Korn Ferry (KFY) Q3 2013 Earnings Call Transcript
Published at 2013-03-06 19:31:22
Gary D. Burnison - Chief Executive Officer, President, Treasurer and Executive Director Robert P. Rozek - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Gregg Kvochak
Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division Stephen Sheldon Kelly A. Flynn - Crédit Suisse AG, Research Division Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
Ladies and gentlemen, thank you for standing by, and welcome to the Korn/Ferry International Third Quarter Fiscal Year 2013 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made in the call today, such as those relating to future performance, plans and goals, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, investors 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 which are beyond the company's control. Additional information concerning such risks and uncertainties can be found in the release relating to this presentation, in the company's annual report for fiscal 2012 and in other periodic reports filed by the company with the SEC. Also, some of the comments today may reference non-GAAP financial measures, such as constant currency amounts. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measure, is contained in the release relating to this call, which is posted on the company's website at www.kornferry.com. With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison. Gary D. Burnison: Well, thank you, everybody, and good afternoon. I'm pleased with our results for the quarter and, more importantly, our strategic progress as a firm. The revenue for the quarter was $202 million. That's up 9% over last year, 2% on an organic basis. Our adjusted operating margin was 8%, and we achieved $0.31 of adjusted EPS. The balance sheet continues to be very strong with $305 million of cash and marketable securities and no debt. The pull of our strategy that we put in place several years ago was evident again this quarter with the overall growth year-over-year within our broader talent management offerings. Futurestep was up 17% year-over-year, and our Leadership business was up about 5% organically. Obviously, it was up a lot more if you include the recent acquisition. And our flagship search business was up 2% sequentially and still continues to maintain its industry-leading position. We talk a lot at Korn/Ferry about common purpose, and our common purpose is to accelerate the destination of our clients and change the lives of people, of clients, candidates and colleagues. And today, when you look around the world, CEOs are faced with a wide variety of issues, most importantly, a fight for relevancy and growth. And, ultimately, regardless of the path that they choose, their organizations, workforce, their people, that's what matters most. So questions like, how can a workforce become better aligned with the strategy? What skills are required to execute on their vision? What talent is needed? How will they overcome fatigue, accelerate engagement and establish a common purpose in an overly-connected world? And that's exactly what this firm is poised to do. When I think about our organization and the strategic progress that we've made, I would use the word transformation. I mean, if you did Google Earth on us today, it looks substantially different than it did just a few years ago. If you consider today that almost 40% of our revenue is being driven across broader talent solutions, that really wasn't in place not that long ago. And so, as an organization, as the premier provider of talent management solutions, our mission is to accelerate our clients' success, and doing that by more effectively linking their business and talent strategies. And if you look at the organization today, we essentially do 3 things: We can help an organization design a talent strategy; we can help an organization develop its people; and, finally, we can help an organization with the attraction of new talent into the organization. Within the talent strategy design bucket, there's a whole host of solutions, from organizational design to strategy and talent alignment. When you look at developing a workforce, our solutions there would range from Board effectiveness to succession planning, CEO and top team effectiveness, leadership development, diversity and inclusion and then the online and blended learning products. And finally, when you look at the bucket around talent attraction, that would include our flagship Executive Search business, our Board-recruiting business, our RPO business, onboarding, interviewing techniques and the like. So this is a definitely -- when you look at our company today, it's a different firm. But I'd point out that Search, for us, is the anchor, and it provides a significant competitive advantage, namely access and permission to talk about a client's broader talent agenda. And so, we're going to go forward following the strategy that we put in place several years ago to be able to deliver a comprehensive approach to talent. So #1, we're going to continue to drive a solutions-based, go-to-market strategy; secondly, deliver client excellence through intellectual property and process and technology. We obviously are extending the brand of Korn/Ferry and also elevating it. We have to make our own organization, continue to make that a premiere career destination, developing, building bottom-up capabilities within our workforce. So then, finally, as evidenced by our most recent acquisition of PDI Ninth House, pursue a long-term growth strategy through a pragmatic approach to M&A that really serves to differentiate our organization and give us reasons to talk to clients throughout the whole year. So as we sit here today completing the third quarter, I would say that I am enormously proud of this company and what we're doing. And as the issues become more complex for CEOs fighting for growth, fighting for relevancy, that's exactly where this firm is positioned, to be that bridge between a CEO's vision and their workforce strategy. So with that, I'll turn it over to our CFO, Bob Rozek. Bob? Robert P. Rozek: Thanks, Gary, and good afternoon, everyone. 2 weeks ago, I celebrated my 1 year anniversary at Korn/Ferry, and in this short period of time, as Gary just walked through, much has really changed at the company. We've made tremendous progress, continuing with our leadership position in Executive Search, and have taken major steps towards diversifying our business mix and really positioning the company and the brand as one of the leading global providers of talent management solutions. In the third quarter, in addition to driving the business forward, we had a great deal of energy and effort that went into welcoming and integrating our 2 recent acquisitions: PDI Ninth House and Global Novations. These investments add scale and depth to our Leadership & Talent Consulting business, and really complement our Search in the Futurestep lines of business, which further demonstrates our commitment to adding diversed and synergistic capabilities to our industry-leading portfolio of talent management services and products. So as Gary said, our fiscal '13 third quarter fee revenue grew $16.1 million or nearly 9% year-over-year, and $5.8 million or 3% sequentially, reaching $202 million. The overall mix of our fee revenue continues to shift, with year-over-year increases of about $13 million and $4.5 million in L&TC and Futurestep, respectively, offset by only a slight decrease in executive recruitment of $1.5 million. On an organic basis, fee revenue was up 2% year-over-year and was essentially flat on a sequential basis. In future quarters, given the rapid integration of Global Novations and PDI businesses into our leadership and talent management segment, we'll be reporting consolidated LTC results. That's really the way that we -- as you bring the businesses into the fold, that we capture and measure the LTC operating activity. On our second quarter earnings call, we indicated that, in the third quarter, we would incur incremental charges related to our integration, as well as certain transaction costs associated with the acquisition of PDI Ninth House, which we obviously closed on December 31, 2012. In the third quarter, we incurred $2.5 million of transaction and integration costs, and $4.4 million of restructuring charges associated with the acquisition, and there's an additional $600,000 of separation charges in another operating segment. The $4.4 million of restructuring costs was primarily associated with the alignment of our workforce at PDI, and will result in approximately $5.5 million to $6 million of annual savings to really start to realize in Q4. Now excluding all these charges, the adjusted operating earnings in the third quarter were $16.2 million, and that represents an 8% margin. This compares to adjusted operating earnings of $17.1 million and a 9.2% margin in the third quarter of fiscal '12, and $18.3 million of adjusted operating earnings in a 9.3% margin in the second quarter of fiscal '13. Our third quarter operating earnings were adversely affected by slightly lower-than-expected L&TC fee revenue, which Gregg will comment on later, as well as additional expense associated with our deferred comp programs and the incremental purchase accounting amortization resulting from the 2 current year acquisitions. One of the things that you'll note in our press release is we've included additional operating metrics, EBITDA and EBITDA margin, and these are additional metrics that we now use to assess our performance period-to-period, as they exclude the impact of the incremental acquisition-related amortization, as well as providing for a comprehensive look at the impact of market movements from our deferred compensation programs, which really allows us to better focus on operating results. Our Q3 FY '13 adjusted EBITDA and EBITDA margin was $25.2 million and 12.5%, respectively, as compared to $22.5 million and 12.1% in the third quarter of fiscal '12 and 24.4% and 12.5% in the second quarter of fiscal '13. Our third quarter ending cash and marketable securities balance is $305 million, and that was down about $27 million compared to the second quarter, even after you consider we paid $80 million for the acquisition of PDI Ninth House in the quarter. Excluding cash and marketable securities reserved for deferred comp and accrued for bonuses, our investable cash balance is about $128 million with about 68% of this being located outside the U.S. I would note that, given the geographic dispersion of this cash and our working capital needs, we would look to keep about $100 million of this on-hand, which really leaves about $28 million of what we refer to as our net investable cash. Finally, excluding restructuring, transaction and integration charges and so on, fiscal '13 third quarter adjusted earnings per share were $0.31 compared on the same basis to $0.25 in the second quarter of fiscal '13, and $0.26 in the third quarter of fiscal '12. Our third quarter earnings per share were negatively impacted by about $1 million or $0.01 per share of incremental purchase accounting amortization, and were positively impacted by about $1.4 million or $0.03 per share of a tax benefit that was discrete to the quarter. On a GAAP basis, our fiscal '13 third quarter earnings per share were $0.20. Now I'm going to turn the call over to Gregg to review our reporting segments in a little more detail.
Okay. Thanks, Bob. I'm going to start with our Executive Recruitment segment. Despite year-end holiday seasonality, worldwide demand for our Executive Recruitment services improved in the third quarter. Consolidated Executive Recruitment fee revenue in the third quarter was $130.5 million, up $2.7 million or 2.1% sequentially and down $1.5 million or 1.2% year-over-year. Excluding the effect of foreign currency exchange rates, consolidated Executive Recruitment fee revenue was up 1.7% sequentially and down 1.1% year-over-year. Regionally, at constant currency, North America was up 2.7%, South America was up 7.9%, while both Europe and Asia-Pacific were down marginally by 80 basis points and 10 basis points, respectively, on a sequential basis. Year-over-year, also on a constant currency basis, North America was down 1.2%, Europe was down 3%, Asia-Pacific was off 40 basis points and South America was up 7.1%. All of our Executive Recruitment specialty practices, except financial services, grew in the third quarter compared to the second quarter. At actual rates, consumer goods was up 1%, life sciences and healthcare was up 7%, technology was up 10% and industrial was up 50 basis points. Financial services was off 7% sequentially and accounted for only 16% of all Executive Recruitment fee revenue in the third quarter. Year-over-year, also at actual rates, all of our specialty practices, except industrial, were up, with consumer goods up 10%, life sciences and healthcare up 3%, technology up 12% and financial services up 2%. Worldwide, the industrial practice was down 9% year-over-year in the third quarter. The total number of dedicated Executive Recruiting consultants worldwide at the end of the third quarter was 390, which is down 8 year-over-year and 12 sequentially, primarily reflecting the results of our Q2 restructuring actions. Annualized fee revenue production per consultant in the third quarter was approximately $1.31 million, compared to approximately $1.25 million in the second quarter of fiscal '13 and $1.28 million in the third quarter of fiscal '12. The number of new search assignments opened worldwide in the second quarter was 1,138, which was down 3% sequentially and down 3.6% year-over-year. Excluding separation charges in the third quarter and restructuring charges in the second quarter, consolidated Executive Search adjusted operating earnings were $22.2 million, up $980,000 or 4.6% sequentially, primarily due to cost savings actions initiated in the second quarter. On the same basis, when compared to the third quarter of fiscal '12, consolidated Executive Search operating earnings in the third quarter of fiscal '13, were down $940,000 or 4%, driven primarily by lower fee revenue, partially offset by lower operating expenses. The worldwide consolidated Executive Search operating margins was 17% in the third quarter of fiscal '13, compared to 16.6% in the second quarter and 17.5% in the third quarter of fiscal '12. Executive Search adjusted EBITDA margin was 19.1% in the third quarter of fiscal '13, as compared to 18.2% in the second quarter of fiscal '13 and 19% in the third quarter of fiscal '12. Now turning to Leadership & Talent Consulting. In the third quarter of fiscal '13, worldwide fee revenue for L&TC was $41.2 million, up $1.5 million or 5% organically year-over-year and, including acquisitions, was up $13.1 million or 47% year-over-year. Excluding fee revenue from Global Novations and PDI Ninth House in both the second and third quarters, L&TC third quarter fee revenue was down approximately $3.6 million or 10% sequentially. On a sequential basis, fee revenue growth trends in the third quarter were adversely affected by lower billable hours due primarily to holiday seasonality and the ongoing integration activities, as well as seasonally lower new business volume. Regionally, North America accounted for approximately 67% of total L&TC worldwide revenue in the third quarter, compared to 69% in the second quarter prior to the PDI Ninth House acquisition. At the end of the third quarter, there were 149 dedicated L&TC consultants. Driven by the previously mentioned factors that collectively contributed to decelerating fee revenue, as well as increases in certain operating expenses, such as acquisition-related amortization, bad debts and non-billable engagement expenses, L&TC's third quarter adjusted operating earnings were down $3.5 million year-over-year and $5.3 million sequentially to $1.6 million with a lower operating margin of 4%. Adjusted EBITDA margin in the third quarter was 8.4% compared to 21.4% in the third quarter of fiscal '12 and 20.7% in the second quarter of fiscal '13. Finally, turning to Futurestep, which generated $30.4 million of worldwide fee revenue in the third quarter. At actual rates, Futurestep's fee revenue in the third quarter grew 17.5% year-over-year and 1.1% sequentially. Measured on a constant currency basis, Futurestep's third quarter fee revenue was up $4.4 million or 17% year-over-year and up $70,000 or 30 basis points sequentially. Geographically, on a constant currency basis, all operating regions grew year-over-year, led by North America and Asia-Pacific, which were up 25% and 4%, respectively. Sequentially, North America was up 7%, Asia-Pacific was flat and Europe was down 9%. Futurestep's profitability continued to improve in the third quarter and was up both year-over-year and sequentially. Excluding allocated overhead, Futurestep's operating margin was 12.3% in the third quarter, compared to 6.1% in the third quarter of fiscal '12 and 11.1% in the second quarter of fiscal '13. Adjusted EBITDA margin in the third quarter was 13.3%, compared to 7.2% in the third quarter of fiscal '12 and 12.1% in the second quarter of fiscal '13. Now I'll turn the call back over to Bob to discuss our outlook for the fourth quarter of fiscal '13. Robert P. Rozek: Thanks a lot, Gregg. As you can see, we had a good quarter, and we're pleased with our results, which were in line with our expectations despite the rapid integration of our newly acquired businesses. New orders in January improved over December, and in Executive Search, February new orders were on par with January. Historically, our fiscal fourth quarter has been a seasonally strong quarter for new business in fee revenue. In looking ahead to the fourth quarter, assuming the world stays fairly consistent with where we are today from an economic perspective, the financial markets and foreign exchange, fiscal '13 fourth quarter fee revenue is likely to range from $210 million to $230 million. Additionally, in the fourth quarter, as you drive the next phase of our worldwide integration with PDI Ninth House, which involves the consolidation and elimination of redundant office space around the world, lease termination, fixed asset write-offs and other charges associated with that consolidation are estimated to range between $3.5 million and $5.5 million and are estimated to result in $2 million to $3 million of annual savings, which will start principally in fiscal '14. Excluding these estimated charges, adjusted diluted earnings per share in the fourth quarter are likely to range from $0.28 to $0.34, with diluted earnings per share, as measured by GAAP, likely to be in the range of $0.21 to $0.29. I'd like to also note that earnings per share, on both an adjusted basis and a GAAP basis, will include approximately $0.02 of incremental amortization expense associated with the recent acquisitions in the quarter, which is $0.01 incremental to what we incurred in the third quarter. With that, we'll now turn it over to Gary, who will open it up for questions. Gary D. Burnison: Okay. Operator, can you open up the line?
[Operator Instructions] And our first question is from Tobey Sommer with SunTrust. Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division: This is Frank in for Tobey. In your prepared remarks, you highlighted strength in the technology sector. Can you give us any color on what's driving that and maybe dig a little deeper maybe by geography? Gary D. Burnison: I would say that the improvement in the technology sector has been gradual. If you look at, for example, take our search business today, it represents about 13% of the company or so. And when you look across the geographies, it's been pretty balanced when you look at sequential growth. So I wouldn't pin it on 1 particular geography. It's been pretty broad-based and -- as well as across the sectors. Robert P. Rozek: I think the only thing I would add to that too, Gary, is it's -- not coincidental that technology started to turn when Bernard came onboard as well. Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division: Okay. Great. And then, on the LTC segment, can you talk to us about seasonality moving into the April quarter? What should we expect there. And, kind of, what's built into this -- kind of, the middle of that guidance range? Gary D. Burnison: The middle of the guidance range is going to assume that we've got PDI. We only had PDI for 1 month here in this quarter. We'd closed the transaction on December 31. So we are at the midpoint there. We're assuming that we're going to have PDI for the full quarter at about the levels of business that we saw in January. We're assuming that utilization is going to be slightly higher than what we had. We had about 58% utilization in that business, and it should be higher than that. Offsetting that is going to be the significant integration activities that we still have going on in terms of co-locating real estate and the like. Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division: Okay. And finally, can you talk a little bit about recruiting and attrition and kind of what you're seeing in terms of hiring new folks? Gary D. Burnison: Well, when you -- we're continually looking to add consultants into the businesses across all 3 segments of the organization. That's something that we've consistently done quarter-over-quarter, year-over-year. If you look at our Search business today, we ended the quarter with about 390-or-so consultants. We don't guide out more than a quarter or so. But we are looking to invest in our people across all 3 businesses.
Our next question is from Tim McHugh with William Blair.
This is Stephen Sheldon in for Tim today. First, in the Executive Search segment, it seems like -- I think you said every segment was up sequentially, every vertical was up sequentially except for financial services. Can you just provide some additional color on what you're seeing in that vertical? Gary D. Burnison: Well, we've seen -- in the last couple of months, it was 2 of our consecutive best months in terms of new business that we've seen in a year. I mean, I go back to March of '12, we had a pretty good month in terms of new business. But the last couple of months have been very strong that we've strung together. So we are cautiously optimistic. Financial services continues to be tough, but we've seen growth in the other segments, particularly in life sciences and healthcare. That's been very, very strong for us.
Okay. Great. And then, just on the impact of the PDI revenue from cost-cutting, is there going to be any impact from these changes that you've, kind of, put through in the last few months? Gary D. Burnison: Changes in terms of what?
So the cost-cutting measures that you put in place for PDI, just the synergies, I guess? Gary D. Burnison: Yes?
Is it going to have any top line impact for PDI? Robert P. Rozek: I would say that, well, the cost-cutting measures that we did in the third quarter were the alignment of the workforce, now we're going through the consolidation and co-location of folks. So we're going to be taking close to 600 people and moving them out of where they -- what's become home for them to a new place. So obviously, we're expecting there to be some level of disruption as a result of that activity. It's just -- I think it's just normal human nature for that to happen. Gary D. Burnison: We'd like to see the utilization of that LTC business, say, 70% or so. This last quarter, we were at 58%. It's doubtful we will be at 70% this next quarter given what Bob just talked about. But as we look forward, you would expect that utilization to be significantly higher than 58%.
Okay. And then one last one, if I could. In Futurestep, it was performing really well and above what we had expected. I think you said North America and APAC were particularly strong. Is that -- is there any difference between the verticals, as -- are you seeing anything from specific client sets or -- just any more color there would be appreciated. Gary D. Burnison: Well, we've -- again, the life sciences and healthcare area has been very, very strong for us. And that's true across most of our businesses, and Futurestep is no exception there. So when I look sequentially, we did have higher growth in that part of the business on a sequential basis. But other than that, it's been pretty broad-based.
Next question is from Kelly Flynn with Crédit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: I'm not sure if you said this, but what's the organic growth year-over-year implied by the guidance for the quarter? Robert P. Rozek: The organic in -- for Q4 guidance? Kelly A. Flynn - Crédit Suisse AG, Research Division: Yes. Robert P. Rozek: Yes. We don't -- as I indicated in my remarks, as we move forward, Kelly, as we integrate these businesses into each other, the integration creates a lot of synergies within the -- on the top line as well. So once we buy a business for a very short period of time we look at it independently. But going forward, as I indicated, we're just going to look at it at LTC. So we're not going to be able to pull it apart and say well so much was related to both Novations and PDI. It's just we're looking at it in LTC buckets. So you just got to look at the growth rate in LTC quarter-to-quarter. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. Well, I guess, what I'm getting at -- maybe you could help me with this. I think you said if we, I guess, exclude LTC for a percentage [ph]fee revenue for the Search business, I think you said it was down about 1.1% on constant currency year-over-year. Are you -- should we expect that to improve, be slightly up in the quarter? I'm trying to understand if when you take a business that's picking up. I mean, are we moving towards the year-over-year growth as we progress through the year? Gary D. Burnison: Well, that's certainly our hope. I mean, it's certainly good to see that this last quarter, sequentially, which was a seasonal quarter, that we saw an increase in Search. And we would like to think that, that would be the case in the next quarter. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. And then, I mean, can you give any more qualitative color on the regions, particularly Europe? I mean, how would you describe the feel of that environment? Is it materially better? Do you feel like it's really starting to pick up and or reaccelerate is it still, kind of, dragging along, but not worsening? Gary D. Burnison: Yes. It's -- I would say that, that's it. I mean, it's kind of the new normal, and there really hasn't been a marked change from what I've seen in terms of attitude. Our business in Europe has performed remarkably well, and to see -- even in this last quarter, to see a slight sequential improvement is good news for us. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. Great. And then, lastly on financial services, we could probably guess, but could you just give a little more detail on what particular areas of the industry are the weakest and whether or not that's looking like it's stabilizing or worsening? Robert P. Rozek: Investment banking is clearly the softest, and I would say that it has stabilized over many months. Then when you get into operations, technology, risk, compliance, that has been a stronger part of the market by function.
Our next question is from Ty Govatos with TG [ph] Research.
Can you give me the bonus accrual for the quarter and the 9 months? Robert P. Rozek: Yes. The bonus expense in the quarter was $28 million, and the 9 months is roughly $80 million, $81 million, $81.5 million.
And the RPO business, could you talk about that and what percentage now it is of the Futurestep operation? Robert P. Rozek: The RPO business today is about 50% of the Futurestep operations. Futurestep's at $30 million. It's roughly $15 million.
Any reason to expect that to change any time over the next year or 2, that ratio? Robert P. Rozek: Yes. I think the focus of burn, driving that business forward is to move into that -- into a direction of more heavily weighted towards RPO activity. So we would expect to see that percentage grow over the next year, 2-year, 3-year timeframe.
Our next question is from Mark Marcon with RW Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: With regards to PDI and Global Novations, the contribution this quarter was somewhere around $11 million to $12 million. That contribution from PDI, how much was that, specifically? For that 1 month? Robert P. Rozek: That was at the low -- towards the low end of the guidance that we gave it in the second quarter, Mark, right around the $6 million mark. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: The $6 million mark, and that was in for the full month, right? Robert P. Rozek: It was just for 1 month, that's correct. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: For 1 month. And so, would the expectation be that, given you have significant integration activity still to go through, would you expect that, that monthly run rate is a good proxy for what you would expect during the third -- during the coming quarter before things normalize? Gary D. Burnison: Yes, I think it is, realistically, Mark. Given the significant activity we have around co-location and the like, I think, as we sit here today, that's a reasonable expectation. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And do you think that, that -- all that co-location activity, will that impact the sales cycle, as well as the ability to get existing work done? And so, I guess, what I'm wondering is at what point would you expect them to get to kind of the targeted utilization rate? Gary D. Burnison: Well, overall, for our LTC business, the utilization rate, I mean, was 58%, and we would like to see that more like 70%. So that would be our target. And so, as we look out into this calendar year, our expectation would be that we come pretty close to that. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. So -- and I guess, I was just wondering, it sounded like for the coming fourth quarter, you don't expect that. But I was just trying to pin it down in terms of whether the first quarter of the next fiscal year we could get there or whether there'd be still some lag and maybe we have to wait out a few more quarters beyond that? Gary D. Burnison: Well, I would say it's not going to be a few more quarters beyond that, but whether it's fully -- if we fully get it done in this quarter, that's a question mark. But our intent here is to bring these colleagues in. The response from clients has been fabulous. The response from our existing colleagues. I honestly couldn't be happier. So we'll just have to work over time on the utilization of the entire business, not just that particular aspect. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then, with regards to -- once you get to that utilization rate, how would you think about the margins in that particular business? Do you think it can get to the mid-teens to low-teens? Gary D. Burnison: We do. We do. And in fact, if you look back, we've delivered on that in the past. And one of the things too, I mean, we got it -- this is our -- I think, our third best quarter ever in our LTC business. So we keep setting the bar higher for ourselves. But if you look back on what we've achieved, we've hit those kinds of margins in the business. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then, Futurestep is making really nice progress even on the incremental margins. How should we think about that continuing to progress? Gary D. Burnison: Well, we've always said that when you look at the organization, that the Futurestep margins will obviously be higher than staffing margins, and will be less than -- clearly, less than the Executive Search margin. So it really depends on the mix of business. And as Bob said, the tie to burn is really trying to orient that business towards bigger projects, RPO business, which tends to be more profitable business for us. So we would like to continue to see margin expansion in that business. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And then, there's some mention in the press release about use of contractors. Can you just give us a sense for where that was -- where the utilization was from that perspective? And is that just kind of a 1, 2 quarter type of deal? Robert P. Rozek: Yes. I think, Mark, that depending on the mix of work we're doing and the skill sets that are needed to deliver it, we'll either look in-house or outside for contractors to help us deliver it. So it's not something that we can sit today and say we're going to see this either go away or increase. It all depends on the nature of the work that we're delivering in a particular quarter. And this quarter was a heavier utilization of individuals with skill sets that were outside of the organization. Now these are people that have a long-standing relationship with the organization and so on that we use over time, just not somebody that we have enough to do full time with. So we work with them on a contracting basis. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: For what purpose? Gary D. Burnison: It could be delivering leadership development engagements, it could be coaching engagements. Our orientation, philosophically, is that we want our own full-time employees to do that, but there's parts of the business that are much harder to predict, where the most efficient thing, and effective with our clients, as well as for us, is to use certified contractors, independent consultants that have been certified in all of our intellectual property. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And then, with regards to the utilization rate going up across the platform, how would you say the excess capacity currently, where does it currently rest within the core Executive Search, particularly in North America and Europe? Gary D. Burnison: The -- we see the core Executive Search or the LTC business? Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Core Executive Search. Gary D. Burnison: Oh, well, I think, right now, our revenue per partner is -- it's $1.3 million-or-so. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Yes, which is quite good. Gary D. Burnison: Yes, it's quite good. We would actually like to have it higher -- continue to move the average fee up. I think it's pretty broad-based. There may be a little bit more in Asia than, say, in North America. That probably would come to mind. But overall, there definitely is capacity within the Search business. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. And how should we think about the tax rate as it relates to the guidance? Robert P. Rozek: Yes. I think, Mark, you go back to our sort of our normalized rate at roughly 35%.
It appears there are no further questions, Mr. Burnison. Gary D. Burnison: Okay. Well, I thank everyone for listening in. And again, we are -- as an organization, we're very, very proud of what we're achieving. But we've got an insatiable appetite to continue to grow and as a firm itself. I thank you for your time this afternoon, and we'll talk to you next time.
Ladies and gentlemen, this call will be available for replay for 1 week starting today at 6:30 p.m. Eastern Standard Time, running through the day, March 13 at midnight. You may access the AT&T Executive Playback service by dialing 1 (800) 475-6701 and entering the access code 284535. International participants may dial (320) 365-3844. Additionally, the replay will be available for playback at the company's website, www.kornferry.com, in the Investor Relations section.