Korn Ferry (NYSE:KFY) Q3 2024 Earnings Call Transcript

Korn Ferry (NYSE:KFY) Q3 2024 Earnings Call Transcript March 6, 2024

Korn Ferry beats earnings expectations. Reported EPS is $1.07, expectations were $0.99.
KFY isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Korn Ferry Third 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 final — 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 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 January 31, 2024. 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. Number one, I’m enormously proud of our organization and how we continue to acclimate, innovate and align our business to the opportunity ahead. Clearly, the strategy is working. The results for the quarter, we did about $669 million of fee revenue, which was down 2%. But in terms of the strategy working, our non-search offerings provided a substantial buffer against the more cyclically sensitive recruiting offerings. Earnings and profitability were also good, 15.2% EBITDA margin. And the revenue from Consulting and Digital, when combined with our Interim business, now represent 50% of our topline. And during the quarter, our Consulting bill rate increased 12% and our Digital Subscription & License revenue increased 11% over the prior year.

In today’s world, as organizations toggle between perform and transform, it’s clear that vertical is out and horizontal is in. And that’s exactly the same for us and it’s gratifying to see the results of this cross-firm collaboration strategy. Today, we’re approaching almost $3 billion in fee revenue with a balanced portfolio across solutions and geographies. That’s now generating over a third of our fee revenue from our very successful Marquee and Regional account program, where just four short years ago, our top five Marquee and Regional accounts averaged around $19 million per account, with the largest at $26 million. Compared to today, where our top five average almost $30 million, and our largest account has a run rate of almost $50 million, driven to a large extent by this horizontal approach by our cross-line of business referrals, which today generate about a quarter of our fee revenue.

And further to that point, when I look at our $350 million plus Digital business, today, 30% of our fee revenue is generated from Consulting referrals. And we’re looking to expand this horizontal focus even further through four primary Digital growth drivers. Number one, a firm-wide push around Digital sales, Digital offerings. Secondly, increasing our commercial output and sales productivity. Third, enhancing our product offerings, like our talent applications and talent platform. And finally, increasing our Digital revenue through partnerships, including offering joint solutions and opportunities with HR technology providers. It’s clear, given the results over the last few quarters, that we’re at the threshold of even greater opportunity.

And regardless of the environment, from one cycle to the next, our vision remains unchanged to become the premier organizational consulting firm. Our household brand, unparalleled IP, and diversification strategy will continue to positively influence our performance and accelerate the trajectory of thousands of organizations. Indeed, Korn Ferry is uniquely positioned as a firm relentlessly focused on synchronizing strategy, operations and talent. A firm that offers increasing relevant solutions in a rapidly changing world and I think we’re only really scratching the surface of what we can become. With those short remarks, I’m joined by Tiffany, Gregg, and Bob. And Bob, I think, I’ll turn it over to you next.

Bob Rozek: Great. Thanks, Gary, and good afternoon and good morning. Before I jump into the numbers, I just want to highlight a couple of points. First, I think, the third quarter was a very good quarter and I’m extremely proud of my Korn Ferry colleagues and all that they’ve accomplished. Second, equally as important, I think, our performance this quarter continues to demonstrate that our strategy is working. The third quarter results were ahead of our expectations and really marked a strong start to the back half of our fiscal year. Both earnings and profitability improved year-over-year and sequentially despite seasonally lower fee revenue. A result of increasing productivity by leveraging our cost base. Again, an overall positive scorecard for our broader diversification strategy.

We’re excited about and confident in this strategy as it continues to play out just as we expected and have talked about. With resilience and growth in our Consulting and Digital business offsetting, cyclical moderation and portions of our talent acquisition offerings. We continue to leverage existing client relationships, our colleagues across lines of business and our unique IP data and content to drive topline synergies with a particular focus on our market and regional accounts as you heard Gary talk about that. A number of our key operating statistics improved in the quarter. We had higher hourly bill rates in both Consulting and Interim, which are up 12% and 21% year-over-year and are really reflective of the exceptional value and impact our services deliver to our clients.

Our Subscription & License fee revenue in Digital increased 11% year-over-year and was actually 38% of Digital’s total new business for the third quarter, which illustrates the underlying strength and relevance of our data and solutions, as well as contributing to increasing fee revenue stability going forward. Equally important, I’m pleased with the year-over-year and sequential growth of our earnings and profitability. The adjusted EBITDA margin was 15.2% in the third quarter, with Digital, Consulting and RPO all improving their profitability, both year-over-year and sequentially, and Exec Search improving sequentially. Last, I’d like to highlight our balanced approach to deploying capital, specifically capital return to shareholders.

In addition to our substantial dividend increase last quarter, this quarter we increased our share repurchases, acquiring 383,000 shares, which brings our year-to-date share repurchase to 565,000 shares. A total of $67 million has been returned to shareholders through a combination of dividends and share repurchases year-to-date, and our Board just approved another dividend of $0.33 a share that’s payable on April 15th. 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 third quarter, which is typically seasonally slower, global free revenue was $669 million and was down only 2% year-over-year, measured at both actual rates and at constant currency. By line of business, Consulting and Digital grew 3% and 6%, respectively, year-over-year, and combined generated 38% of total fee revenue in the third quarter. Fee revenue moderation in the third quarter for most of our talent acquisition solutions continued to stabilize. Executive Search and RPO were down 6% and 22%, respectively, year-over-year, while Professional Search & Interim were up 11% year-over-year, primarily driven by Salo, which was acquired in November of 2022. Consolidated new business in the third quarter, excluding RPO, was flat year-over-year at both actual rates and at constant currency.

By line of business, Digital new business grew 2% year-over-year, Consulting was flat year-over-year, and Professional Search & Interim was up 9% year-over-year, driven in part by the acquisition of Salo. Executive Search new business was down 6% year-over-year, with recent monthly data points indicating that global demand is stabilizing. For RPO, new business in the third quarter was strong at $122 million and includes $83 million of renewals and extensions, and $39 million of new logo wins. Exiting the third quarter and entering our fourth quarter, consolidated new business trends continue to improve. Excluding RPO, consolidated new business was up 11% and approximately 5% organically year-over-year in January and in line with expectations in February.

Earnings and profitability also continue to improve in the third quarter. Adjusted EBITDA in the third quarter grew 6% year-over-year to $102 million with an adjusted EBITDA margin of 15.2% and was up 3% sequentially with a 120-basis-point improvement in margin despite seasonally slower fee revenue. Strong cost controls and greater consultant and execution staff productivity continues to drive growth and profitability, which has now improved sequentially for three consecutive quarters. Finally, our adjusted diluted earnings per share in the third quarter were $1.07, up 6% year-over-year and up 10% sequentially. Adjusted fully diluted earnings per share exclude $6.4 million or $0.12 per share of after-tax restructuring and acquisition integration costs, which were positively offset by $9.7 million or $0.18 per share of non-recurring tax benefits.

GAAP fully diluted earnings per share were $1.13 in the third quarter. Our investable cash position at the end of the third quarter remains strong at $496 million and our capital allocation continues to be balanced. Through the end of the third quarter, we deployed $122 million of cash using $37 million for capital expenditures, $18 million for debt service and returned $67 million to shareholders in combined dividends and share repurchases. With that, 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 third quarter was $90 million, which was up 6% year-over-year at actual rates and at constant currency. Digital Subscription & License fee revenue in the third quarter was $33 million, which was approximately 37% of fee revenue for the quarter and up 11% year-over-year. Global new business for KF Digital was $111 million, with $42 million or 38% of the total tied to Subscription & License sales up from 36% last quarter. The overall pipeline for Digital remains strong as we head into the fourth quarter and into the next fiscal year. For Consulting, fee revenue in the third quarter was $167 million, which was up approximately 3% year-over-year at actual rates and at constant currency.

Fee revenue growth was strongest in organizational strategies, which increased 9% year-over-year. Today, we are selling larger and more complex transformational engagements, which use our rich proprietary data to drive unique and differentiated insights. Consulting’s average bill rate continues to climb, now at $438 an hour, which is up over $46 an hour or 12% from just one year ago. Adjusted EBITDA margins also improved, increasing 40 bps sequentially and by 230 bps year-over-year. Additionally, global new business Consulting in the third quarter was flat year-over-year, with double-digit growth in EMEA and in North America. Total fee revenue in Professional Search & Interim in the third quarter was $131 million, up $13 million or 11% year-over-year.

Breaking down the quarter, year-over-year fee revenue growth was mostly driven by the Interim portion of the business, which offset moderation in the Permanent Placement portion of the segment. Interim fee revenue grew to $78 million from $53 million year-over-year, driven by the recent acquisition of Salo. Interim’s average hourly bill rate has increased to $129 per hour, which is up $22 an hour or over 20% from one year ago and reflective of the added value of being part of the broader Korn Ferry ecosystem. Professional Search and Permanent Placement fee revenue declined by $23 million or 19% year-over-year, to $56 million. Professional Search & Interim new business increased 9% year-over-year in the third quarter, aided by the recent acquisition of Salo.

Moving on to Recruitment Process Outsourcing. New business for the third quarter was $122 million, comprised of $39 million of new logos and $83 million of renewals, which included several Marquee accounts. Total revenue under contract at the end of the quarter was approximately $696 million. Fee revenue in the third quarter totaled $81 million, which was down $23 million or 22% year-over-year at actual rates and constant currency. Fee revenue was impacted by moderation in hiring volume within the existing base of contracts, as well as labor hoarding conditions, which have continued in the market. Historically, fee revenue averaged 106% of the original contract value, which is why we view the current slowdown in demand as transitory and believe RPO is well positioned to benefit in client hiring returns to more normalized levels.

The pipeline remains strong as RPO continues to renew existing clients and win new business with a differentiated service offering in the marketplace. Finally, global fee revenue for Executive Search in the third quarter was $199 million, down 6% at actual and 7% at constant currency. Overall, global demand in the third quarter would indicate that demand is stabilizing. Additionally, consultant productivity has improved, driving a year-over-year 222-basis-point improvement in adjusted EBITDA margins. I will now call the turn — turn the call back over to Bob to discuss our outlook for the fourth quarter of fiscal 2024.

Bob Rozek: Great. Thanks, Tiffany. Monthly new business trends exiting our third quarter and entering the fourth quarter have begun to stabilize. January new business was up 11%, 5% organically year-over-year, February new business was in line with our expectations and we are well positioned to deliver our March new business, which historically is one of our best new business months of the year. Assuming normal monthly seasonal new business patterns and assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets and foreign exchange rates, we expect fee revenue in the fourth quarter of fiscal 2024 will range from $675 million to $695 million, our adjusted EBITDA margin to improve to approximately 15.3% to 15.4%, or I’m sorry, 15.5%, and our consolidated adjusted diluted earnings per share to range from $1.09 to $1.17.

Finally, we expect our GAAP diluted earnings per share in the fourth quarter to range from $1.06 to $1.14. Now in closing, we’ve made substantial progress as demonstrated by our continuing performance in delivering our strategic plan to lead the market in organizational consulting. Our topline diversification continues to serve us well as the non-permanent placement talent acquisition portions of the business, which represent almost 50% of fee revenues, Gary mentioned, remain on track to deliver consistent growth. Our IP, data and science-backed services and solutions continue to differentiate us in this war for the best talent. Further, our strong cost based management really positions us to deliver continuing improvements in earnings and profitability, and positions us to successfully continue our balanced approach to capital deployment.

As I always say, we’re at the beginning of what’s going to be a very long ballgame and I truly believe our best is yet to come. With that, we’d like to answer any questions that you may have.

See also 15 Countries With Most Effective Gun Control In The World and 20 Countries with Most Bombers and Superior Air Force.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Trevor Romeo from William Blair. Please go ahead.

Trevor Romeo: Hi. Thanks so much for taking the questions here. The first one is just kind of on the overall macro and demand backdrop. I think if you look at some of the CEO confidence surveys, we’ve seen those increase a little bit so far in the last couple of months. I think the capital markets backdrop feels a bit more stable. It seems like maybe fewer people are talking about a severe recession now. So I guess, how much change have you started to see in overall demand sentiment and what do you think from this point could be a catalyst to start seeing a more significant demand recovery?

Gary Burnison: Well, the latter part is a tough question. Clearly, we’ve seen those same trends for sure. As I talked about on the last earnings call, that my expectation was you’d start to see deflation — deflationary pressures. I think you’re starting to see that for sure. Obviously, everybody is on pins and needles with respect to the Fed. But I still, what I’ve said for some time, I think, we’re in the middle of a multi-quarter recess, and back to a period of time where rates would be at more normalized levels from a period of two to three decades of very cheap money, and I think, companies are adjusting to that reality. And what that is creating is a focus on organizations to have a more horizontal approach. Less vertical, more horizontal, and perform at the same time they transform, which creates opportunities for our Consulting business in Digital offerings, which is exactly what you’re seeing.

And CEOs are looking not just at their strategy and how to be more horizontal, but looking at their leadership and their talent. And I think that’s reflective of the engagements that we’re winning today. I would say that there, as I was listening to Tiffany and Gregg and Bob, the word that kept coming up was stabilizing and I think that is absolutely true for sure. And I do think there’s some green shoots, and it’s hard to, again, I’m not going to say that two months or three months make a trend. But certainly when you look at the most cyclical parts of at least our business, you take, for example, Pro Search, number one. We have seen an uplift in volume and we think that uplift is 15% to 20% over the last few months and that’s what we’re expecting in the fourth quarter.

That’s what February delivered. So I think that’s a positive — a very positive sign, and Interim has also stabilized as well. So I think those are, for us, I think those are two good green shoots, and I think, they do portray a positive sign for the labor market.

Trevor Romeo: Okay. Thanks. Thanks, Gary. That’s helpful. Maybe a follow-up on margins, nice improvement to 15% EBITDA in the quarter. Looks like a little bit of further improvement in the guidance. As we think about kind of modeling margins maybe beyond the next quarter, can you talk about some of the puts and takes, and maybe base case for fiscal 2025 and how quickly you could get back to that 16% to 18% target range you’re looking for?

Gary Burnison: Well, the — we — that is the longer term targeted 16% to 18%. If I just dial it back before the pandemic on an apples-to-apples basis, so adjusting for the mixed shift as we entered this new business called Interim, which today is about $350 million. It was zero four and a half years ago. That impacts the margin compares by 200 basis points to 250 basis points. So if you — when you adjust for that, pre-pandemic we were running 12%, 12.5% pro forma adjusted for the mixed margin. Today we’re at 15%. So profitability is substantially ahead of where it was pre-pandemic. The business is up, call it, third topline is up kind of 30% from the pre-pandemic levels. Both of those data points I’m extremely proud on.

We have to deliver profitable revenue growth and we do think there’s some upside in the EBITDA margin. And when that can crank up to 16% to 18%, I think part of that depends on the Fed and what a more normalized rate environment is going to look like. The Search business today is, call it, $800 million. I mean, it got to as high as $930 million, which probably isn’t a good compare. But clearly there’s a lot of room there. There’s room on Pro Search. There’s room on Interim. I think the Consulting business we’re scratching the surface. So at the end of the day, in this kind of business, it’s really about the topline and that’s why we’ve got a strategy really focused on One Korn Ferry, a horizontal approach to going to market and I think that’s reflective in the data around our Marquee and Regional accounts, as well as the cross referrals.