Korn Ferry (KFY) Q3 2023 Earnings Call Transcript

Korn Ferry (NYSE:KFY) Q3 2023 Earnings Conference Call March 8, 2023 12:00 PM ET

Company Participants

Gary Burnison - Chief Executive Officer

Bob Rozek - Chief Financial Officer

Gregg Kvochak - Senior Vice President of Investor Relations

Tiffany Williams - Global DE&I Director

Conference Call Participants

George Tong - Goldman Sachs

Jasper Bibb - Truist Securities

Marc Riddick - Sidoti

Operator

Ladies and gentlemen, convey you for opinionated by and invited to nan Korn Ferry Third Quarter Fiscal Year 2023 Conference Call. [Operator Instructions] As a reminder, this convention telephone is being recorded for replay purposes. We person besides made disposable successful nan Investor Relations conception of our website astatine kornferry.com, a transcript of nan financial position that we will beryllium reviewing pinch you today.

Before we move nan telephone complete to your host, Mr. Gary Burnison, fto maine first publication a cautionary connection to investors. Certain statements made successful nan telephone today, specified arsenic those relating to early performance, plans and goals, represent forward-looking statements wrong nan meaning of nan Private Securities Litigation Reform Act of 1995. Although nan institution believes nan expectations reflected successful specified forward-looking statements are based connected reasonable assumptions, investors are cautioned not to spot undue reliance connected specified statements. Actual results successful early periods whitethorn disagree materially from those presently expected aliases desired because of a number of risks and uncertainties which are beyond nan company's control. Additional accusation concerning specified risks and uncertainties tin beryllium recovered successful nan merchandise relating to this position and successful nan periodic and different reports revenge by nan institution pinch nan SEC, including nan company's yearly study for fiscal twelvemonth 2022 and nan company's soon to beryllium revenge quarterly study for nan 4th ended January 31, 2023. Also, immoderate of nan comments coming whitethorn reference non-GAAP financial measures specified arsenic changeless rate amounts, EBITDA and adjusted EBITDA. Additional accusation concerning these measures, including reconciliations to the astir straight comparable GAAP financial measurement is contained successful nan financial position and net merchandise relating to this call, some of which are posted successful nan Investor Relations conception of nan company's website astatine www.kornferry.com.

With that, I'll move nan telephone complete to Gary Burnison. Please spell ahead, Gary.

Gary Burnison

Okay. Thanks, Greg and bully afternoon, everybody. Thanks for joining us. Number one, I'm very proud of our 3rd 4th performance, peculiarly successful ray of nan macroeconomic environment. Given our standard and nan extent and breadth of our IP information and content, we are incredibly good positioned to alteration our clients to navigate an system successful transition.

Our strategy is working. We've built synergistic businesses astir Executive Search that are generating much durable interest revenues. We're going to proceed to prioritize finance successful nan larger, faster-growing, little cyclical markets that group our patient and our clients up for success. As an example, nan caller summation of Salo now brings our Interim Services to beryllium much than 10% of our firm's gross connected a pro forma basis. This wasn't moreover a business for america a twelvemonth ago. And yes, this mightiness beryllium nan astir anticipated downturn ever but this is besides a transitory time. And for illustration others successful nan past, it besides brings opportunity. It's a proving crushed for nan ratio of our strategy, nan spot of our culture, nan resilience of our colleagues and nan potency of nan Korn Ferry brand.

With that, Bob, I'll move it complete to you.

Bob Rozek

Great. Thanks, Gary and bully day and bully morning, everyone. Our results successful nan 3rd 4th proceed to supply impervious that our maturation strategy is working. For instance, we proceed to show nan expertise to thrust apical statement synergies betwixt our solutions. As an example, our caller acquisitions successful nan Interim abstraction which we judge provides existent outsized opportunities for growth, they person created almost 700 further engagement wins resulting successful an incremental $43 cardinal successful interest gross since nan 3rd 4th of fiscal twelvemonth '22 erstwhile we acquired nan Lucas Group. And this is each done cross-sales betwixt nan acquired entities and bequest Korn Ferry.

Cross-sells betwixt our different lines of business and some our marquee and location accounts, some proceed to besides execute very good successful nan quarter. I precocious celebrated my 11th twelvemonth pinch Korn Ferry. And 1 of nan reasons why I joined nan institution was nan maturation strategy. It really resonated pinch maine and I judge much profoundly successful it today. We are relentlessly driving an integrated solutions-based go-to-market strategy, delivering unparalleled customer excellence, extending nan Korn Ferry brand, advancing Korn Ferry arsenic nan premier profession destination and we're pursuing transformational opportunities astatine nan intersection of talent and strategy. This maturation strategy served america good backmost successful 2012 erstwhile I joined and it continues to do truthful and moreover much today.

Let maine move nan telephone complete to Gregg, who will return you done immoderate of nan institution -- wide institution financial highlights.

Gregg Kvochak

Okay. Thanks, Bob. Turning to our 3rd 4th financial results. Fee gross was $681 cardinal for nan 4th which was level year-over-year and up 4% astatine changeless currency. By statement of business, interest gross was mixed arsenic request successful Executive Search and imperishable -- placement master hunt moderated from post-pandemic betterment highs while our Consulting, Digital, RPO and Interim Solutions remained comparatively stable. Measured year-over-year astatine changeless currency, Consulting was up 4%, Digital was fundamentally level and RPO was up 9%. Including gross from precocious acquired businesses, Professional Search & Interim was up 33% astatine changeless currency, while Executive Search was down 9%.

In nan 3rd quarter, consolidated caller business, excluding RPO was up 5% year-over-year astatine changeless rate and up astir 1% astatine existent rates, pinch maturation successful each lines of business isolated from Executive Search. In nan 3rd quarter, adjusted EBITDA was $96 cardinal pinch an adjusted EBITDA separator of 14% which was successful statement pinch our guidance. Earnings and profitability were impacted by an wide operation displacement successful interest gross to lower-margin lines of business, investments successful interest earner and execution capacity and to a lesser extent, costs inflation.

Adjusted afloat diluted net per stock successful nan 3rd 4th were $1.01 which was down $0.58 aliases 36% year-over-year. Adjusted afloat diluted net per stock excludes an after-tax complaint of $42 cardinal aliases $0.80 per stock related to nan realignment of our workforce and nan impairment of definite existent property assets. GAAP afloat diluted net per stock successful nan 3rd 4th were $0.21.

Our investable rate position remains beardown and our existent superior deployment proceed to beryllium balanced. For each of fiscal '23, done nan extremity of nan 3rd quarter, we repurchased astir $80 cardinal of our stock, paid rate dividends of astir $25 million, deployed $99 cardinal for business acquisitions and funded astir $48 cardinal of superior expenditures, astir of which was directed towards merchandise improvement initiatives for our integer business.

With that, I'll now move nan telephone complete to Tiffany to reappraisal our operating segments successful much detail.

Tiffany Williams

Thanks, Gregg. Starting pinch KF Digital, world interest gross successful nan 3rd 4th was $85 cardinal which was down 6% year-over-year and astir level astatine changeless currency. Digital subscription and licence interest gross successful nan 3rd 4th was $30 cardinal which was astir 31% of interest gross for nan quarter. Global caller business for KF Digital was $109 million, pinch $39 cardinal aliases 35% of nan full subscription and licence sales.

Earnings and profitability successful nan 4th were impacted by finance successful merchandise improvement initiatives and a flimsy uptick successful SG&A. For Consulting, interest gross successful nan 3rd 4th grew to $162 cardinal which was level year-over-year and up astir 4% astatine changeless currency. Fee gross maturation was strongest successful organizational strategy which grew 12% versus anterior year. Additionally, world caller business for Consulting successful nan 3rd 4th was up 9% year-over-year astatine changeless currency.

The Professional Search & Interim business -- caller business accrued 30% successful nan 3rd 4th versus past year, driven by double-digit spot successful North America, aided by nan existent twelvemonth acquisitions. Total interest gross was $118 million, up $28 cardinal aliases 31% complete nan aforesaid clip period. Breaking down nan quarter, maturation successful nan interim business was much than capable to offset nan expected deceleration successful nan imperishable placement information of nan segment. Interim Services interest gross grew to $53 cardinal from $15 cardinal successful nan aforesaid 4th of nan anterior year, driven successful portion by nan caller acquisitions of Patina and ICS. Permanent placement interest gross declined by $10 cardinal to $65 cardinal year-over-year, down 13% astatine existent and down 11% astatine changeless currency.

Moving connected to recruitment process outsourcing. New business for nan 3rd 4th was $44 cardinal and full gross nether statement astatine nan extremity of nan 4th was astir $837 million. Fee gross totaled $104 cardinal which was up $5 cardinal aliases 5% year-over-year and up astir 9% astatine changeless currency. The pipeline remains beardown arsenic RPO continues to triumph caller business by offering a differentiated tech-enabled solution crossed a assortment of markets and industries. The measurement from these caller wins offset immoderate of nan measurement moderation seen complete nan past fewer quarters, positioning nan RPO business for beardown maturation successful nan moderation successful nan base

Finally, world interest gross for Executive Search successful nan 3rd 4th was $212 cardinal and arsenic expected, knowledgeable a year-over-year diminution of 9% astatine changeless rate compared to nan precocious maturation complaint enjoyed during nan pandemic betterment past year. Growth successful EMEA was offset by slower request successful North America and APAC. Global caller business successful nan 3rd 4th for Executive Search was down 13% year-over-year and down astir 10% astatine changeless currency.

I will now move nan telephone backmost complete to Bob to talk our outlook for nan 4th fourth of fiscal '23.

Bob Rozek

Great. Thanks, Tiffany. Now assuming nary caller awesome pandemic-related lockdowns aliases further changes successful worldwide geopolitical conditions, economical conditions, financial markets and overseas speech rates, we expect interest gross successful nan 4th fourth of fiscal '23 to scope from $690 cardinal to $710 million. Our adjusted EBITDA separator to beryllium astir 14% and our consolidated adjusted diluted net per stock to scope from $0.97 to $1.05. Finally, we expect our GAAP diluted net per stock successful nan 4th fourth to scope from $0.89 to $0.98.

Now successful closing, we proceed to judge powerfully that our differentiated and diversified offerings and solutions, nan organizational consultancy we person built will guarantee our clients find solutions for their organizational and talent challenges for some nan adjacent word arsenic good arsenic successful nan agelong term.

With that, we would beryllium gladsome to reply immoderate questions you whitethorn have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first mobility comes from nan statement of George Tong from Goldman Sachs.

George Tong

Can you talk really caller business trends performed successful nan period of February? And if you person immoderate penetration arsenic good into nan period of early March?

Gary Burnison

Bob, do you want to do that?

Bob Rozek

Sure. Yes. Our caller business trends successful February erstwhile we closed retired nan period George, nan caller business came successful correct wherever we expected it to beryllium and really it was up astir 7%, excluding RPO, it was up astir 7% year-over-year. RPO had different bully -- really bully period this month. They did a adjacent to $45 cardinal successful caller business successful nan period of February. For March, it's excessively early to really talk astir it arsenic only we sewage 3 aliases 4 days successful now. So there's really not overmuch to opportunity is nan measurement that nan caller business comes in, astatine times, it tends to travel much towards nan extremity of nan month. So it would beryllium astir apt excessively premature to springiness you immoderate penetration into March yet.

George Tong

Okay, sewage it. That's helpful. And then, Digital side...

Bob Rozek

Yes, I was going to opportunity nan different point I would adhd is nan patterns that we're seeing successful nan period of February were precisely what we saw successful nan 3rd 4th by statement of business.

George Tong

Got it. That's helpful. Switching gears to nan integer business. Revenue maturation location moderated from 15% year-over-year maturation successful fiscal 2Q astatine astir level changeless rate this quarter, fiscal 3Q. Can you elaborate connected nan reasons down this alteration successful maturation erstwhile you expect nan reacceleration successful maturation and what nan drivers will beryllium for maturation acceleration?

Gary Burnison

Well, I deliberation nan -- there's a mates of short-term drivers and past there's immoderate mean to semipermanent drivers. The medium- to semipermanent drivers revolve astir our occurrence pinch our tech level that we're building. And that is simply a group of IP that is anchored astir processing technologies utilizing our developmental room of competencies and nan like. So that's 1 facet that will summation nan mean to agelong term. The 2nd is to nan grade that we're successful astatine bringing successful partners wrong our ecosystem to administer our IP. The 3rd point I would mention is that erstwhile you look astatine our income unit wrong nan integer channel, you person to retrieve that almost 30% of nan income unit is comparatively caller successful nan last, telephone it, 6 to 9 months. And truthful it people takes clip for those group to ramp up.

And I'd besides constituent retired a displacement that we made going backmost a mates of years but really 1.5 years agone is moving that business to a SaaS model. And truthful erstwhile you look astatine that and you spell back, say, a year, 1.5 years ago, nan subscription backlog was astir apt gross nether statement was benignant of $300 million. Now it's moved up to astir $350 million. And truthful there's been a monolithic displacement that we've made complete nan past 2 to 3 years successful that business from instantly recognizing gross to creating a much sustainable business model. So you don't needfully spot that successful nan gross but there's a major, awesome translator happening.

And then, nan last point I'd opportunity is that, obviously, it's an situation wherever everybody is watching costs. And we saw it successful this past 4th successful nan integer business from immoderate of our exertion clients cutting backmost connected immoderate of nan things that they were getting from us, peculiarly astir assessment. So I deliberation those are nan factors that I would look to connected some a short and mean to semipermanent basis.

Operator

Your adjacent mobility comes from nan statement of Tobey Sommer from Truist Securities.

Jasper Bibb

This is Jasper Bibb connected for Tobey. Just 2 speedy explanation questions connected nan guidance. First is nan 4Q guidance, it bespeak nan afloat effect of nan restructuring programme connected margin. And past secondly, really overmuch incremental gross from Salo is successful nan guidance?

Gary Burnison

Bob, why don't you grip nan incremental cost. And we're expecting for Salo successful nan 4th astir $30 cardinal of incremental gross successful nan 4th quarter.

Bob Rozek

Yes. And past successful position of nan guidance, we executed nan scheme that we talked astir connected nan past net call. We spent betwixt taking retired positions and reducing our existent property footprint. We spent astir $51 cardinal we're going to get location successful nan $50 cardinal to $55 cardinal scope for saves. But what we're besides forecasting for nan 4th fourth is continued moderation successful what I would telephone nan exec hunt successful nan master hunt perm placement business. And that, arsenic you know, is precocious yielding successful position of nan EBITDA separator for us. And truthful arsenic that continues to decline, that will devour immoderate of nan savings. And we're besides reinvesting backmost into nan business successful position of interest earners and transportation capacity to meet our customer request arsenic good arsenic we're going to proceed to accelerate nan investments that we made successful -- that we're making into Digital. And truthful those will nett out. And past arsenic nan perm placement information of nan business troughs retired and past starts to recover, we'll spot nan margins commencement to travel popular up and travel backmost again.

Jasper Bibb

That makes sense. And past connected nan hunt advisor productivity, down to $1.4 cardinal this quarter, beautiful overmuch successful statement pinch pre-COVID levels. If request continues to soften successful that segment, really should we deliberation astir managing to a productivity period versus keeping capacity for an eventual cyclical rebound?

Gary Burnison

Well, correct now, we're positioned to support capacity. And erstwhile you look astatine our consulting business, our integer business and successful nan hunt businesses wherever our position is to clasp capacity. And truthful it really depends connected what happens present pinch nan economy. But nan $1.4 million, obviously, if request falls, that will apt decline. But my predisposition correct now is to support capacity.

Jasper Bibb

Got it. Last 1 for me. I was hoping you could speak to your semipermanent EBITDA separator targets. I still deliberation those are feasible and really should we deliberation astir nan accrued interim vulnerability via your caller acquisitions, possibly changing nan semipermanent gross separator floor plan of nan business arsenic portion of that.

Gary Burnison

Yes, it's a awesome question. I deliberation it -- number one, look, this was a business that didn't exist. And truthful during nan pandemic, we looked astir and said, really is nan world going to alteration and [indiscernible] professionals wanting much elasticity successful their life. And pinch an aging babe boomer population, possibly group that didn't want to activity afloat clip but still want to lend successful meaningful ways to society. And truthful we very purposefully said let's spell into this market. And we've taken that now from fundamentally 0 to a tally complaint now of astir $320 million, $330 cardinal successful nan span of 18 months. This will be, for sure, a $1 cardinal business for us. There's nary mobility astir it. Now arsenic we do that and we reside these bigger markets that I deliberation person proven complete clip to beryllium little cyclical than, say, nan bequest business of Executive Search, nan separator floor plan is going to change. There's nary uncertainty astir it.

And I tin person Bob -- Bob, you tin picture nan quantitative effect of that. But if we get this business to $1 cardinal which we deliberation we tin and everything other were nan aforesaid which is not going to enactment nan same. But if it did, you're astir apt talking 200 to 300 ground points I would deliberation of a separator shift. But we conscionable -- we really are excited astir this. We are seeing unthinkable levels of transverse referrals of ways to create deeper meaning, deeper effect pinch clients. And truthful I do deliberation that overall, overmuch for illustration nan strategy, erstwhile I started, I mean, this is my 84th net call. And I'm going backmost to time 1, nan full business was fundamentally executive hunt and now executive hunt coming is 31% of nan company.

And I deliberation what we've demonstrated now is we've -- we're building a level that has much customer effect that changes much people's lives that enables group and organizations to beryllium much of that. And it besides provides a overmuch much unchangeable institution for shareholders. And you tin conscionable spot it successful nan numbers. And you tin spot it successful nan caller business complete nan past respective months successful position of what's happening, barring immoderate benignant of economical disaster. But Bob, possibly you could remark connected nan quantitative facet of nan margin.

Bob Rozek

Sure. So Jasper, erstwhile we bargain these businesses, they mostly travel pinch about, I would say, astir 8% EBITDA margin. And our extremity arsenic we spell done nan integration, arsenic you know, we've sewage -- person built a institution that's benignant of plug and play. So we're capable to get costs synergies reasonably easy conscionable by plugging nan acquired companies into our network. And our extremity is to return those margins up to nan 12% to 15% scope complete time. And arsenic Gary alluded to, nan trade-off successful -- for separator for america is nan opportunity for maturation and nan stableness that those gross streams bring to nan organization.

Operator

Your adjacent mobility comes from nan statement of Marc Riddick from Sidoti.

Marc Riddick

So I was wondering if you could talk a small spot astir immoderate of nan -- if location were immoderate changes successful peculiar request drivers and I'm specifically talking astir peculiar trends that you've noticed possibly complete nan past fewer months that person benignant of changed aliases shifted, whether it's from a standpoint of immoderate of nan things that were driving request complete nan past mates of years. Are location immoderate peculiar areas that person benignant of picked up that possibly we haven't been talking astir aliases reasoning astir aliases possibly immoderate things that person waned a spot beyond recessionary impact?

Gary Burnison

Well, business has surely been a agleam spot and that's been a change. When I look year-over-year, business is up astir 10%. So that's surely -- that's good, considering it's almost 30% of nan company's portfolio. Clearly, going backmost to August of past summer, astatine nan extremity of past summer, pinch nan move by cardinal banks and peculiarly nan Fed to go much hawkish, companies are intelligibly looking astatine their cost. And truthful location was this monolithic upswing aft nan pandemic successful position of hiring. And arsenic you would expect, that is moderated and that's precisely what we've seen. So we've seen moderation successful nan perm parts of our recruiting business. Wage maturation is -- it's still astatine elevated levels. It's astir apt 6%, 7%. People that are jumping jobs are not getting what they were getting coming retired of nan pandemic. It's much for illustration a 15% uptick successful wages. And truthful that intelligibly has moderated. And I would expect that, that moderation is going to proceed connected nan perm side, peculiarly fixed nan comments yesterday aliases nan time earlier by nan Fed.

The RPO business is for illustration it ever has, I mean, it's held up incredibly well. And yes, we've seen immoderate degradation of nan guidelines business, nan benignant of a nominal amount. Going backmost to past fall, it was astir nan exertion sector. But we've besides picked up immoderate conscionable tremendous wins, some successful nan business area and wellness care. And past you look astatine nan consulting and integer business successful nan quarter, connected a changeless rate basis, Consulting was up 9%, caller business and integer was up 6%. So it's fundamentally -- I mean, it's benignant of -- it's really playing retired arsenic nan strategy was designed. I mean nan strategy is perfectly working.

Marc Riddick

That's really helpful. And past I was benignant of funny astir -- it seems arsenic though we were starting to spot a spot of a pickup successful business recreation and past possibly starting to spot a small spot much face-to-face activity and being successful beforehand of clients again. But I would opportunity it seems arsenic though it's benignant of -- now that mightiness beryllium nan recessionary effect but that's benignant of been backmost and distant a small bit. I was wondering if you possibly person immoderate thoughts arsenic to possibly what you're seeing? If clients are doing nan face-to-face pinch you a small spot more? Do you spot much of a pickup successful recreation intermezo going forward? Or really should we beryllium reasoning astir that?

Gary Burnison

Well, nan genie's retired of nan bottle. And truthful I deliberation that each of america bask nan elasticity that, unfortunately, nan pandemic brought about. And truthful erstwhile this full point started, I said -- 3 years ago, I said this thing, travel, each this stuff, it's going to beryllium -- really you're entertained, really you consume, really you produce, it's going to beryllium astir 50% of what it was. Now it's not 50% of what it was. And truthful clearly, yes, we are seeing a desire for sure. There's nary substitute for being in-person pinch different quality being -- but it's not moreover astatine nan 50% level of what it was. And I deliberation that's a generational change. I mean, that could return 5 to 10 years to genuinely play out. So it's intelligibly accrued complete nan past respective months but thing astatine each for illustration it was. And past we'll spot pinch "China" mounting speech nan geopolitical aspect, we'll spot what happens pinch China. It's only been 2, 3, 4 weeks since "it's opened up." China has had an tremendous resistance connected not only multinational companies and successful nan Asia Pacific region but besides successful our business. It's been, arsenic you would expect, it's been resistance connected nan apical line. It could beryllium arsenic overmuch arsenic $40 cardinal to $50 cardinal a twelvemonth for us.

Operator

And Mr. Burnison, it appears location are nary further questions.

Gary Burnison

Okay. Well, we admit everybody taking nan clip to listen. And first and foremost, I want to convey our colleagues each astir nan world for conscionable an unthinkable performance. And acknowledgment to Bob and Gregg and Tiffany and we'll talk to you adjacent time. See you. Bye-bye.

Operator

Ladies and gentlemen, this convention will beryllium disposable for replay for 1 week starting coming astatine 3:00 p.m. Eastern Time moving done nan time March 15, 2023, ending astatine midnight. You whitethorn entree nan AT&T executive playback work by dialing 866-207-1041 and entering nan entree codification 703-7839. International participants whitethorn dial 402-970-0847. Additionally, nan replay will beryllium disposable for playback astatine nan company's website. That does reason your convention for today. Thank you for your information and for utilizing AT&T teleconference. You whitethorn now disconnect.