Korn Ferry

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry third 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've 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 Bernison, 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 reports filed by the company with the SEC, including the company's annual report for fiscal year 2019 and in the company's soon-to-be-filed quarterly report for the quarter ended January 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.cornferry.com. With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.

Okay, thank you, David, and good afternoon, everybody. Thank you for joining us. I'm sure that you, like everybody around the world, has been captivated by this humanitarian crisis that we have with COVID-19, and I'm certainly going to comment about that. But I do think it's important to set the stage for our company today and the ability to navigate through uncertain times, and clearly there's no doubt about it, this is an uncertain time. So let me first comment on the quarter that finished at the end of January. We delivered 9% constant currency growth, $515 million in fee revenue, solid profitability. I would say the quarter was very good. Our most recent acquisitions, that we did have really added tremendous capability to us around learning and development. And I think we've got the opportunity to take those acquisitions combined with our own IP and really tap a multi-billion dollar long-term market opportunity. The digital business, as we indicated a quarter ago, we thought it would be $100 million for the quarter it was. that's up 61% at constant currency. But again, that's benefited by the recent acquisitions. But organically, it was up almost 4% at constant currency. The foundation for this company's strategy has been knowledge. It has been IP. And whether that has been organically developed or whether it's been through M&A, it's really, I think we are the bellwether mark around being the experts on human and organizational performance. Every year, we develop and train nearly 1 million professionals. We have rewards data on 20 million people. We've done 69 million assessments. We've got thousands of organizational benchmark data. Every year, three minutes each business hour, we put somebody in a new job. So I think when you, you know, we definitely know what's the difference between great and good when it comes to organizational performance and the difference between good and great when it comes to individual roles. So, you know, with that richness of our IP and our global capabilities, We believe there's an opportunity to create a $10 billion firm focused on the execution of a client's strategy by optimizing its most powerful lever, which is its people and the organization that surrounds the people. And so today, we've got a much more diversified and balanced firm. That would include almost a billion dollars in revenue coming from consulting and digital solutions. That alone is substantially bigger than our next executive search competitor. But when you look at the consulting and digital solutions, it really breaks down into four areas. One is organizational strategy. Two, assessment and succession. Three, learning and development. And finally, rewards and benefits. So I think this diversification strategy, it's going to ultimately provide the most important benefit of tapping larger addressable markets that I think are going to have more potential, more durable and visible revenue streams. And for us, the ultimate goal is to have a bigger impact on clients and what really drives their performance. And so when you look at the data, the strategy is working. I would just point out that when you look at the results of our inside sales, or in other words, the percentage of revenue that's driven from referrals between lines of business, it's 24%. We certainly want to see it higher, but I think that's a demonstration that we're going to market as one, which we set as a goal now a couple years ago when we sunsetted a lot of the legacy brands that we have. So I, you know, I believe we're redefining an industry. I think we've got the right know-how of science data solutions to help companies deliver superior performance. And so, you know, with that context, let me make a few comments about the coronavirus. You know, obviously at this point, the magnitude of the threat and the threat that it poses to both human health which is the most important. And secondly, the global economy, it's unknown. And it's uncertain when there's going to be meaningful control of this outbreak. So this situation demands continued vigilance and preparation. So let me first comment on what we've done The number one priority continues to be the health and safety of our colleagues. So we've put protocols in place, whether that's social distancing. We've established a corporate emergency team. We've limited travel. We've limited internal meetings, office visitors. We've closed a selected number of offices we have some employees working out working from home and we are in daily communication with our colleagues that is by far my biggest priority and as a CEO I think that you know it's not just a question of shareholders it's a question of stakeholders and stakeholders are comprised of your employees your customers and your shareholders, and I think as a CEO you have to look at all three. And so our first priority has been our colleagues, and we're doing everything within our power to keep them safe. But when we look at our business, I'd also point out that many months ago, as I told you we would, we were going to take actions to position the company for the future. And those actions included the creation of a regional account program, the continuation of the marquee program, account program that we have, the one corn ferry activity that I referenced earlier, that we were going to moderate our execution and support headcount, that we were going to rebrand the KF Digital platform and start to create something that we could actually monetize our IP through a technology platform, that we were going to orient our professional search towards knowledge-based assignments, and that we were going to strengthen our balance sheet. All of those things we've done, and we've continued with the aggressive recruiting of account leaders. So in spite of these actions, the uncertainty that the coronavirus has presented to all of us has clouded the near-term predictability of our business. And so even though February new business was solid, it was up 6% year over year, and we can certainly get into it in the call. You know, in recent weeks and days, we've seen selected governments and companies, they've implemented social distancing actions that are similar to ours. either limiting travel, group face-to-face interaction. We've all seen that. You know, these actions are unlike what you'd expect in a normal economic contraction. In other words, you haven't seen across the board cost cutting along with job eliminations. And so, you know, these actions are different. And as we sit here today, the extent to which further incremental social distancing actions are put in place, or additional authoritative bodies adopt such measures, and for what time, those are substantial unknowns. So the measures taken to date, they almost certainly will impact our business for the fiscal fourth quarter and potentially beyond. And so due to the rapidly changing, you know, situation's fluid, right? So given that and combined with that creates a lack of visibility with respect to further actions to be taken, it's just too difficult for us to accurately assess and quantify the impact at this point. That's just the truth. So, you know, consequently, we're not going to issue any specific revenue and earnings guidance for our fourth quarter. And we're going to reassess the suspension of our guidance once we're comfortable that this humanitarian crisis has passed. And I just point out kind of one other thing, and that is we always do contingency planning. And as part of that, we look back at what happened during the SARS outbreak in late 2002. through the midpoint of 2003, and I had just started with the company. When we look back at that time, and I'm not suggesting it's analogous, but I think it's helpful to look back in history, our global fee revenue was down about 9% over two quarters. Then once the crisis was contained, and that was about the middle of 2003, fee revenue rebounded sharply. I mean, it was a V. In fact, what happened was that the revenue surpassed the peak, you know, the immediately preceding pre-epidemic quarter. So it was actually, it was higher. And so, you know, it's difficult if, you know, if you want to, for us to predict if our business today is going to react in a similar way to the current crisis, because, hey, the world is looks different. You know, the Chinese economy is four times the size it was. And there's no question, no question if you look how interdependent the world is today just by looking at the news. But more importantly, Korn Ferry is substantially different. And so back then we were $300 million and today we're $2 billion today. Back then, we kind of did just one thing. Now we do many things. We've increased the scale. We've increased our financial position. We've enhanced our liquidity. I mean, there's absolutely no comparison of today's Corn Ferry to the 2002 Corn Ferry. So I think that significantly increased scale and, you know, the stronger... financial position will allow us to withstand a near-term revenue decline that's similar to what we experienced back in SARS and maintain a 10%, 11% adjusted dividend margin on a trailing 12 basis without taking any restructuring actions, by the way. But again, I think that coming back full circle, our overall priorities for our colleagues. And, you know, we are taking what I think is a balanced approach to this crisis, which is really anchored around three things. One, safety. Two, caution. And three, agility. And that last part will be incredibly important. And I think we've positioned this company to be very, very agile. So I think we've taken the steps. We've got a business that is in the people business, people drive organizations, and I'm probably more bullish today than I've been about the opportunity for Korn Ferry in the future. So I'm joined here by Bob and Greg, and so I'll turn it over to Bob.

Great. Thanks, Gary, and good afternoon, everyone. I'm going to start with a few highlights. So in the third quarter, we reached another milestone as our quarterly fee revenue eclipsed the $500 million mark for the first time in our history. As Gary indicated earlier, our fee revenue in the third quarter was $515 million. That's up about 9.4% year-over-year constant currency. Growth in the quarter was driven primarily by our new KF Digital segment, which at $99 million was up $37 million or 61% year-over-year at constant currency, and RPO and professional search, which was up $12 million or 17% year-over-year at constant currency. I'll talk a little bit about the integration of the recent acquisitions. That activity is on plan. as are the cost savings associated with the rationalization of the combined cost base. In the third quarter, we recorded charges of about $21 million for the elimination of redundant positions and facility rationalization. Our third quarter cost base reflected savings of about $6 million, and because those actions took place over the course of the quarter, some, in fact, happened in late January, we expect an additional savings of about $3 million in the fourth quarter. As previously disclosed and Gary talked about, we've now divided our legacy advisory segment into two components, KF Consulting and KF Digital. And the results of the recent acquisitions are reported within the new KF Digital segment, and Greg will provide some more details about that in his prepared remarks. We continue to execute on our policy of maintaining a balanced approach to capital allocation. For all of our fiscal year 20 through today, we have now repurchased about 2.1 million shares using total cash of about $80 million. Currently, we have about $171 million remaining on our authorization for share repurchases. Additionally, today our board declared a 10% per share dividend payable on April 15, 2020, to shareholders of record on March 26, 2020. And finally, I'll just comment that our balance sheet remains very strong. We have approximately $420 million of investable cash at the end of the third quarter. I'm now going to comment a little bit on new business trends. Globally, new business in the third quarter was up about $25 million, or about 5%. at constant currency. We're also continuing to see differences in the trends of new business within our lines of business. If you look at what executive search did in the third quarter, that business was down 6% year over year. However, our professional search business on a global basis, their new business was up about 20%. So again, we continue to see data points, as we've talked in the past, that the diversification in the business is really starting to take hold. In the third quarter, RPO was awarded $58 million of new business, consisting of $32 million of new clients we call new logos, and $26 million of extensions and renewals with existing clients. Our consulting new business in the third quarter was up 2% year-over-year, led by North America, which was at a very strong quarter, up 9% year-over-year. And then finally, excluding recent acquisitions, the digital new business was up 9% year-over-year constant currency, and that was also driven by North America, which saw a 21% increase year-over-year. And finally, our adjusted diluted earnings per share in the third quarter was 75 cents, down about 6 cents or 7% year-over-year, driven in part by the change in our revenue mix, a little bit higher net interest expense, and a higher effective tax rate, which was about 26.5% in the quarter compared to 25% in the third quarter of fiscal 19. I'm now going to turn the call over to Greg to review our operating segments in a little bit more detail. Thanks, Bob.