Korn Ferry Q4 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Fourth Quarter Fiscal Year 2025 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 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 I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made in today's call, 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 the 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 2025. 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 the most direct comparable GAAP financial measures, is contained in the financial presentation and earnings release relating to this call, all 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 Mr. Burnison. Please go ahead, Mr. Burnison.

Okay. Thank you, everybody, for joining us. And I'm going to have the team get into the more details. But overall, you know, our execution has been outstanding. We continue to deliver on all of our financial and strategic objectives. And when I look forward, I mean, our strategy is working. The breadth of our solutions provides a more durable and synergistic revenue offering, really a growth foundation for tomorrow. And for us, it all starts with clients. In the quarter, there were a number of transformative engagements from leading industrial companies to global semiconductor companies where we're helping drive a more nimble organizational structure, to financial services, and in particular in the insurance sector, where we're really creating a data-rich foundation to help build their future talent pipeline, including developing about 2,500 leaders per year. It's working. The strategy is definitely working, and it demonstrates that the ongoing investments we are making to extend our offerings and our solutions and expand our impact are powering performance for clients, and that's what it's all about. The success in our business was evident during the quarter again. Fee revenue was up 4%. New business was up 3%, both of those in constant currency. Fundamentally, this business has changed over the last several quarters and years. Our evolution towards synergistic fee revenue sources driven by large-scale client engagement has changed the fundamental composition and scale of our business. We've got ten and twenty-year CAGR growth rates of more than 10%. Seventy-seven percent of our clients buy two or more of our solutions, more than half buy three. We've got large repeatable clients of scale. The Marquee and Diamond accounts for us represent almost 40% of our fee revenue. We've raised our dividend six times in five years. We've got a balanced approach to capital. Twenty-six percent of our top line is driven through inside sales and inside referrals. This is working. As I look forward to this year, we're going to continue to innovate. We're going to put a strong focus on technology, AI, and more importantly, offerings that drive organizational performance for our clients. Our enterprise talent data analytics and insights are helping clients understand whether they have the right talent in the right roles that align with their strategic priorities. In the quarter, we completed the fourth product release of TalentSuite in the last year or so. With each release, our organizational and talent products enable us to be more deeply embedded with our clients as we bundle our services and IP. This IP is immense. Billions of data points, 108 million assessments are taken, rewards data on 28 million people, 31,000 companies, engagement data on 38 million people, culture and benchmark data on 7 million respondents across over 500 organizations. I could go on and on. Our intention is to license that to create knowledge transfer to change a lot of lives and the destination of our clients. As we close out another fiscal year, it's gratifying to see our success in a very difficult economic environment and a testament to the evolution of our firm. It's all made possible through our talented colleagues. We are truly a global consulting firm that powers performance, which is why the world's most forward-thinking companies across every major industry turn to us for a shared commitment to lasting impact and the bold ambition to be more than. With that, Bob, I'll turn it over to you.

Great. Thanks, Gary, good morning, good afternoon, everyone. It was a great fourth quarter, one that exceeded expectations, especially in light of the current operating environment. I would be remiss if I didn't thank all of my Korn Ferry colleagues whose determination and dedication made these results and our full-year results possible. Our fourth-quarter performance is yet another data point validating how our strategy is producing industry-leading results. As the universal demand for great talent continues to grow, we're uniquely positioned to fulfill our clients' talent needs with scope and scale across all industries and geographies. Now, in addition to the detailed results and data points found in our earnings presentation posted on our website, here are a few company-wide and solution-specific highlights for the quarter. Our Marquee and Diamond accounts remained strong at 39% of our consolidated fee revenue in the fourth quarter. Our cross-solution referrals also remained strong. We exited the year with 26% of our consolidated fee revenue being referred among our solution areas. We continue to invest in commercial capacity by increasing our senior client partner population by approximately 25 net new hires. Executive search grew for the fourth consecutive quarter, up 15% year over year at constant currency. Digital subscription and license new business in the fourth quarter grew to 40% of the total digital new business, up from 37% in the prior year quarter, continuing to add more stability and predictability to our fee revenue base. RPO continued to build for future growth with $119 million of new business awards. Seventy-seven percent of that amount is attributed to new logos. Our average hourly bill rates in consulting and the interim portion of PSI remain strong at $454 an hour and $131 an hour, respectively. Turning to overall company results for the fourth quarter, consolidated fee revenue grew to $712 million, up 4% year over year at constant currency. Earnings and profitability also continued to grow on a year-over-year basis. Adjusted EBITDA grew 8% to $121 million. Adjusted EBITDA margin grew 70 basis points to 17%, and our adjusted diluted earnings per share grew 5% to $1.32. At constant currency, total company new business grew 3% year over year, including RPO and grew 5% year over year excluding RPO. You've noted in our earnings presentation posted to our website, we have disclosed a new operating metric: estimated remaining fees under existing contracts, which is additional proof point demonstrating the effectiveness of our diversification strategy. This operating metric represents the estimated amount of remaining fees associated with existing contracts for services and solutions yet to be delivered to our clients. At the end of the fourth quarter, this totaled approximately $1.7 billion, up 12% year over year. Of this amount, we estimate that approximately 57% or $977 million will be recognized as fees within the next year, while the remaining 43% or $734 million is estimated to be recognized beyond the next four quarters. Certain of our solutions, such as executive and professional search firm placements, have shorter-duration contracts that result in fee revenue being recognized in the next quarter or so. However, a much larger portion of our estimated remaining fees under existing contracts comes from our other solution areas, which have longer-duration contracts, thus providing more durable and resilient future fee revenue streams. We have also introduced fee revenue by geography: The Americas, EMEA, and APAC. We are an organization that puts clients first, and we engage with our clients holistically as Korn Ferry, looking to our regional and local colleagues as the point of integration and execution. Looking at the three regions, fee revenue in The Americas was essentially flat year over year at constant currency, while we saw growth in Exact Search and RPO. EMEA fee revenue grew 9% year over year at constant currency, driven by growth in Exact Search, Pro Search, and Interim there. APAC fee revenue grew 8% year over year at constant currency, principally driven by growth in Exec Search and RPO. Our capital allocation continues to remain balanced. For all of fiscal 2025, we returned $173 million to shareholders through combined share repurchases and dividends. We invested $44 million in M&A and $62 million in capital expenditures focused on talent suite, our technology platform, productivity tools, and related product enhancements. Now turning to our outlook for the first quarter of fiscal 2026, assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets, and foreign exchange rates, we expect fee revenue in the first quarter of fiscal 2026 to range from $675 million to $695 million, our adjusted EBITDA margin to range from approximately 16.8% to 17.2%, and our consolidated adjusted diluted earnings per share to range from $1.18 to $1.26. Finally, we expect our GAAP diluted earnings per share in the first quarter to range from $1.16 to $1.24. Our accomplishments in fiscal 2025 underscore our ongoing commitment to remain focused on controlling what we can, leaning into growth opportunities where we see them, and driving operational excellence. As our firm continues to evolve, we will remain relentlessly focused on client service. Korn Ferry is a global consulting firm that powers client performance. We are well positioned for the next step in our evolution, and I am more confident and excited than I have ever been about what this company can become. With that, we would be glad to answer any questions you may have.

Thank you. If you have a question, your first question comes from the line of Trevor Romeo of William Blair. Your line is open.

Hey, everyone. Thanks so much for taking the questions. Great performance despite the tough environment. I just wanted to dial in a bit on any color you might have on new business trends and, I guess, revenue trends by month? Over the last several months, especially with the tariff announcements in April and everything that's transpired since then, business confidence still being a bit lower, just any indications of how trends and your conversations have changed the past few months would be really helpful, especially if you've seen any areas of incremental weakness since then.

I mean, there's always uncertainty. That's the only thing that's certain. The conversations ebb and flow, and you have something that happens with Israel and Iran, and you have a different conversation. It seems like it's happening more frequently these days. In terms of new business, May was actually stronger than April. April was about the same as March, and February was pretty good. The conversations change. But when I look at the firm as a whole, it's pretty impressive, particularly in this market, which I would consider a recession for the last seven quarters.

Yes, that makes sense, Gary. Thank you. I wanted to dig in on executive search a little bit. I think you talked a lot about the Peak 65 demographics. Many executive surveys we see are showing high levels of turnover. However, in this quarter, I think the 15% growth was stronger than what we have been seeing. Was there anything specific that changed this quarter for the search business? Was it share gains or something like that? What would you expect in terms of growth over the next few quarters for that?

You know, I don't think you can look at it necessarily quarter to quarter. There are going to be ebbs and flows. If you look at it over the long term, the firm has delivered 10% to 11% growth year in and year out. That has been pretty remarkable. That speaks to the solutions and offerings that we have. However, when you look at any particular moment, consulting can be up while search is down, digital is flat, and RPO is up. The key here is to have a well-rounded set of solutions that drive organizational performance and human performance. Korn Ferry is just starting out. Certainly, there are demographic factors at play and a demand for a different type of leader today compared to five years ago. All of those factors are at play, but I focus on the overall firm performance and profitability and the growth we can achieve for shareholders and colleagues.

Okay. Great. So, nothing particular for this quarter in Executive Search? I'll jump back in the queue. Just wanted to quickly mention thanks for all the new disclosures. I think that will give investors a better view into your visibility. So everyone, good.

Your next question comes from the line of George Tong of Goldman Sachs. Your line is open.

Thanks. Good morning. Could you provide an update on what you're seeing with sales cycles? And also, how client spending behaviors may be different across segments? In various segments, where are you seeing any changes or macro sensitivity or purchasing pattern differences? Any update there would be helpful.

Well, number one, there's a cost of living crisis, and I've said this for a long time. In America, there's a cost of living crisis, and that's serious. For many months, companies have been able to raise prices, shrink packaging, and volumes went down, but that hasn't been the case for the last seven quarters. Now, companies across the board are cutting costs, consistently. I look at that environment and given everything going on, it is still going to be a challenging environment going forward. So for me, that's the biggest issue. Secondly, the leadership team that got you here may not get you there. We're on the precipice of incredible change, and growth is elusive, which has significant ramifications for the workforce.

Got it. Okay. That's helpful. Could you talk about how quarterly new business performed in the consulting segment and then overall for digital? I know you provided total subscription and license new business, but total new business for digital and consulting, what was the year-over-year change?

I tend to look at the firm in total, and that was up about 5%. Broadly, in the consulting area, the engagements are getting bigger. Now, about 25% of our new business is engagements that are seven figures and above, which have much longer implementation times. These could be three-, four-, or five-year leadership development journeys that take time to work through. I think of one engagement that originated two and a half to three years ago, and we are only about 25% through all the cohorts. It definitely takes time. There are a few factors at play. The firm will continue to move towards powering clients' performance, which on the consulting side means more transformative engagements that will probably take longer to implement. In terms of digital, I am proud of the fourth release of the talent suite. I believe that, when we look back five years from now, it will be an absolute game changer. Hopefully, by the end of this calendar year, it will be seamlessly integrated with at least one major CRM provider. Digital has been very consistent in terms of new business—it's neither gone up nor down significantly. It's been very consistent, even in a recessionary environment for the last seven quarters.

Hey, Gary. Can I just add a bit of specificity? The digital business year over year was up 4% in constant currency, while consulting was flat. This highlights how larger engagements are impacting revenue in the consulting world. The demand for our services and solutions remains strong.

Your next question comes from the line of Mark Marcon of Baird. Your line is open.

Good morning or good afternoon, depending on where you are. Congrats on strong results. I wanted to pick up on a few points you mentioned earlier, specifically regarding the fourth release of the talent suite. Can you talk about the significant user experience changes users will see and what gives you confidence for a decent uplift with this fourth release?

I mean, the confidence is that people still make businesses. The main improvement that you will likely see over the next few months is seamlessness and the ability to switch between various functions, such as learning and development, setting competitive pay packages, and identifying the right success profiles for specific roles. My hope is that across hiring, developing, rewarding, and motivating, there will be increased seamlessness from a user experience perspective, which hasn't been the case in the past. I believe the offerings we have are truly second to none, and I have a lot of confidence in them.

That's great. And Bob, to clarify, when you mentioned digital was up 4%, and consulting was flat, was that in terms of new business?

Yes, it was for the last quarter, new business in Q4.

Great. Given the timing of the release, would you expect that digital would start seeing a pickup in the second half of this fiscal year? Specifically, you mentioned potentially getting attached to larger packages. Could you elaborate on that?

The timing of these things is hard to predict. Would I expect something by the end of this calendar year? Probably not. But I do expect to see some momentum next calendar year.

Great. You mentioned a different type of leader. Could you expand on that? You have conversations with thought leaders. What do boards look for in terms of different types of leaders?

The traditional components—strategy, vision, financial acumen, courage, and confidence—are essential. However, we see a very strong component given that profound change is upon us. The single biggest change is for a CEO to embrace ambiguity. There is a difference between embracing ambiguity and thriving in it. We are entering a period of significant change; AI is not about replacing jobs but rather about filling the gap in labor shortages. Low birth rates show we are heading toward a labor supply and demand imbalance that will be addressed through technology or immigration. I am more convicted about this today than ever before.

That makes sense. Regarding executive search, you witnessed good growth in the markets and saw a substantial increase in consultant productivity, with an average of $1.6 million. What are you seeing at the top end of that, and what has been driving that increase in productivity and international growth?

The North American growth has been good too. Overall, that solution has performed well across the globe. Our demonstrated track record and real strategy drive a company's performance, along with external factors like demographics and leadership burnout. All these elements are interrelated, making it challenging to pinpoint which is paramount.

Given all the changes, it's too early to tell what impact they will have. However, regarding the latest international news, do you foresee any short-term impact on confidence, or will things just play out in the background?

You're right; it depends on how all this unfolds. Even if the situation persists at the current level, it's unfavorable. The overall climate, including rising costs of living and inflation—especially given that many prices have increased by substantial amounts—adds to the challenges we've faced over the last several quarters. Growth remains the most practical solution to address these economic issues, and productivity growth has been fortunate in the U.S. over a long time. However, these demographic trends indicate a serious shortage of workers, highlighting the role technology will play in the future.

One final question, if I may. Can you discuss what the bonus payout will be and how we should think about investable cash?

Now, Bob, would you like to take that?

We typically disclose too much around the bonus payout for obvious reasons. However, it will be sufficient to ensure we are rewarding our high performers. As for investable cash, the balance at the end of the year was about $675 million, with approximately 25% to 30% of that in the U.S. We will continue to deploy capital following our balanced approach. We’ve consistently looked to invest back into the business first, hiring individuals and teams and supporting investments in our talent suite. Additionally, we've invested in M&A, such as expanding our interim solution in EMEA. We generate a strong amount of cash and can return value to shareholders through dividends and share repurchases, roughly $85 million to $90 million each, which we plan to continue.

Your next question comes from the line of Tobey Sommer of Truist. Your line is open.

Thank you. Gary, you described a labor market where things are tough, purchasing power is down, and employee turnover is falling to historically low levels. Is this something you monitor to see if the market can drive more dynamism in the labor market? What kinds of macro changes could improve the velocity?

Economic growth is essential. The employee turnover in the U.S. is historically low at around 8% to 9% due to job scarcity. During this time, companies have raised prices significantly, leading to reduced pricing power. As a result, firms are hesitant to make changes. It's not a good situation to have such low turnover because it indicates an anemic labor market.

I appreciate that. Could you expand on headcount productivity from a corporate perspective? How has the organization delivered higher corporate revenue without proportionally increasing internal headcount over the last five years? Is there more potential for that moving forward?

We've experienced a unique period where the scalability of our intellectual property is a significant factor. The impressive statistics we've shared are influential in how we can monetize that IP. It's a complex challenge, especially given the many changes we've faced. Looking at the consulting business, we need to shift towards larger engagements, which may impact short-term revenue. Over time, we've increased EBITDA margins by about 300 to 350 basis points. We've had significant changes in our business mix and added new capabilities like interim solutions, but predicting our future success remains difficult.

To add from a corporate cost perspective, we've built a company that's plug-and-play with common systems, processes, and controls globally. This infrastructure has made it easier to achieve scale over time.

Thank you for that. You highlighted the need to accelerate and grow the digital side. Given what you've mentioned regarding ecosystem and partner channels, are there any additional internal changes you plan to implement to drive acceleration? This could involve incentives, focusing on marquee sales forces, or other structural adjustments.

First, we've unified under one business at Korn Ferry with five solutions. Changing the mindset of the organization is key. Also, focusing on marquee and Diamond accounts is crucial. Our leadership team is systematically analyzing new business and logos to explore solutions. Every day, we are engaging with these tasks as a leadership team. We are also introducing new roles such as global account leaders and client service partners to facilitate the delivery of our entire suite of offerings across the firm. These are vital efforts we are pursuing.

Your last question comes from the line of Josh Chan of UBS. Your line is open.

Hi, Gary and Bob. Congrats on a good quarter. Just two quick questions, specifically about Exact Search. Would you classify the business as having accelerated? Has it seen significant sequential and year-over-year growth while maintaining a similar consultant level? Is that how you view the business?

I generally avoid putting too much stock in quarter-to-quarter fluctuations, especially given the ebbs and flows across various solutions. However, over the last seven or eight quarters, this solution has been in a steady upward trend. That trend is evident despite facing a challenging economic environment.

Understood. Just to clarify, does the Q1 guide include continued double-digit growth in Exact Search, or is that reflected in the overall guidance?

Yes, we guided the total company, but it does anticipate a continued level of growth on a year-over-year basis.

It appears there are no further questions, Mr. Burnison.

Okay. Thanks for joining us. Thanks for taking the time. I am really, really proud of our colleagues, especially in light of what we all read about every day. We look forward to talking to you again. I am very excited about what we have in store for us. This is just the beginning for Korn Ferry. Thank you all. We'll talk to you later. Bye bye.

Ladies and gentlemen, this conference call will be available for replay one week starting today, running through the day 06/25/2025, ending at midnight. You may access the echo replay service by dialing 807702030 and entering the access code +1 000152750 followed by the pound key. Additionally, the replay will be available for playback at the company's website at www.kornferry.com in the Investor Relations section. This concludes today's conference call. You may now disconnect.