Earnings Call Transcript - KFY Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Second Quarter Fiscal Year 2021 Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. We have also made available in the Investor Relations section of our website at kornferry.com a copy of the financial presentation that we'll be reviewing with you today. Before I turn the call over to your host Mr. Gary Burnison, please 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 2020 and the company's soon to be filed quarterly report for the quarter ended October 31, 2020. 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 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 at www.kornferry.com. With that, I'll turn the call over to Mr. Burnison. Please, go ahead, sir.

Gary Burnison, CEO

Okay. Thank you, Gregg, and good afternoon or good morning and thanks for joining us. This is the 11th hour of the 11th month of the year like no other. And the good news is that our business has rebounded dramatically. Revenue was up 27% sequentially to $435 million. Our earnings and profitability, they were both very good, with $66 million of adjusted EBITDA and a 15.2% adjusted EBITDA margin. I'm also pleased with the work we did to ensure a strong balance sheet and position of liquidity. This has served us well. Not only weathering the pandemic storm, but being able to invest back into the recovery that we’ve seen. And I'd attribute these results to what I'm calling the three Rs. First, the action strategy solutions and messages we've taken have resonated in the marketplace. Secondly, our clients have responded. And third, our colleagues have been resilient through a year that none of us have experienced in our lifetimes. Yes, it's a testament to our strategy, but it's really about the resiliency of our colleagues across the globe. I couldn't be more proud. And while I'm pleased with the progress and the path we see ahead, there's no question that the magnitude of the humanitarian and economic impact brought on by this pandemic will continue to permeate and shape the global landscape for quite some time. As we've said since early March, I do believe there will be more change in the next two years than in the last 10 years. And that brings tremendous opportunity, real tangible opportunity for Korn Ferry. Almost every company on the planet is and will have to reimagine their business. Quite simply, different work needs to get done and work needs to get done differently. And to get work done differently, companies will need to rethink their organizational structure roles and responsibilities, how they compensate, engage and develop their workforce, let alone the type of agile talent they hire and how they hire talent in a virtual world, which will depend to a greater extent on assessment. These are Korn Ferry's businesses and that's real opportunity for our company. 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 foundational to our service offerings. We're also a firm that changes people's lives. As previously mentioned, I'm very proud to say, we're launching Leadership U for Humanity, a nonprofit venture of the Korn Ferry Charitable Foundation, focused on developing the total mosaic inside communities and within corporations. One of our partners will include the Executive Leadership Council. His mission is to develop and increase the number of successful executives across the globe. Our goal is to take our expertise in IP and develop 1 million new leaders from diverse backgrounds, using our Korn Ferry Advance and Leadership U platforms. We'll also be offering this to all of our colleagues. 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 represents about 23% of the firm's revenue in FY 2020 in a way that makes our IP more relevant and scalable. To give you some perspective on how far we come, at the start of the pandemic we flipped the switch almost overnight, with nearly all of our assessment capability converting to a digital environment. And on the recruiting side, we're further refining our platform processes such as AI video and technology. More and more search will not simply be about discovering or validating what someone has done, but finding out who they are. We have this capability to differentiate our strategy. Our strategy is absolutely taking hold. We see that pay off with our approach to clients as we create loyal repeatable sustaining relationships with clients at scale. That's where we're moving our business. That's our true north. We have about 300 marquee and regional accounts, representing about 34% of global revenue which we'd like to increase to 40% or so. We'll continue to develop account leaders from within as well as hire from the outside. So forget the new normal, this is normal. It's nearly nine months since the pandemic was declared. As I said before, it's not just a marathon, but an Ironman Triathlon of endurance, agility, and change. By embracing this change, we absolutely can make tomorrow better than today. I feel we have the right strategy with the right people at the right time to accelerate through the turn. As we enter 2021, we will continue our strategic commitment to build the preeminent global organizational consultancy. I look forward to what the new calendar year brings us. Before we take your questions, I'm joined by Bob Rozek and Gregg Kvochak. Bob, I'll turn it over to you.

Bob Rozek, CFO

Great. Thanks, Gary and good morning and good afternoon. As Gary said, the rebound in our business has been tremendous. The sharp improvement in fee revenue in our fiscal second quarter is more than a result of improved global market conditions. In fact, it really attributed to the resilience of our diverse mix of product and service offerings, our disciplined client management activities, and the growing relevance our solutions have in today's business environment. Coming through the last nine months of economic upheaval, we now have several proof points that our strategy is succeeding. The business we have today is less economically cyclical with the time to recovery shorter and the trajectory of our recovery even steeper. Our operating experience through the COVID-19 recession thus far demonstrates several important points; first, our more diversified business is clearly demonstrating greater resilience than in the Great Recession where fee revenue in the quarter immediately following the trough quarter was approximately 43% less than the prior peak quarter. For the current COVID-19 recession, the decline in fee revenue from the peak quarter to the quarter immediately following the trough was only 16%. You can see a very dramatic improvement. You heard Gary mention our marquee and regional account programs. These are client relationships that continue to deliver a less cyclical more resilient revenue than the rest of our portfolio. We achieved this result by actively managing the accounts with global account leaders who use a disciplined account management strategy. Through the first six months of fiscal 2021, we saw our marquee and regional account fee revenue decline approximately 14% year-over-year, which compares favorably to the decline in the rest of our portfolio, which was down 23%. In our Digital business, we continue to see meaningful progress selling subscription-based solutions. Our FY 2021 Q2 subscription-based fee revenue amounted to $22.7 million, which was up 43% year-over-year and up 7% quarter sequential. Subscription-based new business improved in the second quarter reaching $29 million, which was up 39% year-over-year and 25% quarter sequential. While the shift to more subscription-based fee revenue will have a short-term negative impact on fee revenue growth, it clearly positions us with more durable fee revenue in the long term. In our Consulting business, we continue to see success with our effort to capture larger engagements valued at $500,000 or more. These engagements provide us with incrementally better visibility and a more durable stream of revenue. In FY 2021, our Q2 Consulting new business was pretty steady with the prior year despite last year's number being an all-time high, which included a single non-recurring engagement of $12 million. These large engagements are also driving rapidly growing consulting backlog, which enhances our revenue visibility and durability. Our RPO business continues to enjoy great success as companies increasingly look to outsource and variabilize their cost base. RPO new business in the second quarter was $120 million, which is just shy of an all-time high. As I said when I started, we now have real proof points that our strategy is working. Now I'll turn to our quarterly results. In the second quarter, all of our business segments were up sharply from the trough of the first quarter with a significant improvement from the rate decline that we saw in the first quarter. For the second quarter of FY 2021, our fee revenue was $435 million, which was up $91 million or 27% sequentially and down only 12% measured year-over-year. Fee revenue declines improved consecutively year-over-year each month of the quarter. On a quarter sequential basis, fee revenue in the second quarter for Executive Search was up 23% and RPO and Pro Search was up 25% with Pro Search being up 20% and RPO up 27% consulting was up 28% and digital was up 34%. More importantly, as fee revenue improved, we've been able to drive higher earnings and profitability by leveraging the cost-saving actions we recently implemented and the productivity and cost efficiencies resulting from our emerging digital and virtual delivery processes. Adjusted EBITDA in the second quarter was up $56 million sequentially to slightly over $66 million with an adjusted EBITDA margin of 15.2%. Our adjusted fully diluted earnings per share were also up in the second quarter reaching $0.54, which was up $0.73 sequentially. Our balance sheet and liquidity remained very strong. At the end of the second quarter, cash and marketable securities totaled $774 million. When you exclude amounts reserved for deferred comp arrangements and for accrued bonuses, our investable cash balance at the end of the second quarter was approximately $458 million. Finally, during the last couple of quarters, we have discussed a number of restructuring and cost-saving initiatives designed to help the firm through the trough of the COVID-19 crisis. Some of these cost-saving actions like salary cuts were highlighted as being temporary in nature. It is important to note that based on our Q2 performance, we have made an accrual to pay all of our employees 100% of their salaries for the second quarter, therefore, our cost structure in this quarter is fully loaded concerning current compensation expenses. I will now turn the call over to Gregg to review our operating segments in more detail.

Gregg Kvochak, CFO

Thanks Bob. Starting with our digital segment, global fee revenue for KF Digital was $75 million in the second quarter and up 34% sequentially and up approximately $9.3 million or 14% year-over-year. The subscription and licensing component of KF Digital fee revenue in the second quarter was approximately $23 million which was up 7% sequentially and up $7 million or 43% year-over-year. Mobile new business in the second quarter for the digital segment was up approximately 17% year-over-year. Adjusted EBITDA in the second quarter for KF Digital was up $15.1 million sequentially to $23.1 million with a 30.8% adjusted EBITDA margin. Now, turning to consulting. In the second quarter, consulting generated $126.7 million of fee revenue, which was up approximately 28% sequentially and down approximately 12% year-over-year. Demand for our consulting services continues to strengthen enhanced by our growing virtual delivery capabilities. In particular, growth was strong in some of our virtually delivered solutions in leadership and professional development, and assessment and succession, which were up sequentially 53% and 38% respectively. New business in the second quarter for our consulting services was also up sharply. In the second quarter, consulting new business was up approximately 17% sequentially with growth in North America, Europe, and APAC. Adjusted EBITDA for consulting in the second quarter was up $13.5 million sequentially to $20.1 million with an adjusted EBITDA margin of 15.9%. RPO and professional search generated global fee revenue of $85.6 million in the second quarter which was up 25% sequentially and down 10% year-over-year. RPO fee revenue was up approximately 27% sequentially and professional search fee revenue was up approximately 20% sequentially. With regards to new business in the second quarter, professional search was up 9% sequentially and RPO was awarded a near record $120 million of new business consisting of $59 million of renewals and extensions and $61 million of new logo work. Adjusted EBITDA for RPO professional search in the second quarter was up approximately $7.8 million sequentially to $13.8 million with an adjusted EBITDA margin of 16.1%. Finally, for Executive Search, global fee revenue in the second quarter of fiscal 2021 was approximately $148 million, which was up approximately 23% sequentially with growth in every region. Sequentially, North America was up approximately 32%, while EMEA and APAC were up approximately 5% and 21% respectively. The total number of dedicated Executive Search consultants worldwide in the second quarter was 512, down 73 year-over-year and up two sequentially. Annualized fee revenue production per consultant in the second quarter was $1.16 million and the number of new search assignments opened worldwide in the second quarter was 1,331, which was down approximately 15% year-over-year but up 19% sequentially. Executive Search also benefited from cost reductions, productivity enhancements, and streamlined virtual delivery processes in the second quarter as adjusted EBITDA grew approximately $20 million sequentially to $28.2 million with an adjusted EBITDA margin of 19.1%. Now, we'll turn the call back over to Bob to discuss some of our recent monthly new business trends.

Bob Rozek, CFO

Great. Thanks, Gregg. Globally, our monthly new business trends continue to improve throughout the second quarter. Excluding new business awards for RPO, global new business in the second quarter measured year-over-year was down only approximately 7% and that was from record new business in the second quarter of fiscal 2020. With the year-end holidays approaching, both November and December are typically seasonally slower months for new business. However, on a month-to-date basis, what we're seeing in November is that it is in line with last month and last year. If our typical seasonal patterns hold this year, we would expect January to be our high month for new business in the quarter. Now approximately three months have passed since our last earnings call and while advances have been made in the science, societal, and economic impacts of COVID-19, there remains significant uncertainty about the ultimate consequences. On the positive side, there have been several announcements regarding vaccines that have greater than 90% effectiveness. In addition, the world has adopted new ways of working and interacting with substantial acceptance of business being conducted virtually. On the negative side, there are several unanswered questions regarding the capacity to manufacture the vaccines at scale as well as how they will be distributed and administered to the population at large. In addition, we're seeing governments reinstating lockdowns as the number of COVID-19 cases and hospitalizations reach all-time highs. The volatile and unprecedented nature of what we're currently experiencing combined with so many unanswered questions and ever-changing data points continues to cloud near-term predictability of our business. Consistent with our approach for the prior three quarters, we will not issue any specific revenue or earnings guidance for the third quarter of FY 2021. Despite November's new business, which is as of today in line with prior month and year-ago levels, we remind you that our third quarter is our seasonally low quarter due to time off around the year-end holidays. Typically, what you would see is a sequential decline from our second to our third quarter has ranged sort of 3% to 5%. Ignoring any incremental impact from COVID, we would expect that pattern to be the same in the current year. However, what we are not able to determine is to what extent there will be any incremental impact from COVID-19, which could potentially exacerbate our typical sequential decline. That concludes our prepared remarks. We would be glad to answer any questions you may have.

Operator, Operator

Your first question comes from George Tong from Goldman Sachs. Please go ahead.

George Tong, Analyst

Hi. Thanks. Good morning. Your digital business had a significant rebound in terms of new business, up 17% in fiscal Q2. Could you elaborate on some of the trends operationally that you're seeing? Which specific areas within digital were strong? And what types of customers took on most of the business within the quarter?

Gary Burnison, CEO

Well the customers were pretty broad-based. As you know, the digital business encompasses several different service offerings. Training and development is a significant piece of it. The other piece is compensation. The third piece is around assessment and succession. There's a fourth piece around org strategy, but that's a much smaller portion of the business. For several quarters, we've made a move. That said, we've got all this great IP and how can we monetize that IP. I think this is a continuation of the strategy to really change thousands of people's lives through our IP. The customer base was pretty broad-based. Certainly, the professional development piece has been driving a fair share. That's a big market. We look at the market opportunity for us at about $250 billion. When you look at that market, you start to break it apart. Training and development is an enormous piece of that. We made a move over many, many quarters, particularly since the pandemic started, to move that business to virtual delivery. When you look at the virtual instructor-led delivery days, they're up 21% sequentially in the second quarter. We did 1,651 delivery days versus about 2,200 in Q4. So we've shifted almost all of our training now to virtual; it's around 97%. Bob's got the exact numbers. We're still down in terms of delivery days about 27% from Q4. I think you'll continue to see us address that. The third quarter will be a very tough compare because a year ago we had the impact of the Aspen acquisitions, which gave us tremendous capabilities around training and development, particularly around sales effectiveness. You'll definitely see a decline in the third quarter, but we had anticipated that. I think it's all of those factors coming together.

George Tong, Analyst

Got it. That's very helpful. And then just as a follow-up, your EBITDA margins in the quarter were not too far off from the levels seen last year just down a little bit. As you begin to take on some of the costs – as the costs come back with improving revenue trends, how do you expect incremental margins to perform in fiscal Q3 and beyond? Should we see something similar to Q2, or would you expect some of the permanent cost savings that you talked about to have a greater impact if some of your variable costs start to come back? How do you think about the margin profile going forward?

Gary Burnison, CEO

Well, I do think that over time we could easily reach a situation where our margins are actually better. We've reimagined our own business. I think part of that is reflected in the results here. When you look at our 15% margin and as Bob talked about in the Great Recession, one quarter out, our business was down – one quarter out from the trough our business was down 43%. I think now, it's down like 16%. Clearly, the strategy has played out. With respect to profitability, you could say the same thing. We do have plans around real estate. That takes a much longer time to actualize, but we'll continue to move forward with a different real estate footprint. The way people get work done as we've talked about is changing. I believe half of that is going to be permanent. So in terms of the flow-through, I mean Bob can comment on what we're targeting. I think that as we used to look at flow through, I don't know, it was 25% or kind of flow through to EBITDA. I think that's probably going to hold true and there could be some upside to that. Bob, do you want to comment further on that?

Bob Rozek, CFO

Yes. I'd say that in the foreseeable future, our flow through, which we experienced in the second quarter, was much higher than the 25%, as we continue to see some efficiencies from people not traveling and so on. We'll continue to see our flow through at an accelerated rate. Over the long haul, we're combing through over 100 leases. We're looking at all the business development travel that we used to do and coming up with new policies and approaches to that. I'd say you should expect a minimum sort of a two percentage point increase in our long-term profitability. We'll have more to say on that in the future as we conclude our analysis.

Sam Kusswurm, Analyst

Hey, guys. How are you doing?

Gary Burnison, CEO

Great.

Sam Kusswurm, Analyst

Excellent. I was hoping you could help characterize how much of the sequential increase in revenue was due to pent-up demand versus general strength in the market? Trying to understand how we should be thinking about the strength in this quarter as we model out the rest of the year here? Thanks.

Gary Burnison, CEO

Well, pent-up demand is always this phrase, and I don't know how – what it really means. I look at the results and say number one, years ago, we went down the strategy of how can we have greater impact with clients. How can we broaden the conversation? How can we take our IP and change thousands of people's lives? What you're seeing in the results is exactly the strategy playing out. Parts of the business are substantially less cyclical than other parts. When I look at the trailing four months of new business, overall, it's down 4% as a company platform-wide. But our Pro Search business has been probably the most cyclical; it was down 21% in terms of new business. Executive Search is less cyclical than Pro Search, down 17%. RPO is actually up 1%. Consulting is up 5%, and Digital is up 11%. You’re seeing the strategy play out. As we've indicated, to see one quarter out of the trough, the business reacted completely differently than the Great Recession is very encouraging. That's more than pent-up demand; it really has to do with the resiliency of our colleagues. I can't express enough what our colleagues have done. I think the messages, the solutions, and the actions we've taken have resonated in the marketplace. The D&I Consulting business is now approaching almost a nine-digit business on an annual run rate. This is all due to the quality of the people we have, the solutions, and our strong stance on D&I. Whenever you go through transformation, there's a period of pause, reflection, and neutrality. What you're seeing is companies transitioning from defense to offense. That has played a significant role in the business. Our marquee and regional accounts, the fact that they've outperformed the portfolio, is again a testament to the strategy. All those factors explain the results. I'm incredibly encouraged by what we've seen.

Sam Kusswurm, Analyst

That's helpful. And kind of unrelated, you've spoken about the desire to increase the number of margin engagements as a percentage of revenue mix. I'm wondering what type of projects tend to form those larger engagements? Can you share what the margin profile and project length tend to have?

Gary Burnison, CEO

Sure, it's a couple-fold. One is around organizational transformation, again relating to companies moving towards offense; different work needs to get done and done differently. The second driver is helping companies go from analog to digital. The third driver is around career transition services, where we started a B2C business called Korn Ferry Advance, which has helped 100,000 people using our IP. We’ve really taken that platform and made a significant impact. Those large engagements fall along those lines as well as D&I.

Gregg Kvochak, CFO

Thanks. We'll call the next.

Tobey Sommer, Analyst

Thank you. It sounds like you have made good progress in Digital and moving towards virtual delivery. How would you characterize that progress in moving towards more recurring business models? An update on what your goals may be over the longer term would be helpful. Thanks.

Gary Burnison, CEO

The RPO business has turned out to be a recurring business model, but the contracts are long. The multi-year contracts; in this last quarter, Bob could provide the detail, but we had a combination of renewals as well as new logos, with new business reaching an almost record level for RPO. On the Consulting side, our Digital clearly has a recurring business model. There's no question. Bob talked about the percentage of subscription-based revenue there. That's been effective. What's noteworthy is the focus we've had for quite some time on our house account marquee and regional accounts, about 300 in total, with dedicated account leaders. This focus creates a platform for recurring revenue and with our marquee and regional accounts. Look at any world-class professional services organization; about 40% or so comes from loyal repeatable clients of scale, and that along with our IP lays the foundation of our strategy and impacts our overall strategy.

Tobey Sommer, Analyst

Are those take-or-pay contracts, or do those modulate down as customer demand declines?

Gregg Kvochak, CFO

Most of them do allow for modulation depending on what customer sees with our RPO contracts. We often refer to Executive Search as a light switch—it's either on or off, whereas RPO is like demos. For example, someone might specify 10,000 hires a year, and if they face challenges they may dial that back to 6,000, 7,000, or 8,000 hires. Our consulting business is largely of that nature as well. Many clients we work with remain active year in and year out, showing a sizable recurring nature.

Bob Rozek, CFO

Yes. That would refer to the subscriptions and licenses. We had almost $23 million of revenue in the quarter for that business. Our new business was $29 million, which represented a solid year-over-year and sequential increase.

Tobey Sommer, Analyst

Perfect. Switching gears, can I ask a question about the acquisition strategy? Does the prospect of higher margins inform your acquisition strategy moving forward? If the company manages to achieve high teens EBITDA margin, acquiring inefficient businesses with mid-or high single-digit EBITDA margins could end up being dilutive. Should we rethink your target profile?

Gary Burnison, CEO

You raised an interesting point, Tobey. I tend to look at this from a client perspective without necessarily regard to margin. The margin plays a significant role, but return on capital is also meaningful and certainly a measure we will analyze along with purchase price. I believe we are at the very beginning of a significant endeavor to create a unique multibillion-dollar organizational consultancy. If you can have loyal repeatable clients and quality solutions, we create a firm capable of having a bigger impact. For our firm, changing people's lives means exceeding potential. We are interested in solutions and capabilities that allow us to change more people's lives, hence acquisitions that yield impact. The top line we derive from introductions across business lines is impressive; roughly 25% of our revenue comes from those means. In select parts, it's even higher. It shows that the strategy is indeed compelling.

Gregg Kvochak, CFO

If you go back to fiscal 2018, that number was 14.5%. We've taken that over the past two or three years from 14.5% to the 25% referenced.

Tobey Sommer, Analyst

A numerical question, should we consider similar improvements in free cash flow? Will the EBITDA conversion rules stay consistent?

Bob Rozek, CFO

I'd expect consistent free cash flow in the 70% to 75% range of our EBITDA. We've reduced our capital spending during the downturn, which will eventually need to ramp up to support our business growth. Free cash flow in our EBITDA should continue to stay in the 70% to 75% area.

Tobey Sommer, Analyst

In the third quarter, what are your observations regarding the strong sequential improvement compared to the 2009 period? How do you discern which aspects stem from the macroeconomic backdrop versus the company-specific business model resilience?

Gary Burnison, CEO

Bob, do you want to take that?

Bob Rozek, CFO

It's difficult to isolate the driving factors. As we step back to assess our performance through this recession, we believe our evidence indicates resilience, durability, and our strategy’s effectiveness. Evaluating each recession distinctly, the proof points we gathered demonstrate that, comparing performance, the business model we’ve developed has proven effective. Although tough to quantify individual impacts, we see strong metrics to underpin our overall performance.

Kevin McVeigh, Analyst

Great. Thanks. Gary or Bob or Gregg, any sense of the type of engagements people are focusing on? Is it more on revenue management, expense management, or just IT enhancements? Any insight on talent demands would help a lot.

Gary Burnison, CEO

Part of it is clearly—it's not expense-driven; it’s humanitarian where companies—you ask five definitions of culture and receive ten different answers. For us, it’s defined by how an organization operates. Companies are reassessing their business structures, including onboarding, training, and moving from analog to digital operations. Career transition services, driven by our KF Advance platform, lead to enhancements around workforce restructuring. Finally, the D&I investments we made eight years ago are paying off as that business is expanding greatly compared to its initial size.

Kevin McVeigh, Analyst

Super helpful. Any comments on what it will take to restore your guidance? What can we expect on that front?

Gary Burnison, CEO

Look, we tend to be conservative in our assumptions. The recent lockdowns we've observed in Europe and various U.S. cities create some concern. Yet, I think that the companies have adapted. We mentioned when this thing started, that it was going to be an Ironman, lasting 18 to 24 months. I previously predicted a widespread vaccine availability around October of next year. Although significant developments may happen sooner, we remain cautiously prudent. I don't see the world pausing; instead, we are adjusting to this reality. Adjustments are essential for our stakeholders, including clients, colleagues, and shareholders. Incremental lockdowns, albeit concerning, haven’t led to complete business disruptions.

Mark Marcon, Analyst

Good morning. I was wondering if you could talk about how you're investing in the business regarding consultant headcount? Are you currently in a position to play offense and upscale the talent?

Gary Burnison, CEO

We had a plan that we rolled out a year ago. When this situation arose, we kept our sights on our goals. Growing internally and utilizing our own IP for growth is a priority,; we are also pursuing external talent. Although you may not see those numbers immediately in metrics because of transition time and other factors, we’ve been actively seeking consultants and leaders in various roles across our divisions.

Mark Marcon, Analyst

Great. And regarding what your clients are saying, how are they approaching this sell strategy now? What pace do you foresee in the business coming back?

Gary Burnison, CEO

As I converse with CEOs, there’s less of a notion around a new normal—this is now normal. Acceptance of the situation is growing, and we’re seeing significant improvements across industries. Consumer segments were the highest-performing, while industrial and consumer sectors need to catch up. They will return, and given government stimulus, I’m optimistic for the future. Political changes in the U.S. may not hinder us; companies are taking offensive stances. I am more optimistic than six months ago regarding business improvement.

Mark Marcon, Analyst

Great to hear, Gary. Are you seeing any clients pulling back due to the recent surge in cases?

Gary Burnison, CEO

No, not right now. November has shown strong new business and existing mandates; we see it as a continuation. However, typically, November and December are slower months. I expect consulting days and delivery to drop more substantially this December than historically seen, due to seasonal norms. While we've transitioned virtually for training, we're still lagging 27% from Q4 in terms of delivery days. You'll see that reflected in Q3. I remain optimistic.

Marc Riddick, Analyst

Hi. Good afternoon.

Gary Burnison, CEO

Hi Marc.

Bob Rozek, CFO

Hi Marc.

Marc Riddick, Analyst

Thank you for your commentary and color. Regarding those transitioning from defensive to offensive strategies, what does that suggest for your interactions as you partner with them? Are you gaining greater insights into their plans?

Gary Burnison, CEO

Overall, the interaction has changed. Companies are reassessing their structures—how they onboard people, conduct training, and transition from analog to digital. Our dynamic capabilities in career transition services offer avenues for companies to thoughtfully restructure their workforce. Additionally, our commitment to Diversity & Inclusion requires consideration from companies across all levels. It’s clear they’re exploring their organizational profiles for the future.

Marc Riddick, Analyst

Helpful insights. Regarding regions, are you observing differences in clients moving from defense to offense?

Gary Burnison, CEO

In North America, the agility level has been impressive. The trailing four months of new business in North America is up 7%, while EMEA and Asia-Pacific are down 12-13%. It's evident that North America has adapted very well to the challenges; thus, it stands out significantly in performance. Companies are making those changes faster, and while EMEA and Asia have made progress, they need time to catch up.

Marc Riddick, Analyst

Thank you for that. I recall from 2008, many C-suites postponed retirement during tough times. Are you sensing executives could be ready to move on once businesses stabilize post-pandemic?

Gary Burnison, CEO

Yes, I believe the conditions have shifted the way executives assess their futures. I've had discussions with C-suite leaders who once thought they’d wait a few years and are now considering their departures sooner. The recent challenges have led to more introspection about professional and personal priorities. The number of changes might be more substantial than we expect in the coming months and quarters.

Operator, Operator

At this time, there are no further questions. I'd like to turn the call back over to Gary Burnison for any closing remarks.

Gary Burnison, CEO

Okay, Gregg. About a week ago, somebody said to me, Happy Thanksgiving, and I was a little jarred. I was jarred by the comment because everything has blurred together. Certainly, this is a special time of year. I wish everyone a wonderful Thanksgiving in the United States. Thank you for joining us, and we look forward to talking to you next time. Thank you. Bye-bye.

Operator, Operator

Ladies and gentlemen, this conference call will be available for replay for one week starting today at 3 PM Eastern Time, running through the day, November 30th, ending at midnight. You may access the AT&T Executive Playback Service by dialing 866-207-1041 and entering the access code 5073726. Our international participants may dial 402-970-0847. Additionally, the replay will be available for playback at the company's website, www.kornferry.com in the Investor Relations section. That concludes your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.