Korn/Ferry International: Q3 Fiscal 2008 Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended January 31, 2008 (the third quarter of fiscal year 2008) and the nine months ended on that date. Korn/Ferry International is a global provider of talent management solutions, operating primarily through two segments: Executive Recruitment (executive search and leadership development) and Futurestep (outsourced recruiting and middle-management search). The company reported 4,742 clients in the prior fiscal year, including approximately 43% of the Fortune 500.
Key Financial Metrics
| Metric (in thousands) | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Total Revenue | $212,091 | $173,508 | $615,192 | $499,441 |
| Fee Revenue | $201,156 | $165,239 | $582,366 | $473,720 |
| Operating Income | $21,180 | $21,408 | $71,675 | $62,904 |
| Net Income | $16,256 | $14,730 | $50,465 | $41,959 |
| Diluted EPS | $0.37 | $0.33 | $1.10 | $0.95 |
| Cash & Equivalents | $223,654 | $232,531 | $223,654 | $211,768 |
| Working Capital | $252,891 | $235,271 | $252,891 | $235,271 |
| Long-Term Debt | $0 | $0 | $0 | $0 |
Note: Working Capital calculated as Total Current Assets ($473,235) minus Total Current Liabilities ($220,344).
Material Changes vs. Prior Period
- Revenue Growth: Fee revenue increased 22% in Q3 and 23% for the nine-month period compared to the prior year. This growth was driven by an increase in the number of engagements billed and higher average fees across all regions. Favorable foreign exchange rates contributed approximately $10.0 million to Q3 revenue and $24.3 million to the nine-month revenue.
- Operating Income: Q3 operating income decreased slightly by 1% ($0.2 million) despite revenue growth, due to a $38.8 million increase in operating expenses. However, operating income for the nine-month period increased 14% ($8.8 million).
- Expense Increases: Compensation and benefits expenses rose 23% in Q3, driven by an 18% increase in global headcount and higher revenue-based awards. General and administrative expenses increased 32% in Q3, largely due to higher premise/office costs and business development spending.
- Segment Performance:
- Executive Recruitment: Fee revenue grew 21% in Q3. Operating income increased 6% to $29.0 million.
- Futurestep: Fee revenue grew 26% in Q3. Operating income decreased 12% to $2.0 million due to significant investments in headcount (up 83% year-over-year) and administrative costs.
Outlook, Risks, and Unusual Items
- Auction Rate Securities Liquidity Risk: The company holds approximately $24.9 million in auction rate securities (ARS). In mid-February 2008, global credit market liquidity issues caused some auctions to fail. While the company believes the credit quality of these securities remains high and they do not expect a material impact on working capital needs, the ability to liquidate these assets in the near term is limited. The company may need to reclassify these securities to non-current assets if market conditions do not improve.
- Stock Repurchases: The company repurchased approximately $62.6 million of common stock during the nine months ended January 31, 2008. As of January 31, 2008, approximately $43.7 million remained available under the current repurchase program.
- Acquisitions: The Lominger Entities acquisition (completed in fiscal 2007) contributed $0.6 million to Q3 operating income and $3.3 million to the nine-month operating income.
- Management Commentary: Management intends to maintain a disciplined acquisition strategy and focus on increasing market share in Recruitment Process Outsourcing (RPO) and Leadership Development Solutions (LDS). They noted that recent expense increases and reserve creations are aimed at improving long-term operating efficiency.
Key Facts for Investor Verification
- Liquidity of ARS: Verify the current status of the $24.9 million in auction rate securities and whether any impairment charges or reclassifications to non-current assets have occurred since the filing date (March 2008).
- Margin Compression: Monitor the trend of operating margins, particularly in the Futurestep segment, where operating income declined despite revenue growth due to aggressive headcount expansion.
- Foreign Exchange Impact: Assess the sensitivity of future earnings to currency fluctuations, as favorable exchange rates contributed significantly to the reported revenue growth in the current period.
- Stock Buyback Progress: Track the remaining $43.7 million authorization for stock repurchases and the company's commitment to returning capital to shareholders.