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Korn/Ferry International announces Q1 2015 fee revenue of $251.2m

Including such costs, diluted earnings per share was $0.29 in the three months ended July 31, 2014.

“I’m pleased with Korn Ferry’s performance during the quarter and our continued profitability. I am especially proud that all three service lines showed growth during the quarter resulting in a fee revenue increase of 10%, with an adjusted diluted earnings per share of $0.43, up 30% year over year,” said Gary D. Burnison, CEO of Korn Ferry. “The needs of global organizations are rapidly changing. While finding and recruiting the right executives is critical, companies are also seeking our expertise and offerings to help redefine their business through talent.”

Fee revenue was $251.2 million in Q1 FY’15, an increase of $22.8 million, or 10.0% (8.9% on a constant currency basis), compared to Q1 FY’14, primarily driven by an $11.8 million, $7.5 million, and a $3.5 million increase in fee revenue in Executive Recruitment, Futurestep and Leadership & Talent Consulting, respectively. The overall fee revenue increase was driven by fee revenue growth in all of our major markets - industrial, life science/healthcare, technology, financial services, and consumer.

Compensation and benefit expenses were $169.1 million in Q1 FY’15, an increase of $16.3 million, or 10.7%, compared to the year-ago quarter. The increase was due to an increase in performance related bonus expense resulting from the increase in fee revenue and profitability, as well as an increase in salaries and related payroll taxes. These increases were partially offset by $2.5 million in management separation charges recorded in Q1 FY’14 with no such charge in Q1 FY’15. The increase in salaries and related payroll taxes was due to an increase in the average headcount in Executive Recruitment and Futurestep in Q1 FY’15 compared to Q1 FY’14, reflecting our continued growth-related investments back into our business.

General and administrative expenses were $37.4 million in Q1 FY’15, a decrease of $2.5 million, or 6.3%, from Q1 FY’14, primarily due to a decrease of $2.5 million in legal and other professional fees, a decrease in marketing and business development expenses of $1.5 million, and a decrease in integration/acquisition costs of $0.4 million, partially offset by an increase of $0.8 million in foreign exchange loss in Q1 FY’15 compared to the year-ago quarter.

As previously disclosed, during Q1 FY’15, the Company took actions to rationalize its cost structure as a result of efficiencies obtained from prior year technology investments that enabled further integration of our legacy business and our recent acquisitions as well as other cost saving initiatives. As a result, the Company recorded net restructuring charges of $9.9 million in Q1 FY’15 compared to restructuring charges of $3.7 million in Q1 FY’14. Adjusted EBITDA was $37.9 million in Q1 FY’15, an increase of $6.0 million, or 18.8%, compared to Q1 FY’14. Adjusted EBITDA margin was 15.1% and 14.0% in Q1 FY’15 and Q1 FY’14, respectively.

On a GAAP basis, operating income was $18.6 million in Q1 FY’15 and $16.6 million in Q1 FY’14 resulting in an operating margin of 7.4% in the current quarter compared to 7.3% in the year-ago quarter. Operating income was impacted by all of the above items, including an increase in depreciation and amortization of $0.9 million in Q1 FY’15 compared to Q1 FY’14.

Balance Sheet and Liquidity

Cash and marketable securities were $371.6 million at July 31, 2014, compared to $468.3 million at April 30, 2014. Cash and marketable securities include $116.7 million held in trust for deferred compensation plans at July 31, 2014, compared to $116.2 million at April 30, 2014. Cash and marketable securities decreased by $96.7 million from April 30, 2014, primarily due to the payment of bonuses earned in fiscal 2014 and paid during the first quarter of fiscal 2015, partially offset by cash provided by operating activities.

Executive Recruitment

Fee revenue was $148.4 million in Q1 FY’15, an increase of $11.8 million, or 8.6% (7.6% on a constant currency basis), compared to Q1 FY’14. The increase in fee revenue was driven by increases in North America of $8.2 million or 11.1% and Europe of $5.9 million or 17.2%, partially offset by decreases in Asia Pacific of $1.6 million or 7.6% and Latin America of $0.7 million or 10.0%. This overall increase is primarily attributed to an 8.7% increase in the number of executive recruitment engagements billed in Q1 FY’15 compared to the Q1 FY’14.

Adjusted EBITDA was $31.9 million and $31.8 million during Q1 FY’15 and Q1 FY’14, respectively. Adjusted EBITDA remained flat year over year in spite of the increase in fee revenue primarily due to an increase in compensation and benefits expense of $9.5 million associated with the investments in headcount to grow our business (an increase in the average headcount of 85 positions), as well as increased demand in our incentive compensation resulting from the continued adoption of our strategy, including referrals between lines of business. In addition, general and administrative expenses are up $1.9 million in Q1 FY’15 compared to Q1 FY’14, partially due to increased levels of business activity as well as other increases such as foreign exchange loss and premise and office costs.

On a GAAP basis, operating income was $24.2 million in Q1 FY’15, a decrease of $4.1 million, or 14.5%, compared to Q1 FY’14, resulting in an operating margin of 16.3% in the current quarter compared to 20.7% in the year-ago quarter. The decline in operating income was due to an increase in restructuring charges of $4.2 million as well as the factors impacting Adjusted EBITDA as discussed above.

Futurestep

Fee revenue was $39.2 million in Q1 FY’15, an increase of $7.5 million, or 23.7% (21.8% on a constant currency basis), compared to the year-ago quarter. The increase in fee revenue was driven by a 23.3% increase in the weighted average fees billed per engagement in Q1 FY’15 compared to Q1 FY’14 resulting from a 48% increase in fee revenue from recruitment process outsourcing and a 13% increase in professional recruitment.

Adjusted EBITDA was $5.3 million during Q1 FY’15, an increase of $0.6 million, or 12.8%, compared to Q1 FY’14, due primarily to the increase in fee revenue of $7.5 million, offset by an increase in compensation and benefit expenses of $5.4 million due to an increase in salaries and related payroll taxes and performance related bonus expense, both related to an increase in profitability and headcount as well as the continued adoption of our strategy, including referrals between lines of business. In addition, the use of outside contractors (cost of services expense) increased $1.1 million driven by the growth in our recruitment process outsourcing business and a decrease in other income of $0.6 million in Q1 FY’15 compared to the year-ago quarter.

On a GAAP basis, operating income was $3.5 million in Q1 FY’15, an increase of $1.0 million, compared to Q1 FY’14, resulting in an operating margin of 8.8% in the current quarter compared to 8.0% in the year-ago quarter. Operating income and operating margin for Q1 FY’15 were negatively impacted by a $0.2 million increase in restructuring charges as compared to Q1 FY’14, as well as the items from above, except other income.

Outlook

Assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, and factoring in the impact of the Q1 restructuring, fee revenue is expected to be in the range of $244 million to $254 million in Q2 FY’15 and diluted earnings per share are likely to be in the range of $0.42 to $0.48.

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