Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry Second Quarter Fiscal Year 2023 Conference Call. 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'll be reviewing with you today. Before we turn the call over to your host, Mr. Gary Burnison, let me first hand the call over to Tiffany Lauder, Vice President, Investor Relations, to read a cautionary statement to investors. Please go ahead, Ms. Lauder.

Thank you, Amy. 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 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 other periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year 2022 and in the company's soon-to-be-filed quarterly report for the quarter ended October 31, 2022. 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 of 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.

Good afternoon and thank you, Tiffany and thank you, everybody, for joining us. Our fiscal second quarter results were very good. We generated about $728 million in fee revenue, which was up 20% at constant currency and 14% at actual rates. I'm really proud of our performance given that the global economy has been in transition for several months now. We're seeing change on every front from over a decade of high liquidity and historically low interest rates to changes in central bank policies, significant shifts in global trading partners, and persistent inflationary pressures. In response, companies and our clients will undoubtedly have to continue adjusting their organizational and workforce strategies to tomorrow which is an opportunity for Korn Ferry. As we come to a close of another calendar year, I think it's good to take stock of just how far Korn Ferry has come and how much more capable we've become. First, when we look at our historical performance through the cycles, it's clear our diverse offerings and larger scale have resulted in progressively better results from peak to peak and trough to trough. In other words, the ceiling and the floor continue to be incrementally higher through each term. For example, our peak and trough revenues from the Great Recession to the COVID recession are more than 3x higher. And over the long run, our 10-year CAGR has been 13%. There's no doubt that we're a substantially different firm today than we were even just a few years ago, with far greater scale and relevance of our offerings. Our evolving capability and broad offerings are propelling Korn Ferry and our clients through this transitory period. This combines organizational strategy, leadership and professional development, assessment and succession, rewards and talent acquisition, capabilities to help clients execute their business strategy. We've anchored a firm around a well-balanced, diverse slate of solutions. Number one, a major account strategy that now represents 37% of our portfolio, consulting and digital capabilities that represent almost 40% of our firm. And the integrated go-to-market strategy, One Korn Ferry, that's resulted in almost 30% of our revenue coming from cross-line of business referrals, a new Korn Ferry that trains and develops over 1 million professionals a year on compensation and rewards advisory and digital offerings that combined out on more than 25 million executives, a new interim transition management staff capability with about $225 million of annual revenue on a run rate basis. And this offering essentially didn’t exist for us a little over a year ago. An award-winning RPO business with consistent top line growth which now represents 14% of our firm. Today, RPO has nearly $1 billion of revenue under contract. This includes 2 major 3-year contract wins with a combined value of nearly $200 million that we secured in the second quarter. And we're a much more globally, geographically diverse firm today. No doubt there's economic uncertainty as we enter 2023. But this transitory time, like others in the past, is also the proving ground for the effectiveness of our strategy, the strength of our culture, the resilience of our colleagues, the relevance of our solutions and our offerings and the potency of the Korn Ferry brand. The truth is that great companies make their best moves in times like these. And Korn Ferry is a great company. Looking forward to 2023, we're going to continue to refine our account strategy to take advantage of changing global trade lanes, putting further emphasis on our regional accounts. We're going to pursue a larger addressable market, almost $100 billion in the U.S. alone of interim and transition management, particularly around the skilled positions of finance and accounting, digital and technology, supply chain and legal, just to name a few. We're going to build on our health care expertise, particularly in the RPO area. We're going to further develop our partner ecosystem to distribute our consulting and digital capabilities globally. We're going to invest in our professional and leadership development offerings, especially our digital platforms, upskilling technologists as well as sales professionals. And we're also going to pivot towards cost optimization solutions that will be even more relevant in the current environment. We're going to carefully balance our cost structure and profitability to seize both short- and midterm opportunities. And finally, we're going to continue to deploy a systematic and balanced approach to capital allocation between share repurchases, dividends, and M&A. I'm confident that we've built a company that provides a suite of core and integrated solutions that line up perfectly with the talent and organizational issues our clients are wrestling with today. In addition to Tiffany, I'm joined on this call by Bob Rozek and Gregg Kvochak. And Bob, I will turn it over to you.

Great. Thanks, Gary and good afternoon or morning, depending on where you are. As Gary said, the global economy is in transition. Today, unprecedented economic forces are driving companies to rethink their business and their talent strategies. As this transition continues to unfold, it is also clear that the organizational and talent issues facing businesses are more complex than ever. Today, companies are seeking new ways of filling essential roles while also keeping their existing workforce retained, engaged, and developed. Our company is built to help our clients navigate through this transition. Today, our suite of workforce solutions is aligned with the needs of the market, even as economic growth slows. This transition provides an opportunity for us to guide clients through these uncertain times with the same unparalleled service and expertise that has built our strong brand over the last 50-plus years. Now as our clients adjust their strategy, organization, and workforce for the realities that lie ahead, we stand ready to partner with our broad range of core talent solutions which were outlined by Gary. When we take bits and pieces of these core solutions and package them together into an integrated solution, we believe our ability to service our clients is unparalleled. It gets even more interesting when we leave our industry-leading data into our integrated solutions. Then we can form unique and differentiated points of view that our competitors simply cannot. Now, let me turn to our second quarter results. Fee revenue grew to $728 million. It's up $88 million or 14% year-over-year at actual rates and 20% at constant currency. Growth by line of business was mixed. We saw good demand in consulting, digital, in the interim portion of professional search and interim. As we anticipated, this was partially offset by moderating demand in executive search in the permanent placement portion of professional search and interim from the elevated levels that we saw during the pandemic recovery period. At constant currency, measured year-over-year, Consulting was up 12%, digital was up 15%, RPO up 19%. Professional Search & Interim, which was aided by the recent acquisitions, was up 147%, and Executive Search was down 4%. The consolidated new business, excluding RPO, was seasonally strong in the second quarter, with year-over-year growth in nearly every line of business. Similar to fee revenue, we continue to see new business demand moderating in the permanent placement portion of our talent acquisition businesses, which was more than offset by our recent acquisitions and new business growth across the rest of the company. Consolidated new business, excluding RPO was up 8% year-over-year at actual rates and 14% at constant currency. As Gary indicated, RPO was awarded a record $290 million of new business in the second quarter, which included the 2 large assignments that Gary also referenced. Synergies between Professional Search & Interim and our other lines of business have been very strong. If you go back to November 1, 2021, when we did our first acquisition in the Pro Search & Interim business, referrals between Pro Search & Interim and our other lines of business have resulted in approximately 600 new assignment wins with a combined contract value of nearly $36 million and that really reinforces the complementary and synergistic nature of our core solutions. Earnings and profitability also remained strong in the second quarter. Adjusted EBITDA in the second quarter was $131 million at a margin of 18%. The earnings and profitability in the quarter were impacted by a mix shift in fee revenue by line of business as well as our continued investment spending into digital. Finally, our adjusted fully diluted earnings per share were $1.43, which was down $0.10 or 7% year-over-year. Now, it's important to note that our adjusted fully diluted earnings per share were negatively impacted by $0.09 due to a higher tax rate, which was 27.8% and that compares to 25.1% in the second quarter of fiscal '22. Our investable cash position remained strong. At the end of the second quarter, cash and marketable securities totaled about $831 million. Now if you exclude amounts reserved for deferred compensation and for accrued bonuses, our global investable cash balance at the end of the second quarter was about $457 million. Our capital deployment continues to be well balanced. Through the second quarter, we repurchased approximately 992,000 shares of stock using about $56 million. We paid cash dividends of about $17 million, funded about $33 million of capital expenditures that again were directed towards our digital business. And we deployed about $99 million on M&A. With that, I'll now turn the call over to Gregg to review our operating segments in more detail.

Thanks, Bob. Starting with KF Digital. Global fee revenue in the second quarter was $94 million, which was up 6% year-over-year and up approximately 15% at constant currency. Digital subscription and license fee revenue in the second quarter was $29 million, which was up 12% year-over-year and was approximately 31% of revenue for the quarter. Global new business for KF Digital was $112 million, with $40 million or 36% of the total tied to subscription and license sales. Earnings and profitability in the quarter were marginally impacted by investments in both commercial sales representatives and product development initiatives. In the second quarter, Digital generated adjusted EBITDA of $27.5 million with a 29.2% adjusted EBITDA margin. For Consulting, fee revenue in the second quarter grew to $173 million, which was up 5% year-over-year and up approximately 12% at constant currency. Fee revenue growth continued to be broad-based with growth in almost every solution area and was strongest regionally in EMEA and North America which were up 17% and 11%, respectively, at constant currency. Additionally, global new business for consulting in the second quarter was up 2% year-over-year at constant currency. In the second quarter, adjusted EBITDA for Consulting grew 3% year-over-year to approximately $31 million with an adjusted EBITDA margin of 18%. Growth in Professional Search & Interim remained strong in the second quarter and was aided by new and enhanced capabilities recently acquired from Lucas Group, Patina, and ICS. Fee revenue tied to permanent placement search was $79 million in the second quarter, which was up approximately $24 million or 44% year-over-year and was positively impacted by our recent acquisitions. Our Interim Service fee revenue in the second quarter grew to $55 million, driven in part by the recent acquisition of ICS, which primarily provides on-demand, high skilled IT professionals on a flexible or project basis. Our Interim Services average bill rate was approximately $107 per hour and we generated $850,000 of fee revenue per billable day in the second quarter. In the second quarter, adjusted EBITDA for Professional Search & Interim was up $10.7 million or 49% year-over-year to $32.5 million with a 24.1% adjusted EBITDA margin. The outlook for Recruitment Process Outsourcing business remains strong. As previously mentioned, RPO was awarded a record $290 million of new business in the second quarter, including 2 large 3-year contracts totaling almost $200 million. This brings the total revenue under contract at the end of the second quarter to approximately $958 million. Fee revenue in the second quarter was $107 million, which was up $11 million or 12% year-over-year and approximately 19% at constant currency. Sequentially, RPO fee revenue was down 6% in the second quarter, primarily due to moderating volume tied to a few of our life sciences and technology clients. Additionally, going forward, it is also important to note that larger, long-term RPO assignments like those awarded in the second quarter are more complex to set up and therefore, there is a timing delay between initial startup and implementation costs and the recognition of revenue. Adjusted EBITDA for RPO in the second quarter grew to $16 million, which was up $1.6 million or 11% year-over-year with an adjusted EBITDA margin of 14.9%. Finally, global fee revenue for Executive Search in the second quarter was $218 million, which was down 7% year-over-year and down 4% at constant currency. Growth in EMEA, which was up 21% year-over-year at constant currency, was offset by slower demand in North America and APAC, which was primarily tied to China. North America and APAC were each down approximately 10% year-over-year at constant currency in the second quarter. Global new business in the second quarter for Executive Search was down 8% year-over-year and down approximately 4% at constant currency. At the end of the second quarter, the number of dedicated Executive Search consultants worldwide was 621, which was up 51 year-over-year and up 2 sequentially. Annualized fee revenue production per consultant in the second quarter was $1.41 million and the number of new search assignments opened worldwide in the second quarter was down 11% year-over-year to 1,637. In the second quarter, Global Executive Search adjusted EBITDA was $54.5 million with an adjusted EBITDA margin of 25%. With that, I'll turn the call back to Bob to discuss our outlook for the third quarter of fiscal '23.

Great. Thanks, Greg. Our third quarter is historically our seasonal low quarter for both new business and fee revenue, and that's really due to the slower calendar year and holiday season. Consolidated new business in November followed our historical patterns and was in line with our expectations. If current trends remain consistent with historical seasonal patterns, we expect December new business to be down sequentially from November and for January to rebound slightly. We are evolving to an organization that is selling larger, integrated solutions. And we're doing that in a world that is moving from offshoring to nearshoring. Because of these factors, in the recent moderation in our permanent placement talent acquisition solutions, we are in the process of developing a plan to realign our workforce, making investments to match the right resources with the right skill sets in the right geographies as well as reductions where we have excess capacity. Also in this review, we'll be looking at further reductions in our real estate footprint, along with reductions in other discretionary operating costs. We expect that the plan we are developing will generate $45 million to $55 million in annual run-rate savings and will cost $25 million to $35 million to implement. Now with respect to the realignment of our workforce, we expect the plan to be completed and implemented by the end of the third quarter. We expect annual run-rate savings of between $40 million and $50 million, starting in the fourth quarter. Now certain of the real estate savings are included in this run rate, with the remaining amounts to be realized in future periods as we execute the plan. Now in summary, assuming no new major pandemic-related lockdowns, further changes in worldwide geopolitical conditions, economic conditions, financial markets, and foreign exchange rates, we expect fee revenue in the third quarter of fiscal '23 to range from $660 million to $690 million. Also, given the factors leading to the development of our realignment plan, we expect our adjusted EBITDA margin in the third and fourth quarter to temporarily fall to a range of 14% to 15%. And our consolidated adjusted diluted earnings per share in the third quarter to range from $0.88 to $1. Finally, when you include the charge for the previously discussed plan, we expect our GAAP diluted earnings per share in the third quarter to range from $0.40 to $0.66. Now, while the transition in the economy will result in some short-term volatility for our business, it's also an opportunity for us to prove the value and relevance of our solutions and the power of our brand. We remain more confident than ever that our strategy is the right strategy. We've built a firm that provides the right core and integrated talent solutions that help solve the talent and organizational issues our clients are facing. Today, more than ever, we believe our clients realize that an integrated talent management strategy is essential for their long-term success. And working with the right partner is critical, and we believe that Korn Ferry is that partner. With that, we would be glad to answer any questions you may have.

Our first question comes from George Tong of Goldman Sachs.

George, we lost you. Why don't we move on to the next question.

Could you describe a little bit about what you ended up seeing in terms of the sequential trends in terms of new business and confirmed orders coming through on the Executive Search side and how that ended up flowing through? And what you're hearing from your clients right now in terms of the prospects, in terms of further confirmations as we go into December, January, and February?

Well, I'd say, first of all, November new business compared to October, so sequentially was exactly like we would have imagined it to be and it's in line with historical trends, Mark. The new business for the firm overall in November was up 6%. Now to your question on Executive Search, we've been seeing this, as you know, for several months. There's been a moderation from the very heightened levels that we saw 1.5 years ago. And with respect to Executive Search, we saw in the second quarter, a new business down about 4%. And we saw the same thing in November. So both in the quarter and November, we saw declines in both of those. And the outlier was EMEA. EMEA was actually very strong. EMEA was up 13% in Executive Search in the quarter. And constant currency in November is up 17%. So clearly, we've been saying the air has come out of the tire in the global economy for several months; and that's what we saw in as recently as November.

The only thing I would add to that is in my remarks, I commented that the volumes that we're seeing in Executive Search today and this is probably over the past 4 or 5 months, they've moderated but they've moderated back to sort of what we would call a good month in the pre-pandemic period. So I'll give you North America as an example. Prior to the COVID shutdown, a good month for us is about 250 to 275 searches. Coming through the recovery, we had bumped up to elevated levels. There were 325, 350. And for the past 4 or 5 months, they've come back down to somewhere in the 260, 265 range. So right back to where we were pre-pandemic.

And Bob, would you expect that to hold here as we think about the way the new orders are going to trend over the next 3 to 6 months? I mean, obviously, you guys are sharp. You read all the headlines. You could see it. I'm not sure what your clients are saying. But most CEOs are basically expecting a recession, so you would expect some belt tightening. So how are you thinking about the new orders on a go-forward basis?

Yes, I believe we are currently at a seasonal low in Q3. December is typically the most challenging month of the year, and we expect to follow that trend with a slight recovery in January. Looking ahead, we are maintaining our current unit volume levels. Conversations with people in the field suggest that it's not that they're declining to proceed; rather, it's simply taking more time for compensation letters to be finalized. This is likely to continue for the foreseeable future.

Great. And then can you talk a little bit about what you're seeing on the Professional Search & Interim on an organic basis or a pro forma basis? Obviously, the numbers are skewed by the acquisitions. But how is that looking on a pro forma basis?

The interim business is performing well, Mark. On an organic basis, it has looked very strong, particularly in November, with no decline observed in the Interim, especially considering the current job landscape. In Pro Search, we are experiencing similar trends as in Executive Search. Reflecting on your question, if we examine the last three recessions, we note they were all event-driven. However, this situation appears to be a gradual decline, with significant transformations underway due to factors like inflationary pressures, shifts in global trade, and nearshoring. Many companies are undergoing changes. A notable difference this time, particularly in the U.S., is the labor force dynamics. The workforce, consisting of 164 million Americans, has remained steady for nearly three years, and the labor participation rate is at a historic low of 62%. While we can discuss uncertainties and recession, this aspect is crucial. Companies might be reluctant to implement significant workforce downsizing. We are observing a decrease in the quit rate and a drop in job openings, which is expected. Yet, the overall composition of the labor force is a markedly new variable compared to previous cycles. The firm today operates quite differently. When I review the Q2 results against the quarter before the pandemic, we see a 40% increase in revenue and a 70% rise in EBITDA. For Q3, in comparison to the same timeframe pre-pandemic, the midpoint of our guidance indicates a 30% revenue increase and a 22% EBITDA rise. Thus, today’s firm presents a different profile, with Executive Search providing significant market access and expanded capabilities. Our consulting new business in November increased by 20% when adjusted for constant currency. For the quarter, it remained at a high level but still positive. Additionally, the RPO business has been exceptional, bringing in new clients. Overall, for the quarter, our new business nearly reached $1 billion, marking the highest level in the company's history.

Congratulations on the progress with RPO. Can you tell me about the two major contracts you won this quarter that added $200 million in annualized revenue? Were these new to RPO or did you acquire them from other competitors? Additionally, you mentioned plans to expand your presence in healthcare within RPO. Will this growth be through organic means, or are you considering other strategies?

Well, we're looking at both. Those were both taken from other firms that operate in that space. And it's really because of our account strategy. That's really where it began. And so those are takeaways. Our health care business, one of the things we have to do is with this movement around nearshoring, you could call it nationalization, however you want to characterize it, we have to be much more agile with our regional accounts. And we're putting a tremendous amount of focus on how we should rearrange resources in our portfolio to match changing global trading partners. So one of the areas that we've targeted is health care. Health care today represents about 7% of Korn Ferry globally. And clearly, in the RPO area, we think we've got an enormous opportunity. So clearly, we're going to pursue that on an organic basis. We've got a fabulous team. And if we could do something inorganically, we do that as well, Mark.

Great. And then one last one and then I'll jump in the queue. With regards to the expense reductions that you outlined, how much of that is going to be rightsizing the personnel versus the real estate footprint?

Yes. We will keep evaluating our real estate strategy, especially during this transitional period characterized by hybrid work models. While we would like to expand our real estate presence, the economic implications currently discourage this. We are reviewing our overall cost structure, which includes real estate considerations. I anticipate that about two-thirds of our adjustments will likely stem from workforce rebalancing. Recently, we have secured several significant contracts and have been focused on reallocating our resources accordingly. However, there is a challenge in aligning language, geography, and skills between areas experiencing declines and those presenting new growth opportunities. This is not a widespread layoff; it is highly targeted. This decision has been difficult and something I have contemplated for several months. While it pains me to make these changes, we need to realign our workforce to capitalize on the promising opportunities ahead.

Our next question comes from George Tong, Goldman Sachs.

Sorry for the audio difficulties earlier. So a question around the cost savings program. It sounds like it's going to be a balance of personnel, real estate. Are the cost cuts going to be more concentrated, perhaps in Executive Search where you're seeing more of an inflection in new business trends? Or is it going to be relatively broad-based across the company?

No, it's very targeted and I'm not going to get into exactly where it's going to be because we're still finalizing the plans. But I would tell you that we have secured some major wins for the organization, strategic wins. And as we've looked at meeting those demands, we have an imbalance. And there is excess capacity that we cannot solve because of language and location and things like that. So that it's very targeted and we'll certainly, on our next call, we'll tell you what we did.

Got it. As you consider the recovery in margins back to the mid- to high teens, what do you estimate the timeline will be for margins to return to the long-term target of approximately 18% that you mentioned historically?

I believe there are a few unpredictable factors to consider. We see a significant market opportunity in Interim Services. During account calls, it’s clear that the evolving career nomad landscape presents a strong chance to further distinguish our firm. The market potential here could reach up to $100 billion. We've grown from nearly nothing to a run rate of $225 million this past quarter. Over the next 3 to 5 years, this could become a major differentiator for Korn Ferry. However, this market comes with lower margins compared to Consulting or Executive Search, which indicates a change in our business mix. When we set the long-term margin target of 18% to 19% post-COVID, we didn't anticipate the current shift in our business mix. This change between RPO and Interim could impact margins by as much as 150 basis points. Therefore, when forecasting the future, it's essential to consider this mix shift. Regarding the last quarter's margin of 18%, it's challenging to predict now. The term uncertainty is often overused, but it applies every day. Nonetheless, uncertainty also brings opportunity, and we need to remain agile, adjusting our account strategy to capitalize on available opportunities.

Got it. And then lastly, on the Consulting business, you've seen actually some pretty resilient and positive trends lately. Historically, how cyclical has the Consulting business been? And how would you compare the macro sensitivity of the Consulting business relative to the Executive Search business?

We haven't had it for that long. When I started with the company, it was at zero, but now it's about $700 million. The reality is that we do not have enough resources and we are completely undersized given the market opportunity. This area has to be a significant part of Korn Ferry's future over the next three to five years. I am really proud of our team and what we've accomplished in new business this quarter and in November; it's inspiring to me. While we lack extensive data due to the short track record, I would estimate that compared to Executive Search, the cyclical nature of our consulting is probably about half as volatile. All consulting services are cyclical, but my instinct is that it's less so. During the COVID recession, we observed that the more cyclical segments of our business, such as Executive Search and Perm Recruiting, were hit harder, whereas Consulting, Digital, and even RPO were less cyclical than Search. Now, with our Interim capabilities, the narrative is even more compelling. It's important to recognize that the margins in that business differ and are not as strong as those in Executive Search or Consulting. However, with the Interim business, we will definitely maintain a high standard; we won't venture into general staffing or anything comparable. We will remain very specialized.

George, just to maybe pile on a little bit. If you go back to the pandemic, it was a firm overall. Peak to trough quarter, we were down about 30%. Consulting was in the 20% to 25% range down. And then if you look at the whole year period that we're going through the recovery, our RPO business actually grew 7% year-over-year.

Our next question comes from Tim Mulrooney with William Blair.

That was helpful color on the cyclicality, how you're thinking about the business. Just on the guide, real quick, for the third quarter. Your guidance assumes revenues down, I don't know, $50 million at the midpoint from the second quarter to the third quarter. But EBITDA is expected to be down like $35 million from second quarter to the third quarter at the midpoint. I would have thought the decremental margin would be, I don't know, somewhat less than that. So can you just talk about the primary factors that led to that guidance range? Are there large investments happening here? Are there near-term fixed costs that just don't come down as fast as revenue?

No, that's a good question. First of all, the guide reflects what we would view as seasonality of 4% to 5% on the top line. So that's number one. And then the second contributing factor is this moderation that we've seen for a long time that we've been living with around Executive Search and Perm Recruiting. You're right that in terms of the impact on the margin and what we've been trying to really carefully look at is rebalancing the workforce and how we do that because this is not a situation where what I don't want to do is make draconian changes that compromise our ability to see short- and midterm opportunities. So we've wrestled with this how we can reallocate resources. And that reflects some of the carry that we decided to carry longer as we really thoughtfully planned out how we could redeploy resources. So that's really the answer to your question. And we'll execute on this plan and we'll talk to you about it in the beginning of calendar 2023.

That's very insightful. I agree that your investors seem to have a long-term perspective. I prefer to see you focus on long-term decisions rather than short-term profits. One more question from me regarding Executive Search. What are your expectations for this business in the third quarter as you set your revenue guidance for this segment? Specifically, how do you view this business in the third quarter regarding moderating engagements compared to executive compensation potentially leveling off or decreasing from the high rates we experienced last year? I recall last year discussing with some private executive search firms about compensation increasing by 100%, which significantly boosted revenue for the search business. Now, if the Executive Search business is slowing down, how much of that slowdown is due to compensation changes versus actual engagement volumes? Apologies for the lengthy question.

I believe Bob and Gregg can provide the specific data on that. However, it's clear that over the past couple of years, there has been notable wage pressure that has increased our Executive Search fees. According to our guidance, we're planning for approximately a 13% decrease in the top line, although this could vary slightly. This may be attributed to higher volume while the fee remains more consistent. I genuinely think we're experiencing a significantly different labor market, which adds uncertainty to the performance of these types of businesses. The labor participation rate is surprisingly low. Reflecting on the Great Recession, the U.S. lost 7.9 million jobs. Given the current labor participation rate of 62% and 164 million Americans in the workforce, I'm struggling to see how we could reach a similar job loss figure, even as companies are scrutinizing expenses and anticipating the Central Bank's actions. It’s difficult for me to conclude that the U.S. will see a loss of 8 million jobs like we did during the Great Recession.

Gary, it's Bob. And Tim, just to add a bit more color. Gary's spot-on. It really is all unit count and volume related. We did see increases in our average search fees coming through the recovery, but that's pretty much plateaued at this point. Now we're actually just dealing with volume.

Our next question comes from Marc Riddick with Sidoti.

So I did want to follow up and I appreciate all the color that you gave and your thoughts behind what it is that you'll be doing for the remainder, let's call the remainder of this fiscal year, though it seems as though a lot of it will be concentrated in the third quarter. I was wondering if you could talk a little bit about maybe without giving too much granularity, I guess but sort of big picture-wise, what sort of led to that process of what you're seeing as needing to take place? And also whether that was more a function of the marquee accounts that you talked about. I think you said that's now up to 37% of revenue and substantial progress made over the last few years in that part of the business. And certainly, that would be understandable. But also, you've talked about new business wins. So I'm sort of trying to get thoughts as to how much of that is being driven by the marquee accounts and kind of trying to get to where they are or get ahead of where they're going versus some of the big picture, big ticket wins that you'll be pursuing?

We hope our perspective aligns with market trends. We've had significant success in securing large contracts, but over the past few months, we've observed companies tightening their budgets and adjusting their workforce. This has resulted in a decline in some of our established business areas, although it has coincided with major new contracts. The challenge we face is that despite our hard work, there is a disconnect driven by language and location issues. This has created excess capacity in certain areas. Additionally, as noted in the news, there are ongoing mismatches related to global trade dynamics and nearshoring. We need to confront this situation and strategically position the company to seize new opportunities, which is our current focus.

Great. And then I wanted to sort of highlight just given the ability to generate the cash that you're able to generate and what the market has done with your as well as other personnel and consulting-related names, I just wanted to talk a little bit about your thoughts around what to do with cash and share repurchase activity and dividends and the like.

Well, the plan right now, I think fiscal year-to-date, we've repurchased $70 million of stock. We continue to, as Bob indicated, the dividends are a good part of our capital allocation strategy as well. But we tend to look at this in a very balanced way and we look back over the past couple of years, that's what we've done. We certainly made a conscious effort to invest in the Interim businesses where we didn't have capability. And that would be my answer. Now if valuation levels, if they change, then our capital allocation strategy would change somewhat as well.

Our last question comes from Tobey Summers with Truist Securities.

I just wanted to double-check something to start off. What was the implied revenue decline on a sequential or year-over-year basis, if we kind of take the midpoint of the January guidance?

The implied, you mean from 728 to 675.

Well, it can either be sequential as you just did or year-over-year? I just want to get organic changes in either a sequential or a year-over-year basis.

Organic constant currency. Sure. So last year, our third, I'm going right off the top of my head, so you're going to have Bob and Gregg correct me. But I want to say last year, actual is 681. I think when you dial it back for constant currency, that 681 translates to something like 650, 645 in that kind of neighborhood. The midpoint of the guide is 675. So constant currency, that's up 4%, 5%. And clearly, that is benefited from the investments that we have made in the interim business and it reflects moderation in our Perm Recruiting business.

I mentioned that Gary's numbers were quite close.

Okay. I'll move on to a couple of other questions and maybe you can arrive at a number.

Yes, I would like to refer you back to the run rate when we acquired the companies. After integration, we lose the ability to specifically identify, and Lucas Group has been integrated since the beginning of the year. Therefore, I cannot identify that. However, if you consider the run rate we mentioned when we acquired those companies, it falls in the range of $55 million to $60 million.

Okay. Could you give us some color about the 2 major RPO wins? I know you talked about it a little bit already but maybe in terms of number of annual hires, types of occupations, geographies and differentiators that might have prompted the client to choose you over the incumbents.

I'll let Bob address the specifics, but we won't disclose the client or the industries. One of our key differentiators is the impressive success and high-quality of our referenceable clients, which creates a cycle of success. Additionally, we have an exceptional team and process in place, and our intellectual property allows us to integrate solutions tailored to what the client aims to achieve, whether that involves organizational strategy or compensation advice. This integrated platform significantly contributes to our continued success in that area of the business.

I think you mentioned that the cost reduction is significantly smaller than what you might have implemented in previous downturns. It seems like you're anticipating some level of stability in demand as we move into 2023. How does the organization feel about this? There has been a lot of volatility, much like the world has experienced, with job cuts, furloughs, rapid hiring, and now a more measured adjustment that you've outlined. Can you elaborate on that? I realize this isn’t a specific question, but I hope you understand what I’m getting at.

I believe this reflects the current state of the world. Back in April and May of 2020, I mentioned that dealing with COVID would be a years-long journey followed by a transitional phase. This transition has impacted numerous aspects of life, from entertainment to consumption to production. If we look back three years, it was quite unsettling. Even today, I heard a story about someone contracting COVID, and if you had heard something similar 2.5 years ago, it would have left you anxious about your own situation. We are indeed experiencing a very unique period as humans. The context also varies depending on where you are geographically. For instance, I was on a call with our team in China recently, and they have shown remarkable resilience despite the challenging circumstances they've faced for three years. So, I genuinely think it varies by location. This raises deeper human and philosophical questions. I am particularly proud of our mission, which is to change lives and empower individuals and organizations to realize their potential. We take action on issues, whether it involves George Floyd's situation, our charitable efforts, or initiatives like Leadership U for Humanity, where we have supported over 1,000 people of color in leadership programs. Our Mosaic programs have also reached 1,000 individuals. We aim to practice what we preach. Ultimately, it’s about being part of an organization that resonates with your values and inspires you. Just as in our personal lives, companies experience cycles, and we are currently navigating one. Korn Ferry has a strong history of successfully managing these transitions, which likely aligns with how many people feel.

I'll try to sneak in a last brief one. Could you provide some color on the drivers of digital growth? We haven't heard as much about KFL or the other individual products recently. So I want to refresh us.

I believe this is clearly more of a medium-term strategy due to two key aspects. The first aspect pertains to the digital offerings and products available, and the target audience we aim to reach. We are primarily focusing on two areas: firstly, sales professionals, and secondly, which is relatively new for us, creating a platform for upskilling technologies. On the distribution front, when examining leading consulting firms, you'll notice they often collaborate with partners to fuel business growth, something Korn Ferry has not traditionally pursued. Moving forward, a significant factor will be our success in developing a network of partners to help distribute our intellectual property, which is not a quick task. Our team is currently engaged in this effort with one of our partners. Therefore, this initiative is indeed more of a medium-term project, and we're dedicated to making it happen.

And Gary, I would just add a little bit more color on that, Toby. One of the things you'll notice when we went back to Q1, we talked about where Digital landed and the lack of large deals in that quarter. In this quarter, they actually rebounded nicely and they had 7 deals above $1 million, 2 of them were about $5 million and 1 was north of $900,000. So it's also a function of selling, continuing to be able to sell the larger deals.

Okay. Amy, I want to conclude and thank everybody. And despite all of this talk that you read about everyday, there is opportunity. And that's what we have a demonstrated track record of seizing and that's what we're going to continue to do. And so during this festive season, I wish everybody Happy Hanukkah, Merry Christmas, happy holidays and we'll talk to you in 2023. Thanks, everybody.

Ladies and gentlemen, this conference call will be available for replay for 1 week starting today at 3:00 p.m. Eastern, running through the day December 15, 2022, ending at midnight. You may access the AT&T Executive playback service by dialing 866-207-1041 and entering the access code of 6225763. International participants may dial 402-970-0847. Additionally, the replay will be available for playback at the company's website at www.kornferry.com in the Investor Relations section.