Korn Ferry Q2 FY2026 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Second Quarter Fiscal Year 2026 Conference Call. 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 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 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 this presentation and in the periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year 2025 and in the company's soon to be filed quarterly report for the quarter ended October 31, 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 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 Mr. Burnison. Please go ahead.

Okay. Thanks, Regina, and thank you, everybody, for joining us. In the quarter, our performance was outstanding. I'm really proud of our firm, our colleagues, and our purpose. We enable people and organizations to be more than. Talent is everything. It's a universal need, and that's our business. We're a household brand. We're seen by millions of people around the world, and we have incredible permission to make an impact in the world, which is currently defined by digitization and economic fluctuation. Today, organizations require more than static strategies. They need the ability to adapt, align, and act. Our firm sits at the intersection of these opportunities, unlocking the potential in people and organizations, synchronizing strategy, operations, and talent to accelerate performance, fuel growth, and inspire a legacy of change. At the heart of our strategy is client centricity. Here are just a few examples in the quarter where we've integrated multiple solutions to create enduring client partnerships. One of the largest commercial real estate services companies is partnering with us to secure a contract to build and manage multiple AI data centers for a major tech company. We're providing RPO and total rewards to make hundreds of hires per year. A major university in the United States is opening a new hospital, and we're developing a comprehensive talent strategy to bring in hundreds of physicians and other professionals. A global consumer company with over 150,000 employees is assessing and developing leaders to ensure they are equipped to drive enterprise-wide digital and AI transformation. Those are just a few examples, and it's clear that the larger, more recurring relationships we have pay off not only for our clients but for our shareholders. As we begin another calendar year, we're going to lean even more heavily into our collective 'We Are Korn Ferry' strategy. Our go-to-market efforts, our marketing initiatives, and our solution orientation in all of our organization are indexing more heavily into one business, not five segments. Clearly, the strategy is working, driving resilience and durability in our business. I'm really confident that we are well-positioned for a tremendous 2026. With that, I'll turn it over to Bob. Bob, go ahead.

Great. Thanks, Gary. Good afternoon and good morning, depending on where you're at. In the second quarter, our financial and operating results continue to improve. We posted our fourth consecutive quarter of accelerating growth, which serves as continuing proof that the intentional execution of our strategy to transform Korn Ferry is succeeding. In today's uncertain business environment, there has never been a greater need for talent, and that's exactly where we come in. We've built an organization to fulfill the comprehensive talent needs of our clients. We deliberately expanded our areas of expertise in human capital solutions, where our people, enabled by technology, and our foundational assets are uniquely positioned to help our clients drive their business performance. We continue to evolve the integration of our colleagues and solutions to enhance how we address our clients' challenges in changing needs. Looking more broadly at the company's financial performance over the quarter, we continue to demonstrate our ability to successfully execute our strategy in a low visibility and uncertain business environment. We have been on a deliberate journey to build a more durable and stable base of fee revenue and profitability while providing additional value and impact for our clients. With the go-live of our new talent suite technology platform this past November, we are in a better position to leverage our foundational assets to lean into our collective go-to-market efforts as a holistic talent partner, as Gary mentioned, as one business. In addition to the detailed results found in our posted earnings presentation, I'm going to go through a few company-wide and solution-specific highlights for the second quarter. Our business referrals grew to 27.6% of consolidated fee revenue, up approximately 250 basis points both year-over-year and quarter sequentially, demonstrating early signs of progress driven by our 'We Are Korn Ferry' go-to-market evolution. Estimated remaining fees under existing contracts increased to $1.84 billion, up 20% year-over-year, led by strong new business in RPO. Executive Search fee revenue remained strong, growing 10%, marking the sixth consecutive quarter of year-over-year growth. Professional Search and interim fee revenue was up 17% year-over-year with growth in both professional search at 7% and interim, including the Trilogy acquisition at 24%. Our subscription and licensed new business continued on a positive trajectory, growing to 43% of Digital's new business for the quarter. Hourly bill rates in consulting and interim remained strong at $460 and $142 an hour, respectively. Overall, consolidated fee revenue grew 7% year-over-year to $722 million. Earnings and profitability also remained strong. Adjusted EBITDA grew $8 million or 7% year-over-year to $125 million. Adjusted EBITDA margin was strong at 17.3%, and adjusted diluted earnings per share grew $0.12 or 10% year-over-year to $1.33. Excluding RPO, total company new business grew 4% year-over-year, led by strength in EMEA. RPO delivered $253 million of new business in the quarter, with 16% coming from new logos and 84% from renewals. Estimated remaining fees from existing contracts at the end of the second quarter were $1.84 billion, with around 57% or $1 billion expected to be recognized within the next year. Fee revenue in the Americas was up 3% year-over-year, led by executive search and RPO. EMEA fee revenue continued to be strong, growing 20% year-over-year, with growth in Executive Search, Professional Search, and interim consulting and digital. APAC fee revenue was flat with moderate growth in Exec Search and Pro Search and interim offset by slight declines in RPO consulting and digital. Our capital allocation during the quarter remained balanced. Through the end of the second quarter, we returned almost $70 million to shareholders through combined repurchases and dividends and invested $43 million in capital expenditures focused on talent suite, productivity tools and other solution enhancements. Now, turning to our outlook for the third quarter of fiscal '26, assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets, and foreign exchange rates, and recognizing the year-end holidays, we expect fee revenue in the third quarter to range from $680 million to $694 million, with our adjusted EBITDA margin ranging from approximately 17.2% to 17.4%. We expect our consolidated adjusted diluted earnings per share to range from $1.19 to $1.25 and our GAAP diluted earnings per share in the third quarter to range from $1.15 to $1.21. I'm excited about the next step in our go-to-market evolution. 'We Are Korn Ferry' with a focus on becoming the holistic talent partner for our clients. We remain committed to controlling what we can, leaning into identified growth opportunities, and driving operational excellence. We remain well-positioned to drive long-term, profitable, and sustainable growth by utilizing our foundational assets to deliver expanding and differentiated solutions to our clients. I'm 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.

It seems like the Executive Search business continues to perform well. Could you talk about where you're seeing the sources of strength within North America and how you think about the business in light of slower job market velocity, but you're still posting pretty good results?

We think of the company as one business, not five segments, and that's what the new 'We Are Korn Ferry' strategy is really about. When you look at the different solutions, for example, Executive Search, you're seeing significant growth worldwide in just about every market. This is due to a combination of factors. First, there is a realization on the part of companies that what got them here won't get them to the next level, requiring different leadership skills today than five years ago. Second, the retirement of baby boomers, where around four million Americans are retiring in the next several years, is also affecting the market. Lastly, many leaders are reconsidering their work-life balance due to the changes brought about by COVID. All of these factors combined are leading to the strength in that solution, along with our strategy. Additionally, our business referrals within the firm reached an all-time high at almost 28% this quarter, showing the strength of combining our intellectual property with exceptional talent and a global reach.

On that point about the referrals, could you give us a sense of where it has been historically over a long period of time? And then where you think that could go as you focus more on this strategy?

We would like to see the referral percentage go to about 35%. Historically, it has been around 25% to 26%. Generally, it has been improving over time. We have around 1,800 partners and principals responsible for originating business. We recently gathered around 50% of them in person, and the experience was energizing. It is clear to me that we are only utilizing about 10% of our potential. We must pivot the organization from segments; we do not have five businesses; we have one business with five solutions. I believe we can lean even more into that in 2026.

I kind of just wanted to follow up on that last line of questioning, but maybe a slightly different way. It did look like some of your placement type solutions improved either sequentially or the growth year-over-year accelerated a bit. Thinking Pro Search interim, especially on a sequential basis for Interim, RPO, new business wins, sounds like the cross-referrals and the 'We Are Korn Ferry' strategy are driving some of that. But I also wanted to ask if you're starting to see any change in the willingness among the client base to hire more or spend more, or is it mostly just those cross-sell efforts that are driving some improvement?

The strategy is clearly working. Look at the last eight quarters amid what I consider a labor recession. The guidance for the next quarter implies about 3% growth. In comparison, other competitors might report declines of 3% to 4%. The strategy undeniably works. We've seen a sequential uptick of 7% or 8% in Pro Search and Interim solutions. Take the Interim solution, which we didn't have just five years ago; our investment in that area has paid off. The market opportunity around it is quite significant. As for RPO, we had a stellar quarter with new business, indicating the quality of our intellectual property and the use of AI in that solution. To summarize, while there hasn't been a significant change in the overall market, there are positive indicators.

For my follow-up on the consulting solution, just wanted to ask, when you look at the bill rates up 10% year-over-year, what can you say about the mix of services and the mix of senior versus junior consultants in terms of impacting growth? One of the narratives out there is that AI will put pressure on consulting businesses from a pricing perspective; what is your take on that?

I think it speaks to the integration of the overall firm and delivering larger, more impactful engagements at scale. In this last quarter, a major driver was org strategy. It's not just about how companies can use AI, potentially eliminating 15% of the workforce. Instead, it's about evaluating overall skill sets and workforce needs. The growth in consulting stems from our strategy, focusing on the holistic approach of how technology can impact a company over the next three to five years. Bill rates have increased from the high $200s per hour to nearly $500 per hour over recent years, with approximately 40% of new consulting business being big engagements over $500,000. We're now seeing substantial opportunity in North America, which we're actively pursuing.

Just to add a little more color to what Gary said, about 40% of new business in consulting is from large engagements over $500,000, which illustrates that our strategy is indeed working. We are definitely selling larger, more transformational engagements.

This is Sami on for George. In Search, we typically see a step down in 3Q and then a ramp in 4Q. With the current strength in new business, should we expect this year's seasonality to look different? Is the new business strong enough to offset the usual softness in the third quarter?

Our guidance does not imply that. Clients will be impacted by the way the holiday season falls this year, losing about two weeks, which will affect the entire business. Therefore, we have factored that into our guidance. While it is possible for the business to exhibit strong performance, it is not in our current forecast.

On consulting, build rates were strong, but margins were flat. Could you explain how much runway is left for the shift towards higher value engagements? Will these larger engagements impact margins positively or negatively?

There is significant opportunity within the consulting solution. Years ago, we were largely focused on small transactions primarily around assessment. Today, we've shifted our focus to larger, impactful engagements. This transformation allows us to continue driving business towards value-added services rather than just focusing on bill rates.

Considering the current environment's uncertainties, it actually works to our advantage. Clients are trying to understand how to operate effectively in this changing world, and they're turning to us for guidance. This is where our org strategy business is thriving.

In the Search business, could you describe any time savings and efficiencies from using various AI tools? Is this shortening the time to fulfill a search, or are clients requesting more of you subsequently?

The process is undeniably more efficient today. A small part of that efficiency comes from technology, but the larger impact stems from how work is done today, especially after COVID. For example, in a recent high-profile confidential search, we utilized Zoom effectively. The changes brought by COVID have altered our workflow significantly. While technology plays a larger role in our RPO business, it has positively impacted Executive Search, albeit to a lesser extent. We believe there is still further opportunity in that sector, but it will largely remain a high-touch solution.

We have been incorporating AI within the Search solution for several years now. This not only sets us apart in the marketplace but has also greatly enhanced our research, candidate identification, and sourcing capabilities.

Could you talk about the sunsetting of the old system and the impact on accounting, perhaps relating it to the launch of the Talent Suite?

Could you please repeat your question?

We launched Talent Suite on November 17. Previously, we operated on an older, less integrated system. Talent Suite consolidates all our data into a single repository with a single sign-on. Clients can now navigate our data sets more efficiently than before, and our data structure has been harmonized to facilitate meaningful analytics. We sunset the previous system in July to implement this transition, which required the acceleration of remaining depreciation costs, leading to the impact observed in the last quarter.

What are your expectations for the financial impact from the Talent Suite?

We anticipate that Talent Suite will be incredibly beneficial for the organization as a whole. It enables clients to engage with our entire suite of offerings seamlessly. Our clients have been selecting singular services, but Talent Suite allows us to present our full range of capabilities, including analytics and pay transparency. This will unlock significant market opportunities, especially as clients adapt to new regulations around pay disclosure. Establishing a strong job architecture through Talent Suite will facilitate comprehensive pay equity and transparency analysis.

To give you further context, Talent Suite is streamlining our processes, allowing greater efficiency in delivering our foundational assets to clients. This presents a considerable opportunity for all stakeholders involved.

Have you noticed any changes in demand for diverse hires since going public?

Not at all. The competitive landscape remains strong but stable. There are several principle players in executive search, and all have substantial opportunities ahead. I haven't observed any significant changes post-IPO.

This is Alex Sinatra on for Mark Marcon. While growth has been strong overall, there has been a bit of a decline in the digital segment. Can you explain what drove that decline and shed light on new sales expectations in that sector?

Several quarters ago, we made a purposeful decision to focus the entire firm on monetizing our intellectual property. As a result, we reduced the number of sellers by about 35%. We are pivoting towards having more enterprise-focused sellers who can better articulate the value of our IP. Consequently, this shift has affected the top line in digital intentionally. In the upcoming quarters, we will be adding more enterprise capability, and we recently secured some significant transformational deals that got postponed to the current quarter, which will significantly impact revenues.

Regarding new RPO contracts, can you elaborate on where they are coming from? How many are from clients switching from other firms versus new clients, and how many were driven by cross-sell efforts?

The majority stemmed from renewals, which validates the quality of our services. Most of these are from our marquee and diamond clients, constituting about 40% of the firm's overall revenue. These clients have outperformed the portfolio, with their growth at around 10% compared to the general growth of 3% to 4%. We're experiencing significant growth in sectors like industrial and healthcare, with about 75% of new business deriving from renewals and 25% from new logos.

To provide more insights on business referrals, approximately 50% of fee revenues in RPO originated from referrals outside that particular solution.

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

Okay, Regina. Thank you, everybody, for listening. It's the holiday season, and I wish you a wonderful holiday. We look forward to speaking with you in the new year. Thanks, everybody. Bye-bye.

Ladies and gentlemen, this conference call will be available for replay for one week starting today and ending at midnight on December 16, 2025. You may access the Echo-replay service by dialing (800) 770-2030 and entering the access code 2574781 followed by the pound key. Additionally, the replay will be available for playback at the company's website, www.kornferry.com in the Investor Relations section. This concludes our call today. Thank you all for joining. You may now disconnect.