Korn Ferry

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry first 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 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 2020, and in the company's soon-to-be-filed quarterly report for the quarter ending July 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 will turn the call over to Mr. Burnison. Mr. Burnison, please go ahead, sir.

Okay, thank you, Stephen, and good afternoon, good morning, everybody. It's been six months since the pandemic was officially declared. And I think the world is at the beginning of an Ironman triathlon. You know, it's not just a marathon, but a triathlon of endurance, agility, change. In fact, you know, I think over the next two years, we're going to see more change than we've seen in the past 10. Change will circle humanity. And in business, different work will need to get done, and work will need to get done differently. Almost every company on the planet is going to have to reimagine their business, whether that's rethinking their organizational atmosphere, their structure, roles, responsibilities, how they compensate, how they engage, how they develop their workforce. There's change that's going to be all around us. They're going to need to hire learning, agile, diverse talent. and do so in a more inclusive ethos and in an increasingly digital world. And that's the essence of Korn Ferry's business, to enable people and organizations to exceed their potential to be more than. You know, in early March, we were announcing the best results in our history, record fee revenue and a continued transformation from a monoline firm to an organizational consultancy. Then the world temporarily paused. Certainly that pause temporarily impacted our business. During the first quarter of our fiscal year, we generated about $344 million in fee revenue, which was down about 28% constant currency. But I think the key word is temporary. As we alluded on our last call, we're continuing to see green shoots. with July new business better than June, June better than May, and May better than April. Trailing new business for the three months ended August was down about 13% year over year combined, which is obviously more positive than we saw in our first quarter and what we saw when the world stopped in April. In fact, August new business was only down about 6% year over year. So really good news. July, new business was up 34% over June. So again, you know, green shoots that we're seeing. And I think I'm, more than anything, I'm proud. Proud of our organization. I'm motivated by how we've positioned ourselves for the opportunity ahead. And, you know, we face this crisis every, from a position of strength, not only when you consider the breadth and depth of our solutions, but when you consider our balance sheet. And the foundation of the firm has been to ground it in IT and data. And that continues to be the backbone of Korn Ferry. We've got rewards data on over 20 million people, 25,000 companies. We've done almost 70 million assessments. We have, you know, thousands of organizational benchmark data. We've got thousands of success profiles every year. We train and develop a million professionals a year. And certainly, you know, last but not least, is we place a candidate each business hour every three minutes. And so we're, you know, we're using this this time of change, not only to have an impact with our clients, but also to reimagine our own business. And that includes moving from analog to digital, including in our assessment and learning business, which, you know, today it's almost 25% of the company. And we're certainly shifting that business. I mean, we've done more virtual sessions in the last couple months than we've done in the last, you know, many, many months. The pipeline is good. We've pivoted very quickly. I can't be proud of our team. And when you look at the uptick here month over month in both our consulting and digital new business, you can see that something's working. And on the recruiting side, that's another place where we are reimagining that business as well through AI and technology and a lot of the platform that we use. in RPO. We've taken this IP, we've taken it out to the marketplace. I'm very proud in terms of the stance we have taken. I think our biggest opportunity as a company is to recast the Korn Ferry brand. We recently launched Leadership U, a curriculum that helps leaders take on today's challenges. And more importantly, amid all the calls for change, we're amplifying our voice, not only on diversity, but also equity and inclusion, both within Korn Ferry and among our clients. And we know from our research that diversity is a fact, engagement is an emotion, but inclusion is a behavior. And so our focus on D&I is, Actually, it's about eight years ago, almost. Actually, it was two days ago, eight-year anniversary of us making an investment in a company at that time was called Global Innovations. We've turned that into what I consider to believe the absolute best D&I consulting business in the world. And as I mentioned, our July consulting new business was the fourth highest month in our history. And I think that was driven in part by the strong voice we've taken not only around the pandemic, but also around D&I. I'm also proud and pleased to say that we're launching Leadership U for Humanity. And that's 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 be the Executive Leadership Council. an absolute preeminent organization. Their mission is to develop, increase the number of successful black executives around the globe. And our goal is to develop a million new leaders from diverse backgrounds using our Korn Ferry Advance and Leadership U platforms. And so not only, I think, have we demonstrated that we say what we mean, But we're not just talking about it. We're being about it and providing a systemic solution to a systemic issue. And so out of tomorrow's change, a new order is emerging, and Corn Fairy is going to help drive that change, helping people and organizations be more than that. With that, I'm joined here by Bob Rozak and Greg Kowalczyk. And so before we entertain questions, I'll turn it over to you, Bob.

Great. Thanks, Gary. And good afternoon and good morning. Before I jump into the first quarter results, I want to just elaborate on a couple points that Gary talked about. I think he's absolutely right concerning the amount of change that will take place in the next two, even three or four years. We're already seeing it in our clients. I truly believe that Korn Ferry is uniquely positioned to lead companies through this change. You know, the data, IP, and know-how that Gary talked about really sits at the center of our organization and permeates all of our solutions. And that provides a common, harmonized language for talent that's really core to our One Korn Ferry integrated approach to helping clients solve their corniest business issues through the most valuable asset, which obviously is the people. Again, I believe we're uniquely positioned because we're the only firm that has the end-to-end data, IP, and know-how to address every aspect of an employee's engagement with his or her employer. Not only do we have first mover advantage, but in my opinion, our position and our collection of assets is virtually impossible to replicate. So as I sit here today in the midst of this wave of change with the collection of assets and solutions we've assembled, my optimism for Korn Ferry's future growth prospects have never been higher. Now let me turn my attention to the first quarter. I'll start with a few highlights before turning it over to Greg, and then I'll come back on and address our recent business trends. For the first quarter of fiscal year 21, our fee revenue was $344 million, down about 28% in constant currency. More importantly, our monthly fee revenue trends within the quarter showed signs of stabilization. Consolidated fee revenue in May was down about 34% year-over-year, while June and July were down 27% and 26%, respectively. For each of our service offerings, we saw fee revenue slowing at different rates, which really was in line with our expectation and reflects the diversification and mixed shifts that we've been communicating. Specifically, fee revenue in the first quarter measured at constant currency was down 37% for executive search, 35% for professional search, Our consulting was down 26%. RPO was down 22% and digital was down 2%. Driven by the revenue contraction, our consolidated adjusted EBITDA for the first quarter was 10.6 million with an adjusted EBITDA margin of 3.1%. And our adjusted fully diluted loss per share was 19 cents. Our balance sheet and liquidity remained strong. At the end of the first quarter, cash and market local securities totaled $733 million. Excluding amounts reserved for deferred comp and for accrued bonuses and actually net of the funds used to right-side the firms, our investable cash balance at the end of the first quarter was about $511 million, and that's up about $150 million year over year. We continue to have undrawn capacity of $645 million. on our revolver. So altogether, we have close to $1.2 billion in liquidity to manage our way through the COVID-19 crisis and to invest back into the business through the recovery. Last, we had about $400 million in outstanding debt at the end of the quarter. Finally, during the quarter, we completed our restructuring actions to side the firm for the anticipated current levels of revenue. As you will recall, in April, just before the end of our fiscal fourth quarter of FY20, we announced a number of cost actions targeted at both compensation expense, which included layoffs, furloughs, and across-the-board salary cuts, as well as other actions focused on the reduction of G&A. Combined with the actions completed in the first quarter, we have initially reduced our cost base by about $321 million annually. I'm now going to turn the call over to Greg to review our operating segment in more detail.

Okay, thanks, Bob. Starting with our digital segment, global fee revenue for KF Digital was $56 million in the first quarter and down approximately $2 million, or 2% year-over-year measured at constant currency. The subscription licensing component of KF Digital fee revenue in the first quarter was approximately $21 million, which was up $6 million year-over-year and flat sequentially. New business in the first quarter for the digital segment was down approximately 3% globally year-over-year at constant currency, with a subscription and licensing component of approximately 40%. Adjusted EBITDA in the first quarter for KF Digital was $7.9 million, with a 14.2% adjusted EBITDA margin. Now turning to consulting. In the first quarter, consulting generated $99 million in fee revenue, which was down approximately 26% year-over-year at constant currency. As clients have settled into their new work-from-home protocols and have become more familiar with our virtual delivery capabilities, new business for our consulting services has begun to improve. Measured year-over-year at constant currency, new business in the first quarter for our consulting segment was down approximately 4%, led by North America, where new business was up 11% year-over-year. Adjusted EBITDA for consulting in the first quarter was $6.6 million, with an adjusted EBITDA margin of 6.6%. RPO and professional search generated global fee revenue of $68 million in the first quarter, which was down 27% year-over-year at constant currency. RPO fee revenue was down approximately 22%, and professional search fee revenue was down approximately 35%. year over year, measured at constant currency. Adjusted EBITDA for RPO professional search in the first quarter was $6 million, with an adjusted EBITDA margin of 8.8%. Finally, for executive search, global fee revenue in the first quarter of fiscal 21 was approximately $120 million, which compared year over year and measured at constant currency was down approximately 37%. At constant currency, North America was down 38%, while both EMEA and APAC were down 35%. The total number of dedicated executive search consultants worldwide at the end of the first quarter was 510, down 59 year-over-year, and down 46 sequentially. Annualized fee revenue production per consultant in the first quarter was $900,000, And the number of new assignments opened worldwide in the first quarter was 1,115, which was down approximately 34% year over year, but up 9% sequentially. Adjusted EBITDA for executive search in the first quarter was approximately $8.1 million, with an adjusted EBITDA margin of 6.7%. And I'll turn the call back over to Bob to discuss some of our recent monthly new business trends.

Great. Thanks, Greg. Globally, year-over-year declines in monthly new business exiting fiscal year 21Q1 and entering the second quarter continue to stabilize. Excluding new business awards for RPO, global new business measured year-over-year was down approximately 31% in May, down 25% in June, rebounding to down 5% in July. Measured sequentially, June new business was up 17% over May, and July new business was up 34% compared to June. With summer vacations, August is a seasonally slow month and normally is lower relative to July. Measured year over year, August new business was stable and down about 6%, which is in line with what we saw in July. Monthly new business trends have varied by segment and have in some cases been choppy month to month. Digital new business was up 3% year-over-year in June, down 5% year-over-year in July, and up 10% in August. Likewise, consulting new business was down 28% year-over-year in June, rebounding to up 34% in July and up 10% in August. For executive search, new business was down 34% year-over-year in June, improving to down 27% in July and was down 19% in August. And finally, professional search new business was down 15% year-over-year, falling to down 23% in July and August. With regards to RPO, a strong quarter of new business. with 56 million of global awards, and that was comprised of 32 million of new clients and 24 million of renewals and extensions. And we continue to have a strong pipeline of new business in the RPO world. Approximately two months have passed since our last earnings call, yet there remains significant uncertainty about the ultimate impact of COVID-19 on society and global economies. Currently, governments are struggling to balance reopening and re-engaging in an effective way against the maintenance of an environment that fosters the health and safety of everyone. Now, there really is no playbook. This effort takes on many forms, and there's not a clear path to success. Further, it's unclear whether certain governmental aid programs that were put in place to provide financial assistance to impacted businesses and individuals, whether they will remain in place or for how long. The unprecedented nature of the current environment, combined with many unanswered questions and rapidly changing data points, like the recent acceleration of corporate layoffs and the potential outcome of the US presidential election, that really continues to cloud the near-term predictability of our business And consistent with our approach in the last two earnings calls, we will not issue any specific revenue or earnings guidance for the second quarter of fiscal year 21. That concludes our prepared marks. We're glad to take any questions you may have.

Ladies and gentlemen, we'll now begin the question and answer session of today's conference. If you wish to ask a question, please depress the 1 followed by the 0 in your touchtone phone. You'll hear a tone indicating that you placed yourself in queue and all questions will be pulled in the order I received. You may remove yourself at any time by pressing the pound key on your touchtone phone. And if using a speakerphone, please pick up your handset before depressing the keys. One moment, please, for our first question. Our first question will come from the line of George Long. Please go ahead.

Hi, this is George. Good morning. You indicated that July new business trends were down 5% year-over-year, whereas August new business was down 6% year-over-year. Could you talk about what contributed to the moderation in the pace of improvement in new business trends overall and perhaps by segment?

You know, if you look, the good news is obviously the headline numbers are on the quarter were not spectacular, but the world stopped in April, and you're going to see that with GDP. But what we have seen is a very steady upswing in new business. And as Bob indicated, July was better than June, which was better than May. So that's really good news. And when we look at August overall, we were down about 6%. Executive search was down 18%. If you just isolate the month of August and consulting and digital, we're actually up 10%. So I think that when you look at the platform as a whole, the business is reacting almost in line with what we thought it would do. And when you look at the drivers of consulting, and digital, I would say I would point to number one, transformation, and the fact that every company, you know, different work needs to get done and work needs to get done differently. So every company in the world is going to have to reimagine their business. And that starts with the organization and its people. And when there's transformation, there's usually a pause. then the next step is with people. So we've certainly seen that. We're starting to see early signs of that in our consulting and digital business. I think the other broad stroke I would put on the new business trends is our D&I business, which is before this was about a mid-eight-figure business. And we've seen over the last few months – about a 50% uplift in how we can help companies not just deal with diversity, because that's a fact, but more importantly, how you deal with inclusion, which is a behavior. So I would point to those two, and then I would point to one other, which ties to transformation, which is around developing a workforce and creating a more learning, agile workforce that can operate in a digital world with an inclusive ethos. So those are, I think, the broad strokes on the business, you're seeing obviously an uptick in search, which is good. And then from an industry standpoint, you know, it's much like you would probably intuitively think the consumer area, has seen improvement, but not as much as, say, life science. Life science has been, as you would guess, certainly stronger. And so those would be the broad strokes. Obviously, energy has been challenged over the past few months. But that would be my kind of 38,000-foot view.

Yeah, hey, George, just so you know, on the White Council of Toby, after our last earnings call, we actually put a slide into the earnings call presentation that's posted that shows the new business by each line of business. That's on page seven.

Great. No, that's helpful. And as a follow-up, could you provide some perspectives around how you expect the trends that you're seeing in new business to translate into revenue or fee performance? It sounds like clients aren't canceling. So retention rates are changing. So it's really the pace of new business that's ultimately going to drive fee revenue performance. It sounds like it's ultimately delays rather than cancellation. So could you provide some perspectives on how you expect the translation of new business into fee revenue?

Yeah, we've seen on the, you know, the search businesses are rather straightforward. That's going to be, you know, that translates to revenue generally over 90 days. And when you look at the consulting and digital business, you'd find that essentially, you know, 50% of it gets recognized in, you know, say within 12 months, and then the balance is going to be over the next 13 to 35 months. And the RPO business is not materially different than that. And what I would say, there's been a couple other trends too. We've certainly seen a shift towards bigger engagements. That was a strategic pillar of ours going back a couple years. We're now really starting to see it more impactful engagements. That's something that is coming through. And I think the other thing that Bob could maybe allude on is When you look at the digital business, we've talked for a while about moving that business to a subscription-based model. And that digital business, we obviously made a push towards digitizing that. But the reality is when this pandemic hit, still a lot of the business was delivered in classrooms. And we have gone – I mean, we are all over that, moving that to a digital offering. And one of the things is to increase the amount of subscription-based business from digital. So, Bob, do you want to comment on that?

Yeah. So, George, just so you know, the subscription business – and I'll give it to you over the last three quarters, including Q1 – was right around $21 million. So that demonstrates the durability of that revenue in the current environment that we're operating in. The piece of that I think is better news is if you look at the new business subscription offerings, it was about $23.5 million in Q1. That's up 42% kind of year over year. And even quarter sequential, it's up about 16%. So, again, as Gary indicated, you know, part of the strategy in the diversification is also creating more durable revenue streams, and, you know, we're starting to see that take shape. I mean, even, you know, when we talked about the larger engagements, you know, when you stratify the, you know, into the large engagements for digital, we consider that over 250. For consulting, we consider that over 500. You know, we're seeing growth in those large engagements year-over-year and quarter sequential versus the smaller, more transactional engagements. That's where we see the decline. So, again, these are data points at this point, but we are starting to see really the strategy come to light that we've been talking about

Got it. Very helpful.

Thank you. Our next question will come from the line of Toby Summer. Please go ahead.

Thanks. Just a quick follow-up I could on the new business trend. What's contract duration like or new business trend duration?

And if you could speak to that a little bit by segment.

And in particular, the D&I wins that you have, are those on the longer side? Just trying to think of that as far as how to play out the model. Yeah, we hope that the DNI is definitely not going to be 90 days, but it's not going to be as long as the balance of the portfolio. Companies, there's going to be real change. People are, from what I can tell talking to CEOs, people are taking this very, very seriously. particularly in the United States. So I would guess that much of that will have, you know, a shorter tail. And so if I describe that the search businesses, you know, have a tail of, say, 90 days or so, and the consulting digital RPO businesses have a revenue recognition of, say, 50% within 12 months, and then the balance, you know, over, say, you know, 36 months, I think this will be – the D&I business will be somewhere in between.

Okay, thanks. That's helpful. How should we think about the temporary cost cuts being reabsorbed into the business?

Again, from a modeling perspective, it's a pretty significant variable for us to compensate for. I would think about it when we laid out the cost cuts. Um, our goal was this, you know, number one, I guess, as I stepped out, this was a humanitarian crisis. Um, and so we pulled out a contingency playbook a year ago and did a number of things, um, to prepare for a turn. Obviously we didn't envision this kind of turn. But when we, in early March, we obviously saw this in China about the third week in January. As we looked at this, we said, well, you know, this is a humanitarian crisis. And let's go into this with the view of preserving as much muscle as we possibly can to accelerate through the turns. And last time, when I go back 12 years, Corn Fairy's business grew five-fold from the trough, obviously over a period of years, both inorganically and organically. And within four quarters of the trough, the business was up 60%. So we said, okay, let's try to save as many jobs as we possibly can. Unfortunately, we did have to make the decision to let go some very, very good people, which troubled us. And then we took some other action that were more temporary in nature. And so when you look at it in total, on an annualized run rate, we said we would reduce the cost base by about $320 million. Essentially, half of that was more permanent in nature, and half of it would be variable. And so when you look at this quarter on that variable piece, you'll probably find that 40% or so of that variable came back in, maybe a little bit less, into the first quarter. something like that bob can provide the the specific numbers the way that you know we're we're not providing guidance just given you know how quickly the world seems to change from day to day um and the way that i would kind of look at this is just say okay you know you did 345 million dollars in revenue and fee revenue this quarter which obviously reflected the world stopping in April. And if that were to go up, say, you know, pick a, pick a number, say, you know, 25 million, how would that margin expand? And I would probably point you to on that first 25 million, it would probably go up, you know, a hundred, 150 basis points. And as you go up the ladder in $25 million increments, As you each rung up that ladder, you're going to see more leverage and more flow through to dividend. So that's kind of how I would think of it in very, very broad strokes. Bob, can you clarify any of that? Is that about right?

No, it's actually pretty spot on, Gary. The percentage you talked about, 40, is actually 41%. So you're spot on in that. The model that you laid out is exactly how we view the world. Thank you. If I could ask another one.

With that in mind, investors looking at businesses in the storm are trying to see what they'll be like when things are more normal and we're just worried about economic forces and not the humanitarian crisis you articulated. What kind of revenue level do you think the company would need to hit to operate at the old EBITDA margins of around 16%? Because that kind of analysis is going to be integral to long only building a position amid this turmoil. Well, I think, yeah, I hear you. I think you first have to have to look at, you know, do you believe in the company's strategy of creating a preeminent organizational consultancy, taking strategy and synchronizing with, you know, an organization and talent and driving superior performance, I think we're at the very, very beginning of that journey. So what I would say is, number one, it really kind of does depend on the mix of business in what happens here. I think there's going to be, again, more change in the next two years than in the last 10 years, and that change is going to encompass a lot of different factors, including the C-suite. Because I think what you're going to find is for a whole host of reasons, there's going to be a lot of chairs that are going to get reshuffled. People may make personal decisions. There could be demographic issues and considerations. There could be a number of things, but that would not surprise me in the least, that once companies get past this neutral zone and really move to offense, and I'm not suggesting that companies haven't done that. clearly there's been a number that have. But now you're really going to determine, you know, winners and losers. So you're absolutely right. You know, Korn Ferry in its past performance, we, from the last trough, grew the company fivefold. And from the trough in 12 years ago, within four quarters, it grew 60%. And so, you know, it depends on, number one, if you consider this to be a trough. If you do and you apply that same sort of logic to where we were in the first quarter, I think you could reasonably conclude that we would be back at those margin levels, you know, for sure. So we think we've taken the right step, not only on the cost side, but much, much, much more importantly on the top line side. about how we can help companies really, really deliver on change. And whether that's D&I, whether it's sales effectiveness, whether it's M&A, whether it's transformation, or whether it's the reshuffling of a C-suite, I feel very confident in that.

Okay. If we just take the next shift out of it, Can you be at the old margin at a lower revenue level because of the cost cuts you've taken out?

Yes.

Thank you.

We have a question from the line of Sam Cussworn. Please go ahead.

Hey, everyone. Hope you guys are doing well. My question relates to executive search. Are there certain client groups that demand has trended particularly better or worse than throughout the quarter here?

Could you, you got a little muffled. Could you repeat that? I'm sorry, one more time.

Yeah. With an executive search, are there certain client groups that demand has trended particular better or worse than throughout the quarter?

That are trending better or worse? Yes. Yeah. Well, when you look at it, you know, clearly the life sciences area, has for sure trended better on the other end of it there's been certain aspects of the industrial business such as energy that haven't trended as well and so those would probably be the barbells and I'd also say that professional services has not trended well. But given, you know, what we're seeing in manufacturing activity and all of that, I'm not so sure that those trends that I just alluded to would continue. But I would say those are the outliers, things like wealth management, asset management, have done reasonably well in this environment.

Thanks. That's helpful. Maybe switching gears then a little bit. You know, in prior cycles, when coming out of a recession, were there more favorable opportunities for market share capture from struggling competitors or even additional acquisition opportunities?

For sure. You know, we've been, one of the things we did a year ago is we planted a lot of M&A seeds. And as you know, we've done 13 acquisitions and 12 of those were really kind of sole sourced where the company wasn't necessarily for sale. We planted a lot of M&A seeds going back a year ago. So there will undoubtedly be be those kind of opportunities. When we look at the market, we size the market, you know, somewhere between 200 and 250 billion dollars. And when you look at that market sizing, you would find that the areas of learning and development represent a disproportionate size of that market. And so we are keenly focused on growing that learning and development business. The executive search market, although incredibly strategically important to Korn Ferry and an advantage that other professional services firms do not have, I think that executive search market is probably no more than $5 billion. The professional search market is probably four or five times the size of the executive search market. So we look at that as a much broader market, and we also focus on the RPO piece of the business as well, which has continued to deliver incredible quality results. renewals as well as new logos. So we think that there's that opportunity and there's that opportunity to also bundle services together.

Just to elaborate on a point Gary made earlier too, when you think about the cost savings that we put in place, Gary mentioned about 50% of those relate to position elimination, 50% or other actions. And it was a very conscious decision on our part to do that. So we retained, as Gary indicated, the muscle to enjoy more than our fair share of the recovery. So as you think about us coming out the other side of this, our participation in that recovery, we've got the company positioned to enjoy more than our fair share of that. Thanks for the answers, guys.

A question from the line of Mark. Mark, please go ahead.

Hello. Thanks for taking my questions. One, just as it relates to some of the cost actions that you took over the last five months, from the permanent side, what percentage of that has already gone through here in the in the first quarter, or are there more benefits to see in terms of the permanent reductions as it relates to the financials?

Bob, you should answer that.

Yeah, yeah, no, let me take that. Mark, I would think about it, again, more from the perspective, because, again, we're trying to balance the temporary cuts. We've got a program in place for the organization to share some of the economics, you know, back to the employees so the, you know, sort of mute the impact of the pay cuts. But as you think about it, I would think about it the way that kind of Gary described it in, you know, if you assume the trough was this quarter and you have $25 million increments, you're going to get, you know, 150 basis point margin improvements up to probably around maybe a little bit north of $400 million in revenue. Once you get past that point, you'd be looking at a more normalized flow through.

Great. And then, Gary, you've described this as potentially a triathlon. You've been through multiple cycles. Obviously, there's this one's unprecedented in multiple respects, but how do you think most of your clients are going to basically react in terms of going into offense, engaging in terms of, you know, some of the changes that, you know, that you could help them with? What's that pacing do you think going to look like? And in terms of reshuffling organizations, how, you know, How quickly do you think that's going to occur?

I think the elephant in the room is fiscal stimulus. And, you know, there's, as you know, I mean, there's a substantial, the punch bowl spike big time. So the really hard piece of the algebra is gauging the fiscal stimulus and whether that continues. As you know, there's some countries where that's scheduled to end in October. that certainly has an overriding impact on the economic landscape. But I would say we are starting to see, we've clearly seen it in the D&I space, there's no doubt about it. But in terms of transformation, yes, we are starting to see that. And I just, I firmly believe that there is more change here in the next two years than in the last 10 years. And I think that Um, you know, don't take this the wrong way, but it's been, it's been a bit preseason up till very, very recently. And, and I do believe, um, that, you know, culture for me, the definition is how an organization gets things done. I think it's going to be, uh, incredibly widespread. And, and I think that, that a lot of the changes that we're seeing, you know, people are not going to go back, um, So I'm envisioning, and you can see it in our consulting business, you know, I do envision that to be pretty widespread. But I think the overarching question there is the stimulus question, because that impacts companies' liquidity, impacts the degree of change they can actually actualize. And that one's hard to handicap. My intuition would be that for any politician, it would be very, very hard to stop spiking the punch bowl. But you never know.

Well, I'll give you a data point on that, you know, as we go. are looking at the second quarter, you know, whether it's money coming back to Corn Ferry or money going to our employees, we're estimating that that level of aid is going to drop by about 30% from what we saw in the first quarter. So it's, you know, it's pretty, it is a, it's a big factor as Terry indicated in terms of what we see going forward.

I mean, if we don't see a, a resumption with regards to that stimulus? I mean, do you anticipate that perhaps, you know, some of that choppiness that we've seen from month to month in some of the businesses could, you know, continue?

Yes. I mean, how could you have 50% of Americans making more unemployed than employed, right? I mean, that's a, you know, there's some startling data points, you know, better than I. And, yeah, that's a definite risk factor.

Okay. Can you talk a little bit about some of the new business trends that you indicated on a monthly basis, you know, in terms of the variance? What drove some of that, you know, the choppiness? Like were there big engagements that were coming through and then, you know, some pulled back? And I'm talking about specifically like, you know, in professional search you ended up seeing some improvement you know, there in terms of going from June to July. I mean, it was getting better from May to June and then dipped off in July. Was that related to, you know, the spike in terms of COVID and, you know, same thing with digital? On the flip side, consulting ended up jumping dramatically in July. Was that DNI?

Yeah. Yeah. So you're absolutely right. I mean, as Bob said, one of the things we've talked about this for a while, we've tried to move the organization towards being in the business outcome business. So moving the solutions more, you know, anchored around outcomes and business impact. So we've certainly seen a shift, as Bob indicated, towards larger engagements. And I think you're going to see that. You're going to see that on the consulting side in particular as where there could be, you know, in any particular month, there could be a large engagement that is hit. And so we, you know, we see that and we're very, you know, I think some of the most validating things to me have been not only the stance we've taken publicly around issues, but some of the wins. And, you know, these are major companies that have turned over either part of their leadership development to us, their leadership journeys, helping companies move from analog to digital. These are major wins with brand name logos that Korn Ferry never would have done 12 years ago. So the company's positioned completely differently today. And so, yes, you're absolutely going to see some of that. Is it going to be like the RPO business that tends to be really lumpy? Um, I'm not, I'm not sure, but clearly that, yes, you're absolutely right. The professional search, you know, I wouldn't, I wouldn't read too much into that. Um, you know, clearly in June, we saw a huge, uh, upswing in professional search. Um, but you know, again, you know, you had, you had pent up demand from the world stopping in April. So I'm not so sure. I would read much into that. But I do think that overall, when you look at the consulting and digital business, you would point to transformation, you'd point to D&I, and you would point to learning and development. And obviously, you know, some of those things are very related, right?

Absolutely. And, Matt, I'll give you some tips. Some data points on that, you know, the new business in our digital business year over year, the engagements above 250 was actually up 5%. Quarter sequential was up 13%. Our consulting new business, and we draw a line for large engagements that are 500,000, was actually up 80% year over year and almost 50% quarter sequential. So you can see the real shift is very indicated towards a strategic shift towards large engagements.

That's fantastic. Can you talk a little bit about two different things? One, what you're doing in terms of changing and transforming yourself. Some elements are relatively obvious in terms of like the sales training piece and moving to virtual work. but what are some of the other elements that are changing and what would some of the longer-term impacts be on the margin structure? And then secondly, when we think about some of the leadership development and analog to digital engagements that you're doing, you know, D&I is fairly obvious in terms of what you'd be doing for clients, but can you talk about the engagements that you're seeing, like the specifics with regards to types of engagements that you're seeing now from some of the larger clients that are where you're seeing some of those big growth rates?

The broad brush is analog to digital. And so companies are increasingly looking at their workforce and saying, you know, how learning agile are we, you know, to make that move from analog to digital, it's not only strategy, but then you've got to say, okay, what kind of workforce do you have? So do you have people that are are mentally agile, strategically agile, people agile. And so we have real IP that will go in and say, okay, this is where you're trying to move the company directionally now. This is what we think it's going to look like in two years. And so what type of workforce do you need? And then measure that workforce today. And then if there's a gap, okay, these are the learning journeys that you go through. So I would say that is absolutely – in terms of a broad thesis, that's number one. As you said, the D&I is, yes, maybe it is more obvious, but I'll tell you that even though on the surface it's more obvious, it's much more systemic. It is hard, much harder for organizations to drive that change, not around diversity, but around the behavior of inclusiveness. And so that is, again, a leadership journey. We haven't seen much around the M&A space, but we have pretty deep solutions around that. I wouldn't be surprised if that kicks in at some point here. Sales effectiveness, we've got a very, very, what I consider to be world-class business there. We have been helping companies, how you engage with customers virtually, That is a big topic of conversation today. And so you've seen that. I think with our own business, we are trying to do the same thing. So number one, I think our biggest opportunity is to recast the brand and to make the brand synonymous with organizational performance. And so, you know, hopefully people have seen what we've done there. in terms of that, you know, making the brand more elastic. I think second for us, just like our clients, is analog to digital. And that's not just in our learning business and assessment business, which is, you know, like almost 25%. It's also in our core recruiting businesses. And we're pushing very, very hard around, you know, what we can do there in terms of using our technology and AI and the things that we use in our RPO business across the entire recruiting platform. So that would probably, you know, that would be number two. We obviously continue to look at M&A. You know, there's nothing that's executable right now, but we're obviously, you know, we've planted a lot of seeds there. Then the fourth piece is our own talent and whether that is developing from within or adding talent from the outside. That's another leg of, you know, our playbook that we said we would try to actualize here, you know, accelerating through the turn.

Great. Thanks a lot. I appreciate the color.

And our last question will come from the line of Mark Riddick. Please go ahead.

Hi, good morning. I wanted to just touch on – and thanks for the detail that you provided up to this point. I just wanted to touch a little bit on maybe where you are with marquee accounts and the progress that's been made there, certainly with everything going on, and just also wanted to get a sense of with the – the folks that were kind of in that marquee group, if you will, if the actions that you're seeing there or the plans that you're seeing there differ than maybe the rest of the clientele, if there are any particular trades that we should be thinking about as far as maybe what, you know, some of your marquee customers are doing as opposed to others.

Thanks. Yeah, I'll make some broad comments, and then maybe, Bob, if there's any data that you happen to have, At your fingertips, we really do believe that when you look at a world-class professional services firm, 35% to 40% of the portfolio would be driven by loyal, repeatable, sustaining clients of scale. That's where we are moving to. That's our true north. We have about 300 accounts between marquee and regional that we would consider as part of that. We need to continue to develop from within and bring in account leaders, which is a completely different game than Korn Ferry has played in the past. So we've got to be aggressive in that. I will say that I can't mention the wins, but there's been some really validating wins with major logos who not only picked our solution because they of our technology platform. So we started a B2C business that is relatively small in financially, but we've put 100,000 people through that around being the world's gymnasium to exercise your career. Well, as part of that, we developed what has now been validated as a world-class platform, technology platform. And so some of the wins, and in fact, we've even gotten into career transition services Some of those wins are actually due to our fabulous team in the KF Advanced business and the platform that we've built. But the other reason is that some of those wins have been from marquee and regional accounts where we've had a dedicated effort for many quarters. And so I think clearly when I look at some of the marquee wins, they're from marquee accounts. Bob, I don't know if there's any data that you happen to have at your fingertips.

Yeah, yeah. So, Mark, just so if you go back to where we finished last year, the marketing regional accounts were about 32, 33% of our total revenue. You know, Gary just alluded to the program we put in place with account leaders, account managers. Again, is demonstrating that our strategy is paying off with the larger engagements. The first quarter, the marquee and regional accounts was about the same as where we ended last year. But with the change that we're seeing in larger engagements, we absolutely expect that group of accounts to grow as a percentage of our total revenue over the next couple of years.

Okay, that's certainly encouraging. And then I guess the final question for me is – and you touched on this a little bit as far as the potential of acquisitions, but I guess maybe I can maybe ask it a slightly different way. Are there any pieces that you look at now that you feel as though would be – that Corn Fairy is missing or things that you would like to enhance? I know you've talked about enhancing the digital and recurring revenue streams and things, but I was wondering if there are any – observations over the last few months that has made any shifts in some of the overall acquisition wish list? Thanks.

The organizational strategy and learning and development clearly are big pieces. And as you said, the digital aspect of that. You know, if you look at our research, what it would suggest is that for number one, the number one predictor, success is learning agility. But on top of that, for people to actually even find their potential, let alone exceed it, people need opportunity. In our research, whether it's on female leaders, black leaders, across the board, you have to have opportunity, you have to have mentorship, you have to have sponsorship, and there needs to be development. So we believe that learning and development, albeit it's going to be delivered completely differently at least for the next you know few years that that's a that's a place that is sustaining and uh where corn fairy wants to help people exceed their potential for sure so i'd point to those two um obviously we we have some other lenses but that would probably be the the biggest

I would not like to turn the conference call back over to Mr. Burnison for any closing remarks.

Okay. Well, listen, I thank everybody for joining us. You know, clearly the first quarter, you know, headline numbers were, you know, were not spectacular, but the good news is that the company is positioned to accelerate through the turn. And more importantly, when you look at the, at the new business, it's clearly encouraging. So our business, in essence, is to enable people and organizations to exceed their potential, and I think this company is in a better position than it's ever been. So with that, thank you very much for your time. Have a good rest of your day. Thank you.

Ladies and gentlemen, today's conference call will be available for replay for one week, starting today at 3 p.m. Eastern Time, running through the day, September 10th, ending at midnight. You may access the AT&T Executive Playback Service by dialing 866-207-1041 and entering the access code 240-7985. and our international participants may dial 402-970-0847 and once again use the access code 240-7985. Additionally, the replay will be available for playback at the company's website, www.cornfairy.com. in the investor relations section. Ladies and gentlemen, we'd like to thank you for your attendance in today's quarterly meeting, and thank you for using the service. Have a wonderful day. You may now disconnect.