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Korn Ferry International reports record fee revenue of $255.7m for Q2

"I am very pleased with what Korn Ferry has accomplished.  We generated the strongest top line results in the company's history, up 8% year over year at constant currency, with strong earnings per share," said Gary D. Burnison, CEO, Korn Ferry.  "To be relevant and meaningful, global organizations are demanding a workforce that can innovate, with leaders who are extremely agile and can drive growth across borders.  While challenging, this environment is also creating opportunity for Korn Ferry, as our diversified offerings and approach are helping companies build the right teams, with the right talent, and linking business strategies to talent strategies."        

Fee revenue was $255.7 million in Q2 FY'15, an increase of $17.7 million, or 7.4% (8.1% on a constant currency basis), compared to Q2 FY'14, driven by an $8.9 million, $8.5 million, and a$0.3 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 – consumer, industrial, life science/healthcare, financial services and technology.

Compensation and benefit expenses were $174.7 million in Q2 FY'15, an increase of $13.4 million, or 8.3%, compared to the year-ago quarter.  The increase was due to an increase in performance related bonus expense resulting from the continued adoption of our strategy, including referrals between lines of business, resulting in an increase in fee revenue and profitability, as well as an increase in salaries and related payroll taxes.  Also contributing to the increase in compensation and benefit expenses was an increase in the use of outside contractors driven by the growth in our recruitment process outsourcing business in Q2 FY'15 compared to Q2 FY'14.  These increases were partially offset by $2.0 million in management separation costs incurred in Q2 FY'14 which were not incurred in Q2 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 Q2 FY'15 compared to Q2 FY'14, reflecting our continued growth-related investments back into our business.

General and administrative expenses were $30.1 million in Q2 FY'15, a decrease of $5.7 million, or 15.9%, from Q2 FY'14, mainly due to a $6.2 million insurance reimbursement received for legal fees incurred in prior periods and a decrease in marketing and business development expenses of $0.7 million.  This decline in general and administrative expenses was partially offset by an increase in professional fees, primarily to drive our strategic initiatives and unfavorable foreign currency rates that resulted in an impact of $1.3 million in the quarter.

Adjusted EBITDA was $44.0 million in Q2 FY'15, an increase of $7.3 million, or 19.9%, compared to Q2 FY'14.  Adjusted EBITDA margin was 17.2% and 15.4% in Q2 FY'15 and Q2 FY'14, respectively.  The increase in Adjusted EBITDA was driven by an increase in fee revenue of $17.7 million, and decreases of $5.7 million and $1.4 million in general and administrative expenses and cost of services, respectively, partially offset by an increase in compensation expense of $15.4 million (excluding certain prior year separation costs) and a decrease in other income of $1.9 million.

On a GAAP basis, operating income was $34.4 million in Q2 FY'15 and $23.2 million in Q2 FY'14 resulting in an operating margin of 13.5% in Q2 FY'15 compared to 9.7% in the year-ago quarter.  Operating income (including certain prior year separation costs) was impacted by all of the above items with the exception of other income, which is not included in GAAP operating income.

Balance Sheet and Liquidity

Cash and marketable securities were $400.1 million at October 31, 2014, compared to $468.3 million at April 30, 2014.  Cash and marketable securities include $135.6 million held in trust for deferred compensation plans at October 31, 2014, compared to $116.2 million at April 30, 2014.  Cash and marketable securities decreased by $68.2 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 and its Board endorse a balanced approach to capital allocation.   First, the Company's strategy has been to become the world's premier talent management firm by utilizing capital for investment in the Company's consultants and intellectual property, as well as the strategic acquisition of businesses perceived to be both accretive and in the best interests of the Company – acquisitions that produce a return superior to the Company's cost of capital. Management believes recent acquisitions have not only yielded such returns but have helped to create a stronger, broader, solution-rich firm that is less economically cyclical and more strategically relevant to its clients.

In addition, the Company is announcing today that the Board has adopted a dividend policy, reflecting an intention to distribute to our stockholders a regular quarterly cash dividend of$0.10 per share, commencing at the conclusion of the third quarter of FY'15.  The declaration and payment of dividends under the quarterly dividend program will be at the discretion of the Board and will depend upon many factors, including our earnings, capital requirements, financial conditions, the terms of our indebtedness and other factors our Board of Directors may deem to be relevant.

The Board has also approved an increase in the Company's stock repurchase program to an aggregate of $150 million.  Common stock may be repurchased from time to time in open market or privately negotiated transactions at the Company's discretion subject to market conditions and other factors.

Executive Recruitment

Fee revenue was $149.0 million in Q2 FY'15, an increase of $8.9 million, or 6.4% (7.1% on a constant currency basis), compared to Q2 FY'14.  The overall increase in fee revenue was primarily attributable to a 3.4% increase in the weighted-average fees billed per engagement and a 3.0% increase in the number of executive recruitment engagements billed in Q2 FY'15 compared to Q2 FY'14.  On a regional basis, fee revenue increased in North America by $7.5 million, or 10.0%, and Europe by $2.5 million, or 7.3%, partially offset by decreases in Asia Pacific of $0.6 million, or 2.8%, and Latin America of $0.5 million, or 5.6%.  

Adjusted EBITDA was $32.0 million and $30.7 million during Q2 FY'15 and Q2 FY'14, respectively.  The Adjusted EBITDA increase was driven by an $8.9 million increase in fee revenue offset by an increase in compensation and benefits expense of $6.2 million associated with the investments in headcount to grow our business, as well as increased incentive compensation resulting from the continued adoption of our strategy, including referrals between lines of business.  In addition, general and administrative expenses are up $1.5 million in Q2 FY'15 compared to Q2 FY'14, partially due to unfavorable exchange rates which had an impact of $1.3 million in the current quarter.

On a GAAP basis, operating income was $29.9 million in Q2 FY'15, an increase of $1.8 million, or 6.4%, compared to Q2 FY'14, resulting in an operating margin of 20.1% in both the current quarter and in the year-ago quarter.  All items having a significant impact on operating income have been discussed above in the discussion regarding Adjusted EBITDA.

Leadership & Talent Consulting

Fee revenue was $66.3 million in Q2 FY'15, an increase of $0.3 million, or 0.5% (0.9% on a constant currency basis), from the year-ago quarter.  This increase is primarily attributed to an increase in product revenue of $0.5 million in Q2 FY'15 compared to Q2 FY'14.     

Adjusted EBITDA was $10.9 million during Q2 FY'15, an increase of $0.6 million, or 5.8%, compared to Q2 FY'14.  Adjusted EBITDA margin was 16.4% in Q2 FY'15 compared to 15.5% in Q2 FY'14 due to a decrease in cost of services of $2.0 million, partially offset by an increase in compensation and benefit expense of $1.4 million.  The decrease in cost of services primarily relates to an increased focus on the utilization of internal resources versus outside contractors.  The increase in compensation and benefit expenses was due to an increase in performance related bonus expense resulting from higher fee revenue, profitability, and the continued adoption of the company's integrated go-to market strategy across all three of our lines of businesses.

On a GAAP basis, operating income was $7.8 million in Q2 FY'15, an increase of $0.8 million compared to the year-ago quarter, resulting in an operating margin of 11.7% in the current quarter compared to 10.6% in the year-ago quarter.  The increase in operating income was due to the factors impacting Adjusted EBITDA as discussed above and an increase in depreciation expense of $0.1 million.

Futurestep

Fee revenue was $40.4 million in Q2 FY'15, an increase of $8.5 million, or 26.6% (27.3% on a constant currency basis), compared to the year-ago quarter.  The increase in fee revenue was driven by an 18.4% increase in the weighted average fees billed per engagement and a 6.9% increase in the engagements billed in Q2 FY'15 compared to Q2 FY'14.  The increase in the weighted average fees billed per engagement resulted from a 35.7% increase in fee revenue from recruitment process outsourcing and a 33.3% increase in professional recruitment.

Adjusted EBITDA was $5.6 million during Q2 FY'15, an increase of $2.6 million, or 86.7%, compared to Q2 FY'14, due primarily to the increase in fee revenue of $8.5 million and an increase in compensation and benefit expenses of $5.5 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 $0.7 million driven by the growth in our recruitment process outsourcing business.

On a GAAP basis, operating income was $5.1 million in Q2 FY'15, an increase of $2.5 million, compared to Q2 FY'14, resulting in an operating margin of 12.8% in the current quarter compared to 8.0% in the year-ago quarter.  The increase in operating income was due to the same factors impacting Adjusted EBITDA.

 

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