Earnings Call Transcript - KFY Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Fourth Quarter Fiscal Year 2020 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 a copy of the financial presentation that we will be reviewing with you today. Before I turn the call over to our host, Mr. Gary Burnison, let me first read a continuation statement to our investors. Certain statements made in this 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. Additionally, 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 quarterly report for the quarter ended January 31, 2020, the Company’s current report on Form 8-K filed on May 11, 2020 and the Company’s soon to be filed annual report for fiscal year 2020. Also, some of the comments today may reference non-GAAP financial measures, such as constant currency amounts, EBITDA and adjusted EBITDA. Additionally, information concerning these measures, including reconciliations to most directly comparable GAAP financial measure 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. With that, I’ll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.

Gary Burnison, CEO

Okay. Thank you, everyone, and good afternoon. Thanks for joining us. The last several months have been unlike anything most of us have experienced in our lifetimes. With long overdue calls for social equality, a persistent global pandemic, and recovery curves, the only certainty today is uncertainty. But amid all this change, we’d be remiss not to recognize all the heroes. It’s been truly uplifting to see the humanity around us, our healthcare workers and other first responders and all those who are committed to making our world a safer, better, and a more equal place. I’ve never been more proud of our firm and how we’ve responded during these times. At the beginning of this pandemic, we adopted a framework of safety, caution, and agility to navigate the crisis. That included mobilizing almost all of our global colleagues to a work-from-home environment in really the course of days, and we sized our business to the current reality while preserving tremendous muscle, which we believe will allow us to accelerate through the turn. We took a strong voice in the world, hosting multiple COVID-19 webinars, which were attended by over 20,000 leaders, and we led Race Matters webinars for colleagues and clients that attracted more than 100,000 leaders from global organizations. We’re continuing to engage with clients in these discussions, given our large diversity and inclusion consulting business. We appointed Mike Hyter as our Chief Diversity Officer, elevating our ongoing focus on and continuing commitment to not only diversity, but much more importantly, inclusion. Diversity is a fact, inclusion is a behavior, and we’re committed to continuing that conversation beyond the pledge through action. Now, let me comment briefly on our fiscal fourth quarter. Fee revenues were down about 7.9% at constant currency as the impact of the virus accelerated through the quarter. Our adjusted EBITDA margin was almost 16%, and we delivered $0.60 of adjusted EPS. Full year revenues were $1.9 billion and we delivered approximately $300 million of adjusted EBITDA and $2.92 of adjusted EPS. Now for the future. There is no question that the magnitude of the humanitarian and economic impact brought on by the virus far outweighs what anyone could have expected a few short months ago. The pace and magnitude of the decline caused by this global health crisis is unprecedented, at least in the last 100 years. But with the crisis, there are also tremendous opportunities, and we believe that includes real tangible opportunities for Korn Ferry. Almost every company on the planet is and will have to reimagine their business. And I believe that in the next two years, there will be more change than in the last 10. Quite simply, different work needs to get done and work needs to get done differently. To get work done differently, companies will need to rethink their organization structure, roles, and responsibilities, how they compensate, engage, and develop their workforce, as well as the type of talent they hire and how they hire that talent in a virtual world, which will depend even more on assessment. As a reminder, our assessment and learning business is almost 25% of the company. So these are Korn Ferry’s businesses, and this is on top of our M&A change management, virtual sales effectiveness, customer experience services, and the D&I services that we offer to the marketplace. That is real opportunity for us. As an organizational consulting firm, we enable people and organizations to exceed their potential. To exceed potential, people need an abundance of opportunity, development, and sponsorship, which is absolutely foundational to our service offerings. We’re also using this time of change as an opportunity to reimagine our business. For example, we’re moving from analog to digital delivery of our assessment and learning business, which, as I just mentioned, it’s 25% of the company in a way that makes our IT more relevant and scalable. On the recruiting side, we’re further refining our platform processes, such as AI, video, and technology. On the administrative front, we’re continuing to further consolidate our activities, adopting a One Korn Ferry approach to deliver greater efficiencies across the entire organization. Looking back during the Great Recession, our revenue was up almost 60% four quarters from the trough, eventually growing 5x to almost $2.1 billion revenue run rate a few months ago. We believe the opportunity to grow after the pandemic subsides lies in front of us. We’re a much different company today. Our firm’s recovery could be substantially different with a pronounced upswing based on a broader and deeper mix of business. To undertake this journey, we’re going to be agile, flexible, and responsive to the environment and our clients. Fortunately, we’re facing this crisis from a position of strength when you consider we have a solid balance sheet with high levels of cash and liquidity, and we’ve taken swift and decisive actions to protect the company, more importantly preserving its muscle. We’ve also seen some green shoots in new business and client wins. April, May, and June stabilized down approximately 30% year-over-year, and sequentially June was up approximately 18% over May. So June was better than May, and May was better than June in terms of new business. We’ve also set operational guardrails in our business, designed to preserve our position of strength and enable the firm to invest into the recovery. We’re committed to maintaining at least neutral EBITDA. This preserves the muscle of the firm and our ability to fully harness the opportunities in the recovery, and we will maintain our dividend this quarter. As we discussed in the last earnings call, we continue to assess the changing health and economic environment and the impact it has on our forward visibility. As cities, states, and countries reopen their economies, there has been a significant resurgence of COVID-19 cases in a number of places. In some cases, this has resulted in the delay or even cancellation of plans to reopen. Despite the recent positive data indicating that our new business trends may be stabilizing as well as the resilience that our clients and colleagues are demonstrating, the near-term predictability of our business remains clouded. As a result, we will not be providing specific revenue and earnings guidance for the first quarter of FY '21. In wrapping up my remarks, I want to leave you with this. At some point, we’ll be looking at this virus through the rearview mirror. I truly believe that we have the right strategy with the right people at the right time to accelerate further through the turn like we’ve done before. We have a demonstrated track record of doing that. So now, I’m joined virtually by Bob Rozek and Gregg Kvochak. And I’ll turn it over to you, Bob.

Robert Rozek, CFO

Thanks, Gary. And good afternoon, good morning, everyone. I’ll start with a few important highlights for the full year and the fourth quarter of fiscal year '20 before I address new business trends. For the full year of fiscal '20, our fee revenue was $1.93 billion, which was essentially flat year-over-year. Our adjusted EBITDA was $301 million and the adjusted EBITDA margin was 15.6%, and as Gary indicated, adjusted fully diluted earnings per share were $2.92. Now turning to the most recently completed quarter, our fourth quarter. Fee revenue was $440.5 million, which was down 7.9% year-over-year measured at constant currency. In the fourth quarter, fee revenue for Executive Search was down 10% globally, RPO and Professional Search was down 9%, Consulting down 14%, and Digital grew 14%, and all of that at constant currency. Adjusted EBITDA in the fourth quarter was approximately $70 million with a 15.8% adjusted EBITDA margin, and our adjusted fully diluted earnings per share in the quarter were $0.60. Our balance sheet and liquidity remained very strong at the end of the fourth quarter, with cash and marketable securities totaling $863 million, which is up about $95 million year-over-year. When you pull out amounts reserved for deferred compensation and accrued bonuses, that’s what we define as our investable cash, and that balance at the end of the fourth quarter was approximately $532 million, up about $150 million year-over-year. As of April 30, 2020, we had undrawn capacity of $646 million on our revolver. So we have close to $1.2 billion in liquidity to manage our way through COVID-19, and as Gary indicated, to invest back into the business through the recovery. Finally, the firm had outstanding debt at the end of the fourth quarter of about $400 million. Due to the negative economic impact of COVID-19, we did take swift and decisive actions to downsize our cost base. As previously announced, we took cost actions that were targeted at compensation as well as G&A spend. Initially, we reduced our cost base by about $300 million on a run-rate basis. We believe these actions will help us manage the business to maintaining our minimum operating boundary of adjusted EBITDA neutrality throughout the COVID crisis. In the current environment, maintaining operational flexibility is critical for us and will allow us not only to preserve the franchise, but as I indicated, will allow us to invest into the recovery. Gregg, do you want to go through some of the operating segments?

Gregg Kvochak, COO

Sure. Thanks, Bob. I’m going to start with the Digital segment. Global fee revenue for KF Digital was $69 million in the fourth quarter, up approximately $7 million or 14% year-over-year measured at constant currency. The subscription and licensing component of KF Digital’s fee revenue in the fourth quarter was approximately $21 million, which was up $6 million year-over-year and was flat sequentially. Adjusted EBITDA in the fourth quarter for KF Digital was $17 million with a 24.5% adjusted EBITDA margin. Now shifting to the Consulting segment. In the fourth quarter, Consulting generated $121 million of fee revenue, down approximately 14% year-over-year at constant currency. In every region, Consulting fee revenue in the fourth quarter was negatively impacted by the sudden shift to work-from-home protocols, which limited our consultants’ ability to execute and complete advisory assignments at client sites. Adjusted EBITDA for Consulting in the fourth quarter was $11.1 million with an adjusted EBITDA margin of 9.2%. RPO and Professional Search generated global fee revenue of $82 million in the fourth quarter, both components down approximately 9% year-over-year at constant currency. Adjusted EBITDA for RPO and Professional Search in the fourth quarter was $12.7 million with an adjusted EBITDA margin of 15.4%. Finally, for Executive Search, global fee revenue in the fourth quarter of fiscal '20 was approximately $168 million, which compared year-over-year and measured at constant currency was down approximately 10%. At constant currency, North America and EMEA were each down 10% year-over-year, and APAC was down 16%. The total number of dedicated Executive Search consultants worldwide at the end of the fourth quarter was 556, down 9 year-over-year and down 26 sequentially. Annualized fee revenue production per consultant in the fourth quarter was $1.18 million, and the number of new search assignments opened worldwide in the fourth quarter was 1,229, which was down approximately 28% year-over-year. Adjusted EBITDA for Executive Search in the fourth quarter was approximately $47.5 million with an adjusted EBITDA margin of 28.3%. Now I’ll turn the call back over to Bob to highlight some of our recent monthly business trends.

Robert Rozek, CFO

Great. Thanks, Gregg. So globally, year-over-year decline in monthly business as we exited fiscal year '20 and entered fiscal year '21 appear to have stabilized. Excluding new businesses for RPO, our global new business measured year-over-year was down approximately 20% in March and 34% in April. Starting our new fiscal year, May was down approximately 32% year-over-year, and June was down 26%. Over the past two years, June has been sequentially better than May kind of in the 5% to 7% range. In the current year, we’re obviously seeing the same general pattern of improvement, and we still don’t know July's new business yet. Regarding RPO, new business in the fourth quarter was once again strong with $109 million of global awards, which was comprised of $72 million from new clients and $37 million from renewals and extensions. In the near term, the new business pipeline for RPO remains strong. That concludes our prepared remarks. We’d be glad to answer any questions that you have.

Operator, Operator

Thank you. Our first question comes from Tim Mulrooney with William Blair. Please go ahead.

Tim Mulrooney, Analyst

Good morning.

Gary Burnison, CEO

Hey, Tim.

Tim Mulrooney, Analyst

Given we’re two months through the first quarter, can you just talk about the recent trends that you’re seeing in the Consulting business? And can you maybe break that down and what you’re seeing by geography and the types of consulting services that are holding up maybe better or worse in this pandemic?

Gary Burnison, CEO

On the Consulting side, we’ve clearly seen an uptick in our D&I business. We took a pretty proactive stance both in COVID-19 and with respect to social equality and race. We have definitely seen quite a bit of activity in the marketplace. When you just isolate June new business, you would find that the Consulting new business just in the month of June is down about 29%. Looking at the trailing four months, you would find that the Consulting business is down about the same approximately. I believe that until this point, and don’t take this the wrong way, but it’s been a bit pre-season for companies. Every company in the world is going to have to change how they do business, and different work needs to get done and work needs to get done differently, that’s essentially the definition of culture: how an organization gets things done. Whether it is looking at their org strategy, roles and responsibilities, how they deal with customers virtually, how they improve sales effectiveness virtually, M&A, restructuring, all of those things play into Korn Ferry’s platform today, which is substantially different than 12 years ago in the Great Recession. The other thing we’ve seen is a pretty significant uptick in career transition services. Several years ago, we started a business called KF Advance. The thinking behind KF Advance was to give professionals a gymnasium to work out, to use our IP, to grow, learn, develop, and to be motivated and inspired. We have put over 100,000 people through KF Advance. The technology platform that we’ve built is incredibly powerful, and we’re using that platform around career transition. There have been a number of engagements with the unfortunate decisions that companies have had to make regarding their workforce. They want to be very sensitive and treat people the right way, and part of that is sheltering their transition. We’ve definitely seen an uptick and some marquee wins there. I feel really good about where our Consulting business is today. Despite the overhead about new business down in June, the world shutdown. But I feel really good about where that Consulting business, and you’ll see when we unfortunately had to right-size our workforce, we were very purposeful in how we did that. The number of consultants really didn’t change much. We had a contingency playbook that we dusted off a year ago, and part of that playbook was driving change within our own organization. We were careful about preserving muscle.

Tim Mulrooney, Analyst

Okay. Very helpful perspective. Thank you. One more from me, shifting gears to your Digital business. Can you just talk about the recent acquisitions you completed? How is this going integration wise? How have they performed during the downturn? And how much did they add to revenue in the fourth quarter? Thank you.

Gary Burnison, CEO

We’ve integrated that business, so we don’t disclose that separately. I would tell you that it’s been incredible. There are, at least in the United States, 15 million salespeople. Not only that, but we picked up our tremendous learning capabilities around project management and the like. So, I could point to a couple of wins in career transition where actually that was in part due to the people and the IP that we picked up through the Aspen acquisitions. Think about different work needs to get done and how companies are going to have to engage with customers and what that customer experience looks like and what they do around their sales force. I’m very, very bullish on what we can do with our business. We’re also today bundling our services, which I think that’s very unique for a professional services firm. For example, if we are doing a search for a Chief Revenue Officer, we are bundling in diagnostics that we can do at very little cost around their sales force.

Tim Mulrooney, Analyst

Okay. Thank you very much.

Operator, Operator

And our next question comes from George Tong of Goldman Sachs. Please go ahead.

George Tong, Analyst

Hi, thanks. Good morning.

Gary Burnison, CEO

Good morning.

George Tong, Analyst

You provided helpful details around new business trends in March, April, May, and June. Can you unpack those by Executive Search, by geography, and perhaps Consulting? You called out RPO, but just a little bit additional detail there by month would be very helpful? Thank you.

Gary Burnison, CEO

Let me kind of step back and then Bob and Gregg, if you can fill in. First, let me look at the trailing four months. I would generally say that the way the business has operated in a crisis that we haven’t seen in 100 years. We obviously wanted to create something that had real impact for clients, that was number one to enable people and organizations to exceed their potential. Part of it was to diversify our platform. Looking at the trailing four months, you’ll find that RPO new business is actually up 72% over those four months. Digital is up 2%. The most cyclical, on the other end of the curve, which we thought it would be, was Professional Search. That was down 36%. Executive Search was down 33% and Consulting was less cyclical than Search at about 27%. The last three months, again, June was better than May and May was better than April. In June, global new business was down 23%. By region, North America was down 24%, EMEA was down 23%, and APAC was down 16%. APAC went into the crisis earlier and allegedly came out of it sooner. June for Search was down 33%, Consulting 29%, Digital was actually up a few percentage points, and RPO Professional Search was down 17%, but that’s hard to look at that 17% because RPO is very lumpy. We’ve had some incredible wins in the RPO business.

Robert Rozek, CFO

Yeah. Just a couple of points. You’re right, Gary, the RPO business and those wins that we had in the fourth quarter, a significant percentage came from the Asia Pacific region itself. One was in Singapore and one was in Australia. The other thing I would add is, as we look at the new business activities over the last four or five months, there are really no discernible patterns that emerge. One month we could be doing fairly poorly in new business and the next month it pops back up again. So it’s very choppy. A lot of sawtooth activity, which I think is what you expect in an environment as people are trying to deal with the working from home situation and the current pandemic. Geographically, there is not a lot of differentiation amongst the different geographies. That would be the only other thing I would add, Gary.

Gary Burnison, CEO

Thanks, Bob.

George Tong, Analyst

Great. And just to follow-up on EBITDA, your goal of maintaining EBITDA neutrality. Can you talk a little bit more about that over what timeframe you hope to achieve that goal? And if that really was a statement around margins or EBITDA dollars?

Gary Burnison, CEO

I would say, we’re not providing guidance. That would be my first comment. If you were to tell me when the biology, I really believe this is a triangulation of cash, biology, and psychology. To the extent that you’re fortunate enough to have cash, either as a business or individually, you’ve got incredible freedom. Korn Ferry is blessed that we have that financial freedom. Biology is going to determine the endpoint. The thing in the middle is really our business that we offer to clients, how to get work done differently. So I think we are much better positioned today than we were in 2008 and 2009. If you tell me when the humanitarian crisis ends, I could tell you how these operating boundaries shift. I think there is going to be a balance of shareholders, employees, and customers. We have to be very cognizant of our own colleagues and their well-being. The operating boundary we’ve established is a minimum of EBITDA neutrality.

Robert Rozek, CFO

Gary, I would just add to that. George, our operating boundary is a minimum of EBITDA neutral. So we’re going to operate the business to EBITDA, which is going to be a minimum EBITDA neutral.

George Tong, Analyst

Got it. Very helpful. Thank you.

Operator, Operator

And our next question comes from Mark Marcon with Baird. Please go ahead.

Mark Marcon, Analyst

Good morning and good afternoon, depending on where you are. Gary, I really appreciate the thoughtful comments that you had. Just one clarifying statement. When you say EBITDA neutrality, do you mean breakeven or what exactly does EBITDA neutrality mean?

Gary Burnison, CEO

It means a minimum of EBITDA breakeven.

Mark Marcon, Analyst

Okay. And you do have on results through June, I know you’re not giving guidance, and we’re not expecting it, but I’m wondering if there is any way of kind of giving a frame for, like if revenue is down by 29% or 30% on the consulting side, that would typically translate over to blank as it relates to margins? Is there any way of giving some sort of guide rails just with regards to not necessarily guidance, but just an understanding of like, okay, what does this mean because you’ve done a great job in terms of managing the expenses thus far? And associated with that, can you talk a little bit about some of the restructuring actions and the cost savings that they will drive on an annualized basis going forward?

Gary Burnison, CEO

Let me try a couple, Bob can add. And Mark if I miss something, just come back. When you look at the organization, if you take the Search businesses, both Executive and Professional Search, those convert to revenue within 90 days. If you take the trailing four months, those Search businesses are down, call it, 35%. You can reasonably do some mathematics. On both Consulting and Digital, new business generally converts to revenue within the first 12 months, about two-thirds of it. The balance goes over, probably 13 to 35 months. The RPO business, less than 50%, probably more than 25% recognized in 12 months. The balance goes recognized over 13 months to 35 months. If Consulting is down about you say 30%, we would expect breakeven EBITDA.

Robert Rozek, CFO

I think that as you think about revenues going down, there are a couple of things that complicate. It depends on which line of business experiences the worst downturn. As you know, Search is profitable at 24%, 25% EBITDA margin. Digital is even more profitable and so on. A lot of it’s going to depend on what lines of business, how the revenues fall in themselves. The other thing that complicates it is the new business. We’re seeing a real shift in the mix of our new business. If you look at smaller engagements at $500,000, we’re generally seeing declines in new business at that level. If you go $500,000 and above, we’re actually seeing new business growth year-over-year. You’ve got not just the overall decline of business, but a shift in the size of the engagements.

Gary Burnison, CEO

If Consulting is down, you see it as negative EBITDA. If Search is down, we’d expect it to be positive EBITDA.

Mark Marcon, Analyst

Great. Thank you.

Marc Riddick, Analyst

Hey. Hello, everyone.

Gary Burnison, CEO

Hey, Marc.

Robert Rozek, CFO

Hey, Marc.

Marc Riddick, Analyst

I wanted to start with an update on cash usage and maybe some of the opportunities that are there? Can you address acquisition opportunities that may be presented by the business challenges in the environment?

Gary Burnison, CEO

There will be opportunities. A year ago when we brought out our contingency playbook, we took an accelerated effort at meeting a lot of companies. We’ve done 13 acquisitions over 12 or 13 years. For most of those, there wasn’t a book, those were relationships we developed. We went into that pretty hard a year ago. We’ve seen a couple of those come our way, but we passed on those. I do believe that will be an opportunity for Korn Ferry as this pandemic subsides. The triangulation here is cash, biology, and psychology. Cash gives you substantial freedom to invest and grow depth and capability. Our first - I think we’ve had a balanced approach to capital allocation between dividends, stock buybacks, acquisitions, and our people. Obviously, this pandemic changes that a little bit. We’re starting from a position of strength when you look at our balance sheet. Those opportunities will undoubtedly occur, but we’re still actively meeting companies and operating the business to accelerate through the turn. Given what we’ve seen over the last few weeks, anybody could have predicted three weeks or four weeks ago that this thing is going to come in waves, and that’s the reality. The real endpoint is the biology. A vaccine or therapeutic answer that’s widely available is not happening soon. We’re going to run that balance among shareholders, employees, and customers while we continue our balanced view of capital allocation. We will have opportunities, there is no question about it.

Marc Riddick, Analyst

Okay, great. Can you spend some time talking about the overall umbrella of the change of culture that your customers are currently undertaking? Do you sense that the initial stages of that process are now taking place? And are they taking place higher up the ladder, in the C-suites, more so than it was before?

Gary Burnison, CEO

The first few months people were playing defense, and cash was not just king; it was God. But I think when you look at it generally, people were trying to protect their employees and get them moved to a virtual environment. I believe the regular season will start here. There are going to be advances and retreats. The great companies are those that go on offense. That’s what separates great from good. Great companies accelerate through the turn. Barring some major lockdown, companies are going to have to learn to deal with risk. Governments are going to be generous, and companies will move to offense over time. I can’t really say if that will be July, October, or later, but that will happen.

Operator, Operator

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

Gary Burnison, CEO

I want to thank you for listening to the call. I’ve never been more proud of our company, our colleagues, and all the things that we’ve accomplished in an event that hasn’t happened in 100 years. We’re proud that Korn Ferry has taken the leading voice in addressing issues of race. Thank you very much for your time. We’ll talk to you here in a couple of months. Thanks very much. Bye-bye.

Operator, Operator

Ladies and gentlemen, this conference will be made available for replay starting today at 11:00 PM Pacific through July 9 at midnight. You can access the replay system by dialing 866-207-1041 with an access code of 445-0757. Again that dial-in number is 866-207-1041 with an access code of 445-0757. That does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing Service. You may now disconnect.