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Korn Ferry announces Q3 results

Korn Ferry has announced third quarter results with record fee revenue of $242.2 million and adjusted diluted earnings per share of $0.43.

"Korn Ferry had a strong third quarter, with year-over-year growth across all lines of business and within every region. We generated the strongest topline results in the company's history, representing a 21% year-over-year increase in fee revenue, or 14% adjusting for the PDI Ninth House acquisition, on a constant currency basis, generating higher earnings per share," said Gary D. Burnison, CEO, Korn Ferry. "In today's environment, global organizations must create growth opportunities that far outstrip the potential of the global economy - ultimately through people. Validated by our results, Korn Ferry's capabilities are being increasingly embraced by clients to unlock growth through innovative talent strategies."

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

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Fee revenue

$       242.2

$     202.0

$     708.6

$      584.9

Total revenue

$       251.0

$     210.3

$     734.8

$      611.1

Operating income

$         27.3

$         8.7

$       67.1

$        28.5

Operating margin

11.3%

4.3%

9.5%

4.9%

Net income

$         21.3

$         9.5

$       51.5

$        21.1

Basic earnings per share

$         0.44

$       0.20

$       1.07

$        0.45

Diluted earnings per share

$         0.43

$       0.20

$       1.05

$        0.44

 

 

 

 

EBITDA Results (a):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

EBITDA

$         35.2

$        17.7

$       95.2

$        47.0

EBITDA margin

14.5%

8.8%

13.4%

8.0%

 

 

Adjusted Results (b):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Operating income

$         27.3

$        16.2

$       75.7

$        51.5

Operating margin

11.3%

8.0%

10.7%

8.8%

EBITDA (a)

$         35.2

$        25.2

$     103.8

$        70.0

EBITDA margin (a)

14.5%

12.5%

14.6%

12.0%

Net income

$         21.3

$        15.0

$       57.3

$        37.2

Basic earnings per share

$         0.44

$        0.32

$       1.19

$        0.79

Diluted earnings per share

$         0.43

$        0.31

$       1.17

$        0.78

(a) 

EBITDA refers to earnings before interest, taxes, depreciation and amortization.  Adjusted EBITDA further adjusts EBITDA to exclude restructuring charges (net of recoveries), integration/acquisition and separation costs.  EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliation). 

 

(b)

Adjusted results are non-GAAP financial measures that exclude the following (see attached reconciliations):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Restructuring charges, net of recoveries

$             —

$          4.4

$         3.7

$         19.9

Integration/acquisition costs

$             —

$          2.5

$         0.4

$           2.5

Separation costs

$             —

$          0.6

$         4.5

$           0.6

Fee revenue was $242.2 million in Q3 FY'14, an increase of $40.2 million, or 21% on a constant currency basis (20% at actual exchange rates), compared to Q3 FY'13, primarily due to increases of $21.1 million, $13.5 million and $5.6 million in fee revenue in Leadership & Talent Consulting, Executive Recruitment and Futurestep, respectively.  The overall fee revenue increase was driven by fee revenue growth in the technology, financial services and life science/healthcare sectors.  Adjusting for the PDI Ninth House acquisition which was completed on December 31, 2012, fee revenue increased 14% on a constant currency basis (12% at actual exchange rates) in Q3 FY'14 compared to the year-ago quarter to $227.0 million in Q3 FY'14 from $202.0 million in Q3 FY'13.

Compensation and benefit expenses were $162.2 million in Q3 FY'14, an increase of $22.4 million, or 16%, compared to Q3 FY'13.  Adjusting for the PDI Ninth House acquisition, compensation and benefit expenses increased 9% in Q3 FY'14 compared to the year-ago quarter to $152.8 million in Q3 FY'14 from $139.8 million in Q3 FY'13.  The increase was due to an increase in performance related bonus expense and salaries and related payroll taxes.  The increase in the performance related bonus expense resulted from an increase in fee revenue and profitability.  The increase in salaries and related payroll taxes was due to an 11% increase in the average headcount in Q3 FY'14 compared to Q3 FY'13.

General and administrative expenses were $37.2 million in Q3 FY'14, an increase of $1.3 million, or 4%, compared to Q3 FY'13.  Adjusted for the PDI Ninth House acquisition, general and administrative expenses decreased 3% in Q3 FY'14 compared to the year-ago quarter to $35.0 million in Q3 FY'14 from $35.9 million in Q3 FY'13.  The decrease was primarily due to a decrease in integration/acquisition costs incurred in Q3 FY'13 as a result of the acquisition of PDI Ninth House, partially offset by an increase in legal and other professional service fees and bad debt expense.

Adjusted EBITDA was $35.2 million in Q3 FY'14, an increase of $10.0 million, or 40%, compared to Q3 FY'13.  Adjusted EBITDA margin was 14.5% and 12.5% in Q3 FY'14 and Q3 FY'13, respectively. 

On a GAAP basis, operating income was $27.3 million in Q3 FY'14, an increase of $18.6 million, or 214%, compared to Q3 FY'13 resulting in a margin of 11.3% in the current quarter compared to 4.3% in the year-ago quarter. 

Balance Sheet and Liquidity

Cash and marketable securities were $377.2 million at January 31, 2014, compared to $366.0 million at April 30, 2013.  Cash and marketable securities include $115.1 million held in trust for deferred compensation plans at January 31, 2014, compared to $98.0 million at April 30, 2013.  Cash and marketable securities increased by $11.2 million from April 30, 2013, primarily attributable to cash provided by operating activities, partially offset by Q1 FY'14 payments of FY'13 annual bonuses and contingent consideration paid to selling shareholders of PDI Ninth House.

Results by Segment

Selected Executive Recruitment Data (dollars in millions)

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Fee revenue

$ 144.0

$ 130.5

$ 420.7

$ 385.7

Total revenue

$ 149.7

$ 135.7

$ 437.5

$ 402.0

Operating income

$   31.6

$   21.6

$   88.0

$   54.5

Operating margin

22.0%

16.6%

20.9%

14.1%

 

 

 

 

Ending number of consultants

429

390

429

390

Average number of consultants

421

396

414

395

Engagements billed

2,975

2,670

6,384

5,944

New engagements (a)

1,233

1,138

3,749

3,519

 

 

 

 

EBITDA Results (b):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

EBITDA

$  33.6

$  24.4

$  94.8

$  61.8

EBITDA margin

23.3%

18.7%

22.5%

16.0%

 

 

Adjusted Results (c):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Operating income

$  31.6

$  22.2

$  89.3

$  65.8

Operating margin

22.0%

17.0%

21.2%

17.1%

EBITDA (b)

$  33.6

$  25.0

$  96.1

$  73.1

EBITDA margin (b)

23.3%

19.1%

22.8%

19.0%

(a)

Represents new engagements opened in the respective period.

 

(b)  

EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliations).

 

(c)

Adjusted results are non-GAAP financial measures that exclude the following (see attached reconciliations):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Restructuring charges, net of recoveries

$          —

$           —

$         1.3

$         10.7

Separation costs

$          —

$          0.6

$          —

$           0.6

Executive Recruitment

Fee revenue was $144.0 million in Q3 FY'14, an increase of $13.5 million, or 12% on a constant currency basis (10% at actual exchange rates), compared to Q3 FY'13.  The increase in fee revenue was driven by increases in all regions with the largest increases in North America and Europe.  This increase is primarily attributed to an 11% increase in the number of executive recruitment engagements billed. 

Adjusted EBITDA was $33.6 million during Q3 FY'14, an increase of $8.6 million, or 34%, compared to Q3 FY'13.  Adjusted EBITDA margin was 23.3% in Q3 FY'14 compared to 19.1% in Q3 FY'13.  This increase is primarily attributed to the $13.5 million increase in fee revenue in Q3 FY'14 as compared to Q3 FY'13, partially offset by an increase of $4.7 million in compensation and benefit expenses driven primarily by an increase in performance related bonus expense and salaries and related payroll taxes partially offset by a decline in employee insurance costs.  

On a GAAP basis, operating income was $31.6 million in Q3 FY'14, an increase of $10.0 million, or 46% ($9.4 million, or 42% on an adjusted basis), compared to Q3 FY'13, resulting in an operating margin of 22.0% in the current quarter compared to 16.6% in the year-ago quarter. 

Selected Leadership & Talent Consulting Data (dollars in millions)

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Fee revenue

$        62.3

$       41.2

$     188.4

$      108.0

Total revenue

$        64.3

$       43.1

$     194.6

$      113.5

Operating income

$          5.7

$       (2.8)

$       17.0

$          7.7

Operating margin

9.1%

(6.8)%

9.0%

7.1%

 

 

 

 

Ending number of consultants (a)

125

149

125

149

Staff utilization (b)

61%

58%

66%

63%

 

 

 

 

EBITDA Results (c):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

EBITDA

$          8.9

$       (1.0)

$       26.4

$        11.2

EBITDA margin

14.5%

(2.4)%

14.1%

10.3%

 

 

Adjusted Results (d):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Operating income

$          5.7

$         1.6

$       18.2

$        12.8

Operating margin

9.1%

4.0%

9.6%

11.9%

EBITDA (c)

$          8.9

$         3.4

$       27.6

$        16.3

EBITDA margin (c)

14.5%

8.4%

14.7%

15.1%

 

 

 

 

(a)  

Represents number of employees originating consulting services.  FY'14 and FY'13 include approximately 69 consultants and 92 consultants, respectively, from the prior year acquisitions.

 

(b)

Calculated by dividing the number of hours of our full-time LTC professional staff, who recorded time to an engagement during the period, by the total available working hours during the same period.

 

(c)

EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliations).

 

(d)

Adjusted results are non-GAAP financial measures that exclude the following (see attached reconciliations):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Restructuring charges, net of recoveries

$          —

$         4.4

$        1.2

$          5.1

Leadership & Talent Consulting

Fee revenue was $62.3 million in Q3 FY'14, an increase of $21.1 million, or 52% on a constant currency basis (51% at actual exchange rates), from the year-ago quarter.  Adjusting for the PDI Ninth House acquisition, fee revenue increased 15% on a constant currency basis (14% at actual exchange rates) in Q3 FY'14 compared to the year-ago quarter to $47.1 million in Q3 FY'14 from $41.2 million in Q3 FY'13. 

Adjusted EBITDA was $8.9 million during Q3 FY'14, an increase of $5.5 million, or 162%, compared to Q3 FY'13.  Adjusted EBITDA margin was 14.5% compared to 8.4% in Q3 FY'13.  The increase in adjusted EBITDA was due to an increase in fee revenue, partially offset by an increase in compensation and benefit expense and general and administrative expenses, all primarily related to the acquisition of PDI Ninth House.

On a GAAP basis, operating income was $5.7 million in Q3 FY'14, an increase of $8.5 million, compared to Q3 FY'13.  Operating margin was 9.1% in the current quarter, a significant improvement from negative operating margin of 6.8% in the year-ago quarter.  The increase in operating income was driven by an increase in fee revenue and a decrease in restructuring expense of $4.4 million that took place in Q3 FY'13 as a result of the PDI Ninth House acquisition, offset by an increase in compensation and benefit expense.

Selected Futurestep Data (dollars in millions)

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Fee revenue

$ 35.9

$ 30.3

$   99.5

$  91.2

Total revenue

$ 37.0

$ 31.5

$ 102.7

$  95.6

Operating income

$   3.9

$   3.7

$     9.0

$    7.1

Operating margin

10.9%

12.3%

9.1%

7.8%

 

 

 

 

Engagements billed

1,242

1,062

2,592

2,487

New engagements (a)

584

513

1,829

1,784

 

 

 

 

EBITDA Results (b):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

EBITDA

$   4.4

$  4.1

$  10.9

$    8.1

EBITDA margin

12.2%

13.3%

10.9%

8.9%

 

 

 

 

Adjusted Results (c):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Operating income

$   3.9

$   3.7

$   10.2

$   10.2

Operating margin

10.9%

12.3%

10.2%

11.2%

EBITDA (b)

$   4.4

$   4.1

$   12.1

$   11.2

EBITDA margin (b)

12.2%

13.3%

12.1%

12.3%

(a)  

Represents new engagements opened in the respective period.

 

(b)  

EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures (see attached reconciliations).

 

(c)  

Adjusted results are non-GAAP financial measures that exclude the following (see attached reconciliations):

Third Quarter

Year to Date

FY'14

FY'13

FY'14

FY'13

Restructuring charges, net of recoveries

$         —

$         —

$       1.2

$       3.1

Futurestep

Fee revenue was $35.9 million in Q3 FY'14, an increase of $5.6 million, or 20% on a constant currency basis (18% at actual exchange rates), compared to the year-ago quarter.  The increase in fee revenue was driven by a 17% increase in the number of engagements billed in Q3 FY'14 compared to Q3 FY'13 driven by large recruitment process outsourcing contracts entered into in the prior quarter which began to be delivered in the current quarter and non-executive and other professional recruitment.

Adjusted EBITDA was $4.4 million during Q3 FY'14, an increase of $0.3 million, or 7%, compared to Q3 FY'13.  Adjusted EBITDA margin decreased to 12.2% in Q3 FY'14 compared to 13.3% in Q3 FY'13.  The increase in adjusted EBITDA was primarily due to an increase in fee revenue of $5.6 million, a decrease of $0.2 million in general and administrative expenses, partially offset by an increase in compensation and benefit expenses of $4.7 million and an increase in cost of services expense of $0.9 million.  The increase in compensation and benefits expenses is primarily driven by an increase in staffing to accommodate a number of larger recruitment process outsourcing contracts won by the Company in the current fiscal year.

On a GAAP basis, operating income was $3.9 million in Q3 FY'14, an increase of $0.2 million, compared to Q3 FY'13 resulting in an operating margin of 10.9% in the current quarter compared to 12.3% in the year-ago quarter. 

Outlook         

Looking ahead to Q4 FY'14, assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, fee revenue is expected to be in the range of $240 million to $250 million in Q4 FY'14 and diluted earnings per share are likely to be in the range of $0.35 to $0.41.

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