Korn Ferry (NYSE:KFY) Q2 2024 Earnings Call Transcript

Korn Ferry (NYSE:KFY) Q2 2024 Earnings Call Transcript December 6, 2023

Korn Ferry beats earnings expectations. Reported EPS is $0.97, expectations were $0.96.

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry Second 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 statements within the meaning of 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 of the SEC, including the company’s annual report for fiscal year 2023 and in the company’s soon-to-be-filed quarterly report for the quarter ended October 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 those measures, including reconciliations to the most direct 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 website at www.kornferry.com. With that, I’ll turn the call over to Mr. Burnison. Please, go ahead, Mr. Burnison.

Gary Burnison: Okay. Good afternoon, everybody, and thank you for joining us and season’s greetings. The team is going to get into this in more detail. But there is no doubt that the strategy is working. Despite a softer labor market, our results demonstrate the resiliency of our business. Through a marquee and regional account strategy, multiple talent product offerings, and cross-referring those solutions to our clients, we generated $704 million in fee revenue in the quarter, which was down about 3% year-over-year. Despite a persistent uneven economic environment, earnings and profitability held steady sequentially as we delivered a 14% adjusted EBITA margin. And also, we announced this morning reflecting that we’ve got a much different company today and the confidence that we have in our organization, we increased our dividend by 83%.

I’m proud of our firm and of our colleagues. We continue to develop increasingly relevant solutions in a rapidly-changing world. In particular, our consulting and digital businesses now generate almost 40% of our top-line. And in fact, digital achieved an all-time record revenue at constant currency during the quarter. To put all this in perspective, I want to take a step back for a moment. When I started with our firm, we were a $200 million company. Today, our firm generates several billion dollars in revenue. In fact, our top-line today is about 40% higher than pre-pandemic levels. And now, we’re at the threshold of even greater opportunity. More importantly, we have the possibility of accelerating the trajectory of thousands of organizations.

At the same time, we have to acknowledge that most of the business world is in the midst of a multi-quarter cyclical reset. It has become clear that the economic environment will continue to be challenging in the months ahead. Countries have been transitioning from almost three decades of cheap money to substantially higher interest rates. This reset will require companies and our clients to not only adapt, but adjust, optimize, and innovate, which creates opportunity for Korn Ferry. We have a proven track record of accelerating through many economic terms. The crucial aspect is breaking before the turn and accelerating through it. In times like these, that’s how great companies make their best moves, and Korn Ferry is a great company. Our vision to become the premier organizational consulting firms working and our diversification strategy continues to positively influence our performance.

We have a household brand operating in every major geographic region of the world with world-class IP and talent, unparalleled client access, and a pristine balance sheet, with substantial financial muscle. We power through cycles and are poised to seize opportunity with a three-point strategy. Number one, optimize. Number two, innovate. And number three, consolidate. I’ll now turn the call over to Bob, who will cover all of this in more detail. Bob?

Bob Rozek: Great. Thanks, Gary, and good afternoon, or good morning. Similar to Gary, I’m very pleased with our performance this quarter. It clearly demonstrates that our broader diversification strategy and investment thesis continues to play out. Our consulting and digital businesses both grew year-over-year, and our recently-acquired interim businesses were more durable than our permanent placement talent acquisition solutions. Now this intentional diversification into strategically aligned capabilities provides additional cross line of business referral opportunities and more relevant and scalable solutions for our marquee and regional accounts. It also contributes to not only more durable fee revenues, but to increased earnings stability, as shown in the company’s sequentially stable adjusted EBITDA despite an increasingly complex and uncertain macroeconomic backdrop.

I’m also pleased with our cost management as the company’s adjusted EBITDA margin marked the second consecutive quarter of continued sequential improvement. Additionally, at the end of the second quarter, we took actions to right-size our workforce capacity to better align it with current business realities, as well as to take advantage of productivity gains we’re realizing in this new world of work. These actions will help us to continue with our adjusted EBITDA margin improvement by driving approximately $110 million to $120 million in overall annual cost saves. Finally, and going back to the point Gary ended with, we do plan to continue to seize opportunities in the current environment with our three-point strategy. He said, optimize, innovate, and consolidate.

Let’s start with optimize first. We’re going to continue to drive productivity by leveraging our cost base. In fact, if you take Q2 of FY ’24 and compare that to Q3 of FY ’20, and that was a quarter right before the pandemic, our fee revenue per employee is up 23%. And if you were to pro forma a full quarter of the impact from our recent restructuring actions, it would actually be up 33%. Now let me turn to innovate. We will continue to build moats around our solutions and services using our proprietary data content and IP, which truly differentiates us from our competitors, who generally have to rely on third party data and insights. We are also actively embedding AI into our existing solutions and services to drive greater delivery efficiencies along with greater client impact.

Last, we will continue with our investments to monetize our data content and IP through our digital business. Now I’ll touch upon consolidate, where our efforts are going to be focused on continuing our investment in strategically aligned less cyclical, faster-growing, larger addressable markets. With all of our recently-acquired interim businesses now being fully integrated and the increasing relevance of our services and solutions in the world today, we will continue to leverage our existing client relationships, and our colleagues across all lines of business will drive top-line fee revenue synergies through expanded client penetration. Lastly, we will continue to expand our leadership and professional development business by replicating our success in delivering leadership coaching at scale and an increasing number of clients and leveraging this success into a broader leadership development outsourcing offering.

Now let me turn the call over to Gregg, who will take you through some overall company financial highlights.

Gregg Kvochak: Okay. Thanks, Bob. In the second quarter, global fee revenue was $704 million, which was above the high end of our guidance range, and down 3% year-over-year, or down 5% at constant currency. By line of business, consulting and digital, which combined were approximately 40% of consolidated revenue, continued to be stable, each growing approximately 3% in the second quarter. For talent acquisition, permanent placement fee revenue continued to moderate from post-pandemic highs with executive search, RPO, and professional search down 17%, down 18%, and down 29%, respectively. Fee revenue in the second quarter for interim services was also more stable, down sequentially approximately $2 million, or 2%. Consolidated new business in the second quarter excluding RPO was down 3% year-over-year at actual FX rates, and down 4% at constant currency.

Consulting new business in the second quarter was strong, up 10% year-over-year, driven by EMEA, which was up 34%. Digital new business was up sequentially in the second quarter, but down 15% measured year-over-year, due primarily to a strong fiscal Q2 which included several large contract wins. Similarly, RPO had a strong quarter with new business at $141 million. New business in the second quarter for executive search was down 10% year-over-year and for professional search and interim was up 1% year-over-year. In line with guidance, second quarter earnings and profitability remained sequentially stable. Adjusted EBITDA in the second quarter was $99 million. And despite moderating fee revenue, strong cost control drove adjusted EBITDA margin to 14%, up 30 basis points sequentially.

Finally, our adjusted fully diluted earnings per share in the second quarter were $0.97, down $0.46, or 32%, year-over-year. Adjusted fully diluted earnings per share excludes $70 million, or $1.01 per share, of restructuring charges related to the realignment of our workforce and integration and acquisition costs associated with our recent acquisition. GAAP-diluted loss per share in the second quarter was minus $0.04. Our investable cash position at the end of the second quarter remained strong at $464 million. Through the end of the second quarter, we deployed $65 million of cash, using $28 million for share repurchases and dividends, $28 million for capital expenditures, and $9 million for debt service. Now, I’ll 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 second quarter was $97 million, which was up 3% year-over-year and up 1% at constant currency. Digital subscription and license fee revenue in the second quarter was $32 million, which was approximately 33% of fee revenue for the quarter and up 12% versus Q2 of last year. The strategy of multi-year subscriptions has created some resiliency in digital revenue as this quarter marked the near all-time high in fee revenue for the segment. Global new business for digital was $95 million, with $34 million, or 36%, of the total tied to subscription and license sales. Although the quarterly timing of larger new business projects is different than last year, the overall pipeline for digital remained strong as we head into the back half of our fiscal year.

For consulting, fee revenue in the second quarter was $178 million, which was up approximately 3% year-over-year and up 1% at constant currency. Fee revenue growth was strongest in organizational strategy, which increased 19% year-over-year, and then assessment and succession, which grew 7% year-over-year. The average hourly bill rate continues to climb, now at $413 an hour, which is up over $42 an hour from just one year ago. Additionally, global new business for consulting in the second quarter was up 10% year-over-year, with continued double-digit growth in EMEA, resulting from large organizational strategy wins in the UK and Middle East. Total fee revenue in professional search and interim in the second quarter was $138 million, up $3.6 million, or 3%, versus Q2 of FY ’23.

Breaking down the quarter, year-over-year fee revenue growth was mostly driven by the interim business, which offset moderation in the per-minute placement portion of this segment. Interim services fee revenue grew to $82 million, up from $55 million in the same quarter of the prior year, driven in part by the most recent acquisition. The average interim hourly bill rate has increased to an average of $126 per hour, up from $107 just one year ago. Permanent placement fee revenue declined by $23 million to $56 million year-over-year, down 29% at actual and down 30% at constant currency. The professional search and interim new business increased 1% in the quarter compared to last year, driven by growth in EMEA and aided by the most recent acquisition.

Moving on to recruitment process outsourcing. New business for the second quarter was $141 million, comprised of $53 million of new logos and $88 million of renewals. And total revenue under contract at the end of the quarter was approximately $681 million. Fee revenue totaled $88 million, which was down $20 million, or 18% year-over-year and down approximately 20% at constant currency. Fee revenue is impacted by a moderation in hiring volume in the existing base of contracts. We see this 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 to revenue at their full contract value. Although the quarterly new business can be choppy at times, the pipeline remains strong as RPO continues to win new business with a differentiated service offering in the marketplace.

Finally, global fee revenue for executive search in the second quarter was $203 million, and as expected, experienced a year-over-year decline of 9% at constant currency, compared to the accelerated growth rate during the pandemic recovery last year. Demand continued to moderate across most regions with the exception of Latin America. Global new business in the second quarter for executive search was down 10% year-over-year and down approximately 11% at constant currency. I will now turn the call back over to Bob to discuss our outlook for the third quarter of fiscal ’24.

Bob Rozek: Great. Thanks, Tiffany. November new business came in line with our expectations and the normal seasonal patterns. And 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 third quarter of fiscal ’24 to range from $645 million to $665 million, our adjusted EBITDA margin to improve to approximately 15%, and our consolidated adjusted diluted earnings per share to range from $0.96 to a $1.02. Finally, we expect our GAAP-diluted earnings per share in the third quarter to range from $0.87 to $0.95. Now, in closing, as I look across the organization, we’re extremely well-positioned in terms of what the world is looking for.

Everything today is about talent. There’s a war for talent. Companies are looking for better talent, different talent, talent with IT skills and so on. The collection of our IP data and content woven through our core and integrated solutions really creates a unique and symbiotic ecosystem of service offerings that touch every aspect of an employee’s engagement with his or her employer. We’re the only company in the world that has this collection of IP data, content and assets. It really gives us a great platform to help our clients synchronize their strategy and talent to drive superior performance concrete change coming out stronger on the other side. With that, we would be glad to answer any questions you may have.

Operator: [Operator Instructions] One moment, please, for the first question. The first question comes from George Tong with Goldman Sachs. Please, go ahead.

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Q&A Session

George Tong: Hi. Thanks. Good morning. New business ex-RPO inflected through a decline in the quarter, but it looks like November is following normal seasonal patterns. Can you talk a little bit more about new business trends that you saw by month during and exiting the quarter and if November trends suggest that we essentially formed a bottom in terms of new business?

Gary Burnison: The new business trends over the last five months have been pretty flat. That’s number one. And it does appear that search has stabilized, particularly, taking a look at even the last four quarters. October was substantially better than September, which we would expect, and November came in, which is November is a seasonal month, and it came in exactly where we thought. So, it’s been fairly, fairly stable, pretty consistent in terms of trends.

George Tong: Got it. That’s helpful. You additionally talked about increasing cross-referrals among large marquee and regional accounts. Can you provide some metrics on the extensive cross-selling and where you’re seeing the most amount of cross-selling, which divisions?

Gary Burnison: Well, the cross-selling — look, the marquee and regional accounts is the anchor of our strategy. It’s 38% of our top-line, and in fact, this quarter, it was 38% of new business. And if you look, overall cross-referrals, right now, I think year-to-date are something around 25% of the company’s top-line. And in some businesses, the percentages is higher and in some it’s lower. When you look at RPO, it’s tended to be a very high percentage, substantially higher than 25%. We’ve certainly been very, very thrilled by saying the level of cross-referrals into our integrated business that we didn’t have three years ago. And then that continues to bear fruit. So, parts of the business is higher and some lower and that’s the anchorboard strategy. They have multiple panel offerings, they have reasons to talk to clients and to drive deeper impact and change the trajectory of literally thousands of organizations.

George Tong: Very helpful. Thank you.

Operator: Next question comes from the line of Mark Marcon with Baird. Please, go ahead.

Mark Marcon: Hey, good morning or good afternoon depending on where you are. I have several questions. One, Gary, you started out by basically talking about, hey, we’ve got this big reset in terms of getting ready for changes in rates. From your conversations and what your top consultants and the feedback that they’re giving you, how are they viewing this reset, like how long do they think it’s going to take? How is that impacting talent plans? What are you just seeing from that perspective, because things have been stable for the last five months? And in addition to that, we are seeing some chatter about Goldilocks that may be a soft landing, instead of expected recession. So, I’m just wondering how that all melts together.

Gary Burnison: Well, in my conversations with clients and our consultants, it varies. It varies depending on where you are. There’s parts of the world that are investing heavily and there’s others that are not. My — look, you step back, and this is my read of things, is that, number one, there’s no question the labor market is softer. I mean, a couple of years ago, the United States was producing like 600,000 jobs a month. Last year, it was 400,000. This year, it’s 200,000. And October is probably like 100,000. So, there’s no question that coming off this incredible surge after the pandemic, that the labor market has moderated. I would expect deflation. I think that is going to happen at Korn and we — prices are back to pre-pandemic levels.

You look at company’s results over the past few quarters and there is a consistent theme. Volume down, prices up, package shrinking. I would expect that there to be deflationary pressures, broadly, broadly speaking. And I’m certainly not an economist, but I would think that central banks are going to hold pretty firm in where the rates are for the next several months and mid- to late-’24, maybe there’s some relief in that. But I think that this environment has taken company’s time to adapt and adjust. And I think that’s what you’re saying with a higher cost to carry. But it’s just — it’s clear to me that prices have to come down overall.

Mark Marcon: Great. I appreciate the perspective. With regards to capital allocation, so congratulations on increasing the dividend. I know that that’s been a point of discussion with the Board for quite some time. Can you talk a little bit about the dynamics that led to such a strong increase in terms of the dividend, and just what — how both the top management as well as the Board, what changed in terms of the thinking? And how should how should we interpret that with regards to further investments in terms of areas like interim or professional search?

Gary Burnison: Confidence, confidence, confidence. I mean, that’s the answer. We have a completely different company today than we did several years ago. And we have confidence in our ability to generate sustainable profits. It is not by any stretch of imagination, deviation from our strategy. We have a multibillion dollar opportunity ahead of us. We’re going to continue to make investments to do acquisitions. But it reflects confidence in what the business is today. And you can see it in the results. I mean, you can see a soft labor market. And clearly, the perm recruiting side of the business were the ebb and flow with that. But you look at the other parts, and it’s buoyant. It’s substantially lifted the firm’s resolve. So, it’s all around confidence.

And you look at our growth rate over 20 years, it’s probably about 14%. I think last 10 years, it’s 12%. 40% of that has been M&A, 60% has been organic. We’re continuing to think that will be the playbook going forward. It could change if there is a big opportunity that comes our way. And that’s one of the reasons why we took the actions we did, unfortunately, is to make sure that we’re breaking and that we can make investments and deliver returns to shareholders. So, we think that a balanced approach is the best way. Number one is to invest in the business, as we’ve done. But we also have to be mindful of returning cash to shareholders either through dividends or stock buybacks.

Mark Marcon: Really appreciate that. I’m sure the shareholders do as well. With regards to the — with regards to just the separation and the restructuring that’s occurring, which sections are being impacted the most from that perspective in terms of when we take a look at the overall headcount reduction in that $110 million to a $120 million in terms of cost reductions, which divisions are being impacted the most there?

Gary Burnison: It was fairly broad-based and it kind of follows the trend in new business. Look, this is something that I just — absolutely, it’s gut-wrenching. And it’s a decision was not taken lightly. Thought months about it, tried a lot of different things, and it’s something that just weighs heavily on me even today. But the reality is that great companies make their best moves in times that aren’t as rosy. And to do that, you have to make sure that you have financial freedom and flexibility to keep making investments. And that was the decision that I took, and unfortunately, it impacted about 8% of the organization. And it pretty much followed with the trends that you see in the business for the most part, both geographically, by industry and by solution.