Q3 2020 Earnings Call
Ladies and gentlemen, thank you were standing by welcome to the Korn Ferry third quarter fiscal year 2020 conference call.
At this time all participants are in listen only mode. Following the prepared remarks, we will conduct a question answer session. As a reminder, this conference is this conference call is being recorded for replay purposes. We've also made available in the Investor Relations section of our web site at Korn Ferry Dot 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 Burn. So 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 reflect in such forward looking statements are based on reasonable assumptions investors are cautioned not to place undue reliance on such statement.
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.
Control additional information concerning such risks and uncertainties can be found in the release relating to this presentation and into periodic reports filed by the company what does he see including the company's annual report for fiscal year 2019, and in the company's soon to be filed quarterly report for the quarter ended January.
30, Onest 2020 also some other comments today may reference non-GAAP financial measures such as constant currency amount 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.
An earnings release relating to this call both of which are posted in the Investor Relations section of the company's website at Www Dot Korn ferry dot com with that I'll turn off the call over to Mr. Berntsen. Please go ahead Mr. burnison.
Okay. Thank you David and good afternoon, everybody. Thank you for.
Joining us I'm sure that.
You like everybody around the world. It's been captivated by this humanitarian crisis that we have with coal that 19, and I'm certainly going to comment about that but I do think it's important.
To set the stage.
For our company.
Today, and the ability to navigate.
Through uncertain times and clearly there's no doubt about it this is an uncertain time.
So let me first comment on the quarter a that finished at the end of January we delivered 9% constant currency growth 515 million in.
The revenue a solid profitability I would say the quarter was very good.
Our most recent acquisitions.
That we did have really added a tremendous capability to us around learning and development.
And I think we've got the opportunity to.
Now to take those acquisitions combined with our own IP and really tap a multibillion dollar long term market opportunity the digital business as we indicated a quarter ago, we thought it would be $100 million for the quarter. It was a that's 61%.
<unk> constant currency, but again, that's benefited by the recent acquisitions, but you know organically it was up.
Almost 4% <unk> constant currency.
You know the foundation for this company strategy has been knowledge. It has been IP and whether that is Ben or.
Yeah adequately developed or whether it's been through M&A.
It's really I think we are the bellwether mark around being the experts on human and organizational performance you know every year.
We develop and train nearly <unk>.
Professionals.
Yeah.
Yes.
People.
On 69 million assessments, we've got thousands of Oregon as that organizational benchmark data.
Every you know every three minutes each business, our we put somebody in a new.
So I think when you you know we definitely know what's the difference between grading could when it comes to organizational performance and the difference between getting great. When it comes to individual roles. So you know without richness of our IP and our global capabilities.
We believe there's an opportunity to create a $10 billion for focused on the execution of a client strategy by optimizing its most powerful lever, which is its people and the organization that that's around.
People. So today, we've got a much more diversified and balanced.
Sure.
I would include almost a billion dollars in revenue coming from consulting and digital solutions.
That alone is is substantially bigger than our next executive search competitor, but when you look at those the consulting and digital solutions, it really breaks down into four areas.
Ones organizational strategy to assessment succession, three learning and development finally rewards and benefit so I think this.
Diversification strategy, it's going to ultimately provide the you know the most important benefit.
Tapping a.
And your addressable markets.
That I think are going to have more potential more durable and visible revenue streams and for us.
The ultimate goal is to have a bigger impact our clients.
And what really drives their.
Formats, and so when you look at the data. This strategy is working I would just point out that when you look at the results of our inside sales.
Or in other words, the percentage of revenue that's driven from retreat from referrals between lines of business, it's 24%.
We certainly want to see at higher.
But I think that's a demonstration that we're going to market as one which we said as a goal now couple of years ago, when we sunset It a lot of the legacy brands.
That we have so I you know I believe were.
Turning an industry I think we've got the right no have science data solutions to help companies deliver superior performance and so you know with that context.
Let me make a few comments.
About the Corona virus.
You know obviously at this point.
The magnitude of the threat.
Then the threat that opposed to both human health, which is the most important and secondly, the global economy. It's unknown and you know it is it's uncertain.
When there was going to be meaningful control of this outbreak.
So this situation demands continued village.
Vigilance.
And preparation so let me first comment on what we've done.
The number one priority continues.
Continues to be the health and safety of our colleagues.
So.
We have put.
Protocols in place, whether that's social distant saying.
We've established a corporate emergency team.
We've limited travel we've limited internal meetings office visitors, we close the selected number of.
Offices, we have some employees.
Working out working from home and we are in daily communication.
With our colleagues that is by far.
My biggest priority and as a CEO I think that.
You know, it's not just the.
Question of shareholders. It's a question of stakeholders and stakeholders are comprised of your employees.
Your customers.
And your shareholders and I think as a CEO you'd have to look at all three.
And so our our first priority has been our.
Oh, and we're doing everything within our power to keep them say.
But when we look at our business I'd also point out that many months ago. As I told you. We would we were gonna take actions to position the company for the future and those actions included the.
The creation of a regional account program.
The continuation.
Of the marquee program account program that we have the one Korn ferry activity that I referenced earlier.
We were going to moderate our execution and support head count.
That we were going to.
Rebrand the Caf digital platform and start to create something that we could actually monetize our IP through technology platform that we were going to Orient, our professional search towards knowledge base assignments.
And then we were going to strengthen our balance sheet.
All of those things we've done.
And we've continued with the aggressive recruiting of account leaders.
So in spite of these actions.
The uncertainty that the Corona virus has presented to all of us.
His cloud in the near term predictability of our business.
And so even though February new business was solid it was up 6% year over year, and we can certainly get into it in the call.
You know in recent weeks in days we've seen.
Selected governments and companies they've implemented social distancing actions that are similar to ours.
Either limiting travel.
Group face to face interaction. We've all we've all seen that you know those these actions are unlike what you'd expect in a normal economic contraction.
In other words, you haven't seen across the board cost cutting.
Along with job eliminations and so you know these actions are different and as we sit here today, the extent to which further incremental social distancing actions are put in place.
Or.
Additional authoritative bodies adopt such measures and for what time.
No. This is those are substantial unknowns.
So the measures taken to date.
They almost certainly will impact our business for the fiscal fourth quarter and potentially beyond.
And so due to the.
Rapidly changing yellow situations for right. So.
Given that and combined with with that creates a lack of visibility with respect to further actions to be taken its just too difficult for us to accurately assess and quantify the impact at this point.
That's just the true.
So consequently, we're not going to issue any specific revenue and earnings earnings guidance for our fourth quarter.
And we're going to reassess the suspension of our guidance. Once we're comfortable that this humanitarian crisis has passed and I'd just point out.
Kind of one other thing and that is.
We always do contingency planning and as part of that.
We look back at what happened during the Sars outbreak.
In late 2000 into.
Through the midpoint of 2003 and I had just started.
With the company.
When we look back at that time, and I'm not suggesting it's analogous but I think it's helpful to look back in history.
Our global fee revenue was down about 9% over two quarters.
And then once the crisis was contained in that.
I was not the middle of 2003.
Fee revenue reap rebounded sharply I mean, it was a V. In fact, what happened was that the rather than it has surpassed that the peak.
The immediately preceding pre epidemic corridor. So it was actually.
Actually it was higher.
And so you know it's difficult.
You know if you want to for us to predict if our business today is going to react in a similar way to the current crisis, because hey, the world looks different you know the Chinese economy is four times a size it was and there's no question.
Question No question, if you look how interdependent the world is today just by looking at the news.
But more importantly, Korn ferry is substantially different.
And so back then we were 300 million and today.
We're $2 billion back then we kind of did just one thing now we do many things we've increased the scale.
We've increased our financial position, we've enhanced our liquidity I mean, there's absolutely no comparison of today's Korn ferry to the.
Valves and into Korn ferry.
So I think that significantly increased scale.
And the stronger financial position.
Will allow us to withstand a near term revenue decline.
That's similar to what we experienced.
Back in Sars and maintain a you know channel, 11% adjusted EBITDA margin on a trailing 12 basis without without taking any restructuring actions by the way.
But but again I think that coming coming back full circle.
Our overall pro.
Already is for our colleagues and you know we are taking a what I think is a balanced approach.
To this.
Crisis.
Which is really anchored around 33 things one safety to caution and three agility.
And that last part will be incredibly important and I think weve positioned this company to be very very agile. So I think we've taken the stops we've got a business that is in the people business.
People drive.
Innovations and I'm, probably more bullish today.
And then I've data about the opportunity for Korn ferry in the future. So I'm joined here by by Bob.
And Greg and so I'll turn it over to Bob Great. Thanks, Gary and good afternoon, everyone.
To start with a few highlights.
So in the third quarter.
Quarter, we reached another milestone as our quarterly fee revenue Eclipse, the 500 million dollar Mark.
For the first time in our history as Gary indicated earlier, our fee revenue in the third quarter was 515 million.
That's up about 9.4% year over year constant currency.
Growth in the quarter was driven primarily by our new K if digital segment.
Which had $99 million was up 37 million or 61% year over year in constant currency and ARPO.
Professional search, which was up 12 million or 17%.
Year over year.
Here at constant currency.
I'll talk a little bit about the integration of the recent acquisitions that activity is on plan.
As are the cost savings associated with the rationalization of the combined cost base.
In the third quarter, we recorded charges of about $21 million.
For the elimination of redundant positions in facility rationalization.
Our third quarter cost base reflected savings of about 6 million and because those actions took place over the course of the quarter.
In fact happened in late January.
We expect an additional.
Those savings of about 3 million in the fourth quarter.
As previously disclosed in Gary talked about we've now divided our legacy advisory segment into two components KF consulting NKF digital and the results of the recent acquisitions.
Reported within the new.
If digital segment and Greg will provide.
Provide some more details about that in his prepared remarks.
We continue to execute on our policy of maintaining a balanced approach.
The capital allocation.
For all of our fiscal year 20 through today, we have now repurchased about two.
1 million shares.
Using total cash of about $80 million.
Currently we have about 171 million.
Dollars remaining on our authorization for share repurchases. Additionally, today, our board declared a 10% fair share dividend payable on April 15th 20.
20 to shareholders of record at March 26, 2020.
And finally I'll just comment their balance sheet remains very strong we have approximately $420 million of investable cash.
The end of the third quarter.
Now going to comment a little bit on new business trends.
Globally, new business in the third quarter was up about $25 million or about 5% at constant currency.
We're also continuing to see differences in the.
The trends of new business within our lines of business.
If you look at what executive search did in the third.
For that business was down 6% year over year. However, our professional search business on a global basis. There are new business was up about 20%.
So again, we continue to see data points as we've talked in the past that the diversification in the business is really starting to take hold.
In the third quarter RPL was awarded $58 million of new business, consisting of $32 million of new clients from called new logos, and 26 million of extensions and renewals with existing clients.
Salting new business in the third quarter is up 2% year over year led by North.
North America, which was at a very strong quarter up 9% year over year.
And then finally, excluding recent acquisitions that digital new business was up 9% year.
Year over year constant currency and that was also driven by North America, which saw 21% increase year over year.
And finally.
Our adjusted diluted earnings per share in the third quarter was 75 cents down about six cents or 7%.
Year over year, driven in part by the change in our revenue mix, a little bit higher net interest expense.
The higher effective tax rate, which was.
26.5% in the.
Quarter compared to 25% in the third quarter fiscal 19, Im now going to turn the call over to Greg to review, our operating segments in a little bit more detail.
Thanks, Bob.
Starting with our new digital segment global fee revenue for Caf Digital was 99 million in the third quarter and up approach.
So at least 37 million year over year, driven primarily by our recent acquisition.
The subscription licensing component of Caf digital revenue in the third quarter was approximately 21 million, which was up 70 million year over year.
Adjusted EBITDA in the third quarter for the digital segment was 25.9 million.
With a 26%.
Adjusted EBITDA margin.
Now turning to a consulting and the third quarter consulting generated 141 million.
Dollars, a fee revenue, which was up approximately 2% year over year at constant currency consulting fee revenue growth was strongest in north.
Our account, which is up approximately 6% year over year.
Adjusted EBITDA for consulting and the third quarter was $18.7 million, which was up $1.7 million, our 10% year over year.
Adjusted EBITDA margin was 13.3% in the third quarter, which was up.
110 basis points year over year.
Our appeal and professional search generated global fee revenue of $92 million in the third quarter, which was up approximately 17% year over year at constant currency.
All geographic regions grew in the third quarter by component professional search was up approximately 9%.
At year over year, and RPL was up approximately 20%.
Earnings and profitability for RPL professional search continue to scale in the third quarter.
EBITDA in the third quarter was $15.2 million up $2.1 million or 16% year over year and EBITDA margin.
Prove to 16.6%.
Finally for executive search global fee revenue third quarter fiscal 20 was approximately $183 million, which compared year over year and measured at constant currency was down approximately 4.6%. The total number of dedicated executive search.
Sultans worldwide at the end of the third quarter was 582 up 30 year over year and essentially flat sequentially.
Annualized fee revenue production.
Our consulting in the third quarter was $1.26 million and the number of new search assignments opened worldwide in the third quarter was.
1565, which is down approximately 3% year over year.
Adjusted EBITDA for executive search in the third quarter was approximately $41 million with an adjusted EBITDA margin of 22.1%.
That concludes our prepared remarks, and we'd be glad to take your questions.
Yes.
Okay, David we'll open it up for questions.
Ladies and gentlemen, if you'd like to ask a question. Please press one zero on your phone.
Your tone in came in place in Q, It may or moved yourself from the Q at any time by once again pressing one than zero.
For using the speakerphone, please pick up the handset before pressing the numbers once again to ask a question. Please press one zero at this time.
So first question to come fine of George Tong with Goldman Sachs. Please go ahead.
Hi, Thanks, good afternoon.
Indicated that your February new business is up 6% year over year can you break that down by business line and talk a little bit about the trends that you're seeing leading into early March.
[laughter].
Daily life has come to a halt.
It certainly appears.
If you are a human.
Being on this planet.
I would say that a you know February new business was up constant currency six per site. That's benefited by our most recent acquisitions. When you look at it on a same store sales basis.
I would probably be up about 2% or so.
Regionally, including the most recent acquisitions I'll just do it by region.
North America was up 7% Asia was up 7% Ironically in February China was up 17%.
EMEA was down three.
Hey, Latin America was up sex.
And search in North America was very good.
In February and look it is just way too early to call.
March and Yeah, you can't take one data point by.
In the first few days and actual mileage may vary but in the first few days in North America Executive search. It's the best start we've had in mind since so I think that you just cannot.
That is just one data point out of Manning.
Consider what's a world activated by right now.
Right that makes sense and just a follow up on that as it relates to the potential impact from the current of ours I know it is too early to tell but can you talk about.
How conversations with clients are progressing is it more of a push out isn't.
One of the sales cycle or is it more of a.
Contractionary tone, where people are looking to.
To reduce headcount, what kind of kind of whats the tone, but your sense.
Too early to tell.
Got it okay. Thank you.
Our next question comes line of Tobey Sommer with Suntrust. Please go ahead.
Thanks, if we could ask few questions about the digital segment.
How much of that segment is.
Recurring.
Heard correctly I think you mentioned.
New business in north.
America was up.
And if I'm right about that and geographic comment, but does that imply international was down in there so by how much.
Yes I.
I think I think told me that related to consulting you ask about digital right.
Yeah, So maybe I'll stick with that how much of it is recurring.
You have any kind of a wallet share kind of Mart metrics, you can share with us.
So if you look at the.
The deck, we posted Toby.
Now started present separately the us a license subscription revenue.
And that was in the quarter was 21.
The in dollars so roughly.
The 100 million or so it's about 20%.
No in those those represent.
Engaged or people sign up the access to either what we call our talent hub, which is where the assessments reside assessment science resides in then.
The pay hub, which is where our pay data.
Resides and they're generally at a minimum one year.
Contracts with.
Could be two or three years.
In associated with those contracts and Theres different service levels I can't remember executive it's just like brands silver gold or something like that and then those.
Have different levels of interaction that we would have with declines in different fee levels associated with them.
So is when you look at.
Well the when you look at the business so.
It's $400 million, that's what it was in the third quarter annualized right. Let me point out a couple things that the.
Recent acquisitions that we did.
They have a little bit heavier weighting.
In that quarter as we've come to understand that business. So that's number one but but when you kind of look at that annualized number of 400 million there's 100.
<unk> million of it that essentially comments from pad. So companies, we've got paid to add on.
20000 companies over 20 million people.
So companies around the world license, our IP around that a substantial part of.
That is repeat is they're coming in year end year out they may come in.
For for different thing, but very very high high percentage of repeat the next biggest piece that we really want to grow.
Is learning and development and so.
That would be.
That would probably be.
Call. It 100, I'm, just rounding numbers here, but you know.
150 $175 million that also has a a relatively high return percentage not quite as high as.
As pay.
But pretty hot.
Then the remaining pieces are where people license our IP could be around organizational strategy. So how do you set up an organization spans and layers roles responsibilities job profiling.
And then assessment succession.
So what what Bob is talk we want to move that business as a whole.
So that it is much more looks like a SaaS business.
So today when you look if you were to take a snapshot of that business I think our our estimate would be.
Thanks for that for that quarter. For example, you know about 21, 21, 20, 21% would fit that we obviously want that to be higher.
And that's where we're trying to take that business.
Great.
How much higher and in what timeframe.
Well.
Yeah.
We definitely look you at least one at double it I mean, you know, we'd love to make that 50% of the business.
But you know we've we've been investing money now over several quarters to make sure. We've got the platform now we've.
The real.
Entity there when you look for Korn Ferry you know, it's really around learning and development that is a massive market.
And so you know with the recent capabilities that we've added we want to add to that.
So the timeframe it's.
That that that's going to be hard for me to pin down, particularly when people are worried about their own survival.
Okay, We'll oh elastic question again, hopefully when the we Corona is front and center.
What.
How much does the.
Miller Heiman acquisition expand.
Your addressable market.
It expands it quite considerably when you look at it Theres really there's there's two or three pieces, we pick up why is around.
Sales professionals.
The second is around project management.
Matt training capabilities in the third is technical.
And so in each in each of those we did so number one our our leadership development business that we had before.
We did this acquisition so before we did it we probably had about 175 million I'm just.
Rounding, okay hundred 75 million or so of leadership development.
Is that what we said when we announced that deal. It all at 120 million of revenue in the quarter. It definitely contributed a little bit more than 30 million pro rata. So it's a 300 million dollar business. So.
But for before we did these recent acquisitions our leadership development was at the high end.
I mean, it was it was teams that with individuals.
What this does it open us up to where the substantial par.
The market opportunity.
Yes, and that's around professionals.
And and so let me just take one one at one of the three that we just picked up as an example sales professionals I mean, just in the United States, There's probably 15 million sales professionals.
We we place thousands of.
Sales professionals every year, we have profiles of what great looks like for sales professionals. So we can combine their you know the assessment of sales professionals, what you're trying to ensure achieve organizationally to the development. So that you know.
That does expand the addressable market, yes, Tobey. This is Bob the other thing I would add to that is you think about the bringing all of our assets together.
Gary mentioned, a couple of times the various.
Amounts of data that we have which we then bring back into whatever solution is we're delivering.
Into a client and that data cuts across geographies companies industries, and so on and really provides us with a very very unique.
Opportunity to have an informed point of view that others just can't have.
Thanks, I'll ask one more question I'll get back in.
Q1.
When you look at your different segments now.
Which one of them do you think are are gaining share in which ones are losing market share.
You know sizing market I'm always I've a in my whole career I've always.
Ben you know, it's a bit of an AR and not science.
I think there is I'm not so much worried about share I'm I'm I'm worried that we capture them the market opportunities, but so when you look at the you know the executive search business.
This is critical.
Strategically for the company no question about it because it provides tremendous access and we have demonstrated now.
That it's not talk we can actually do something with that access.
But let's face it the executive search.
Market is a small market.
And the much bigger markets.
Our around knowledge around recruiting for professionals knowledge workers that as a market that are several times the size.
Of.
The executive search market.
When you look at the market opportunity around or strategy assessments succession.
Learning and development and rewards and benefits depending on how you want to do the art work.
That that could be hundred to have.
Aired billion dollar Mark I mean that that could be really substantial when you cut through that that the biggest piece by far you're going to focus on is training is learning and development. So part of that is is compliance and part of that is talking to call.
So I'm not I really am not so caught up.
And the market share gain.
I'm caught up in creating a new company that goes after a much bigger market.
David anything else.
Yes. Our next question comes line of Mark Marcon with Baird. Please go ahead.
Hey, good afternoon gear in.
Greg and Bob.
One thing just with regards to Miller Heiman, how did you say that contributed more than $30 million.
This quarter.
The acquisition so when we did it when we announced it.
And we're actually now we've integrated the businesses, so I'm not going to be able to get the line of sight in the future, but when we announced the deal we said that it would contribute $120 million that three.
Great when combined with.
To be to $120 million a fee revenue to the company is although we've integrated the businesses when we when we look at it it appears like it contributed somewhat north of $30 million.
In the quarter for <unk> for all three of Mark for.
The three companies got it and then with regards to and not all fell into digital correct. Yes, correct, Yes, sorry, yes, that's exactly and then when we take a look the adjusted EBITDA margins with regard to digital it went from a year ago, where it was Miller Heiman wasn't included was 33 eight went to 26% how should.
We think about could trajectory with regards to the adjusted EBITDA margin on that part of the.
I think Mike I think you'll see that going.
By the time, we get done with all of the integration activities and some are going to go into the.
Q1 of next year solely because we have.
To pick them up and put them into our systems and that's not going to happen until.
Maybe one.
So there will be further.
Position eliminations occurring after that happened and so we'll get will eventually ramp this up to 28 29, 30%.
As we go.
And then obviously as the business grows.
And we get more leverage we could we could pretty easily be north of 30%.
Great and then how should we think about the consulting business.
Some portion of that has been stripped down it looked like it had some good progress growing from 12 to 13.
Three how should we think about that going forward, yes, I think the consulting business.
As we look at it from a long term perspective, mark the EBITDA margins would be sort of in the 12% to 15% range. So I think we probably have another couple of hundred basis points.
Of areas that we can.
We continue to improve.
And then with regards to just from a geographic perspective, just drilling down a little bit more Gary you mentioned, China is actually up can you talk about like the rest of what you're seeing in terms of Asia or whether its Singapore Hong Kong.
Okay.
And what are you seeing there and I know, it's just going to day to day, and then I have one other follow.
Well, it's you know I think that overall when you look at Asia.
It's actually been very very surprising.
So the trends.
In many of the.
Countries that you cited our you know our positive. So just again to pick you know just to pick Japan. Because you commented on it you know, it's it's up 10% in February.
Over the prior year and if you were going to go to Singapore as an example, it's up 60%.
So so you know it's I you know overall I think we look at trailing four months new business.
You know, you're you're going to find the it looks pretty good in Asia, which seems very counterintuitive to all the commentary.
The that I've that I've made right.
Yeah, I mean, including you know if you take a look at Q4 Japanese GDP, which was recently released it was.
I was.
Down like 7%, so being up 10% pretty darn good.
It's got because you're gaining share there or do you think too.
Good some other things that we hear or just kind of exaggerated.
I think Japan is we have in extremely good leader.
Who came on board.
Maybe was 18 months ago.
So I think I think he's having real impact on the business over the effect.
Gary talked about some of the actions that we've taken in terms of.
Moderating headcounts and Thats one area because.
The an enviable task of approving hires in the company and that's one area that we continue to invest in.
The back of this individual.
Bobs Bob's comments are spot on and what I would I'd add though is that you've got aftershock.
So.
You know in Los Angeles see if we're very a custom here to earthquake. So then the aftershock.
So I really think where with this crisis.
You will see aftershocks.
And so I I.
You know that would be my own view.
And so if you just take China for example.
It's it's really take an eight weeks.
But.
Sensual it and there was a new year in there too, but you know eight weeks for things to get back to kind of a new normal.
And the new normals not the old normal.
And whether it is a V or a year or any other alphabet latter you want to pack.
I think what you're seeing as the concept of aftershock.
And so what you may be saying is new business actually reflux discussions that we're going on for a long time.
And sorry.
I'll take the initial earthquake.
Or new business is that meaningful.
Got it.
Gary you couldn't through these before in terms of.
Whether it's a shock or something that's more protracted.
From a capital allocation and discretionary spending perspective, how should we think about things and.
You know like thinking about share buybacks.
You know where margins could.
Hey, it's a range of outcomes how what's the.
That's a bad situation relative to kind of a moderate situation just in terms of based on the limited information. We currently have.
Well I think without regard to a this is my 72nd earning call and you know it was a I remember too you know exactly 20 years ago and the you know dotcom is March that that you know that bundle popped I remember in October of 87. So you know this isn't our first rodeo.
Yeah, I would just regardless of what's happening today, we're going to commit to the operating boundaries that we have talked to.
Our investors about and so as an example, if youre to take Sars.
That happened do the old corn.
Barry.
Back in 2002 2003, today's Korn ferry if that were to happen.
We would we would run the company without taking any action at about a 10% a maybe 11% trailing 12 EBITDA.
Margin.
In any kind of environment, what we have told our investors is that we would operate the business.
With mid.
Single digit EBITDA margins.
Obviously after taking if theres some restructuring to be on.
On an adjusted basis, and we're absolutely committed to that.
I'm confident in that.
Terrific. Thank you.
Yeah.
The next question will be for line of Marc Riddick with Sidoti. Please go ahead.
Hi, good afternoon.
Hey, Mark.
So I wanted to touch a little bit on some of the.
Were some investments spending and planning that that's been worked on for some time, whether it was branding initiatives and investing personnel.
I wanted to get a sense.
Sort of kind of where do you or maybe what inning wherein.
As far as some of those.
Projects as well as the.
Idea, whether or not what we've seen over the last few weeks has altered your near term plans on that or maybe sort of give a little bit of CLO.
Okay.
Well I think the law today, the first thing.
This is what we're concerned about is the health and wellbeing and I know all of US as citizens of the world, Our first and primarily concerned about that it.
It's very hard to show to you know to think about anything else.
Quite candidly, but we have a track record.
The track record speaks for itself.
As we indicated many months ago.
That we were taking certain actions.
To position the company for the future.
Which which we've done.
And so you know we do have.
Different types of of contingency plans.
It's been part of our playbook and we're going to we're going to continue to execute those I would say that when we are looking at the business. There is a market opportunity for us that is billions of.
Dollars and.
We have two.
Look to that market opportunity and so whether that means organically or inorganically, we're going to continue to do that we have a stated goal of of driving our marchionne regional account.
Well.
Lands that we have so we're going to continue to look for people that can build that out our consulting business now.
Our consulting business when you when you look at it is globally.
Probably took last quarter annualized dilo.
It's it's probably 600 million the U.S. business is only $200 million.
$200 million I mean think about the market opportunity so.
We're going to we're going to continue to operate you know we've got a strategy that we think has has grown the company.
It's a completely different company today I mean, some of the business that we've won over the last week.
It's just you know substantially breathtaking you know what I think about the Korn ferry in 2002 multimillion dollar consulting engagements.
Around organizational strategy.
Going against the four big strategy firms I mean, just a different Korn ferry today.
But again, it's it's right now I think all of us.
Our are concerned about what we can do to protect.
Human life I mean, that's our that's absolutely.
What.
We're thinking everyday about and so we've got some places around the world, where our colleagues can't come to work.
China has been through very very difficult time, and the news is changing.
You know bought by the by the hour and that's what we're focused.
Right now.
And then from an offensive standpoint, I suppose is no way to a other areas, where you can sort of point youre.
Total or what have you were the uncertainty is actually something that may lead to greater engagement, particularly with some marquee.
That may.
I'll find themselves in position were working with you is actually maybe more beneficial than smaller beers.
Thanks.
There is and there is an area of the world that went through this very early.
And there now this institution is talking to us about.
How they restructure.
Their company and so.
You know yes.
Absolutely.
Those situations will will develop here overtime.
Okay. Thank you very much.
The next question will be for line of Tim Mulrooney with William Blair. Please go ahead.
Good afternoon. Thank you for taking my questions.
[music].
So are we back to digital within the 400 million dollar digital business it sounds like.
About 20% of that revenue stream is subscription.
Based right now what do you think the digital businesses capable of generating long term could this get up to 30% or even 50% and what would be the implications to your margins.
Well.
Yeah, we yes, we do think.
That's what we're trying to.
To capture and so could it could it be double where it is today in terms of.
The subscription offering you know today, it's 20% could it be 40 schurz.
The long term.
Now margin in that business can be you know you can be very high.
I mean, you know it can be 33, 34%, obviously that's not.
Necessarily.
In the next quarter or two but Theres no question.
That is that's our you know that is one of the linchpins of our of our strategy is that we've got tremendous IP and.
Right around what makes an organization great what separates good from great in terms of people how do you compensate those people and how do you develop them you know we started this business.
Caf advance.
18 months ago, and it would the real goal.
With the capture.
B to C revenue stream for for the company.
That was the initial vision and what's what's turned out.
The business is still relatively small on its own but the technology platform that we've developed.
Is powerful and so now we're using it we just a few days ago got to 5 million dollar assignment from a lot major life Sciences company, where they want to do training for 4001st time managers, well guess what platform that platform is going to sit on.
If advance.
So you know.
That there's definitely there is that kind of opportunity for us.
Tim This is Bob the other thing I would say is if you think about our appeal business. They built a platform that they use to deliver the rpos.
So services, which makes that business.
Extremely sticky and as you think about the platform that we have for digital one of the things that we're working on now is how to integrate their platform into the delivery of our consulting services on the same theory being that once you do that.
Becomes very very sticky.
So this is early innings, but still evolving and where we might be a year from now can look a lot different from where we are today.
I would say, it's very early innings, and we're just taking them.
We're just taking out we've had some balls and now we're going to go to take the fail.
Okay, all right now.
That's really helpful. Thanks, guys staying within digital.
If I look at your customer bases within your executive search and your K out now whats called Caf consulting businesses what percent of those customers also use your digital products I'm trying to understand the attachment.
Right.
It's very very high and that's that's the opportunity right. I mean, if you. If you look to number one what I would say is inside sales. So when you look at the enterprise as a whole.
Yeah, 24% of the revenue is actually coming from referrals from.
Other lines of business the the the referral into consulting is 27%, it's actually going up.
And that the great thing is that it's moving up with time, and we're going to find that with digital too.
That that's an anchor that's a.
And to to our strategy, Yeah, I think Tim I think there's there's multiple ways that we look at then try to measure it.
But the the you should be thinking today, if the attachment rate or kind of pull through is probably in.
35% to 40% range so that is.
Gary indicated thats, where.
As part of the early innings, we are doing a lot of work.
With.
The folks in digital in the folks in consulting and just in terms of educating everybody on the new platform what it what it does what it has and all that.
In the emphasis.
Going forward will be on pulling the the digital assets into in delivering them as part of a consulting arrangement.
And vice versa Yeah.
Right, Okay, yep that doesn't make sense.
After all along those same line if I think about after.
Our consulting engagement and within the Caf consulting business, how often does a customer continue to use those digital products, even though you may not be working with them and a formal consulting engagement.
Well they would they would absolutely continue to use them on a on an ongoing basis. If you think about.
We might do.
Engagement with you can do with the board or the comp committee or management around.
Pay, but if they're using our database, they're going to use that on a continuous basis.
That's that's the whole new theory with the leave behind.
That's something that then becomes embedded into whatever.
HR process.
The company is engaged us for it just becomes part of the an integral part of their process.
Whether its pay assessments assessments to acquire talent assessments for.
Succession planning assessments for development purposes, and so on and the real.
UTI of if you think about what we do we operate along every aspect.
Moving employees engaged with his or her employee and so we have a common language across everything we do as common science common language in is you as a consumer of our services.
If you don't use Korn ferry using company a for pay company be for assessments somebody else for talent acquisition, it's up to you to cobble. It all together it makes sense. If it were if you're doing that with Korn ferry.
Everything is common common nomenclature science, and all that and we actually do the needing to.
Other for you.
Okay got it thank you and I know, we're budding up against the hour Mark here.
I do you have to.
Try to fit in one Corona virus no question. This as it relates to our models.
No as I look I guess it your four different segments.
Now are there some segments that you wouldn't view as being more susceptible or perhaps more resilient.
To this type of macro uncertainty and thank you.
You know my humble answer and.
Or is I can't I, just can't predict that.
You know who who would have.
Predicted a week ago that the Andean well tennis tournament would be counsel, who had predicted that you couldn't travel on a subway or you are advised not to travel on a subway to Manhattan, I mean, I think we have to see.
What happens with this health crisis, and that's why we're not that's why.
We're not providing guidance.
Understood. Thank you.
And there's a question for line of Tobey Sommer with Suntrust. Please go ahead.
Thank you.
[music].
What's your posture on towards hiring revenue generators at this point.
Plus your businesses.
Go for it.
We're going to continue.
Without talent there is no show.
So we're going to work going to continue to bring in talent and.
And.
More importantly, promote talent so this last year.
We promoted over 1000.
Colleagues.
We're on campuses recruiting.
And so we're going to you know we're going to continue to data.
In your in your business, it's a little bit longer lead time like some of the consulting engagements that may be delivered over.
Might see quarters and.
Our peos that can be multi year, what's the responsiveness been of customers where they have to.
Open Iraq are actually on board someone in the case of an hour PEO or.
Or.
Move up a consulting engagement forward naturally.
In terms of longer term consulting assignments, let me yeah. So I'll have bought Bob's got you can comment on on the revenue recognition by by solution by line of business, but I would I would just at a very very high level, what I would say is the RPL business as.
The longest tail it generally speaking meeting of the Bell curve.
For the our appeal engagements it would have the longest payout and what we're winning today, which is which I think is is good long term for the company, we're winning complex Lamar.
Large global or Multiregional deals so for the long term I think that is incredibly healthy for the company, obviously an environment like this.
That may make that.
A little bit more challenging, but I would say.
On that.
Our backlog in that business has been as strong as it's ever been.
So that that would be first socket is the next thing I would look to is learning and development. So those tend to be again not.
Quite as long as the RPL engagements.
But but but definitely have a longer.
Tail for sure.
And then third.
Piece would probably be assessment and succession, where some of those.
We may.
Somebody may sign up to do 5000 assessments for a particular company.
And that could be over you know multiple multiple months, but Bob do you want to just comment on Ah, yes, So I think theres a there's actually.
A couple of things happening or.
Toby I'm sorry.
As we think about it.
Going back the IPO, Gary commented on the large global complex well they those engagements by definition are going to take longer to stand up.
Right. So when we have smaller regional ones, we stand them up quickly and you start recognizing.
In revenue.
More revenue earlier in the contract and what we're finding is.
As Gary indicated great success to win those engagements, but is impacting the early so so I'd say the early quarter or quarters revenue recognition I will still get it as it gets.
Pushed out but it does have some impact.
The.
In the on the consulting side of the business, we're selling larger integrated deals.
If you look at if you were to go in and Stratify, our new business last year this year.
To below 100000 say 100 to 250 to 50 to 500, and then engagements above that.
You will see a real shift in the number of engagements awarded that are of higher value and again, you should think about because we talk about new business.
Being up.
And it is not necessarily translate into the very next quarter's revenue because of.
The nature of the engagements that we're selling in their larger integrated solution that just takes longer to convert those.
Into revenue, it's all the right stuff for us to do as a business.
Because we're layering in to use.
Term backlog.
We're layering in engagements into that backlog that will.
Provide us with a nice platform over time.
I guess that gets to it though is there a user is are you experiencing a change in.
The cadence of the customers kind of drawing on those projects are they slowing them down either the throughput in our peos or the trunk or the consulting engagement, though you're talking about because of the Corona virus Toby.
Well I'm not going to true ascribe.
Causation relationship what I'm asking.
Are you seeing slowness in <unk>.
Taking about whether to run or something else afterwards.
Well certainly in the last look in the last week.
Obviously parts of the world.
Have have lived with this for quite some time.
On and for you know the United States for different parts of Europe. It has been.
Relatively relatively recently.
And so I. It is very hard to comment on you know a weeks.
Worth of activity right.
It's almost impossible and that's why you know we're not answer the first time 72 core I haven't provided guidance and so you've got a real humanitarian crisis and it is tough for us to predict.
You know what happens with that.
That makes I last question for me, what's the proportion of revenue that the company has with oil.
Airlines travel and leisure.
Restaurants, so it's kind of things that may be impacted by.
Kind of most directly by the phenomenon.
Yes, a relatively small energy strict strictly an injury upstream downstream is probably about four or 5%.
The company.
Airline is airlines.
Have been relatively small.
Know for sure less than a.
Thank you very much.
Our next question will be for line of Mark Marcon with Baird. Please go ahead.
Thanks for taking some additional follow ups just on on the verticals.
Financial services, where do we stand.
And now in terms of.
Percentage business.
Right you have that had its probably 17 or 18% or you can doing.
Yes, Mark if you look at the slides that we posted on.
You'll see that financial services is 17% of business great.
And then with regard to digital solutions.
There's lots of different sub segments, but you are in when we take a look at like organizational strategy versus assessment in succession.
And leadership development, which which are you or even most excited about long term Gary.
Well we.
I think the the idea is to is they have an integrated platform I mean that that would be our concept now whether customers are actually going up by that way.
That's that's yet to be proven.
We definitely with.
I would love for that to be the case, but I think just when you look at the size.
The market.
The learning and development.
Has to be.
Just just just given the market size, where the biggest prizes now.
Where we have the most capability is on assessment and succession and so what we've got the unique ability to do is to be able to marry that so you know we have shot.
Doug 69 million assessments like we you know we can identify a.
Sales person in this vertical needs to look like that we can have them take an assessment. We can look at their trace their drivers there competencies and then we can packaged of dollar meant to help them along the journey. So.
Clearly the assessment and the learning.
Development or like peanut butter angelic the organization all strategy and the rewards and benefits are a little bit like Pringles I love to have them with a PV and Jay but it's like you know do you can you I don't know if a customer is going to buy all of them, we love them too but.
I think when you look at the meeting of the Bell curve the anchor it's got to be the assessment succession learning and development.
Got it and then can you give a little bit of granularity with regards that contract that you mentioned.
Just in terms of like how it's structured priced how we should think about those thanks.
Well this is a life sciences.
Right.
Life Sciences company.
Now the end of first time managers and I, certainly do not want to get into.
You know how it's how it's priced.
It would be delivered over you know a couple of year period of time.
And.
Well again, I think the underlying competitive difference that we have as an organization is IP and so the fact that we've built and acquired.
Data base around what separates great from good is an incredible differentiator.
And if you can combine that with development practical learning and development stops, which you know was that the foundation for this cap at dads business.
I mean that that's a winner.
For sure.
Great and then.
Hey.
Ask a another virus question, but just in terms of organizationally what percentage of your consultants are not traveling now.
Well or would the guidance or how should we think.
Well, yeah, we have about you know there's about 8600 colleagues.
In the company.
And so we have indicated at this point we've indicated at this point.
That you know we shouldn't be traveling essentially you know it it has to be mission critical.
You know not not essential travel.
Has been curtailed for quite some time.
So that that's the guide post, but we are trying to communicate daily with our workforce and in different parts of the world.
So we've gone through you know obviously in China.
Many weeks into this in Italy, It's a few days.
And so it kind of varies.
By by country by office, and I would say mark that the.
Who was what our folks are doing in order to conduct business. We're seeing the same thing is coming back from our clients and so.
To the extent that we're not trailing they're not traveling we're working with our clients now to find alternative ways.
To deliver those the services that they need but at the same.
You know I will say a couple of things in Bob's is spot on he's absolutely right.
We have clients that are visiting us all over the world everyday you know we.
New Yorker, San Francisco.
You know people are coming into our offices were trying to take the the right.
Precautions.
And the other thing that word that we're doing is worked weren't trying to do as much pivoting as we can.
To a more virtual setup and I'm sure every company in the World is doing that but we're making a hard you know a real full court press.
To try to do that.
Terrific. Thank you.
And there is a question for line of Kevin Mcveigh with Credit Suisse. Please go ahead.
Great. Thanks, Thanks for allowing me to SK.
Obviously I thought your with all you folks.
From a safety perspective.
Wanted to talk you know Gary like you're saying the men trying to think 72nd call you framed out your good enough to frame out kind of the Sars do you think they sit somewhere between Sars and.
After kind a global.
Actual crisis in terms of level of uncertainty or you know just from a client positioning perspective, and then just you know one thing. That's always been helpful is how you folks have reacted internally are you you know from a we'd be back in the market buying stock are you thinking about any type of contingencies from a expense perspective.
Internally or just given the uncertainty how are you folks approach in that.
Yeah. This is.
Different than October of 1987, it's different than March of 2000.
In 2006, we got very concerned before the turn we took actions several months ago. We also took.
The actions and nobody could have foreseen this.
And so this is a humanitarian crisis, let's be honest and so I think when people are worried.
Look.
You know I'm doing the same thing that everybody else does right. You go the grocery store in there is no toilet paper and you know panic buying.
Gets panic buying panic, selling bigots panic, selling and so our you know our our primary goal has been around the safety of our colleagues, but you know strategy doesn't go left or right right to left left right you've got to have Truenorth and that's got to be anchored around purpose and we're.
We're going to be very consistent.
You know as as we've been in the past.
And so we're going to have a balanced approach to capital allocation.
We've obviously you know months ago we.
Put in place on a do you know we've got $1 billion, if you know but.
We've got 400 million dollar.
Debt issuances, we got 600 million and revolver capacity.
We've got net cash of $420 million.
So you know, it's certainly again nothing nothing is more important than the precious.
Life, So it's hard to its hard to compare these two because.
You know I there is no there's absolutely no comparison, but the company is a incredibly different company today.
There's no question about it.
And I think we've done everything humanly.
Possible to position us for our colleagues our clients and our shareholders.
Great and then just real quick.
Any impact from kinda.
And on time Warner how we should think about that across the business I guess directly or then even just from a competitive perspective.
No I mean, you know that that's.
And towers that we know how much rather oh, no not not not not really I think it's I think it's I think it's early days.
And so I don't.
I don't think Theres a.
There's not an impact to our business.
If anything it would be positive.
Thank you.
It appears or no further questions Mr. Barry.
Okay well. Thank you for for the time, you know uncertainly you know it's.
Unprecedent.
Times.
But like I said, we we've tried to have a playbook here of safety.
Caution and agility and most importantly, you know common purpose and that's to enable people in organizations to.
Exceed exceed their potential.
Actual and you know clearly we're now more than the world leader in an executive search.
And it's all about how we can synchronize the clients town strategy. So the individuals teams and entire organizations can be more than you know that that's our per that's our purpose.
And.
We.
Our the preeminent organizational consulting firms so I. Thank you.
Very much for your time and we'll look forward to speaking next time. Thank you very much.
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