Korn Ferry (KFY) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Second Quarter Fiscal Year 2018 Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

We've also made available in 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 the 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 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 and in the periodic reports filed by the company and with the SEC, including the company's annual report for fiscal year 2017 and the company's soon-to-be-filed quarterly report for the quarter ending October 31.

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

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

With that, I'll turn the conference over to our host, Mr. Burnison.

Please go ahead, sir.

Okay, thank you, everybody.

But first, I just want to say thank you to our colleagues at Korn Ferry, and I'll tell you why.

Because this quarter was the best top line results in the company's history.

To say that I'm proud is an absolutely -- that's just an understatement.

The firm is on a roll.

We generated $443 million in fee revenue in the quarter, which is up about 10%.

Profits were solid, adjusted EPS was $0.67, adjusted EBITDA was about $70 million.

Asia knocked the cover off the ball, Asia was up 17%, Europe was up 10% and North America was up about 6%.

And from an industry perspective, financial services was absolutely spectacular.

That business grew about 36% or so in the quarter.

It's been 2 years to the day, almost -- actually, it's 2 years and 3 days since we completed the acquisition of Hay Group and I -- although we've still got a lot of work to do, there's no doubt about it, I will tell you that this has been a game changer.

Korn Ferry has evolved into an organizational consulting firm.

So what does that mean?

Well, most clients can develop a sound strategy, but they often struggle to make it stick.

And that's where Korn Ferry comes in, combining a client strategy with their talent to drive superior performance.

And a strategy without talent is helpless and talent without strategy is hopeless.

And that's what we did.

We combined these essential elements for our clients' success, and that's what makes our firm unique.

And so there are really 2 aspects to our business.

First, we help companies design their organization, the structure, roles, responsibilities, as well as how they compensate, develop and motivate their people.

And secondly, we help organizations select and hire the talent that they need to execute the strategy.

The acquisitions that we've made over the years, the talent that we're developing internally and bringing on-board, as well as our real relentless focus on solutions align toward our clients' business outcomes, it's making, I think, a notable impact.

The investments we've made, I think, have not only enhanced our performance, but they've strategically repositioned the company forever, providing a platform to both shape and accelerate our growth in the years ahead.

So I'll leave my comments right there.

I'd only say, as we enter this calendar 2018, we're going to continue our strategic commitment to building the preeminent organizational consultancy, a firm that changes people's lives and that enables organizations and people to exceed their potential.

So with that, I'm joined here with Bob Rozek and Gregg Kvochak.

So I'll turn it over to you, Bob.

Great.

Thanks, Gary, and good afternoon, everyone.

As usual, I'm going to start with a few key highlights.

First, as Gary mentioned, fee revenue in the second quarter reached an all-time high, with all 3 lines of our major business segments achieving strong year-over-year growth.

Globally, the fee revenue in the second quarter was approximately $443 million.

It's a growth of over 10% year-over-year at actual foreign currency rates and nearly 9% at constant currency.

Growth was strongest in the talent acquisition businesses, Executive Search and Futurestep, which grew year-over-year by approximately 13% and 17%, respectively.

For Executive Search, fee revenue growth in the second quarter was broad-based, with growth in North America, Europe and Asia PAC regions of 9%, 19% and 33%, respectively.

We're also pleased with the 6% year-over-year growth that we saw in the Hay Group, which reflects not only the addition of new talent, but our focus on larger solutions and our go-to-market activities as well.

Second, in the quarter, we continued to invest for growth.

On a quarter sequential basis, we hired an additional 17 net new fee earners, 6 of those in Executive Search and another 11 at the Hay Group.

Many of the new consultants we have on-boarded over the last several quarters are currently making a real positive impact.

We had a record quarter of new business in all 3 lines of business, which not only contributed to our record overall revenue in the quarter but positions us very well for the second half of fiscal '18.

We expect these new hires to further contribute to growth over the next few quarters as the productivity ramps.

Third, our adjusted EBITDA, as Gary mentioned, in the second quarter reached $69.6 million, an improvement of almost 10% compared to last year's second quarter.

And then, finally, we continue to return capital to shareholders with the payment of our quarterly dividend and the repurchase of our stock.

Over the last 5 quarters, we have now repurchased approximately 2 million shares, that's about 3.5% of our outstanding fully diluted share base and we've used about $58 million of our $150 million authorization.

Now turning to new business trends.

First, for Executive Search segment.

Globally, new business wins in the second quarter continued to improve and reached a record high.

In the second quarter, consolidated Executive Search new business was approximately $180 million and that was up about 15% year-over-year, again driven by strength in North America, Europe and Asia.

Similarly, new business growth in the second quarter for Hay Group was strong, coming in at a record $216 million, and that's up double digits measured year-over-year.

And finally, in the second quarter, Futurestep achieved an all-time high in new business, with total awards of approximately $149 million.

This includes $28 million in single search, and then on the RPO side, it was about $121 million, $5.5 million of that is an extension of an existing client relationship, about $52.5 million is an expansion of an existing client relationship and then about $63 million relates to new customer wins.

And the majority of that RPO revenue will be realized over 4 to 5 years.

At the end of the second quarter, total cash in marketable securities were $414 million, that's up about $24 million compared to the second quarter of fiscal '17.

And then when you exclude amounts reserved for deferred comp arrangements and accrued bonuses, our investable cash balance was about $185 million, and that's up about $30 million year-over-year.

As of the end of the second quarter, we had about $246 million of debt outstanding.

And then, finally, our adjusted diluted earnings per share were $0.67 in the quarter, it's up about 13.5% year-over-year, and on a GAAP basis, fully diluted earnings per share were $0.64.

With that, I'm going to turn it over to Gregg, who will review the operating segments in a bit more detail.

Okay.

Thanks, Bob.

Our Executive Search segment continued at strong pace of growth in the second quarter of fiscal '18, achieving a record $176.8 million of global fee revenue, which was up $20.5 million (sic) [$20.6 million] or 13% year-over-year, measured at actual exchange rates, and up 12% measured at constant currency.

Regionally, growth in the second quarter was broad-based and driven by strength in North America, which was up 9% and double-digit growth in both Europe and Asia-Pacific, which were up 19% and 33%, respectively.

By specialty practice, Executive Search fee revenue growth was mixed in the second quarter.

Compared to the second quarter a year ago, growth in our Financial Service practice, up 41%; industrial practice, up 20%; consumer goods practice, up 13%; and our technology practice, up 4%, was offset by flat year-over-year results in the life science and healthcare practice.

The total number of dedicated Executive Recruitment consultants worldwide at the end of the second quarter was 538, up 37 year-over-year and up 6 sequentially.

Annualized fee revenue production per consultant in the second quarter was $1.32 million, and the number of new search assignments opened worldwide in the second quarter was 1,578, which was up approximately 5% year-over-year.

Consolidated adjusted EBITDA for Executive Search in the second quarter was $370 -- I'm sorry, $37.9 million, which was down marginally when compared to second quarter of fiscal '17.

This was due in part to higher compensation expense resulting from a recent hiring of new consultants and in part due to the year-over-year change in the value of the assets back in the firm's deferred compensation plan.

As in the past, quarterly market-driven gains or losses in these assets are recorded as increases or decreases in compensation expense and primarily affect North America Executive Search.

The consolidated adjusted EBITDA margin for Executive Search in the second quarter fiscal '18 was 21.5% compared to 25% in the second quarter of fiscal '17.

Now turning to the Hay Group where improving new business activity drove fee revenue growth in a seasonally strong quarter.

In the second quarter, Hay Group achieved fee -- record fee revenue of $200 million, which was up 6% year-over-year and 5% measured at constant currency.

Improvement was broad-based and driven primarily by double-digit growth in Europe, Asia-Pacific and Latin America.

As previously mentioned, new business awards for the Hay Group in the second quarter were strong and improved approximately 12% measured year-over-year.

Further, we saw new business awards improve sequentially each month in the quarter.

Despite the sharp increase in consultant and staff hiring over the last several quarters, earnings and profitability for the Hay Group have remained solid.

In the second quarter, adjusted EBITDA for the Hay Group was $36.4 million, an improvement of 3% year-over-year with an adjusted EBITDA margin of 18.2%.

Finally, turning to Futurestep, which achieved another quarter of double-digit growth.

In the second quarter, Futurestep generated $66.3 million of fee revenue, which was up nearly 17% year-over-year.

Continues to balance investments to support future delivery capacity, Futurestep also achieved strong earnings in the second quarter, with EBITDA of $10.2 million and an EBITDA margin of 15.4%, which were both up year-over-year.

Now I'll turn the call back over to Bob to discuss our outlook for the third quarter of fiscal '18.

Great.

Thanks, Gregg.

As previously discussed, monthly new business activity in the second quarter ramped for all of our operating segments, just ahead of our seasonally slower third quarter.

Globally, for Executive Search, new business awards in the months of September and October were up year-over-year by 13% and 22%, respectively, and we saw strength in the month of November, which was also up year-over-year.

If monthly new business patterns remain consistent with prior years, we expect Executive Search new business awards to trough sequentially to a seasonal low in December, then rebound to a quarter peak in January.

For the Hay Group, the third quarter is also typically a seasonally weaker quarter for both new business and revenue, as time off during the year-end holidays results in less time with clients to execute backlog as well as win new assignments.

However, we do expect the Hay Group to benefit in the third quarter from both the surge in new business awards secured in the second quarter as well as the continued ramp-up in productivity of many of our recent consultant hires.

Also as previously mentioned, Hay Group new business awards improved each month during the second quarter and the month of November was strong, up over 14% year-over-year.

With regards to Futurestep, both business under contract and the pipeline of potential new business opportunities remained strong and should drive continued growth in the third quarter.

As we previously mentioned, in the second quarter we continue to hire fee earners and select support staff in all of our operating segments.

At the end of the second quarter, our net consultant counts are up 21 in Executive Search and 37 at the Hay Group on a year-to-date basis.

As is usually the case, in the short term, many of these new hired consultants will not immediately bill at full capacity and, therefore, will create near-term downward pressure and earnings and margins, especially in our seasonally slower third quarter.

Now considering these factors, assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, and under the existing U.S. tax law, we expect our consolidated fee revenue in the third quarter to range from $406 million to $426 million, with growth in all of our lines of business and we expect our consolidated adjusted diluted earnings per share to range from $0.54 to $0.62.

And then, finally, consistent with prior quarters, our financial results in the third quarter include the amortization of integration and acquisition costs of approximately $2.3 million for retention bonuses related to the Hay Group acquisition.

When you include these costs, we estimate that the fiscal '18 third quarter fully diluted earnings per share, as measured by U.S. GAAP, will likely be in the range of $0.51 to $0.59.

And with that, we'll conclude our prepared remarks, and we'd be glad to answer any questions that you have.

(Operator Instructions) And we go to the line of Tobey Sommer from SunTrust.

I wanted to start out with kind of a longer-term question, in light of the improved results and Hay kind of finding a nice growth trajectory.

Gary, do you have goals for returns or ROIC that you could share with us because you are buying back stocks you don't have for a bunch of quarters and just curious how we should view -- what your view is on improving those returns?

Well, we do have goals for ROIC.

And we would clearly expect to be at least 11%, 14%, maybe 15%.

I mean, that obviously depends on where you are in the cycle, but that's kind of the gating that we'd put around it.

Okay.

And could you give us some color on how the product in the licensing business, how that grew in the quarter and maybe update us on how much you think that business can do over time?

It didn't grow at all.

And I think that the reality is, as we've really started to look at the opportunity there, there's been a couple of things that have really struck us.

Number one, the opportunity to create a platform that companies could use to hire people, to assess people, to develop people and pay people is absolutely there.

And we have the [IP] to be able to deliver on that promise.

That's number one.

But the second is, quite frankly, we've got some work to do, in terms of making that dream a reality.

I still believe very, very strongly that the business has the opportunity to double or triple, actually, over time, and it is certainly a very scalable business.

But we're going in and really taking a hard look at the customer interface, how they experience it, and we're making some pretty substantial changes to what that offering will really be.

We're looking at the pricing of the business.

Some of that pricing, you're locked in for more than a year.

But the opportunity is absolutely there.

But we've still got some work to do and we also have to continue to develop talent in that business, as well as augment talent from the outside.

Okay.

In your hiring [plans] you've been pretty aggressive in this calendar year and in the fiscal.

As you look out over the next several quarters, do you see the growth rate of your internal kind of fee-generating staff moderating a bit?

Well, we've -- certainly, we have been very aggressive and it's not -- it's been very, very broad-based.

We've brought in people that have professional account management experience.

We've brought in people that are, what we would call, solution architects.

So it has been aggressive.

I would not anticipate that same level of aggressiveness for the next 1 to 2 quarters.

I think the reality is that our expense base has grown substantially.

I believe we still have capacity, a lot of capacity.

And quite frankly, we've got to kind of recalibrate this products business.

We've got work to do there.

So I think that for those reasons, it's not going to be as aggressive at it was, say, going back 9 months.

Okay.

Two other question for me, and I'll get back in the queue.

As we look into the next quarter, the one you just guided for, would Hay revenue be down a little bit sequentially after kind of a strong seasonal period in September, October or will your kind of recent headcount initiative perhaps offset that traditional seasonal change?

No, it's impossible to -- without a lift in the products business, no.

It's almost impossible because of the substantial reduction in billable hours and time.

I don't know what you'll lose in this quarter if it's 7, 8, 9 days.

I mean, it's a pretty big number.

So there's just no way to really make up for that sequentially.

Yes, and I would say -- Tobey, this is Bob, even when all of our folks are fully ramped up, you're still going to see a sequential drop Q2 to Q3, for the reason Gary just articulated as well, the fact that Q2 is a seasonally high quarter for products revenue because there's a lot of renewal activity that happens during that quarter.

Okay, last question for me.

Bob, do you have any preliminary thoughts on what tax law changes could mean for your book and cash taxes?

Yes.

I think, Tobey, we've done some internal analysis, but I would prefer to wait until we see where everything settles down, and at that point we'll come out with a more formalized point of view.

And now to the line of Tim McHugh from William Blair.

It's Stephen Sheldon, on for Tim.

I guess, first, the acceleration you saw in Hay Group.

I guess, how should we think about the underlying factors driving that.

Would you attribute it mostly to hiring, or are you generally seeing clients more willing to spend towards improving their talent strategy and generally getting more comfortable with the value you provide there?

I don't -- look, I don't -- we have a -- look, we have a new leader in the business.

That has had an impact for sure, no doubt about it.

But the team that we have is really, really good.

And so we have tried to push, over the last several quarters, to orient ourselves towards more impactful, larger assignments.

Secondly, we've try to push the organization towards a solutions mentality.

And so I would, actually -- I would attribute it to those things, obviously to the extent that you can develop talent from within or augment from the outside, that's a big plus.

But I don't think there's been enough time to really put points on the board.

And so I would attribute to those other 3 things than kind of this new talent per se.

Okay, that's helpful.

And then the sequential jump in absolute revenue in Futurestep.

As we think about 3Q and kind of going forward, would you view the absolute revenue contribution this quarter as kind of being sustainable?

And then also, I guess, during the quarter itself, what was the breakdown between kind of trends in RPO versus professional search?

Yes, so the -- I would say, if you go back and you look at historical patterns in Futurestep, the third quarter is generally flat or even down a little from second quarter, again, because of the year-end holidays and we would expect that same pattern to exist this year.

If you go in and look at the business, the business is roughly 45% single search, 55% RPO.

And now to the line of Greg Mendez from Baird.

This is Greg, on for Mark Marcon.

I guess, first, if we look at Executive Search, performed really well, nice pickup in productivity, even with consultant additions, you're still adding and they're still ramping.

So just thinking, how are you thinking about productivity ramping over the next couple of quarters?

I mean, can we get back to like $1.4 million, $1.5 million, just any thoughts around how that's -- where you think that goes?

Well, I think, look, if things play out the way they -- it appears right now, you're at a point where wages will be rising.

Wages rising is a good thing for everybody.

But I would say that -- I would hope that we could look at that at more like $1.4 million, maybe $1.5 million, I mean, why not.

So, yes, I would tend to -- and I think this quarter we were like $1.3 million, something like that, yes, $1.3 million.

So I would -- I think you could [see yourself] to, for sure, like $1.4 million.

And possibly, I think that -- to the more that we integrate ourselves as one rather than being 3 or 6 or 9, I think if we integrate ourselves as one firm, those are not just possibilities, it becomes a reality.

Great.

Also, Futurestep, the new awards this quarter were really strong.

I mean, how does the pipeline look, as we look out for the next couple of quarters, I mean, is it still robust, still a lot of opportunity nationally, with that being early stages, how should we think about that?

Yes, I think the pipeline remains pretty strong.

I would say, and we've seen this in the past when Byrne has a new business -- Futurestep has a new business that it wins, the maturity or the sort of advanced stage of the pipeline changes a little bit.

So the dollar value remains at a high level, but the maturity or the stage of completion of the proposals is probably a little bit earlier.

Okay, got it.

And then within Hay Group, new business is trending strong, it seems like that --, and that's continuing into October.

How's that -- when we think about the North American business, are you seeing improvement in the trends there?

We have.

In terms of the new business, we've certainly seen -- we've got some nice wins, high 6-figure, 7-figure wins, particularly around M&A and talent development.

So that's -- I think that overall, as we continue to move the portfolio hopefully towards bigger assignments, that obviously changes the -- it changes everything, the value proposition, it changes the economics as well.

Great.

And then just quickly, the last question.

Europe sounds like it was doing really well.

Did that strength -- I mean, last quarter, you noted the U.K. was still holding up pretty well despite what was going on with Brexit, did that continue into this quarter, too?

It did.

The U.K. is the flagship of the company.

We've got 750 people there, the business is outstanding.

That business performed, again, incredibly well in the quarter.

And now to the line of Marc Riddick from Sidoti.

I wanted to touch on the -- it maybe just piggybacks a little bit from your comments about the U.K. But I wanted to touch a little bit on the strength of financial services.

Clearly, there was strength across the board, certainly and sequentially, pretty much all the areas in high single to low double-digits.

But I wanted to touch a little bit on the financial services and what was driving that.

And it seems as though the U.K. was part of that, but just wondered if you could delve a little deeper into the growth in the financial services space.

It was.

Europe was clearly part of it, not only the U.K. I would say that we have seen, probably as you would expect, I mean, good activity in commercial banking, consumer banking, wealth management, insurance, those have all been good, as well as private equity.

So when you look at the sectors within financial services, you're going to see pretty strong across the sectors.

And from a geographic perspective, you're also going to find it relatively balanced in terms of growth.

And then, just maybe if you could touch a little bit on the talent acquisition, maybe if there are any differences as to the sources of talent acquisition that you're looking at, maybe if the -- the pipeline there, does it look any different than it does maybe 6 to 9 months ago, or if you're just continuing to see folks that are kind of gravitating toward you from all phases?

It really hasn't changed since the last call, but it certainly has changed over several quarters, no doubt about that.

And so we are an organizational consulting firm and as we go to continue to integrate ourselves around one firm, we have seen people from strategy backgrounds, the big 4, some of the branded HR providers, we've certainly seen an uptick in activity from those sources.

Okay, great.

And then, one last thing.

You've touched a little bit on the -- being in the early phases of the new account program in maybe the past call or 2 and sort of touched on some of those things.

And I was wondering if you could give a bit of an update as to sort of -- certainly, the numbers would indicate that things are going well there, but I was wondering if you could give a little greater detail on that progress.

It's -- today it's about 20% of the firm, 20% of the portfolio.

When you look at world-class professional services companies you'd find, it would be anywhere from 20% to 30%.

So we certainly -- we would not see it at 30%.

But we would see it in the low 20s in terms of percent of the overall portfolio.

I think we made really good progress in the quarter.

I'm not satisfied, but I'll just -- one of the contributors to that large Futurestep new business orders in the quarter was from a marquee account.

And it's just amazing to -- for me to kind of contemplate how much impact we can have with some of these clients versus, say, a decade ago.

It appears there are no further questions.

Mr. Burnison, please continue.

Okay.

Again, I want to say thank you to our colleagues.

Obviously, thank you to our shareholders as well and to our board.

Special time of the year, and so I'd pass on seasons greetings to everybody, and we look forward to speaking to you in the new calendar year.

Thanks, everybody.

Thank you.

And ladies and gentlemen, this conference will be available for replay for 1 week starting today at 6:30 p.m.

Eastern standard time, running through the day of December 13, ending at midnight.

You may access the AT&T Executive Playback service by dialing 1 (800) 475-6701 and entering the access code of 438145.

International participants may dial (320) 365-3844.

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

And that does conclude our conference for today.

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