Q2 2021 Korn Ferry Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry second quarter fiscal year 2021 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 is being recorded for replay purposes. We have also made available and 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 Hurst Your host Mr. Gary Burnison. Please let me first read a cautionary statement too.
Investors certain statements made on 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 invests.
Cutters 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 and periodic and other and reports filed by the company with the SEC.
Including the company's annual report for fiscal year 2020, and the company's soon to be filed quarterly report for the quarter ended October 30, Onest 2020 also some of the comments today made 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 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 Dot Korn ferry dotcom.
With that I'll turn the call over to Mr. Burns and Sun. Please go ahead Sir.
Okay. Thank you, Greg and good afternoon, and good morning, and thanks for joining us.
You know this is the 11th hour.
Of the 11 per month of the year like no other and the good news is that our business has rebounded dramatically.
Revenue was up 27% sequentially to 435 million and in our earnings and profitability. They are both very good was $66 million of adjusted EBITDA and a 15.2 per cent adjusted EBITDA margin on.
I'm also pleased with the work we did to ensure a strong balance sheet and position of liquidity. This has served us well not only weathering the pandemic store, but being able to invest back into the recovery that we've seen you know and.
I'd I'd attribute these results showed on calling the three r.'s first the action strategy solutions and messages would take and have resonated in the marketplace.
Secondly, our clients have responded and third our colleagues have been resilient through the year that none of us have experienced and our lifetimes. Yeah. It's a testament to our strategy, but it's really about the resiliency of our colleagues across the globe I couldnt be more proud.
And while I'm pleased with the progress on the path. We see ahead. There is no question that the magnitude of the humanitarian economic impact brought on by this trend and think we will continue to permeate and shape the global landscape for quite some time and as we've said since early March I do believe there will be more change in the net.
Two years and in the last 10 years and that brings tremendous opportunity real tangible opportunity for Korn ferry almost every company on the planet is and we'll have to reimagine their business quite simply different work needs to get done and work needs to get done differently and to get worked on deferred.
Only companies will need to rethink their organizational structure roles and responsibilities, how they compensate engage and develop their workforce, let alone the top the type of agile talent, they hire and how they hire talent in a virtual world, which will depend to a greater extent on assessment and.
And these are current varies businesses and that's real opportunity for our company as an organizational consulting firm, we enable people and organizations to exceed their potential and to exceed potential people need an abundance of opportunity development and sponsorship, which is foundational to our service offerings.
We're also affirmed the changes People's lives as previously mentioned I'm very proud to say, we're launch and leadership you for humanity and nonprofit venture of the Korn Ferry charitable foundation focused on developing the total maus inside communities and within corporations. One of our partners will include the executive leadership Council.
A preeminent organization, whose mission is to develop and increase the number of successful block executives across the go and globe. Our goal is to take our expertise and IP and develop 1 million new leaders from diverse backgrounds and using our current very advance and leadership you platforms will also be offering.
On this to all of our colleagues. We're also using this time of changes and opportunity to Reimagine on business.
For example on moving from analog to digital delivery of our assessment and learning business, which represents about 23% and the firm's revenue.
And after July 20, and the way that makes our IP and more relevant and scalable and.
To give you some perspective on how far we've come at the start of the pandemic, we flip the switch almost overnight with nearly all of our assessment capability converting to a digital environment and on the recruiting side. We are further refining our platform processes, such as a video and technology more and more search will not simply about this.
Discovering and validating what someone has done but finding out who they are and we have this capability to differentiate our strategy and our strategy is absolutely taking hold and we see that pay off with our approach to clients as we create loyal repeatable sustaining relationship with clients and scale and Thats where were moving.
Our business, that's Archer and nor do we have about 300 marquee and regional accounts, representing about 34% and global revenue, which we'd like to increase to 40% or so as such we will continue to develop account leaders from within as well as higher and from the outside so forget the new normal this year.
As normal it's nearly nine months since the pandemic was declared and as I've said before it's not just the marathon, but and iron man traffic on it.
Of endurance agility and change and embracing this change we absolutely can make tomorrow on better and today I truly feel we have the right strategy with the right people at the right time to accelerate through the turn and as we enter 2021, and we'll continue our strategic commitment to build the preeminent.
And global organizational consultancy and look forward to what the new calendar year brings us and.
Before we take your questions on joined by Bob Rozek, and Gregg Kvochak and Bob I'll turn it over to you.
Great. Thanks, Gary and good morning, and good afternoon.
As Gary said the rebound.
Is this event from that is the sharp improvement and fee revenue fiscal second quarter is more or and then the result of improved global market conditions and said it really good should be to the resilience of our diverse mix of product and service offerings, our disciplined client management activities and the growing.
Relevance our solution set and today's business environment.
Coming to the last nine months of economic upheaval, we now have a number of proof points and our strategy is succeeding the business. We have today is less economically cyclical with the.
The time to recoveries shorter on the trajectory of our core recovery.
Even steeper.
And our operating experience through the cold and 19 recession, and thus far demonstrates a number of important points from.
First on more diversified business is clearly demonstrating radio resilience and in the great recession, where fee revenue in the quarter immediately following the trough quarter was approximately 43% less than the prior peak quarter for.
For the current called and 19 recession and.
The decline and see revenue from the peak quarter two for the quarter immediately following the trough is only 16%. So you can see a very dramatic improvement.
Well Youre, Gary mentioned on marking regional account programs. These are client relationships that continued growth liberal less cyclical more resilient revenue than the rest of our portfolio and we achieved this result by actively managing the balance with global account leaders, who use a disciplined and talent management strategy.
Through the first six months of fiscal 21, we saw and murky and and regional account fee revenue to decline approximately 14% year over year, which compares favorably to the decline and the rest of our portfolio, which was down 23%.
And our digital business, we continue to see meaningful progress selling and subscription based solutions RF Soi 21, Q2 subscription base fee revenue was $22.7 million, which was up 43% year over year and up 7% quarter sequential so.
Scripts and base New business also improved in the second quarter, reaching $29 million, which was up 39% year over year and 25% quarter sequential was the shift to more subscription based fee revenue will have a short term negative impact on fee revenue growth. It clearly.
On the positions us with more durable fee revenue for the long term.
And our consulting business, we continue to see success with our effort to capture larger engagements and that's as you said in the past those that are valued at 500000 more.
These engagements provide us with the incrementally better visibility in a more durable stream of revenue and escalate 21, or Q2 consulting new business was pretty steady with the prior year. Despite last year's number being an all time high which included a single non recurring engagement of.
$12 million and these larger engagements are also driving a rapidly growing.
Gross consulting backlog, which again enhances our revenue visibility and durability.
And last our BPO business continues to enjoy great success spec.
Especially as companies increasingly look to outsource and variabilize their cost base RPM and new business in the second quarter was $120 million, which is just shy of an all time high so as I said when I started we now have real proof points that our strategy is working on.
Now turning to our quarterly results and the second quarter all of our business segments were up sharply from the trough of the first quarter with a significant improvement on the rate decline that we saw on the first quarter.
For the second quarter, and that's why 21 or fee revenue was $435 million, which was up $91 million or 27% sequentially and down only 12% measured year over year.
Revenue declines improved consecutively.
Consecutively year over year, each month of the quarter.
On a quarterly sequential basis fee revenue and the second quarter for sex search was up 23%.
RPL and pro search was up 25 per se.
With proceeds being up 20% and our PEO up 27%.
Consulting was up 28% and digital was up 34%.
Importantly, as fee revenue has improved.
Been able to drive higher on these and profitability by leveraging the cost saving actions, we recently put in place as well as the productivity and.
Cost efficiencies, resulting from our emerging digital and virtual delivery processes. Adjusted EBITDA on second quarter was up $56 million sequentially, just slightly over 66 million with an adjusted EBITDA margin of 15.2%.
Our adjusted fully diluted earnings per share were also up in the second quarter, reaching 54 cents, which was up 73 cents sequentially on.
Our balance sheet and liquidity remained very strong at the end of the second quarter cash and marketable securities totaled 774 million.
When you exclude amounts reserved for deferred comp arrangements and per accrued bonuses, our investable cash balance at the end of the second quarter was approximately $458 million.
Finally during the last couple of quarters, we have discussed a number of restructuring and cost saving initiatives designed to help to from through the trough of the Covidien 18 places some of these cost saving actions like salary cuts were highlighted as being temporary in nature is important to note that.
Based on our Q2 performance, we have in the second quarter made and accrual to pay all of our employees, 100% of their salary for the second quarter and therefore, our cost structure in this quarter is fully loaded as it relates to current compensation expense I will now turn the call over to Greg to review our.
Operating segments in more detail.
Thanks, Bob starting.
Starting with our digital segment mobile.
Global fee revenue per cap digital a 75 million and the second quarter and up 34% sequentially and up approximately $9.3 million or 14% year over year.
Subscription licensing and component of KFC digital fee revenue and the second quarter was approximately $23 million, which was up 7% sequentially and up 7 million or 43% year over year and.
Homeowners business and the second quarter for the digital segment.
Approximately 17% year over year adjusted EBITDA on the second quarter cash digital was up.
$15.1 million sequentially to $23.1 million with 13.8% and Jeff.
Adjusted EBITDA margin.
Now turning to consulting and the second quarter and consulting generated $126.7 million of fee revenue, which was up approximately 21% sequentially and down approximately 12% year over year.
And our consulting services continues to strengthen enhanced by our growing virtual delivery capabilities and.
Secular growth was strong and solve our virtually delivered solutions and leadership and professional development and assessment and succession, which were up sequentially, 53% and 38% respectively.
New business and the second quarter, our consulting services was also up sharply and the second quarter consulting new business was up approximately 17% sequentially with growth and North America, Europe and Asia Pac.
Adjusted EBITDA per consulting and the second quarter was up $13.5 million sequentially to $20.1 million with an adjusted EBITDA margin.
15.9 per site.
ARPU on professional search generated global fee revenue of $85.6 million and the second quarter, which was up 25% sequentially and down 10% year over year on.
RPL fee revenue was approximately 27% sequentially and per pack.
Optional search fee revenue was up approximately 20% sequentially.
With regards to new business and the second quarter professional search was up 9% sequentially and RPL was awarded and near record $120 million of new business, consisting of $59 million on renewals and extensions and $61 million of new logo work.
Adjusted EBITDA per RPL professional surge and the second quarter was up approximately $7.8 million sequentially.
And $13.8 million with an adjusted EBITDA margin of 16.1%.
Finally for executive search global fee revenue and second quarter of fiscal 2000 lots approximately $148 million, which was up approximately 23% sequentially with growth in every region debt.
Quite easily North America was up approximately 32% and while on the and were up approximately 5% and 21% respectively.
The total number of dedicated executive search consultants worldwide and the second quarter was 512 GAAP.
And 73 year over year and up to sequentially annualized fee revenue production per consultant on the second quarter of $1.6 million and there are a number of new search assignments opened worldwide and the second quarter was 1331, which is down approximately 15% year over here.
But up 19% sequentially.
Executive search also benefited from cost reductions productivity enhancements and streamline virtual delivery processes and the second quarter as adjusted EBITDA grew approximately $20 million sequentially to $28.2 million with an adjusted EBITDA margin of 19.1%.
Now, we'll turn the call back over to Bob to discuss some of our recent monthly and business trends great. Thanks, Greg globally, and monthly new business trends continue to improve throughout the second quarter.
So moving new business awards for our BPO grow the business and the second quarter measured year over year was down only approximately 7% and that was from record high and business and the second quarter fiscal 2000.
With the year and holidays approaching both November and December typically seasonally slower months for new new business. However, on a month to date basis. What we're seeing in November is that it is in line with.
Last month and last year.
If our typical seasonal patterns hold this year, we would expect January to be are high and month of new business in the quarter.
No approximately three months have passed since our last earnings call and while advances have been made and science societal and economic impacts.
Phobic 19, there remains significant uncertainty about the ultimate consequences, none of the positive side there have been several announcements regarding vaccines that have greater than 90% effectiveness. In addition, the world has adopted new ways of working and.
And interacting and substantial acceptance of business being conducted virtually.
On the negative side, there on number of unanswered questions regarding the capacity to manufacture the bit vaccines and.
Scale as well as how they will be distributed and administered to the population at large.
In addition, and were seeing governments reinstating lack downs as the number of Cove, and 19 cases, and hospitalizations reach all time highs.
We've also and unprecedented nature of what were current is currently experiencing combined with so many on to answer questions and ever changing data points does continue to cloud near term predictability of our business. So consistent with our approach for the price three quarters, we will and that issue any specific revenue or earnings.
Guidance for the third quarter of that flight 21.
Late November new business again that is as of today in line with prior month and year ago levels.
We would remind you that our third quarter is our seasonally low quarter due to time us around the year and holidays typically what you would see is this sequential decline from our second to our third quarter as rain sort of 3% to 5%.
Ignoring any incremental impact from coal, we would expect that pattern.
To be the same and the current year revenue, what we're not able to determine the levers that we if and and to what extent there.
There will be any incremental impact from cold with 19, which potentially could that be effective exacerbating our typical sequential decline.
That concludes our prepared remarks, we would be glad to answer any questions you may have.
Ladies and gentlemen, and if you'd like to ask a question. Please press one then zero on your telephone keypad.
You may withdraw your question at any time by repeating the one zero command if youre using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one zero at this time and one more and please for your first question.
Your first question comes from the line of George Pong from Goldman Sachs. Please go ahead.
Hi, Thanks, good morning.
Digital business ahead.
Significant rebound in terms of new business up 17% in fiscal Twoq can you elaborate on some of the trends operationally that youre seeing which specific areas within digital were strong and on what types of customers.
And it took on most of the business within the quarter.
Well the customers were were pretty broad based on the as you know the digital business encompasses several different.
Several different service offerings.
Training and development is a big piece of it.
On the other pieces compensation and the third piece is around assessment and succession Theres, a fourth piece around or strategy buckets, and that's as much smaller piece of the business and so.
For several quarters, we've we've made and made a move that said we've got all this great IP.
And how can we monetize that IP and so I think this is a continuation of the strategy to really change thousands of People's lives through through our IP. So.
And that's what we've seen the customer base was pretty pretty broad base.
Certainly the professional development piece of it is has been driving a fair share and that's a that's a big market. We look at the market opportunity for us at about $250 billion and when you look at that market you started to break it up.
Part training and development is an enormous piece of that.
And so we've we've certainly made a move.
Over many many quarters, but particularly since the pandemic started to move that business too.
Virtual delivery and so when you look at the virtual instructor delivery days.
They're up 21% sequentially in the second quarter. So we did a 1651 delivery days.
Versus kind of 2200 and Q4, so we've we've shifted almost all of our training now is virtual it's like 97% bonds GAAP exact numbers.
Now were still off.
Were still down in terms of delivery days about 27% from from Q4, and I think you'll continue to see us eat into that now the third quarter will be a very tough compare because in the last a year ago.
We had the impact of on the the Aspen acquisitions that we made and those gave us tremendous capabilities around around training and development, particularly around sales sales effectiveness, so you'll definitely see and the third quarter.
What a decline.
But we we had anticipated so I think it's all of those factors.
Coming together.
Got it.
Very helpful. And then just as a follow up in your EBITDA margins in the quarter were not too far off from the levels seen last year, just looked on the little bit.
As you.
Begin to take on some of the cost and the cost come back with improving revenue trends. How do you expect incremental margins to perform in fiscal Threeq, you and be on should we see something similar to Twoq you. What would you expect some of the permanent cost savings that you talked about and have more of an impact on some of your variable cost start to come back how do you think about tomorrow.
And profile going forward.
Well I do think that over time here, we can be easily at a situation where our margins are actually better and we've you know look weve real Maria mentioned, our own business and I think part of that is reflective in the results here. So when you look at that 15% margin as Bob talked about.
You know in the great recession, one quarter out our business was down.
One quarter out from the trauma business was down 43% I think I think now it's kind of like 16%. So clearly the strategy has absolutely played out and with respect to profitability and you could say the same thing and so we definitely have plans around real estate that takes on much longer time to to actually.
Why is that we're going to continue to move forward with a with a different real estate footprint and I think people, but on the would be the way people get work done as we've talked about is changing and I think I think half of that is going to be permanent I really do so in terms of the flow through and Bob can comment on on what we're targeting.
And I I kind of think that you know as we used to look at flow through that line on lives of 25% or kind of flow through to EBITDA.
And I think thats, probably going to hold true and there could be some some upside to that Bob do you want to comment further on that.
Yes, I would say that in the.
In the foreseeable future that our flow through is.
Really what we experienced in the second quarter was.
It was much higher than the 25% and as we continue to.
To see some of the efficiencies as well as people know traveling and so on.
It will continue to see flow through an accelerated rate.
I would say George over the long haul, we're right now combing through the and well over 100 leases.
So we're combing through each of our office locations with a point of view in terms of.
The.
Reduction of our footprint.
And we're looking at all the business development travel that we used to do and.
Moving up and new policies and approaches today, So I would say from a long term perspective.
You should expect and minimum.
Sort of a two percentage point.
The increase in our long term profitability.
Well, we'll have none of this and that in the future as we conclude.
Our analysis.
Very helpful. Thank you.
Your next question comes from the line of Sam comes from from William Blair. Please go ahead.
Hey, guys and I was there all right.
Great.
Excellent I was hoping you could help characterize how much and the sequential increase in revenue was due to pent up demand versus general strength and market trying to understand how we should be thinking about the strength in this quarter as we model out the rest of the year here. Thanks.
Well I, you know I pent up demand as always this phrase and I don't know what the how it really and what it really means I.
I look at the results and and you say number one you know years ago, we went down this strategy.
How can we have greater impact with clients. How can we have reasons to broaden the conversation how can we take our IP and change thousands of People's lives and what you're seeing and the results is exactly the strategy and playing out and what you see is that per.
Most of the business are substantially less cyclical than other parts and so when I look at the.
Just trailing four months of of new business.
Overall, it's it's down four per site as a company platform wide and but when you look at that you'd find that the the pro search business has been on the probably the most cyclical it was down 21% in terms and new business executive search less cyclical than pro search down 17 ARPU.
It was actually up it's up 1% Consultings up 5% and digital is up 11%. So I think and first you are seeing the strategy play out.
And as we've indicated to see one quarter out of the trough the business reacting completely differently than the great recession is very encouraging and I think thats more than pent up demand I think it really has to do with.
Number one the resiliency of our colleagues I cant say and.
About what our colleagues have done and I think the the messages these solutions.
You know the actions we've taken.
Have resonated in the market place.
I would point to for example, our deny consulting business and Thats now almost on an annual run rate basis, it's almost on nine digit business.
You know and I attribute that to the quality of the people we have the solutions and the very strong stance.
We've taken.
With respect to today and on I think the other piece is that whenever you go through transformation. There is always a period of pause there was a period of reflection as a period of neutrality.
And I think what you're seeing is that is that companies are some faster than others have moved from defense to offense and I think that's also.
Played.
Pretty big part in the business I think our Marty and regional accounts. The fact that they've outperformed the portfolio is again, a testament to to the strategy and so I I think all of those things working together.
On explain expire.
Explain the result, so I'm I'm incredibly encouraged.
By by what we've seen.
That's helpful.
On the related and I guess on.
You've spoken about the desire to increase the number of margin game and any trends as a percentage of revenue mix I'm wondering what type of projects tend to go on and those larger engagements and then can you share what the margin profile and project length and they tend to have.
And you repeat the first part and the question on Im sorry, I missed the first towards.
Yes, you've spoken about the desire to increase the number of margin engagements as a percentage of revenue yes.
Yeah, Yeah yeah.
Thanks for the question. It's it's a couple of all day, one is around organizational transformation and and again, it's a theme around companies moving towards on bags and different work needs to get done and work needs to get done differently. So how and organization gets things done which is really that the death.
Mission of culture.
That's certainly been a driver the other piece is helping companies go from analog to digital that's probably the second driver and the third driver is around career transition services, where.
Some time ago, we started a b to C business called Korn Ferry advance and we've put a 100000 people through that using our IP.
Trying to be the world's gymnasium for people to exercise their careers and weve really taken that platform and we've been able to have a bigger impact.
With companies one is around career transition so as companies look to two.
Reconfigure their workforce, how they do that going from analog to digital as well as how they take care of their employees and even if they have to make tough decisions on debt.
Thats played a role as well and and so those those large engagements fall along those lines as as well as Dan on.
Thanks for the color.
Your next question comes from the line of Tobey Sommer from Trust Securities. Please go ahead.
Thank you.
Sounds like you made good progress in digital and moving towards virtual delivery.
How would you characterize progress and moving towards more recurring.
And this model and.
And any kind of update on what your goals maybe over the longer channel will be helpful. Thanks.
Well you know the RTL business has has turned out to be.
You could say a recurring business model, but the contracts are long multi year contracts. We this last quarter, Bob and certainly provide the detail, but we we had a combination.
Of renewals, which is just a great sign as well as new logos and so we've seen that business as Bob said on munis. This last quarter in terms of new business was I think it was the second highest quarter almost tied our highest quarter ever. So you could look at that and say Wow that that's really good.
Good and and you know even on the on the consulting side and and digital digital clearly.
On has a recurring business model. There is no question and Bob talked about the percentage of subscription based revenue there.
On that that clearly has been working and consulting.
You know that.
Just on.
I am very very pleased with what we've done with our consulting business and anticipate.
On to see new.
New business being up.
On this difficult time, just take trailing form on seeing it up 5%. So I think it's I think it's those as well as you know the focus that we've had for.
For now quite some time around what we would say house accounts, Marty and regional accounts.
There's about 300 accounts and we have dedicated account leaders on those accounts.
Typically and account leader only has two.
On or three maybe accounts that day, they lead and I think that you know that intimacy that we're creating with clients.
Creates that that platform for recurring revenue and on when I look at some of the big and engagements that we have we've won.
Many of those are.
Coming from our Marty and regional accounts. So when you look at any world class professional services organization.
And find that about 40% or so it's going to vary a little bit, but 40 per site would.
Would be from proactive loyal repeatable clients of scale and that along with our IP is really the bedrock and the foundation to the strategy and I say I think it's both it's all of those pieces.
Okay.
You know shifted or those take or pay contracts are those modulate down as customers demand declines.
For the yeah.
Yes go ahead, Gary Im so no I don't from so.
Yes, I think most until we have some modulation.
Depending on what customers using with our appeal.
Contracts and we kind of as we've talked about this on time, if you look at like and executive search.
And we often refer to that as a light switch to either on or off versus our PEO is more like a denver switch if somebody could sign up to do 10000 hires and year and then you go to a challenging time and they may dial that back to you know so.
Six or seven and 8000 items that year, but you're still going to be doing some hiring and I would say most of our cash.
Consulting business is nature.
Nature, one of the day I took a look at.
As we were.
And for the call looked at the new business by client last year versus this year, because as I say on the consulting side. It was a extremely challenging compare.
And.
But we were essentially flat year over year, which in this environment is really good.
And I looked at the Cline and it was last year versus the share is kind of the nuclear image.
Of each other so I would say that the.
Recurring nature of what we had items.
Gary was indicated by client we're doing business with the same clients year on year out.
I think it's it's actually pretty high.
Okay.
And just a last one follow up on the spot on and go to the question with any digital how much is genuinely recurring.
As defined by accounting or and so that you can kind of count on hard backlog as opposed to a soft backlog, which we characterize most of the other business.
Yes that would be the to subscriptions and licenses. So we had almost $23 million.
Revenue in the quarter.
For that business and again that was.
Remember the formal remarks today, we had a $29 million business, which was up.
30, 40% year over year earnings and of course sequential so we'll see net the subscription and license and new business really getting getting traction.
Okay perfect.
Switching gears, if I could ask a question about.
The acquisition strategy because.
In the context of what seemed to be prospects for higher margins.
Over the longer term it does this current form and.
Kind of shape your future acquisition strategy.
Because if the company is it really able to get to a high teens EBITDA margin then.
Acquiring inefficient businesses with.
Mid or high single digit EBITDA margin, even with cost cutting could end up being dilutive. So I was wondering if your kind of target profile needs to change as a result.
Well you certainly raise.
Very interesting point, Tobey I think that I would pick and.
And look at it from a client perspective, and without regard necessarily to the margin. Obviously the margin clearly plays a role there is no question about it what what's going to be also meaningful is the return on capital and that's.
Thats certainly going to be a measure that we're going to what cash, which which does go hand in hand, obviously with the margin and then the the the purchase price but.
I think we are at the very beginning I really believe we're creating here on multibillion dollar organizational consultancy. That's unique that is that is I think we're the only one day pursuing.
On this endeavor.
Not only strategy, but how do you synchronize a strategy with your talent and and organization. So I think what we've seen here over the last several months is that if you can have loyal repeatable clients.
And you can put on focus on loans and you have quality solutions, we will create a from that that has bigger impact and that's really what we're trying to do at the end of the day. The wife for US is to change People's lives is to enable people and organizations to exceed there.
Potential and so with bottomless of margin if and when you see that there are solutions and capabilities that give us the ability to change more people's lives, we're going to be extremely interested and now the other thing I would say.
Is the.
And I don't use this word we'll do the cross sales, but the amount of the top line.
That comes from introductions across business lines is really and process and then when you look at the this last quarter and you look at the total revenue you'd find that about 25% of the top line is driven by.
Bye Bye cross referrals.
And for some parts of the business, it's substantially higher than that and for other parts. It's lower so I think that.
That the the theory and the strategy is very much playing out that if you know if you can anchor yourself around proactive loyal sustaining clients of scanning on mute and we can bring quality solutions.
We've demonstrated that we can actually have bigger impact in other words, we can cross sell and.
On which I don't particularly like that word, but we can have big bigger impact with clients.
And the expiry of CECO.
Elaborate on that point, if you go back to fiscal 2018, you know that number was 14 and a half percentage. So we've taken it over the last two or three years and pork and at this and up to the 25% that you just referenced.
Yes.
Let's take a numerical question and and then after another step toward I will get back from Q. When you said margins could be higher potentially over the long term should we think of a in a comparable improvement in free cash flow. So should that sort of EBITDA conversion rules stay intact and then how do.
[music].
About the company's real strong sequential improvement in the third quarter.
And parse out what the.
Is it sort of a undoubtedly very rapid economic rebound in the quarter after.
The nadir rubber recession, which differs from the 2009 period, which is kind of a longer slog, how do you parse out sort of the economic macro impact and then the diversification that I did in your prepared remarks.
Bobby on take up.
Yes, so on the I would say Toby and.
The free cash flow, we would expect I think historically, you've been a 70% to 75% range and we would expect.
Continue on.
Right around there later.
Right around that level I think.
What are the things that we're doing now is weve tamp down on our capital spending.
Through as we go through.
The downturn.
And that will those will have to write back up again.
So we can.
Continue to drive.
The digital business and investments that we've made into that business over time, but I would expect the.
On the free cash flow to be on this 70, 75% range.
And our EBITDA.
I would expect debt to continue.
And then in the third quarter I guess.
And what we're seeing right now as we said in the remarks is the new business.
As a percentage machine language with October and last year, which obviously would flow was strong.
And we would expect EPS and then any.
On real negative impact from.
Lockdown activity.
That we would go back to our sort of a typical pattern.
Being down 3% to 5%.
Well, we don't know is what the objective there is the.
Potential lockdowns, where that could have on those and then we would have over.
What is it that we would expect overtime and get back to you know what's what's businesses.
We have the vaccines and place of business back to usual than we'd expected to be.
Moving to a more.
Equity recovery and what we saw on the great recession.
Back to normal levels.
Right I was really from to the third quarter comments about how quickly the business bounced back and to be sort.
Sort of evidence on the diversification working.
On the economic backdrop.
It's a whole rebounded very quickly so how do you tease out the company specific the business model attributes and from as being more resilient versus the economy just improving on.
Yes, when we were making those calm and still get ever more relative to the second quarter, and that's where I got confused on your question Oh, sorry, My Bad I was confused on the calendar and fiscal I was afraid to Twoq I apologize for that.
Yes.
Well listen to it I mean, it's hard to pinpoint exactly what's driving I guess as we step back and.
And each recession, obviously is different as we step back and look at.
Our performance coming through this recession and you.
Look at the.
Five or six.
Proof points that we have we believe that debt demonstrates the.
The resilience that durability.
And the impact of us diversifying and this business and as we've talked in the past and want to base, we and Weve, Chad and you've heard us talk to investors.
Everybody, we talk to would indicate yet and what you're what you're seeing and make sense, but until we see you come through the next day next onto and it's really hard to get credit.
For what you're suggesting in company through this I think again I think we've demonstrated that.
No those proof points are and now in place and weighted.
It is really hard to to pull apart and say exactly what contributes.
You know to to what we're seeing but.
Our performance in the quarter, we can substantiate those proof points.
Thank you.
Your next question comes from the line of Kevin Mcveigh from Credit Suisse. Please go ahead.
Great. Thanks, so much.
Got it.
So I'll just start and that's in here.
[laughter].
Gary or Bob.
[music].
Great.
And just.
[laughter].
From a smell perspective on what people are so focused on.
[laughter].
Revenue per weighted.
That's great and are just teach.
Hey, just any thoughts on fish and scope.
So focused on.
Channel.
Well part of it is clearly.
I don't know if I would say expense driven but it certainly of the humanitarian nature where companies.
You know you asked five people the definition of culture, and you'll get 10 different answers for us it below and organization get things done and and I and there's certainly a piece of debt that has been driven by by companies looking at the way they are getting worked on.
And then what they do with their employees. So so part of it could be around what we call career transition services that would be a piece, where theyre looking where they're having to make adjustments to their workforce and.
And they want to be compassionate and around how they do that and we offer our cash advance essentially our cash advance platform that that's a piece of it and another is around organizational transformation.
On that that is that certainly has been driving it and what goes with that is is what I've said for a couple of calls now that at some point.
Companies would be moving from defense dock and lights and that that has certainly.
Played out there.
On the analog to digital is clearly.
Another thing that's that's driven business.
We haven't seen much yet on M&A.
But we do have world class M&A services, we'll see if that picks up here and in 2021 that could be a huge opportunity for us.
But it but it's really those types of engagements and then the final piece is around deny.
And you know it was about eight years ago, we made an investment and what I believe could be at that time, the absolute preeminent deny consulting business and the world and and we've taken that that business, which at that time was a really very low.
Eight digit business and over a series of years, we've continued to build on that and.
Then you know after the pandemic and with with the.
And the recognition of changes you know societal changes that need to be made.
And then the positions that we have taken in the marketplace and the resiliency of our colleagues that certainly has played.
On a role as well and I think when you look at the when you look at if I turn now to the recruitment side. You know there was a period of time, where where the world paused I do believe that.
There's going to be probably as much C C suite change.
From happening.
Over the next few quarters than we've seen in many many years and that could be because executives said well you know that as they reflected and pause maybe they want it to do something else.
Maybe it's because that on.
Our board looks at a company strategy they want to take it in a different direction, but I would expect that to.
Actually increase over the next few months and quarters.
That's very helpful. And then just real quick on.
And any thoughts on that.
Okay.
Well Kate.
Sure.
Sure.
Particularly carrier offers interest.
For <unk>.
Well we have.
Yeah, No I think what you know I think you know we tend to be.
Further rather conservative in our and our thinking.
And what gives US pause is what we're saying is look we said this was going to be and iron that at the very beginning we said this was going to be 18 to 24 months.
And publicly said I thought a vaccine would be widely.
Now available on the you asked kind of in October of next year I'm not a scientist, but it certainly seems like that is the way things are headed maybe it could be sooner.
But you know clearly the lock down that we've seen.
In Europe, and and different cities in the US has given us pause and we you know we want to be we want to be prudent about it I do think though that and.
And you see it unfortunately.
Moving the level of cases.
And staggering it's absolutely staggering in on 200000 cases and day you know it's amazing how you hear that number and your psychological reaction is so different than it was eight months ago. When we were talking about you know 30, 40 50000 cases on the.
I think the psyche has changed and I think that same psyche holds true for business. This this will not be our first rodeo.
Through this through this pandemic and so I do believe that as hard as it is people.
Our incorporating this bizarre reality into their psyche, which which is reality right. So I would not expect.
The world to the pause I, just I really don't see that but at the same time. We're we're just trying to be prudent with all of our constituencies not only our shareholders, but also our colleagues and our and our clients and so you know.
And Steve if these kind of incremental locked down there.
They give us a little bit of pods.
Super helpful. Thank so much Gary.
Your next question comes from the line of Mark from our cone from Baird. Please go ahead.
Hey, good morning wondering.
Wondering if you could talk a little bit about Gary how you're approaching this investing and the business. When we think about your consultant headcount and the types of people per year.
Historically.
Okay.
As a time to.
On a plate price, but also to play offense and upscale the talent. So I'm wondering if you can give us a little bit of a feel in terms of how you're approaching the next six to nine months.
You know we had a handful when this thing broke out you know we had a contingency playbook that we pulled out a year ago and and when it broke out we share a handful of things that we said we wanted to accomplish.
One of the was to continue to grow from within and use our own IP on.
On our colleagues from sponsorship and Mentorship and development. The other was to look to the outside.
And you don't see it and the numbers yet.
And because a garden waves and the like but we've been very aggressive.
In the marketplace.
Looking looking and talent and that would encompass the entire platform and.
And we've been out looking and account leaders, we've been out looking and hiring consulting talent.
Digital talent and recruiters and so you don't see that fully and the numbers.
But we've been very aggressive mark.
Okay, Great and then with regards to and what are your current telling you how I mean im sure Youve from high level per stations with regards to how they're approaching.
Yes.
Our app on.
How how what sort of pace would you expect to see in terms of the business coming back and once we have a vaccine and how quickly you think things rebound at that point.
I think that as I talk to Ceos and it was in my prepared remarks, you know there was this thing around.
You know the new normal well you now forget is this kind of is normal and I think that I think that sentiment.
More than any has started to to really you know on.
Hold true and in People's minds as as tough as it is I think that there is a growing acceptance and and incorporation that that this is reality.
For us we've seen a pretty big increase sequentially when I look at the industries.
Kind of across the board.
On actually even consumer was the highest performing and I think when you look and feel portfolio today.
The industrial piece and the consumer piece are still behind where.
Where they you know where they were if you will.
And we need to see those come back and.
On undoubtedly day, they will come back so barring any kind of national or country wide lockdowns.
And assuming continued.
And governments stimulus on I'm pretty optimistic.
And you know and even with the political changes in the U.S.
And I stand pretty optimistically that companies are making the pivot to offense and they're saying well the world has really changed different work needs to get done and it needs to get done differently and how do we do that.
And that's essentially the business that we're in and so I'm mark on probably and as I sit here today on on.
Certainly more optimistic than I was six months ago.
Great to hear Gary are you seeing any clients are pulling back to us with the recent spike in terms and no.
No. That's no now now again you know again this is whatever November 23rd Okay. So.
But as of this moment for November and what we've seen and and new business and what we've seen and existing mandates.
And is very much a continuation now November and December on not expecting great things.
I think that a lot of people are going to really on club and the.
Particularly in December so I, just think by by the seasonal nature of where we are.
Do you believe you are going to find on the delivery days that consulting days are going to be actually down maybe even more than what we experienced historically and as I indicated on the digital side, there will be a tough compare and the third quarter even.
The increase that we've seen in the new business.
On the reality is that doing the virtual instructor delivery days you know, it's still off about 27 per cent. So we've made this enormous improvement converting essentially almost.
Almost 100 per side of our training to to virtual delivery to this quarter doing it on 1651 delivery days I mean, we're still on off and so I think you will see that and in the third quarter for sure.
But again on.
I'm optimistic.
Great.
Your next question comes from the line of Marc Riddick from Sidoti. Please go ahead.
[noise] hi, good afternoon.
Hey, Mark.
First of all I want to thank you for all the commentary and color that you provided I wanted to ask specifically about those who have made that switch from diesel on style. Austin's I was wondering if you could talk a little bit about what that.
Means for you and dealing with them and working with them going forward and because I wanted to get a sense of does that then provide maybe greater insight.
Insights as to maybe they're short and longer term plans future visibility and things like that I was wondering because it could talk about that a little bit.
Well I think overall I don't want to if you don't want to sound like a lot like a broken record, but but theres certainly as you know a couple broad themes around you know and organization and what it looks like.
And that is playing out.
How do you on board people virtually how do you train people virtually.
How are you moving your business from analog to digital those types of engagements clearly hub and have been playing out.
As a as well as as well as the D. and I side.
So I think that again people have pivoted.
And they're looking at and what their organization is going to look like that in 2022, not only 2021 and and what does that mean, what type of talent doing you know I you know and.
Year ago. If you would have asked me what would somebody higher and.
And executive a CEO or even a board member without physically needing them I would have said you're crazy and.
But the reality is that actually whats happening and and the good news for all of US is that.
Unfortunately, as human beings, we're very biased and we sometimes make long decisions within the first seven seconds of meeting somebody so the IP that we have.
Around who somebody is right as opposed to what they've done and I think is really playing out in the in the market place and you know we're seeing that today, where I just wouldn't adjusted I wouldn't have guessed that a year ago and I think theres just so many examples about per.
Playing out through the corporate World, where somebody took a trip and man you did you really have to take that trip and so although the you know the Microsoft teams and the zoom is not the most intimate for sure.
And it can be quite isolating for for all of US I think there is a recognition and that when we get into 2022 later part of 2021, I think that half of the stuff that we used to do just lumping Don I, just I don't see it I think there's going to be.
Real change and so we've we've definitely we've certainly seen that.
You know over the last several weeks.
That's really helpful. And then I guess the last one from me and for those who have.
Moved into the offensive can't but is there any day.
Differences that you're seeing from a regional standpoint, I mean, obviously different parts of the world and experienced called it in different ways and different and slightly different timing and that's why if you're seeing any different jim that that pace of of shifting from defense to office Bakken well I think in North America look North America has output.
On there's there's no question about when and when you look at the trailing four months new business.
Across the entire Korn ferry platform, it's up 7% and North America, where whereas if you look at EMEA and Asia Pacific.
Those are going to be down you know 12, 13%, 10% and in that ballpark trailing four months and just new business. So.
That there's no question that it at least for Korn Ferry and I think Korn ferry is again reflective of the economy that day North America has been has been very very agile and part of that has to do with I think the the the laws and the ability to.
And make changes.
But that that piece of the business.
Has certainly been heartening to see and I'm not sure and by that I am not suggesting that companies and EMEA and Asia haven't made those moves.
Because they certainly have.
But the North American business for us.
Has been a shining star and when you look at the company overall, you know the the last two quarters before Cove, and we were doing about $560 million of new business. This last quarter, we did 560 million and new business. So what we've seen I hate to use alphabet and I think it's so ridiculous.
But we have seen a v. I mean, and you just can't you can't deny it and when you look at that V. certainly the entire platform has benefited but north America.
Certainly outperformed by far.
Thanks. Thank you for that and then the last thing for me I was sort of thinking about E going back to 2008, whatever going live in so that's one of the things I recall is on a lot of the C suite leaders, who maybe had thought about retiring or or making changes and things like that really kind of hung in there.
Until they had gotten to the other side and of the greatest of difficulties and then you saw a pick up of Ses and we move are you getting a sense that there might be a.
I guess.
Going back to the pent up term I'm not sure if that's the best way to put it but.
Are you getting a sense it there and those who may be.
Ready to move on and once we get to be on their side on the challenges of this and thank you. Yes, yes, yes, yes, I was talking to a C and online and go on and you know this person and said that.
You know they thought they would hang and for you know, but before covered it was several years and then even as recently as a few weeks ago. They thought they'd hang in for a year and on that that has changed so I think what this has done is people have again, there has been a period of popeyes a pause towards purpose a pause towards were.
Flux and a pause towards your real why as a human being and I and I believe that to be the case, yes. We have certainly we've seen that the other thing we've seen is and again and maybe rather intuitive, but just the amount of people that have moved like just have relocated and because they can kind of do that.
Our job anywhere so yeah.
Yes, we've certainly seen those those beginning signs and I would expect that that kind of C suite turnover is going to stay pretty high.
And over the next several months and quarters I do.
That's really helpful. Thank you very much.
And at this time there are no further questions I'd like to turn the call back to Gary Burnison for any closing remarks.
Okay, Greg and.
I think about a week ago somebody said to me happy Thanksgiving and I was a little jar and [laughter] I was jarred by the comment because you know every kind of Dillards day, you to you know the demand from the days have ever on together, but certainly this is on a.
Special time of the year I wish everybody.
On a wonderful Thanksgiving and the United States. Thank you for joining us and we look forward to talking to on next time. Thank you bye bye.
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