Korn Ferry (NYSE:KFY) Q3 2023 Earnings Call Transcript March 8, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry Third Quarter Fiscal Year 2023 Conference Call. 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 we 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 2022 and the company's soon to be filed quarterly report for the quarter ended January 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 Gary Burnison. Please go ahead, Gary.

Gary Burnison: Okay. Thanks, Greg and good afternoon, everybody. Thanks for joining us. Number one, I'm very proud of our third quarter performance, particularly in light of the macroeconomic environment. Given our scale and the depth and breadth of our IP data and content, we are incredibly well positioned to enable our clients to navigate an economy in transition. Our strategy is working. We've built synergistic businesses around Executive Search that are generating more durable fee revenues. We're going to continue to prioritize investment in the larger, faster-growing, less cyclical markets that set our firm and our clients up for success. As an example, the recent addition of Salo now brings our Interim Services to be more than 10% of our firm's revenue on a pro forma basis.

This wasn't even a business for us a year ago. And yes, this might be the most anticipated downturn ever but this is also a transitory time. And like others in the past, it also brings opportunity. It's a proving ground for the efficiency of our strategy, the strength of our culture, the resilience of our colleagues and the potency of the Korn Ferry brand. With that, Bob, I'll turn it over to you.

Bob Rozek: Great. Thanks, Gary and good afternoon and good morning, everyone. Our results in the third quarter continue to provide proof that our growth strategy is working. For instance, we continue to demonstrate the ability to drive top line synergies between our solutions. As an example, our recent acquisitions in the Interim space which we believe provides real outsized opportunities for growth, they have created almost 700 additional engagement wins resulting in an incremental $43 million in fee revenue since the third quarter of fiscal year '22 when we acquired the Lucas Group. And this is all through cross-sales between the acquired entities and legacy Korn Ferry. Cross-sells between our other lines of business and both our marquee and regional accounts, both continue to also perform very well in the quarter.

I recently celebrated my 11th year with Korn Ferry. And one of the reasons why I joined the company was the growth strategy. It really resonated with me and I believe more deeply in it today. We are relentlessly driving an integrated solutions-based go-to-market strategy, delivering unparalleled client excellence, extending the Korn Ferry brand, advancing Korn Ferry as the premier career destination and we're pursuing transformational opportunities at the intersection of talent and strategy. This growth strategy served us well back in 2012 when I joined and it continues to do so and even more today. Let me turn the call over to Gregg, who will take you through some of the company -- overall company financial highlights.

Gregg Kvochak: Okay. Thanks, Bob. Turning to our third quarter financial results. Fee revenue was $681 million for the quarter which was flat year-over-year and up 4% at constant currency. By line of business, fee revenue was mixed as demand in Executive Search and permanent -- placement professional search moderated from post-pandemic recovery highs while our Consulting, Digital, RPO and Interim Solutions remained relatively stable. Measured year-over-year at constant currency, Consulting was up 4%, Digital was essentially flat and RPO was up 9%. Including revenue from recently acquired businesses, Professional Search & Interim was up 33% at constant currency, while Executive Search was down 9%. In the third quarter, consolidated new business, excluding RPO was up 5% year-over-year at constant currency and up approximately 1% at actual rates, with growth in all lines of business except Executive Search.

In the third quarter, adjusted EBITDA was $96 million with an adjusted EBITDA margin of 14% which was in line with our guidance. Earnings and profitability were impacted by an overall mix shift in fee revenue to lower-margin lines of business, investments in fee earner and execution capacity and to a lesser extent, wage inflation. Adjusted fully diluted earnings per share in the third quarter were $1.01 which was down $0.58 or 36% year-over-year. Adjusted fully diluted earnings per share excludes an after-tax charge of $42 million or $0.80 per share related to the realignment of our workforce and the impairment of certain real estate assets. GAAP fully diluted earnings per share in the third quarter were $0.21. Our investable cash position remains strong and our current capital deployment continue to be balanced.

For all of fiscal '23, through the end of the third quarter, we repurchased approximately $80 million of our stock, paid cash dividends of approximately $25 million, deployed $99 million for business acquisitions and funded about $48 million of capital expenditures, most of which was directed towards product development initiatives for our digital business. With that, I'll now turn the call over to Tiffany to review our operating segments in more detail.

Tiffany Williams: Thanks, Gregg. Starting with KF Digital, global fee revenue in the third quarter was $85 million which was down 6% year-over-year and approximately flat at constant currency. Digital subscription and license fee revenue in the third quarter was $30 million which was approximately 31% of fee revenue for the quarter. Global new business for KF Digital was $109 million, with $39 million or 35% of the total subscription and license sales. Earnings and profitability in the quarter were impacted by investment in product development initiatives and a slight uptick in SG&A. For Consulting, fee revenue in the third quarter grew to $162 million which was flat year-over-year and up approximately 4% at constant currency.

Fee revenue growth was strongest in organizational strategy which grew 12% versus prior year. Additionally, global new business for Consulting in the third quarter was up 9% year-over-year at constant currency. The Professional Search & Interim business -- new business increased 30% in the third quarter versus last year, driven by double-digit strength in North America, aided by the current year acquisitions. Total fee revenue was $118 million, up $28 million or 31% over the same time period. Breaking down the quarter, growth in the interim business was more than enough to offset the expected deceleration in the permanent placement portion of the segment. Interim Services fee revenue grew to $53 million from $15 million in the same quarter of the prior year, driven in part by the recent acquisitions of Patina and ICS.

Permanent placement fee revenue declined by $10 million to $65 million year-over-year, down 13% at actual and down 11% at constant currency. Moving on to recruitment process outsourcing. New business for the third quarter was $44 million and total revenue under contract at the end of the quarter was approximately $837 million. Fee revenue totaled $104 million which was up $5 million or 5% year-over-year and up approximately 9% at constant currency. The pipeline remains strong as RPO continues to win new business by offering a differentiated tech-enabled solution across a variety of markets and industries. The volume from these new wins offset some of the volume moderation seen over the last few quarters, positioning the RPO business for strong growth in the moderation in the base Finally, global fee revenue for Executive Search in the third quarter was $212 million and as expected, experienced a year-over-year decline of 9% at constant currency compared to the high growth rate enjoyed during the pandemic recovery last year.

Growth in EMEA was offset by slower demand in North America and APAC. Global new business in the third quarter for Executive Search was down 13% year-over-year and down approximately 10% at constant currency. I will now turn the call back over to Bob to discuss our outlook for the fourth quarter of fiscal '23.

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 fourth quarter of fiscal '23 to range from $690 million to $710 million. Our adjusted EBITDA margin to be approximately 14% and our consolidated adjusted diluted earnings per share to range from $0.97 to $1.05. Finally, we expect our GAAP diluted earnings per share in the fourth quarter to range from $0.89 to $0.98. Now in closing, we continue to believe strongly that our differentiated and diversified offerings and solutions, the organizational consultancy we have built will ensure our clients find solutions for their organizational and talent challenges for both the near term as well as in the long term. With that, we would be glad to answer any questions you may have.

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