Korn Ferry (NYSE:KFY) Q1 2024 Earnings Call Transcript

Korn Ferry (NYSE:KFY) Q1 2024 Earnings Call Transcript September 7, 2023

Korn Ferry beats earnings expectations. Reported EPS is $0.99, expectations were $0.92.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry First Quarter Fiscal Year 2024 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 call is being recorded for replay purposes. We have also made available in the Investor Relations section of our website 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 statement 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 and in the periodic and other reports filed by the Company with the SEC, including the Company’s annual report for fiscal year 2023 and the Company’s soon to be filed quarterly report for the quarter ended July 31, 2023. Also some of the comments today may reference non-GAAP financial measures such as constant currency amounts, EBITDA, and adjusted EBITDA.

Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measure 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 website at www.kornferry.com. With that, I’ll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.

Gary Burnison: Okay. Thank you, Greg, and good afternoon, everybody, and thanks for joining us. Our team is going to get into the numbers in a second, but I first want to say how incredibly proud I am, proud of our firm, of our colleagues. And our diversification strategy is the right one. I mean, it continues to positively influence our results. I would point out that clearly the market demand for perm placement talent acquisition has softened from post-pandemic highs, but the rest of the portfolio has performed absolutely as designed. I mean, our consulting and digital businesses have never been more meaningful, especially when you think about tomorrow’s economy, when there’s going to be continued demographic shortages, skill shifts, all over the globe.

I really — as I step back and tap Google Earth, I think much of the business world is in the midst of a multi-quarter cyclical reset, not only in how we work, but also adapting to an interest rate environment that we haven’t seen in almost two decades. This transitory period is going to bring about, I think, significant change and more importantly, opportunity for Korn Ferry, and we’re going to seize that opportunity with a three-point strategy: number one, optimize; two, innovate; and three, consolidate. And Bob’s going to get into that a little bit more, in his remarks. And I would just conclude by saying, while we’re certainly not where we used to be, we’re definitely on the road to where we want to be, the firm that enables people and organizations to be more than.

Bob, I’ll turn it over to you.

Bob Rozek: Great. Thanks Gary. And good afternoon or good morning, depending on where you’re calling in from. Listen, I echo Gary’s comments in that we’re pleased with the results from the first quarter of the fiscal year as our earnings and profitability remain sequentially stable despite the challenging macroeconomic backdrop as well as a seasonably slower fee revenue quarter. As I step back and put the quarter in context, I’m also pleased that our results are a clear demonstration that we continue to successfully execute our strategy. We’ve built a company with a portfolio of core and integrated human capital solutions that are both highly relevant in the world today, as well as synergistic with respect to top line.

In an environment where other employment services companies are seeing downward pressure on their top line, as we’ve executed our strategy, our fee revenue was essentially flat year-over-year as client demand around solutions such as workforce transformation, assessment succession, interim contract labor offset the expected moderation in permanent placement talent acquisition. Now you heard Gary speak about our strategic focus going forward, optimize, innovate, and consolidate. So, let me start with optimize first. And we are going to continue to drive productivity by leveraging our cost base. In fact, if you take Q1 of FY24 and compare that to Q3 of FY20, that’s the quarter right before the pandemic, our fee revenue per employee is up 18%.

We’ll also continue to pursue opportunities in faster growing economies, with governments that are driving economic infrastructure and human capital initiatives, with our marquee and regional accounts, and with our across line of business referrals. Now let me turn to innovate. We will be at the forefront of talent and organizational data ensuring that our IP is fit-for-purpose for the foreseeable future. We are going to continue to leverage new technologies, as they emerge such as generative AI, to drive greater client impact. We’ll continue with our investment to monetize our intellectual property through our digital business, and increase our emphasis and investment in our expansive and proprietary data. Last, I’ll touch upon consolidate, where our efforts are going to be focused on, continuing our investment in strategically aligned, less cyclical, faster growing and larger addressable markets.

We’re going to continue to focus on building out a global executive and professional interim business, expanding our business in leadership and professional development, as well as our capabilities in leadership development outsourcing. And we’ll continue to explore opportunities in strategic and operational consulting. Now with that, let me turn the call over to Gregg who is going to take you through some of the overall company financial highlights.

Gregg Kvochak: Thanks, Bob. In the first quarter, global fee revenue was $699 million, flat year-over-year at actual foreign exchange rates and at constant currency. Fee revenue continued to moderate from post-pandemic highs in our permanent placement talent acquisition businesses and was offset by stable revenue for both, consulting and digital, and revenue from our recent investments in interim services. By line of business measured year-over-year at constant currency, fee revenue was down 12% for executive search, down 21% for professional search permanent placement, and down 16% for RPO. In contrast, fee revenue growth measured year-over-year at constant currency was up 1% for consulting, up 5% for digital and aided by our recent acquisitions of ICS and Salo, fee revenue for interim services was up $59 million.

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Consolidated new business in the first quarter, excluding RPO, was up 1% year-over-year at actual rates and up 2% at constant currency. Consistent with fee revenue, new business in the first quarter moderated most in executive search and permanent placement professional search. Earnings and profitability measured year-over-year also moderated in the first quarter. Adjusted EBITDA in the first quarter was $96 million with an adjusted EBITDA margin of 13.7%. Consistent with recent quarters, earnings and profitability in the first quarter were impacted by the mix shift in fee revenue by line of business, investments in headcount to preserve fee generating and execution capacity, and product development initiatives specifically for digital. Additionally, it should also be noted that adjusted EBITDA in the first quarter was essentially flat sequentially, with a 30 basis-point improvement in margin, driven primarily by cost control measures implemented over the last two quarters.

Finally, our adjusted fully diluted earnings per share in the first quarter were $0.99, down $0.51 or 34% year-over-year. Adjusted fully diluted earnings per share exclude approximately $6 million or $0.10 per share of restructuring, integration and acquisition costs, primarily related to our acquisitions, as well as an incremental reduction in our real estate footprint. Our investable cash position at the end of the first quarter was $481 million. In the first quarter, we deployed $34 million of cash, $4 million for share repurchases, $8 million for dividends, $13 million for capital expenditures, and $9 million for debt service. Now, turn the call over to Tiffany to review our operating segments in more detail.

Tiffany Louder: Thanks, Gregg. Starting with KF Digital, global fee revenue in the first quarter was $88 million, which was up 5% year-over-year at actual and at constant currency. Digital subscription and license fee revenue in the first quarter was $33 million, which was approximately 37% of fee revenue for the quarter. The increase was primarily due to the continued execution of our strategy to move from point sale solutions to longer term subscription and license sales, and also an increase in assessment tools as the technology industry began investing again with a focus on leadership development. Global new business for KF Digital was $93 million with $32 million or 34% of the total tied to subscription and license sales.

For consulting, fee revenue in the first quarter was $168 million, which was up approximately 1% at both actual and constant currency. Fee revenue growth was strongest in assessment and succession, which increased 10% year-over-year. Average hourly bill rates continued to climb, now close to $400 an hour, which is up over $30 an hour from just one year ago. Additionally, global new business for consulting in the first quarter was up 7% year-over-year at constant currency with double-digit growth in EMEA and Latin America. The professional search and interim business increased 29% at constant currency in the first quarter versus last year, driven by double-digit strength in North America and aided by the current year acquisitions. Total fee revenue was $142 million, up $43 million or 44% over the same time period.

Breaking down the quarter, growth in the interim business was more than enough to offset moderation in the permanent placement portion of the segment. Interim services fee revenue grew to $84 million from $25 million in the same quarter of the prior year, driven primarily by the recent acquisitions. Permanent placement fee revenue declined by $16 million to $58 million year-over-year, down 22% at actual and down 21% at constant currency. Moving on to recruitment process outsourcing, new business for the first quarter was $48 million, and total revenue under contract at the end of the quarter was approximately $680 million. Fee revenue totaled $96 million, which was down $18 million or 16% year-over-year and down approximately 16% at constant currency.

Fee revenue was impacted by a moderation in hiring volume in the base and backlog. We see the slowdown as transitory and believe RPO is well positioned to benefit when hiring returns to more normalized levels in the base and the larger, more recent wins begin converting for fee revenue. Although the quarterly new business can be choppy at times, the pipeline remains strong as RPO continues to win new business, the differentiated service offering in the marketplace, which includes our new data-driven recruiting technology, Nimble, that uses — that draws upon our unique data, IP and talent management expertise. Finally, global fee revenue for executive search in the first quarter was $205 million, and as expected, experienced a year-over-year decline of 12% at constant currency compared to the high growth rates enjoyed during the pandemic recovery in the first quarter of last year.

Demand continued to moderate, most notably in North America and Latin America, followed by EMEA and APAC. Global new business in the first quarter for executive search was down 14% year-over-year at actual and at constant currency. I will now turn the call back over to Bob to discuss our outlook for the second quarter of fiscal ‘24.

Bob Rozek: Great. Thanks, Tiffany. Now, assuming no new major pandemic-related lockdowns or further changes in worldwide geopolitical conditions, economic conditions, financial markets, and foreign exchange rates, we expect fee revenue in the second quarter of fiscal ‘24 to range from $675 million to $695 million, our adjusted EBITDA margin to be 13.5% to 14%, and our consolidated adjusted diluted earnings per share to range from $0.91 to $1.1. Finally, we expect our GAAP diluted earnings per share to range from $0.85 to $0.97. Now, in closing, we have amassed a unique collection of intellectual property, data, content and science that really is aligned to helping companies solve their business and human capital issues. With these assets, we will continue to partner with clients, helping them build long-term talent strategies that balance company growth with the needs of employees.

Also, with the synergistic assets, which really touch every aspect of an employee’s engagement with his or her employer, we are well-positioned to continue to drive top line growth. No business issue or problem has ever been solved without the involvement of people, and that’s exactly where we come in, working through and with people. We help individuals and organizations exceed their potential every day. With that, we would be glad to answer any questions you may have.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of George Tong from Goldman Sachs.

George Tong: In the past you’ve provided data on cross-selling interim search across your various segments. Can you provide an update on cross-selling and include traction with business lines beyond interim, particularly within your marquee and regional accounts?

Gary Burnison: It continues to be very, very good. We find overall for the platform, number one, the global marquee and regional accounts are almost 40% of the portfolio. Then when you look at the cross referrals, they’re typically in any quarter 25% to 30%. And you would find that cross-referral percentage to be higher into RPO, into pro search for sure. When you see the cross-referrals into digital, it’s about 35% or so. So, overall, it continues to demonstrate that the stretch is working, that we have more reasons to talk to clients. And that continues to be a huge opportunity for the firm.

George Tong: Got it. That’s helpful. And then within your RPO business, new business fell approximately 68% year-over-year to $48 million in the fiscal first quarter. Can you talk a little bit about what you are seeing within RPO, and when you would expect new business trends to improve?

Gary Burnison: Well, I think, one of the broader trends that’s happening in what I really consider to be a multi-quarter cyclical reset is what I would call labor hoarding and it wasn’t that long ago, 3.5 years ago when companies had to take pretty drastic measures given what’s happening with COVID. Then you had this incredible uplift in demand almost overnight. You had the great resignation. And you saw people switching jobs, getting 20%, 25% salary bumps, and there was really a mad dash for talent. And I think that many CEOs have been reluctant to take drastic action on their workforce. And one of the hardest positions to recruit during the great resignation was actually recruiters. And so, companies built up fairly robust HR staffs.

And I think what you’re seeing now is in-sourcing, which is something that I haven’t seen, I think this is my 86th earnings call, and I just — you typically don’t see that at this point in a cycle. And I would call it labor hoarding. And so, that’s definitely impacted our RPO business. And when you look at new business, it does tend to be very, very lumpy. So, the last couple of years, we’ve done about $600 million or so in new business in each of those years. In the first quarter, we did like $50 million here. I would expect the second quarter that that number will be substantially higher, maybe $100 million to $150 million. Now, would I expect new business to be $600 million again in this year? No, I wouldn’t. But, would it be $525 million, $550 million?

Yes, I think that’s a reasonable estimate. And — but look, the pipeline, as Tiffany said, looks very, very good. The backlog looks good. But clearly, in-sourcing and labor hoarding is absolutely having an impact on that RPO business. No question about it.

Bob Rozek: And Gary, this Bob. Hey George, this is Bob. Just to weigh in a little bit. If you notice, when we talk about new business, we always do it without RPO because of the choppiness that we see in that business. So, you can’t really look at one quarter in isolation and say that new business is up or down. I think you have to look at it over some time horizon. In fact, if you go back last year in FY23, it was like $150 million in Q1; it was $290 million in Q2; it was $44 million in Q3; and $115 million in Q4. So, you don’t see the sort of smooth linear pattern in RPO that perhaps you do in the other businesses. So, you just have to keep that in mind as you think about the RPO in new business. And as Gary said, we feel very, very good about the pipeline and the strength of that pipeline.