Korn Ferry International Announces Third Quarter Fiscal 2015 Results of Operations

LOS ANGELES, March 9, 2015 /PRNewswire/ -- Korn/Ferry International (NYSE: KFY), the preeminent authority on leadership and talent, today announced third quarter fee revenue of $249.5 million and diluted earnings per share of $0.46.

"I am pleased with the results of our fiscal third quarter, which includes top line growth of 7 percent year over year at constant currency," said Gary D. Burnison, CEO, Korn Ferry International. "As our recent acquisition of Pivot Leadership indicates, our firm is committed to creating the preeminent authority on leadership and talent, which includes deploying our capital to acquire the right intellectual property, top talent and solutions that help our clients propel their business." 

Financial Results
(dollars in millions, except per share amounts)

 

Fee revenue was $249.5 million in Q3 FY'15, an increase of $7.3 million, or 3.0% ($16.4 million, or 6.8% on a constant currency basis), compared to Q3 FY'14, primarily due to increases of $5.8 million and $2.1 million in fee revenue in Futurestep and Leadership & Talent Consulting, respectively, partially offset by a decrease of $0.6 million in Executive Recruitment.  The overall fee revenue increase was driven by fee revenue growth in certain of our major markets – industrial and life science/healthcare, partially offset by declines in technology and education/non-profit.

Compensation and benefit expenses were $164.7 million in Q3 FY'15, an increase of $2.5 million, or 1.5%, compared to the year-ago quarter.  The increase was driven by higher performance related bonus expense resulting from an increase in fee revenue and profitability as a result of the continued adoption of our strategy, including referrals between lines of business.  Salaries and related payroll taxes were also higher due to an increase in the average headcount in Executive Recruitment and Futurestep in Q3 FY'15 compared to Q3 FY'14, reflecting our continued growth-related investments back into our business.  These increases were partially offset by a decline in the fair value of vested amounts owed under certain deferred compensation plans.

General and administrative expenses were $36.8 million in Q3 FY'15, a decline of $0.4 million, or 1.1%, from Q3 FY'14, mainly due to a decrease in marketing and business development costs and premise and office expenses of $1.0 million and $1.0 million, respectively.  These declines were partially offset by an increase in professional fees, primarily to drive our strategic initiatives and acquisition related costs.

Adjusted EBITDA was $39.1 million in Q3 FY'15, an increase of $3.9 million, or 11.1%, compared to Q3 FY'14.  Adjusted EBITDA margin was 15.7% and 14.5% in Q3 FY'15 and Q3 FY'14, respectively.  The increase in Adjusted EBITDA was primarily driven by $7.3 million in higher fee revenue and a $0.8 million decline in general and administrative expenses (excluding acquisition costs of $0.4 million), partially offset by an increase in compensation expense of $2.5 million and a decline in other income of $2.6 million.  The decrease in other income was due in large part to the decline in the market value of mutual funds held in trust for settlement of our obligations under certain deferred compensation plans.

Operating income was $32.9 million in Q3 FY'15 and $27.3 million in Q3 FY'14 resulting in an operating margin of 13.2% in Q3 FY'15 compared to 11.3% in the year-ago quarter.  Operating income was impacted by all of the above items with the exception of other income, which is not included in operating income.

Balance Sheet and Liquidity

Cash and marketable securities were $453.3 million at January 31, 2015, compared to $468.3 million at April 30, 2014.  Cash and marketable securities include $133.7 million held in trust for deferred compensation plans at January 31, 2015, compared to $116.2 million at April 30, 2014.  As of January 31, 2015 and April 30, 2014, we held $160.7 million and $193.3 million, respectively, of cash and cash equivalents in foreign locations.  Cash and marketable securities decreased by $15.0 million from April 30, 2014, primarily due to Q1 FY'15 payments of FY'14 annual bonuses, partially offset by cash provided by operating activities.

The Company declared its first ever quarterly dividend of $0.10 per share on March 4, 2015, payable on April 9, 2015 to stockholders of record on March 25, 2015.

Results by Segment
Selected Executive Recruitment Data
(dollars in millions)

 

Executive Recruitment

Fee revenue was $143.4 million in Q3 FY'15, a decrease of $0.6 million, or 0.4% (an increase of $5.1 million, or 3.5% on a constant currency basis), compared to Q3 FY'14.  The overall decrease in fee revenue was primarily attributable to a 1.9% decrease in the weighted-average fees billed per engagement, partially offset by an increase of 1.5% in the number of engagements billed in Q3 FY'15 compared to Q3 FY'14.  On a regional basis, fee revenue decreased in EMEA by $2.3 million, or 5.9% (an increase of $1.0 million, or 2.6 % on a constant currency basis), partially offset by increases in North America of $0.8 million, or 1.0% ($1.4 million, or 1.8% on a constant currency basis), Asia Pacific of $0.7 million, or 3.5% ($1.6 million, or 7.9% on a constant currency basis), and South America of $0.2 million, or 2.7% ($1.1 million, or 14.7% on a constant currency basis).   

Adjusted EBITDA was $35.1 million and $33.6 million during Q3 FY'15 and Q3 FY'14, respectively.  The increase in Adjusted EBITDA was driven by a decrease in compensation and benefits expense of $2.0 million, partially offset by a decline in fee revenue of $0.6 million.  The decrease in compensation and benefit expense was primarily due to a decrease in performance related bonus expense of $2.4 million, as a result of lower fee revenues, and a decline in the fair value of vested amounts owed under certain deferred compensation plans.

Operating income was $33.6 million in Q3 FY'15, an increase of $2.0 million, or 6.3%, compared to Q3 FY'14, resulting in an operating margin of 23.4% in the current quarter compared to 22.0% in the year-ago quarter.  Operating income was impacted by all of the above items.

Selected Leadership & Talent Consulting Data
(dollars in millions)

Leadership & Talent Consulting

Fee revenue was $64.4 million in Q3 FY'15, an increase of $2.1 million, or 3.4% ($3.6 million, or 5.8% on a constant currency basis), from the year-ago quarter.  This increase is primarily attributed to an increase in product revenue of $1.7 million in Q3 FY'15 compared to Q3 FY'14 with the remaining increase being generated by consulting fee revenue.           

Adjusted EBITDA was $11.7 million during Q3 FY'15, an increase of $2.8 million, or 31.5%, compared to Q3 FY'14.  Adjusted EBITDA margin was 18.3% in Q3 FY'15 compared to 14.5% in Q3 FY'14 due to an increase in fee revenue of $2.1 million and a decrease in cost of services of $1.2 million, partially offset by an increase in compensation and benefit expense of $0.9 million.  The decrease in cost of services primarily relates to an increased focus on the utilization of internal resources versus contractors.  In addition, the increase in Adjusted EBITDA margin was due to the change in revenue mix with a greater proportion of fee revenue for Q3 FY'15 being derived from product revenue, which yields higher margins than consulting fee revenue.  The increase in compensation and benefit expenses was due to an increase in performance related bonus expense of $2.5 million resulting from higher fee revenue and profitability, and the continued adoption of the Company's integrated go-to market strategy across all three of our lines of businesses, offset by a decrease in salaries and related payroll taxes of $1.4 million due to a 3% decrease in average headcount for Q3 FY'15 compared to Q3 FY'14.

Operating income was $8.6 million in Q3 FY'15, an increase of $2.9 million compared to the year-ago quarter, resulting in an operating margin of 13.3% in the current quarter compared to 9.1% in the year-ago quarter.  The increase in operating income was due to the factors impacting Adjusted EBITDA as discussed above.

Selected Futurestep Data
(dollars in millions)

Futurestep

Fee revenue was $41.7 million in Q3 FY'15, an increase of $5.8 million, or 16.2% ($7.7 million, or 21.4% on a constant currency basis), compared to the year-ago quarter.  The increase in fee revenue was driven by a 23.5% increase in the weighted average fees billed per engagement offset by a 5.7% decrease in the number of engagements billed in Q3 FY'15 compared to Q3 FY'14. 

Adjusted EBITDA was $6.0 million during Q3 FY'15, an increase of $1.6 million, or 36.4%, compared to Q3 FY'14, due primarily to the increase in fee revenue of $5.8 million, partially offset by an increase in compensation and benefit expenses of $3.7 million due to an increase in salaries and related payroll taxes and performance related bonus expense, both related to an increase in profitability and an 8% increase in average headcount as well as the continued adoption of our strategy, including referrals between lines of business.

Operating income was $5.8 million in Q3 FY'15, an increase of $1.9 million, compared to Q3 FY'14, resulting in an operating margin of 13.8% in the current quarter compared to 10.9% in the year-ago quarter.  The increase in operating income was due to the same factors impacting Adjusted EBITDA.

Outlook                                                        

The current strong U.S. dollar will negatively impact our FY'15 fourth quarter year-over-year and quarter sequential revenue growth.  Foreign currencies weakened throughout the third quarter, negatively impacting our third quarter year-over-year fee revenue growth by approximately $9 million.  Our Q4 FY'15 outlook was prepared using current translation rates, which reflect the continuing strength of the U.S dollar.  As we expect the U.S. dollar to remain strong throughout the fourth quarter, our FY'15 fourth quarter fee revenue outlook reflects the negative impact we experienced in the third quarter as well as further additional downward pressure of approximately $4 - $5 million. 

The acquisition of Pivot Leadership, which closed on March 1, 2015, is expected to contribute approximately $2 million of fee revenue in Q4 FY'15 with breakeven earnings results.  On a run-rate basis, Pivot Leadership is expected to contribute approximately $23 million of annual fee revenue with an Adjusted EBITDA margin of approximately 14% to 15%.

Assuming worldwide economic conditions and financial markets remain where they are currently and considering the effect of foreign exchange rates as discussed above, fee revenue is expected to be in the range of $255 million to $265 million in Q4 FY'15, and diluted earnings per share are likely to be in the range of $0.44 to $0.50.

Earnings Conference Call Webcast

The earnings conference call will be held today at 4:30 PM (EDT) and hosted by CEO Gary Burnison, CFO Robert Rozek and SVP Finance Gregg Kvochak.  The conference call will be webcast and available online at www.kornferry.com, accessible through the Investor Relations section.  We will also post to this section of our website earnings slides, which will accompany our webcast, and other important information, and encourage you to review the information that we make available on our website.

About Korn Ferry

Korn Ferry is the preeminent authority on leadership and talent.  For decades, clients have trusted us to recruit leaders throughout the world.  Today we are their partner in designing strategies to accelerate business outcomes through talent.  For more information, visit www.kornferry.com.

Forward-Looking Statements

Statements in this press release and our conference call that relate to future results and events ("forward-looking statements") are based on Korn Ferry's current expectations.  These statements, which include words such as "believes", "expects" or "likely" include references to our outlook.  Readers 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 that are beyond the control of Korn Ferry.  The potential risks and uncertainties include those relating to competition, the dependence on attracting and retaining qualified and experienced consultants, our ability to successfully integrate acquired businesses, maintaining our brand name and professional reputation, potential legal liability, the portability of client relationships, global and local political or economic developments in or affecting countries where we have operations, currency fluctuations in our international operations, risks related to the growth, alignment of our cost structure with our growth, restrictions imposed by off-limits agreements, reliance on information processing systems, cyber security vulnerabilities, limited protection of our intellectual property, our ability to enhance and develop new technology, our ability to develop new products and services, consolidation of industries we serve, our ability to successfully recover from a disaster or other business continuity problems, changes in our accounting estimates/assumptions, impairment of goodwill and other intangible assets, deferred tax assets, seasonality, our ability to successfully rationalize our cost structure and employment liability risk.  For a detailed description of risks and uncertainties that could cause differences, please refer to Korn Ferry's periodic filings with the Securities and Exchange Commission.  Korn Ferry disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Use of Non-GAAP Financial Measures

This press release contains financial information calculated other than in accordance with U.S.  Generally Accepted Accounting Principles ("GAAP").  In particular, it includes:

• adjusted net income, adjusted to exclude restructuring charges, integration and acquisition costs and certain separation costs, net of income tax effect;
• adjusted basic and diluted earnings per share, adjusted to exclude restructuring charges, integration and acquisition costs and certain separation costs, net of income tax effect;
• constant currency amounts that represent the outcome that would have resulted had exchange rates in the reported period been the same as those in effect in the comparable prior year period;
• EBITDA, or earnings before interest, taxes, depreciation and amortization and EBITDA margin; and
• adjusted EBITDA, which is EBITDA further adjusted to exclude restructuring charges, integration and acquisition costs and certain separation costs, and adjusted EBITDA margin.

This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial information determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Management believes the presentation of non-GAAP financial measures in this press release provides meaningful supplemental information regarding Korn Ferry's performance by excluding certain charges and other items that may not be indicative of Korn Ferry's ongoing operating results.  The use of these non-GAAP financial measures facilitate comparisons to Korn Ferry's historical performance.  Korn Ferry includes these non-GAAP financial measures because management believes they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its evaluation of Korn Ferry's ongoing operations and financial and operational decision-making.  In the case of constant currency amounts, management believes the presentation of such information provides meaningful supplemental information regarding Korn Ferry's performance as excluding the impact of exchange rate changes on Korn Ferry's financial performance allows investors to make more meaningful period-to-period comparisons of the Company's operating results, to better identify operating trends that may otherwise be masked or distorted by exchange rate changes and to perform related trend analysis, and provides a higher degree of transparency of information used by management in its evaluation of Korn Ferry's ongoing operations and financial and operational decision-making.

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SOURCE Korn Ferry