Korn Ferry (KFY) Earnings Call Transcript & Summary

Absolutely.

So within your search business, you've moved up market more. You're winning more deals that are senior level assignments, what's your outlook for engagement volumes and pricing given that mix shift up market? And how much additional runway do you see from this upmarket shift?

Yes. I think from a pricing perspective, I mean, the pricing model stays the same. It's 1/3 of the first year cash comp. But as you move up market, obviously, you make more money, so you get a higher average fee. And we've seen that grow over the past 4 or 5 years. The one area that is part of what Gary does with this client centricity. So every day, we get e-mails on all the new business we've won the day before. And it first is they go, man, I got to go through another 50 e-mails, but now actually, as you pay attention to it, the one C-suite area that I'm finding really predominant now as CFO, has been, I see a lot of CFO churn at this point in time. I think there's really good runway left in terms of people getting to the point where it's time to to hang it up and go on and do something different. Peak 65, I think, is in the early stages. I would say on professional search, again, we're playing at higher levels. So somewhat insulated from AI. I think some of the early narrative around AI was -- nobody was ever going to work again. And now you're back to it's not really it's going to be more of an efficiency tool. And I think as people got the tool out into employees' hands, if you just let everybody do it to their own liking how do you ever capture that productivity, like you're doing something different, and I'm doing something different. And so one of the things we're doing is, as I said to our guys, okay, we got the tool in everybody's hands, but now we got to figure out an organized way to capture that productivity. And when you start to do that and you start to look at a job and deconstruct that job, it's pretty easy to realize AI is not going to replace that job. It might impact certain tasks, but it's not going to replace it. So I think the pendulum has swung on the whole AI thing, and it's creating actually a tailwind for us where I need people with different skills right? It's creating new jobs that we haven't seen in the past. So on the Pro Search side, that's where I think we're seeing a lot of the uptick that in volume that we are I think interim is -- it went through a very rough time, right, decline for what it was 36 months in a row. And I think we're starting to see that pick back up again in our field business, if I think about what we guided for Q2, they're back into triple-digit revenue revenues now.

If we look at performance across the different regions, what would you say is driving the differences in performance across the Americas, EMEA and APAC? And how would you characterize the pipeline in each of those regions?

I would say -- the pipeline for each of the regions is good. I would say Asia is probably the most impacted by the conflicts which early on was kind of surprised me, but probably shouldn't have been, but they're very reliant on resources coming through the straight. And so they've really been impacted. That business for us is kind of just stable right now, not growing dramatically. Europe was somewhat immune to the Middle East. Now we're starting to see it have some impact. So our growth in Europe in the first quarter was about 4% or 5%. It was down, but about 4% or 5%. And in America seems to just be chugging along, like, as if it's -- the Middle East is not an issue.

Yes. If we look at performance within your talent and organizational solutions business, what do you think it would take for that business to accelerate in growth and potentially reach a target of double-digit growth?

Yes. I think a couple of things. There's -- as we elevate the level of engagement that we're doing in that business, you're naturally extending the sales cycle. And I think given some of the uncertainty with the Middle East and so on, the sales cycle that's longer already, people are taking longer and longer to sign deals. So I think we need resolution on some of the uncertainties that exist in the macro environment today. The other thing we've done in the digital business, we have an annual performance cycle that we go through. And we have a number of underperforming call enterprise sellers in digital that we has to move on, hired new people on. And so they need some time to ramp up. So it's probably going to be through the end of this fiscal year before they really hit their stride. So I think it's a combination of that and then the macro settling down a bit.

You've combined consulting and digital together into the new segment. Can you dissect how those two businesses are performing if they're separating our performance or if they're growing similarly together?

Yes. The -- both of those businesses are growing similar. We separated them, I don't know, I can't remember, it was 5 or 6 years ago in the thought process as well. If you isolate the digital business, it's going to help our trading multiple. And those businesses really belong together. If I get to tell everybody, there should never be a consulting engagement that doesn't include digital, and there should never be dated consulting because digital is where we have all of our foundational assets when you think about data, IP, science, behavioral science. And if our consultants aren't consulting around that, what are they talking about, right? So that -- those two businesses really belong together. So I'm looking forward to -- and we've got two good leaders now that are very collaborative, Leslie and Mathias get along really well. So it's just we just got to get the macro to settle down and have the new folks ramp up and that business will be fine.

Yes. Recently, you launched your new talent suite, and that does have a benefit to your digital business and other parts of your business. Can you talk about how much talent suite should be a catalyst for Korn Ferry?

Yes. I think it's -- one of the things I'm trying to get folks to do is a separate talent suite from digital. I mean it happens to be associated with digital, but that's where the tech is built, if you will. But it really supports the whole firm, right? If you think about everything that we do, all the assets that we have, whether it's assessments, it's pay data, it's development content. All of that lifts the entire firm. So what Talent Suite did is to put it on a common platform and made it easier to access, easier to use. I think with the work that we're doing at AI, it's going to make it a lot easier to take bits and pieces and bring it together to create unique and interesting insights that nobody else can do because nobody has the type of data or assets that we have. And one of the things we're working on right now is sort of repositioning in the market because I think there's there's a misconception that people think that this is talent Sweet. And it's not. It just -- it [indiscernible] it's an enabling platform. And really what we're selling is talent intelligence. And so that's the work that we're doing now on trying to reposition, but it should be -- once -- when any software you roll out, we had some stability [indiscernible] and now we need to really just drive it into everything that the firm.

Yes. You've seen some pretty healthy RPO new business activity in recent quarters. Can you talk about that? What's driving the new logo wins? And then within existing RPO contracts, how volumes are performing?

Yes. Volumes are definitely coming back within the existing contracts. That's why they're back into triple digits in terms of fee revenue. We have a pretty differentiated offering what that business has done over time, we've done a really nice job of integrating our foundational assets into their offering. So the assessments like if you're going into a company, you're going to hire 1,000 people at this level a year. We'll take the top 25, assess them create a profile of what good looks like in that organization. And then as the -- our recruiters are out recruiting for them, people that they're talking to take the same assessment. And so when we show up, you have resumes of individuals that look like what good looks like in that organization. They bring our pay data into the offering. So we know if you only want to pay somebody whatever $60,000 a year or $70,000 a year, it's going to take longer because the standard is actually $85,000. So all of that intel we bring it to the recruiting process gives us a bit of a differentiated offering.

Your largest clients are known as marquee and diamond accounts. Can you talk about how your largest clients are performing, how growth within marquee and diamond accounts compares versus your overall revenue?

Yes. For the most part, those accounts every quarter grow faster than the rest of the company. Today, they represent about 40% of our consolidated fee revenue. If you go back in time, it was probably in the low 30s. So we continue to invest in those accounts. What I'm really excited about, and we're going through that right now is bringing the very large AMS clients into our program. And that's going to have the impact of that really supercharging the size of that program relative to the rest of the company.

Right. And how do marquee and diamond accounts grow relative to overall Korn Ferry faster by...

I would say if you go back over the past 3 or 4 years, it's probably 300 to 400 basis points faster.

Great. Let's talk a little bit about margins. So Korn Ferry saw 17% EBITDA margins in fiscal 1Q. It's targeting medium- to longer-term margins of 16% to 18%. What are the primary drivers that you think could move margins above or below that range?

Yes, I would say there's nothing that comes to mind that would drive us below that range. I would say once we -- if you just take AMS and you drive them from 100 to 140, you're at the top end of that range right there, right? So to the extent -- and we do have a great track record to the extent we go past the 40, that gives us the opportunity to go above that range. And I think to the extent that the search businesses, continue to fire on all cylinders. That's very profitable for us. And once we get the digital component of talent, nor where we need it to be, it does 30%, 31% EBIT margins. So I see a real opportunity to go above that range. I don't see us falling below the -- even where we're at now in the 17%.

Now interim search does have lower margins than the other businesses of coronary. Can you think -- talk about how mix could impact margin performance? And if there are other areas of the business that you may push into that could be accretive or additionally dilutive to margins?

Yes. Actually, with the interim business, when we buy them, their margins are kind of 6% to 7%. Our interim business today is doing the same as our RPO businesses. It's [ 15%. ] So we've driven a lot of synergies into it. And we have an organization that's plug-and-play. And most of those businesses are underinvested, not well managed. So it's easy for us to pick them up and bring them into our system. And then once we do that and you start to get the flywheel effect from the revenue synergies, you get a lot more volume going across a pretty stable cost base. So we've been able to take those up to about I would say if we went out and bought just another interim business, the size of AMS, that would obviously have downward pressure because it's just the mix of our earnings would change. But to me, it's more about getting the synergies right now on AMS and getting our -- the digital portion of talent [indiscernible] solutions where we need it to be.

Right. The AMS deal does transform your balance sheet a bit. You are taking on around $600 million, $580 million of additional revolver proceeds to fund -- finance the deal, used around $300 million of cash on hand. Can you talk about what your expectations are for delevering the balance sheet? How quickly you can do that and then plans for free cash flow deployment after that?

Yes. So right now, we've got a little bit north of $1 billion of down on the balance sheet and our gross leverage ratio is about 1.7x. From a capital deployment perspective, if I go back over the past 2 years, 2 years ago, we bought back about $100 million of stock. Last year, we bought about $115 million. And that's capital that we have the ability to make a decision with. Now some of that will get consumed as we drive cost synergies. I would say, as I look forward to the end of this year, I would say a minimum of $50 million to $60 million of that will be available for us. And our inclination is to pay down debt first. Now having said that, if there were some substantial dislocation being an opportunity by [indiscernible], we would look -- do the math and whichever make more sense we would do. But right now, our inclination is focused on debt debt base.

And then once you get the debt paid down, presumably, you would be open to M&A. How are you thinking about your M&A strategy following this large transaction? Are strategic larger acquisitions off the table for now as you ingest and digest this larger deal, or are you going to be back to the market looking for transformative strategic deals?

I would say you probably won't see us do something of this size within the next year. We got to digest what we -- the bite we just took. And then after that, there's not -- there's -- I think about the target environment, it's not rich with companies of this size. They come along every now and then. You'll probably see us go back to more of the $100 million, maybe $150 million, $200 million tuck-in type type deals.

And as you think about those tuck-ins, which areas of the business are you most interested in growing inorganically?

Yes. The interim business is interesting to us for a whole host of reasons. One, I think the change in the dynamics in the labor market would lend that to lead us to say, well, that's an area you want to continue to invest in. I think the success we're seeing with the cross-selling referring across is also something that's interesting to us as well. So you probably see us continue on the interim side Leadership in professional development is something that we would be interested in doing as well.

Great. Well, we're just about out of time. Bob, thank you for the great discussion.

Very good. Thanks, George.