Korn Ferry - Earnings Call - Q1 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry First Quarter Fiscal Year twenty twenty one Conference Call. At this time, all participants are in a listen only mode. Following the prepared remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded for replay purposes. We have also made available in the Investor Relations section of our website at cornferry.com, a copy of the financial presentation that we will be reviewing with you today.

Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. 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, 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 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 twenty twenty and in the company's soon to be filed quarterly report for the quarter ending 07/31/2020. Also, some of the comments today may reference non GAAP financial measures such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning these measures including reconciliations to the most directly comparable GAAP financial measure is contained in the financial presentation and earnings release relating to this call, both of which are posted in the Investor Relations section of the company's website at www.cornferry.com. With that, I will turn the call over to Mr.

Burnison. Mister Burnison, please go ahead, sir.

Speaker 1

Okay. Thank you, Steven, and good afternoon, good morning, everybody. It's been six months since the pandemic was officially declared, and I think the world is at the beginning of an Ironman triathlon. You know, it's not just a marathon but a triathlon of endurance agility change. In fact, you know, I think over the next two years, we're gonna see more change than we've seen in the past ten.

Change will circle humanity. And in business, different work will need to get done and work will need to get done differently. Almost every company on the planet is gonna have to reimagine their business. Whether that's rethinking their organizational atmosphere, their structure, roles, responsibilities, how they compensate, how they engage, how they develop their workforce, there's change that's gonna be all around us. They're gonna need to hire learning agile, diverse talent and do so in a more inclusive ethos and in an increasingly digital world and that's the essence of Korn Ferry's business, to enable people and organizations to exceed their potential, to be more than.

You know, in early March, we were announcing the best results in our history, record fee revenue and a continued transformation from a monoline firm to an organizational consultancy. And then the world temporarily paused. Certainly that pause temporarily impacted our business. During the first quarter of our fiscal year, we generated about $344,000,000 in fee revenue, which was down about 28% constant currency. But I think the keyword is temporary.

As we alluded on our last call, we're continuing to see green shoots. With July new business better than June, June better than May and May better than April. Trailing new business for the three months ended August was down about 13% year over year combined which is obviously more positive than we saw in our first quarter and what we saw when the world stopped in April. In fact, August new business was only down about 6% year over year. So really good news.

July new business was up 34% over June. So again, green shoots that that we're seeing. And I I think I'm more than anything, I'm proud. I'm proud of our organization. I'm motivated by how we've positioned ourselves for the opportunity ahead.

And, you know, we face this crisis from a position of strength, not only when you consider the breadth and depth of our solutions, but when you consider our balance sheet. And the foundation of the firm has been to ground it in IT and data. And that continues to be the backbone of Korn Ferry. We've got rewards data on over 20,000,000 people, 25,000 companies. We've done almost 70,000,000 assessments.

We have thousands of organizational benchmark data. We've got thousands of success profiles. Every year we train and develop a million professionals a year and certainly, you know, last but not least is we place a candidate each business hour every three minutes. And so we're, you know, we're using this this time of change not only to have an impact with our clients but also to reimagine our own business. And that includes moving from analog to digital including in our assessment and learning business, you know, today, it's almost 25% of the company.

And and we're certainly shifting that business. I mean, we've done more virtual sessions in the last couple months than we've done in the last, you know, many, many months. The the pipeline is good. We've pivoted very quickly. I I can't be proud of our team.

And when you look at the the uptick here month over month in both our consulting and digital new business, you you can see that that something's working. And and on the recruiting side, that's another place where we are reimagining that business as well through AI and technology and a lot of the platform that we use in RPO. We've taken this IP. We've taken it out to the marketplace. I'm very proud in terms of the stance we have taken.

I think our biggest opportunity as a company is to recast the Korn Ferry brand. We recently launched Leadership U, a curriculum that helps leaders take on today's challenges. And more importantly amid all the calls for change, we're amplifying our voice. Not only on diversity but also in equity and inclusion both within Korn Ferry and among our clients. And we know from our research that diversity is a fact, engagement is an emotion, but inclusion is a behavior.

And so our focus on DNI, it's about eight years ago, almost, actually it was two days ago, eight year anniversary of us making an investment in a company at that time was called Global Novations. We've turned that into what I consider to believe the absolute best D and I consulting business in the world. And as I mentioned, our July consulting new business was the fourth highest month in our history. And I think that was driven in part by the strong voice we've taken not only around the pandemic but also around DNI. And I'm also proud and pleased to say that we're launching Leadership You for Humanity.

And that's a nonprofit venture of the Korn Ferry Charitable Foundation focused on developing the total mosaic inside communities and within corporations. One of our partners will be the executive leadership council, an absolute preeminent organization. Their mission is to develop and increase the number of successful black executives. Around the goal, so yeah, around the globe. And our goal is to develop a million new leaders from diverse backgrounds using our Korn Ferry Advance and Leadership U platforms.

And so not only I think have we demonstrated that we say what we mean, but we're not just talking about it. We're being about it and providing a systemic solution to a systemic issue. And so out of tomorrow's change, a new order is emerging, and Korn Ferry's gonna help drive that change, helping people and organizations be more than. With that, I'm I joined here by, Bob Rozak and Greg Kovacek. And so, before we entertain questions, I'll turn it over to you, Bob.

Speaker 2

Great, thanks Gary and, good afternoon and good morning. Before I jump into the first quarter results I wanna just elaborate on a couple points that Gary talked about. I think he's absolutely right concerning the amount of change that will take place in the next two, even three or four years. We're already seeing it in our clients. I truly believe that Korn Ferry is uniquely positioned to lead companies through this change.

You know the data, IP and know how that Gary talked about really sits at the center of our organization and it permeates all of our solutions. And that provides a common harmonized language for talent, that's really core to our One Korn Ferry integrated approach to helping clients solve their thorniest business issues through the most valuable asset which obviously is their people. Again I believe we're uniquely positioned because we're the only firm that has the end to end data, IP and know how to address every aspect of an employee's engagement with his or her employer. Not only do we have first mover advantage, but in my opinion, our position and our collection of assets is virtually impossible to replicate. So as I sit here today, you know, in the midst of this wave of change, with the collection of assets and solutions we've assembled, my optimism for Korn Ferry's future growth prospects have never been higher.

Now let me turn my attention to the first quarter. I'll start with a few highlights, before turning it over to Greg and I'll come back on and address our recent business trends. For the first quarter of fiscal year twenty one, our fee revenue was $344,000,000 down about 28% in constant currency. More importantly, our monthly fee revenue trends within the quarter showed signs of stabilization. Consolidated fee revenue in May was down about 34% year over year, while June and July were down 2726% respectively.

For each of our service offerings, we saw fee revenue slowing at different rates which really was in line with our expectation and reflects the diversification and mix shifts that we've been communicating. Specifically fee revenue in the first quarter measured at constant currency was down 37% for executive search, 35% for professional search. Consulting was down 26%, RPO was down 22% and digital was down 2%. Driven by the revenue contraction, our consolidated adjusted EBITDA for the first quarter was $10,600,000 with an adjusted EBITDA margin of 3.1% and our adjusted fully diluted loss per share was $0.19 Our balance sheet and liquidity remained strong. At the end of the first quarter, cash and marketable securities totaled $733,000,000 Excluding amounts reserved for deferred comp and for accrued bonuses, and actually net of the funds used to right size the firms, our investable cash balance at the end of the first quarter was about $511,000,000 that's up about $150,000,000 year over year.

We continue to have undrawn capacity of $645,000,000 on our revolver. So altogether, we have close to $1,200,000,000 in liquidity, to manage our way through the COVID-nineteen crisis and to invest back into the business through the recovery. Last we had about $400,000,000 in outstanding debt at the end of the quarter. Finally, during the quarter, we completed our restructuring actions to size the firm for the anticipated current levels of revenue. As you will recall in April, just before the end of our fiscal fourth quarter of FY20, we announced a number of cost actions targeted at both compensation expense, which included layoffs, furloughs, and across the board salary cuts, as well as other, actions focused on the reduction of G and A.

Combined with the actions completed in the first quarter, we have initially reduced our cost base by about $321,000,000 annually. I'm now going to

Speaker 3

turn the call over to Greg to review our operating segments in more detail. Okay. Thanks, Bob. Starting with our digital segment. Global fee revenue for KF Digital was $56,000,000 in the first quarter and down approximately $2,000,000 or 2% year over year measured at constant currency.

The subscription and licensing component of KF Digital fee revenue in the first quarter was approximately $21,000,000 which was up $6,000,000 year over year and flat sequentially. New business in the first quarter for the Digital segment was down approximately 3% globally year over year at constant currency with the subscription and licensing component up approximately 40%. Adjusted EBITDA in the first quarter for KF Digital was $7,900,000 with a 14.2% adjusted EBITDA margin. Now turning to Consulting. In the first quarter, Consulting generated $99,000,000 in fee revenue, which was down approximately 26% year over year at constant currency.

As clients have settled into their new work from home protocols and have become more familiar with our virtual delivery capabilities, new business for our consulting services has begun to improve. Measured year over year at constant currency, new business in the first quarter for our consulting segment was down approximately 4% led by North America where new business was up 11% year over year. Adjusted EBITDA for consulting in the first quarter was $6,600,000 with an adjusted EBITDA margin of 6.6%. RPO and Professional Search generated global fee revenue of $68,000,000 in the first quarter, which was down 27% year over year at constant currency. RPO fee revenue was down approximately 22% and Professional Search fee revenue was down approximately 35% year over year measured at constant currency.

Adjusted EBITDA for RPO and Professional Search in the first quarter was $6,000,000 with an adjusted EBITDA margin of 8.8%. Finally, for Executive Search, global fee revenue in the 2021 was approximately $120,000,000 which compared year over year and measured at constant currency was down approximately 37%. At constant currency, North America was down 38%, while both EMEA and APAC were down 35%. The total number of dedicated executive search consultants worldwide at the end of the first quarter was five ten, down 59 year over year and down 46 sequentially. Annualized fee revenue production per consultant in the first quarter was $900,000 and the number of new assignments opened worldwide in the first quarter was eleven fifteen, which was down approximately 34% year over year, but up 9% sequentially.

Adjusted EBITDA for Executive Search in the first quarter was approximately $8,100,000 with an adjusted EBITDA margin of 6.7%. Now I'll turn the call back over to Bob to discuss some of our recent monthly new business trends.

Speaker 2

Great, thanks Greg. Globally year over year declines in monthly new business exiting fiscal year twenty twenty Q1 and entering the second quarter continue to stabilize. Excluding new business awards for RPO, global new business measured year over year was down approximately 31% in May, down 25% in June, rebounding to down 5% in July. Measured sequentially, June new business was up 17% over May, and July new business was up 34% compared to June. With summer vacations, August is a seasonally slow month and normally is lower relative to July.

Measured year over year, August new business was stable and down about 6% which is in line with what we saw in July. Monthly new business trends have varied by segment and have in some cases been choppy month to month. Digital new business was up 3% year over year in June, down 5% year over year in July, and up 10% in August. Likewise, consulting new business was down 28% year over year in June, rebounding to up 34% in July and up 10% in August. For executive search, new business was down 34% year over year in June, improving to down 27% in July and was down 19 in August.

And finally, professional search new business was down 15% year over year, falling to down 23% in July and August. With regards to RPO, a strong quarter of new business with 56,000,000 of global awards. And that was comprised of 32,000,000 of new clients and 24,000,000 of renewals and extensions. And we continue to have a strong pipeline, of new business in the RPO world. Approximately two months have passed since our last earnings call, yet there remains significant uncertainty about the ultimate impact of COVID-nineteen on society and global economies.

Currently governments are struggling to balance reopening and reengaging in an effective way against the maintenance of an environment that fosters the health and safety of everyone. Now there really is no playbook. This effort takes on many forms and there's not a clear path to success. Further it's unclear whether certain governmental aid programs that were put in place to provide financial assistance to impacted businesses and individuals, you know, whether they will remain in place or for how long. The unprecedented nature of the current environment combined with many unanswered questions and rapidly changing data points like the recent acceleration of corporate layoffs, and the potential outcome of the US presidential election, that really continues to cloud the near term predictability of our business.

And consistent with our approach, in the last two earnings calls, we will not issue any specific revenue or earnings guidance for the second quarter of fiscal year twenty twenty one. That concludes our prepared remarks. We're glad to take any questions you may have.

Speaker 0

Ladies and gentlemen, we'll now begin the question and answer session of today's conference. Followed by the zero in your touch tone phone. You'll hear a tone indicating that you placed yourself in queue and all questions will be pulled in the order you are received. You may remove yourself at any time by depressing the pound key on your touch tone phone. Our first question will come from the line of George Long.

Please go ahead.

Speaker 4

Hi, this is George. Good morning. You indicated that July new business trends were down 5% year over year whereas August new business was down 6% year over year. Could you talk about what contributed to the moderation in the pace of improvement in new business trends overall and perhaps by segment?

Speaker 1

If you look, the good news is obviously the headline numbers on the quarter were not spectacular, but the world stopped in April and you're going see that with GDP. But what we have seen is very steady, upswing in new business. And as Bob indicated, July was better than June, which was which was better than May. So that's really good news. And when we look at August overall, we were down about 6%.

Executive search was down 18% if you just isolate the month of August. And consulting and digital were actually up 10%. So I think that when you look at the platform as a whole, the business is reacting almost in line with what we thought it would do. And when you look at the drivers of consulting, and digital, I would say I would point to number one, transformation and and the fact that every company, you know, different work needs to get done and work needs to get done differently. So every company in the world is gonna have to reimagine their business and and that starts with the organization and its people.

And when there's transformation, there's there's usually a pause, then the next step is is with people. So we've certainly seen that. We're starting to see early signs of that in our consulting and digital business. I think the other broad stroke I would put on the new business trends is our D and I business, which is before this was about a mid 8 figure business. And we've seen over the last few months about a 50% uplift in how we can help companies, not just deal with diversity, because that's a fact.

But more importantly, how you deal with inclusion which is a behavior. So I would I would point to those two, and then I would point to one other which ties to transformation, which is around developing a workforce and creating a more learning agile workforce that can operate in a digital world with an inclusive, ethos. So those are, I think, the broad strokes on the business. You're seeing, obviously, an uptick in, search, which is good. And then from an industry standpoint, it's much like you would probably intuitively think.

The consumer area has seen improvement but not as much as say life science. Life science has been, as you would guess, certainly, stronger. And so those would be the broad strokes. Obviously, energy has been challenged, over the past few months. But that would be my kinda 38,000 foot view.

Speaker 2

Yeah. Hey, George. Just you know, on the wise counsel of Toby, after our last earnings call, we actually put a slide into the earnings call presentation that's posted that shows the new business by each line of business. It's on Page seven.

Speaker 4

Great. No that's helpful. And as a follow-up could you provide some perspectives around how you expect the trends that you're seeing in new business to translate into revenue or fee performance? It sounds like clients aren't canceling. So retention rates are changing.

So it's really the pace of new business that's ultimately going to drive fee revenue performance. It sounds like it's ultimately delays rather than cancellations. So could you provide some perspectives on how you expect the translation of new business into fee revenue?

Speaker 1

Yeah. We've seen on the search businesses are rather straightforward. That's going to be that translates to revenue generally over ninety days. And when you look at the consulting and digital business, you'd find that essentially, you know, 50% of it gets recognized in, you know, say, within twelve months, and then the balance is gonna be over the next thirteen to thirty five months. And the RPO business is not materially different than that.

What I would say, there's been a couple other trends too. We've certainly seen a shift towards bigger engagements. That was a strategic pillar of ours going back a couple years. We're now really starting to see it more impactful engagements. That's something that is coming through.

And I think the other thing that Bob could maybe allude on is when you look at the digital business, we've all, you know, we've talked for a while about moving that business to a subscription based model and that that digital business, you know, we obviously made a push, towards digitizing that. But, you know, the reality is when this pandemic hit, still a lot of the business was delivered, in classroom. And we have gone I mean, we are all over that, moving that to a digital offering. And one of the things is to increase the amount of subscription based business from digital. So Bob, do you wanna comment on that?

Speaker 2

Yeah. So George, just so you know, the subscription business, I'll give it to you over the last three quarters including this q one, was right around, $21,000,000. So that demonstrates the durability of that revenue, you know, in the current environment that we're operating in. You know, the the piece of that I think is is better news is if you look at the new, business for our subscription, offerings, it was about 23 and a half million dollars in q one. That's up 42% kinda year over year.

And even quarter sequential, it's up about 16%. So again, as Gary indicated, you know, part of the strategy, in the diversification is also creating more durable revenue streams and, you know, we're starting to see that, see that take shape. I mean even when we talked about the larger engagements, when you stratify whether it's digital or consulting into the large engagements for digital, we consider that over two fifty. For consulting, we consider that over 500. We're seeing growth in those large engagements year over year and quarter sequential versus the smaller more transactional engagements that's where you see the decline.

Again, these are data points at this point but we are starting to see really the strategy come to light that we've been talking about.

Speaker 4

Got it. Very helpful. Thank you.

Speaker 0

Our next question will come from the line of Tobey Sommer. Please go ahead.

Speaker 1

Thanks. Just a quick follow-up if I could on the new business trends. What's contract duration like or new business trend duration? And if you could speak to that a little bit by segment? And in particular, the D and I wins that you have, are those on the longer side?

Just trying to think of that as far as how to play out the model. Yeah, we hope that the D and I is it's definitely it's not going to be ninety days, but it's not going to be as long as the balance of the portfolio. Companies, there's gonna be real change. People are, from what I can tell talking to CEOs, people are taking this very, very seriously, particularly in The United States. So, I would guess that much of that will have a shorter tail.

And so if I describe that the search businesses have a tail of say ninety days or so and the consulting digital RPO businesses have a revenue recognition of say 50% within twelve months and then the balance over say thirty six months. I think this will be the D and I business will be somewhere in between. Okay. Thanks. That's helpful.

How should we think about the temporary cost cuts being reabsorbed into the business? Again, from a modeling perspective, it's a pretty significant variable for us to contemplate. Would think about it when we laid out the cost cuts. Our goal was this, you know, number one, guess as I step back, this was a humanitarian crisis. And so we pulled out a contingency playbook a year ago and did a number of things, to prepare for a turn.

Obviously we didn't envision this kind of turn. But when we, in early March, we obviously saw this in China about the third week in January. As we looked at this, we said this is a humanitarian crisis. And let's go into this, with the view of preserving as much muscle as we possibly can to accelerate through the turn. And last time when I go back twelve years, Korn Ferry's business grew fivefold from the trough, obviously, over a period of years, both inorganically and organically.

And within four quarters of the trough, the business was up 60%. So we said, okay. Let's try to save as many jobs as we possibly can. Unfortunately, we we did have to make the decision to let go some very, very good people which, troubled us. And then we took some other action that were more temporary in nature.

And so when you look at it in total on an annualized run rate, we said we would reduce the cost base by about $320,000,000 Essentially, half of that was, more permanent in nature and half of it would be variable. And so when you look at this quarter on that variable piece, you'll probably find that, you know, 40% or so of that variable came back in, maybe a little bit less, into the first quarter, something like that. Bob can provide the specific numbers. The way that, you know, we're not providing guidance just given, you know, how quickly the world seems to change from day to day. And the way that I would kind of look at this is just say okay, you know, you did $345,000,000 in revenue, in fee revenue this quarter, which obviously reflected the world stopping in April.

And if that were to go up, pick a number, say, $25,000,000 how would that margin expand? And I would probably point you to on that first $25,000,000 it would probably go up 100, 150 basis points. And as you go up the ladder in $25,000,000 increments, as you each rung up that ladder, you're gonna see more leverage and more, flow through to EBITDA. So that's kinda how I would think of it in very, very broad strokes. Bob, can you clarify any of that?

Is that about right?

Speaker 2

No, it's actually pretty spot on Gary. The percentage you talked about 40 is actually 41% so you're spot on. Yeah, no, the model that you laid out is exactly how we view the world.

Speaker 1

Thank you. If I could ask another one, with that in mind, you know, investors looking at businesses in the storm are trying to see what they'll be like when things are more normal and we're just worried about economic forces and not the humanitarian crisis you articulated. What kind of revenue level do you think the company would need to hit to operate at the old EBITDA margins of around 16% since that kind of analysis is going to be integral to long only building a position amid this turmoil? Well, I think, yes, I I hear you. I think you you first have to have to look at, you know, do do you believe in the company's strategy of creating a preeminent organizational consultancy, taking strategy, synchronizing with an organization and talent and driving superior performance.

I think we're at the very, very beginning of that journey. So what I would say is number one, it really kinda does depend on the mix business in what happens here. I think there's going to be again more change in the next two years than in the last ten years and that change is gonna encompass a lot of different factors including the c suite. Because I think what you're gonna find is for a whole host of reasons, there's gonna be a lot of chairs that are gonna get reshuffled. People may make personal decisions.

There could be demographic issues and considerations. There could be a number of things but that would not surprise me in the least that once companies get past this neutral zone and really move to offense, and I'm not suggesting that companies haven't done that. Clearly, there's been a number that have. But now you're really gonna determine winners and losers. So you're absolutely right.

Korn Ferry in its past performance, we, from the last trough grew the company fivefold. And from the trough in twelve years ago within four quarters, grew 60%. And so it depends on number one, if you consider this to be a trough. If you do and you apply that same sort of logic, to where we were in the first quarter, I think you could reasonably conclude that we would be back at those margin levels, for sure. So we think we've taken the right step not only on the cost side, but much, much, much more importantly on the top line side about how we can help companies, really, really deliver on change.

And whether that's D and I, whether it's sales effectiveness, whether it's M and A, whether it's transformation or whether it's the reshuffling of the C suite, I feel very confident, in that. Okay. If we just take the mix shift out of it, can you be at the old margin at a lower revenue level because of the cost cuts you've taken in? Yes. Thank you.

Speaker 0

We have a question from the line of Sam Cusworn. Please go ahead.

Speaker 1

Hey everyone. Hope you guys are doing well. My question relates to Executive Search. Are there certain client groups that demand has trended particularly better or worse than throughout the quarter here? Could you you've got a little muffled.

Could you repeat that? I'm sorry, one more time. Yeah. Within executive search, are there certain client groups that demand has trended particularly better or worse than throughout the quarter? That are trending better or worse?

Yes. Yeah. Well, when look at it, you know, clearly the life sciences area has for sure trended better. On the other end of it, there's been certain aspects of the industrial business, such as energy that haven't trended as well. And so those would probably be the barbells.

And I'd also say that professional services has not trended well. But given what we're seeing in manufacturing activity and all of that, I'm not so sure that those trends that I just alluded to would continue. But I would say those are the outliers, things like wealth management, asset management have done reasonably well in this environment. Thanks, that's helpful. Maybe switching gears a little bit.

You know, in prior cycles when coming out of a recession, were there more favorable opportunity for market share capture from struggling competitors or even additional acquisition opportunities? For sure. We've been one of the things we did a year ago is we planted a lot of M and A seeds. And as you know, we've done 13 acquisitions and 12 of those were really kind of sole sourced, where the company wasn't necessarily for sale. We planted a lot of M and A seeds, going back a year ago.

So there will undoubtedly, be those kind of opportunities. When we look at the market, we size the market at somewhere between $200 and $250,000,000,000 And when you look at that market sizing, you would find that the areas of learning and development represent a disproportionate size of that market. And so we are keenly focused on growing that learning and development business. The executive search market, although incredibly strategically important to Korn Ferry and an advantage that other professional services firms do not have. I think that executive search market is probably no more than 5,000,000,000.

The professional search market is probably four or five times the size of the executive search market. So we look at that as a much broader market and we also focus on the RPO piece of the business as well which has continued to deliver incredible quality renewals as well as new logos. So we think that there's that opportunity and there's that opportunity to also bundle services together.

Speaker 4

This Yeah, very

Speaker 2

is Bob. Just to elaborate on a point Gary made earlier too, when you think about the cost savings that we put in place, Gary mentioned about 50% of those relate to positional elimination. The other 50% were other actions. And it was a very conscious decision on our part to do that, so we retained, you know, as Gary indicated, the muscle to enjoy more than our fair share of recovery. So as you think about us coming out the other side of this, our participation, in that recovery, we've got the company positioned, to enjoy more than our fair share of that.

Speaker 1

Thanks for answers guys.

Speaker 0

A question from the line of Mark Marcon. Please go ahead.

Speaker 1

Hello, thanks for taking my questions.

Speaker 4

One, just as it relates to some of the cost actions that you took over the last five months. From the permanent side, what percentage of that has already gone through here in the first quarter? Are there more benefits to see in terms of the permanent reductions as it relates to the financials?

Speaker 1

Bob, you should answer that.

Speaker 2

Yeah, yeah, no, let me take that. Mark, I would think about it again more from the perspective because again we're trying to balance the temporary cuts. We've got a program in place for the organization to share some of the economics back to the employees so to of mute the impact of the pay cuts. But as you think about it, I would think about it the way that kind of Gary described it you know, if you assume the trough was this quarter and you have $25,000,000 increments, you're gonna get, you know, 150, basis point margin improvements, up to probably around maybe a little bit north of $400,000,000 in revenue. Once you get past that point, you'd be

Speaker 3

looking at a more normalized flow through. Great. And then

Speaker 4

Gary, you know you've described this as potentially a triathlon. You've been through multiple cycles. Obviously there's, this one's unprecedented in multiple respects. But how do you think most of your clients are gonna basically react in terms of going into offense, engaging in terms of some of the changes that you could help them with. What's that pacing do you think gonna look like?

And in terms of reshuffling organizations, how quickly do you think that's gonna occur?

Speaker 1

I think the elephant in the room is fiscal stimulus. And there's a, as you know, I mean there's a substantial, the punch bowl spike big time. So the the the really hard piece of the algebra is gauging the the the fiscal stimulus and and whether that continues. As you know, there's there's some countries where that's scheduled to end in October. That certainly has an overriding impact on the economic landscape.

But I would say we are starting to see, we've clearly seen it in the D and I space, there's no doubt about it. But in terms of transformation, yes, we starting to see that. And I just, I firmly believe that there is more change here in the next two years than in the last ten years. And I think that, you know, don't take this the long way, but it's been it's been a bit preseason up till very, very recently. And and I do believe, that, you know, culture, for for me, the definition is how an organization gets things done.

I think it's gonna be incredibly widespread. And I think that a lot of the changes that we're seeing, people are not gonna go back. So I'm envisioning, and you can see it in our consulting business, you know, I do envision that to be pretty widespread, but I think the overarching question there is the stimulus question, because that impacts companies' liquidity, impacts the degree of change they can actually, actualize. And that one's hard to handicap. My intuition would be that for any politician it would be very, very hard to stop spiking the punch bowl.

But you never know.

Speaker 2

Just to give you a data point on that, you know, as we, are looking at the second quarter, you know, whether it's money coming back to Korn Ferry or money going to our employees, we're estimating that that level, of aid is gonna drop by about 30% from what we saw in the first quarter. So it's a big factor as Terry indicated, in terms of what we see going forward.

Speaker 4

I mean if we don't see a resumption with regards to that stimulus, mean you anticipate that perhaps some of that choppiness that we've seen from month to month in some

Speaker 2

of the businesses could you know, continue?

Speaker 1

Yes. I mean, how could you have 50% of Americans making more unemployed than employed, right? I mean, that's a,

Speaker 4

you know,

Speaker 1

there's some startling data points that you know better than I And yeah, that's a definite risk factor.

Speaker 4

Okay. Can you talk a little bit about some of the new business trends that you indicated on a monthly basis you know, in terms of the variance, what drove some of that choppiness? Like were there big engagements that were coming through and then some pulled back? And I'm talking about specifically like in professional search you ended up seeing some improvement there in terms of going from June to July. I mean, was getting better from May to June and then dipped off in July.

Was that related to, you know, the spike in terms of COVID and, same thing with digital. On the flip side, consulting ended up jumping dramatically in July. Was that D and I?

Speaker 1

Yeah, so you're absolutely right. I mean, as Bob said, one of the things we've talked about this for a while, we've tried to move the organization towards being in the business outcome business, so moving the solutions more, you anchored around outcomes and business impact. So we've certainly seen a shift, as Bob indicated, towards larger engagements. And I think you're gonna see that. You're gonna see that on the consulting side in particular where there could be, you know, in any particular month, there could be a large engagement that has hit.

So we see that and we're very I think some of the most validating things to me have been not only the stance we've taken publicly around issues but some of the wins. And these are major companies that have turned over either part of their leadership development to us, their leadership journeys, helping companies move from analog to digital. These are major wins with brand name logos that Korn Ferry never would have done, you know, twelve years ago. So the company is positioned completely differently today. And so, yes, you're absolutely gonna see some of that.

Is it gonna be like the RPO business that tends to be, you know, really lumpy? I'm not I'm not sure, but clearly, that yes. You're absolutely right. The professional search, you know, I wouldn't I wouldn't read too much into that. You know, in June, we saw a huge upswing in professional search.

But, you know, again, you know, you had you had pent up demand from world stopping in April. So I'm not so sure I would read much into that. But I do think that overall, when you look at the consulting and digital business, you would point to transformation, you point to DNI, and you would point to learning and development. And obviously, you know, some of those things are very related, right?

Speaker 2

Absolutely. Mark, maybe some data points on that. You know, the new business in our digital business year over year, the engagement's above two fifty, was actually up 5%. Quarter sequential was up 13%. Our consulting new business, and we draw a line for large engagements there at 500,000, was actually up 80% year over year and almost 50% quarter sequential.

So you can see the real shift that Gary indicated towards, strategic shift towards large engagements.

Speaker 4

That's fantastic. Can you talk a little bit about two different things? One, what you're doing in terms of changing and transforming yourself? Some elements are relatively obvious in terms of like the sales training piece and moving to virtual. But what are some of the other elements that are changing and what would some of the longer term impacts be on the margin structure?

And then secondly, when we think about some of the leadership development and analog to digital engagements that you're doing? D and I is fairly obvious in terms of what you'd be doing for clients, but can you talk about the engagements that you're seeing, like the specifics with regards to types of engagements that you're seeing now from some of the larger clients where you're seeing some

Speaker 2

of those big growth rates?

Speaker 1

The broad brush is analog to digital. And so companies are increasingly looking at their workforce and saying, you know, how learning agile are we? You know, to to make that move from analog to digital, it's not only strategy, but then you've gotta say, okay, what kind of workforce do you have? So do you have people that are are mentally agile, strategically agile, people agile? And so we have real IP that will go in and say, okay, this is this is where you're trying to move the company directionally now.

This is what we think it's gonna look like in two years. And so what type of workforce do you need? And then measure that workforce today. And then if there's a gap, okay, these are the learning journeys that you go through. So I I would say that is absolutely number one.

In terms of a broad thesis, that's number one. As you said, the DNI yes. Maybe it is more obvious but I'll tell you that even though on the surface it's more obvious, it's much more systemic. It is hard, much harder for organizations to drive that change, diversity, but around the behavior of inclusiveness. And so that is again a leadership journey.

We haven't seen much around the m and a space, but we have pretty deep solutions around that. I wouldn't be surprised if that, you know, kicks in at at some point here. Sales effectiveness, you know, we've got a very, very, what I consider to be world class business there. We have been helping companies, you know, how you engage with customers virtually. That is a big topic of conversation today and so and so you've you've seen that.

I think with our own business, we are trying to do the same thing. So number one, I think our biggest opportunity is to recast the brand and to make the brand synonymous with organizational performance. And so hopefully people have seen what we've done there in terms of that making the brand more elastic. I think second for us, just like our clients, is analog to digital. And that's not just in our learning business and assessment business, is, you know, like almost 25%.

It's also in our core recruiting businesses. And we're pushing very, very hard around, what we can do there in terms of using our technology and AI and the things that we use in our RPO business across the entire recruiting platform. So that would be number two. We obviously continue to look at M and A. There's nothing that's executable right now, but we're obviously we planted a lot of seeds there.

Then the fourth piece is our own talent and whether that is developing from within or adding talent from the outside, that's another leg of our playbook that we said we would try to actualize here accelerating through the turn.

Speaker 4

Great, thanks a lot. I appreciate the color.

Speaker 0

And our last question will come from the line of Mark Riddick. Please go ahead.

Speaker 5

Hi, good morning. I wanted to just touch on and thanks for the detail that you provided up

Speaker 3

to this point. I just wanted

Speaker 5

to touch a little bit on maybe where you are with marquee accounts and the progress that's been made there certainly with everything going on. And just also wanted to get a sense of with the folks that were kind of in that marquee group, if you will, if the actions that you're seeing there or the plans that you're seeing there differ than maybe the rest of the clientele if there are any particular trades that we should be thinking about as far as maybe what some of your marquee customers are doing as opposed to others? Thanks.

Speaker 1

Yeah, I'll make some broad comments and then maybe Bob, if there's any data that you happen to have at your fingertips. We really do believe that when you look at a world class professional services firm, 35% to 40% of the portfolio would be driven by loyal, repeatable, sustaining clients of scale. That's where we are moving to. That's our true north. We have about 300 accounts between Marquee and Regional that we would consider as part of that.

We need to continue to develop from within and bring in account leaders which is a completely different game than Korn Ferry has played in the past so we've gotta be aggressive in that. I will say that I can't mention the wins but there's been some really validating wins with major logos who not only picked our solution because, of our technology platform. So we started a b to c business that is relatively small financially but we've put a 100,000 people through that around being the world's gymnasium to exercise your career. Well, as part of that, we developed what has now been validated as a world class platform, technology platform. And so some of the wins and in fact, we've even gotten into career transition services.

Some of those wins are actually due to our fabulous team in the KF Advanced Advance business and the platform that we've built. But the other reason is that some of those wins have been from, marquee and regional accounts where we've been had a dedicated effort for many quarters. And so I think clearly when I look at some of the marquee wins from marquee accounts. Bob I don't know if there's any data that you happen to have at your fingertips.

Speaker 2

Yeah. Yeah. So, Mark, just so if you go back to where we finished last year, the the marketing and regional accounts were about 32, 33% of our our total revenue. You know as Gary just alluded to the program we put in place with account leaders, account managers. Again, it was demonstrating that our strategy is paying off with the larger engagements.

The first quarter, the marquee and regional accounts was about the same as where we ended last year. But with the larger, the change that we're seeing in larger engagements, we absolutely expect that group of accounts to grow as a percentage of our total revenue over the next couple of years.

Speaker 5

Okay, that's certainly encouraging. And then I guess the final question for me is and you touched on this a little bit as far as the potential of acquisitions, but I guess maybe I can maybe ask it a slightly different way. Are there any pieces that you look at now that you feel as though would be that Korn Ferry is missing or things that you would like to enhance? I know you've talked about enhancing the digital and recurring revenue streams and things. But I was wondering if there are any observations over the last few months that has made any shifts in some of the overall acquisition wish list?

Thanks.

Speaker 1

The organizational strategy and learning and development clearly are big pieces and as you said, the digital aspect of that. If you look at our research, it would suggest is that for, number one, the number one predictor of success is learning agility. But on top of that, for people to actually even find their potential, let alone exceed it, people need opportunity. In our research, whether it's on female leaders, black leaders, across the board, you have to have opportunity. You have to have mentorship.

You have to have sponsorship and there needs to be development. So we believe that learning and development albeit it's gonna be delivered completely differently at least for the next few years, that's a place that is sustaining and where Korn Ferry wants to help people exceed their potential for sure. So I'd point to those two. Obviously we have some other lenses but that would probably be the biggest.

Speaker 0

I would now like to turn the conference call back over to Mr. Bernison for any closing remarks.

Speaker 1

Okay, well listen I thank you everybody for joining us. Clearly the first quarter headline numbers were not spectacular, but the good news is that the company is positioned to accelerate through the turn. More importantly, when you look at the new business, it's clearly encouraging. So our business in essence is to enable people and organizations to exceed their potential and I think this company is better positioned than it's ever been. So with that, thank you very much for your time.

Have a good rest of your day. Thank you.

Speaker 0

Ladies and gentlemen, today's conference call will be available for replay for one week starting today at 3PM Eastern Time running through the day, September 10, ending at midnight. You may access the AT and T executive playback service by dialing (866) 207-1041 and entering the access code 2407985. And our international participants may dial (402) 970-0847. And once again, using the access code 2407985. Additionally, the replay will be available for playback at the company's website, www.cornferry.com in the investor relations section.

Ladies and gentlemen, we like to thank you for your attendance in today's quarterly meeting and thank you for using the service. Have a wonderful day. You may now disconnect.