Korn Ferry - Earnings Call - Q2 2021
November 23, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry Second 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 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'll be reviewing with you today.
Before I turn the call over to your host, Mr. Gary Burnison, please 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 periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year twenty twenty and the company's soon to be filed quarterly report for the quarter ended 10/31/2020. Also, 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'll turn the call over to Mr. Bernderson.
Please go ahead, sir.
Speaker 1
Okay. Thank you, Greg, and good afternoon or good morning, and thanks for joining us. You know, this is the eleventh hour of the eleventh month of the year like no other, and the good news is that our business has rebounded dramatically. Revenue was up 27% sequentially to $435,000,000 and our earnings and profitability, they were both very good with $66,000,000 of adjusted EBITDA and a 15.2% adjusted EBITDA margin. I'm also pleased with the work we did to ensure a strong balance sheet and position of liquidity.
This has served us well, not only weathering the pandemic storm, but being able to invest back into the recovery that we've seen. You know, and I'd I'd attribute these results to what I'm calling the three r's. First, the action strategy solutions and messages we've taken have resonated in the marketplace. Secondly, our clients have responded. And third, our colleagues have been resilient through a year that none of us have experienced in our lifetimes.
Yeah. It's a testament to our strategy, but it's really about the resiliency of our colleagues across the globe. I couldn't be more proud. And while I'm pleased with the progress and the path we see ahead, there's no question that the magnitude of the humanitarian economic impact brought on by this pandemic will continue to permeate and shape the global landscape for quite some time. And as we've said since early March, I do believe there will be more change in the next two years than in the last ten years.
And that brings tremendous opportunity, real tangible opportunity for Korn Ferry. Almost every company on the planet is and will have to reimagine their business. Quite simply, different work needs to get done and work needs to get done differently. And to get work done differently, companies will need to rethink their organizational structure, roles, responsibilities, how they compensate, engage, and develop their workforce, let alone the top the type of agile talent they hire and how they hire talent in a virtual world, which will depend to a greater extent on assessment. And these are Korn Ferry's businesses, and that's real opportunity for our company.
As an organizational consulting firm, we enable people and organizations to exceed their potential. And to exceed potential, people need an abundance of opportunity, development, and sponsorship, which is foundational to our service offerings. We're also a firm that changes people's lives. As previously mentioned, I'm very proud to say we're launching Leadership U for Humanity, 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 include the executive leadership council, a preeminent organization whose mission is to develop and increase the number of successful black executives across the go globe.
Our goal is to take our expertise in IP and develop 1,000,000 new leaders from diverse backgrounds using our Korn Ferry Advance and Leadership U platforms. We'll also be offering this to all of our colleagues. We're also using this time of change as an opportunity to reimagine our business. For example, we're moving from analog to digital delivery of our assessment and learning business, which represents about 23% of the firm's revenue in f y twenty in a way that makes our IP more relevant and scalable. To give you some perspective on how far we've come, at the start of the pandemic, we flipped the switch almost overnight with nearly all of our assessment capability converting to a digital environment.
And on the recruiting side, we're further refining our platform processes such as AI, video, and technology. More and more, search will not simply about discovering or validating what someone has done, but finding out who they are. We have this capability to differentiate our strategy. And our strategy is absolutely taking hold, and we see that payout with our approach to clients as we create loyal, repeatable, sustaining relationship with clients of scale. And that's where we're moving our business.
That's our true north. We have about 300 marquee and regional accounts representing about 34% of global revenue, which we'd like to increase to 40% or so. As such, we'll continue to develop account leaders from within as well as hire from the outside. So forget the new normal. This is normal.
It's nearly nine months since the pandemic was declared. And as I've said before, it's not just a marathon, but an iron man triathlon of of endurance, agility, and change. And embracing this change, we absolutely can make tomorrow better than today. I truly feel we have the right strategy with the right people at the right time to accelerate through the turn. And as we enter 2021, we'll continue our strategic commitment to build the preeminent global organizational consultancy.
I look forward to what the new calendar year brings us. And before we take your questions, I'm joined by Bob Rozak and Greg Kovacek. And, Bob, I'll turn it over to you.
Speaker 2
Great. Thanks, Gary, and good morning and good afternoon. As Gary said, the rebound in our business has been tremendous. The sharp improvement in fee revenue in our fiscal second quarter is more than a result of improved global market conditions. In fact, it really attributed to the resilience of our diverse mix of product and service offerings, our disciplined client management activities, and the growing relevance our solutions have in today's business environment.
You know, coming through the last nine months of economic upheaval, we now have a number of proof points that our strategy is succeeding. The business we have today is less economically cyclical with the time to recovery shorter and the trajectory of our record recovery, even steeper. Our operating experience through the COVID nineteen recession thus far demonstrates a number of, important points. First, our more diversified business is clearly demonstrating greater resilience than in the great recession where fee revenue in the quarter immediately following the trough quarter was approximately 43% less than the prior peak quarter. For the current COVID nineteen recession, the the decline in fee revenue from the peak quarter to the quarter immediately following the trough is only 16%.
So you can see a very dramatic improvement. You're Gary mentioned our marquee and regional account programs. These are client relationships that continue to deliver less cyclical, more resilient revenue than the rest of our portfolio. And we achieved this result by actively managing the accounts with global account leaders who use a disciplined account management strategy. Through the first six months of fiscal twenty one, we saw our marketing and regional account fee revenue decline approximately 14% year over year, which compares favorably to the decline in the rest of our portfolio, which was down 23%.
In our digital business, we continue to see meaningful progress selling subscription based solutions. Our f y twenty one q two subscription based fee revenue was 22.7, million dollars, which was up 43 percent year over year and up 7% quarter sequential. Subscription based new business also improved in the second quarter reaching $29,000,000, which was up 39% year over year and 25% quarter sequential. While the shift to more subscription based fee revenue will have a short term negative impact on fee revenue growth, it clearly positions us with more durable fee revenue for the long term. In our consulting business, we continue to see success with our effort to capture larger engagements.
And that's, as you said in the past, those that are valued at 500,000 or more. These engagements provide us with an incrementally better visibility and a more durable stream of revenue. In f y twenty one, our q two consulting new business was, pretty steady with the prior year despite last year's number being an all time high, which included a single nonrecurring engagement of $12,000,000. And these large engagements are also driving a rapidly group, growing consulting backlog, which again enhances our revenue visibility and durability. And last, our RPO business continues to enjoy great success, especially as companies increasingly look to outsource and variabilize their cost base.
RPO new business in the second quarter was a $120,000,000, which is just shy of an all time high. So as I said when I started, we now have real proof points that our strategy is working. Now I'll turn to our quarterly results. In the second quarter, all of our business segments were up sharply from the trough of the first quarter with a significant improvement from the rate decline that we saw in the first quarter. For the second quarter of FY twenty one, our fee revenue was $435,000,000, which was up 91,000,000 or 27% sequentially and down only 12% measured year over year.
Fee revenue declines improved consecutively year over year each month of the quarter. On a quarter sequential basis, fee revenue in the second quarter for Exec Search was up 23%. RPO and Pro Search was up 25% with Pro Search being up 20% and RPO up 27%. Consulting was up 28% and digital was up 34%. More importantly, as fee revenue has improved, we've been able to drive higher earnings and profitability by leveraging the cost saving actions we recently put in place as well as the productivity and cost efficiencies resulting from our emerging digital and virtual delivery processes.
Adjusted EBITDA in the second quarter was up $56,000,000 sequentially to slightly over 66,000,000 with an adjusted EBITDA margin of 15.2%. Our adjusted fully diluted earnings per share were also up in the second quarter reaching 54¢, which was up 73¢ sequentially. Our balance sheet and liquidity remained very strong. At the end of the second quarter, cash and marketable securities totaled 774,000,000. When you exclude amounts reserved for deferred comp arrangements and for accrued bonuses, our investable cash balance at the end of the second quarter was approximately $458,000,000.
Finally, during the last couple of quarters, we have discussed a number of restructuring and cost saving initiatives designed to help the firm through the trough of the COVID nineteen crisis. Some of these cost saving actions, like salary cuts, were highlighted as being temporary in nature. It is important to note that based on our q two performance, we have in the second quarter made an accrual to pay all of our employees 100% of their salary for the second quarter. And therefore our cost structure in this quarter is fully loaded as it relates to current compensation expense. I will now turn the call over to Greg to review our operating segments in more detail.
Speaker 3
Thanks, Bob. Starting with our digital segment. Global fee revenue for KF Digital was 75,000,000 in the second quarter and up 34% sequentially and up approximately $9,300,000 or 14% year over year. The subscription and licensing component of KF Digital fee revenue in the second quarter was approximately $23,000,000, which was up 7% sequentially and up 7,000,000 or 43% year over year. Global new business in the second quarter for the digital segment was up approximately 17% year over year.
Adjusted EBITDA on the second quarter for KF Digital was up $15,100,000 sequentially to $23,100,000 with a 30.8% adjusted EBITDA margin. Now turning to consulting. In the second quarter, consulting generated $126,700,000 of fee revenue, which was up approximately 28% sequentially and down approximately 12% year over year. Demand for our consulting services continues to strengthen, enhanced by our growing virtual delivery capabilities. In particular, growth was strong in some of our virtually delivered solutions in leadership and professional development and assessment and succession, which were up sequentially 5338% respectively.
New business in the second quarter for our consulting services was also up sharply. In the second quarter, consulting new business was up approximately 17% sequentially with growth in North America, Europe, and APAC. Adjusted EBITDA for consulting in the second quarter was up $13,500,000 sequentially to $20,100,000 with an adjusted EBITDA margin of 15.9. RPO and Professional Search generated global fee revenue of $85,600,000 in the second quarter, which was up 25% sequentially and down 10% year over year. RPO fee revenue was up approximately 27% sequentially, and professional search fee revenue was up approximately 20% sequentially.
With regards to new business in the second quarter, professional search was up 9% sequentially, and RPO was awarded a near record $120,000,000 of new business consisting of 59,000,000 of renewals and extensions and $61,000,000 of new logo work. Adjusted EBITDA for RPO professional search in the second quarter was up approximately $7,800,000 sequentially to $13,800,000 with an adjusted EBITDA margin of 16.1%. Finally, for executive search, global fee revenue in the '21 was approximately $148,000,000, which was up approximately 23% sequentially with growth in every region. Sequentially, North America was up approximately 32%, while EMEA and APAC were up approximately 521% respectively. The total number of dedicated executive search consultants worldwide in the second quarter was 512, down 73 year over year and up two sequentially.
Annualized fee revenue production per consultant in the second quarter was $1,160,000, the number of new search assignments opened worldwide in the second quarter was 1,331, which was down approximately 15% year over year, but up 19% sequentially. Executive search also benefited from cost reductions, productivity enhancements, and streamlined virtual delivery processes in the second quarter as adjusted EBITDA grew approximately $20,000,000 sequentially to $28,200,000 with an adjusted EBITDA margin of 19.1%. Now we'll turn the call back over to Bob to discuss some of our recent monthly new business trends.
Speaker 2
Great. Thanks, Greg. Globally, our monthly new business trends continue to improve throughout the second quarter. Excluding new business awards for RPO, global new business in the second quarter measured year over year was down only approximately 7%, and that was from record high new business in the second quarter of fiscal twenty. With the year end holidays approaching both November and December, typically seasonally slower months for new new business.
However, on a month to date basis, what we're seeing in November is that it is in line with last month and last year. If our typical seasonal patterns hold this year, we would expect January to be our high month of new business in the quarter. Now approximately three months have passed since our last earnings call. And while advances have been made in the science, societal, and economic impacts of COVID nineteen, there remains significant uncertainty about the ultimate consequences. Now on the positive side, there have been several announcements regarding vaccines that have greater than ninety percent effectiveness.
In addition, the world has adopted new ways of working and interacting with substantial acceptance of business being conducted virtually. On the negative side, there are a number of unanswered questions regarding the capacity to manufacture the vaccines at scale as well as how they will be distributed and administered to the population at large. In addition, we're seeing governments reinstating lockdowns as the number of COVID nineteen cases and hospitalizations reach all time highs. The volatile and unprecedented nature of what we're currents currently experiencing combined with so many unanswered questions and ever changing data points does continue to cloud near term predictability of our business. So consistent with our approach for the prior three quarters, we will not issue any specific revenue or earnings guidance for the third quarter of FY twenty one.
Despite November new business, again, that is as of today in line with prior month and year ago levels, we would remind you that our third quarter is our seasonally low quarter due to time off around the year end holidays. Typically, what you would see is this sequential decline from our second to our third quarter has ranged sort of three to five percent. Ignoring any incremental impact from COVID, we would expect that pattern to be the same in the current year. However, what we're not able to determine, however, is if we if and and to what extent there will be any incremental impact from COVID nineteen, which potentially could have the effect of, exacerbating our typical sequential decline. That concludes our prepared remarks.
We would be glad to answer any questions you may have.
Speaker 0
Ladies and gentlemen, if you'd like to ask a question, please press one then zero on your telephone keypad. You may withdraw your question at any time by repeating the one zero command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Your first question comes from the line of George Peng from Goldman Sachs. Please go ahead.
Speaker 4
Hi, thanks. Good morning. Your digital business had a significant rebound in terms of new business, up 17% in fiscal 2Q. Can you elaborate on some of the trends operationally that you're seeing? Which specific areas within digital were strong and what types of customers took on most of the business within the quarter?
Speaker 1
Well, the customers were pretty broad based. As you as you know, the the digital business encompasses several different several different service offerings. Training and development is is a big piece of it. The other piece is compensation, and the third piece is around assessment and succession. There's a fourth piece around org strategy, but that's a that that's a much smaller piece of the business.
And so, you know, for several quarters, we've we've made a made a move that said we've got all this great IP, and how can we monetize that IP? And so I I think this is a continuation of the strategy to really change thousands of people's lives through through our IP. So, you know, that's what we've seen. The customer base was was pretty pretty broad based. Certainly, the professional development piece of it is has been driving a a fair share.
And, you know, that's a that's a big market. We look at the market opportunity for us at about $250,000,000,000. And when you look at that market, you start to to, you know, break it apart. Training and development is is an enormous piece of that. And so we've we've certainly made a move, over many, many quarters, but particularly since the pandemic started to move that business to, you know, virtual delivery.
And so when you look at the virtual instructor led delivery days, they're up, you know, 21% sequentially in the second quarter. So we did a 651 delivery days versus kinda 2,200 in q four. So we've we've shifted almost all of our training now is virtual. It's like 97%. Bob's got the exact numbers.
Now we're still off. We're still down in terms of delivery days about 27% from from q four. And I think you'll continue to see us eat into that. Now the third quarter will be a very tough compare because the a year ago, we had the impact of, the the Aspen acquisitions that we made. And those gave us tremendous capabilities around training and development, particularly around sales effectiveness.
So you'll definitely see in the third quarter
Speaker 2
a
Speaker 1
decline, but we had anticipated that. So I think it's all of those factors coming together.
Speaker 4
Got it. That's very helpful. And then just as a follow-up, your EBITDA margins in the quarter were not too far off from the levels seen last year, just moved down a little bit. As you begin to take on some of the costs as the costs come back with improving revenue trends, how do you expect incremental margins to perform in fiscal 3Q and beyond? Should we see something similar to 2Q, or would you expect some of the permanent cost savings that you talked about to have more of an impact as some of your variable costs start to come back?
How do you think about the the margin profile going forward?
Speaker 1
Well, I do think that, over time here, we we could be easily at a situation where our margins are actually better. And, we've you know, look. We've reimagined our own business, And I think part of that is reflective in in the results here. So when you look at that 15% margin, as Bob talked about, you know, in the in the great recession, one quarter out, our business was down. One quarter out from the trough.
Our business was down 43%. I think now it's down like 16%. So clearly, the strategy has absolutely played out. With respect to profitability, you could say the same thing. And so we definitely have plans around real estate.
That takes a much longer time to to actualize, but we're gonna continue to to move forward with a with a different real estate footprint. And I think people, you know, the the way people get work done, as we've talked about is is changing. And I think I think half of that's gonna be permanent. I I I really do. So in terms of the flow through, I mean, Bob can comment on on what we're targeting.
But I I I kinda think that, you know, as we used to look at flow through, you know, I don't know if it's a 25% or kinda flow through to to EBITDA. You know, I I think that's probably gonna hold true, there there could be some some upside to that. Bob, do you wanna comment further on that?
Speaker 2
Yeah. I would I would say that in the in the foreseeable future that our flow through is which is really, what we experienced in the second quarter was was, much higher than the 25% as we continue to, to see some of the efficiencies as well as people not traveling and so on. We will continue to see, you know, flow through at an accelerated rate. I would say, George, over the long haul, we're we're right now combing through. We, you know, have well over a 100 leases.
So we're combing through each of our office locations with a point of view in terms of, you know, the, you know, you know, reduction of our footprint. You know, we're looking at all the business development travel that we used to do and coming up with new policies and approaches to that. So I would say from a long term perspective, you you should expect a minimum of sort of a two percentage point increase in our long term profitability. Have more to say on that in the future as we conclude our analysis.
Speaker 4
Very helpful. Thank you.
Speaker 0
Your next question comes from the line of Sam Cuswell from William Blair. Please go ahead.
Speaker 5
Hey guys, am I coming through all right? Great. Excellent. I was hoping you could help characterize how much of the sequential increase in revenue was due to pent up demand versus general strength in the market. Trying to understand how we should be thinking about the strength in this quarter as we model out the rest of the year here.
Thanks.
Speaker 1
Well, I, you know, I, you know, pent up demand is always this phrase that I don't know what the hell it really you know, what it really means. I I I I look at the results and and say, number one, you know, years ago, we went down this strategy of, how can we have greater impact with clients? How can we have reasons to broaden the conversation? How can we take our IP and change thousands of people's lives? And and what you're seeing in the the results is exactly the strategy playing out.
And and what you see is that parts of the business are substantially less cyclical than other parts. And so when I look at the, you know, just trailing four months of of new business, overall, it's it's down 4% as a company, platform wide. But when you look at that, you'd find that the the pro search business has been probably the most cyclical. It was down 21% in terms of new business. Executive search less cyclical than pro search down 17.
RPO is actually up. It's up 1%. Consulting's up 5%, and digital is up 11%. So I think I think first, you're seeing the strategy play out. And as as we've indicated, to see one quarter out of the trough, the business reacting completely differently than the great recession is very encouraging.
And I think that's more than pent up demand. I I think it really has to do with, number one, the resiliency of our colleagues. I I can't say enough about, what our colleagues have have done. I think the the messages, the solutions, you know, the actions we've taken, have resonated in the marketplace. I would point to, for example, our DNI consulting business.
I mean, that's now almost on an annual run rate basis. It's almost a nine digit business. You know? And I I attribute that to the quality of the people we have, the solutions, and the very strong stance, we've taken, with respect to to DNI. I think the other piece is that, you know, whenever you go through transformation, there's always a period of pause.
There's a period of reflection. There's a period of neutrality. And I think what you're seeing is that is that companies are some faster than others, have moved from defense to offense. And I think that's also, played a a pretty big part in the business. I think our marquee and regional accounts, the fact that they've outperformed the portfolio is, again, a testament to to the strategy.
And so I I think all of those things working together, explain, explain the results. So I'm I'm incredibly encouraged, by by what we've seen.
Speaker 5
That's helpful, and kind of unrelated, I guess. You've spoken about the desire to increase the number of large engagements as a percentage of revenue mix. I'm wondering what type of projects tend to form those larger engagements? And then can you share what the margin profile and project length they tend to have?
Speaker 1
Could you repeat the first part of the question? I'm sorry. I missed the first words.
Speaker 5
Yeah. You've spoken about the desire to increase the number of large engagements as a percentage of revenue.
Speaker 1
Yeah. Yeah. Yeah. Thanks for the question. It's it's, a a couple fold.
I mean, one is around, organizational transformation. And then, again, it's a theme around companies moving towards offense and, you know, different work needs to get done and work needs to get done differently. So how an organization gets things done, which is really the the definition of culture, That's certainly been a driver. The other piece is helping companies go from analog to digital. That's probably the second driver.
And the third driver is around career transition services where, you know, some time ago, we started a a b to c business called Korn Ferry Advance, and we've put a 100,000 people through that using our IP, trying to be the world's gymnasium for people to exercise their careers. And we've we've really taken that platform, and we've been able to have a bigger impact, with companies. One is around career transition. So as companies look to to, you know, reconfigure their workforce, how they do that going from analog to digital as well as how they take care of their employees and even if they have to make tough decisions. That's played a role as well.
And so those those large engagements fall along those lines, as as well as DNI.
Speaker 5
Thanks for your color, Meyer.
Speaker 0
Your next question comes from the line of Toby Summer from Truist Securities. Please go ahead.
Speaker 6
Thank you. It sounds like you made good progress in digital and moving towards, virtual delivery. How would you characterize progress in moving towards more recurring, business models? And any kind of update on what your goals may be over the longer term would be helpful. Thanks.
Speaker 1
Well, you know, the RPO business has turned out to be, you know, you could say a recurring business model. The contracts are long. They're multiyear contracts. We this last quarter, Bob could certainly provide the the detail, but we we had a combination of renewals, which is just a great sign, as well as new logos. And so, you know, we we've seen that business, as Bob said.
I mean, this this last quarter in terms of new business was, I think, it was the second highest quarter, almost tied our highest quarter ever. So you could look at that and say, That that's really good. And and, you know, even on the on the consulting side and and and digital, digital clearly has a reoccurring business model. There's no question. And Bob talked about the percentage of subscription based revenue there.
That that clearly has been working. And consulting, you know, that I'm just, I'm very, very pleased with what we've done with our consulting business and and to see, you know, to see new business, you know, being up, in this difficult time just takes trailing four months, seeing it up 5%. So I I think it's I think it's those as well as, you know, the focus that we've had for now quite some time around what we would say, you know, house accounts, marquee, and regional accounts. There's about 300 accounts, and we have dedicated account leaders on those accounts. Typically, an account leader only has two, or three maybe accounts that they that they lead.
And I think that, you know, that intimacy that we're creating with clients creates that that platform for recurring revenue. And when I look at some of the big engagements that we have, we've won, many of those, are coming from our marquee and regional accounts. So when you, you know, you look at any world class professional services organization, you'd find that about 40% or so, you know, it's gonna vary a little bit, but 40% would be from proactive, you know, loyal, repeatable clients of scale. And that, along with our IP, is really the bedrock, the foundation to the strategy. And I I think it's it's those it's all of those pieces.
Speaker 6
Okay. You know, shifted. Are those take or pay contracts, or do those modulate down as customers' demand declines? For the Yeah.
Speaker 2
Go ahead, Garrett. I'm sorry. No. Go ahead. I'm sorry.
Yeah. I think I think most of them, Toby, have some modulation, you know, depending on what customers see the same with our our RPO contracts. And, you know, we kinda as we've talked about this over time, if you look at, like, an executive search, we we often refer to that as a light switch. It's either on or off versus RPO. It's more like a dimmer switch.
So somebody could sign up to do, you know, 10,000 hires a year, and then you go through a a challenging time, and they may dial that back to, you know, six or seven or or 8,000 hires that year. But they're still gonna be doing some hiring, and I would say most of our consulting business is of that nature. You know, one of things I I took a look at as we were, you know, preparing for the call, looked at the new business by client last year versus this year because as I said on the, you know, consulting side, it was a extremely challenging compare, but we were, you know, essentially flat year over year, which in this environment is is really good. And I, yeah, I looked at the clients, and it was, you know, last year versus this year, it was kind of a mirror image of each other. So I I would say that the the recurring nature of what we have, you know, as Gary was indicating by client, you know, we're doing business with the same clients year in and year out.
So I think it's it's, you know, it's actually pretty high.
Speaker 6
Okay. Just a last one follow-up on this one and then go to another question. Within digital, how much is genuinely recurring, you know, as defined by accounting norms so that you could kinda count a hard backlog as opposed to a soft backlog, which we characterize most of the other business?
Speaker 2
Yeah. That would be the the subscriptions and licenses. So we had almost $23,000,000 of revenue in the quarter for that business. And, again, that was if you remember from the remarks that we had, like, $29,000,000 of new business, which was, you know, up, you know, 40% year over year in in quarter sequential. So we're seeing that the subscription and license new business really getting getting traction.
Speaker 6
Perfect. Switching gears, if I could ask a question about the acquisition strategy because in the context of what seemed to be prospects for higher margins over the longer term, it it does this inform and kind of shape your future acquisition strategy? Because if the company is really able to get to a high teens EBITDA margin, then, you know, acquiring inefficient businesses with, you know, mid or high single digit EBITDA margin even with cost cutting could end up being dilutive. So I was wondering if your kind of target profile needs to change as a result.
Speaker 1
Well, you certainly raise, a very interesting point, Toby. I I think that, I I would tend to look at it from a client perspective and without regard necessarily to the margin. Obviously, the margin clearly plays a role. There's no question about it. What what's gonna be also meaningful is the return on capital.
And, you know, that's certainly gonna be a measure that we're gonna look at, which which does go hand in hand, obviously, with the margin and then the the the the purchase price. But, you know, I I think we are at the very beginning. I I really believe we're creating here a multibillion dollar organizational consultancy that's unique. That is that is, I I think we're the only ones pursuing, this endeavor of not only strategy, but how do you synchronize a strategy with your talent and an organization. So I think what we've seen here over the last several months is that if you can have loyal, repeatable clients and you you can put a focus on those and you have quality solutions, we, you know, we'll create a firm that that has bigger impact.
And and that's really what we're trying to do. At the end of the day, the why for us is to change people's lives, is to enable people in organizations to exceed their potential. And so, you know, regardless of margin, if we see that there are solutions and capabilities that give us the ability to change more people's lives, we're gonna be extremely interested in that. Now the other thing I would say is the the I don't use this word, really, the the cross sales. But, you know, the amount of the top line that comes from introductions across business lines is really impressive.
I mean, when you look at the the this last quarter and you look at the the total revenue, you'd find that about, you know, 25% of the top line is driven, by by cross referrals. And for some parts of the business, it's substantially higher than that. And for other parts, it's lower. So I I think that the that the the theory and the strategy is very much playing out that if, you know, if you can anchor yourself around proactive, loyal, sustaining clients of scale, you can you can bring quality solutions. I think we've demonstrated that we can actually have bigger impact.
In other words, we can cross sell, which I don't particularly like that word, but, you know, we we can have big bigger impact with clients.
Speaker 2
Expect to speak elaborate on that point. If you go back to fiscal twenty eighteen, you know, that number was 14 and a half percent. So we've taken it, you know, over the past two or three years from 14 and a half percent up to the 25% that you just referenced.
Speaker 6
Let's speak a numerical question, and then I have to another one. Slip two more, and I'll get back in the queue. When you said margins could be higher potentially over the long term, should we think of a comparable improvement in free cash flow? So should the sort of EBITDA conversion rules stay intact? And then how do you think about the company's real strong sequential improvement in the third quarter and parse out what is sort of a unnaturally very rapid economic rebound in the quarter after the, you know, the nadir of a recession, which differs from the 2009 period, which is kind of a longer slog.
How do you parse out sort of the economic macro impact and then the diversification that you cited in your prepared remarks?
Speaker 1
Bob, you wanna take that?
Speaker 2
Yeah. So on the, I would say, Toby, on the the free cash flow, we would expect I think historically, we've been in the 75% range, and and we would expect to continue right, you know, right around that right around that level, I think. You know, one the things that we're doing now is we've we've tamped down our capital spending, you know, through as we're going through the, you know, the the downturn. And that'll, you know, that'll have to write back up again, you know, so we can, you know, continue to drive the digital business and investments that we've made into that business over time. But I would expect the the I would the free cash flow to be, you know, in the 75% range of of our EBITDA.
I would expect that to continue. And then in the third quarter, I guess, you know, we're what we're seeing right now, as said in the remarks, is, you know, the new business is essentially in line with with October and last year, which obviously were were were strong. And we would expect absent any, you know, real negative impact from, you know, the lockdown activity that we would, you know, go back to our sort of our typical pattern of being down three to 5%. What we don't know is what the impact of that is, you know, the the potential lockdowns or what that could have on us. And then we would, you know, over, you know, quarters that that we'd expect over time to get back to, you know, once once businesses, you know, we have the vaccines in place and business back to usual, then, you know, we would expect there to be probably a a more, rapid recovery than what we saw in the great recession, back to normal levels.
Speaker 6
Right. I I was really referring to the third quarter comments about how quickly the business bounced back. It's been sort of, evidence of the diversification working, but the economic backdrop, you know, as a as a whole rebounded very quickly. So how do you tease out the company specific, the business model attributes of the firm as being more resilient versus the economy just improving a lot?
Speaker 2
Yeah. When we were making those comments, they were more relative to the second quarter. That's why I got confused on your question.
Speaker 6
Oh, sorry. My my bad. I was confused in the calendar and fiscal. I was referring to two q. I apologize for that.
Yeah.
Speaker 2
Well, listen. It it I mean, it's hard to to pinpoint exactly what's driving it. I guess as we step back and, you know, each recession obviously is different. We step back and look at, you know, our performance coming through this recession, you know, and you look at the, you know, five or six proof points that we have, we believe that that demonstrates the,
Speaker 1
you
Speaker 2
know, the resilience, the durability, and the impact of, you know, us diversifying this business as we we've talked in the past. And one of the things, you know, when we've when we've chatted or you've heard us talk to investors, you know, everybody that we talked to would indicate, yeah, what you're what you're saying makes sense. But until we see you come through the next the next downturn, it's really hard to give you credit, you know, for what you're suggesting and and, you know, coming through this. I think, again, I think we've demonstrated that all those proof points are are now in place. And, you know, it is really hard to to pull apart and say exactly what contributes, you know, to to what we're seeing.
But, you know, our performance in the quarter, we think, substantiates those proof points.
Speaker 6
Thank you.
Speaker 0
Your next question comes from the line of Kevin McVeigh from Credit Suisse. Please go ahead.
Speaker 7
Great. Thanks so much for slotting slotting in here. Gary or Bob or Greg, any sense of kind of the type of engagements that that from a c level perspective, more people are focused? Is it tend to be more kind of revenue generated, expense management, or just IT? Just any thoughts as you think about just the scope of talented people that are looking for?
Speaker 1
Well, part of it is clearly, I I I don't know if I would say expense driven, but it's certainly of a humanitarian nature where companies, you know, you ask five people the definition of culture and you'll get 10 different answers. For us, it's the way an organization gets things done. And and I and there's certainly a piece of this that, has been driven by by companies looking at the way they are getting work done and then what they do with their employees. So so part of it could be around what we call career transition services. That that would be a piece where they're looking, where they're having to make adjustments to their workforce, and they wanna be compassionate around how they do that.
And, we offer our KF Advance, essentially, our KF Advance platform. That that's a piece of it. Another is around organizational transformation. That that is that certainly has been driving it. And what goes with that is is what I've said for a couple calls now that at some point, companies would be moving from defense to offense, and that that has certainly played out.
The analog to digital is is clearly another thing that's that's driven the business. We haven't seen much yet on m and a, but we do have world class m and a services. We'll see if that picks up here in in 2021. That could be a a huge opportunity for us. But it but it's really those types of engagements.
So then the final piece is around, DNI. And, you know, it was about, eight years ago, we made an investment in, what I believe to be at that time, the absolute preeminent DNI consulting business in the world. And and we've taken that that business, which at that time was a really very low, eight digit business. And over a series of years, we've continued to build on that. And then, you know, after the pandemic and with with the, the recognition of of changes, you know, societal changes that needed to be made, and then the positions that we have taken in the marketplace and the resiliency of our colleagues, that certainly has played, a role as well.
And I think when you look at the when you look at if I turn now to the recruitment side, you know, there was a period of time where where the world paused. I I do believe that, there's gonna be probably as much c c suite change, happening over the next few quarters than we've seen in many, many years. And that could be because executives said, well, you know, that as they've reflected and paused, maybe they wanna to do something else. Maybe it's because that, as a board looks at a company's strategy, they they wanna take it in a different direction. But I would expect that to to actually increase over the next few, months and quarters.
Speaker 7
That's super helpful. And then just real quick on yeah, any thoughts as to just what it would take to restore the guidance? Is there anything you're looking for, particularly carrier Popper? Is it just a just a little little word?
Speaker 1
Well, we look. You know? I yeah. No. I thank you.
You know, I think, you know, we tend to be, further you know, rather conservative in our in our thinking. And what what gives us pause is is what we're seeing. You know, look, we said this was gonna be an iron man. At the very beginning, we said this was gonna be eighteen to twenty four months. I had publicly said I thought a vaccine would be widely, you know, available in The US kind of in October.
I'm not a scientist, but it it certainly seems like that is the way things are headed. Maybe it could be sooner. You know? But, you know, clearly, the the lockdowns that we've seen, in Europe and in in different cities in The US has given us pause. And we, you know, we wanna be we wanna be prudent, about it.
I I do think though that and you see it unfortunately, you know, the the level of cases is staggering. It's absolutely staggering, you know, two hundred thousand cases a day, you know. It it's amazing how you hear that number and your psychological reaction is so different than it was eight months ago when we were talking about, you know, thirty, forty, fifty thousand cases. I mean, I I think the psyche has changed, and I think that same psyche holds true for business. You know, this this will not be our first rodeo through this through this pandemic.
And so I I do believe that as hard as it is, people, are incorporating this bizarre reality into their psyche, which which is reality. Right? So I I I I would not expect, the world to to pause. I just I I I really don't see that. But at the same time, we're we're just trying to be prudent with all of our constituencies, not only our shareholders, but also our colleagues and our and our clients.
And so, you know, it's these it's these kind of, you know, incremental lockdowns, that give us a little bit of pause.
Speaker 7
Super helpful. Thanks so much, Gary.
Speaker 0
Your next question comes from the line of Mark Marcon from Baird. Please go ahead.
Speaker 5
Hey, good morning.
Speaker 6
Wondering if you could talk a little bit about, Gary, how you're approaching just investing in the business when we think about your consultant headcount and the types of people that you're hiring. Historically, as a time to, you know, play defense, but also to play offense and upscale the talent. So I'm wondering if you can just give us a little bit of a feel in terms of how you're approaching the next, you know, six to nine months.
Speaker 1
You know, we had a handful when this thing broke out. You know, we had a contingency playbook that we pulled out a year ago. And when it broke out, we you know, there are a handful of things that we said we wanted to accomplish. One of it was to continue to to grow from within and use our own IP on our colleagues for sponsorship and mentorship and development. The other was to look to the outside.
And you don't see it in the numbers yet, because of, you know, garden leaves and the like, but we've been very aggressive, in the marketplace with, looking looking at talent, and that would encompass, the entire platform. And we've been out, looking at account leaders. We've been out looking and hiring consulting talent, digital talent, and recruiters. And so you don't see that fully in the numbers, but we've been very aggressive, Mark.
Speaker 6
Okay. Great. And then with with regards to what are your clients
Speaker 1
telling you now? I mean, I'm I'm sure you have
Speaker 6
high level conversations with regards to how they're approaching, you know, this this platform. How how what what sort of pace would you expect to see in terms of the business coming back? And once we have a a vaccine, how how quickly do you think things rebound at that point?
Speaker 1
I think that as I talked to CEOs, and it was in my prepared remarks, you know, there was this thing around, you know, the, you know, the new normal. Well, you know, forget it. This kind of is normal. And I think that I think that sentiment more than any has started to to really, you know, hold true in in people's minds. As as tough as it is, I think that there is a growing acceptance and an incorporation that that this is reality.
For us, you know, we've seen a pretty big increase sequentially when I look at the industries, kind of across the board. Actually, even consumer was the highest performing. But I think when you look at the portfolio today, the industrial piece and the consumer piece are are still behind, where they, you know, where they were, if you will. And, you know, we need to see those come back, and undoubtedly, they they will come back. So barring any kind of, you know, national or countrywide lockdowns and assuming continued government stimulus, I'm I'm pretty optimistic, you know, and even with the political changes in The US.
I I stand pretty optimistically that companies are making the pivot to offense. And they're saying, wow. The world has really changed. Different work needs to get done. It needs to get done differently.
And how do we do that? And that's essentially the business that we're in. So I'm Mark, I'm probably as I sit here today, I'm I'm certainly more optimistic than I was six months ago.
Speaker 6
Great to hear, Gary. Are are you seeing any clients that are pulling back just with the recent spike in terms of No.
Speaker 1
No.
Speaker 2
That's No.
Speaker 1
Now now, again, you know, again, this is whatever November 23. Okay? So but as of this moment, for November, what we've seen in in new business and what we've seen in existing mandates, is very much a a continuation. Now November and December, I'm not expecting great things. I think that a lot of people are going to really unplug, you know, particularly in December.
So I just think by by the the seasonal nature of where we are, I do believe you're gonna find that the delivery days, the consulting days are gonna be actually down maybe even more than what we've experienced, historically. And as I indicated on the digital side, there will be a tough compare in the third quarter even with the increase that we've seen in the new business. Reality is that the the virtual instructor led delivery days, you know, it's still off about 27%. So we've made this enormous improvement, you know, converting essentially, you know, almost a 100% of our training to to virtual delivery to this quarter doing, you know, 1,651 delivery days. I mean, we're still off.
And so I think you will we'll see that in in the third quarter for sure. But, again, I'm I'm optimistic.
Speaker 2
Great.
Speaker 0
Your next question comes from the line of Mark Riddick from Sidoti. Please go ahead.
Speaker 6
Hi, good afternoon.
Speaker 2
Hey, Mark. Hey, Mark.
Speaker 8
First of all, I wanna thank you for all the the the commentary and color that you've provided. I I wanna ask specifically about those who have made that switch from defense to offense. I was wondering if you could talk a little bit about what that means for you in dealing with them and working with them going forward because I wanted to get a sense of does that then provide maybe greater insights as to maybe their short and longer term plans, future visibility, things like that? Was wondering if you could talk about that a little bit.
Speaker 1
Well, I think overall, I don't wanna don't wanna sound like like like a broken record, but but there certainly is, you know, a a couple broad themes around, you know, an organization and what it looks like. And that is playing out. You know, how do you onboard people virtually? How do you train people virtually? How do you move your business from analog to digital?
Those types of engagements clearly have been have been playing out, as as well as the as well as the DNI side. So I I think that, again, people have pivoted, and they're looking at what their organization is gonna look like in 2022, not only 2021. And and what does that mean? What type of talent do they need? You know, I you know, a year ago, if you would have asked me, would would somebody hire, an executive, a CEO, or even a board member without physically meeting them, I would have said you're crazy.
And but the reality is that's actually what's happening. And and the good news for all of us is that, unfortunately, as human beings, we're very biased. And we sometimes make wrong decisions within the first seven seconds of meeting somebody. So the IP that we have around who somebody is, as opposed to what they've done, I think is really playing out in the in the marketplace. And, you know, we're seeing that today where I I just wouldn't have guessed it.
I wouldn't have guessed it a year ago. And I think there's just so many examples of that playing out through the corporate world where, you know, somebody took a trip and, man, you did you really have to take that trip? And so although the, you know, the Microsoft Teams and the Zoom is not the most intimate for sure, and it can be quite isolating for for all of us. I think there is a recognition that when we get into 2022, later part of 2021, I think that half of the stuff that we used to do just won't be done. I I just I I don't see it.
I think there's gonna be a a real change. And so we've we've definitely you know, we've certainly seen that, you know, over the last several weeks.
Speaker 8
That that that's really helpful. And then I guess the last one for me. For for those who have, moved into the the offensive camp, is there any, differences that you're seeing from a regional standpoint? I mean, obviously, different parts of the world have experienced COVID in different ways and different slightly different timing, but I was wondering if you're seeing any difference in that pace of shifting from defense to offense? Thank you.
Speaker 1
Well, I think in North America look. North America has outperformed. There's there's no question about it. When when you look at the trailing four months new business across the entire Korn Ferry platform, it's up 7% in North America. Where whereas if you look at EMEA and Asia Pacific, those are gonna be down, you know, 13%, 10%, you know, in in that ballpark trailing four months and just new business.
So, that there's no question that at least for Korn Ferry, and I think Korn Ferry is a good reflective of the economy that that North America has been has been very, very agile. Part of that has to do with, I think, the the the the laws and the ability to make changes. But that that piece of the business has certainly been heartening to see. And I'm not by that, I'm not suggesting that companies in EMEA and Asia haven't made those moves because they certainly have. But the North American business for us, has been a shining star.
And when you look at the company overall, you know, the the last two quarters before COVID, we were doing about 560,000,000 of new business. This last quarter, we did 560,000,000 in new business. So what we've seen I hate to use alphabets. I think it's so ridiculous, but we have seen a v. I mean, you just you you can't deny it.
And when you look at that v, certainly, the entire platform has benefited, but North America has certainly, outperformed, by far.
Speaker 8
Thank thank you for that. And then the last thing for me, was sort of thinking about going back to, you know, 2008 or whatever, going you know, living through that. One of the things I recall is that a lot of the c suite leaders who who maybe had thought about retiring or or or making changes and things like that really kinda hung in there until they had gotten to the other side of of the the greatest of difficulties, and then you saw a pickup of of c suite moves. Are are you getting a sense that there might be going back to the the pent up term, I'm not sure if that's the best way to put it, but if are you getting a sense that there are those who may be ready to move on once we get to the other side of of the the challenges of of this pandemic. Thank you.
Speaker 1
Yeah. Yes. Yeah. Yeah. I was talking to a CNR long ago, and he you know, this person had said that, you know, they thought they they would hang in for you know?
But before COVID, it was several years. And then even as recently as as a few weeks ago, they thought they'd hang in for a year, and then that that has changed. So I think what this has done is people have again, there's been a period of pause, a pause towards purpose, a pause towards reflection, a pause towards your real why as a human being. And I and I believe that to be the case. Yes.
We have certainly we've seen that. The other thing we've seen is and, again, it may be rather intuitive, but just the amount of people that have moved, like, just have relocated and because they can kinda do their job anywhere. So, yeah, we've certainly seen those those beginning signs, and I would expect that that kind of c suite turnover is going to stay pretty high, over the next several months and quarters. Do.
Speaker 8
It's really helpful. Thank you very much.
Speaker 0
And at this time, there are no further questions. I'd like to turn the call back to Gary Burnison for any closing remarks.
Speaker 1
Okay, Greg. You know, it was, I think about a week ago, somebody said to me, happy Thanksgiving, and I was a little jarred. I was jarred by the comment because, you know, every you know, it's kinda blur's day. You know you know, the the months and the days have have run together, but, certainly, this is, you know, a special time of the year. I wish everybody a wonderful Thanksgiving in The United States.
Thank you for joining us, and we look forward to talking to you, next time. Thank you. Bye bye.
Speaker 0
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