Korn Ferry International Announces Third Quarter Fiscal 2018 Results of Operations

LOS ANGELES, March 6, 2018 /PRNewswire/ --

Highlights

• Korn Ferry reports record fee revenue of $447.6 million in Q3 FY'18 driven by organic growth in all three lines of business as compared to Q3 FY'17:

• Operating income was $48.6 million in Q3 FY'18 with an operating margin of 10.9%. Adjusted EBITDA was $70.3 million with Adjusted EBITDA margin of 15.7%.
• Q3 FY'18 diluted earnings per share was $0.48 compared to diluted earnings per share of $0.42 in Q3 FY'17. Adjusted diluted earnings per share was $0.70 in Q3 FY'18, compared to adjusted diluted earnings per share in Q3 FY'17 of $0.53.
• The Company continued to return capital to stockholders during the quarter, paying $5.7 million in dividends and repurchasing $3.3 million worth of its outstanding shares.
• The Company declared a quarterly dividend of $0.10 per share on March 5, 2018 payable on April 13, 2018 to stockholders of record on March 26, 2018.

Korn/Ferry International (NYSE: KFY), a global organizational consulting firm, today announced fee revenue of $447.6 million for its third quarter of fiscal 2018.  In addition, third quarter diluted earnings per share was $0.48 and adjusted diluted earnings per share was $0.70.  Adjusted diluted earnings per share for the third quarter excluded $12.7 million, or $0.22 per share, comprised of the impact of the United States Tax Cut and Jobs Act ("Tax Act") and integration/acquisition costs net of related taxes.

"I am pleased to report 17% year over year growth for our recently completed third quarter, with fee revenue of $448 million and solid profitability, including diluted earnings per share and adjusted diluted earnings per share of $0.48 and $0.70 and adjusted EBITDA of approximately $70 million," said Gary D. Burnison, CEO of Korn Ferry. "Today Korn Ferry is truly a global organizational consulting firm. We help companies design their organization – the structure, the roles and responsibilities, as well as how they compensate, develop and motivate their people. As importantly, we help organizations select and hire the talent they need to execute their strategy. I'm pleased with the trajectory of our firm and our continued momentum as we enable people and organizations to exceed their potential."

Selected Financial Results                  
(dollars in millions, except per share amounts) ^(a)

The Company reported record fee revenue in Q3 FY'18 of $447.6 million, an increase of $65.7 million or 17.2% (an increase of $49.9 million or 13.1% on a constant currency basis) compared to Q3 FY'17.  The organic growth was driven by all three lines of business:

Fee revenue growth in the quarter was partially offset by increased compensation and benefits as well as general and administrative expenses resulting in operating income and Adjusted EBITDA growing 59.3% and 27.1%, respectively, as compared to Q3 FY'17 and diluted earnings per share and Adjusted diluted earnings per share growing 14.3% and 32.1%, respectively, as compared to Q3 FY'17.

Results by Segment

Selected Executive Search Data
(dollars in millions) ^(a)

Fee revenue was $180.4 million in Q3 FY'18, an increase of $27.6 million or 18.1% (an increase of $22.0 million or 14.4% on a constant currency basis) compared to Q3 FY'17.  The overall increase in fee revenue was attributable to higher fee revenue in the North American, EMEA and APAC regions.

Operating income was $34.3 million in Q3 FY'18 compared to $29.3 million in Q3 FY'17.  Operating margin was 19.0% in Q3 FY'18 compared to 19.2% in the year-ago quarter.  The increase in operating income was due to higher fee revenue, offset by an increase in compensation and benefits expense driven by 6.4% increase in headcount and performance related bonus expense.

Adjusted EBITDA was $37.2 million in Q3 FY'18 with an Adjusted EBITDA margin of 20.6% compared to $32.6 million and 21.3%, respectively, in the year-ago quarter.  

Selected Hay Group Data
(dollars in millions) (a)

Fee revenue was $198.1 million in Q3 FY'18 compared to $175.7 million in Q3 FY'17, an increase of $22.4 million or 12.7% (an increase of $14.6 million or 8.3% on a constant currency basis) compared to Q3 FY'17.  The higher fee revenue was primarily driven by a $15.6 million increase in consulting services with the remaining increase of $6.8 million was generated by the products business.

Operating income was $27.1 million in Q3 FY'18 with an operating margin of 13.7% in the current quarter compared to $16.0 million and 9.1%, respectively, in the year-ago quarter.  The change in operating income was primarily due to higher fee revenue compared to the year-ago quarter, offset by increases in compensation and benefits expense driven by an increase in average consultant headcount in Q3 FY'18 compared to Q3 FY'17 and an increase in performance related bonus expense.

Adjusted EBITDA was $36.9 million in Q3 FY'18 with an Adjusted EBITDA margin of 18.6% compared to $30.1 million and 17.1%, respectively, in the year-ago quarter.  

Selected Futurestep Data
(dollars in millions) (a)

Fee revenue was $69.1 million in Q3 FY'18, an increase of $15.7 million or 29.4% (a $13.3 million or 24.9% increase on a constant currency basis), compared to the year-ago quarter.  The higher fee revenue was primarily driven by an increase in recruitment process outsourcing and professional search of $9.9 million and $6.0 million, respectively, in Q3 FY'18 compared to Q3 FY'17.

Operating income was $10.1 million in Q3 FY'18, an increase of $3.6 million compared to Q3 FY'17 operating income of $6.5 million.  Operating margin was 14.6% in the current quarter compared to 12.3% in the year-ago quarter.  The change in operating income was primarily due to higher fee revenue compared to the year-ago quarter, offset by increases in compensation and benefits expense driven by a 31.5% increase in headcount associated with increased recruitment process outsourcing engagements and higher performance related bonus expense.

Adjusted EBITDA was $10.8 million during Q3 FY'18, an increase of $3.4 million compared to Q3 FY'17.  Adjusted EBITDA margin was 15.6% in Q3 FY'18 compared to 13.9% in the year-ago quarter.

Outlook

Assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady on a consolidated basis:

• Q4 FY'18 fee revenue is expected to be in the range of $448 million and $462 million; and
• Q4 FY'18 diluted earnings per share is likely to range between $0.66 to $0.70.

On a consolidated adjusted basis:

• Q4 FY'18 adjusted diluted earnings per share is expected to be in the range from $0.69 to $0.73.

Earnings Conference Call Webcast

The earnings conference call will be held today at 4:30 PM (EST) and hosted by CEO Gary Burnison, CFO Robert Rozek and SVP Finance Gregg Kvochak.  The conference call will be webcast and available online at ir.kornferry.com.  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 a global organizational consulting firm. We help companies design their organization – the structure, the roles and responsibilities, as well as how they compensate, develop and motivate their people. As importantly, we help organizations select and hire the talent they need to execute their strategy. Our approximately 7,000 colleagues serve clients in more than 50 countries. Visit kornferry.com for more information.

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, changes in demand for our services as a result of automation, the dependence on attracting and retaining qualified and experienced consultants, maintain relationships with customers and suppliers and retain key employees, maintaining our brand name and professional reputation, potential legal liability and regulatory developments, 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, restrictions imposed by off-limits agreements, reliance on information processing systems, cyber security vulnerabilities, changes to data security, data privacy and data protection laws, limited protection of our intellectual property, our ability to enhance and develop new technology, our ability to develop new products and services, the utilization and billing rates of our consultants, our ability to successfully recover from a disaster or other business continuity problems, changes in our accounting estimates/assumptions, tax accounting effects of the Tax Act, impairment of goodwill and other intangible assets, deferred tax assets that we may not be able to use, seasonality, risks related to the integration of recently acquired businesses 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 attributable to Korn/Ferry International, adjusted to exclude the tax impact associated with the Tax Act, restructuring (recoveries) charges, net, integration/acquisition costs and write-off of debt issuance costs and to include the deferred revenue adjustment related to the Legacy Hay acquisition, net of income tax effect;
• adjusted basic and diluted earnings per share, adjusted to exclude the tax impact associated with the Tax Act, restructuring (recoveries) charges, net, integration/acquisition costs and write-off of debt issuance costs and to include the deferred revenue adjustment related to the Legacy Hay acquisition, net of income tax effect; and in the case of the outlook section, also adjusted for tax rate impact;
• constant currency (calculated using a quarterly average) 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;
• Adjusted EBITDA, which is EBITDA further adjusted to exclude restructuring (recoveries) charges, net and integration/acquisition costs and to include the deferred revenue adjustment related to the Legacy Hay acquisition and Adjusted EBITDA margin; and
• adjusted fee revenue, which includes revenue that Hay Group would have realized over the ensuing year after acquisition if not for business combination accounting that requires a company to record the acquisition balance sheet at fair value and write-off deferred revenue where no future services are required to be performed to earn that revenue.

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.  These non-GAAP financial measures are performance measures and are not indicative of the liquidity of Korn Ferry.  These charges represent 1) the tax impact associated with the Tax Act, 2) costs we incurred to acquire and integrate the Legacy Hay acquisition, 3) charges we incurred to restructure the combined company due to the acquisition of Legacy Hay, 4) debt issuance costs written-off upon replacement of our credit facility and 5) revenue that Hay Group would have realized if not for business combination accounting that requires a company to record the acquisition balance sheet at fair value and write-off deferred revenue where no future services are required to be performed to earn that revenue.  As such, reported fee revenue can make fee revenue and operating results appear to fluctuate more than they would if business combination accounting did not require deferred revenue to be written off. Adjusted fee revenue is not a measure that substitutes an individually tailored revenue recognition or measurement method for those of GAAP, rather, it is an adjustment for a short period of time that will provide better comparability in the current and future periods.  Management believes the presentation of adjusted fee revenue assists management in its evaluation of ongoing operations and provides useful information to investors because it 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 distorted by write-offs required under business combination accounting 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.  Management no longer has adjusted fee revenue after Q1 FY'17.  The use of non-GAAP financial measures facilitates comparisons to Korn Ferry's historical performance.  Korn Ferry includes 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.  Management further believes that EBITDA is useful to investors because it is frequently used by investors and other interested parties to measure operating performance among companies with different capital structures, effective tax rates and tax attributes and capitalized asset values, all of which can vary substantially from company to company.  In the case of constant currency amounts, management believes the presentation of such information provides useful 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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