Korn Ferry (KFY) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Korn/Ferry second quarter FY15 conference call.

(Operator Instructions)

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

We have 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 forward-looking statements within the meaning of the Private Securities Litigations Reform Act of 1995.

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

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

Additional information concerning such risks and uncertainties can be found in the release relating to this presentation, in the Company's annual reports for FY14, 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 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 will turn the call over to Mr. Burnison.

Please go ahead.

Mr. Burnison

Okay.

Thank you, Rochelle, and good afternoon and seasons greetings.

Thank you for joining us here today.

We have Bob Rozek, our CFO, Linda Hyman, our CHRO, and Gregg Kvochak.

Let me just start out by saying how proud I am of what we have accomplished this calendar year.

And really not only the calendar year, but more specifically our fiscal second quarter, which ended in October.

We -- in that quarter, we achieved the strongest top line results in our 45 year history, generating $256 million in revenue, which on a constant currency basis, is up about 8% over last year.

Profitability was also strong, with EPS of $0.51, and that was up about 24%.

We continue to see strong growth, steady growth across industries and solutions, with most of our global practice areas up year-over-year.

Futurestep rang the bell.

They led the way, growing 27% year over year, and that was really spurred from growth in North America and Europe, and from all of our service lines.

Our flagship search business was up 7% -- a little over 7% on a constant currency basis, with continued strength in North America.

That was up about -- almost 11%.

And the search business continues to maintain its industry-leading market share and leadership position, and it grants us brand permission and trust, most importantly allowing us to engage in conversations with clients about their talent agenda.

Our leadership offering generated about $66 million in fee revenue, which was essentially flat year-over-year.

But that was against a really difficult comp.

We posted strong EBITDA margin, however, in that business of a little over 16%.

And so overall, I'm pleased with our results.

Certainly this past calendar year, and during the quarter.

I'm even more excited about what the future holds for us.

Korn/Ferry is the authority on talent.

We are an organization that, based on data and research, we can measure and predict who is going to be successful in any given role, organization, industry, or geography.

And for those clients, for those boards, for CEOs, for leadership teams, who truly want to use talent as a competitive asset to drive sustained growth.

Korn/Ferry is the authority on talent through IP, a focus on innovation, and our ability to design a client's talent strategy, identify gaps and then help them build and/or attract talent.

I'm confident that in the year ahead, we're going to create real impact, and drive dramatic change in the organizations we serve, continuing to see the opportunity to create the world's preeminent leadership and talent consulting firm.

So how are we going to do this?

We're going to continue to drive relentlessly a proactive go-to-market strategy, broadening the conversation with our clients, penetrating those relationships, delivering multi-line diversified solutions.

Secondly, we are going to make our brand more elastic through innovation, executing through IP, and the investments that we are making in the Korn/Ferry Institute around key themes such as growth, talent analytics, learning agility and enterprise agility.

Third, we're going to continue to develop our workforce, our people, to broaden the conversation with our clients.

And finally, we're going to execute a systematic approach to M&A, as well as capital allocation, which Bob is going to speak to.

So with that, Bob, I will turn it over to you.

Great.

Thanks, Gary, and good afternoon everybody.

Thanks for joining our call.

Our strong financial performance continued in the second quarter of FY15, with our overall results benefiting from our strong demand for recruitment and leadership consulting services, the continued execution of our go-to-market account management programs, and our ongoing focus on cost management.

In what is historically a seasonally weaker quarter for us, our fee revenue reached nearly $256 million, as Gary said, with growth across all three lines of business.

At constant currency, our consolidated fee revenue was up $19.3 million, or 8.1% year-over-year, and it was up $8.1 million, or 3.2% sequentially.

As our integrated selling activities and account management efforts continue to advance, it definitely impacts our fee revenue mix, which continues to evolve, with now 42% of our second-quarter fee revenue being generated from services other than executive search.

In executive search, second-quarter new business was up 2.8% compared to the second quarter of FY14, and down marginally sequentially, due primarily to summer vacation seasonality.

After a seasonally slow start in August, monthly new orders improved each month within the quarter.

In LTC, new business awards in the second quarter grew 10.5% year-over-year, and were up 3.5% compared to the first quarter of FY15.

And Futurestep continues to really hit its stride.

It achieved its second-best quarter of new business ever, with total awards up nearly 40% compared to the first quarter.

Leveraging our cost saving actions that we initiated in the first quarter, our Firm achieved both record earnings and profitability in Q2.

Excluding all management separation charges in the second quarter of FY14, adjusted EBITDA improved $7.4 million, or 20.1% year-over-year, to $44 million.

When compared to the first quarter of FY15, adjusted EBITDA in the second quarter improved $6.1 million, or 16.1%.

EBITDA margin was 17.2% in the second quarter of FY15, compared to 15.4% in the second quarter of FY14, and 15.1% in the first quarter of FY15.

In the second quarter, I would like to highlight a couple of nonrecurring items that resulted in a net benefit to earnings.

Specifically, we received an insurance settlement, which reimbursed the Firm for legal fees incurred in prior years.

This was partially offset by higher other professional fees relating to the ongoing evolution of our strategy, and additional performance-related bonus expense, resulting from the continued adoption of our strategy, including referrals between lines of business.

The net benefit to EBITDA in operating earnings in the quarter associated with these items was approximately $2.4 million, with an approximate 90 basis point favorable impact to our EBITDA margin.

On a GAAP basis, operating earnings in the second quarter were $34.4 million, with a 13.5% margin, as compared to $23.2 million and a 9.7% margin in the second quarter of FY14, and $18.6 million and a 7.4% margin in the first quarter of FY15.

Excluding management separation charges in the second quarter of FY14, and restructuring charges in the first quarter of FY15, adjusted operating earnings in the second quarter were up $9.2 million, or 36.5%, with a 290 basis point improvement in margin year-over-year, and up $5.9 million, or 20.7% sequentially, with a margin improvement of 210 basis points.

Our financial position remains strong in the second quarter, with total cash and marketable securities of $400 million, up $85 million compared to the second quarter of FY14, and up $28 million compared to the first quarter of FY15.

Excluding cash and marketable securities reserved for deferred compensation arrangements and for accrued bonuses, the current investable cash balance is approximately $180 million, and that's up $53 million year-over-year, but down $31 million on a quarter sequential basis, primarily due to the funding within the quarter of our long term (technical difficulty) payments that related to FY14.

Approximately 32%, or roughly $57 million to $58 million of our investable cash, currently resides in the US.

And after considering working capital needs, our worldwide net investable cash is now approximately $105 million, with roughly 30% of that residing in the US, nets about $31 million to $32 million.

I'm pleased to announce that our Board of Directors has endorsed our plan for a balanced approach to capital allocation going forward.

This approach first includes investing in growth initiatives, such as the hiring of consultants, the continued development of our intellectual property and derivative products and services, as well as the investment in synergistic accretive M&A transactions that earn a return that is superior to our Company's cost of capital.

Our recent acquisitions have yielded such returns, and have helped create a stronger, broader, solution-rich Firm that is less economically cyclical and more strategically relevant to the Company's clients.

Second, this approach includes the planned return of a portion of excess capital to our shareholders, in the form of a regular dividend.

The Board has endorsed management's recommendation to establish the payment of a quarterly dividend in the amount of $0.10 per share, commencing at the conclusion of the third quarter of FY15.

Additionally, the Board has approved an increase in funds authorized for share repurchases by approximately $125 million, to a level that is $150 million, with which the Company can utilize on an opportunistic basis, going forward.

Finally, fully diluted earnings per share were $0.51 in the second quarter, and that was benefited by roughly $0.03 to $0.04 from the nonrecurring items that I discussed earlier.

Adjusting for management separation charges in the second quarter of FY14, this represents a $0.10, or 24%, improvement year-over-year.

Sequentially adjusting for restructuring charges incurred in the first quarter of FY15, fully diluted earnings per share improved $0.08, or 19%.

On a GAAP basis, fully diluted earnings per share in the second quarter of FY15 were up $0.13, or 34% year-over-year, and up $0.22, or 76% sequentially.

I will now turn the call over to Gregg, who will review our operating segments in more detail.

Thanks, Bob.

We will start with our executive recruitment segment.

Globally, revenue growth for our executive recruitment segment in the second quarter was affected by summer vacation seasonality.

On a consolidated basis, fee revenue in executive recruitment for the second quarter was $148.9 million, up $10.1 million, or 7.2%, year-over-year, and up $2.7 million, or 1.8%, sequentially when measured at constant currency.

Year-over-year, on a regional basis, at constant currency, North America was up 10.6%, Europe was up 7.5%, while Asia-Pacific was down 2.2%, and South America was flat.

On a quarter sequential basis, also at constant currency, North America grew approximately 1%, Europe was down 5.3%, while Asia Pacific and South America were up 9.6% and 38.4%, respectively.

Compared to the second quarter of FY14, growth in our major specialty practices was mixed, with the consumer goods practice up 25%, the industrial practice up 11%, the financial services practice up 10%, while the life sciences and healthcare and technology practices were down 1% and 13%, respectively.

Quarter sequential growth was also mixed, with consumer goods up 8%, life sciences and healthcare up 3%, flat results in technology, while financial services and industrial were down 5% and 3%, respectively.

Financial services accounted for approximately 7.2% of all executive recruitment fee revenue in the second quarter -- excuse me, 17.2% of all executive recruitment fee revenue in the second quarter, which was up 70 basis points year-over-year, and down 80 basis points on a sequential basis.

The total number of dedicated executive recruiting consultants worldwide at the end of the second quarter was 440, up 28 year-over-year, and down 2 sequentially.

Annualized fee revenue production per consultant in the second quarter was $1.35 million, and essentially flat with both the second quarter of FY14 and the first quarter of FY15.

The number of new search assignments open worldwide in the second quarter was 1,310, which was up 77 basis points year-over-year, and was flat sequentially.

Consolidated executive search EBITDA in the second quarter was $32 million, with a 21.5% margin, compared to $30.7 million, with a 21.9% margin in the second quarter of FY14.

The slightly lower year-over-year EBITDA margin for the second quarter of FY15 was primarily a result of higher variable incentive compensation expense, linked to the execution of our strategy, including referrals between lines of businesses, as well as the timing of recent investment hiring of additional consultants.

When compared to the first quarter of FY15, EBITDA and EBITDA margin in the second quarter were flat on essentially flat fee revenues.

Turning now to our leadership and talent consulting segment, which generated $66.3 million of global fee revenue in the second quarter.

On a constant currency basis, L&TC's fee revenue in the second quarter grew $620,000, or nearly 1% year-over-year, with growth in Europe and Latin America offsetting slightly weaker results in the North American and Asia-Pacific regions.

Compared to the first quarter of FY15, also on a constant currency basis, L&TC's fee revenue was up $3.4 million, or 5.4%.

Regionally, North America accounted for approximately 69% of total L&TC worldwide fee revenue in the second quarter, compared to 70% in the first quarter of FY15.

At the end of the second quarter, there were 131 dedicated L&TC consultants, which was up 3 compared to the second quarter of FY14, and up 4 compared to the first quarter of FY15.

Professional staff utilization in the second quarter was up 100 basis points, both year-over-year and sequentially, to 71%.

In the second quarter, L&TC continued to realize cost savings, driven mostly by back office and operational efficiencies resulting from recent restructuring activity.

L&TC's EBITDA margin in the second quarter grew to 16.4% which was up 90 basis points year-over-year, and up 120 basis points sequentially.

Finally, turning to our fastest growing segment, Futurestep, which grew for the eighth consecutive quarter, and generated $40.3 million of fee revenue in the second quarter.

On a constant currency basis, Futurestep's fee revenue in the second quarter was up $8.7 million, or 27.2%, year-over-year, and up $1.98 million, or 5%, sequentially.

On a regional basis, measured year-over-year at constant currency, North America was up 37%, Europe was up 43%, South America was up 41%, and Asia-Pacific was flat.

Sequentially, on the same basis, all regions grew in the second quarter, led by North America and Europe, which were up 3.7% and 7.8%, respectively.

Leveraging their fixed cost, Futurestep's profitability has continued to improve with revenue growth.

Futurestep generated $5.6 million of EBITDA, with a 14% margin in the second quarter, which was up $2.7 million, or 90%, with a 470 basis point margin improvement year-over-year, and up $310,000, or nearly 6%, with a 40 basis point improvement in margins sequentially.

I'll now turn the call back over to Bob to discuss our outlook for the third quarter of FY15.

Great.

Thanks, Gregg.

Historically, we've talked about our second and third quarter as being our seasonally weaker quarters, primarily due to the summer vacation season and the year-end holidays.

And now that we have two years of history with our most recent acquisitions, it's clear that the third quarter is our seasonally low quarter, due to the impact of the year-end holidays on the number of business days that are worked within that quarter.

Globally, as expected, August was our weakest month of new business in this fiscal year, with new business improving consecutively in both September and October.

It provides us with a pretty good backlog.

Our November new business was seasonally low, and we anticipate December will be soft due to the year-end holidays, both new order releases and deliveries slows.

January has historically been a strong month of new business across all of our service lines.

In general, the total number of working days in the third quarter will affect fee revenue in each of our business lines.

There's roughly, depending on what part of the world you're in, say seven to nine less working days in the third quarter compared to the second quarter, and actually two less working days this year than in the third quarter of last year.

Our top line growth is also being adversely impacted by currency movements, particularly with respect to the pound, the euro and the Australian dollar.

Additionally, our forward visibility remains limited, and it's difficult in any month to decipher if deceleration is simply seasonality, or if certain economic or geopolitical factors are negatively affecting our new business.

Assuming worldwide economic conditions, financial markets and foreign-exchange rates remain where they are, fee revenue in the third quarter of FY15 is likely to range from $241 million to $251 million, and diluted earnings per share are likely to range from $0.43 to $0.49.

With that, I will conclude our prepared remarks, and we would be glad to answer any questions you may have.

(Operator Instructions)

Kevin McVeigh, Macquarie.

Great, thanks.

Great job in terms of results.

I wanted to just get a sense overall.

As we think about the margin profile, particularly in the Futurestep business, you really saw tremendous sequential and year-on-year margin expansion in that business.

How should we think about that going forward?

And any of the hiring that you talked about, did that dampen any of the margins in the quarter?

Or is that all things we should thing about going forward?

And if you could give us a sense of where those hires will be split.

Yes, let me take the Futurestep question first, Kevin.

This is Bob

Hello, Bob

Hello, how you doing?

In the Futurestep, yes, I think as we talk to folks, we think the long-term margin range for that business is in the 13% to 15%.

I think where you see them now, as they continue to ramp up with new contracts, if you go back to last year in the second quarter, they had a real spike in new business awards.

And that negatively impacted their margin in that quarter.

But now we have our pipeline and backlog filling in.

So as they continue to gather new contracts, we're not seeing the downward pressure on their margin anymore.

So I would stay probably in the 13% to 15% range.

Right now, they are right smack dab in the middle of it.

And then in terms of the new hires, if you look across where we were on a year-over-year basis, the predominant hiring came in the executive search segment.

I think were up 28 search consultants.

Some of the folks are starting to get their legs under and keep them now.

So the ramp-up time, as we bring in people with experience, is a little bit less than those that don't have it.

So I would not anticipate any real downward pressure from those hires going forward.

Great.

And then in terms of just any impact -- are you seeing in the business, or are you thinking about it differently?

And this may be a reach but just given how much oil has come off, has that impacted any of the end markets?

Maybe some stepping up more, maybe some coming off the accelerator a little bit?

Or is that still too early to tell?

It's way too early to tell.

It's certainly something that we have our eye on.

And for all intents and purposes, it's really only been a couple solid weeks.

And so I think the jury is out, and we will see what that holds in January and February.

Got it.

And then, Gary, the decision to introduce the dividend, which looks great, and then up the buyback, is that a functions of just where we are in the cycle?

And just how we are thinking about acquisitions going forward?

Or just any thoughts on capital commitment going forward -- just given the recent news?

Listen, I think it's really not a change.

Our first priority is to invest in our business, either through intellectual property or hiring and other expansion.

Secondly is to continue to look for solutions that make the brand more elastic, that allow us to penetrate our clients in a deeper and more meaningful way.

And lastly, we have to be cognizant of the cash balance that we're building.

And we cannot earn less than 1% on that.

So we have to be mindful of all three of those, and we have to take a balanced approach.

And our Board has been very instrumental in helping to shape what we announced here today.

Super.

Congratulations.

Thank you.

Tobey Sommer, SunTrust.

Thank you.

Just a couple quick follow-ups on that.

Do have a dividend payout ratio in mind?

Or do you have a different way of looking at that particular aspect of your capital allocation?

Yes, right now, Tobey, it's roughly 20% of our domestic cash flow.

And at today's price, it's about 1.5 points.

Obviously, we will continue to monitor the buildup of cash, and over time would like to slowly grow that to a little bit higher yield.

But there's nothing targeted.

The key variable for us is going to be the M&A landscape and what opportunities are out there and what we're able to capitalize on.

Right.

That could use more or less of our cash, depending on the outcome of that.

Speaking of that, segue into the next question.

Does the timing of this capital allocation news imply that the pipeline for M&A is a little less interesting or robust than it was a couple of quarters ago?

No, not at all.

Not at all.

It reflects an ongoing dialogue with our Board, who again, I think, has been very, very helpful in shaping this.

And it reflects the accumulation of cash.

And we have to be more transparent to our shareholders.

And that's the road we're going down here.

(multiple speakers) It's very consistent, Tobey, with some of the conversations that we've had, over time, in terms of taking a balanced approach.

It's not A or B or C, but it's looking across all the potential uses of cash and being balanced and thoughtful.

How much of the business is driven by cross-selling now?

And how has that maybe changed over the last two years?

And you can answer that either with numbers or qualitatively, if you like.

No, I'll answer with numbers.

If you look at the new business that's going into Futurestep and LTC, approximately 40%.

And when you count the tail and the repeat business, that number becomes even more material.

So one of the things that we take great comfort in is the acceptance by clients to invest in what is probably their most under-invested area, which is people, which is the most important area.

And the way that our colleagues have embraced the notion of broadening the conversation.

And so I think that is pretty remarkable, in a relatively short amount of time.

Thank you.

Tim McHugh, William Blair and Company.

Thanks.

Bob, first, when you were talking about the legal reimbursement, you netted that out against some items.

Can you review what that was that you were saying -- the net impact from that this quarter?

Yes, we had an insurance recovery in the quarter, which was partially offset by we got some higher professional fees, as we continue to go back and revisit our strategy and fine-tune it, as we move forward.

As well as some additional bonus incentive compensation expense in the quarter, as our revenue spiked up to the level they were at and the level of cross-selling that Gary just talked about, drove a higher bonus expense for us in the quarter.

So the net of all of those items was about $2.4 million to EBITDA.

Okay.

Ideally, those referral fees are less of a one-time issue, though, if you're going to continue to grow, right?

Yes, but we stepped up, actually, over the last -- really, over the last -- it has been in the second quarter, actually.

The last three or four months, we have stepped up our incentive compensation scheme for driving a broader talent agenda.

So that is actually something that is at a newer level, relative to last year or six months ago.

Is that a permanent change?

Or is this a temporary incentive program?

We're going to see how it plays out.

We are not 100% sure.

We continue to evolve our compensation scheme, which we have to continue to do to reward our colleagues for not just what they deliver but how they do it.

And so quite candidly, we're going to continue to see how the months play out here, and whether we should actually revise it again or maintain it.

And it seemed like those referral fees, particularly that was the Futurestep sales, where you saw the success this quarter?

Is that fair?

It goes across the board.

It goes any piece of business that one originates outside their primary home.

They will receive, subject to the profitability of the Company, incentive compensation.

Certainly, given the Futurestep growth, yes, there has been a fair amount to Futurestep.

But it also goes the other ways, too.

Search to LTC, LTC Futurestep to Search.

Albeit the latter is much, much smaller than the former.

Yes, I think, Tim, also, if you look at the new business awards for LTC, they are at a pretty significant level.

I think it's the highest level since we've had PDI combined with the business.

So Futurestep did have a good quarter.

But LTC in this quarter, the last two months were relatively strong with their new business orders.

So that drove a portion of it, as well.

Can you reconcile -- I was going to ask about that -- reconcile that statement with, year-over-year revenue was basically flat.

And it feels like you are implying or guiding us towards a similar number for this next quarter or at least not a whole lot of growth.

When you say year over year --

I get the seasonality; but if we're looking year over year, I guess trying to understand that.

I think what you are looking at here is, number one, it's a pretty difficult comparison.

You've got a difficult comp.

In last year's second quarter, we had a very, very large engagement that happened to hit in one quarter.

The second thing is that when you look at the nature of the projects that we're now winning and securing, they are actually executed over a multi-quarter period.

And so whereas in the past, it could be, we picked up, for example, an assessment that would be executed pretty quickly, now the assignments are really stretching out over time.

And that's what we actually are trying to deliver more value, bigger assignments, bigger impact with our clients.

And so I think it's going to be a little bit lumpier than what we would have had, say, two, three, four years ago.

Okay.

And then, I guess two number questions, Bob.

One, the tax rate, how are you think about that for next quarter?

And you talked about currency being a bigger hit.

Can you quantify, I guess, in any way, the impact that you're expecting?

Yes, Tim, if you look at both year over year and the quarter sequential impact on what we're thinking about for Q3, it's probably a couple million, $2 million to $3 million.

And the biggest impact is coming from the euro, the pound and the Australian dollar, as we rolled up our thinking on Q3.

From a tax rate perspective, I think the last time we chatted, I was pushing folks towards 33% to 34%.

Given the way our earnings are playing out right now, it's probably going to be closer in the 32% to 33% range for the full year, given the mix that we are experiencing to date.

Okay.

Great, thank you

Yes.

Thank you.

Tobey Sommer, SunTrust.

Thank you.

What is the currency impact on your guidance?

Just based on the difference between the exchange rates we know about a year ago and what you've built in for this year's?

Yes, I would say that's $2 million to $3 million, Tobey.

That's what I was just commenting to Tim on.

I apologize.

I was talking to the operator there for a second.

Yes, it's $2 million to $3 million.

Okay.

I've got two business line questions.

In Futurestep, a lot of momentum over the last two quarters, strong growth rate.

How sustainable is that momentum?

And what is driving what looks like the market share gains?

I imagine cross-selling is part of it, but is that the single answer?

It's not the single answer; but I think, number one, it is leadership.

That's probably first and foremost.

We've got a phenomenal team.

I think secondly is the ability to broaden the conversation.

Search has had an enormous, enormous impact on that business.

Third is the fight for knowledge workers.

And I would point to those.

And the growth is in North America, and it's actually in Europe as well.

The other thing I would highlight for you, Tobey, as well, is within the RPO side of Bern's business, one of the things that they've been able to do is to win more engagements.

They have got a demonstrated ability to deliver on those engagements.

As they get larger and larger engagements, and demonstrate that ability, they are getting more swings at the plate.

They are getting more opportunities, which are translating into more wins.

So their success in the early days, and the ability to execute and deliver on that success, is feeding on itself in that business.

Okay, thanks.

That's helpful.

And then for LTC, I'm curious, are you keeping pace with the market?

And what can you do to grow faster in LTC?

I think it's an interesting market because if you ask any CEO what their biggest asset is, they say people.

And yet there's usually a divide between that statement and what happens in an organization.

And so what you have is a very fragmented industry, where it's unusual to see multi-hundred thousand dollar, multi-million dollar engagements.

And so to get a read on quote, the market, is certainly more art than it is science.

In terms of the growth question, I think that we must continue to orient our business along global solution lines.

Solution sets such as org design or assessment or succession planning or on-boarding or team effectiveness or development.

We have to bring to market more standardized, scalable solutions sets that we can replicate in scale.

And so while we have continued to invest in intellectual property and acquire these products and tools, I think we've got to do a better job into packaging those and then replicating success.

Thank you very much.

If I could sneak one more in.

How much revenue is being derived directly from IP and product related businesses at this point?

It's about -- again, on a standalone basis, it would be 6%, 7% of the Company.

Now, the thing that's a little bit misleading is that we also use that IP for a good part of our leadership and, in fact, even our Futurestep work.

And further, we're actually using it in search, too.

But on a standalone basis, 6%, 7%.

But when you look at the LTC business, there is a fair amount of that business that is actually utilizing the IP in delivery of consulting work.

Thank you very much.

Thank you.

Mark Marcon, Robert W. Baird.

Good afternoon.

And first of all congratulations to you and the Board in terms of the capital allocation decision.

I'm really glad to see it.

Thank you, Mark.

With regards to Futurestep, you have been experiencing strong growth.

I'm just wondering, how should we think about capacity in that division?

Are you running into any constraints?

Obviously, you do have a number of the deals come on; and so you have to scale up for those.

But how should we think about that longer, over the next couple of years?

Mark, this is Bob.

Bern has done a nice job over time of putting into place the service management centers across the globe.

And so essentially, what he does is as new contracts come on, he will staff up with the help he needs in those service management centers.

But he's always counterbalancing that with other increases or decreases in existing contracts that come into play.

So it's a bit of a logistics exercise for him to do to go in and manage his workforce according to the demand that's coming out of the contracted base.

But no obstacles, in terms of adding more capacity as --

No, I think we are constantly in discussions with Bern about expanding capacity in the service management centers, especially more recently, now that we're seeing his new win rate continue to develop as positively as it has.

And we'll add -- but essentially getting a little bit more real estate and some desks and cubicles and so on.

And then he's got to go out and staff up the folks.

Right.

And then with regards to L&TC, can you talk a little bit about the success that you are having, or the challenges that you are having, with regards to increasing the number of people who can sell some of those capabilities skillfully and successfully?

Yes, it is very difficult to find them, to be quite candid.

But as I talked about --

I know of a good search firm.

(laughter)

Yes.

We can't be the cobbler's kids, can we?

It is tough, but it's more than the people.

It's also about educating Boards and CEOs about putting their money where their mouth is.

And it is their single greatest asset.

And so one of the things that we have to do is to demonstrate the data and the proof points, and we have to use data to help generate demand.

In addition to having these more global solutions sets that we can replicate that have real impact, we also need to generate demand.

So we're continuing to look, Mark, for those people.

And whether that is done through acquisitions or that is done through hiring or that is through continuing to develop our own people, we're going to do all three of those

In fact, Mark, one of the things that, in spite of my propensity to try to keep costs down, Gary is having us invest back into a more dedicated recruiting function within L&TC.

So we've got now three or four folks who are spending full-time trying to track the folks down and bring them into the organization.

Great.

And then -- I apologize if this was asked before -- but with regards to Asia-Pacific, what you see in China?

Listen, the business has actually -- this last quarter, if you look year over year, it was flat.

I think that going back for the past few quarters, there has been a cautiousness that is in that market.

The long-term trends are still very, very appealing.

But the demand for some of our services is -- quite candidly, it's brand-new.

It's an immature market around what companies really do -- not only just developing people, but even in terms of how they hire.

And so it's young; it's immature; and there has been cautiousness that has been in that market for a good four to six quarters now.

The good news, when you look at it here, certainly, this last quarter, it hasn't gone down.

It was essentially flat.

But the financial services market, not only in China but globally, has just been totally changed this cycle versus the last one.

Continued challenges in capital markets, where we're just not doing the levels of business that we did before.

And that is true in China as well.

And in terms of how you plan for that, are -- do you start saying, gee, it's not at a level -- for whatever reason, it hasn't come back.

Do you start just reallocating across different practices?

We've done that.

That's exactly what we've had to do.

Listen, I'm very optimistic on in particular, what we have in China and our prospects.

And you can't be on and off.

You can't have an on-and-off switch.

You have to be there.

We've been there for two decades.

We are excited about the long-term prospects.

But we have to realize the transformation that that country is going through.

And it's a relatively young market for 60% of our business.

And even the recruiting side is much different than it is in the United States.

Yes.

Great.

I appreciate the color.

Thank you.

Thank you.

Ken Ruskin, Acclivity Capital.

I just had a quick follow-up question.

I wanted to make sure I understood that the January quarter guidance includes the impact of two fewer working days.

Is that correct?

That's correct.

Okay.

Yes, on a year over year basis.

Sequentially, it is in the seven to nine range, again depending on where you are in the globe.

Great, okay.

Yes.

I meant year on year.

So does the math just simply work to that being like a 3% type revenue hit year on year?

Yes, Ken, the math work is easier on the L&TC business because it's time and materials as you charge your time.

And then there are two less days you don't get it.

It's a little more challenging to do that on the search side.

So I would say probably in the 3% to 4% range would not be a bad way to look at it.

On the L&TC side?

Yes.

Okay.

Got it.

Okay, thanks so much.

Thank you.

Tim McHugh, William Blair & Company.

Just one or two quick follow-ups.

The margins guided to in Q3, if I strip out the legal reimburse to insurance reimbursement from Q2, it seems like you expect a healthy improvement versus the third quarter.

Is it as simple as not having those referral fees?

Or are you seeing a full benefit from some of the actions taken in Q1 from a cost structure?

Is there something you would point to why?

(multiple speakers) It's -- I think if you -- yes, if you pull out the net of those items in Q2, the 90 basis points, you get down to about a 16.2%, 16.3% margin.

Our margin inherent in Q3 is essentially flat with that, right around the same point.

And then I think you hit the nail on the head, Tim, in terms of getting the full benefit of the Q1 actions.

And then, again, as Gary indicated, we always continue to look at our incentive programs.

And whether you dial them up, dial them back in the particular quarter, with respect to what we're trying to drive in the organization, will have an influence on that.

Okay.

And then just -- I forget if you said this --but can you elaborate on Europe in terms of the sentiment in terms of the executive search business, just relative to the economic data points we are hearing?

What's the commentary from the ground that you are getting back right now?

Yes, I'm happy to do that.

So as we talk to Bernard Zen-Ruffinen, who leads the European practice, I think we continue to see strength in the UK.

And UK is roughly 40% of our European business.

Where we're really are seeing the most weakness in Europe today in the search side is in Germany.

That's probably the one area that there is the most concern over.

The currency is a big -- obviously, between the pound and the euro, that's a big impact, as I have said before.

Seeing the pound, euro and the Australian dollar, it's $2.5 million, $3 million.

And about $2 million of that relates to the pound and the euro.

So we're seeing that have some downward pressure on our revenues in Europe, as well as on what we expect to guide to.

Okay.

All right.

Thank you.

Thank you.

Tobey Sommer, SunTrust.

Just one question.

What is the value of the stepped-up incentive comp that you netted against the insurance adjustment?

Yes, I don't think we get into that level of detail, Tobey.

We wouldn't give out that level of granularity in the dollars on the line.

Okay.

Thank you.

Thank you.

And it appears there are no further questions.

Back to you, Mr. Burnison.

Okay.

I want to thank everybody for joining us here.

I wish everybody a very safe and happy holiday season.

And thank you for the interest in Korn/Ferry and what we are creating here.

Have a great holiday.

Thanks.

Okay, thank you.

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