity.

Number one, as a Company we see opportunity organically for deeper penetration of our existing clients, number one.

But secondly, we do see opportunity to both add depth and scale into our leadership business as well as breadth of service offering.

So we actually see both.

Okay.

And you had some comments about in Futurestep, I think it was about $85 million of new RPO contracts; about $13 million was in Q4.

So you already have $70 million in revenue that is locked up for fiscal 2015.

Is that the way I should look at it?

Some of those contracts extend over longer periods of time than just the year.

So the average length of the contract, in fact, was right around two years this past year; with new business activity, I think it's stretched out closer to three.

Okay.

And just one housekeeping one.

There was a pretty big sequential spike in D&A, and could you give us an idea of what you think the run rate will be going forward?

Yes, I would say that the fourth quarter is probably more indicative of go-forward run rate.

Maybe a little bit more upward pressure as we continue to make some investments in our technology.

We had previously talked about investing back into common general ledger platforms as well as workforce management tools, so the spike-up that you see is kind of those systems being put into place.

Okay.

Great, thank you very much.

It appears there are no further questions, Mr. Burnison.

Okay.

Well, I first want to thank our shareholders for their interest in our story, number one.

Secondly, I would like to thank our Board for their advice, and certainly for our colleagues around the world.

I'm just enormously proud of the Korn/Ferry that we have built and, more importantly, the Korn/Ferry we're going to build.

So with that, I'll say good day, and we'll talk to you next time.

Goodbye.

Thank you.

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