KORN FERRY Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Execution has been outstanding with earnings and profitability increasing year-over-year and sequentially, achieving a 6th consecutive quarter of EBITDA margin improvement over 17%.
• Business is diversified with stability in talent acquisition, digital new business trends improving, and steady consulting performance.
• Invested in productizing IP and proprietary data assets, launching the Korn Ferry Talent Suite which brings together talent management capabilities, assessment data, etc., via subscription agreements.
• Made an investment in Trilogy International, which expands interim professional offerings to EMEA and North America.
• Focus on marquee and regional account strategy (38% of portfolio, almost all marquee clients use at least 3 service offerings).
• Strong consultant productivity, with fee revenue per employee 35% higher than pre-pandemic levels; adjusted EBITDA margin improved for the sixth consecutive quarter to 17.4%.
• Deployed capital including repurchasing $33 million of stock and paying a quarterly dividend of $0.37 per share.

Segment Performance

• KF Digital: Fee revenue in the second quarter was $93 million, down 4% year-over-year but up 5% sequentially. Digital subscription and license fee revenue was $35 million, up 7% year-over-year and accounted for approximately 38% of fee revenue for the quarter. New business for KF Digital was strong at $105 million, up 11% year-over-year. Digital's adjusted EBITDA margin was 31.4%.
• Consulting: Fee revenue in the second quarter was $167 million, down 6% year-over-year and flat sequentially. Average bill rate was $419 per hour, up 1% year-over-year. Adjusted EBITDA margin was 17.5%, up 120 basis points year-over-year.
• Professional Search and Interim: Total fee revenue in the second quarter was $121 million, down 12% year-over-year and flat sequentially. Permanent placement professional search fee revenue contracted 5% year-over-year but was flat sequentially. Interim fee revenue was $68 million, down 17% year-over-year but flat sequentially. Adjusted EBITDA margin for professional search and interim was 22.5%.
• Recruitment Process Outsourcing (RPO): Fee revenue in the second quarter was $88 million, flat year-over-year and quarter sequentially. Total revenue under contract at the end of the second quarter was $659 million. Adjusted EBITDA margin was 14.7%.
• Executive Search: Global fee revenue in the second quarter was $206 million, up 2% year-over-year and essentially flat quarter sequentially. New Executive search assignments increased 2% year-over-year and 1% sequentially. Adjusted EBITDA and margin were both up materially, 29% and 27% respectively year-over-year.

Guidance

• Expect fee revenue in the third quarter of fiscal 2025 to range from $635 million to $665 million.
• Adjusted EBITDA margin is expected to remain approximately 16.5% to 17.3%.
• Consolidated adjusted diluted earnings per share is expected to range from $1.06 to $1.18.
• GAAP-diluted earnings per share in the first quarter is expected to range from $1.02 to $1.16.
• Seasonality and holiday timing impact consulting and interim businesses, with an estimated $30 million to $40 million revenue impact due to fewer working days.
• Trilogy acquisition is expected to contribute approximately $14 million to $15 million in the third quarter.

Risks

• Uncertainties in operating environment including geopolitical conditions, economic conditions, financial markets, and foreign-exchange rates which could materially affect actual results.
• Seasonal fluctuations and fewer working days impacting revenue, particularly in consulting and interim segments.
• Macro environment leading to companies being slower to draw down commitments for larger consulting engagements, affecting revenue and implementation timelines.
• Decline in DE&I practice revenue, with an annual decline of at least $50 million observed.

Question and Answer

• Q: Melissa McMahon asked about revenue trends by segment in Q3 guidance and Trilogy acquisition contribution. A: Gary Burnison mentioned seasonality impact, with an estimated $30 million to $40 million revenue impact due to holiday timing, and Trilogy expected to contribute ~$14 million to $15 million in Q3.
• Q: Jasper Bibb asked about revenue trends and RPO business. A: Gary Burnison noted RPO as a green shoot with 60% new business in Q3 being new logos, and discussed seasonality impact on consulting and interim.
• Q: George Tong asked about digital business decline and consulting larger contracts. A: Gary Burnison talked about digital's new business strength, investment in the Korn Ferry Talent Suite, and consulting's larger contract mix and slower implementation due to macro environment.
• Q: Josh Chan asked about labor turnover impact and RPO green shoots. A: Gary Burnison discussed unusual labor market cycle, RPO as positive with expansion into healthcare, and temp market challenges.
• Q: Mark Marcon asked about margin improvement in revenue decline and consulting new business trends. A: Gary Burnison talked about margin improvement through cost management, pivot to profitable work, and consulting new business trends including DE&I decline and slower larger engagement implementation.