KORN FERRY Q3 FY2025 earnings call

• Execution has been outstanding with significant transformation engagements won. Diversification evident with total firm new business up 13% at constant currency. Raised dividend to shareholders. Third quarter results exceeded expectations with fee revenue $669 million, 2% y-o-y at constant currency. Adjusted EBITDA increased 13% y-o-y to $114 million, margin up 190 basis points to 17.1%, adjusted EPS up 11% to $1.19. Marquee and diamond accounts at 39% of consolidated fee revenue. Cross solution referrals at 25% of consolidated fee revenue. Increased investment hiring with ~25 new fee earners in Q3. Balanced capital allocation with $45M on Trilogy acquisition, $18M on share repurchases, $19M in dividends year-to-date.

Consulting

• New business: $159 million, up 3% at constant currency. Engagements greater than $500,000 represented ~41% of new business, up from 32% last year's third quarter. Hourly bill rate climbed 5% to $461 per hour. Adjusted EBITDA margin 17.7%, up 100 basis points year-over-year.

Digital

• Fee revenue: $91 million, up 3% in constant currency. 39% of total fee revenue from subscription and licenses (compared to ~36% a year ago). Adjusted EBITDA margin 31.3%, up 100 basis points year-over-year.

Executive Search

• Fee revenue: $205 million, up 4% at constant currency. Growth in three regions, notably North America. Consultant productivity increased 7% to ~$1.5 million annualized per consultant. Adjusted EBITDA margin 25%, up 320 basis points year-over-year.

Professional Search and Interim

• New business and fee revenue flat at constant currency. Interim average hourly bill rate $129 per hour. Permanent placement consultant productivity $650,000 annualized per consultant. Adjusted EBITDA margin 21%, up 280 basis points year-over-year.

RPO

• Fee revenue: $85 million, up 6%. Fee revenue under contract accelerated to $752 million, with ~42% estimated to be recognized in the next four quarters. Adjusted EBITDA margin 15%, up 360 basis points year-over-year.

• Fourth quarter fiscal '25 fee revenue expected to range from $680 million to $700 million.
• Adjusted EBITDA margin expected to remain approximately 16.8% to 17%.
• Consolidated adjusted diluted earnings per share range from $1.22 to $1.30.
• GAAP diluted earnings per share range from $1.20 to $1.28.

• Uncertain macroeconomic environment. - Supply-demand imbalance in labor. - Cost of living crisis impacting consumers' ability to afford. - Potential impact of capital markets recovery on Executive Search demand.

Q: Hi. Thanks so much for taking the questions. Thanks for all the detail in the results and the commentary to the team. Just wanted to first touch on sort of margins and productivity. I think a lot of the productivity or revenue per consultant metrics across your segments are up quite nicely. I know you've been making some investments in technology tools and such and you recently started ramping up hiring again. But what are some of the areas where you've seen the most success driving productivity for a lot of your businesses? And how much room do you think you'd have to further increase productivity without seeing an uptick in near-term market or macro demand?

A: Well, I think there's definitely opportunity to improve productivity. We made a conscious decision going back now a couple of years that we would purposely pivot. We saw the economic environment that was on the horizon. And we made decisions to pivot to a more profitable type work and you just see it across the board. You see it in, for example, the rate per hour on both our Consulting business, our Consulting solution and our Interim solution. The Consulting solution. The rate per hour is up to $461 an hour. I mean that was $300 an hour, three or so years ago. In the Interim business, we're staying at the high end, which is $129 an hour this last quarter. And when you look at our productivity, we're producing probably 35%, 40% more revenue than we did right before the pandemic with the same number of employees. And we made a conscious decision to manage the talent that we have in the company. And you'll see that, for example, in our PS&I solution, the number of fee earners, client-facing consultants that we have there is probably down 50% or so 40% from where it was three years ago. So we think -- we still think we have room to go even if the environment stays as it is.

Q: Hi. Thanks. Good morning. Your digital new business trends inflected from 10% growth last quarter to an 8% decline in constant currency this quarter. Can you talk a little bit about what drove the decline in digital?

A: Yes. It's quarter-to-quarter you're going to see ebbs and flows. I mean a year ago in the quarter, we had some significant, it's a tough compare. We had some significant deals that companies were licensing our comp database and they were picking up several countries at a time. And that led to a pretty robust compare to a year ago. But when you step back and look at it, it's been very, very stable in an environment that, again, has been less than ideal for a good eight quarters here. So that's the specific reason. It was on the licensing of the compensation database. But overall it's been pretty stable in a tough environment over the last eight quarters.

Q: Hey, good morning or good afternoon depending on where you are physically. Congrats on the good results. Gary, you started out your discussion, which unfortunately was a little bit muffled. I don't know if you had a bad connection at the time or not, discussing some of the big engagements that you've been recently winning. And I was just wondering if you could elaborate a little bit further with regards to the size, scope of those big engagements? And how you were able to get those, who you ended up winning them from? Like if who else was part of the RFPs? Just to a little elaborate how you're moving up the food chain in terms of being a thought leader?

A: Yes. It's definitely happened and sorry for that, hopefully, and it's not muffled now. It's really a decision that we made several years ago that we would -- we want to get into more high-impact engagements. And so what all of those engagements have in common is the environment today where growth is elusive. And so the question for leaders is around transformation. And how do you transform your workforce given a shift in strategic direction. And so those engagements are scaled engagements. I mean where you're touching literally thousands of employees at a particular client. And they involved largely either organizational design or far-reaching leadership development programs -- professional development programs on how companies can shift their mindset and their employees' skill set to match a new strategic direction for the company. And today when you look at the consulting backlog, it's actually at an all-time high. And I think it's about 40% of that backlog are engagements that are definitely over $500,000 and actually could be over $1 million. Now there's good news, bad news. The good news is that those are predictable, durable revenue sources. The more challenging news is that it takes multi-quarters to implement. And so you're seeing in our results that the new business in consulting is significantly ahead of revenue. And so you're seeing a shift towards much more impactful assignments that take longer to implement. Then you're also seeing less quasi discretionary engagements than we've seen, say three or four years ago. And the primary reason for that is that companies don't have a lot of pricing power and they're cutting cost. And they've been cutting costs now for seven or eight quarters. And so anything that was somewhat discretionary is being put on hold.

Q: Hi. This is Tyler Barishaw on for Tobey. You mentioned 25 new fee earners in the quarter. How should we think about that as like a -- think about that as a run rate going into fiscal year '26 or can you just maybe raise some expectations for that?

A: Well, we're -- I think that's probably fair. We are -- we've continued to actively manage the talent that we have within the organization. You're going to continue to see us do that. And we're out -- we have been for many, many quarters continuing to promote from within, creating opportunities within the firm where we're a coveted career destination. We're going to continue that. Just a couple of months ago, we promoted 1,000 people across the organization. And we'll continue to augment that by looking at the outside. We don't really publish targets per se like that. But I think you're going to continue to see us make sure that we're pivoting towards profitable work that we're raising the productivity whether that's through technology and AI or other things, you're going to continue to see us do that. And we're going to aggressively bring in talent. So it would be reasonable for the next quarter to kind of think about the number you said. But also that we're going to actively manage the workforce that we have today as well.

Q: Hi. Good morning. This is Karan Singhania on for Josh. Thanks for taking our questions. So we wanted to ask on the Q4 margin guide. Typically, Q4 margins are higher than Q3, but it looks like you're guiding margins down this time. So just wondering if you can maybe give a bit more color on what you're seeing across the businesses? And what is different than prior years in terms of that, just that sequential progress?

A: Yes. I mean I think you have to first, and Bob, you can take it. But first, you have to step back and say, okay, hold on guys. When you adjust for the change of mix in our business, pro forma, our margins are up like 350 basis points over the last several years. These margins are incredibly healthy. But Bob, I'll let you and you can add.

Q: Hi. Good morning. This is Karan Singhania on for Josh. And just like, as my follow-up, I just wanted to ask on the North America Executive Search business. So growth in that came in strong at like 6%. And I think you briefly touched on that in one of the previous questions. But can you just elaborate on what drove that growth? And can we expect a recovery in that business from here on?

A: Look, that business, that solution is, we've seen real strength over the last several months. And I do believe that, yes, does that reflect the success of our strategy? Yes. But I also believe that it reflects all the things that I've been talking about, including Peak 65 and cost of living crisis and work life balance. I think it encompasses all of those things together. And this is -- the last eight quarters have actually been quite unusual when you look at past employment cycles to see the temp penetration rates go down for almost three years. And now it finally is kind of -- it looks like maybe it stabilized at 1.6%. To see the outsourcing solution that we have to see that go down at a time when companies are cutting costs. It's been a very, very strange eight quarters, and that's why I would step back and look at the firm in total and the fact that we are impacting a client's organizational performance, we have durable revenue streams. The solutions look to counterbalance each other and a macro trend ahead that would suggest that companies are going to have to do stuff -- do things differently with their workforce. So that's how I look at the firm today. And the search is, I think, the -- it's the result of a lot of things we've been talking about on this call.