Korn Ferry

Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry third quarter fiscal year 2026 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 that 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 2025 and in the company's soon-to-be-filed quarterly report for the quarter-ended January 31, 2026. 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 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 Mr. Burnison. Please go ahead, Mr. Burnison.

Okay. Thank you, Regina, and thank you, everybody, for joining us. Our outstanding performance during the quarter reflects the ongoing evolution of our firm. From one corn fairy to we are corn fairy. Fundamentally, our purpose is to enable people and organizations to be more than. You know, as I reflect, on all the recent conversations surrounding AI and disintermediation. It strikes me that the question isn't simply will AI take away jobs. The fact is there won't be enough workers. The prism we need to look through is a stark imbalance in labor supply. So while there may be fewer jobs compared to the last couple decades, there'll also be a lot less people in the labor force. And let's be clear on what this means. It's not simply that AI will take away your job. It's that those not embracing technology and AI will be left out. Today, the world is enveloped by unprecedented levels of change. Ripple effects from the pandemic, aging demographics, and technological advancement from something out of Star Wars, all of which is converging to exert greater impact on the way people live, work, and consume. For example, birth rates in the U.S. have been falling since the late 1960s. They've essentially been cut by more than half in each year. Ten thousand baby boomers are retiring every day. That's $4 million a year for the next several years. Over the next 10 years, labor force participation is forecasted to decline further. And today, it's already lower than pre-COVID levels. As the labor force gets smaller, technology or immigration will need to fill the gap between supply and demand to maintain economic growth. And AI will absolutely play a critical role. And at Korn Ferry, we're at the forefront of working directly with global decision makers who are grappling with these issues as they seek answers to creating and sustaining a high-performing workforce. The outliers of achievement and performance are gonna be more in demand, not less in demand. The need for highly skilled, agile talent will only increase. It'll be more critical than ever to identify the 20% doing the 80%. Companies must identify, hire, develop, and retain the scarce, experienced professionals needed to lead this transformation. which invariably means doing more with less. And when we look at our own business and our clients, it supports this macroeconomic thesis. Internally, we have become far more efficient and productive. Over the last three years, revenue is up and costs are down. Our revenue per headcount has increased by almost a third. As a result, We are more profitable, and we've grown our margins by more than 300 basis points. And we're continuing to drive a major transformation from one corn fairy to we are corn fairy. What does it mean? Well, it means that we're not five businesses. We're one business with five solutions and 9,000 colleagues, all with a unified mindset. And it begins with client centricity, deepening our solutions with our existing clients to unlock growth. We've got more than 10,000 clients around the world, but 4,500 of those represent 90% of our revenue. And when I look at that set of clients, our penetration is only one and a half or two solutions per client. for two-thirds of the 4,500 clients. That means there's a lot of runway to deepen the relationship. So with We Are Korn Ferry, we are taking a top-down and bottom-up systematic process to tap this growth opportunity. Our marketing accounts again outperform the portfolio, up 9%, contributing 40% of our overall total revenue. Our cross-business referrals are now at a near high of 27% of our business. And at the top of the house, our work has never been more impactful. Recently, a well-known TV broadcast highlighted seven major CEO transitions over the last few months. And we were involved in six of them. Further reflecting our client centricity, we've won several significant transformation engagements across the globe. A major aerospace and defense company is one of our first end-to-end talent suite customers, utilizing our proprietary data to make better talent decisions across 40,000-plus employees. This is a multi-year talent suite engagement. For me, talent suite isn't a product. It's money ball for business based on data beyond compare. It gives clients decades of insight of what separates great from good, and it powers the entire firm. At one of the top financial institutions in the world, With nearly 100,000 employees, we're supporting a new enterprise-wide talent excellence program, incorporating our world-class assessment capability and leadership accelerator programs. And finally, we're proud to be a founding partner of the LA 28 Olympic and Paralympic Games, powering the people who power the games. We're not only building their C-suite, but also helping them design the organization and hiring the nearly 5,000 people who will perform on the world's most inspiring stage. With that, I will turn it over to Bob Rozak. Bob, go ahead.

Great. Thanks, Gary, and good afternoon or good morning. We're very pleased with our third quarter results. This is our fifth consecutive quarter of accelerating year-over-year fee revenue growth, and we continue to deliver earnings growth, driving strong profitability and free cash flow. Our go-to-market approach continues to be intentional and focused on opportunities where we can build broader relationships with clients by selling larger integrated solutions that support their evolving talent issues. Now what's really impressive is we are doing this in an environment where business conditions and labor markets remain challenged. It is very clear that our strategy is working and our results demonstrate that we have built a company that is different from others in the industry. We perform differently because we are different. Now turning to overall company results comparing Q3 of FY26, to Q3 of FY25. Our consolidated fee revenue grew 7% to $717 million. Again, our fifth consecutive quarter of accelerating year-over-year growth. Earnings continued to grow in line with fee revenue and profitability remained strong, just that EBITDA grew $9 million or 7.5% to $123 million. Our adjusted EBITDA margin was 17.2%, up 10 basis points, and adjusted diluted earnings per share grew 9 cents or 8% to $1.28. Total company new business, excluding RPO, grew 11%, with both consulting and digital reaching all-time quarterly highs. RPO delivered $54 million of new business in the quarter, with 78% coming from new logos, and 22% from renewals. Estimated remaining fees under existing contracts at the end of the quarter were $1.85 billion. That's up 11% year-over-year, and we estimate that approximately 60%, or about $1.1 billion, will be recognized within the next year, with the remaining 40%, or about $734 million, estimated to be recognized beyond the next four quarters. And finally, our capital allocation during the quarter remained balanced. Through the end of the third quarter, we have returned about $113 million to shareholders through combined share repurchases and dividends, and we've invested $64 million back into capital expenditures focused on talent suite, productivity tools, and other solution and product enhancements. In a separate announcement last week, our board has approved a 15% increase in our quarterly cash dividend to 55 cents per share, and that's our seventh dividend increase in the last six years. Our cash flow remains strong, and we are confident in the outlook for our business. In addition to the detailed results found in our posted earnings presentation, here are a few company-wide and solution-specific highlights for the third quarter. You saw fee revenue growth was very broad-based across all solutions. The interim portion of our PS&I solution grew 4%, continuing to benefit from new business referrals, which were a key factor driving our outperformance in an industry that has been challenged for more than 36 months. Our new business referrals and marquee diamond account program continue to be contributors of growth enabled by our We Are Korn Ferry go-to-market initiative. As Gary mentioned, new business referrals accounted for 27.2% of our consolidated fee revenue, and that's up 200 basis points year-over-year, and the marketing indictment accounts continued to be strong at 40% of our total fee revenue. Also in the third quarter, subscription and licensed new business grew 30% year-over-year and accounted for 43% of digital's total new business. Additionally, in the third quarter, subscription and and license fee revenue grew 8%. And finally, our average hourly bill rates for consulting and interim grew by 2% and 15% respectively, again, demonstrating the high value our clients place on these solutions. Now, turning to our regions, fee revenue in the Americas was up 6%, led by growth in executive search and RPO. EMEA fee revenue continued to be strong, growing 13% with double-digit growth in executive search, consulting, digital, and PS&I, and APEC fee revenue declined slightly at 2% with growth in executive search being offset by modest weakness and other solutions. Now, turning to our outlook for the fourth quarter of fiscal 26, assuming no material negative impact from the recent Middle East conflict and no further changes in worldwide geopolitical conditions economic conditions, financial markets, and foreign exchange rates, we expect fee revenue in the fourth quarter to range from $730 million to $750 million, our adjusted EBITDA margin to range from 17.1% to 17.3%, and our consolidated adjusted diluted earnings per share as well as our gap diluted earnings per share to range from $1.34 to $1.40. Now in closing, our financial results over the last five quarters demonstrate that our unique combination of foundational assets, expertise, and capabilities truly matter to our clients. Looking to the future, I'm very excited about our opportunities to drive continued top-line growth. You heard Gary talk about our top 4,500 clients. With the rollout of Talent Suite and our We Are Corn Fairy initiative, we continue to see significant opportunity to expand those relationships in what we call the green space. That is horizontal expansion where we bring additional solutions to our clients, vertical expansion where we leverage our strong C-suite relationships and provide solutions at scale to what we call the vital many, and that's down into an organization's professional ranks. We have a great playbook to run from, our marquee and diamond accounts where we have a strong track record of successfully expanding those relationships. I also see further opportunities in our joint go-to-market activities, particularly between consulting and digital. And as I've said many times before on these calls, I am more convinced than ever that our best is yet to come. With that, we would be glad to answer any questions you may have.