Q3 2023 Korn Ferry Earnings Call
Speaker 3: Ladies and gentlemen, thank you for standing by and welcome to the Corn Ferry Third Quarter Fiscal Year 2023 Conference Call. At this time, all participants are in a listen-only mode. In the prepared remarks, we will conduct a question-and-answer session.
Speaker 3: As a reminder, this conference call is being recorded for replay purposes. We have also made available in the investor relations section of our website at cornfairy.com a copy of the financial presentation that we will be reviewing with you today. Before we turn the call over to your host, Mr. Gary Bernason, let me first read a cautionary statement to investors.
Speaker 3: Certain statements made in the call today, such as those relating to future performance, plans and goals, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, the company is not
Speaker 3: Investors are cautioned not to place undue reliance on such statements. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties which are beyond the company's control. Additional information concerning such risks and uncertainties may be provided to the firm.
Speaker 3: can be found in the release relating to this presentation and in the periodic and other reports filed by the company with the SEC including the company's annual report for fiscal year 2022 and the company's soon to be filed quarterly report for the quarter ended January 31, 2023. Also some of the comments today may reference non-GAAP financial messages.
Speaker 3: such as constant currency amounts, EBITDA, and adjusted EBITDA. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measure, is contained in the financial presentation and earnings release relating to this call.
Speaker 3: both of which are posted in the investor relations section over the company's website at www.cornfairy.com. With that, I'll turn the call over to Gary Bernason. Please go ahead, Gary.
Speaker 3: Thanks Greg and good afternoon everybody. Thanks for joining us. Number one, I'm very proud of our third quarter performance, particularly in light of the macroeconomic environment. Given our scale and the depth and breadth of our IP data and content.
Speaker 3: We are incredibly well positioned to enable our clients to navigate an economy and transition. Our strategy is working. We've built synergistic businesses around executive search that are generating more durable fee revenues. We're going to continue to prioritize investment.
Speaker 4: in the larger, faster growing, less cyclical markets.
Speaker 4: It set our firm and our clients up for success. As an example, the recent addition of SALO now brings our interim services to be more than 10% of our firm's revenue on a pro forma basis. This wasn't even a business for us a year ago.
Speaker 4: And yeah, this might be the most anticipated downturn ever, but this is also a transitory time.
Speaker 4: And like others in the past, it also brings opportunity. It's a proving ground for the
Speaker 4: efficiency of our strategy, the strength of our culture, the resilience of our colleagues, and the potency of the corn fairy brand. With that, Bob, I'll turn it over to you.
Speaker 5: Great. Thanks, Gary, and good afternoon or good morning, everyone. Our results in the third quarter continue to provide proof that our growth strategy is working. For instance, we continue to demonstrate the ability to drive top-line synergies between our solutions. As an example …
Speaker 5: Our recent acquisitions in the interim space, which we believe provides real outsized opportunities for growth, they have created almost 700 additional engagement wins resulting in an incremental $43 million in fee revenue since the third quarter of fiscal year 22 when we acquired the Lucas Group.
Speaker 5: this is all through cross sales between the acquired entities and Legacy Corn Fairy
Speaker 5: Cross sales between our other lines of business and both our marquee and regional accounts both continue to also perform very well in the quarter.
Speaker 5: You know, I recently celebrated my 11th year with Corn Fairy and one of the reasons why I joined the company was the growth strategy You know, it really resonated with me and I believe more deeply in it today You know, we are relentlessly driving an integrated solutions-based go-to-market strategy.
Speaker 5: delivering unparalleled client excellence.
Speaker 5: extending the corn ferry brand, advancing corn ferry as the premier career destination, and we're pursuing transformational opportunities at the intersection of talent and strategy.
Speaker 5: This growth strategy served us well back in 2012 when I joined, and it continues to do so and even more today.
Speaker 5: Let me turn the call over to Greg who will take you through some of the company overall company financial highlights
Speaker 6: Thanks, Bob.
Speaker 3: Turning to our third quarter for financial results. Fee revenue was $681 million for the quarter, which was flat year over year and up 4% at constant currency.
Speaker 4: By line of business, fee revenue was mixed as demand in executive search and permanent placement professional search moderated from post-pandemic recovery highs, while our consulting, digital, RPO and interim solutions remained relatively stable.
Speaker 3: Measured year over year at constant currency, consulting was up 4%,
Speaker 3: Digital was essentially flat, and RPO was up 9%.
Speaker 4: including revenue from recently acquired businesses, professional search and interim was up 33% at constant currency.
Speaker 7: while executive search was down 9%.
Speaker 7: In the third quarter, Consolidated New Business, excluding RPO, was up 5% year-over-year at constant currency and up approximately 1% at actual rates, with growth in all lines of business except executive search.
Speaker 7: In the third quarter, adjusted EBITDA was $96 million with an adjusted EBITDA margin of 14%.
Speaker 7: which was in line with our guidance.
Speaker 7: Earnings and profitability were impacted by an overall mix shift in fee revenue to lower margin lines of business, investments in fee earner and execution capacity, and to a lesser extent, wage inflation.
Speaker 7: Adjusted fully diluted earnings per share in the third quarter were $1.01, which was down 58 cents or 36% year over year.
Speaker 7: Adjusted fully diluted earnings per share excludes an after-tax charge of 42 million dollars or 80 cents per share related to the realignment of our workforce and the impairment of certain real estate assets.
Speaker 7: Gap fully diluted earnings per share in the third quarter were 21 cents.
Speaker 7: Our investment cash position remains strong and our current capital deployment continue to be balanced.
Speaker 7: For all of fiscal 23, through the end of the third quarter, we purchased approximately $80 million of our stock.
Speaker 7: paid cash dividends of approximately $25 million, deployed $99 million for business acquisitions, and funded about $48 million of capital expenditures, most of which was directed towards product development initiatives for our digital business.
Speaker 7: With that, I'll now turn the call over to Tiffany to review our operating segments in more detail. Thanks, Greg. Starting with KF Digital, global fee revenue in the third quarter was 85 million, which was down 6% year over year and approximately flat at constant currency.
Speaker 8: Digital subscription and license fee revenue in the third quarter was 30 million, which was approximately 31 percent of fee revenue for the quarter. Global new business for KF Digital was 109 million with 39 million or 35 percent of the total tied to subscription and license sales. Earnings and profitability in the quarter were impacted by investment and product development initiatives.
Speaker 8: 12% versus prior year. Additionally, global new business for consulting in the third quarter was up 9% year over year at constant currency.
Speaker 8: The professional search and interim business, new business, increased 30% in the third quarter versus last year, driven by double-digit strength in North America, aided by the current year acquisition.
Speaker 8: Total fee revenue was $118 million, up $28 million, or 31% over the same time period.
Speaker 8: Breaking down the quarter, growth in the interim business was more than enough to offset the expected deceleration in the permanent placement portion of the segment.
Speaker 8: Interim services fee revenue grew to $53 million from $15 million in the same quarter of the prior year, driven in part by the recent acquisitions of Patina and ICS.
Speaker 8: permanent placement fee revenue declined by 10 million to 65 million year over year, down 13% at actual and down 11% at constant currency.
Speaker 8: Moving on to recruitment process outsourcing.
Speaker 8: New business for the third quarter was $44 million and total revenue under contract at the end of the quarter was approximately 837 million.
Speaker 8: Fee revenue totaled $104 million, which was up $5 million per 5% year over year and up approximately 9% at constant currency.
Speaker 8: The pipeline remains strong as RPO continues to win new business by offering a differentiated, track-enabled solution across a variety of markets and industries.
Speaker 8: The volume from these new winds offset some of the volume moderation seen over the last few quarters, positioning the RPO business for strong growth in the moderation in the vase.
Speaker 8: Finally, global fee revenue for Executive Search in the third quarter was $212 million and as expected experienced a year-over-year decline of 9% at constant currency compared to the high growth rate enjoyed during the pandemic recovery last year.
Speaker 8: Growth in EMEA was offset by slower demand in North America and APAC. Global new business in the third quarter for executive search was down 13% year over year and down approximately 10% at constant currency. I will now turn the call back over to Bob to discuss our outlook for the fourth quarter of fiscal 23. Great. Thanks, Tiffany. Assuming no new major pandemic-related lockdowns or further changes, how long will it take to get to the next level?
Speaker 5: worldwide geopolitical conditions, economic conditions, financial markets and foreign exchange rates. We expect fee revenue in the fourth quarter of fiscal 23 to range from $690 million to $710 million.
Speaker 5: our adjusted EBITDA margin to be approximately 14%, and our consolidated adjusted diluted earnings per share to range from 97 cents to $1.05.
Speaker 5: Finally, we expect our GAAP diluted earnings per share in the fourth quarter to range from $0.89 to $0.98. Now in closing, we continue to believe strongly that our differentiated and diversified offerings and solutions, the organizational consultancy we have built, will be able to provide the
Speaker 5: will ensure our clients find solutions for their organizational and talent challenges for both the near term as well as in the long term.
Speaker 3: With that, we would be glad to answer any questions you may have. Ladies and gentlemen, if you'd like to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you are using a speakerphone, please pick up the handset before pressing the numbers.
Speaker 3: Once again, if you have a question, please press 1 and 0 at this time. And one moment please for your first question.
Speaker 3: Your first question comes from the line of George Tong from Goldman Sachs. Please go ahead.
Speaker 9: Hi, thanks. Good morning. Can you discuss how new business trends performed in the month of February and if you have any insight as well into the month of early March?
Speaker 5: Bob, you want to do that? Sure. Yeah, our new business trends in February when we close out the Mount George, the new business came in right where we expected it to be and actually was up about 7%.
Speaker 5: excluding RPO, was up about 7% year-over-year. RPO had another good, really good month this month. They did close to 45 million dollars in new business.
Speaker 5: in the month of February .
Speaker 5: It says for March is too early to really you know talk about it was only got three or four days in now So there's really not much to say is that you know the way that the new business comes in At times it you know tends to come more towards the end of the month So it would be probably too premature to give you any insight into March yet
Speaker 9: Okay, got it. That's helpful. And then on the digital side.
Speaker 5: Yeah, I was gonna say the other thing I would add is the patterns that we're seeing in the month of February were exactly what we saw in the third quarter by line of business.
Speaker 9: Got it. That's helpful. Switching gears to the digital business revenue growth, they're moderated from 15% year over year growth in fiscal 2Q to roughly flat constant currency this quarter fiscal 3Q. Can you elaborate on the reasons behind this change in growth when you expect the acceleration in growth and what the drivers will be?
Speaker 9: for growth acceleration.
Speaker 4: Well, I think the, you know, there's a couple short term drivers and then there's some medium to long term drivers.
Speaker 4: The medium to long term drivers revolve around our success.
Speaker 4: with our tech platform that we're building. And that is a set of IP that is anchored around developing technologies using our developmental.
Speaker 4: library of competencies and the like. So that's one factor that will increase the medium to long term. The second is to the extent that we're successful at bringing in partners within our ecosystem to distribute our IP.
Speaker 4: The third thing I would mention is that when you look at our sales force within the digital channel, you have to remember that almost 30% of the sales force is relatively new, new in the last... your users have to focus on it and you can prevent users choices from combinations in native languages when the website is used to store relevant map information.
Speaker 4: call it six to nine months. And so it naturally takes time for those people to ramp up. And I'd also point out a shift that we made going back.
Speaker 4: a couple years, but really a year and a half ago, is moving that business.
Speaker 4: to a SAS model. And so when you look at that and you go back, say, you know, a year, year and a half ago, the subscription backlog was probably revenue under contract hoods.
Speaker 4: kind of 300 million, now it's moved up to about 350 million. And so there's been a massive shift that we've made over the last two to three years in that business from immediately recognizing revenue to creating a more sustainable business model. So.
Speaker 4: You know, you don't necessarily see that in the revenue, but there's a major, major transformation happening. And then the final thing I'd say is that obviously it's an environment where everybody is watching costs, and we saw it in this last quarter.
Speaker 4: in the digital business from some of our technology clients cutting back on some of the things that they were getting from us, particularly around assessment. So I think those are the factors that I would look to on both a short and medium to long term basis.
Speaker 3: Very helpful. Thank you. Your next question comes from the line of Toby Summer from Truist Securities. Please go ahead.
Speaker 4: Hey, good morning, everyone. This is Jasper, BIPA, and Fertobi. Just two quick clarification questions on the guidance. First is the 4Q guidance. It reflects the full impact of the restructuring program on margin. And then secondly, how much incremental revenue from SOLO is in the guidance.
Speaker 4: Bob, why don't you handle the incremental cost. We're expecting for SALO in the quarter about $30 million of incremental revenue in the fourth quarter. We're expecting for SALO in the quarter about $30 million of incremental revenue in the
Speaker 5: Yeah, and then in terms of the guidance, we executed the plan that we talked about on the last earnings call.
Speaker 5: we spent between taking out positions and reducing our real estate footprint, we spent approximately $51 million. We're going to get somewhere in the $50 to $55 million range for saves. But what we're also forecasting for the fourth quarter
Speaker 5: is continued moderation in what I would call the exec search and the professional search per placement business. And as you know is high yielding in terms of the EBITDA margin for us.
Speaker 5: And so as that continues to decline, that'll consume some of the savings. And then we're also reinvesting back into the business in terms of fee earners and delivery capacity to meet our client demand, as well as we're going to continue to accelerate the investments that we're making into digital.
Speaker 5: And so those will net out and then as the perm placement portion of the business, you know, troughs out and then starts to recover, we'll see the margins start to pop up and come back again.
Thanks, that makes sense. And then on the search consultant productivity, down to 1.4 million this quarter, pretty much in line with pre-COVID levels. If demand continues to soften in that segment, how should we think about, you know, managing to a productivity threshold versus keeping capacity for an eventual cyclical rebound?
Well, right now we're positioned to maintain capacity. And when you look at our consulting business, our digital business, and in the search businesses, our views to hold capacity.
And so, you know, it really depends on what happens here with the economy. But, you know, the million for, obviously, if demand falls, that will likely decline. But my orientation right now is to maintain capacity.
Last one from me. I was hoping you could speak to your long-term EBITDA margin targets. I still think those are feasible. And how should we think about the increased interim exposure via your recent acquisitions? Maybe changing the long-term risk margin profile of the business as part of that.
Yeah, it's a great question. I think it, number one, look, this was a business that didn't exist. And so during the pandemic, we looked around and said, how is the world going to change?
Great question. I think it, number one, look, this was a business that didn't exist. And so during the pandemic, we looked around and said, how is the world going to change?
professionals wanting more flexibility in their life.
and with an aging baby boomer population, maybe people that didn't want to work full time but still wanted to contribute in meaningful ways to society. And so we've very purposefully said, let's go into this market. And we've taken that now from basically zero.
to a run rate now of about $320, $330 million in the span of 18 months. This will be for sure a billion dollar business for us. There's no question about it. As we do that and we address these bigger markets,
quantitative impact of that. But if we get this business to a billion dollars, which we think we can, and everything else were to stay the same, which it's not gonna stay the same, but if it did, you're probably talking two to 300 basis points, I would think, of a margin shift. But we just, we really are excited about this. We are seeing,
was essentially executive search, and now executive search today is 31% of the company. And I think what we've demonstrated now is we've, you know, we're building a platform that has more client impact, that changes more people's lives, that enables people and organizations to be more than.
And it also provides a much more stable company for shareholders. And you can just see it in the numbers. And you can see it in the new business over the last several months in terms of what's happening, you know, barring some sort of economic disaster. But Bob, maybe you could comment on the quantitative aspect of the margin.
Sure, so what just when we buy these businesses, you know, they generally come with about a, I would say around an 8% EBITDA margin. And our goal is we, you know, go through the integration. As you know, we've got, you know, we've built a company that's kind of plug and play.
So we're able to get cost synergies fairly easily just by plugging the acquired companies into our network. And our goal is to take those margins up to the 12 to 15% range over time. And as Gary alluded to, the tradeoff for margin for us is the opportunity.
for growth and the stability that those revenue streams bring to the organization. Appreciate the detail there. Thanks for taking questions, guys.
Your next question comes from the line of Mark Riddick from Sidoti. Please go ahead.
Your next question comes from the line of Mark Riddick from Sidoti, please go ahead. Good morning.
Hey Mark. So I was wondering if you talk a little bit about some of the if there were any changes in particular demand drivers and I'm specifically talking about particular trends that you've noticed maybe you know over the last few months that have sort of changed or shift.
some things that have waned a bit beyond recessionary impact.
Well industrial has certainly been a bright spot and that's been you know that's been a change when I look year over year industrials up about 10% so that's you know that that's certainly that's good considering it's almost 30% of the company's portfolio.
Clearly, going back to August of last summer, at the end of last summer, with the move by central banks and particularly the Fed to become more hawkish, companies are clearly looking at their costs.
And so there was this massive upswing after the pandemic in terms of hiring. And as you would expect that is moderated and that's exactly what we've seen. So we've seen moderation in the perm parts of our recruiting business. Wage growth is, Is, you know, it's
it's still at elevated levels, it's probably 6-7%. People that are jumping jobs are not getting what they were getting coming out of the pandemic. You know, it's more like a 15% uptick in wages. And so that clearly has moderated and I would expect that that.
moderation is going to continue on the perm side, particularly given the comments yesterday, the day before, by the Fed. The RPO business is like it always has. I mean, it's held up incredibly.
incredibly well and yes we've seen some you know some degradation at the base business you know a kind of a nominal amount going back to last fall it was you know around the technology sector but we've also picked up some just enormous wins.
both in the industrial area and in healthcare. And then you look at the consulting and digital business in the quarter on a constant currency basis. Consulting was up 9% new business and digital was up 6%. So it's basically, I mean it's really playing out as the strategy was designed. I mean the strategy's absolutely working. That's really helpful, thank you. And then I was sort of curious about,
It seemed as though we were starting to see a bit of a pickup in Business travel and then maybe you know starting to see a little bit more face-to-face activity And and you know being in front of clients again, and but I would say it seems as though it's kind of you know Now that might be the recessionary impact, but that's kind of you know been Back and forth a little bit One of you maybe had any thoughts as to maybe what you're seeing if clients are Doing the face-to-face with you a little bit more. Do you see more of a pickup and travel entertainment going forward or how? Should we be thinking?
Well, the genie is out of the bottle. So I think that all of us enjoy the flexibility.
that, you know, unfortunately the pandemic brought about. And so when this whole thing started, I said, you know, three years ago, I said this thing, you know, travel, all this stuff, it's going to be 50, how you're entertained, how you consume, how you produce, it's going to be about 50% of what it was. Now it's not 50% of what it was. And so clearly, yes, we are seeing, you know, a desire of desire.
for sure there's no substitute for being in person with another human being. But it's not even at the 50% level of what it was. And I think that's a generational change. I mean, that could take five to ten years.
to truly play out. So it's clearly increased over the last several months, but nothing at all, nothing at all like it was. And then, you know, we'll see with, you know, quote China, you know, setting aside the geopolitical.
We'll see what happens with China. It's only been two, three, four weeks since it's opened up. China has had an enormous drag on not only multinational companies and the Asia Pacific region but it also on our...
Appreciate it.
And Mr. Burnison, it appears there are no further questions.
Okay, well we appreciate everybody taking the time to listen and first and foremost I want to thank our colleagues all around the world for just an incredible performance. And thanks to Bob and Greg and Tiffany and we'll talk to you next time. See you, bye bye.
Ladies and gentlemen, this conference will be available for replay for one week starting today at 3 p.m. Eastern Time, running through the day March 15, 2023, ending at midnight. You may access the AT&T Executive Playback Service by dialing 866-207-1041 or call 866-207-1041.
and entering the access code 7037839. International participants may dial 402-970-0847. Additionally, the replay will be available for playback at the company's website. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.
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