Korn Ferry (NYSE:KFY) Q4 2023 Earnings Call Transcript
Korn Ferry (NYSE:KFY) Q4 2023 Earnings Call Transcript June 27, 2023
Korn Ferry reports earnings inline with expectations. Reported EPS is $1.01 EPS, expectations were $1.01.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Fourth Quarter and Fiscal Year Ended April 30th, 2023 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 kornferry.com, a copy of the financial presentation that we will be reviewing with you today. Before we 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 statement within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the company believes the expectations reflect 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 risk factors and uncertainties, which are beyond the company's control. Additional information concerning such risks and uncertainties can be found in the release relating to this presentation and in the periodic and other reports filed by the company with the SEC, including the company's soon to be filed annual report for fiscal year 2023. 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 measures is contained in the financial presentation and earnings release relating to this call. Both, which are posted in the Investor Relations section of the company's website at www.kornferry.com. With that, I'll turn the call over to Gary Burnison. Please go ahead, Gary. Mr. Burnison, please go ahead.
Gary Burnison: Hello, they just sent me a text, I'm going to come, dial back in over to you.
Operator: Okay, no problem. Thank you. And Mr. Burnison is online now.
Bob Rozek: Gary, you there?
Gary Burnison: Yes.
Bob Rozek: Hello?
Gary Burnison: Yes.
Bob Rozek: I think we're ready to roll here, we want you to kick it off.
Gary Burnison: Okay. We’ve got lowest everybody is on the line, number one. Good afternoon and thanks for joining us. Our team is going to get into the numbers in a moment. But I first wanted to start by saying how incredibly proud I am of our firm, of our colleagues, of our purpose to enable people and organizations to be more of that, and the results of our diversification strategy, which is clearly working as we had planned. And so for example, while we've experienced a drop in the search business from post-pandemic highs, the rest of the portfolio performed as expected. With RPO less cyclical, digital, and consulting growing and our new interim business really blossoming. In fact, over the last 18-months or so, we've added this new interim capability, which has about $400 million of annual revenue on a run rate basis, bringing our total professional search in interim business to approximately $550 million to $600 million on a run rate basis and that's the direct result of our strategy.
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Anticipating over three years ago, a workplace mobility that we thought would emerge post-pandemic and it has. Tectonic shifts are happening everywhere. How we produce and consume? Where and how we work? How we're entertained an ongoing war shifting trade lanes, inflation, interest rate rises at a rate we haven't seen in a long, long time, and now Generative AI. These megatrends can result in change that's fundamentally good for our clients and for Korn Ferry. And it's interesting to reflect that the foundation of our firm began with IP and science. With a world immersed in Generative AI will continue to invest not only in these technologies, but also in our proprietary data, assessment instruments, and knowledge and these will be the ultimate differentiators.
Amid this transformation and change, I believe, we're still at the very beginning of what Korn Ferry will be with therefore much more tangible opportunity ahead to help our clients to be more of that. With that, I'll turn it over to Bob Rozek.
Bob Rozek: Great, thanks, Gary, and good afternoon or good morning, depending where you're at. As I've said before, despite the substantial progress we've made evolving the business, I really believe that we're still in the early innings of this transformative journey. As Gary mentioned, strategy is working, it's producing the growth and results we set out for, which really are the proof points that the strategy is in fact working. With what has become an ongoing backdrop of macro uncertainty, the execution of our strategy has produced another successful year with organic and inorganic growth resulting in an all-time high of slightly more than $2.8 billion in fee revenue. If I go back two short years to fiscal ‘21, which is a year of the pandemic.
Our fee revenue has grown by more than $1 billion in that time and 70% of that growth came organically with the rest coming inorganically. Our consulting business showed resilience throughout the year, bolstered by the relevance of our larger integrated solutions, our digital business also showed resilience, while continuing its transformation from selling analog point solutions to licensing our digital performance management tools. RPO remains extremely well positioned with its strong track record of large new business wins and I expect that business to return to robust double-digit growth when a lot of the uncertainty that we're seeing today clears. Demand in Executive Search in the perm placement portion of professional search moderated in the second-half of last year.
But in the same time, demand in interim remained steady and that offset some of the transitory softness in the perm placement businesses. Synergistic referrals between interim and perm placement plus referrals between our other lines of business and our marquee and regional accounts were significant contributors to the achievement of our FY ‘23 annual fee revenue. So again, it's clear to me, our strategy is working. So we're going to continue driving our integrated solution-based go-to-market strategy, including our marquee and regional accounts, delivering unparalleled client excellence, extending our very strong Korn Ferry brand, advancing Korn Ferry is the premier career destination, and continuing to pursue transformational opportunities at the intersection of talent and strategy.
With that let me turn the call over to Gregg, who will take you some -- through some of the overall company financial highlights.
Gregg Kvochak: Thanks, Bob. In the fourth quarter, global fee revenue was $731 million, up 8% year-over-year and up 12% at constant currency. By line of business, fee revenue continued to moderate from post-pandemic highs for our permanent placement talent acquisition solutions, Executive Search, professional search, and RPO. However, other lines of business remained stable in the quarter. Measured year-over-year at constant currency, fee revenue was, up 3% for consulting, up 5% for digital, and aided by our recent acquisitions of ICS and Salo, fee revenue for our Interim Services grew $70 million year-over-year. Consolidated new business in the fourth quarter also moderated and was down 4% year-over-year at actual foreign exchange rates and down 2% at constant currency.
Consistent with fee revenue, new business in the fourth quarter moderated most in Executive Search and Professional Search. In line with our guidance, earnings, and profitability also moderated in the fourth quarter. Adjusted EBITDA in the fourth quarter was $98 million with an adjusted EBITDA margin of 13.4%. Earnings and profitability in the fourth quarter were impacted by a number of factors. These factors include the mix shift in fee revenue by line of business. Startup costs associated with the ramp-up of newly awarded large RPO assignments. Investments in headcount to preserve fee-generating and execution capacity and product development initiatives for digital. Our adjusted fully diluted earnings per share in the fourth quarter were $1.01 down 74%.
I'm sorry, down $0.74 or 42% year-over-year. Adjusted fully diluted earnings per share exclude $6.9 million or $0.10 per share of restructuring charges related to the cost true-up of actions taken in the third quarter and integration and acquisition costs associated with our recent acquisitions. GAAP diluted earnings per share in the fourth quarter were $0.91. Our investable cash position at the end of the fourth quarter remained strong at $488 million and our capital allocation continues to be well-balanced. For all of fiscal '23, we deployed $490 million of cash, using $94 million per share repurchases, $33 million for dividends, $62 million for capital expenditures, $255 million for M&A, and $19 million for debt service. Now I will turn the call over to Tiffany to review our operating segments in more detail.
Tiffany Louder: Thanks, Gregg. Starting with KF Digital. Global fee revenue in the fourth quarter was $91 million, which was up 2% year-over-year and up 5% at constant currency. Digital subscription and license fee revenue in the fourth quarter was $32 million, which was approximately 35% of fee revenue for the quarter. The accumulation of sales of subscriptions over time has created year-over-year growth in subscription-based revenue, with increases in both sales effectiveness and total rewards tools. Global new business for KF Digital was $101 million, with $35 million or 35% of the total tied to subscription and license sales. For consulting, fee revenue in the fourth quarter grew to $175 million, which was flat year-over-year, although both periods are all-time high and up approximately 1% at constant currency.
Fee revenue growth was strongest in organizational strategy, followed by assessment and succession and rewards and benefits. Additionally, global new business for consulting in the fourth quarter was down slightly, 4% year-over-year at constant currency with mid-single-digit growth in EMEA. The Professional Search and interim business increased 40% in the fourth quarter versus last year, driven by double-digit strength in North America and aided by the current year acquisitions. Total fee revenue was $152 million, up $51 million or 50% over the same time period. Breaking down the quarter, growth in the interim business was more than enough to offset moderation in the permanent placement portion of the segment. Interim services fee revenue grew to $89 million from $20 million in the same quarter of the prior year, driven primarily by the recent acquisitions.
Permanent placement fee revenue declined by $18 million to $63 million year-over-year, down 23% at actual and down 22% at constant currency. Moving on to recruitment process outsourcing. New business for the fourth quarter was strong once again at $115 million and total revenue under contract at the end of the quarter was approximately $777 million. Fee revenue totaled $100 million, which was down $13 million or 11% year-over-year and down approximately 9% at constant currency. Although, we are seeing notable sequential improvement within life sciences, overall fee revenue is impacted by a moderation in hiring volume from all other industries in the base and backlog. We see this slowdown as transitory and believe RPO is well positioned to benefit with hiring returns to more normalized levels in the base and the larger more recent wins begin converting to revenue.
Our pipeline remains strong as RPO continues to win new business, the differentiated service offering in the marketplace. Finally, global fee revenue for Executive Search in the fourth quarter was $213 million, and as expected, experienced a year-over-year decline of 11% at constant currency, compared to the high growth rates enjoyed during the pandemic recovery last year. Demand continued to moderate most notably in North America and APAC, followed by EMEA and Latin America. Global new business in the fourth quarter for Executive Search was down 20% year-over-year and down approximately 19% at constant currency. I will now turn the call back over to Bob to discuss our outlook for the first quarter of fiscal '24.
Bob Rozek: Great. Thanks, Tiffany. Assuming no new or further changes in worldwide geopolitical conditions, economic conditions, financial markets, and foreign exchange rates, we expect fee revenue in the first quarter of fiscal ‘24 to range from $668 million to $698 million. Our adjusted EBITDA margin to be approximately 13.5%, and our consolidated adjusted diluted earnings per share to range from $0.84 to $1. Finally, we expect our GAAP diluted earnings per share in the first quarter to range from $0.78 to $0.95. In closing, I want to thank all of our colleagues for just an absolutely tremendous year. We continue to believe our portfolio of distinctive organizational consulting solutions, which are based on our deep risk proprietary IP and data delivered by our world-class colleagues will continue to differentiate Korn Ferry on our journey to become the preeminent organizational consultancy. With that, we would be glad to answer any questions you may have.
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