Korn Ferry
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Earnings Call Transcript

Earnings Call Transcript
2019-Q1

from 0
Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Korn/Ferry First Quarter Fiscal Year 2019 Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. We have also made available in the Investor Relations section of our Web site at kornferry.com, a copy of the financial presentation that we will be reviewing with you today.

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 the presentation and in the periodic reports filed by the company with the SEC, including the company's annual report for the fiscal year 2018.

Also, some of the comments today may reference non-GAAP financial measures such as adjusted fee revenue, constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measures is contained in the financial presentation and earnings release relating to this call, both of which are posted in the Investor Relations section of the company's Web site at www.kornferry.com.

With that, I will turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.

G
Gary Burnison
CEO

Okay, thanks Amy, and thanks everybody. Thanks for joining us. I'm very pleased with the quarter. We reported top line growth of about 16%. It was very balanced across the firm. EBITDA was strong. Asia rung the bell, it was up 22%, EMEA was up 18%, North America 15%, so a really, really good quarter and one that I'm very proud of.

As we talked about in our last earnings call, we made a decision to sunset the legacy logos and go with one brand, one unifying brand, which is Korn/Ferry, and now we're -- we said it would be about a 15-month endeavor, and we're three months in to that. And I'm convinced more than ever it's the right thing to do for the firm. But it has to be for us; it's much more than a branding exercise. It's really about creating opportunity, opportunity for our shareholders, for our colleagues, really taking this powerful platform that we've built over many years, that we've acquired and we've developed incredible IP and solutions. And so now it's about creating -- using that and creating greater impact in the world.

They have greater impact with clients. I mean, essentially, they have greater and deeper penetration of our client base. And if you just look at the numbers, you can see the opportunity for shareholders and for the company. Clients that we serve on an integrated basis with multiple solutions, well, it represents 60% of our firm's revenue, but guess what, it's only 10% of our client base.

And we also know that the revenue on these same clients, these multi-solution clients, they're four to five times greater than mono line clients. And what comes with that is more stickiness, lower cost of sales. And the other thing is that our colleagues have much more meaningful work. They can develop new skills with greater purpose, and they will have bigger career opportunities, which should create also a stickier workforce. So I'm convinced this is the next evolution in what we're trying to achieve here. Today our offerings, they run the gamut of what companies need to outperform. We've worked with organizations to help them design their structure, their roles, responsibilities; we help them hire the right people to bring their strategy to life, we advise them on how to reward and develop and motivate their people. I mean, simply put, we synchronize strategy and talent to drive superior performance for our clients.

So obviously we've come a long way, the numbers clearly show that, but at the same time, I think we've got big opportunity ahead. And really starts with this unifying brand, this really kind of a one-brand go-to-market strategy.

And also, which is equally important, focusing the organization toward more of an industry and solution orientation. And for example, if you look at three of our solutions, global solutions, so take org strategy, leadership development, rewards and benefits. So those are large, expanding, fragmented markets. I mean multi billion dollar markets. And today, that's only 30% of our company. So I think that speaks to opportunity for our shareholders and for our colleagues.

And I've also talked about the need to productize our IP. That can create greater impact. It's certainly more scalable, and it's something that has real -- the roots are shareholder value. I mean it's something that is quite sticky too, a bit of a Trojan horse within a client. And today, that productized revenue is only 12% of our top line. So that's another area for opportunity for Korn/Ferry, and we're going to continue to invest in an integrated IP-based talent platform.

And then finally, we're going to not only bring people into this company, not only bring top consultants in, like, we've demonstrated that in the past, but we also have to continue to make investments in our own talent, because you know that when people are engaged, they're motivated -- if they're happy they're motivated. And guess what, they're going to outperform. In this last year, we promoted a thousand colleagues to new roles, so a balanced really good quarter, broad-based growth. I am convinced this unification around one brand is the thing to do, but it has to be much, much more than a branding exercise, and that's kind of what we're doing now.

So I'm joined here by Bob Rozek and Gregg Kvochak. And so, Bob, I'll turn it over to you.

B
Bob Rozek
EVP and CFO

Great. Thanks a lot, Gary, and good afternoon everyone. I'm going to start with a few highlights. Results in the first quarter continue to demonstrate our ability to drive synergies across our various solutions, and really the power of our Korn/Ferry brand.

In the first quarter, our global fee revenue grew 16% year-over-year, reaching almost $466 million. And this was our fourth consecutive quarter of double-digit revenue growth. Once again, our growth was broad-based with each of our operating segments benefiting from our unified branding and go-to-market approach. Growth continued to be strongest for our talent acquisition businesses, so Executive Search, and RPO, and Professional Search, which grew by approximately 20%, and 28% respectively. And revenue growth for Advisory was also very strong, reaching $195 million, and that's a year-over-year growth rate of 9%.

More importantly, in the first quarter, growth in earnings exceeded growth in revenue. Adjusted EBITDA in the first quarter was $70.8 million, which is an improvement over $10.4 million and over 17% year-over-year, while our adjusted EBITDA margin improved 20 basis points to 15.2%.

Now turning to new business, we continue to see real strength in our new business for Executive Search. We saw continued acceleration in the first quarter. Globally, Executive Search new business was up approximately $198 million. It's over 15% year-over-year. It was really across the board in all regions, North America, Europe, and Asia-Pac.

For Advisory, new business growth in the first quarter was strong. It was up 8% year-over-year. We saw strength in Europe and Asia-Pac. And their new business reached nearly $206 million. And finally for PRO and Professional Search, they achieved another strong quarter of new business totaling almost $70 million, has about $39 million of long term RPO awards, and $31 million of Professional Search awards.

At the end of the first quarter, our total cash and marketable securities were $500 million. That's up about $92 million compared to the first quarter of fiscal '18. And our investable cash balance at the end of the first quarter was approximately $295 million, and that's up about $60 million year-over-year.

Firm head outstanding debt at the end of the first quarter was approximately $230 million. And finally, our adjusted diluted earnings per share were $0.78 in the first quarter of fiscal '19, and that's up $0.23 or 42% compared to the first quarter of last year.

Adjusted net income and adjusted earnings per share, both benefited from a low tax rate of approximately 20% in this quarter, which was driven primarily by a larger-than-expected tax benefit associated with previously granted performance-based equity awards that vested in that first quarter. This lower-than-normal tax rate drove about $0.06 to $0.07 of incremental adjusted earnings per share for the quarter.

On a GAAP basis, which includes the ongoing amortization of retention bonuses related to our acquisition as well as the one-time intangible write off associated with our re-branding initiative, the fully diluted loss per share for the first quarter was minus $0.70.

I will now turn the call over to Gregg to review our operating segments in more detail.

G
Gregg Kvochak
SVP, IR

Okay. Thanks, Bob. Growth for our Executive Search segment remained strong in the first quarter as global fee revenue reached $192.9 million, a new all-time high, compared to year-over-year and measured at actual exchange rates, Global Executive Search Fee revenue grew $31.7 million or 19.7% in the first quarter and 19.3% measured at constant currency.

Consistent with recent trends, growth for Executive Search Segment remained broad-based with each of our geographic regions posting strong gains. At constant currency, North America was up 22%, Europe was up 14%, Asia-Pacific was up 21%, and Latin America was up 13%. By industry specialty, growth was also broad-based. Compared to the first quarter a year ago at actual exchange rates, our consumer goods and financial services practices were each up 23%, our technology practice grew 16%, our industrial practice was up 15%, and our life sciences and healthcare practice grew 14%.

The total number of dedicated Executive Search consultants worldwide at the end of the first quarter was 545, up 13 year-over-year and up 4 sequentially. Annualized fee revenue production per consultant in the first quarter was $1.42 million, and the number of new search assignments opened worldwide in the first quarter was 1,708, which was up approximately 3% year-over-year.

Adjusted EBITDA for Executive Search in the first quarter was $46.7 million, up $11.5 million or over 33% year-over-year. The consolidated adjusted EBITDA margin for Executive Search in the first quarter of fiscal '19 was 24.2% compared to 21.9% in the first quarter of fiscal '18.

Now turning to Advisory; in the first quarter, Global Advisory Fee revenue reached $195.4 million, which grew year-over-year by 8.9% and 8.6% measured at constant currency. Growth was driven primarily by strength in both Europe and Asia-Pacific regions, which were up double digits, and by North America which was up approximately 1%. As previously mentioned, global new business awards for the Advisory Segment in the first quarter were up approximately 8% measured year-over-year.

Growth in earnings and profitability for Advisory in the first quarter exceeded fee revenue growth. In the first quarter, adjusted EBITDA was $35.4 million, an improvement of $4.1 million or nearly 14% year-over-year, with an adjusted EBITDA margin of 17.7%, which was up 80 basis points year-over-year. Finally, turning to RPO and Professional Search, where in the first quarter double-digit growth continued. The RPO and Professional Search segment generated $77.3 million of fee revenue in the first quarter, which was up 27.5% year-over-year at actual rates, and 27.3% at constant currency. All geographic regions continue to grow at a double-digit pace in the first quarter.

And as previously mentioned, in the first quarter, the RPO and Professional Search segment was awarded another $70 million of new business globally, consisting of $39 million of long-term RPO assignments, and $31 million of shorter-term Professional Search assignments. Earnings also improved in the first quarter for the RPO and Professional Search segment with EBITDA of $12.5 million, and an EBITDA margin of 16.2%, which were both propped year-over-year.

Now, I'll turn the call back over to Bob to discuss our outlook for the second quarter fiscal '19.

B
Bob Rozek
EVP and CFO

Great, thanks, Gregg. New business activity existing fiscal '19 first quarter and entering the second quarter has been strong globally for Executive Search new business awards in the month of June and July were very strong, and August new business was up approximately 17% year-over-year. If monthly new business patterns remain consistent with prior years we expect Executive Search new business awards to grow sequentially in September, reaching a quarter peak in October. For Advisory, the fiscal second quarter is typically a strong quarter for both new business awards and revenue.

August new business for Advisory was up 18% year-over-year, and 2% sequentially. And if monthly patterns are consistent with prior years we expect new business to improve over each of the next two months in the quarter. With regard to our RPO and Professional Search segment, both business under contract and the pipeline of potential new business opportunities remain strong. And we expect it will drive continued growth in the second quarter. Now, considering these factors and assuming worldwide economic conditions, financial markets, and foreign exchange rates remain steady, and assuming an effective tax rate at the higher end of the 25% to 27% range for the quarter, we expect our consolidated fee revenue in the second quarter of fiscal '19 to range from $470 million to $490 million. And we expect our consolidated adjusted lean earnings per share to range from $0.76 to $0.84.

And then finally, considering the ongoing quarterly amortization of approximately $2.3 million for retention bonuses related to a prior acquisition, we estimate that fiscal '19 second quarter fully diluted earnings per share measured by U.S. GAAP will likely be in the range of $0.73 to $0.81.

And that concludes our prepared. We would be glad to answer any questions you may have.

Operator

Thank you. [Operator Instructions] And our first question is from George Tong with Goldman Sachs. Please go ahead.

G
George Tong
Goldman Sachs

Hi, thanks. Good afternoon. You've recently implemented your account management program for your next layer of large accounts beneath your marquee accounts. Can you discuss how quickly revenues in the account management program grew in the quarter relative to your marquee accounts?

G
Gary Burnison
CEO

Well, we're very early days. So the clinical analysis is that the pipeline which we look at as closely as revenue didn't materially change over the past four months. But again, I'm not discouraged. The reality is when you look at our client base, there's no question about it that there's significant opportunity to drive deeper relationships, deeper penetration. And the starting point is around being client-centric and segmenting the portfolio. Then you have to put teams against that. And so, our -- the first path to this was our marquee account program. And with that now we have over a hundred accounts and it represents 20% of the portfolio. Now we're going for another 400. So it's very aggressive, and I really did not expect to see results pay off in three or four months, but I guarantee you that over time a very systematic approach to segmenting the client portfolio, putting teams against that is going to pay off in the long run for shareholders and for our colleagues.

G
George Tong
Goldman Sachs

Got it, that's very helpful. And I know in prior quarters, you had indicated recently that marquee accounts were up in terms of revenue growth double-digits. Can you comment on whether that trend is holding steady or accelerating in growth just in the marquee…

G
Gary Burnison
CEO

Yes, first quarter was double-digit. So it was very, very good. There're some pockets of weakness, and there's some pockets of strength. And again, when you look at the portfolio overall, I really believe that in a professional services firm 30%-40% of the portfolio really needs to be directed top down with several hundred clients putting dedicated teams against that, and that's the journey that we're on.

G
George Tong
Goldman Sachs

Makes sense. And then lastly, you'd indicated that while 60% of revenues comprise multi-solution clients, it's only really 10% of clients. Can you comment on your traction, specifically with cross selling this quarter relative to earlier quarters and specific data points that highlight incremental success in bundling your solutions?

G
Gary Burnison
CEO

Yes. So there wasn't a material change this quarter. It was about the same, give or take the last quarter [ph], so the data points would be -- when you look at, for example, Search into Advisory almost 20%, 20% of the new business in Advisory coming from quote, if you look at it in the old days, search partners; RPO and Professional Search from Executive Search, much higher than 20%. The other way around, from Advisory to Search, it's about 5%. So we're actually -- that's encouraging that it's going both ways, it's not at the level we want to see it. But I think that actually the way you get at that is not through necessarily training, although that will help. You actually have to put multi disciplined teams against targeted accounts, and they've got to work it for several quarters. That's how you create that blending.

G
George Tong
Goldman Sachs

Got it, very helpful. Thank you.

Operator

And our next question is from Tim McHugh with William Blair & Company. Please go ahead.

T
Tim McHugh
William Blair & Company

All right, thanks. Just ask about Advisory side, can you talk at all about headcount there? I think in three straight quarters it ticked down a little. What's underlying that? And as part of that equation how should we think about retention now particularly a couple of years past the Hay acquisition?

G
Gary Burnison
CEO

I don't have any concerns around that at all. I think that we're managing the workforce. And I do believe that we are undersized in Advisory. There's no doubt about that. And you could make that comment globally, but particularly in North America. And so, yes, we're making a concerted effort to bring talent in, no question about it, which we will continue to do. But the other thing that's much more sustainable for the organization is we have to have a firm system, and so, to use baseball terminology. And so this year was the first year we've just -- we went out to campuses, we're on 20 campuses, hired a bunch of youth off campuses. We just finished two-and-a-half months of training in Dallas, Texas, and now we've put them out to city.

So I think what you're going to see over time is this is going to be a company that's going to hire thousands of youth off campuses, and we're going to train them and develop them. And that's the way of the future. Now having said that, we also have to go to the outside, and so we're going to try to balance those two.

T
Tim McHugh
William Blair & Company

And then you think about Hay in the U.S. at this point, I guess, what's the thinking what's necessary to -- ways [ph] to accelerate the growth there to match kind of what you're seeing elsewhere?

G
Gary Burnison
CEO

I think that it's probably several fold. When we were in sixth grade and we divided up teams, it was invariably the team with the most talent won the game. So I think it's pretty -- you look at it and then you say, wow, given the market size, we have too few people. So we've got to invest in that, there's no doubt there. But it can't be just a people game. And so there has to be a bigger strategy behind that. So part of that is around these, quote "house accounts", the marquee accounts, the managed accounts, to segment the portfolio, put teams to get at it that way. That's another avenue you got to go down.

The third avenue is you really have to have solutions that are repeatable and scalable, and I'm not so sure where we've reached that maturity level, so we've got to go there. And I would hope that over time that it's not just double the hours, that we can actually productize this IP. Now, that's not just North America, that's global. And we still haven't put the points on the board that I would like to.

Amy, I don't know, did we lose you?

Operator

No, I'm sorry. The next question is from Kevin McVeigh with Credit Suisse. Please go ahead.

K
Kevin McVeigh
Credit Suisse

Great, thanks. You just continue to do an amazing job in the RPO. Really, really good growth there, and margins ticked up. Can you just help us kind of think about, Bob or Gary, like at 16.2% what type of range we should think about within that business?

B
Bob Rozek
EVP and CFO

Yes, I would -- I'd be thinking somewhere in the -- we range right now in the 15% to 17%. And obviously we're kind of at the midpoint of that. So it'd be, for the foreseeable future, somewhere between 16% and 15.5%.

K
Kevin McVeigh
Credit Suisse

Got it. And then, Bob, just so I'm clear, was the $0.06 to $0.07 tax benefit factored in to the guidance of $0.67 to $0.75 or is the $0.70 really $0.71 if you used a normalized tax rate or was that $0.06 to $0.07 tax factored into it when you provided the Q1…

B
Bob Rozek
EVP and CFO

No, it was not, Kevin. Because when we did the guidance we didn't know what the ending stock price was going to be on the date that the equity awards invested. And the way that the accounting for that works is you don't deal with it throughout the life of the award, you wait till the date that invest, and then it becomes a discrete item. So the $0.71 to $0.72 of actual compares to what we guided to.

K
Kevin McVeigh
Credit Suisse

So that's $0.67 to $0.75, right, I just want to make sure I've got the apples-to-apples.

B
Bob Rozek
EVP and CFO

Yes.

K
Kevin McVeigh
Credit Suisse

Super. And then the margins overall, can you just remind us, I know there's some seasonality, but how should we expect kind of the seasonality of the margins. It looks like the total adjusted EBITDA came in at 15.2. As we work our way through the year, is there any way to think about a range of how they should trend?

B
Bob Rozek
EVP and CFO

Yes, I would think you'd get a little bit of uplift in Q2. Q2, if you go back over time, is a stronger revenue quarter for us.

K
Kevin McVeigh
Credit Suisse

Yes.

B
Bob Rozek
EVP and CFO

Q3 tends to be, with all the year-end holidays, revenue tends to be a little bit lighter as our folks are off and the clients are off. And then Q4 tends to be our strongest. But you're not going to see hundreds of basis points differences in those margins. So I have sum of between 15 and 16 at the higher end of the range, Q2-Q4 lower end of the range, Q1-Q3.

K
Kevin McVeigh
Credit Suisse

Super. Okay, thank you very much.

Operator

And our next question is from Marc Riddick with Sidoti. Please go ahead.

M
Marc Riddick
Sidoti & Company

Hi, good afternoon. Was wondering if you could give a bit of an update on sort of where you are on the data side of things as far as penetration with customers. Thinking back to when the acquisition took place, you had this piece of data that you were looking to get more utilization. I was wondering if you could give a general overview update as to where you are in that regard and how that's coming along. Thank you.

G
Gary Burnison
CEO

Yes. Look there's a lot of work, a lot of blood, sweat and tears, and a quite a substantial investment to try to build a chassis that we can license. And so, I just talked about the product size part of our business, which today is only 12%. So I would say that truthfully when you look at the growth numbers, the points that we're putting up, it's okay, but it's not at all what we want it to be. So, for example, this last quarter, this product is up 4%. Well, that shouldn't be 4%; that should be 14% plus really. But the truth is that when you actually look at the platform we're trying to put together with the data, this is -- we're building a talent platform that companies can license. So you look at the platform today and our revenue, there has been zero in terms of licensing our IP to make hiring decisions.

Well, that's just crazy. I mean, that doesn't make any sense given the richness of our IP. So I believe that there is a substantial amount of energy in the organization around mining the data, packaging it with IP, and then trying to productize it. But again I think we're probably three, four quarters away from liftoff. I just I think that's the reality building a new platform, working at how we license that whether we have -- in terms of a SaaS model, whether we have the gold levels or platinum levels and all access passes. I mean all those concepts, they take time, but I think the underlying opportunity, it's hard to dispute. Then in terms of the other piece of the data, we have a whole institute that is working at data and improving all the instruments that we use today.

M
Marc Riddick
Sidoti & Company

Okay, great. And I wonder if you could show a little color on the -- there was a mention in the prepared commentary around the Asia-Pacific regions. Why don't you give a little update as sort of how are you thinking about the EMEA region and maybe some of the feedback that you're getting these days as we see the Brexit headlines of the world? Just wondering if you had any thoughts on sort of where you're seeing today and where we are there. Thank you.

G
Gary Burnison
CEO

I'm probably the most proud of what we have in EMEA. I just spent three dedicated months there. I met with a lot of clients, a lot of different people; very, very strong results. If you look at the last several quarters for Korn/Ferry, this last quarter it was up 18%. So it is a -- I think, we have done a very, very good job. Clearly the question of Brexit is huge. I don't think it's getting the air time it really deserves, and it's really -- I live there, it's really hard to tell where that it's going to turn out. I have my own personal view but it troubles me that there is not more attention on it, because it is a -- it's a major issue.

M
Marc Riddick
Sidoti & Company

Agreed, agreed. I appreciate the color. Thank you.

Operator

Thank you. And our next question is from Tobey Sommer with SunTrust. Please go ahead.

T
Tobey Sommer
SunTrust Robinson Humphrey

Thank you very much. To start-up, Bob, can I ask you a couple of numbers questions?

B
Bob Rozek
EVP and CFO

Sure.

T
Tobey Sommer
SunTrust Robinson Humphrey

Why the higher end of the tax rate range, in terms of your guidance, and is it expected to kind of change throughout the year, or is there some other factors causing this?

B
Bob Rozek
EVP and CFO

Yes, Tobey, so where we are right now, and I think the rest of corporate America is in the same boat, everybody is trying to digest the new tax law. And there's a couple of provisions underneath that basically create a new realm of alternative minimum tax and so on. And there're new rules and regulations coming out and interpretations of that law quite frequently. So we are being a little bit conservative until we really understand how all those provisions are going to work their way through our effective rate. And so, we think we're going to be in the 25% to 27% range, and until I see where the number shake out, which obviously have to be by this November. We're going to be conservative in guide towards the higher end of that range.

T
Tobey Sommer
SunTrust Robinson Humphrey

Okay. With respect to -- I guess this was partially addressed in the last question, but just to make sure I understood it, what was product growth in the quarter? And Gary was I correct in hearing that you said like three to four quarters before we should expect kind of a material acceleration in that rate of growth, or are you specifically just referring to kind of some sort of license subscription model?

G
Gary Burnison
CEO

No, no, I think you've asked me before, I think you asked me two calls ago, what is it saying, when can you -- you talked about doubling and tripling this business in terms of opportunity, I think it was you either asked when -- what does it really look like. So now we're a couple more quarters, and I just -- I think we -- now I can probably say we're three to four quarters away from real lift off in that productize business. The growth rate was slightly more than 4% this quarter. I think last quarter it was probably -- I don't know, Bob…

B
Bob Rozek
EVP and CFO

It was around 4%, 5%.

G
Gary Burnison
CEO

Okay, okay. So that's not what we aspire to, for sure. So, I was talking about the total product business.

T
Tobey Sommer
SunTrust Robinson Humphrey

Okay. In the Executive Search segment, how does the uptick compared to historic norms in the reported third quarter and maybe reflected in your guidance, we're hearing that those are coming in better-than-normal, but I'd love to hear what your experience is?

G
Gary Burnison
CEO

They're not remarkably different this quarter, Tobey, versus what we saw in quarter four or quarter three. I mean we've seen over -- I would say over the past probably eight quarters, a slight increase in upticks, but nothing that's going to really move the needle for us. It's up to maybe a $2 million a quarter, but nothing all that dramatic.

T
Tobey Sommer
SunTrust Robinson Humphrey

Okay. Gary, another kind of broader strategic question for you, actually two, they are interrelated. One, are there any changes to management incentive compensation in fiscal '19, and we should be aware of as you look at how you emphasize book margin and growth? And then what is your target for ROIC or return on equity and over what timeframe can you achieve those?

G
Gary Burnison
CEO

Well, this quarter, it's good to see go up for now of 12.5%. I'd talked a couple of calls ago that we'd like to see it grow by 400 bps. And so, I think when I said that, I think it was about 11% or 11.5%. So the good news is -- okay, we've seen that rise, and so there is room there for sure. Obviously, it's got to be in the right economic climate, but there is room there. So that would be my answer on ROIC. What was the other part of your question?

T
Tobey Sommer
SunTrust Robinson Humphrey

Any changes to incentive compensation for management that we should be keep in mind?

G
Gary Burnison
CEO

The top individuals are compensated consistent metrics of basically how the firm does. And so, no material changes in this fiscal year.

T
Tobey Sommer
SunTrust Robinson Humphrey

Okay. Last question from me, could you describe the M&A pipeline and valuation versus six months to 12 months ago, and does this new economic backdrop encourage you to become more aggressive or encourage you to kind of hold your arms and just accumulate cash and wait for a better day?

G
Gary Burnison
CEO

Well, clearly, we've been in the latter camp. That doesn't mean we haven't been looking, because we have in a big way, and so we have been -- it's all about -- look, at the end of the day, it's about culture fit, it's about the IP, the data, and so we have not decreased the effort around investigating ways to scale our business at all.

T
Tobey Sommer
SunTrust Robinson Humphrey

Thank you.

Operator

And our next question is from Mark Marcon with R.W. Baird.

M
Mark Marcon
Robert W. Baird

Good afternoon. And let me add my congratulations, really strong results. I was wondering if you could just talk about the range of reactions to the new branding, particularly within consulting and advisory, both in terms of old Hay folks versus old PDI folks versus new people that you're recruiting and what you're hearing, and also any client feedback that you've gotten.

G
Gary Burnison
CEO

Well, look, I mean, you're going to -- you ask a question like that you're going to get a range of responses, but I just expect -- I mean, I met with hundreds of colleagues, literally hundreds in person, and so over a series of many meetings, many weeks, many days, and I would say that there is a crying out in the organization that now is the right time to pivot and pivot around a unified approach to market. I've got no doubt, no hesitancy at all about that. And so, although when you look at the -- the bell curve, you may have people that it's very hard for them to give up a handle, and to give up a name and to give up -- and I have sympathy for that. So you will certainly -- you would hear that, no doubt about it by firsthand talking to people, looking them in the eye. No question the right decision. Now, we have to operationalize that. And that's really what this branding -- it's not a branding exercise at all; it's much more than that. So that work is still to be done.

In terms of clients, I don't think there is any question that Korn/Ferry has been the brand. It was Korn/Ferry Hay Group, Korn/Ferry Futurestep, don't kid yourself, people used Korn/Ferry. Now, in parts of the world there are several countries where maybe a legacy brand was more dominant than Korn/Ferry, and we will deal with that. The bigger challenge from a client perspective is making Korn/Ferry synonymous with synchronizing talent and strategy to drive performance, because that's a bigger challenge. And we've clearly made a dent in that over the last few years, but I would say that's the bigger hurdle that we still have to overcome.

M
Mark Marcon
Robert W. Baird

And how are you going to attack that in terms of like what are you going to do differently in order to change that client perception to a greater perspective?

G
Gary Burnison
CEO

Well, there's nothing like the good old-fashioned way, and that is when you do good work, that'd be good, more work, and so you develop a reputation over time. So we've got -- look, we've got a very aggressive social media strategy and thought leadership strategy that we -- I could burry you with statistics around media and hits and all that, but there is no substitute for having scale and depth and do that without work that creates that halo around the brands. And now we have in the company today you've got 1,400 people that have responsibility for business origination, and to some extent, development. So you are actually credible in terms of scale to be able to really do those big, big projects. So today, that's actually a possibility.

M
Mark Marcon
Robert W. Baird

Great. And then, Asia-Pac was really impressive from a margin perspective, what's the -- how should we think about the margin profile on a go-forward basis there? And then along those lines, what are you hearing more very, very recently from both your consultants and clients with regards to any concerns around trade war or emerging markets contingent?

G
Gary Burnison
CEO

Yes. So Mark, I will take the first part of that question. The APAC margin was strong. I would expect there to be probably a little bit of diminish in that over the next couple of quarters. We have been doing some hiring in Asia. And so, we will start to see the short-term impact of having folks come on-board, and then having to ramp up, but you might lose a couple of 100 basis points for a couple of quarters. Then once those folks become productive, I think we would be within plus or minus where we are now, 100 basis points or so.

B
Bob Rozek
EVP and CFO

And the table rattling has not impacted yesterday; I mean it just has not impacted client's activity. Now, we will see would that could obviously change, but that has not impacted activity.

G
Gary Burnison
CEO

Yes, we do a monthly revenue call, and Mark I talk to folks out in the field, and we have not done any sort of change in the arm in terms of what the level of business activity that's happening out there.

M
Mark Marcon
Robert W. Baird

Great. And then last question, can you just expand a little bit on the profile on the types of people that you might end up bringing in?

G
Gary Burnison
CEO

The types of -- Mark, I'm sorry, you cutoff, what was it?

M
Mark Marcon
Robert W. Baird

The types of the profiles or the types of people that you would bring in, you mentioned on-campus recruiting; are we talking about more experienced people who have gotten their MBAs or we talking about undergrads, what work profile are you looking at?

G
Gary Burnison
CEO

Yes. So, I would say there is a couple -- there is probably really kind of four buckets of people we are looking at. Now, the farm system, has a couple of bucket, so what I would call the farm system is a more classic, professional services up or out. And I don't want to say out, but it's kind of an upward mobile model. And so that would be undergrads as well as grads, if they could fall into those two buckets. There is beyond that the kind of graduates, undergrads, there is another bucket that we are looking at, that you would classically call in a professional service firm, managers, senior managers, principals, the people that have kind of equal responsibility between executing work and originating works. So, we are really searching for that level. And then the fourth bucket would be a more classical view of a senior partner.

Now, in terms of the actual skill sets, we are looking for -- and those fall into several buckets. We are looking for account leaders, account managers, as you know we got a -- we have started that; we need to expand it in a big way. So account management skill is one bucket. Second bucket is solution architect. So people that can hear a client's problem; take our IP and design a solution, that's totally repeatable by the way in other places, so that is a second bucket. The third bucket is specific kind of consulting skills. So for example, org strategy, leadership development, rewards and benefits, so those would be very, very specific. So those would be the kinds of buckets that we are looking at.

M
Mark Marcon
Robert W. Baird

Great. And when you think ideally about the size of the platform, how -- if you could find all A players today, how big would the Advisory consultant group be at this point, if you…

G
Gary Burnison
CEO

It would be twice the size. I mean it would definitely be twice of size. No question about it, I mean that's not executable, but it is -- the opportunity is there in this kind of market.

M
Mark Marcon
Robert W. Baird

And so when we think about over say the next two to three quarters and just trying to judge the effectiveness from a recruiting perspective by bringing in those type of people, how should we -- what would be a reasonable expectation, in terms of scaling that up?

G
Gary Burnison
CEO

Yes, I think you have to have a balance -- it's not, it's easy to say, right, that you could double or triple that consultant account. That's a very -- and I think that the math would substantial that. However, you have to balance that with many different dimensions. You have to balance it with onboarding, can you assimilate these people, how is that going to work, you've got to take that into account. You've got to take the economic cycle into account. The plane is flying at 38,000, we're not going to tank it to 18,000 and do over. I think we've demonstrated a track record of building and doing what we say.

So I've never guided out headcount more than a quarter, I'm just not going to do that. But I would say that a year or so ago we made a big push on around talent. And you saw it, it was really, really clear, it was loud. And we're also making sure that we're managing the workforce, and you've seen that too. You can tell that we're actually managing the workforce. So we're trying to strike that balance of being prudent for shareholders.

M
Mark Marcon
Robert W. Baird

Perfect. Congrats again.

G
Gary Burnison
CEO

Thank you.

Operator

And we have a follow-up from Tobey Sommer with SunTrust.

T
Tobey Sommer
SunTrust Robinson Humphrey

Thanks. Gary, just wanted to follow-up on the M&A question I had, you said you fell in the later [camp], et cetera, is that a function of valuations or backdrops?

G
Gary Burnison
CEO

Well, they're kind of interrelated, right.

T
Tobey Sommer
SunTrust Robinson Humphrey

Sure.

G
Gary Burnison
CEO

So it's hard to separate. The backdrop does have some -- the determining factor in valuation. So I think that that is, yes. Yes, the backdrop is very sunny.

T
Tobey Sommer
SunTrust Robinson Humphrey

Okay, I guess I was -- by backdrop I was referring to length of cycle or something like that, but you're referring to economic growth being strong, et cetera. Okay, so in that respect I understand they're interrelated. So you're saying valuations are high?

G
Gary Burnison
CEO

The valuations are high?

T
Tobey Sommer
SunTrust Robinson Humphrey

Yes.

G
Gary Burnison
CEO

That's really -- that's such a broad -- we look at it on a company-by-company basis, and I would say that -- I would answer it this way, if there was something that we thought was compelling that really propelled shareholder value we would do it, okay. So again, it's kind of a multidimensional equation. And we would take everything into account. And I would not -- valuation alone would not kill it, if I could answer it that way.

T
Tobey Sommer
SunTrust Robinson Humphrey

Thank you very much.

G
Gary Burnison
CEO

Okay.

Operator

It appears there are no further questions, Mr. Burnison. Please go ahead.

G
Gary Burnison
CEO

Okay. Well, thank you everybody for taking the time. And Amy, thank you for moderating this call. And we're obviously very, very excited. And we look forward to talking to you soon. See you later. Bye-bye.

Operator

Ladies and gentlemen, this conference call will be available for replay for one week, starting today at 6.30 p.m. Eastern Daylight Time, running through the day September 13th, ending at midnight. You may access the Executive Playback service by dialing 800-475 -6701 and entering the access code of 453999. International participants may dial 320-365-3844. Additionally, the replay will be available for playback at the company's Web site, www.kornferry.com, in the Investor Relations section. You may now disconnect.