Korn Ferry International Announces First Quarter Fiscal 2016 Results of Operations

LOS ANGELES, Sept. 8, 2015 /PRNewswire/ -- Korn/Ferry International (NYSE: KFY), the preeminent authority on leadership and talent, today announced first quarter fee revenue of $267.4 million and adjusted diluted earnings per share of $0.47, excluding integration/acquisition costs of $0.7 million.  On a GAAP basis, diluted earnings per share was $0.46 in the three months ended July 31, 2015.

"For our fiscal first quarter we reported 13% year over year growth at constant currency and growth within all of our service lines," said Gary D. Burnison, CEO, Korn Ferry.  "Our Futurestep offering continued to deliver outsized results growing 27% year over year at constant currency.  Our strong performance reaffirms that Korn Ferry is increasingly the people advisory firm that organizations turn to for the people strategies that deliver business strategies."

Fee revenue was $267.4 million in Q1 FY'16, an increase of $16.2 million, or 6.4% ($32.5 million, or 12.9% on a constant currency basis), compared to Q1 FY'15, primarily due to increases of $6.9 million, $5.6 million, and $3.7 million in fee revenue in Futurestep, Leadership & Talent Consulting, and Executive Recruitment, respectively.  The overall fee revenue increase was driven by fee revenue growth in certain of our major markets – financial services, life science/healthcare and technology, partially offset by a decline in industrial and consumer goods.

Compensation and benefit expenses were $179.5 million in Q1 FY'16, an increase of $10.4 million, or 6.2%, compared to the year-ago quarter.  The increase was driven, in part, by higher salaries and related payroll taxes and employee insurance due to a 12% increase in the average headcount in Q1 FY'16 compared to Q1 FY'15, reflecting our continued growth-related investments back into our business.  Performance related bonus expense was also higher due to an increase in fee revenue and profitability as a result of the continued adoption of our strategy, including referrals between lines of business. 

General and administrative expenses were $37.5 million in Q1 FY'16, relatively flat compared to $37.4 million in Q1 FY'15.

Adjusted EBITDA was $41.7 million in Q1 FY'16, an increase of $3.8 million, or 10.0%, compared to Q1 FY'15.  Adjusted EBITDA margin was 15.6% and 15.1% in Q1 FY'16 and Q1 FY'15, respectively.  The increase in Adjusted EBITDA was primarily driven by higher fee revenues offset by an increase in both compensation and benefit expenses and other loss, net.  The increase in other loss, net was due in large part to the decrease in the fair value of our marketable securities in Q1 FY'16 compared to the year-ago quarter.

On a GAAP basis, operating income was $32.9 million in Q1 FY'16 and $18.6 million in Q1 FY'15 resulting in an operating margin of 12.3% in Q1 FY'16 compared to 7.4% in the year-ago quarter.  The increase in operating income was primarily driven by higher fee revenues and a decrease in restructuring charges, net offset by an increase in compensation and benefit expenses.  Restructuring charges, net of $9.9 million were recorded during Q1 FY'15 with no such charge taken in Q1 FY'16.

Balance Sheet and Liquidity

Cash and marketable securities were $414.5 million at July 31, 2015, compared to $525.4 million at April 30, 2015.  Cash and marketable securities decreased by $110.9 million from April 30, 2015, primarily due to Q1 FY'16 payments of FY'15 annual bonuses and $5.1 million in dividend payments made to stockholders during the quarter, partially offset by cash provided by operating activities.  Net of amounts held in trust for deferred compensation plans and accrued bonuses, cash and marketable securities were $237.5 million and $235.6 million at July 31, 2015 and April 30, 2015, respectively.  As of July 31, 2015 and April 30, 2015, we held $149.5 million and $143.4 million, respectively, of cash and cash equivalents in foreign locations, net of amounts held in trust for deferred compensation plans and bonuses. 

The Company declared a quarterly dividend of $0.10 per share on September 7, 2015, payable on October 15, 2015 to stockholders of record on September 25, 2015.

Executive Recruitment

Fee revenue was $152.1 million in Q1 FY'16, an increase of $3.7 million, or 2.5% (an increase of $13.1 million, or 8.8% on a constant currency basis), compared to Q1 FY'15.  The overall increase in fee revenue was primarily attributable to a 3.7% increase in the weighted-average fees billed per engagement, partially offset by a 1.1% decrease in the number of engagements billed in Q1 FY'16 compared to Q1 FY'15.  On a regional basis, fee revenue increased in North America by $8.1 million, or 9.8% ($8.9 million, or 10.8% on a constant currency basis), South America by $0.1 million, or 1.6% ($1.6 million, or 25.4% on a constant currency basis), partially offset by a decline in EMEA by $4.2 million, or 10.4% (an increase of $1.2 million, or 3.0% on a constant currency basis) and Asia Pacific by $0.3 million, or 1.5% (an increase of $1.4 million, or 7.2% on a constant currency basis).

Adjusted EBITDA was $36.9 million and $31.9 million during Q1 FY'16 and Q1 FY'15, respectively.  The increase in Adjusted EBITDA was driven by higher fee revenue of $3.7 million and a decrease in general and administrative expenses of $2.2 million partially offset by increases in compensation and benefit expenses of $1.5 million.  The increase in compensation and benefit expenses was primarily due to an increase in performance related bonus expense resulting from an increase in average headcount and fee revenue, partially offset by a decline in the fair value of the vested amounts owed under certain deferred compensation plans in Q1 FY'16 compared to Q1 FY'15.  General and administrative expenses were lower due to a change from a foreign exchange loss in Q1 FY'15 to a foreign exchange gain in Q1 FY'16 and a decline in both premise and office expense and other general and administrative expenses.

Operating income was $34.9 million in Q1 FY'16, an increase of $10.7 million, or 44.2%, compared to Q1 FY'15, resulting in operating margin of 23.0% in Q1 FY'16 compared to 16.3% in Q1 FY'15.  Operating income was impacted by all of the above items and a decrease in restructuring charges, net of $5.5 million that was recorded in Q1 FY'15 with no such charge in Q1 FY'16.

Leadership & Talent Consulting

Fee revenue was $69.2 million in Q1 FY'16, an increase of $5.6 million, or 8.8% ($8.7 million, or 13.7% on a constant currency basis), from the year-ago quarter.  This increase is primarily attributed to higher consulting fee revenue of $4.3 million in Q1 FY'16 compared to Q1 FY'15 with the remaining increase being generated by product revenue.  The increase in consulting fee revenue includes $5.2 million of fee revenue from Pivot Leadership which was acquired on March 1, 2015.

Adjusted EBITDA was $10.7 million during Q1 FY'16, an increase of $1.0 million, or 10.3%, compared to Q1 FY'15 due to higher fee revenue of $5.6 million, partially offset by an increase in compensation and benefit expenses of $2.5 million and increases in both costs of services and other loss, net of $1.1 million.  The increase in compensation and benefit expenses was primarily due to  an increase in salaries and related payroll taxes as a result of higher average headcount in Q1 FY'16 compared to the year-ago quarter.  The higher headcount and cost of services reflects our continued growth-related investments back into our business.

Operating income was $7.5 million in Q1 FY'16, an increase of $4.1 million compared to Q1 FY'15, resulting in an operating margin of 10.8% in the current quarter compared to 5.4% in the year-ago quarter.  The increase in operating income was due to the factors impacting Adjusted EBITDA as discussed above and a decrease in restructuring charges, net of $2.8 million that were recorded in Q1 FY'15 with no such charge in Q1 FY'16.

Futurestep

Fee revenue was $46.1 million in Q1 FY'16, an increase of $6.9 million, or 17.6% ($10.7 million, or 27.3% on a constant currency basis), compared to the year-ago quarter.  The higher fee revenue was driven by a 10.4% increase in the weighted average fees billed per engagement and a 6.3% increase in engagements billed in Q1 FY'16 compared to Q1 FY'15.

Adjusted EBITDA was $6.8 million during Q1 FY'16, an increase of $1.5 million, or 28.3%, compared to Q1 FY'15, due primarily to the increase in fee revenue of $6.9 million, partially offset by higher compensation and benefit expenses of $4.6 million and an increase in general and administrative expenses of $0.7 million.  The increase in compensation and benefit expenses was driven by higher salaries and related payroll taxes and vacation expense as a result of a 26% increase in average headcount and an increase in the use of outside contractors.  The higher average headcount and increase in use of outside contractors are both related to the higher levels of fee revenue driven by the continued adoption of our strategy, including referrals between lines of business.  The increase in general and administrative expenses was due primarily to higher premise and office expense in Q1 FY'16 compared to the year-ago quarter. 

Operating income was $6.2 million in Q1 FY'16, an increase of $2.7 million, compared to Q1 FY'15, resulting in an operating margin of 13.4% in the current quarter compared to 8.8% in the year-ago quarter.  The increase in operating income was due to the same factors impacting Adjusted EBITDA and a decrease in restructuring charges, net of $1.4 million that were recorded in Q1 FY'15 with no such charge in Q1 FY'16.

Outlook

We expect the strong U.S. dollar will continue to negatively impact our FY'16 second quarter year-over-year revenue growth.  Assuming worldwide economic conditions and financial markets remain where they are currently and considering the effect of foreign exchange rates, fee revenue is expected to be in the range of $267 million to $277 million in Q2 FY'16, and diluted earnings per share are likely to be in the range of $0.47 to $0.53.

Earnings Conference Call Webcast

The earnings conference call will be held today at 4:30 PM (EDT) and hosted by CEO Gary Burnison, CFO Robert Rozek and SVP Finance Gregg Kvochak.  The conference call will be webcast and available online at www.kornferry.com, accessible through the Investor Relations section.  We will also post to this section of our website earnings slides, which will accompany our webcast, and other important information, and encourage you to review the information that we make available on our website.

About Korn Ferry

Korn Ferry is the preeminent authority on leadership and talent.  For nearly half a century, clients have trusted us to recruit world-class leaders.  Today, we are their partner in designing organizational strategy and developing their people to achieve unimaginable success.  For more information, visit www.kornferry.com.

Forward-Looking Statements

Statements in this press release and our conference call that relate to future results and events ("forward-looking statements") are based on Korn Ferry's current expectations.  These statements, which include words such as "believes", "expects" or "likely" include references to our outlook.  Readers are cautioned not to place undue reliance on such statements.  Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties that are beyond the control of Korn Ferry.  The potential risks and uncertainties include those relating to competition, the dependence on attracting and retaining qualified and experienced consultants, our ability to successfully integrate acquired businesses, maintaining our brand name and professional reputation, potential legal liability, the portability of client relationships, global and local political or economic developments in or affecting countries where we have operations, currency fluctuations in our international operations, risks related to growth, alignment of our cost structure with our growth, restrictions imposed by off-limits agreements, reliance on information processing systems, cyber security vulnerabilities, limited protection of our intellectual property, our ability to enhance and develop new technology, our ability to develop new products and services, consolidation of industries we serve, our ability to successfully recover from a disaster or other business continuity problems, changes in our accounting estimates/assumptions, impairment of goodwill and other intangible assets, deferred tax assets, seasonality, our ability to successfully rationalize our cost structure and employment liability risk.  For a detailed description of risks and uncertainties that could cause differences, please refer to Korn Ferry's periodic filings with the Securities and Exchange Commission.  Korn Ferry disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Use of Non-GAAP Financial Measures

This press release contains financial information calculated other than in accordance with U.S.  Generally Accepted Accounting Principles ("GAAP").  In particular, it includes:

• adjusted net income, adjusted to exclude restructuring charges and integration and acquisition costs, net of income tax effect;
• adjusted basic and diluted earnings per share, adjusted to exclude restructuring charges and  integration and acquisition costs, net of income tax effect;
• constant currency amounts that represent the outcome that would have resulted had exchange rates in the reported period been the same as those in effect in the comparable prior year period;
• EBITDA, or earnings before interest, taxes, depreciation and amortization and EBITDA margin; and
• adjusted EBITDA, which is EBITDA further adjusted to exclude restructuring charges, and integration and acquisition costs, and adjusted EBITDA margin.

This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial information determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Management believes the presentation of non-GAAP financial measures in this press release provides meaningful supplemental information regarding Korn Ferry's performance by excluding certain charges and other items that may not be indicative of Korn Ferry's ongoing operating results.  The use of these non-GAAP financial measures facilitate comparisons to Korn Ferry's historical performance.  Korn Ferry includes these non-GAAP financial measures because management believes they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its evaluation of Korn Ferry's ongoing operations and financial and operational decision-making.  In the case of constant currency amounts, management believes the presentation of such information provides meaningful supplemental information regarding Korn Ferry's performance as excluding the impact of exchange rate changes on Korn Ferry's financial performance allows investors to make more meaningful period-to-period comparisons of the Company's operating results, to better identify operating trends that may otherwise be masked or distorted by exchange rate changes and to perform related trend analysis, and provides a higher degree of transparency of information used by management in its evaluation of Korn Ferry's ongoing operations and financial and operational decision-making.

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