Korn Ferry (KFY) Q1 2027 earnings call transcript

Thanks, Regina, and thank you, everybody, for joining us. I'm going to have the team walk through the numbers, but first I'd just comment that our performance was absolutely outstanding. All regions are up, and it marks our sixth consecutive quarter of top-line growth, which underscores the strength of our strategy, and we remain focused on executing with discipline, investing in opportunities, that will drive sustainable impact and create lasting value for our shareholders, all of which reflects the confidence we have in our strategic direction and long-term outlook. As I reflected during our previous quarterly call, I used to talk about opportunities measured in the hundreds of millions of dollars. Today, I think in terms of opportunities measured in the billions.

And last week, we took another significant step in that direction with the completion of our combination with AMS. This brings together two iconic brands and creates a global leader in talent and organizational consulting. AMS is a world-class firm that propels our We Are KORN FERRY strategy to be the world's conductor of talent and organizational orchestration. We now offer one of the most comprehensive organizational talent solution portfolios in the world. The combined firm has nearly 17,000 colleagues in more than 130 offices, complementary strengths, and more expansive industry coverage, all united in a shared commitment to accelerate our client's success. Together with AMS, we have profound operational capability delivering technology-enabled talent solutions at scale supported by long-term contracted client relationships.

We've deeply deepened our client-centric approach as we expand the breadth of our solutions with every relationship. And here, just a couple examples. At a global energy company, we're supporting their strategic and talent transformation, impacting 60,000 roles across 200 business units. So we're a global consumer products company with more than 100,000 employees. Turn to us for worldwide delivery of org design, analytics, and workforce planning.

And at the heart of how we serve our largest clients is TalentSuite, powering our work and enabling better people decisions at scale. In fact, more than 90% of our marquee and diamond accounts have an active talent suite subscription today. I couldn't be more excited about the evolution and the trajectory of our firm. Today's KORN FERRY has a unique ability to serve our clients across the entire talent spectrum. Search is about identifying talent. Workforce solutions is scaling that talent. And talent and organizational solutions is unlocking their potential. There's no question that technology will continue to play a significant role in the future, bridging the imbalance of supply and demand of labor. But it's not technology alone.

People are the catalyst for organizational success. Human beings, not human doings. It's a belief that defines who we are, and that's why KORN FERRY is in the people business.

With that, Bob, I'll turn it over to you.

Great. Thanks, Gary, and good afternoon and good morning, everyone. Our financial performance continues to steadily improve and outpace the broader industry. In the first quarter of FY27, our fee revenue grew for this sixth consecutive quarter with strong earnings growth and steady profitability. Our improving performance in this ever-changing business environment really continues to underscore both the effectiveness of our strategy, the hard work and talent of our colleagues, and our operational excellence. Before reviewing the quarter in detail, and as we announced on our fourth quarter earnings call for fiscal year 26, we are now reporting our financial results of the company in three geographic segments, the Americas, EMEA, and APAC. This new reporting structure aligns with our We Are KORN FERRY go-to-market initiatives, and actually with how our clients engage with us.

To assist with the transition from a global solution focus to regional geographies, the slides posted in our investor presentation include three new solution groupings within each geographic region. The three new solution groupings are search, which is the old executive search and professional search, talent and organizational solutions, which is comprised of consulting and digital, and then workforce solutions, which is comprised of RPO and interim.

Now, turning to our first quarter performance highlights, estimated remaining fees under existing contracts grew 14% year-over-year to $1.92 billion, led by global new business growth in workforce solutions. Our internal business referral rate increased to 29.4% of consolidated fee revenue. It's up by about 300 basis points year over year, and our marquee and diamond accounts remain steady at about 40% of consolidated fee revenue. Now, both of these metrics really demonstrate the fee revenue synergies we're creating with our We Are KORN FERRY go-to-market activities. Our consolidated new business grew 12% year-over-year, and fee revenue grew in all regions and all industry groups.

Fee earner productivity, which we measure as new business per average fee earners annualized, grew year-over-year in all regions. Now I'll talk a little bit about the company results. Related fee revenue grew 7% year-over-year to $756 million, again marking our sixth consecutive quarter of growth. Earnings and profitability also remain strong. Adjusted EBITDA grew 8 million, or 7% year-over-year, to $128 million. The adjusted EBITDA margin was flat year-over-year at 17%, and adjusted diluted earnings per share grew 12 cents, or 9%, year-over-year to $1.43.

As previously mentioned, our estimated remaining fees under existing contracts were $1.92 billion at the end of the quarter, We estimate about 56% or $1.1 billion will be recognized within the next four quarters, and the remaining 44% or $835 million will be recognized beyond the next year.

Turning to our regional results, fee revenue in America has grew 9% year-over-year to $442 million, led by growth in search and workforce solutions. EMEA fee revenue continued to strengthen, growing 4% year-over-year to $228 million. Growth was broad-based with strength in all solution groups. And APAC fee revenue inflected to growth in the first quarter, reaching $87 million, up 1% year-over-year, led by surge.

Finally, we continue to maintain a disciplined, balanced approach to capital allocation over the quarter. During the quarter, we paid $30 million of dividends and invested $15 million in capital expenditures. In the future, we will be inclined to use investable cash for the reduction of debt associated with the acquisition of AMS. However, we will also closely monitor our share price and use capital for that if we find that more attractive.

Turning to our outlook for the second quarter of fiscal 27, assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets, and foreign exchange rates, and including the addition of AMS. Now, it's only for two months, September and October. Our second quarter fee revenue is expected to range from $860 million to $878 million. Our adjusted EBITDA margin is expected to range from 16.8% to 17.2%. And adjusted diluted earnings per share are expected to range from $1.30 to $1.40 per share.

We have a page in the investor deck and provided some guidance assumptions and you find adjusted diluted earnings per share includes the net after impact of the two months of incremental intangible asset amortization incremental net interest expense and incremental shares issued in connection with the acquisition of AMS In closing, we remain focused on executing our We Are KORN FERRY go-to-market initiatives, which are driving deeper, more durable client relationships.

Additionally, with the recent addition of AMS to the KORN FERRY family, we will strengthen our position in RPO and interim while broadening our capabilities into contingent workforce solutions and early career and campus recruiting. AMS has a substantial backlog of multi-year contracts and long-tenured client relationships. Going forward, it is our goal to deepen the value of those client relationships, introducing clients to all that KORN FERRY offers.

Together with AMS, we are a much stronger company with greater capabilities to drive client business performance through their most precious asset, which is their people. With that, we would be glad to answer any questions you may have.

Well, when you look at the firm as a whole, that's what I tend to look at. And, you know, this was precipitated. We made this decision several quarters ago that we had to change how we were facing off with clients. And what we wanted was not an isolated solution-by-solution approach, but rather a holistic face-off with our clients, as we are KORN FERRY. And so that's been a very systematic effort that's been driven top-down and bottom-up, top-down through our Marquee and Diamond accounts and bottom-up every single day through what we're doing in terms of looking at new engagements that are open. And so, you know, I look at the firm overall over the last, you know, 10 years, 20 years, and you'd find a growth rate that's probably going to be around 10, 11, 12 percent, something like that.

Up until this latest investment that we've made, we looked at that growth rate, and we said 60 percent was organic, 40 percent was inorganic. Obviously, with the combination of AMS, that changes those calculations, and it's more like 50-50. So I first look at the overall firm's growth rate historically, and when I look at the demographic trends and what's happening in the world, there's no reason to believe.

I don't certainly see any reason that that kind of growth rate that we've experienced in the past, we wouldn't continue to experience. Now, you know, clearly from quarter to quarter, there's going to be regional differences. And, you know, AIPAC going back now several quarters has been impacted by, you know, the socioeconomic changes that have been happening, particularly, for example, in China. And so that, you know, that region has been impacted pretty severely by that fall off since the pandemic.

EMEA over the last several quarters has actually been our best performing region. More recently, over the last couple quarters, you'll see that the Middle East has had a pretty big impact on the results there. And then America, you know, has been steady. So, you know, I tend to look at it from a geographic perspective, the total first, so then each geography. And what it really reflects is, you know, how we're trying to drive, you know, a client-centric approach. And then, you know, when you look at solutions, you know, this last quarter, the Workforce Solutions group and search, you know, those were both outstanding. Really, really outstanding growth rates, you know, 10, 11%. And, you know, looking at new business over the last several months, you know, it continues to reflect that trend.

It is. You know, it's impacting the total firm, and it certainly, you know, has an impact on how we're completing searches. But the thing that we're very, very careful about there is the data that we have. We have significant proprietary data, you know, comp data on 30 million people around the world, 30,000 companies. We've done 113 million executive assessments. We have upwards of 15,000 success profiles. We have pretty sensitive information on not just what people have done, but who they are. And so with respect to AI, particularly as it relates to the search group, we've been very, very careful about how we use that. And we're going to continue to be, you know, very cautious about that because of the nature of our data.

So certainly it has had an impact, but I think it's going to continue to have an impact. Absolutely. And thank you, Tyler.

This is Bob. Maybe a little bit more grand. I think what's happening is clients are expecting more from us in terms of candidate slates, and we're able to deliver more of it, but it has not materially impacted the timeline of a search. It's pretty consistent with what we've been seeing all along, and a lot of that's dependent on the client scheduling, making decisions, and so on.

So while we're meeting their demands on additional information requests, the timeline has not changed.

And you know, Bob, that's an interesting point because what we're seeing from clients and candidates is everybody seems to have a perfect resume. And so, you know, our firm has been built on IP and data, and it's not, you know, what somebody has done at the levels that we operate. It's who you are. And so the IP and the data that I was talking about are absolutely fundamental to how we are doing our search work as well as our talent and organizational development activities. So, you know, it's actually, because of AI, it's actually increasing the demand for what we have given our, you know, the proprietary nature of the database. And ultimately, it's about, you know, who somebody is.

That's just the truth.

Well, what we said when we announced the investment was that we would get to $140 million of run rate EBITDA within a year, We're going to turn the call over to management for the KORN FERRY. That is, that's demonstrated, it's proven, and we also have a track record of tapping the economies of scale that come with platforms such as KORN FERRY. And so I'm absolutely 200% confident that we are going to achieve that level of incremental EBITDA and more, because I think that the revenue opportunity here and the growth opportunity for us is enormous. In terms of the exact timing, what we have said, as I indicated, is that incremental 40, you would see, you know, by a year from closing, which would have been last week, we're going to achieve that much faster than that.

Yeah, it does. And also, it's going to follow the typical, you know, kind of calendarization of holidays. And so that's, you're absolutely correct, generally speaking. And Bob, I don't know if you want to provide any more precision around that.

Yeah, Melissa, what I would do is I would just follow the traditional KORN FERRY seasonality. Their business is pretty similar to ours, where we always have our low watermark in Q3. You've got Thanksgiving in the U. S. , and then the year-end holidays. You know we give our people a week off Clients give their folks one week or two weeks off So just not as many hours in that quarter So you see the same sort of pattern if you will that you experience with KORN FERRY Got it That what we figured Thank you guys so much Our next question will come from the line of George Tong with Goldman Sachs.

Well, I would say the RPO is actually recurring wins. When you look at the new business, clearly over the last several months, given what's happened in the Middle East and the demographic factors that we've talked about on previous calls, search and workforce solutions have been absolutely the stronger performers. And what's been really nice to see and supported our thesis when we made this decision is all the investments that we've made in workforce solutions. And whether that's interim or RPO, you know, that's really paying dividends. And in this quarter, the RPO new wins were, you know, something like $160 million, and 50% of those were from new logos. So you're going to see, you're definitely going to see lumpiness around the, for example, the outsourcing wins.

But that's one of the reasons why we entered into this investment with AMS, because what you have there is you have recurring, loyal client relationships of scale.

And their client relationships, just take their top 10, the average tenure of those client relationships is 14 years. So, you know, two-thirds of their business is in the RPO area, and, you know, I look at that as incredibly sticky and recurring. And when you look at the combined backlog now, you know, this firm has absolutely made an enormous transformation over the last decade and even two decades, where now you're looking at a firm that looks completely different than the KORN FERRY, And today we've got a backlog of, you know, three and a half billion dollars now with AMS. And so, yeah, the workforce solutions is an integral part. And we've certainly seen a lift in new business, including, like I said, including the interim area, which has had a significant lift.

And I think that's all that above market growth has been driven by the We Are KORN FERRY strategy. And look at our, you know, the cross referrals this quarter, we're almost 30%, which is, you know, which is really, really good to see.

Hey, Gary, maybe just a little, because I think the backlog commentary is really important for folks to understand. So if you look at our backlog, George, we were at the end of the quarter about $1.9 billion, and 60% of that, or roughly 60%, comes out within the next year, and then after that you probably have another year and a half for the remainder. What AMS brings is not only a very large backlog, but it's also given the strength and tenure of the customer relationships that Gary talked about.

They're about 40% within the first year. 60% comes out over the next four years. So it gives us much more durability and visibility and resilience going forward.

Well, our focus is absolutely on revenue, and we've already, you know, we've hit the ground running. We've had big teams together now over the last week since we've closed, and there's obviously a little bit of pre-integration planning where we've mapped top 100 customers, put teams against them. There's actually meetings happening this week with clients. I mean, we are absolutely all over that. It's certainly going to change the nature of our marquee and diamond portfolio. That undoubtedly will go up. As you know, it's incredibly complimentary given AMS's industry and geographic footprint with KORN FERRY. And so I look at not only the RPO solution, but I look at contingent workforce solutions and early careers and technology consulting and integration as well as reskilling.

I look at all five solutions, if you will, very, very positively. And the contingent workforce solutions, I think, could be something that is definitely, definitely multi-hundred million and could be multi-billion dollars, given the amount of money that companies spend on the temporary side. And the offering is really cool where, you know, we will now go in and we can consolidate vendors and save a company, you know, six, seven, 800 basis, 900 basis points on their spend. I mean, this is material, material savings.

And the contingent workforce solutions, you know, we're going to take that given the relationships we have around the world. And it's the same with early careers, with the early careers and the campus hiring that they do and just the marquee logos. Their client logos are so impressive. And, you know, like I said, I mean, everybody's got a perfect resume and understanding who somebody is is incredibly important to that hiring decision. And then on the technology consulting side, they bring skills that we need, particularly around integrating Talent Suite with CRM and HR platforms. So, you know, I look at all of those and say, wow, over the next three to five years, you're going to see incredible lift, I believe, given this iconic brand and bringing our organizations together.

So we are absolutely off and running on the revenue side. And on the economies of scale side, we have a track record. And we have a global platform that is highly scalable. And so, you know, we definitely are going to look at the economies of scale. And, you know, whether that's in vendor spend, we're, you know, we're looking at that very, very closely. And I would just go back to our track record and say, we do everything we say we're going to do and more.

Well, I think the question of raising rates, that's a real issue. Growth is very, very hard to come by for most companies if they're not building data centers or in the AI area. So I think it has been a challenging environment, and the Middle East has not made that any easier. And you see the impact on our EMEA results for sure. So has it worsened over the last three or four months? I would say no. But again, we've got the big question of increasing rates and more conflict in the Middle East that doesn't seem to end.

I guess on the other side, Mark, what I would point out is just the tremendous demographic opportunities because there is a supply, demand, imbalance. And you know this better than anybody. I mean, the U. S. economy is only projected to produce like five or six million jobs over the next decade, you know, compared to 25 million over the previous decade. So baby boomers are retiring, you know, and, you know, the labor force just isn't going to grow. So the question then is, you know, how do you really find that talent that's not going to not just have a good company, but a great company? And I think, you know, my earlier comments about AI are absolutely right.

I mean, everybody does have a perfect resume. I think our IP and our skill sets and our success profiles actually play an enormous role with that kind of backdrop.

Yeah, with LinkedIn, you know, it was around finding people. And that was the big, you know, question. And I think even back then, I said, you know, it's not a question of finding somebody. It's a question of finding out who they are. And I think with the AI, it's even more pronounced because what I am seeing, what I am hearing from clients is just everybody's perfect. And everybody has this stellar background And so I actually think it way different from the LinkedIn days And if you look at our pricing overall on the entire platform it gone up It increased over time And I think you could make the argument that the same things could happen here because this one is not because it's recent.

I just think this is way, way more profound than the LinkedIn days, you know, 15, 20 years ago.

It's the same as what we had forecasted. So, you know, their CAGR over the last several years has looked, you know, similar to ours. And if you go back further than that, the trend would be remarkably identical. You know, even before COVID, then you've got the great resignation. Everything kind of trended the same way. And going into the close, you know, when we announced it, we said, you know, at the time, it was about $650 million a year in annualized revenue. You know, and going into the close and what we forecasted for the first two months is, you know, the pro rata share of that. It really, you know, hasn't changed.

And so, you know, we're looking at this. What we're going to do now, the go-to-market side, we're all over, as I talked about to George. We're absolutely all over that. So we are integrating right off the bat, I hate the word integrating, but synchronizing the go-to-market activity. So that is absolutely, that's absolutely happening. It's going to take us about eight months or so to get everybody on the same platform, and we're targeting, our fiscal year ends April 30th, we're targeting a May 1st, 2027 date, Where we would get everybody onto a common platform that would be, you know, SAP and the like, and a common CRM, all of that. We are going to do some things immediately so that our front line consultants, we have about 1,800, 1,900 of those, so they have visibility into the customer activity for our largest clients.

So we're absolutely doing that right off the bat. You know, AMS has a completely different industry coverage than KORN FERRY. They're very, very heavy into financial services. It's about almost 50% of their overall portfolio. So I look from, you know, industry and geographic, it's very, very complementary. At the end of the day, we're looking at the business through a regional lens and then through these three solutions. Our goal here is to have a unified RPO offering, which we will have, but we're not going to be on even on the same system for a number of months. So the first few months here is really around learning about each other and not saying, well, this is the way we've always done things, so this is the way we're going to do it in the future.

It's really around finding a third way. And that includes the IP from both organizations. And that IP is obviously very, very meaningful in the RPO area. So, you know, our principle here is do no harm. Focus on the customer right off the bat. Look at the economies of scale here over, you know, the next several months. But it's around, you know, it's around culture. I mean, people ignore when you do something like this, you know, people ignore culture. But, you know, culture is the way an organization gets things done, and by definition, that's going to have to change. And that's one of the exciting things, you know, about being in business. It's not stagnant. It constantly changes.

So we have to continue to evolve our culture collectively together.

Well, look, it's, you know, two quarters is a pretty, that's a pretty short amount of time. We want to look at whether we're expanding client relationships. You know, that's every organization, whether it's a family, a church, every organization has to grow. And so we look at this and say, wow, two iconic brands, complementary, geographic fit, industry fit, marquee logos.

And so for us, you know, what we tend to look at is, you know, how do our enterprise accounts do, our marquee and diamond clients, and what's happening with the cross referrals. And you've seen that now over time that's gone up and to the right pretty consistently. We would look to that. It's all about deepening relationships and innovation, bringing new offerings to market. So all of those things we would certainly look at. But the first principle is do no harm, and make sure you understand, and you understand each other before we find a third way.

And Gary, I would just add to that, if you're trying to think over the next two months, remember what Gary said, we're not going to be integrated from a platform perspective until May 1. So just that in and of itself, we should frame it up for you, saying over the next couple of quarters, you'll see some progress, but it'll be more heavily weighted towards after the integration.

That's primarily on the cost side. As Gary indicated on the top line side, we're starting that right now.

Well, we do. We think that there is enormous opportunity to continue to deepen relationships, and that's reflected in the cross-referrals. So after this investment, we're going to have something like 2,000 consultants that are responsible for originating business. And so for the AMS colleagues that have come in to Legacy KORN FERRY, they have the opportunity to be able to deepen those relationships with other solutions that they didn't have. And the same holds true for KORN FERRY, for Legacy KORN FERRY and the 18 or 1850 frontline consultants that we have, where we have new capabilities to be able to offer to our existing customer base. And we've already put in cross-referral incentives, and we're doing it as we speak, literally as we speak, for our new AMS colleagues, where they are going to be rewarded for opening the door and introducing other solutions.

So, yeah, you're going to, you know, at the end of the day here after this transaction, you're going to have a couple thousand frontline consultants. And, you know, we're looking at that productivity. And, you know, we see that productivity being about $2 million per consultant. And obviously, that has room for significant expansion, given the complementary nature of the solutions that we have here.

Hey, Gary, the other thing I would add to that is if you think about our go-to-market activities and go-to-market mindset, it's driven through the Marquee Endowment accounts, and it's all about deepening our client relationships. And, you know, demonstrated by our referral rates going from 18%, you know, back when we started measuring up to almost 30% today. The other thing I would add for AMS, they operate very similar to us. And if you go back to 2020 and you look at their growth, Gary indicated it was kind of the same as ours. Their carrier is 10%, 11%. Over 50% of that came from expanding their existing client relationships. So those go-to-market activities that are important to us are also obviously very important to them and very consistent with what we've done over time.

Okay, Regina, thank you for hosting this, and I thank everybody for joining. And we are very, very excited about what we can do now with, you know, I think the dominant firm in talent and organizational consulting. So thank you all, and we'll talk to you soon. Bye-bye.