Korn Ferry - Earnings Call - Q3 2020
March 10, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry Third Quarter Fiscal Year twenty twenty 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've also made available in the Investor Relations section of our website at kornferry.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 reports filed by the company with the SEC, including the company's annual report for fiscal year twenty nineteen and in the company's soon to be filed quarterly report for the quarter ended 01/31/2020. 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'll turn the call over to Mr. Bernison.
Please go ahead, Mr. Bernison.
Speaker 1
Okay. Thank you, David, and good afternoon, everybody. Thank you for joining us. I'm sure that you, like everybody around the world, has been captivated by this humanitarian crisis that we have with COVID-nineteen, and I'm certainly gonna comment about that. But I do think it's important to set the stage for our company today and the ability to navigate through uncertain times.
And clearly, there's no doubt about it, this is an uncertain time. So let me first comment on the quarter that finished at the January. We delivered 9% constant currency growth, $515,000,000 in fee revenue, solid profitability. I would say the quarter was very good. Our most recent acquisitions that we did have really added tremendous capability to us around learning and development.
And I think we've got the opportunity to take those acquisitions combined with our own IP and really tap a multibillion dollar long term market opportunity. The digital business, as we indicated a quarter ago, we thought it would be $100,000,000 for the quarter it was. That's up 61% at constant currency. But again, that's benefited by the recent acquisitions. But organically, it was up almost 4% at constant currency.
The foundation for this company's strategy has been knowledge. It has been IP. And whether that has been, organically developed or whether it's been through M and A, it's really I think we are the bellwether mark around being the experts on human and organizational performance. Every year, we develop and train nearly 1,000,000 professionals. We have rewards data on 20,000,000 people.
We've done 69,000,000 assessments. We've got thousands of organizational benchmark data. Every three minutes, each business hour, we put somebody in a new job. So I think when we definitely know what's the difference between great and good when it comes to organizational performance and the difference between good and great when it comes to individual roles. With that richness of our IP and our global capabilities, we believe there's an opportunity to create a $10,000,000,000 firm focused on the execution of a client strategy by optimizing its most powerful lever, which is its people and the organization that surrounds the people.
And so today, we've got a much more diversified and balanced firm. That would include almost a billion dollars in revenue coming from consulting and digital solutions. That alone is substantially bigger than our next executive search competitor. But when you look at those, the consulting and digital solutions, it really breaks down into four areas. One is organizational strategy.
Two, assessment and succession. Three, learning and development. And finally, rewards and benefits. So I think this diversification strategy, it's gonna ultimately provide the most important benefit of tapping larger addressable markets that I think are gonna have more potential, more durable and visible revenue streams. And for us, the ultimate goal is to have a bigger impact on clients and what really drives their performance.
So when you look at the data, the strategy is working. I would just point out that when you look at the results of our inside sales, or in other words, the percentage of revenue that's driven from referrals between lines of business, it's 24%. We certainly want to see it higher. But I think that's a demonstration that we're going to market as one, which we set as a goal now a couple years ago when we sunsetted a lot of the legacy brands that we have. So I believe we're redefining an industry.
I think we've got the right know how of science data solutions to help companies deliver superior performance. And so with that context, let me make a few comments about the coronavirus. Obviously at this point, the magnitude of the threat and the threat that it poses to both human health, which is the most important. And secondly, the global economy, it's unknown. And it's uncertain when there's gonna be meaningful control of this outbreak.
So this situation demands continued vigilance and preparation. So let me first comment on what we've done. The number one priority continues to be the health and safety of our colleagues. So we've put protocols in place, whether that's social distancing. We've established a corporate emergency team.
We've limited travel. We've limited internal meetings, office visitors. We've closed a selected number of offices. We have some employees working out working from home. And we are in daily communication with our colleagues.
That is by far my biggest priority. And as a CEO, I think that you know, it's not just a question of shareholders. It's a question of stakeholders. And stakeholders are comprised of your employees, your customers, and your shareholders. And I think as a CEO, you have to look at all three.
And so our our first priority has been our colleagues, and we're doing everything within our power to keep them safe. But when we look at our business, I'd also point out that many months ago, as I told you we would, we were going to take actions to position the company for the future. And those actions included the creation of a regional account program, the continuation of the marquee program, account program that we have, the one Korn Ferry activity that I referenced earlier, that we were gonna moderate our execution and support headcount, that we were gonna rebrand the KF Digital platform and start to create something that we could actually monetize our IP through a technology platform, that we were gonna orient our professional search towards knowledge based assignments, and that we were gonna strengthen our balance sheet. All of those things we've done, and we've continued with the aggressive recruiting of account leaders. So in spite of these actions, the uncertainty that the coronavirus has presented to all of us has clouded the near term predictability of our business.
And so even though February new business was solid, it was up 6% year over year, and we can certainly get into it in the call. Know, in recent weeks and days, we've seen selected governments and companies, they've implemented social distancing actions that are similar to ours. Either limiting travel, group face to face interaction. We've We've all seen that. These actions are unlike what you'd expect in a normal economic contraction.
In other words, you haven't seen across the board cost cutting along with job eliminations. And so these actions are different. And as we sit here today, the extent to which further incremental social distancing actions are put in place or additional authoritative bodies adopt such measures and for what time, those substantial unknowns. So the measures taken to date, they almost certainly will impact our business for the fiscal fourth quarter and potentially beyond. And so due to the rapidly changing situation is fluid, right?
So given that and combined with that creates a lack of visibility with respect to further actions to be taken, it's just too difficult for us to accurately assess and quantify the impact at this point. That's just the truth. Consequently, we're not gonna issue any specific revenue and earnings guidance, for our fourth quarter. And we're gonna reassess the suspension of our guidance once we're comfortable that this humanitarian crisis has passed. And I just point out kind of one other thing, and that is we always do contingency planning.
As part of that, we look back at what happened during the SARS outbreak in late two thousand and two through the midpoint of 02/2003. And I had just started with the company. When we look back at that time, and I'm not suggesting it's analogous, but I think it's helpful to look back in history, our global fee revenue was down about 9% over two quarters. Then once the crisis was contained, and that was about the middle of two thousand and three, fee revenue rebounded sharply. I mean, was a V.
In fact, what happened was that the revenue surpassed the peak, the immediately preceding pre epidemic quarter. So it was actually it was higher. And so it's difficult wanna if for us to predict if our business today is gonna react in a similar way to the current crisis. Because, hey, the world looks different. The Chinese economy is four times the size it was.
And there's no question, no question if you look how interdependent the world is today just by looking at the news. But more importantly, Korn Ferry is substantially different. And so back then we were $300,000,000 and today we're $2,000,000,000 Back then we kind of did just one thing. Now we do many things. We've increased the scale.
We've increased our financial position, we've enhanced our liquidity. I mean, there's absolutely no comparison of today's Korn Ferry to the 2002 Korn Ferry. So I think that significantly increased scale and the stronger financial position will allow us to withstand a near term revenue decline that's similar to what we experienced back in SARS and maintain a 10%, 11% adjusted EBITDA margin on a trailing 12 basis without taking any restructuring actions, by the way. But again, I think that coming back full circle, our overall priorities for our colleagues. And we are taking what I think is a balanced approach to this crisis, which is really anchored around three things.
One, safety. Two, caution. And three, agility. And that last part will be incredibly important. And I think we've positioned this company to be very, very agile.
So I think we've taken the steps. We've got a business that is in the people business, people drive organizations. And I'm probably more bullish today than I've been about the opportunity for Korn Ferry in the future. So I'm joined here by Bob and Greg, and so I'll turn it over to Bob. Great.
Thanks Gary, and
Speaker 2
good afternoon everyone. I'm gonna start with a few highlights. So in the third quarter, we reached another milestone as our quarterly fee revenue eclipsed the $500,000,000 mark for the first time in our history. Gary indicated earlier, our fee revenue in the third quarter was $515,000,000. That's up about 9.4% year over year at constant currency.
Growth in the quarter was driven primarily by our new KF Digital segment, which at $99,000,000 was up 37,000,000 or 61% year over year at constant currency, and RPO and Professional Search, which was up 12,000,000 or 17% year over year at constant currency. I'll talk a little bit about the integration of the recent acquisitions. That activity is on plan as are the cost savings associated with the rationalization of the combined cost base. In the third quarter, we recorded charges of about $21,000,000 for the elimination of redundant positions and facility rationalization. Our third quarter cost base reflected savings of about 6,000,000 And because those actions took place over the course of the quarter, some in fact happened in late January, we expect an additional savings of about 3,000,000 in the fourth quarter.
As previously disclosed and Gary talked about, we've now divided our legacy advisory segment into two components, KF Consulting and KF Digital. And the results of the recent acquisitions are reported within the new KF Digital segment. And Greg will provide some more details about that in his prepared remarks. We continue to execute on our policy of maintaining a balanced approach to capital allocation. For all of our fiscal year '20 through today, we have now repurchased about 2,100,000.0 shares using total cash of about $80,000,000 Currently, we have about $171,000,000 remaining on our authorization for share repurchases.
Additionally, today, our board declared a 10% per share dividend payable on 04/15/2020 to shareholders of record on 03/26/2020. And finally, I'll just comment that our balance sheet remains very strong. We have approximately $420,000,000 of investable cash at the end of the third quarter. I'm now gonna comment a little bit on new business trends. Globally, new business in the third quarter was up about $25,000,000 or about 5% at constant currency.
We're also continuing to see differences in the trends of new business within our lines of business. If you look at what Executive Search did in the third quarter, that business was down 6% year over year. However, our our professional search business on a global basis, their new business was up about 20%. So again, we continue to see data points, as we've talked in the past, that the diversification in the business is really starting to take hold. In the third quarter, RPO was awarded $58,000,000 of new business, consisting of $32,000,000 of new clients, we call new logos, and 26,000,000 of extensions and renewals with existing clients.
Our consulting new business in the third quarter was up 2% year over year led by North America, which was at a very strong quarter, up 9% year over year. And then finally, excluding recent acquisitions, the digital new business was up 9% year over year constant currency and that was also driven by North America, which saw a 21% increase year over year. And finally, adjusted diluted earnings per share in the third quarter was $0.75 down about $06 or 7% year over year driven in part by the change in our revenue mix, a little bit higher net interest expense and a higher effective tax rate, which was about 26.5% in the quarter compared to 25% in the third quarter of fiscal twenty nineteen. I'm now going to turn the call over to Greg to review our operating segments in a little
Speaker 3
bit more detail. Thanks, Bob. Starting with our new digital segment. Global fee revenue for KF Digital was $99,000,000 in the third quarter and up approximately $37,000,000 year over year, driven primarily by our recent acquisition. The subscription licensing component of KF Digital revenue in the third quarter was approximately $21,000,000 which was up $7,000,000 year over year.
Adjusted EBITDA in the third quarter for the Digital segment was $25,900,000 with a 26% adjusted EBITDA margin. Now turning to Consulting. In the third quarter, Consulting generated $141,000,000 of fee revenue, which was up approximately 2% year over year at constant currency. Consulting fee revenue growth was strongest in North America, which is up approximately 6% year over year. Adjusted EBITDA for consulting in the third quarter was $18,700,000 which was up $1,700,000 or 10% year over year.
Adjusted EBITDA margin was 13.3 in the third quarter, which was up 110 basis points year over year. RPO and Professional Search generated global fee revenue of $92,000,000 in the third quarter, which was up approximately 17% year over year at constant currency. All geographic regions grew in the third quarter. By component, professional search was up approximately 9% year over year and RPO was up approximately 20%. Earnings and profitability for RPO and professional search continued to scale in the third quarter.
EBITDA in the third quarter was $15,200,000 up $2,100,000 or 16% year over year, and EBITDA margin improved to 16.6%. Finally, Executive Search, global fee revenue in the 2020 was approximately $183,000,000 which compared year over year and measured at constant currency was down approximately 4.6%. The total number of dedicated executive search consultants worldwide at the end of the third quarter was five eighty two, up 30 year over year and essentially flat sequentially. Annualized fee revenue production per consultant in the third quarter was $1,260,000 and the number of new search assignments opened worldwide in the third quarter was 1,565, which is down approximately 3% year over year. Adjusted EBITDA for Executive Search in the third quarter was approximately $41,000,000 with an adjusted EBITDA margin of 22.1%.
That concludes our prepared remarks, and we'd be glad to take your questions.
Speaker 1
Okay, David. We'll open it up for questions.
Speaker 0
Ladies and gentlemen, if you'd like to ask a question, please press 10 on your phone. You'll hear a tone indicated and placed in queue. You may remove yourself from the queue at any time by once again pressing 1 Please go ahead.
Speaker 4
Hi, thanks. Good afternoon. You indicated that your February new business is up 6% year over year. Can you break that down by business line and talk a little bit about the trends that you're seeing leading into early March?
Speaker 1
Daily life has come to a halt. It certainly appears if you are a human being on this planet. I would say that February new business was up constant currency 6%. That's benefited by our most recent acquisitions. So when you look at it on a same store sales basis, it'd probably be up about 2% or so.
Regionally, including the most recent acquisitions, I'll just do it by region. North America was up 7%. Asia was up 7%. Ironically, in February, China was up 17%. EMEA was down 3%.
Latin America was up six And search in North America was very good, in February. And, you know, look, it is just way too early to call, March, and and and you can't you can't take one data point. But, in the first few days and actual mileage may vary, but in the first few days in North America executive search, it's the best start we've had in months. And so I I think that you you just cannot you know, that is just one data point out of many, to consider what the world captivated by right now.
Speaker 4
Right. That makes sense. And just to follow-up on that, as it relates to the potential impact from the coronavirus, I know it is too early to tell, but can you talk about, how conversations with clients are progressing? Is it more of a push out? Is it an elongation of the sales cycle?
Or is it more of a contractionary tone where people are looking to reduce headcount? What kind of what's the tone that you're sensing?
Speaker 1
Too early to tell.
Speaker 4
Got it. Okay. Thank you.
Speaker 0
Our next question comes from the line of Tobey Sommer with SunTrust. Please go ahead.
Speaker 5
Thanks. If we could ask a few questions about the digital segment. How much of that segment is recurring? You know, I heard you correctly. I think you mentioned new business in North America was up, and if I'm right about that geographic comment.
But does that imply international was down? And if so, by how much?
Speaker 3
Yeah. I think I think, Toby, that related to consulting. You asked about digital. Right?
Speaker 5
Yeah. So maybe I'll stick with that. How much of it is recurring? And do you have any kind of wallet share kinda mart metrics you can share with us?
Speaker 2
Yeah. So if you look at the the deck we posted, Toby, we now started to present separately the license and subscription revenue. And that was in the quarter, it was $21,000,000. So roughly, out of the 100,000,000 or so, it's about 20%. And those represent engagement where people sign up to have access to either what we call our talent hub, which is where the assessments reside, the assessment science resides, and then the pay hub, which is where our pay data resides.
And they're generally, at a minimum one year contracts with, you know, could be two or three years. And associated with those contracts, then there's different service levels. I can't remember exactly if it's just like bronze, silver, gold, or something like that. And those, you know, have different levels of of interaction that we would have with the clients and and different fee levels associated with them. So is it So when you look
Speaker 1
at that Toby Toby Toby, when you look at the business, so, it's it's $400,000,000. That's what it was in the third quarter annualized. Right? Let me point out a couple things. The the recent acquisitions that we did, they have a little bit heavier weighting, in that quarter as we've come to understand that business.
So that that's number one. But but when you kind of look at that annualized number of 400,000,000, there's a 100,000,000 of it that essentially comes from pay. So companies you know, we've got paid data on, you know, 20,000 companies, over 20,000,000 people. So companies around the world license our IP around that. A substantial part of that is repeat, is they're coming in year in, year out.
They may come in for for different things, but very, very high high percentage of repeat. The next biggest piece that we really wanna grow, is learning and development. And so that would be, you know, that that would probably be, you know, call it a I'm just rounding numbers here. But, you know, a 150, $175,000,000, that also has a a relatively high return percentage, not quite as high as pay, but but pretty high. Then the remaining pieces are where people license our IP, could be around organizational strategy.
So how do you set up an organization, spans and layers, roles, responsibilities, job profiling, and then assessment succession. So what what Bob is talk we we wanna move that business as a whole so that it is much more looks like a SaaS business. And so today, when you look if you were to take a snapshot of that business, I think our our estimate would be for that for that quarter, for example, you know, about 21, 21, you know, 21% would fit that. We obviously want that to be higher, and and that's where we're trying to take that business.
Speaker 5
Great. And how how much higher and in what time frame?
Speaker 1
Well well, we definitely you know, I look. You you at least wanna double it. I mean, you know, we'd we'd love to make that 50% of the business. But, you know, we've we've been investing money now over several quarters to to make sure we've got the platform. Now we've you know, the real opportunity there, when you look for for Korn Ferry, you know, it's it's really around learning and development.
That that is a massive market. And and so, you know, with the recent capabilities that we've added, we we wanna add to that. So so the time frame, it's you know, that that that's gonna be hard for me to to pin down, particularly when people are worried about their own survival.
Speaker 5
Okay. Well, I'll I'll ask a question again, hopefully, when, when Corona isn't front and center. Yeah. What how much does the Miller Heiman acquisition expand your addressable market?
Speaker 1
It it it it expands it quite considerably. When when you look at it, you know, there's really there's there's two or three pieces we pick up. One is around sales professionals. The second is around project management, training capabilities, and the third is technical. And so in each in each of those, we did so so number one, our our leadership development business that we had before we did this acquisition.
So before we did it, we probably had about a 175,000,000. I'm just rounding. Okay? 175,000,000 or so of of leadership development. This adds what we said when we announced the deal.
It'll add, you know, a 120,000,000 of revenue in the quarter. It definitely contribute a little bit more than the 30,000,000 pro rata. So it's a $300,000,000 business. So before, you know, before we did these recent acquisitions, our leadership development was at the high end. I mean, it was it was teams.
It was individuals. What this does is open us up to where the substantial part of the market opportunity is, and that's around professionals. And and so, you know, let me just take one, you know, one one of the three that we just picked up as an example, sales professionals. I mean, just in The United States, there's probably, you know, 15,000,000 sales professionals. We we place thousands of sales professionals every year.
We have profiles of what great looks like for sales professionals. So we can combine there, you know, the the assessment of sales professionals, what you're trying to achieve organizationally to to the development. So that, you know, that does expand the addressable market.
Speaker 2
Yeah. And Toby, this is Bob. The other thing I would add to that is as as you think about the bringing all of our assets together, Gary mentioned a couple of times the various amounts of data that we have, which we then bring back into whatever solution is we're delivering to a client. And that data cuts across geographies, companies, industries, and so on, and really provides us with a very, very unique opportunity to have an informed point of view that others just can't have.
Speaker 5
Thanks. I'll ask one more question.
Speaker 1
I'll get back in the queue. When you
Speaker 5
look at your, different segments now, which ones of them do you think are are are gaining share and which ones are losing market share?
Speaker 1
You know, sizing a market, I'm always I've in my whole career, I've always been you know, it's it's a bit of an art and and not science. I I think there is I'm I'm not so much worried about share. I'm I'm I'm worried that we capture the the market opportunity is big. So when you look at the the you know, the executive search business is critical strategically for the company. No question about it.
Because it provides tremendous access. And we have demonstrated now that it's not talk. We can actually do something with that access. But let's face it. The executive search market is a small market.
And the much bigger markets are around knowledge know, around recruiting for, you know, professionals, knowledge workers. That is a market that is several times the size of the executive search market. When you look at the market opportunity around org strategy, assessment succession, learning and development, and rewards and benefits. Depending on how you wanna do the artwork, you know, that that could be, you know, $102,100,000,000,000 dollar mark. I mean, that that that is that could be really substantial.
When you cut through that, that the biggest piece by far you're gonna focus on is training, is learning and development. So, you know, part of that is is compliance. Part of that is technical. So I'm not I I I really am not so caught up in the market share gain. I'm caught up in creating a new company that goes after a much bigger market.
David, anything else?
Speaker 0
Yes. Our next question will come from the line of Mark Marcon with Baird. Please go ahead.
Speaker 6
Hey. Good afternoon, Gary and Greg and Bob. One thing, just with regards to Miller Heiman, how did you say that it contributed more than $30,000,000 this quarter?
Speaker 1
The acquisition so when we did it, when we announced it, and we're we're actually now we've integrated the businesses, so I'm not gonna be able to give you line of sight in the future. But when we announced the deal, we said that it would contribute a $120,000,000 the three the three would combine would contribute a $120,000,000 of fee revenue to the company. It's it's although we've integrated the businesses, when we when we look at it, it appears like it contributed, you know, somewhat north of $30,000,000 in the quarter for all for all three, Mark. For the three companies.
Speaker 6
Got it. And and then with regards to and that all fell into digital. Correct?
Speaker 7
Yes. Correct.
Speaker 1
Yeah. So yeah. That's that's exactly right.
Speaker 6
And then when we take a look at the adjusted EBITDA margins with regards to digital, it went from, you know, a year ago where it was Miller Heiman wasn't included. It was at $33.08, went to 26%. How should we think about the trajectory with regards to the adjusted EBITDA margin on that part of the business?
Speaker 2
Yeah. Think, Mark, I think you'll see that going by the time we get done with all of the integration activities. And some are gonna go into the Q1 of next year solely because we have to pick them up and put them into our systems, and that's not gonna happen until May 1. So there'll be further position eliminations occurring after that happens. And so we'll eventually ramp this up to 28, 29, 30% as we go forward.
And then obviously, as as the business grows and we get more leverage, you know, we could we could pretty easily be north of 30%.
Speaker 6
Great. And then how should we think about the consulting business now that some portion of that has been stripped out? It looked like it had some good progress going from twelve two to thirteen three. How should we think about that going forward?
Speaker 2
Yeah, think the consultative business, as we look at it from a long term perspective, Mark, the EBITDA margins would be sort of in the 12% to 15% range. So I think we probably have another couple 100 basis points of areas that we can continue to improve.
Speaker 6
Great. And then with regards to just from a geographic perspective, just drilling down a little bit more, Gary, you mentioned China is actually up. Can you talk about like the rest of what you're seeing in terms of Asia, whether it's Singapore, Hong Kong, Japan? What are you seeing there? And I know it's just going day to day, and then I have another follow-up.
Speaker 1
Well, think that overall when you look at Asia, it's actually been very, very surprising. So the trends in many of the countries that you cited are positive. So just again to pick Japan because you commented on it, it's up 10% in February over the prior year. And if you were gonna go to Singapore as an example, it's up 60%. So so, you know, it's you know, overall, I think, you know, we look at, you know, trailing four months new business, you know, you're you're gonna find that it looks pretty good in Asia, which seems very counterintuitive to all the commentary that I've that I've made.
Right?
Speaker 6
Yeah. I mean, including, you know, if you take a look at q four Japanese GDP, which this was recently released, it was that was down like 7%. So being up 10% is pretty darn good. Is that because you're gaining share there? Or do you think just that some of the things that we hear are just kind of exaggerated?
Speaker 2
I I think Japan is is we have an extremely good leader who who came on board, maybe it was eighteen months ago or so. And I think I think he's having real impact on the business over there. In fact, you know, Gary talked about some of the actions that we've taken in terms of, moderating head counts. And that's one area because I have the unenviable task of approving hires in company and that's one area that we continue to invest in off the back of this individual.
Speaker 1
I think Bob's Bob's comments are spot on. And what I'd what I'd add though is that you've got aftershock. So, you know, in Los Angeles, you you you know, we're very accustomed here to to earthquakes and then the aftershocks. So I I I really think with with this crisis, you will see aftershocks. And so I I, you know, that that would be my own view.
And so if you just take China for example, it's it's really taken eight weeks essentially, and there was a new year in there too. But, you know, eight weeks for things to get back to kind of a new normal, and the new normal is not the old normal. And whether it is a v or a u or any other alphabet letter you wanna pick, I I think what you're seeing is the concept of aftershock. And so what you may be saying is new business actually reflects discussions that were going on for a long time. And so I don't I don't think the initial earthquake for new business is that meaningful.
Speaker 6
Got it. And, Gary, you've been through these before in terms of whether it's a a shock or something that's more protracted. From a capital allocation and discretionary spending perspective, you know, how should we think about things and, you know, like thinking about share buybacks, you know, where margins could say it's a range of outcomes, what's a bad situation relative to kind of a moderate situation, just in terms of based on the limited information we currently have?
Speaker 1
Well, I think without regard to this is my seventy second earning call. And it was I remember exactly twenty years ago when .com, it was March, that bubble popped, I remember in October. So this isn't our first rodeo. I would just regardless of what's happening today, we're gonna commit to the operating boundaries that we have talked to our investors about. And so as an example, if you were to take SARS that happened to the old Korn Ferry, you know, in 02/2002, 02/2003.
Today's Korn Ferry, if that were to happen, we would we would run the company without taking any action at about a 10%, maybe 11% trailing 12 EBITDA margin. In any kind of environment, what we have told our investors is that we would operate the business with mid single digit EBITDA margins. Obviously, after taking if there's some restructuring to be on an adjusted basis. And we're absolutely committed to that, and I'm confident in that.
Speaker 6
Terrific. Thank you.
Speaker 0
The next question will be from the line of Mark Riddick with Sidoti. Please go ahead.
Speaker 5
Hi. Good afternoon.
Speaker 2
Hey. Hey, Mark.
Speaker 8
So I wanted to touch a little bit on some of the you know, there were some investments spending and and and planning that that had been worked on for some time, whether it was branding initiatives and and, you know, investing in personnel, what have you. I wanted to get a sense of sort of kind of where you are, maybe what inning we're in as far as, you know, some of those projects as well as the the idea of whether or not what we've seen over the last few weeks has altered kind of your near term plans on that or maybe sort of give a little bit of color around that. Thank you.
Speaker 1
Well, I think the you know, look. The the the the first thing is what what we're concerned about is the health and well-being. And I know all of us as citizens of the world are are first and primarily concerned about that. It's it's it's very hard to to, you know, to to think about anything else quite candidly. But we have a track record.
The track record speaks for itself, as we indicated, you know, many months ago, that we were taking certain actions to position the company for the future, which which we've done. And so, you know, we do have, you know, different types of of contingency plans. That's been part of our playbook, and we're gonna we're gonna continue to execute those. I would say that when we are looking at the business, there's a market opportunity for us that is billions of dollars. And, we have to, look to that market opportunity.
And so whether that means organically or inorganically, we're gonna continue to do that. We have a stated goal of of driving our marquee and regional account, know, that we have. So we're gonna continue to look for people that can build that out. Our consulting business now. Our consulting business, when you when you look at it is, you know, globally, probably took last quarter annualized.
Don't know. You know, it's it's probably 600,000,000. The US business is only $200,000,000. $200,000,000. I mean, think about the market opportunity.
So, you know, we're gonna we're gonna continue to operate. We've got a strategy that we think has has grown the company. It's a completely different company today. I mean, some of the business that we've won over the last week is just, you know, substantial it's breathtaking, you know, when I think about the Korn Ferry in 02/2002. You know, multimillion dollar consulting engagements, around organizational strategy competing against the four big strategy firms.
I mean, just a different Korn Ferry today. But, you know, again, it's it's you know, right now, I think all of us are are concerned about what we can do to protect, human life. I mean, that's our that's absolutely what, you know, we're thinking every day about. And so we've got some places around the world where our colleagues can't come to work. China has been through a very, very difficult time, and the news is changing, you know, by by the by the hour, and and that's what we're focused on right now.
Speaker 8
And then from an offensive standpoint, I suppose, is there a way to are are there areas where you can sort of point to or be they anecdotal or or what have you where the the uncertainty is actually something that may lead to greater engagement, particularly with some some marquee customers that may find themselves in a position where working with you is actually maybe more beneficial than some smaller peers or anything like that? Thanks.
Speaker 1
There's an there's an area of the world that went through this very early, and they're now this institution is talking to us about how they restructure their their company. And so, you know, yes, absolutely, Those situations will develop here over time.
Speaker 5
Okay. Thank you very much.
Speaker 0
The next question will be from the line of Tim Mulrooney with William Blair. Please go ahead.
Speaker 7
Good afternoon. Thank you for taking my questions. So back to digital, within the $400,000,000 digital business, it sounds like about 20% of that revenue stream is subscription based right now. What do you think the digital business is capable of generating long term? Could this get up to 30% or even 50%?
And what would be the implications to your margins?
Speaker 1
Well, you know, we yes. We we do think, that's what we're trying to to capture. And so could it could it be double where it is today in terms of, the the subscription offering? You know, today, 20 Could it be 40?
Sure. The long term, you know, margin in that business, can be, you know, it could be very high. I mean, it, you know, it could be 33, 34%. Now, obviously, that's not, you know, necessarily, in the next quarter or two, but but there's no question. That is that's our you know, that is one of the linchpins of our of our strategy is that we've got tremendous IP and insight around what makes an organization great, what separates good from great in terms of people, how do you compensate those people, and how do you develop them.
Know, we started this business, KF Advance, you know, eighteen months ago. And it the the real goal was to capture, you know, a b to c revenue stream for for the company. That was the initial vision. And what's turned out, the business is still relatively small on its own, but the technology platform that we've developed is powerful. And so now we're using it.
We just, a few days ago got a $5,000,000 assignment from a lot major life sciences company where they want to do training for four thousand first time managers. Well, guess what platform? That platform is gonna sit on KF Advance. So there's definitely there's that kind of opportunity for us.
Speaker 2
Yeah. And, Tim, this is Bob. The other thing I would say is if you think about our RPO business, they built a a platform that they use to deliver the RPO services, makes that business, extremely sticky. And as you think about the platform that we have for digital, one of the things that we're working on now is how to integrate that platform into the delivery of our consulting services on the same theory being that know, once you do that, then it becomes very, very sticky.
Speaker 7
So this is early innings. It's still evolving. And where we might be a year from now could look a lot different from where we are today?
Speaker 2
Yeah. I would would say it's very early innings.
Speaker 1
Yeah. We're just taking the field. We're just taking the field. We've hit some balls, and now we're gonna go take the field.
Speaker 7
Okay. Alright. That that that's really helpful. Thanks, guys. Staying within digital, you know, if I look at your customer bases within your executive search and your KF, now what's called KF Consulting businesses, what percent of those customers also use your digital products?
I'm trying to understand the attachment rate.
Speaker 1
It's it's very, very high, and that's, you know, that's the opportunity. Right? I mean, if you if you look, number one, what I would say is inside sales. So when you look at the enterprise as a whole, you know, 24% of the revenue is actually coming from referrals from other lines of business. The the the the referral into consulting is 27%.
It's actually going up, you know, and that's the great thing is that it's moving up with time. And we're gonna find that with digital too. That, you know, that's an anchor, you know, that's a foundation to to our strategy.
Speaker 2
Yeah, I think, Tim, I think there's multiple ways that we look at that and try to measure it. You should be thinking today if the attachment rate or kind of pull through is probably in 35 to 40% range. As Gary indicated, that's where as part of the early innings, we're doing a lot of work with the folks in digital and the folks in consulting just in terms of educating everybody on the new platform, you know, what it what it does, what it has, and all that. And the the emphasis going forward will be on, you know, pulling the the digital assets into and delivering them as part of a consulting arrangement.
Speaker 1
And vice versa. Yeah. Right.
Speaker 7
Okay. Yep. That makes sense. You know, along those same lines, if I think about after a consulting engagement ends, you know, within the KF Consulting business, how often does a customer continue to use those digital products even though you may not be working with them in a formal consulting engagement?
Speaker 2
Oh, they would they would absolutely continue to use them on a on an ongoing basis. If you think about, you know, if we we might do an engagement with you can do it with the board, the comp committee, or or management around pay. But if they're using our database, they're gonna use that on a continuous basis. That's the whole theory with the leave behind, is that that's something that then becomes embedded into whatever HR process the company has engaged us for. It just becomes part of the an integral part of their process.
Whether it's pay, assessments, assessments to acquire talent, assessments for succession planning, assessments for development purposes and so on. And the real beauty of if you think about what we do, we operate along every aspect, you know, of of an employee's engagement with his or her employee. And so we have a common language across everything we do. It's common science, common language. And as you, as a consumer of our services, you know, if you don't use Korn Ferry, you're using company a for pay, company b for assessment, somebody else for talent acquisition, it's up to you to cobble it all together and make sense of it.
Where if you're doing that with Korn Ferry, everything is common. You know, it's common nomenclature, science, and all that, and we actually do the knitting together for you.
Speaker 7
Okay. Got it. Thank you. And I know we're butting up against the hour mark here, but I I do have to try to fit in one coronavirus question this as it relates to our models. As I look, I guess, at your four different segments now, are there some segments that you would view as being more susceptible or perhaps more resilient to this type of macro uncertainty?
You.
Speaker 1
You know, my my humble answer and and honest answer is I I can't I I just can't predict that. You know, who who would have predicted a week ago that the Indian Wells Tennis tournament would be canceled? Who would predicted that you couldn't travel on a subway or you were advised not to travel on a subway to Manhattan? I mean, I I think we we have to see, what what happens with this health crisis. And not that's why providing guidance.
Speaker 2
Understood. Thank you.
Speaker 0
And there is a question from the line of, Toby Sommer with SunTrust. Please go ahead.
Speaker 5
Thank you. What's your posture on, towards hiring revenue generators at this point across your businesses?
Speaker 1
Go for it. We're we're we're gonna continue. You know, without talent, there is no show. So we're gonna we're gonna continue to bring in talent and and more importantly, promote talent. So this last year, we promoted over a thousand colleagues.
We're on campuses recruiting. And so we're gonna, you know, we're gonna continue to do that.
Speaker 5
In your in your business that's a little bit longer lead time, like some of the consulting engagements that may be delivered over, you know, months and quarters and RPOs that can be multiyear, What's the responsiveness been of customers where they have to, you know, open a rack or actually onboard someone in the case of an RPO or or, move a consulting engagement forward and actually schedule it in terms of a longer term consulting assignment?
Speaker 1
I mean, yeah. So I'll have Bob. Bob's got can comment on the revenue recognition by solution, by line of business. But I would I would just at at a very, very high level, what I would say is the the RPO business has the longest tail. It it you know, generally speaking, meeting of the bell curve for the RPO engagements.
It would have the longest tail. And what we're winning today, which is which, you know, I think is is is good long term for the company, we're winning complex, large, global, or multi region deals. So for the long term, I think that is incredibly healthy for the company. Obviously, in an environment like this, that may make that a little bit more challenging. But I would say that our backlog in that business has been as strong as it's ever been.
So that that would be first. Second is the next thing I would look to is learning and development. So those tend to be, again, not quite as long as the RPO engagements, but but but definitely have a longer, tail for sure. Then the third, piece would probably be assessment and succession where some of those, you know, we may you know, somebody may sign up to do, you know, 5,000 assessments for a particular company, and that could be over, you know, multiple months. But Bob, do you wanna just comment on the
Speaker 2
Yeah. So I think there's actually, Mark, a couple things happening. Toby. I'm sorry. As we think about going back to the RPO, Gary commented on the large global complex.
Those engagements by definition are gonna take longer to stand up. Right? So when we have smaller regional ones, we stand them up quickly and you start recognizing revenue, you know, more revenue earlier in the contract. And what what we're finding is, you know, as Gary indicated, it's great success to to win those engagements, but it it is impacting, the early sort of so I would say the early quarter or quarters revenue recognition. I will still get it as it gets pushed out, but it does have some impact.
The in the on the consulting side of the business, we're selling larger integrated deals. If you look at if you were to go in and stratify our new business last year, this year into, you know, below a 100,000, say a 100 to two fifty, two fifty to 500, and then, you know, engagements above that, you'll see a real shift in the the number of engagements awarded that are of higher value. And again, you should think about, you know, because we talk about new business being up, and it's it's not necessarily translating to the very next quarter's revenue because of the nature of the engagements that we're selling. Again, they're they're, you know, larger integrated solutions, it just takes longer to convert those into revenue. It's all the right stuff for us to do as a as a business, you know, because we're layering in, you know, to use the term backlog, we're layering in engagements into that backlog that will, you know, provide us with a nice platform over time.
I guess that gets to
Speaker 5
it though. Is there a is there a is there are you experiencing a change in the cadence of the customers kind of drawing on those projects? Are they slowing them down? Either the throughput in RPOs or the con or the consulting engagement itself.
Speaker 2
You you're talking about because of the coronavirus, Toby?
Speaker 5
I'm not not gonna ascribe a causation relationship, but I'm asking about are you seeing slowness, and we can think about whether it's corona or something else afterwards.
Speaker 1
Well, certainly in the last look. In in the last week, obviously, parts of the world have have lived with this for quite some time. And for, you know, The United States, for for different parts of Europe, it has been relatively, you know, relatively recently. And so I it is very hard to comment on, you know, a week's worth of activity. Right?
It's almost impossible. And that's why we're not for the first time, two quarters, I haven't provided guidance. And so you've got a real humanitarian crisis, and it is tough for us to predict, you know, what happens with that.
Speaker 5
That makes sense. Last question for me. What's the proportion of revenue that the company has with oil, airlines, travel and leisure, restaurants, those kind of things that may be impacted by kind of most directly by the phenomenon?
Speaker 1
Yeah. Relatively small. Energy, strict strictly energy upstream, downstream is probably about four or 5% of the company. Airline is is airlines have been relatively small, know, for sure, less than that.
Speaker 5
Thank you very much.
Speaker 0
Next question will be from the line of Marc Marcon with Baird. Please go ahead.
Speaker 6
Thanks for taking some additional follow ups. Just on the verticals, Financial Services, where do we stand now in terms of percentage of business?
Speaker 1
Greg, you have that handy. It's probably, you know, 17 or 18%, but you can do it.
Speaker 3
Yeah. Mark, if you look at the slides that we posted, you'll see that financial services is 17% of the business.
Speaker 6
Great. And then with regards to the digital solutions, you know, there's lots of different sub segments that you're in. When we take a look at organizational strategy versus assessment and succession and leadership development, which area are you the most excited about long term, Gary?
Speaker 1
Well, the idea is to if they have an integrated platform, I mean, that that would be our concept. Now whether customers are actually gonna buy that way, that that that's yet to be proven. But we definitely would love for that to be the case. But I think just when you look at the size of the market, the learning and development has to be. Just given the market size where the biggest prize is.
Now where we have the most capability is on assessment and succession. And so what we've got the unique ability to do is to be able to marry that. So we have done 69,000,000 assessments. We can identify a salesperson in this vertical needs to look like that. We can have them take an assessment.
We can look at their traits, their drivers, their competencies, and then we can package development to help them along the journey. So clearly, the assessment and the learning and development are like peanut butter and jelly. The organizational strategy and the rewards and benefits are a little bit like Pringles. I love to have them with a PB and J, but it's like, do you can you I I don't know if customer
Speaker 0
is gonna buy all of them. We love them to. But I think when you look at the median of the bell curve, anchor, it's gotta be the assessment succession learning and development. I
Speaker 6
Got it. And then can you give a little bit of granularity with regards to that contract that you mentioned, just in terms of, like, how it's structured, how it's priced, how we should think about those things?
Speaker 1
Well, this is a life sciences Right. You know, it's a life sciences company. Thousands of, you know, first time managers. I I certainly do not wanna get into, you know, how it's how it's priced. It would be delivered over, you know, a couple year period of time.
And what again, I think the underlying competitive difference that we have as an organization is IP. And so the fact that we've built and acquired you know, a database around what separates great from good is an incredible differentiator. And if you can combine that with a development, you know, practical learning and development steps, which, you know, was the foundation for this KF Advanced business, I mean, that's a winner, for sure.
Speaker 6
Great. And then hate to ask another virus question, but just in terms of organizationally, what percentage of your consultants are not traveling now? Or what's the guidance, or how should we think about Yeah.
Speaker 1
Well, yeah, we have about, you know, there's about 8,600 colleagues in the company. And so we have indicated at this point, we've indicated at this point that we shouldn't be traveling essentially. It has to be mission critical, You know, nonessential travel, has been curtailed for, quite some time. You know? So that's that's the guidepost.
But, you know, we are are trying to communicate daily with our workforce. And in different parts of the world, we've gone through, you know, obviously, in China, it's, you know, many weeks into this. In Italy, it's a few days. And so it it kinda varies by, you know, by country, by office.
Speaker 2
Yeah. I I would say, Mark, that the with what our folks are are doing in order to conduct business, we're seeing the same things coming back from our clients. And so, you know, to the extent that, you know, we're not traveling, they're not traveling, we're working with our clients now to find alternative ways to deliver those services that they need.
Speaker 1
But at the same time, I will say a couple things and Bob's spot on. He's absolutely right. We have clients that are visiting us all over the world every day. In New York or San Francisco, you know, people are are coming into our offices. We're trying to take the the the right precautions.
And the other thing that we're that we're doing is we're we're trying to do as much pivoting as we can to, you know, a more virtual setup. And I'm sure every company in the world is is doing that. But we're making a hard, you know, a real full court press to to try to do that.
Speaker 6
Terrific. Thank you.
Speaker 0
And there is a question from the line of Kevin McVeigh with Credit Suisse. Please go ahead.
Speaker 9
Great, thanks. Thanks for allowing me to ask. Hey, so obviously our thoughts are with all you folks from a safety perspective. Wanted to talk know, Gary, like you're saying you've been kind of I think 70 call. You framed out you're good enough to frame out kind of the SARS.
Do you think this sits somewhere between SARS and after kind of global financial crisis in terms of level of uncertainty or just from a client positioning perspective? And then just one thing that's always been helpful is how you folks have reacted internally. Are you from a will you be back in the market buying stock? Are you thinking about any type of contingencies from an expense perspective internally? Or just given the uncertainty, how are you folks approaching that?
Speaker 1
This is different than October. It's different than March. In 02/2006, we got very concerned before the turn. We took actions. Several months ago, we also took actions.
And nobody could have foreseen this. So this is a humanitarian crisis, let's be honest. And so I think when people are worried, you know, look, you know, I'm doing the same thing that everybody else does. Right? You go to the grocery store and there's no toilet paper.
And, you know, panic buying begets panic buying. Panic selling begets panic selling. And so our primary goal has been around the safety of our colleagues. But strategy doesn't go left to right, right to left, left to right. You've gotta have true north, and that's gotta be anchored around purpose.
And we're gonna be very consistent, you know, as as we've been in in the past. And so we are gonna have a balanced approach to to capital allocation. We've obviously, months ago, we put in place a we've got a billion dollars of but we've got $400,000,000 debt issuances. We got 600,000,000 in revolver capacity. We've got net cash of $420,000,000.
So it's certainly again, is is more important than than the preciousness of life. So it's hard to it's hard to compare these two because, you know, I I there there's no there's absolutely no comparison. But the company is a incredibly different company today. There's no question about it. And I think we've done, everything humanly possible to position us for, our colleagues, our clients, and our shareholders.
Speaker 9
Agreed. And then just real quick, any impact from kinda Aon Time Warner? How how we should think about that across the business, I guess, directly or then even just from a competitive perspective?
Speaker 1
No. I mean, you know, that's that's, Aon, towers that we Towers rather. Yeah. Yeah. No.
No. Not not not not I think it's I think it's, I think it's early days. And so I think there's not an impact to our business. If anything, it would be positive.
Speaker 9
Thank you.
Speaker 0
It appears there are no further questions, mister Bernerson.
Speaker 1
Okay. Well, thank you for, for the time. It's, you know, and certainly, you know, it's, it's unprecedented times. But like I said, we've tried to have a playbook here of safety, caution, and agility. And most importantly, common purpose.
And that's to enable people and organizations to exceed their potential. And clearly, we're now more than the world leader in executive search. And it's all about how we can synchronize a client's talent strategy so that individuals, teams, and entire organizations can be more than. That's our purpose. And we are the preeminent organizational consulting firm.
So I thank you very much for your time, and, we'll look forward to speaking next time. Thank you very much.
Speaker 0
Ladies and gentlemen, this conference call will be made available for replay for one week starting at 08:30PM Eastern Time today, running through the day March 17 ending at midnight. You may access the AT and T executive playback service by calling (866) 207-1041 and entering the access code 2934463. International participants may dial (402) 970-0847. Additionally, the replay will be made available for playback at the company's website, www.cornferry.com in the investor relations section. Thank you.
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