Korn Ferry

Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry second quarter fiscal year 2023 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 we turn the call over to your host, Mr. Gary Burnison, let me first hand the call over to Tiffany Lauder, Vice President, Investor Relations, to read a cautionary statement to investors. Please go ahead, Ms. Lauder.

Thank you, Amy. 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 related to this presentation, and in the other periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year 2022, and in the company's soon-to-be filed quarterly report for the quarter ended October 31st, 2022. 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 gas financial measures, is contained in the financial presentation and earnings release relating to this call, both of which are posted in the investor relations section of the company's website at www.cornferry.com. With that, I'll turn the call over to Gary Burnison. Please go ahead, Gary. Morning, Janet.

Good afternoon and thank you, Tiffany. And thank you everybody for joining us. Our fiscal second quarter results were very good. We generated about $728 million in fee revenue, which was up 20% at constant currency and 14% at actual rates. I'm really proud of our performance given that the global economy has been in transition for several months now. We're seeing change on every front, from over a decade of high liquidity and historically low interest rates to changes in central bank policies, significant shifts in global trading partners, and persistent inflationary pressures. In response, companies and our clients will undoubtedly have to continue adjusting their organizational and workforce strategies to tomorrow, which is opportunity for Korn Ferry. As we come to a close of another calendar year, I think it's good to take stock of just how far Corn Ferry has come and how much more capable we've become. First, when we look at our historical performance through the cycles, it's clear our diverse offerings in larger scale have resulted in progressively better results from peak to peak and trough to trough. In other words, the ceiling and the floor continue to be incrementally higher through each term. For example, our peak and trough revenues from the Great Recession to the COVID recession are more than three times higher. And over the long run, our 10-year CAGR has been 13%. There's no doubt that we're a substantially different firm today than we were even just a few years ago with far greater scale and relevance today. of our offerings. Our evolving capability and broad offerings are propelling Cordberry and our clients through this moment, this transitory period. This combines organizational strategy, leadership and professional development, assessment and succession, rewards and talent acquisition capabilities to help clients execute their business strategy. We've anchored our firm around a well-balanced, diverse slate of solutions. Number one, a major account strategy that now represents 37% of our portfolio. Consulting and digital capabilities that represent almost 40% of our firm. And the integrated go-to-market strategy, one corn fairy that's resulted in almost 30% of our revenue coming from cross-line of business referrals. A new corn fairy that trains and develops over 1 million professionals a year. A compensation and rewards advisory digital offering with comp debt on more than 25 million executives. A new interim transition management staff capability with about 225 million of annual revenue on a run rate basis. And, you know, this offering essentially didn't exist for us a little over a year ago. An award-winning RPO business with consistent top-line growth. which now represents 14% of our firm. Today, RPO has nearly a billion dollars of revenue under contract. This includes two major three-year contract wins with a combined value of nearly 200 million that we secured in the second quarter. And we're a much, much more globally, geographically diverse firm today. No doubt there's economic uncertainty as we enter 2023. But this transitory time, like others in the past, is also the proving grounds for the effectiveness of our strategy, the strength of our culture, the resilience of our colleagues, the relevance of our solutions and our offerings, and the potency of the Corn Ferry brand. The truth is that great companies make their best moves in times like these. And Korn Ferry is a great company. Looking forward to 2023, we're going to continue to refine our account strategy to take advantage of changing global trade lanes, putting further emphasis on our regional accounts. We're going to pursue a larger addressable market, almost $100 billion in the U.S. alone of interim and transition management, particularly around the skilled positions of finance and accounting, digital and technology, supply chain and legal, just to name a few. We're going to build on our healthcare expertise, particularly in the RPO area. We're going to further develop our partner ecosystem to distribute our consulting and digital capabilities globally. We're going to invest in our professional and leadership development offerings, especially our digital platforms, upskilling technologists as well as sales professionals. And we're also going to pivot towards cost optimization solutions that will be even more relevant in the current environment. We're going to carefully balance our cost structure and profitability to seize both short and midterm opportunities. And finally, we're going to continue to deploy a systematic and balanced approach to capital allocation between share repurchases, dividends, and M&As. I'm confident that we've built a company that provides a suite of core and integrated solutions that line up perfectly with the talent and organizational issues our clients are wrestling with today. In addition to Tiffany, I'm joined on this call by Bob Rozak and Greg Kowalczyk. And Bob, I will turn it over to you.

Great. Thanks, Gary. And good afternoon or morning, depending where you are. As Gary said, the global economy is in transition. Today, unprecedented economic forces are driving companies to rethink their business and their talent strategies. As this transition continues to unfold, it is also clear that the organizational and talent issues facing businesses are more complex than ever. Today, companies are seeking new ways of filling essential roles while also keeping their existing workforce retained and engaged, and developed. Our company is built to help our clients navigate through this transition. Today, our suite of workforce solutions is aligned with the needs of the market, even as economic growth slows. These transitions provide an opportunity for us to guide clients through these uncertain times with the same unparalleled service and expertise that has built our strong brand over the last 50 plus years. Now, as our clients adjust their strategy, organization, and workforce for the realities that lie ahead, we stand ready to partner with them with our broad range of core talent solutions, which are outlined by Gary. When we take bits and pieces of these core solutions and package them together into an integrated solution, we believe our ability to service our clients is unparalleled. It gets even more interesting when we weave our industry-leading data into our integrated solutions, as then we can form unique and differentiated points of view that our competitors simply cannot. Now let me turn to our second quarter results. Fee revenue grew to $728 million. It's up $88 million, or 14% year-over-year at actual rates and 20% at constant currency. Growth by line of business was mixed. We saw good demand in consulting, digital, and the interim portion of professional search and interim. As we anticipated, this was partially offset by moderating demand in executive search in the permanent placement portion of professional search and interim from the elevated levels that we saw during the pandemic recovery period. A constant currency measured year over year Consulting was up 12%. Digital was up 15%. RPO up 19%. Professional search and interim, which was aided by the recent acquisitions, was up 147%, and executive search was down 4%. Consolidated new business, excluding RPO, was seasonally strong in the second quarter, with year-over-year growth in nearly every line of business. Similar to fee revenue, we continue to see new business demand moderating in the permanent placement portion of our talent acquisition businesses, which was more than offset by our recent acquisitions in new business growth across the rest of the company. Consolidated new business, excluding RPO, was up 8% year-over-year at actual rates and 14% at constant currency. As Gary indicated, RPO was awarded a record... $290 million of new business in the second quarter, which included the two large assignments that also Gary referenced. You know, synergies between professional search and interim and our other lines of business have been very strong. If you go back to November 1st of 2021, that's when we did our first acquisition in the pro search and interim business. Referrals between ProSearch and Intraman are other lines of business have resulted in approximately 600 new assignment wins with a combined contract value of nearly $36 million. And that really reinforces the complimentary and synergistic nature of our core solutions. Earnings and profitability also remained strong in the second quarter. Adjusted EBITDA in the second quarter was $131 million at a margin of 18%. The earnings and profitability in the quarter were impacted by a mixed shift in fee revenue by line of business, as well as our continued investment spending into digital. Finally, our adjusted diluted, fully diluted earnings per share were $1.43, which was down 10 cents or 7% year over year. Now, it's important to note that our adjusted fully diluted earnings per share were negatively impacted by $0.09 due to a higher tax rate, which was 27.8%, and that compares to 25.1% in the second quarter of fiscal 22. Our investable cash position remains strong. At the end of the second quarter, cash and marketable securities totaled about $831 million. Now, if you exclude amounts reserved for deferred compensation and for accrued bonuses, our global investable cash balance at the end of the second quarter was about $457 million. Our capital deployment continues to be well balanced. Through the second quarter, we repurchased approximately 992,000 shares of stock using about $56 million. We paid cash dividends. of about $17 million, funded about $33 million of capital expenditures that, again, were directed towards our digital business, and we deployed about $99 million on M&A. With that, I'll now turn the call over to Greg to review our operating segments in more detail.

Thanks, Bob. Starting with KF Digital, global fee revenue in the second quarter was $94 million, which was up 6% year over year. and up approximately 15% at constant currency. Digital subscription and license fee revenue in the second quarter was $29 million, which was up 12% year over year, and was approximately 31% of revenue for the quarter. Global new business for KF Digital was $112 million, with $40 million, or 36% of the total, tied to subscription and license sales. Earnings and profitability in the quarter were marginally impacted by investments in both commercial sales representatives and product development initiatives. In the second quarter, digital generated adjusted EBITDA of $27.5 million with a 29.2% adjusted EBITDA margin. For consulting, fee revenue in the second quarter grew to $173 million which was up 5% year-over-year and up approximately 12% at constant currency. Fee revenue growth continued to be broad-based with growth in almost every solution area and was strongest regionally in EMEA and North America, which were up 17% and 11%, respectively, at constant currency. Additionally, global new business for consulting in the second quarter was up 2%, year-over-year at constant currency. In the second quarter, adjusted EBITDA for consulting grew 3% year-over-year to approximately $31 million with an adjusted EBITDA margin of 18%. Growth in professional search and interim remained strong in the second quarter and was aided by new and enhanced capabilities recently acquired from Lucas Group, Patina, and ICS. Fee revenue tied to permanent placement search was $79 million in the second quarter, which was up approximately $24 million, or 44% year-over-year, and was positively impacted by our recent acquisitions. Our interim service fee revenue in the second quarter grew to $55 million, driven in part by the recent acquisition of ICS, which primarily provides on-demand, high-skilled IT professionals on a flexible or project basis. Our interim services average bill rate was approximately $107 per hour, and we generated $850,000 of fee revenue per billable day in the second quarter. In the second quarter, adjusted EBITDA for professional search and interim was up $10.7 million, or 49% year over year, to $32.5 million with a 24.1% adjusted EBITDA margin. The outlook for recruitment process outsourcing, our recruitment process outsourcing business remains strong. As previously mentioned, RPO was awarded a record $290 million of new business in the second quarter including two large three-year contracts totaling almost $200 million. This brings the total revenue under contract at the end of the second quarter to approximately $958 million. Fee revenue in the second quarter was $107 million, which was up $11 million, or 12% year over year, and approximately 19% at constant currencies. Sequentially, RPO fee revenue was down 6% in the second quarter, primarily due to moderating volume tied to a few of our life sciences and technology clients. Additionally, going forward, it is also important to note that larger, long-term RPO assignments, like those awarded in the second quarter, are more complex to set up, and therefore, there is a timing a timing delay between initial startup and implementation costs, and the recognition of revenue. Adjusted EBITDA for RPO in the second quarter grew to $16 million, which was up $1.6 million, or 11% year-over-year, with an adjusted EBITDA margin of 14.9%. Finally, global fee revenue for executive search in the second quarter was $218 million, which was down 7% year-over-year and down 4% at constant currency. Growth in EMEA, which was up 21% year-over-year at constant currency, was offset by slower demand in North America and APAC, which was primarily tied to China. North America and APAC were each down approximately 10% year-over-year at constant currency in the second quarter. Global new business in the second quarter for executive search was down 8% year-over-year and down approximately 4% at constant currency. At the end of the second quarter, the number of dedicated executive search consultants worldwide was 621, which was up 51 year-over-year and up two sequentially. Annualized free revenue production per consultant in the second quarter was $1.41 million and the number of new search assignments opened worldwide in the second quarter was down 11% year-over-year to 1,637. In the second quarter, global executive search adjusted EBITDA was $54.5 million with an adjusted EBITDA margin of 25%. That will turn the call back to Bob to discuss our outlook for the third quarter of fiscal

Great. Thanks, Greg. Our third quarter is historically our seasonal low quarter for both new business and fee revenue, and that's really due to the slower calendar year and holiday season. Consolidated new business in November followed our historical patterns and was in line with our expectations. If current trends remain consistent with historical seasonal patterns, we expect December new business to be down sequentially from November and for January to rebound slightly. We are evolving to an organization that is selling larger, integrated solutions, and we're doing that in a world that is moving from offshoring to nearshoring. Because of these factors and the recent moderation in our permanent placement talent acquisition solutions, we are in the process of developing a plan to realign our workforce making investments to match the right resources with the right skill sets in the right geographies, as well as reductions where we have excess capacity. Also in this review, we'll be looking at further reductions in our real estate footprint, along with reductions in other discretionary operating costs. We expect that the plan we are developing will generate $45 to $55 million in annual run rate savings and will cost $25 million to $35 million to implement. Now, with respect to the realignment of our workforce, we expect the plan to be completed and implemented by the end of the third quarter. We expect annual run rate savings of between $40 million and $50 million starting in the fourth quarter. Now, certain of the real estate savings are included in this run rate with the remaining amounts are going to be realized in future periods as we execute the plan. Now, in summary, assuming no new major pandemic-related lockdowns, further changes in worldwide geopolitical conditions, economic conditions, financial markets, and foreign exchange rates, we expect fee revenue in the third quarter of fiscal 23 to range from $660 to $690 million. Also, given the factors leading to the development of our realignment plan, we expect our adjusted EBITDA margin in the third and fourth quarter to temporarily fall to a range of 14 to 15 percent, and our consolidated adjusted diluted earnings per share in the third quarter to range from 88 cents to a dollar. Finally, when you include the charge for the previously discussed plan, We expect our gap diluted earnings per share in the third quarter to range from 40 cents to 66 cents. Now, while the transition in the economy will resort in some short-term volatility for our business, it's also an opportunity for us to prove the value and relevance of our solutions and the power of our brand. You know, we remain more confident than ever that our strategy is the right strategy. We've built a firm that provides the right core and integrated talent solutions that help solve the talent and organizational issues our clients are facing. Today, more than ever, we believe our clients realize that an integrated talent management strategy is essential for their long-term success. And working with the right partner is critical, and we believe that Korn Ferry is that partner. With that, we would be glad to answer any questions you may have.

Thank you, ladies and gentlemen. If you wish to ask a question, please press 1 then 0 at this time. Our first question comes from George Tong of Goldman Sachs. Please go ahead. George Tong, your line is open. Please check your mute.

Hi, can you hear me? Yeah. Hey, George. Sorry about that. Okay, so you expect... George, we lost you.

Why don't we move on to the next question?

All right, thank you. Mark McCorn with Baird, please go ahead.

Hey, good morning or good afternoon, depending on where you guys are. Could you describe a little bit about like what you ended up seeing in terms of the sequential trends in terms of new business and confirmed orders? you know, coming through on the executive search side and how that ended up flowing through and what you're hearing from your clients, you know, right now in terms of the prospects, you know, in terms of further confirmations, you know, as we go into December, January, and February?

Well, I'd say, first of all, November new business compared to October, so sequentially. was exactly like we would have imagined it to be, and it's in line with historical trends, Mark. The new business for the firm overall in November was about 6% at constant currency. Now, to your question on executive search, we've been now seeing this, as you know, for several months. There's been a moderation there. from the very heightened levels that we saw a year and a half ago. And with respect to executive search, we saw in the second quarter, we saw new business down about 4%, and we saw the same thing in November. So both in the quarter and November, this is constant currency market, We saw declines in both of those. And the outlier was EMEA. EMEA was actually very strong. EMEA was up 13% in executive search. In the quarter, again, constant currency. And constant currency in November, it was up 17%. So, you know, clearly we've been saying, you know, the air leak out of the tire in the global economy for several months, and that's what we saw as recently as November.

Great. The only thing I would add to that is in my remarks I commented that if you look at the volumes that we're seeing in executive search today, and this is probably over the past, four or five months, they've moderated, but they've moderated back to sort of what we would call a good month in the pre-pandemic period. So I'll give you North America as an example. Prior to the COVID shutdown, a good month for us was about 250 to 275 searches. Coming through the recovery, we had bumped up to elevated levels. There were 325, 350. And for the past four or five months, they've come back down to, you know, somewhere in the 260, 265 range. So right back to where we were pre-pandemic.

And, Bob, would you expect that to hold here as we think about, like, the way the new orders are going to trend over the next three to six months? I mean, obviously, you guys are sharp. You read all the headlines. You can see it. Not sure what your clients are saying, but most CEOs are basically expecting a recession, so you would expect some belt tightening. So how are you thinking about the new orders on a go-forward basis?

Yeah, I think we have some Q3s are seasonal lows, so obviously December will be the worst month of the year. So we're going to follow that pattern, and then we'll have a slight rebound in January. You know, kind of what we're, as we're looking at things going forward, we're kind of holding service where we are today from a unit volume perspective. You know, when I talk to folks in the field, what I hear the most is it's not that people are saying, no, we're not going to do this. It's just taking longer for a letter to get signed. And so for the foreseeable future, that's what we expect to continue.

Great. And then can you talk a little bit about what you're seeing on the professional search and interim on an organic basis or a pro forma basis? Obviously the numbers are skewed by the acquisitions, but how's that looking on a pro forma basis?

The interim business is looking good, Mark. On an organic basis, looking very good as recently as November. So no pullback at all on the interim, which isn't, you know, you would intuitively think that given the career nomad landscape. In pro search, we're seeing the same thing that we're seeing in executive search. What I want to go back to your question, because when you look back at the last three recessions, they were all event-driven. This one seems to be a slower leak, and there's massive changes that are happening under our feet, from the inflationary pressure to changing global trade lanes to nearshoring. You know, a lot of companies are making moves around transformation. But the one thing that's substantially different this time around, and I'll just take the U.S. as an example, is the labor force. And the reality is the labor force, 164 million Americans in the workforce, hasn't changed. in almost three years. And the labor participation rate at 62%, as you know, is a historical low. So, you know, you can talk about uncertain times and you can talk about recession, but that's a huge, huge difference. And I think companies are going to be pretty hesitant in doing any kind of massive downsizing the workforce. You're seeing the quit rate falling, you're seeing job openings falling, which you would expect, but I think the general makeup of the labor force is a substantially different and new variable compared to past cycles. The firm today is a much, much different company. When I look at the Q2 results and I compare them to the quarter before the pandemic, our revenue is up 40% and our EBITDA is up 70%. The Q3 guide to that same period of time, going back to pre-pandemic, at the midpoint of the guide, it's suggesting revenue up 30% and EBITDA up 22%. So you have a completely different firm today where executive searches clearly gives us tremendous access. in the marketplace, but you've got a firm now that has broader capabilities. I mean, our consulting new business, I mean, I don't want to take one month and make it a trend, but in November, our consulting new business was up 20% at constant currency. Now, for the quarter, it wasn't at that elevated level, but it was still on the positive side. So I think you've got just a completely different paradigm, and then you throw in the RPO business, where... You know, this has been unbelievable, the new logos we've put on. And as a firm overall, this new – in the quarter, I mean, our new business was almost a billion dollars. I mean, this is the highest in the company's history.

Congratulations on that with regards to the RPO side particularly. The two big contracts that you ended up winning during the quarter, adding $200 million in annualized revenue, were those brand new to RPO or were those switches that you gained from other players? And then you mentioned that you're going to try to become a bigger player in healthcare on RPO. Is that going to be organic or are you looking at some things?

Well, we're looking at both. Those were both taken. They were taken from other firms that operate in that space. And it's really because of our account strategy. That's really where it began. And so those are takeaways. Our health care business, one of the things we have to do, is with this movement around nearshoring, you could call it nationalization, however you want to characterize it, we have to be much more agile with our regional accounts. We're putting a tremendous amount of focus on how we should rearrange resources in our portfolio to match changing global trading partners. And so one of the areas that we've targeted is healthcare. Healthcare today represents about 7% of corn fairy globally. And clearly in the RPO area, we think we've got an enormous opportunity. So clearly we're going to pursue that on an organic basis. We've got a fabulous team. And if we can do something inorganically, we'd do that as well, Mark.

Great. And then one last one, and then I'll jump in the queue. With regards to the expense reductions that you outlined, how much of that is going to be right-sizing the personnel versus, you know, the real estate footprint?

Yeah, we're going to continue to look at real estate. I mean, this is a transitory period in many, many respects. And one of those is hybrid working for sure. And so we've got to continue to look at that. We would actually like to do more there, but it just doesn't make economic So it's something we're going to look at our total cost base, which does include the real estate. I would assume we're finalizing the plans right now, but I would assume probably two-thirds or so, maybe something like that is from rebalancing the workforce. And what we've been doing is we've picked up some major contracts. And over the last few months, we've been working very, very hard to see how we can shift our own resources around. But at the end of the day, we're going to have a mismatch between language, geography, skills, between some of the areas where we're seeing pullback and then some of these new exciting wins. And so this is not a broad-based layoff. It is nowhere near that. It's very, very targeted. It's something I wrestled with for several months. Absolutely hate to do it, but we have to rebalance our workforce to take advantage of the opportunities that we see on the horizon.

Really appreciate the comments. I'll jump back in the queue.

Thank you. Our next question comes from George Tong, Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. Sorry for the audio difficulties earlier. So a question around the cost savings program. It sounds like it's going to be a balance of personnel, real estate. Are the cost cuts going to be more concentrated perhaps in the exec search where you're seeing more of an inflection in new business trends, or is it going to be relatively broad-based across the company?

No, it's very targeted, and I'm not going to get into exactly where it's going to be because we're still finalizing the plans. But I would tell you that we have secured some major wins for the organization, strategic wins. And as we've looked at meeting those demands, we have an imbalance. And there is excess capacity that we cannot solve because of language and location and things like that. So it's very targeted. And we'll certainly on our next call, we'll tell you what we did.

Got it. And then related to that, as you think about the recovery and margins back to call it mid to high teens, what would the timeframe be for when margins can get back to historically what you said would be the long-term margin target of, you know, around circa 18%.

Well, you know, look, I think there's a couple wild cards. We do see a massive market opportunity around the interim services. And when I sit on account calls, Um, it is absolutely clear with the career nomad landscape that this is a, a really, really good way to further differentiate our firm. And so you've got a huge market, you know, it could be as big as a hundred billion dollars. We've taken that from essentially zero to a run rate this last quarter of 225 million. And I think over a three or four or five year period of time, that could be a big driver of differentiation for Korn Ferry. So we're pursuing a larger market there. Now, what comes with that is lower margins that you would have, say, compared to consulting or executive search. you know, there is a mix change that's happening. And so when we talked about the 18 to 19% long-term margin target when we were coming out of COVID, we did not have the shift in business mix that we've seen today. And that shift in business mix between RPO and interim It could be as much as 150 basis points or so. So when you model out the future, that's one thing that you have to take into account is that shift in mix. And in terms of returning to this last quarter we did 18%, that's really hard to say right now, George. You know, the word uncertainty is such an overused word. There's uncertainty in life every single day. But uncertainty creates opportunity, and we have to continue to be very nimble and make sure that we are shifting our account strategy to where there's opportunity.

Got it. That's helpful. And then lastly, on the consulting business, you've seen actually some pretty resilient and positive trends lately today. historically, how cyclical has the consulting business been? And how would you compare the macro sensitivity of the consulting business relative to the exec search business?

Well, you know, we haven't had it for that, you know, for that long. I mean, we've got today, you know, when I started with the company in zero, but today it's about 700 million. I mean, the truth is, that we do not have enough resources. We are completely undersized given the market opportunities. So that's an area for us that over the three to five years has to be a large part of Korn Ferry's future. I am really proud of the team that we have and looking at what we did even in new business in the quarter or even November and the kinds of things that we're doing. um, is, is inspiring to me. I, I would say, you know, that with, without, you know, you know, substantial amount of data because we don't have, we don't have a long track record with it. But I would say that, you know, compared to executive search, it's probably half as cyclical. I mean, you know, all consulting services are cyclical. Um, but I would, I would, my, my instincts would be half. And actually when we went through the COVID recession, um, That's kind of what we saw was that what you would intuitively think, the more cyclical parts of our business, the executive search and perm recruiting, those were hit harder. And the consulting, the digital, even the RPO was substantially less cyclical than the search business. And now with the interim capabilities we have, I think that even makes that story more compelling. You just have to recognize that the margins in that business are different. And, you know, they are not as strong as, say, the executive search or consulting margins. But with the interim business, we are definitely going to stay at the high end. There's no question about that. We're not going to go into general staffing or anything like that. We're going to stay very specialized.

Hey, Gary. Very helpful. Hey, George. Just to maybe pile on a little bit, if you go back to the pandemic, it was a firm overall peak to trough quarter. We were down about 30%. Consulting was in the 20% to 25% range down. And if you look at the whole year period that we were going through the recovery, our RPO business actually grew 7% year over year.

Very helpful. Thank you very much.

Our next question comes from Tim Mulroney with William Blair. Please go ahead.

Hey, thanks for taking my questions, guys. That was helpful color on the cyclicality, how you're thinking about the business. Just on the guide real quick for the third quarter, your guidance assumes revenue is down, I don't know, $50 million at the midpoint from the second quarter to the third quarter, but EBITDA is expected to be down like $35 million from second quarter to third quarter at the midpoint. I would have thought the decremental margin would be, I don't know, somewhat less than that. So can you just talk about the primary factors that led to that guidance range? Are there large investments happening here? Are there near-term fixed costs that just don't come down as fast as revenue?

Yeah. No, that's a good question. First of all, the – The guide reflects what we would view as seasonality of 4% to 5% on the top line. So that's number one. Then the second contributing factor is this moderation that we've seen for a long time that we've been living with around executive search and perm recruiting. Now, you're right that in terms of the impact on the margin, And what we've been trying to really carefully look at is rebalancing the workforce and how we do that. Because this is not a situation where what I don't want to do is go in and make draconian changes that compromise our ability to see short and midterm opportunities. So we've wrestled with this, how we can reallocate resources And that reflects some of that carry that we decided to carry longer as we really thoughtfully planned out how we could redeploy resources. So that's really the answer to your question. And, you know, we'll execute on this plan and we'll talk to you about it in the beginning of calendar 2023.

All right, great. That's helpful color, and I would agree. I feel like your investor base are also long-term focused. I would rather see you make those long-term decisions than the short-term gains for sure. One more from me on executive search. You know, I'm curious what your expectations are for this business in the third quarter based on what you used to build up your total revenue guidance for this segment. And more specifically, what I'm really curious about is how are you thinking about this business in the third quarter in terms of moderating engagements versus maybe executive compensation flattening or coming down from the really high levels we saw last year? I mean, I remember last year talking to you know, some privately held executive search companies in the space. And I'm talking about how comp was up, you know, 100%. It was just up huge. And that was driving higher revenue for the search business. How much of that now, if this executive search business is decelerating, how much of it is that versus actual volumes? Sorry for the long-winded question. Thank you.

Well, I think, look, Bob and Greg can give the real data behind that. But there's no questions. that over the last couple years that there's been significant wage pressure, which has lifted our executive search fees. And, you know, when you look at it in the guide, I think we're planning on something like, you know, 13% or so could be off a little bit down in top line. And that's probably a little bit higher on the volume. and more steady on the fee. I really do believe that this is a substantially different labor market, which is a huge wild card in what happens to these kinds of businesses. I think this labor participation rate is shockingly low. When I look back at the Great Recession, as an example, in the United States, we lost 7.9 million jobs. It is really hard for me with a labor participation rate of 62%, 164 million Americans in the workforce. It is hard for me to come to anywhere near that kind of number, even as companies are looking at costs and doing all this stuff and waiting for what the central bank is going to do and if indeed they're going to moderate the path that they've been on. But it is really hard for me to come to a conclusion that 8 million jobs in the United States are going to be lost like they were in the Great Recession.

Hey, Gary, it's Bob and Tim. Just to add a bit more color, Gary's spot on. It really is all unit counts and volume related. We did see increases in our average search fees coming through the recovery, but that's pretty much plateaued at this point. Now we're actually just dealing with volume.

Okay. Thank you so much.

Our next question comes from Mark Riddick with Sedati. Please go ahead.

Hey, good morning. Good morning, Mark.

So I did want to follow up, and I appreciate all the color that you gave and your thoughts behind what it is that you'll be doing for the remainder, ballpark, let's call it, the remainder of this fiscal year, though it seems as though a lot of it will be concentrated in the third quarter. I was wondering if we could talk a little bit about maybe without giving – without too much granularity, I guess, but sort of big picture-wise, what sort of led to that process of what you're seeing as needing to take place, and also whether that was more a function of the marquee accounts that you talked about. I think you said that's now up to... 37% of revenue and substantial progress made over the last few years in that part of the business. And certainly that would be understandable. But also you've talked about new businessmen. So I'm sort of trying to get thoughts as to how much of that is being driven by the marquee accounts and kind of trying to get to where they are or get ahead of where they're going versus some of the big picture, big ticket wins that you'll be pursuing.

Well, we hope it's one and the same. We hope we're thinking about where the market's going to be going. Clearly, we have enjoyed some incredible success securing very large engagements. And at the same time, as you read about in the paper, we've read about this for five months now, we've seen companies moderating what they're doing in terms of costs overall as well as their workforce. So what you've seen and what we've seen in parts of our business is some pullback in what I would call the base or legacy business, and that's been coupled with major new wins. And the reality is when you compare those, As hard as we've worked over the last few months, there's just a mismatch that you can't solve because of language and because of location. And so there is excess capacity in some places. And you could guess, I mean, when you read the paper, you could guess where that mismatch is. particularly given the mega trend around the changes in global trading partners and global trade lanes and nearshoring, there's a mismatch. And unfortunately, we have to address that and position the company for opportunity. And that's what we're doing.

Great. And then I wanted to sort of highlight just, you know, given the you know, the ability to generate the cash that you're able to generate and the, you know, what the market is, you know, done with yours as well as other, you know, personnel and consulting related names. I just wanted to talk a little bit about your thoughts around, you know, what to do with cash and share repurchase activity and, you know, dividends and the like. Thanks.

Well, the plan right now, you know, I think fiscal year to date, we've repurchased $70 million of stock. We've continued to, you know, as Bob indicated, the dividends are, you know, a good part of our capital allocation strategy as well. But we tend to look at this in a very balanced way. And we look back over the past couple years, that's what we've done. We've certainly made a conscious effort to invest in the interim businesses where we didn't have capability. And, you know, that would be my answer. Now, if valuation levels, if they change, then, you know, our capital allocation strategy would change somewhat as well. Excellent. Thank you very much.

Our last question comes from Toby Summers with Truist Securities. Please go ahead.

Thank you. I just wanted to double check something to start off. What was the implied revenue decline on a sequential or year-over-year basis if we kind of take the midpoint of the January guidance? The implied, you mean from 728 to 675? Yeah, well, it can either be sequential, as you just did, or year-over-year. I just want to get organic changes in either sequential or year-over-year basis. Organic constant currency? Sure. So last year, our third – I'm going right off the top of my head, so you're going to have Bob and Greg going to correct me. But I want to say last year, the actual was 681. I think when you dial it back for constant currency, that 681 translates to something like 650, 645 in that kind of neighborhood. The midpoint of the guide is 675. So constant currency, you know, that's up 4%, 5%. and clearly that is benefited from the investments that we have made in the interim business, and it reflects moderation in our perm recruiting businesses. Okay, I'll move on to a couple other questions, and maybe you can arrive at a number.

I said Gary's numbers were pretty close.

I get it. So what's the acquired revenue so that I can just get to the – the answer for organic.

Yeah, I would take it back, Toby, too. You have to go back to the run rate when we acquired the companies, because once we integrate them, we lose the ability to specifically identify. And Lucas Group has been integrated since the beginning of the year, so I don't have the ability to identify that. But if you go back to sort of the run rate that we said when we bought those companies, you're talking somewhere in the $55 to $60 million range.

Okay. Could you give us some color about the two major RPO wins? I know you talked about it a little bit earlier, but maybe in terms of number of annual hires, types of occupations, geographies, and differentiators that might have prompted the client to choose you over the incumbents? Well, I'll let Bob. We're not going to reveal the client or the industries, but... You know, I think one of the key differentiators that we have is, number one, the success and the high quality of referenceable clients now. It's pretty incredible. And success begets more success. So that's number one, incredible team and process. Number two and, you know, three is the IP and the ability – to integrate that solution with other things that that particular client wants to achieve, whether that's org strategy, whether it's compensation advice. And so this integrated platform is also a major reason why we continue to enjoy success in that part of the business. I think you described the cut, correct me if I'm wrong, the cost cut is sort of substantially smaller than a classic one you might have taken headed into prior downturns. So it seems like you're assuming, you know, some level of stability in demand headed into calendar 23. How's the organization feeling? You know, you've undergone a lot of volatility as, you know, the world has really with the roller coaster of 20. We're job cuts, furloughs, then rapid hiring, and now sort of a more measured realignment that you described. Could you just speak to that? I know that wasn't a specific question, but I think hopefully you get it. Well, I think it reflects where the world is. You know, in April and May of 2020, I said that the COVID would be, you know, it would be a couple-year journey, then two years of a transitory period, and a transitory period from a whole range of aspects, from how people are entertained to how they consume to how they produce to where they work. And, you know, when you go back, you know, three years ago, Um, it was scary. And, you know, even this morning, very early, I, you know, you hear a story of somebody that got COVID. If you'd have heard that story two and a half years ago, you would have fallen over and wondered, was that going to be you next? So I think that we're in a very, very unique time as human beings. Now, I think part of that answer is, uh, where you are in the world as well. I mean, I was on an account call a couple of nights ago in China, for example, and you know, our team in China, has more fortitude and more perseverance and then, you know, they've been in a very difficult situation. It's been three years. So I really do think it kind of, you know, it depends on where you are in the world. And I think that it's a very spiritual and a very human question to ask for us what I'm really proud of is our purpose is to change people's lives, to enable people and organizations to exceed their potential. And when we see something, we don't just talk about it, we be about it. And whether that's George Floyd, whether it's our charitable foundation, whether it's Leadership Youth for Humanity, where we put over 1,000 people of color through our leadership programs, whether it's Our own Mosaic programs where we've, again, put 1,000 people now through that. You know, I think that we're a firm that walks the talk. And at the end of the day, I think that's what it's about. Are you working for an organization that you believe in its purpose that inspires you? And the truth is, like in personal lives, companies are going to go through cycles. And this is a cycle, for sure, that we're in right now. And Corn Ferry has an incredible track record of accelerating through the turn. And I think that probably reflects most people's views. Thanks. I'll try to just sneak in a last brief one. Could you provide some color on the drivers of digital growth? We haven't heard as much about KFCEL or the other individual products recently, so I wanted you to refresh us. Thanks. Well, I think the, look, the, you know, this is a, this is definitely more of a medium term play because there's two aspects. One aspect is the digital offerings and the products that you have and what are you trying, you know, who are you trying to reach? And for there, for that part of the business, what we're trying to do is number one, sales professionals, and two, and this is relatively new, is creating a platform where we can upscale technologies. So those are the two areas that we're really focusing, and the latter being one that is brand new to us. On the distribution side, I believe that when you look at world-class consulting firms, you'll find that they have partners that help to enable further business growth. And that's something that Korn Ferry historically hasn't really attempted. And I think when we look forward that a big, big part of that is to what extent are we going to have success developing an ecosystem of partners that can help distribute our IP. And that is not a two-day exercise. And we're working very, very hard. In fact, as we speak, there's a team that's working on that right now at a client, at one of those partners. So, you know, it's certainly more of a medium-term undertaking. And that's what I'm expecting, and we're working very hard on it.

And, Gary, I would just add a little bit more. A little bit more color on that, Toby. One of the things you'll notice when we went back to Q1, we talked about where digital landed and the lack of large deals in that quarter. In this quarter, they actually rebounded nicely, and they had seven deals above $1 million. Two of them were above $5 million, and one was north of $900,000. So it's also a function of continuing to be able to sell the larger deals. Thanks.

Okay, Amy, I want to conclude and thank everybody. And despite all of this talk that you read about every single day, there is opportunity. And that's what we have a demonstrated track record of seasoning, and that's what we're going to continue to do. And so during this festive season, I wish everybody a happy Hanukkah, a merry Christmas, happy holidays. And we'll talk to you in 2023. Thanks, everybody.

Ladies and gentlemen, this conference call will be available for replay for one week starting today at 3 p.m. Eastern, running through the day December 15, 2022, ending at midnight. You may access the AT&T Executive Playback Service by dialing 866-207-8000. and entering the access code of 622-5763. International participants may dial 402-970-0847. Additionally, the replay will be available for playback at the company's website at www.cornferry.com in the Investors Relations section. And again, those numbers are 866-207-1041 with an access code of 622-5763. And international participants will dial 402-970-0847. Additionally, the replay will be available for playback at the company's website at www.cornferry.com in the Investor Relations section. We're sorry, your conference is ending now. Please hang up.