Korn/Ferry International Earnings Call NUGGETS: Consultant Headcount, Cost Reduction Program

On Wednesday, Korn/Ferry International (NYSE:KFY) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Consultant Headcount

Tobey Sommer – SunTrust: Just I had a couple of questions about the acquisition you announced yesterday, are there any financial details that you could give us like how much – what the revenue contribution might be or anything like that?

Gary Burnison – CEO: I would say that in this environment we would expect that that company would contribute $28 million to $34 million in this kind of environment where we are right now and our plans going forward obviously much bigger than now but that’s kind of where it is today.

Tobey Sommer – SunTrust: Since you have an articulated goal of expanding the LTC business in future step, do you have any long-term goals either as a percentage of revenue or maybe revenue goal in dollar terms that you have laid out for yourself over the coming years for those two businesses.

Gary Burnison – CEO: We think that there is in both of those businesses and I am certainly not going to put a time horizon to this because we do only guide out quarterly and the environment to say it’s challenging is an understatement, but we look at those opportunities with our firm overall to be a talent solutions company and we see those as multi — $100 million opportunities for this organization. So I think that the thing that is may be more relevant than the percent of revenue is the percent of the cash flow of the organization and we haven’t publically stated those goals, nor we certainly got them, but I think that that would be the more meaningful question, so clearly we need to invest, we need to grow, we need to balance all of that with the environment that we’re in, but we certainly have an eye towards profitability and cash flow contribution from those businesses.

Tobey Sommer – SunTrust: My last question, I’ll get back in the queue. Consultant headcount was up I guess nicely sequentially and I was just wondering, if the composition of new hires are able to impact results and contribute immediately, or are there a decent number of people who are kind of on garden leave and need to have some period of time passed before they start contributing financially?

Robert Rozek – EVP and CFO: I think, Tobey, this is Bob, if you go back and look at our headcount at the end of the year, it was up. As Greg had mentioned though, the increase was primarily driven by promotions. So, those are folks who have been with us for a while, who are engaged. So we wouldn’t expect it to be much lag in terms of their ability to deliver. We had started the quarter with 400, there was about 24 promotions and then we had net nine leavers, which is actually a very small attrition rate, around2%.

Cost Reduction Program

Tim McHugh – William Blair: Just want to first ask the cost reduction program that you talked about, is this focus mainly on executive search business and is it primarily personnel related or is it infrastructure and kind of real estate related as well?

Gregg Kvochak – SVP, Finance: It’s to some extend all those. As we look at the organization and our goals for building this Company, one of the things under Bob’s leadership we need to look out is shared services and infrastructure. So, that is the top of his list to look at that. We think we have got some opportunities around shared services. Secondly, when it comes to real estate, we under Bob’s leadership we’re also going to look at that and now some of you have to be practical, you can’t change that in a span of quarters, but clearly we could take a very strategic views to saying this is what it should look like in five years and what levers can we pull today. So when you look at it, Bob articulated the reason and it’s going to be a combination of shared service infrastructure then there’s a people component to it.

Gregg Kvochak – SVP, Finance: The other thing I would add to that Gary as well as we are also going to be looking at driving some efficiencies in through our procurement activities as well. So as you look at our cost savings we’re looking at more efficient spending programs across the organization taking advantage of our scope and scale on a global basis.

Tim McHugh – William Blair: As we think about the margin here, you are affectively guiding the kind of flattish sequential revenue and you had three straight quarters of 9% kind of operating margin, but the guidance, my quick math implies kind of 7% operating margin. But your comment on that earlier I think you said something about 9% that being kind of acceptable to what you would like. How should we – I guess I’m trying to – I know you don’t guide out further, but kind of think about what type of margin you are trying to aim for in a tougher environment like this and then in a better environments (indiscernible)?

Gary Burnison – CEO: Yeah, I would only say that we’ve typically held it as a goal in this organization that we should having very good times where there is economic tailwinds. This should be a low to mid-teen operating margin Company. On the other side when it is in the dark days of winter we should strive that we should be at least cash flow neutral, but hopefully single-digit operating margin. So, those are kind of the two boundaries that we have set for ourselves as an organization. The issue today and again, as we talked to you in June, it’s sure enough the environment has been pretty consistent with what we thought. We’ve got a twiny. So, it’s neither headwinds or tailwinds and we just think if you are kind of doing this level of revenue, our margins should be better. Now, we are obviously, as Bob said, we are in the middle of trying to look at that. So, I think to try to call something out what it’s going to be in two quarters, three quarters is probably a little bit premature. We are just not – we haven’t finalized our thinking there.

Tim McHugh – William Blair: I wanted to ask just, one is an RPO business, the press release talks about this, it’s more of the mix that impact the average fee per search, but can you just (indiscernible) are you seeing any signs of pricing pressure in the RPO business and then secondarily, where there any share repurchases during the quarter?

Gary Burnison – CEO: There were no share repurchases in the quarter. In terms of the Futurestep business, we have not seen any dramatic pricing pressure and when you look at the sequential growth and success of our business, the good news is that it was in the United States business, which maybe a little bit counterintuitive, but we continue to see opportunities with big clients desperately trying to find knowledge workers and those are not – those companies are borderless.