Korn Ferry (KFY) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us. My name is Emily Marzo. I'm a member of the BofA's Business and Information Services global research team. Welcome to the Korn Ferry fireside chat. Today, we are joined by Bob Rozek, Executive Vice President, Chief Financial Officer and Chief Corporate Officer. Before I get started, we will be opening it up for questions towards the end. With that, I'd like to introduce Bob Rozek. Thank you for joining us.

Thank you. Glad to be here.

Yes. So for those who are new to the Korn Ferry story, can you tell us, what do they do? What is the company's value proposition?

Sure. So I'll tell you -- if you go way back in time, we started off as an executive search firm. And I joined the company in February of 2012. At that point in time, we were about 75% executive search. And since that, we've evolved into an organizational, what we call as an organizational consultancy. And we really have 5 core solution areas now. So we have what we call org strategy. It's not the same as like a McKinsey or Bain would do. It's right after McKinsey and Bain would set up the business strategy we would come in and help the company execute that through their people. We have assessment and succession. We have obviously talent acquisition. Beyond Executive Search, we have what we call Professional Search and Interim and then Recruitment Process Outsourcing. So where you would hire in mass for a company. We have leadership and professional development. And then last, we do is total rewards. We're the only company in the world that has all of those solutions under one roof kind of an industry of one. And it really gives us a competitive advantage or a value proposition for our clients in that if you think about like our competitive landscape, it's very, very fragmented. So if you're a client, you're consuming different aspects of our core solutions, you're using different providers, you have to take it all and knit it together and make it all -- makes sense where if you come to Korn Ferry, we do that for you.

And can you talk about what drove this transition? Why the change in the transformation since 2016, I believe?

Well, it was -- actually, we started the biggest transformational thing we did was buy the Hay Group in 2015. But the real reason for doing it, I grew up at Pricewaterhouse ; Gary, our CEO, grew up at KPMG; and we were both audit partners and we had great relationships with our clients. And so you would -- the firm's built advisory, consulting and tax services that you would sell into your clients. And if you think about that relationship versus a search partners relationship, which is much, much stronger, right? If I place you as the CEO, I've just changed your life. So when I call, you're going to pick up the phone, right? And so it was really leveraging those relationships and then building the adjacent services around that relationship that we bring to bear with our clients. And I would actually say as I step back today and I think about -- I know we have a question on there about our ability to refer work between lines of business, but our core solutions are so tightly knit together at walking across all of them to do the multiple lines of business and people call cross-selling activity. It's so easy for -- much easier than when I was at Pricewaterhouse.

And maybe we'll just jump there. How does the client go from one solution to you -- with you through multiple solutions? How do you drive that cross-selling opportunity?

Yes. I'll give you an example. Again, I've placed you as a CEO. And we're talking, you said, Bob, you know what, I've got this executive team, and I kind of want to go in this direction. I'm not sure that the right team to have in place. It feels like some of them are over here, some are over here. How can you help? So we would come in and we would do what we would call a top team effectiveness. So we would go and we would assess the individuals, right? And we would assess them against a set of norms that you would help establish. And then once the assessment protocol is complete, we would look at it and say, okay, we've got this group of folks who are fine the way they are. You've got this group of folks who are good, but there's some potential gaps or derailers. We can bring in our leadership and professional development to help shore that up and then you have to sell the group of folks who are never going to -- they're never -- just never going to get you there. So we can find you new people. And then we can help you organize so kind of boxes on the page what success profiles look like, job roles and responsibilities. And then once that's all set up, we can then help you build an incentive program for your top team to drive the strategy that you want. And right there, I've just watched across all of our solutions in one sentence. That's how easy it is my view and that's how easy it is for our colleagues out in the field to stitch together what we do and bring value to clients.

So I think right now, your referral is about 30%. Is there how -- what is the cap on that? Is there a cap on that?

Yes. I think ultimately, there will be, but I think we've got a lot of room to grow. I think we can take that up to between 35% and 40%. We did the Hay Group acquisition, we were working with BCG at the time, and they told us 2 things. One is as you move from one line of business to multiple lines of business, your revenue opportunities are 4 to 5x greater. And at the time when we did that, we were -- probably about 20% of our revenues were referred, and they were telling us best-in-class is 25% to 30%. But I really believe that we can go beyond that given what I just went through.

Given the depth of that.

Yes.

Yes. And why does a client choose your company? What is your competitive advantage besides being the one-stop shop? What is it that you offer that no one else can in either your assessments or other values?

Yes. I think it's the accumulation of what we have. And if you think about, again, our competitive set in each of the core solution areas, sometimes we have multiple, depending on the subsector within that core solution area. But what they would do is they would -- they could come in and they could do whatever it is that the client is asking them to do and then they unplug and then they leave right? We're -- so for example, let's say, we're going in and they want us to assess their high potential levels. So we can do that, right? And then they're saying, okay, we want to put my development program. But we can also then come and say, okay, here's using our data, right? Here's how your hypos compare to others in your industry, right? Other companies can't do that, right? So we've got the ability. When you think about the company, we've got sort of 5 segments that we go to business through. And right in the middle is our core IP data and content. And again, the only firm in the world that has everything that we do. So we have assessments on over 75 million executives and professionals over time, right? So we know what good looks like when somebody comes to us and says, okay, I want to hire a plant controller in the U.K., we can go and say, okay, here's what good looks like. Here's what the roles and responsibilities should be. Here's what you should pay by having that breadth of solutions and content and data at the center, it gives us a unique ability to do that.

Okay. That's great. And then I guess with the 5 different segments that you do have, where do you see the greatest opportunity for you to grow and develop that further or take more market share?

Yes. I can maybe just walk through some. So Executive Search, the addressable market there has been $10 billion, $11 billion for 15 years and it's going to be $10 billion, $11 billion for the next 15 years. So to me, that's more of a share gain. We have a competitive advantage because of our platform. Our -- as we look at people coming in to the organization and I talked to them all, and I say, well, why did you choose Korn Ferry. And without question, it's always all the platform that you have is so differentiated. Clients were asking me to do some of the stuff that you guys do. I couldn't do it at my own firm. But I think Exec Search is a share gain. Professional Search is the addressable market that's probably 5x greater Our issue there is we were relatively small. So we've been investing into Pro Search and actually into the interim portion of it as well because we have got huge opportunities for growth there. Our -- before we started with the last 3 acquisitions, our professional search business is probably about $175 million and a $25 billion addressable market. I would say RPO is a market that continues to grow. That business has been a significant grower for us and even during the pandemic, it grew 7%. If you go back to the 4 or 5 years before that, they were growing in the high teens, low 20s every single year. I fully expect that to continue. What they've been able to do in their RPO solution is really leverage the IP content and data at the center of the organization and bake that into their solution offering. So it's very, very differentiated. And I would expect our consulting business to also grow at accelerated rates. And one of the things that they're doing, if you take those 5 core solution areas, and we would -- we had a bunch of colleagues who would go out and they would sell themselves, right? So I'm Bob, I'm the best rewards guy in the world. I'm going to sell myself for 2,000 hours, but can't sell that. And so now what we're doing is we're taking bits and pieces from our core solutions, and we're weaving them into what we call an integrated solution. To give you an example, if you do an M&A transaction, we can come in using parts of our core solutions and help you figure out what's the right culture for the combined organization. Who of the individuals that are in both companies, who do we keep? Who do we let go people that you're letting go, we can help find them jobs at other clients. And so the value proposition that we're moving towards consulting solves business issues rather than point solutions. And so I fully expect that business to continue to see outsized growth as well.

Okay. And I guess just turning to the Executive Search portion, we saw all the headlines and the turnover that happened in COVID, the great resignation. How is your approach changed? Or how has the market changed?

Yes, I would say if you go back, and I'll use North America as an example, if you go back prior to the pandemic, a good month for us in terms of Executive Search. We would sign up 250 to 275 new engagements each month. And then coming through, obviously, when the pandemic hit, that dropped off and then the recovery was very steep. The curve was very steep. And we were signing up 325 to say, 350 new engagements a month, that's dropped back down, but it's kind of dropped back down essentially to what good looked like prior to the pandemic. Maybe a little bit south of that. We were doing 225 to 250 a month in North America. The interesting thing was, if you go back to our third quarter, our European business actually grew -- search actually grew. It was up -- it was like 7% or 8% year-over-year. And we've got a phenomenal team over there in U.K., Germany and the Middle East markets were pretty resilient.

Yes. Maybe we can just walk through the different geographies. So how does the U.S. different than Europe, different than APAC?

From the Executive Search side?

From the Executive Search, yes.

Yes. So Asia was hit the hardest. I think a lot of it really related to the lockdown in China and Hong Kong. China is our biggest business over in Asia. And so search got hit the hardest there. What we started to see in the month of February and early days of March is we're seeing a rebound -- a little bit of rebound in Asia as China starts to open up. Again, Europe for us was strong in the third quarter. And as we said on the call, we continue to see that in February. And North America was kind of somewhere in the middle. Latin America actually held up very well for us, but it's small. So it doesn't move the needle.

And what do you think the biggest drivers are of -- is it the reopening? Or what are the biggest drivers in Europe that are making drive that 7%?

Well, I think -- one, I think the economies in the U.K. and Germany, especially the Middle East is booming for us. We have a very large business there, a lot of consulting work that we do there. And as they try to move away from dependence on oil to a real robust economy, we're seeing a lot of opportunities in the Middle East. And I think a lot of it has to do with the teams that we have in the field, our colleagues. We have phenomenal leadership in Europe. Our search partners are top of the class. And so we win -- we more than win our fair share of work.

Okay. And maybe if we could just pivot to the Interim business. You've recently had 2 acquisitions in that space. Could you talk us what interim search is and how it's being developed?

Yes. So it's actually 4. We started with the Lucas Group, and they were more in the Professional Search business. So they're probably about $120 million business, 70% of it was in Professional Search and 30% was in Interim. And they were more, what I would call, kind of the generalist category. Since then, we bought a company called Patina and they do Interim C-suite placements. So CEO, CFO, CIOs and so on. We then bought a company called ICS, and their predominant vertical is IT placements. And then the most recent acquisition we did is Salo and Salo was really focused primarily on finance and accounting. And really what we're trying to do with a couple of things. That business, the Interim business is less cyclical than the search business. And we're actually seeing that in our numbers now. So as we see the permanent placement portion of Pro Search and Exec Search moderate, our Interim business is not. It's staying. And I think a lot of it, too, is our ability to sell that into our existing client base is helping to keep that -- the business strong in the turbulent times today. Our focus is on verticals that we feel are going to stay and continue to be strong regardless of what's going on in the cycle. So IT, you're always going to need IT professionals, people that help you with cybersecurity and so on. C-suite professionals are pretty resilient as well. And we're really trying to take advantage of the secular changes that are happening. People don't want to be tethered to a company for their whole career anymore, right? People want different opportunities, work on different projects, get different experiences and that's where the Interim business comes in.

Okay. And talking about the uncertain times that we are in and the layoffs around hiring and hiring freezes, can you talk about just the overall demand of the labor market? And are you seeing any signs of loosening in parts of the labor market?

No, I think the labor market is still pretty tight. I mean unemployment is low. There's more jobs than there are job seekers and so on. So we're still seeing tightness in the labor market. We are seeing moderation though, is in turnover. I got to look at our turnover coming through the pandemic recovery, it was -- it's crazy people just going -- getting wild job offers and moving all over the place. So we've definitely seen that moderate way, way back for us at this point in time.

All right. In a recession, how do you think about the resiliency of each line of your business?

Yes. I would say, again, on Exec Search in the perm placement portion of process, those are cyclical, so they will moderate during those times. I look at RPO and what's interesting in RPO is, again, they've done a great job building the solution. So we win a lot of work. If you go back to our second quarter, that business won $290 million worth of RPO contracts -- very large -- 2 very large one. One was $135 million over 3 years and one was $66 million over 3 years. And what we're seeing in that business, as I talk about Exec Search, I say it's often -- it's a light which it's either on or off. But you call up 1 day and say, well, I want to do a search and something happens in the next day, you say, I'm not going to do that anymore. On the RPO side, they may sign up to have us hire 10,000 people a year, and as things start to soften and they'll drop back to 8,000. So it's not like it goes away. We just do less. But what we're seeing with that business is because of all the new work that we're winning, the moderation that's happening in the base is getting offset by the new wins. And so as we come out of these uncertain times, that business is really positioned very well for significant growth. I would say our consulting business grew in the third quarter. It was like 3% or 4%. And again, when I step back and I think about that business, I think there's one thing that's a little bit underappreciated. If you think about where the world is today in terms of the work in the business community, everybody is all about workforce transformation. I need to do work differently, and need different work done and need people that are more digitally skilled DE&I, ESG, how do I grow my company in a post-COVID environment. All of our consulting solutions line up perfectly against it. And so the relevance of what we have and what we've built as an organization lines up perfectly with where the world is and, again, as we come out of these uncertain times, I think we're positioned very well to see -- continue to see growth in the consulting business. On the digital side, that one is a little bit harder to work our way through. One of the things that we found is we have [indiscernible], so we have enormous data. Some of it we built, some of it we bought from different companies. And so one of the first things we had to do is we had to go into that business and take all that data and harmonize it. So it all looks and feels the same, so you can go in and slice and dice it. And that effort took us longer than what we had anticipated. And really, what we're trying to do in digital is to move it from analog to digital. So I'll give you an example. Historically, if somebody wanted to pay data they would call up and we would send them a flat file. They take that file and do whatever it is that they're going to do with it. Now what we do is we don't send out to flat file anymore. We have a database that we license. And so people get access to the paid data. They get access. We've done the same thing with our assessments. And all the digital assets that we have now are available through a license. And that business to date has about 1/3 -- it's about a $360 million business, about 1/3 of those revenues come from subscriptions and licenses. And that's another area that we're really focused on as that will help us drive a more durable, resilient top line as well. The other thing that we're working hard on, this is with our consulting and our digital business, is, in any consulting business, it's really hard to scale it without alliances. If you think about the public accounting firms, they have alliances with all the large tech companies, the new systems, implementations, and we're starting down that path with both our consulting and our digital business and I'll give you a couple of examples. So in our digital business, we did an acquisition back in 2019. It was called the Aspen companies, but the primary asset we bought was Miller Heiman, all about sales effectiveness, sales methodologies and so on. We've taken that and transformed that into a digital offering. It's an app, and we're now partnering with salesforce.com and Microsoft Dynamics where the app sits on top of their sort of technology platform. And if somebody is going in and they're struggling in something, they can actually tap into our app and see a 5, 10, 15-minute video, that's like immediate training for them, right? And then it also has all the Miller Heiman methodologies, blue sheets, green sheets and all that, that's available to them through that app. So that's very early days for us in terms of partnering with them. Our consulting business is actually partnering with Microsoft in a different area. Microsoft is rolling out a product they call Viva and if you think about every day, you turn your computer on and Office 365 pops up, right? So they pay like own workforce. And now they're set back saying, well, it's pretty saturated. So what do we do next? And their big idea is to move into owning the employee experience. And they've come to us and said, "Hey, Korn Ferry, we need you. We don't really understand this HR world. We know technology. We sell licenses. We sell to CIOs and CTOs. You guys understand the employee experience. You have relationships with CHROs ." And so we're exploring what that potential partnership or alliance would look like with Microsoft.

And you've talked before about your initiatives to build an ecosystem of partners. Can you talk about what that means across your lines of businesses and what value it adds?

Yes. I think the -- it would be as -- what I just went through with those. I don't see like an Exec Search. I don't think you'd see us form a partnership or anything. I think it's going to be more on the consulting and digital side. where that will take place. And those are sort of our early days, first entrance into that world, but it's something we absolutely have to continue to go down that path.

Okay. And it is 15 minutes. If anyone does have questions, please feel free to raise your hand. We have microphones. They can come around as well. I guess one thing that management has talked about is redistributing resources globally. Can you elaborate on what that means and how it will benefit the organization?

Sure. So we went through -- in the third quarter, an exercise, we called it a workforce rebalancing. We actually ended up removing about 400 or 500 positions from the organization. So it was relatively small reduction. And I'll take you through an example in RPO. So as we were looking at the RPO business, they did see some moderation in the base and that was primarily in technology, which you would expect. Every day you pick up the paper and technology companies are laying people off. We also saw some moderation in Life Sciences. And so as that work was moderating, it was creating excess capacity. And then we're winning work in industrials or in health care. So it's a different skill set, different profile of individual recruiters and so on, or we had moderation in China because of the lockdown, but our new business wins were in the U.S. And so those resources aren't necessarily transferable across the organization. And so what we ended up doing is saying, okay, where do we have excess capacity, and that's where we did the workforce reductions and then where we have a capacity that we have to meet and that's where we did the hiring. And the net result of that, like I said, was above 400 or 500 position reduction.

And is that going to continue? Or is -- are we leveled off...

I think in the RPO business, it's always going to be to some extent. It won't be -- I don't expect it to be -- continue to be a dramatic as where we are today. And you never say never, but we have no immediate plans to further reduce our workforce at this point in time.

That's fine. Okay. And again, we did see large amounts of turnover. We continue to see large amounts of turnover. Do you think that this will persist in a recession? Or do you think that we're had more towards a normalization of the labor market? What are you seeing...

I would say if a real recession hits, I think you'll see a shift from voluntary to involuntary where companies will take actions to rightsize their workforce. Like I said earlier, our voluntary turnover has reduced substantially from where it was coming through the pandemic recovery at this point in time.

Okay. And has COVID or coming through the pandemic with the work from home or where people are located, has that impacted your business or your Executive Search specifically?

Well, it has actually. It's been a very good productivity tool for our Executive Search business. And if you think about the administration around search, so you've got whatever it is, 5 or 6 candidates and they need to meet 7 or 8 people in the company and you have to organize travel, hotels, somebody schedule changes and you're constantly juggling all that around. And today, you just setup a zoom call. And you can get through that process much, much easier. And I think the world has come to accept that as something that's an acceptable substitute for meeting face-to-face. We've had -- we've brought in a couple of Board members over the past couple of years and that's all been done virtually. And so I think for our Executive Search business, it's a real productivity tool. The interesting thing was when we bought the Aspen companies, like I said, the main asset was Miller Heiman, and they were virtually 99% in-person training. We bought them in December of 2019, well, COVID hits in March and in-person goes away. So our folks were really hard to pivot to virtual training in the organization. As an organization, like I live in Scottsdale, Arizona, Gary lives in California, Tiffany lives in Dallas, and we're all over the place. But we make it work really well. In fact, that when we do our earnings calls, Gary sits in California and I sit in Scottsdale, and we do the earnings calls that way. So I think our organization has done a very good job of embracing and accepting the virtual work.

And do you see that across industries or your industry specifically?

No, a lot of our clients are the same way, yes.

Virtual is here to stay for everyone. Yes.

Yes. No, it definitely is. There's no doubt. It's too much of an efficiency. I mean for the pandemic, I was on probably 125 flights a year, right? And now this is -- over the past 12 months is probably my third or fourth business trip. And all the time, I say, if I think about seeing in a car, driving to an airport, sitting in a terminal, sitting on an airplane, that just frees up, gives me time to put energy back into work or do what I like to do personally.

Get a better golf game as we go...

That's not in the cards.

And then, I guess, turning to your capital allocation priorities, how do you think about M&A? How do you think about buybacks? What are your top priorities in 2022?

Yes. We've had a balanced approach to capital since -- before I got here and continues when I joined the company. Our first priority, we really believe deeply in what we're doing in our strategy. And so our first priority is always going to be to put the money back into the business. And we do that a couple of different ways. One, obviously, hiring talent into the organization, whether it's fee earners or delivery capacity. It's important for us to keep growing. We also invest -- again, as I said, we've got data, content and IP at the center of the organization. So we also invest into that, keeping it fresh and relevant and making sure we're staying on top of workforce trends. People talk about workforce of the future now. So continue to invest into that. We're investing into our digital business. A couple of years ago, we actually went to the Board with an accelerated plan to get digital up and running quicker than what we have been accomplishing. And then after that, we would look to do M&A. If you go back, you look over the past 10 to 15 years, our CAGR has been -- revenue growth CAGR has been in the 10%, 11%, 12% range. And doing that organically is a real challenge. So you're always going to have to have some inorganic growth. And so we use M&A as a way to do that. I would say our focus, as we sit here today in the M&A side, would be continuing to invest in the Professional Search and Interim. This is such a huge addressable market for us as well as into leadership and professional development. One of the things that we found, we actually have 2 very large technology companies that have come to us and said, "Hey, I've got this level -- mid-level of management that we want you guys to own their professional development." And so we've taken on their large contracts that go over multiple years. And as we're getting into that, we're exploring opportunities to do leadership development outsourcing. And so that would be another area that would be of interest to us from an M&A perspective.

And what does your pipeline look like today versus last year? How has that been developed?

It's interesting. If you go back and you look at the majority of the acquisitions that we've done and Gary, our CEO, it's kind of his baby. Most of them, the companies weren't for sale. He develops relationships with organizations and nurtures those relationships over time and eventually turns into -- hey, it's time for the founder to go, we want to sell. We want to sell to you. And Gary does that because he believes in a people business. If you buy the company and everybody leaves the next day, then you don't have anything. And we're pretty disciplined about the M&A that we do. So it's got to be -- there has to be a strong cultural fit. It has to be strategically aligned to what we do. We're not going to buy used car dealerships or anything like that. And it has hit the metrics, the economics that we're looking for, which obviously is going to be better than our cost of capital.

All right. And I guess when you're looking at different deals across the board and you're looking at different pipelines, is there a region specific that you look towards or...

Most of our M&A activity has occurred in North America. We've done some acquisitions in Europe. We had a couple of small ones in Asia that didn't work out for us, but most of what we've acquired has been in North America. I think our opportunity to expand geographically is in the Interim business. The Interim business, everything we've bought has been U.S.-based. But it's a big world out there. And so Europe and Asia, we think there's a huge opportunity to build the Interim businesses out there. One of the things I found interesting because our RPO business obviously manages perm hires for very large clients. And some of those clients are coming to us now saying, "Hey, you're managing my perm, why wouldn't you guys want to take on my temporary?" And so we have our RPO folks now working closely with our Interim folks to see what we can do in terms of standing up a solution for that.

All right. And I'll pause now to see if there's any questions. If not, I guess, if we could finish off with what do you think investors are missing from your story?

Yes. I think it's interesting. I think if you went out on the street and you found 10 people who knew Korn Ferry and he asked them what we did, my guess is 6, maybe 7 would say we're an Executive Search firm. So we've been working really hard in trying to get our story out there and help people understand the evolution of the brain. I mean you guys have probably seen if your golfer is at the Korn Ferry tour, we've actually sponsored a golfer on the tour, last name [ Figala ]. He was a big guy that crashed out on 17 at the Waste Management last year, but it's been good for us. So I think it's getting our story out there, understanding who we are, what we do today. And again, I think there's the 2 areas that are really underappreciated is how easy it is to cross-sell. The example I went through earlier in this organization and how -- when we buy companies and when we go to the Board, we make the economics work through cost synergies. We don't prop up revenues and make claims that we're going to chase this and so on. But once we buy a company, get them into the fold, we have incentive programs for any line of business that refers business to another line of business. Those individuals will get paid to do that. And that's what makes us very attractive for our search partners because if you're a search partner at Russell Reynolds, you'll get paid for your 12 or 13 searches a year. You come to Korn Ferry and you're going to get paid for your 12 to 13 searches a year plus if you sell an RPO or you sell a consulting project, you paid for that as well. And so that really stimulates interest in the workforce in terms of referring work between lines of business. And so as we bring these acquisitions on, like I mentioned in our last earnings call, since the Lucas Group acquisition, we've created an incremental like 700 new engagements that go between the acquired businesses and legacy Korn Ferry that generated like $43 million in fee revenue for us. So I really think that, that's underappreciated. And I think the other area, again, this comes with understanding who we are is how relevant this company is and the assets that we've accumulated in the solutions we go to market with how relevant that is in today's world. I mean everything is all about talent today and execution through people is -- that's what we do and because I tell people all time, no business issue are never worked your way through a downturn without the help of people, and that's exactly where Korn Ferry comes in.

All right. With that, I'd like to thank you for joining us today.

Thank you.

Thank you, everyone, in the audience.

Thank you.