Korn Ferry (KFY) 2024 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry second quarter fiscal year 2024 conference call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes, and 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.

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 related to future performance plans and goals constitute forward-looking statements within the meaning of 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 and actual results in the 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 of the SEC, including the Company's annual report for fiscal year 2023 and the company's soon to be filed quarterly report for the quarter ended October 31, 2023.

Also, some of the comments today may reference non-GAAP financial measures, such constant currency amounts, EBITDA, and adjusted EBIT. Additional information concerning those 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.kornferry.

With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.

Okay. Good afternoon, everybody, and thank you for joining us and seasons greetings. The team is going to get into this in more detail, but there's no doubt that the strategy is working despite a softer labor market. Our results demonstrate the resiliency of our business through a marquee and regional account strategy, multiple talent product offerings in cross referring those solutions to our clients.

We generated $704 million in fee revenue in the quarter, which was down about 3% year over year. Despite a persistent uneven economic environment, earnings and profitability held steady sequentially as we delivered a 14% adjusted EBITDA margin. Also, we announced this morning, reflecting that we've got a much different company today and the confidence that we have in our organization. We increased our dividend by 83%.

I'm proud of our firm and of our colleagues. We continue to develop increasingly relevant solutions in a rapidly changing world. In particular, our consulting and digital businesses now generate almost 40% of our top line. And in fact, digital achieved an all-time record revenue at constant currency during the quarter.

You know, to put all this in perspective, I want to take a step back for a moment. When I started with our firm, we were a couple of hundred million dollars company. Today, our firm generates several billion dollars in revenue. In fact, our top line today is about 40% higher than pre pandemic levels, and now we're at the threshold of even greater opportunity.

More importantly, we have the possibility of accelerating the trajectory of thousands of organizations. At the same time, we have to acknowledge that most of most of the business world is in the midst of a multi-quarter cyclical reset as we become clear that the economic environment will continue to be challenging in the months and months ahead, countries have been transitioning from almost three decades of cheap money to substantially higher interest rates. This reset will require companies and our clients to not only adapt, but I just optimize and innovate, which creates opportunity for Korn Ferry.

We have a proven track record proven proven track record of accelerating through many economic turns. The crucial aspect is breaking before the turn and accelerating through it in times like these that are great companies and make their best moves. And Korn Ferry is a great company. Our vision to become the premier organizational consulting firm is working, and our diversification strategy continues to positively influence our performance.

We have a household brand operating in every major geographic region of the world with world-class IP and talent, unparalleled client access and a pristine balance sheet with substantial financial muscle. We power through cycles and are poised to seize opportunity with a three point strategy number one, optimize number two, innovate and number three consolidate.

I'll now turn the call over to Bob, who will cover all of this in more detail. Bob?

Great.

Thanks, Gary, and good afternoon and good morning. Similar to Gary. I'm very pleased with our performance this quarter clearly demonstrates that our broader diversification strategy and investment thesis continues to play out. Our consulting and digital businesses both grew year over year, and our recently acquired interim businesses were more durable than our permanent placement talent acquisition solutions.

Now this intentional diversification into strategically aligned capabilities provides additional cross line of business referral opportunities and more relevant scalable solutions for our marquee and regional accounts and also contributes to not only more durable fee revenues, but to increased earnings stability as shown in the company's sequentially stable adjusted EBITDA despite an increasingly complex and uncertain macroeconomic backdrop. I'm also pleased with our cost management.

The Company's adjusted EBITDA margin marked the second consecutive quarter of continued sequential improvement. Additionally, at the end of the second quarter, we took actions to right-size our workforce capacity to better align with current business realities as well as to take advantage of productivity gains. We are realizing in this new world of work.

These actions will help us to continue with our adjusted EBITDA margin improvement by driving approximately $110 million to $120 million in overall annual cost saves. Finally, and going back to the point, Gary ended with We do plan to continue to seize opportunities in the current environment with our three point strategy is that optimize innovate and consolidate. Let's start with optimized first.

We're going to continue to drive productivity by leveraging our cost base. In fact, if you take Q2 of FY 24 and compare that to Q3 of FY20 when that was a quarter right before the pandemic. Our fee revenue per employee is up 23%. And if you were to pro forma a full quarter of the impact from our recent restructuring actions that would actually be up 33%.

Now let me turn to innovate. We will continue to build moats around our solutions and services using our proprietary data content and IP, which truly differentiates us from our competitors who generally have to rely on third-party data and insights. We are also actively embedding AI into our existing solutions and services to drive greater delivery efficiencies along with greater client impact. Last, we will continue with our investments to monetize our data content and IP through our digital business.

Now touch upon consolidate, our efforts are going to be focused on continuing our investments in strategically aligned, less cyclical, faster, growing and larger bulk addressable markets with all all of our recently acquired interim businesses now being fully integrated in the increasing relevance of our services and solutions in the world. Today, we will continue to leverage our existing client relationships and our colleagues across all lines of business will drive top line fee revenue synergies through expanded client penetration.

Last, we will continue to expand our leadership and professional development business by replicating our success in delivering leadership coaching at scale and an increasing number of clients and leveraging this success into a broader leadership development outsourcing offering.

Now let me turn the call over to Greg, who will take you through some overall company financial highlights.

Okay.

Thanks, Bob. In the second quarter, global fee revenue was $704 million, which was above the high end of our guidance range and down 3% year over year or down 5% at constant currency. By line of business consulting and digital, which combined were approximately 40% of consolidated revenue, continued to be stable, each growing approximately 3% in the second quarter.

For talent acquisition, permanent placement fee revenue continued to moderate from post pandemic highs with executive search, RPO, and professional search down 7%, down 18%, and down 29% respectively. Fee revenue in the second quarter for interim services was also more stable, down sequentially approximately $2 million or 2%.

Consolidated new business in the second quarter, excluding RPO, was down 3% year over year at actual FX rates and down 4% at constant currency. Consulting new business in the second quarter was strong, up 10% year over year, driven by AMEA, which was up 34%. Digital new business was up sequentially in the second quarter, but down 15% measured year over year due primarily to a strong fiscal Q2, which included several large contract wins.

Similarly, RPO had a strong quarter with new business at $141 million. New business in the second quarter for Executive Search was down 10% year over year and for Professional Search & Energy was up 1% year over year. In line with guidance, second quarter earnings and profitability remained sequentially stable. Adjusted EBITDA in the second quarter was $99 million. And despite moderating fee revenue, strong cost control drove adjusted EBITDA margin to 14%, up 30 basis points sequentially.

Finally, our adjusted fully diluted earnings per share in the second quarter were $0.97, down $0.46 or 32% year over year. Adjusted fully diluted earnings per share excludes $70 million or $1.01 per share of restructuring charges related to the realignment of our workforce and integration and acquisition costs associated with our recent acquisition.GAAP diluted loss per share in the second quarter was minus $0.04.

Our investable cash position at the end of the second quarter remained strong at $464 million. Through the end of the second quarter, we deployed $65 million of cash using $28 million for share repurchases and dividends, $28 million for capital expenditures, and $9 million for debt service.

Now I'll turn the call over to Tiffany to review our operating segments in more detail.

Thanks, Greg. Starting with KF Digital, global fee revenue in the second quarter was $97 million, which was up 3% year over year and up 1% at constant currency. Digital, subscription, and license fee revenue in the second quarter was $32 million, which was approximately 33% of fee revenue for the quarter and up 12% versus Q2 of last year.

The strategy of multiyear subscriptions has created some resiliency in digital's revenue as this quarter marked a near all-time high in fee revenue for this segment. Global new business for digital was $95 million with $34 million or 36% of the total tied to subscription and license sales. Although the quarterly timing of larger new business projects is different than last year, the overall pipeline for digital remains strong as we head into the back half of our fiscal year.

For consulting, fee revenue in the second quarter was $178 million, which was up approximately 3% year over year and up 1% at constant currency. Fee revenue growth was strongest in organizational strategy, which increased 19% year over year. And in assessment and succession, which grew 7% year over year.

The average hourly bill rate continues to climb now at $413 an hour, which is up over $42 an hour from just one year ago. Additionally, global new business for consulting in the second quarter was up 10% year over year with continued double-digit growth in AMEA resulting from large organizational strategy wins in the UK and Middle East.

Total fee revenue in professional search and interim in the second quarter was $138 million, up $3.6 million or 3% versus Q2 of FY23. Breaking down the quarter year over year, fee revenue growth was mostly driven by the interim business, which offset moderation in the permanent placement portion of the segment. Interim services fee revenue grew to $82 million, up from $55 million in the same quarter of the prior year, driven in part by the most recent acquisitions. The average interim hourly bill rate has increased to an average of $126 per hour, up from $107 just one year ago.

Permanent placement fee revenue declined by $23 million to $56 million year over year, down 29% at actual and down 30% at constant currency. Professional Search and interim new business increased 1% in the quarter compared to last year, driven by growth in AMEA and aided by the most recent acquisitions.

Moving on to recruitment process outsourcing new business for the second quarter was $141 million, comprised of $53 million of new logo logos and $88 million of renewals and total revenue under contract at the end of the quarter was approximately $681 million.

Fee revenue totaled $88 million, which was down $20 million or 18% year over year and down approximately 20% at constant currency. Fee revenue is impacted by a moderation in hiring volume in the existing base of contracts. We see this slowdown as transitory and believe RPO was well positioned to benefit when hiring returns to more normalized levels in the base and the larger more recent wins begin converting to revenue at their full contract value. Although the quarterly new business can be choppy at times. The pipeline remains strong as RPO continues to win new business with a differentiated service offering in the marketplace.

Finally, global fee revenue for executive search in the second quarter was $203 million and as expected, experienced a year-over-year decline of 9% at constant currency compared to the accelerated growth rate during the pandemic recovery last year. Demand continued to moderate across most regions with the exception of Latin America. Global new business in the second quarter for executive search was down 10% year over year and down approximately 11% at constant currency.

I will now turn the call back over to Bob to discuss our outlook for the third quarter of fiscal '24 through things.

Thanks Tiffany. November new business came in line with our expectations and the normal seasonal patterns. And assuming no new major pandemic related lockdowns or further changes in worldwide geopolitical conditions, economic conditions, financial markets and foreign exchange rates. We expect fee revenue in the third quarter of fiscal '24 to range from $645 million to $665 million and our adjusted EBITDA margin to improve to approximately 15%. And our consolidated adjusted diluted earnings per share to range from $0.96 to $1.02. Finally, we expect our GAAP diluted earnings per share in the third quarter to range from $0.87 to $0.95.

Now in closing, as I look across the organization, we're extremely well positioned in terms of what the world is looking for. Everything today is about talent. There's was a war for talent. Companies are looking for better talents, different talent talent with IT skills and so on. The collection of our IP data and content woven through our core in integrated solutions really creates a unique and symbiotic ecosystem of service offerings that touch every aspect of an employee's engagement with his or her employer with the only company in the world that has this collection of IP data content and assets it really gives us a great platform to help our clients synchronize their strategy and talent to drive superior performance, conquer change coming out stronger on the other side.

With that, we would be glad to answer any questions you may have.

(Operator Instructions)

George Tong, Goldman Sachs.

Thanks. Good morning. New business ex RPO inflected to a decline in the quarter, but looks like November following normal seasonal patterns. Can you talk a little bit more about new business trends that you saw by month during and exiting the quarter, November trends suggest that we've essentially formed a bottom in terms of new business.

The on the new business trends over the last five months have been pretty flat that's That's number one. And it does appear that searches as stabilized, particularly taking a look at even the last four quarters, October was substantially better than September, which we would expect and November came in, which is November is a seasonal month and it came in exactly where we thought. So it's been fairly fairly stable, pretty consistent.

And in terms of trends,

got it. That's helpful. And you additionally talked about increasing cross referrals among large marquee and regional accounts new. I'll provide some metrics on the extent of cross selling and where you're seeing the most about the cross-selling, which which division

Well, the the cross-selling, you know, look at the marquee and regional accounts, it is the anchor of our strategy. It 38% of our top line. And in fact, this quarter it was 38% of new business. And if you walk on overall cross referrals right now, I think year to date or something around 25% of the company's top line. And in some businesses, the percentages is higher and some lower.

When you look at RPO, it's tended to be a very high percentage, substantially higher than than 25%. We've certainly been very, very thrilled by saying what level of cross referrals into our intermediary business, and we didn't have three years ago that continues to bear fruit.

So you know what parts of the business in prior in some lower, and that's the anchor of our strategy to have multiple offerings to have reasons to talk to clients and to drive deeper, impacting and change the trajectory of literally thousands of thousands of organizations.

Very helpful. Thank you.

Mark Marcon, Baird.

Very good morning or good afternoon depending on where you are on had several questions. One, if Gary, you started out by basically talking about, you know, hey, we've got this big reset in terms of getting ready for you. No changes in rates from your conversations with your top consultants and the feedback that they're giving you, you know, how how are they viewing this reset? Like how long do they think it's going to take? How how is that impacting talent plans and what are you just seeing from that perspective because things have been stable for the last five, you know, months. And in addition to that, we are seeing, you know, some chatter about Goldilocks of maybe a soft landing instead of expected recession. So I'm just wondering how that all melds together.

Well, the you know, in my conversations with clients and our consultants it varies. As you know, it varies depending on where you are there. There's parts of the world that are that are investing heavily and there's others that are not might look you step back and this is my read of things. Is that number one, there's no question. The labor market is softer. I mean, a couple of years ago, the United States was producing like 600,000 jobs a month last year. It was 400,000. This year, it's 200,000. And October is probably like 100,000. So there's no question that I'm coming off this incredible surge after the pandemic that the labor market has moderated.

And I would expect deflation. I think that is going to happen in corn and wheat prices are back to pre-pandemic levels and you look at companies' results over the past few quarters and there's a consistent theme volume down prices up on package shrinking and I would expect that there to be deflationary pressures broadly broadly speaking, and I'm certainly not an economist, but I would think the central banks are going to hold pretty firm in where the rates are for the next several months.

And, you know, mid to late 24, maybe there's there's some relief in that, but I think that this environment has taken companies time to adapt and adjust. And I think that's that's what you're saying and with a higher cost to carry. But it's just it's clear to me that prices have to come down, you know, overall.

Great. I appreciate the perspective with regards to capital allocation. So continuing is not increasing the dividend. I know that that's been a point of discussion with the Board for quite some time. Can you talk a little bit about the dynamics that led to such a a strong increase in terms of the dividend?

And just you know what how of the top management as well as the Board, what what changed in terms of the thinking and how should how should we interpret that with regards to you know, further investments in terms of areas like interim or professional search?

Confidence, confidence confidence. I mean, that's the answer. We have a completely different company today than we did several years ago, and we have confidence in our ability to generate sustainable profits. And it is not by any stretch of the imagination, a deviation from our strategy. We have a multibillion-dollar opportunity ahead of us.

We're going to continue to to make investments to do acquisitions, but it reflects confidence in what the business is today and you can see it in the results and you can see a soft labor market and clearly the perm, you know, recruiting side of the business would ebb and flow with that. But you look at the other other parts. And it's doing that. It's substantially lifted the firms results. So it's all around, it's all around confidence.

And if you look at our growth rate over 20 years, it's probably about 14%. I think last 10 years it's 12%. 40% of that has been M&A, 60% has been organic. And we're continuing to think that will be the playbook going forward. It could change if there's a big opportunity that comes our way. And that's one of the reasons why we took the actions we did, unfortunately, is to make sure that we're breaking and then we can make investments and deliver returns to shareholders.

So we think that a balanced approach is the best way. And number one is to invest in the business as we've done. But we also have to be mindful of returning cash to shareholders either through dividends or stock buyback.

Really appreciate that. I'm sure the shareholders do as well.

With regards to the arm with regards to just the separation and the restructuring that's occurring, which sections are being impacted the most from that perspective in terms of when we take a look at the overall headcount reduction and that $110 million to $120 million in terms of cost reductions, which which divisions are being impacted the most there

it was it was fairly broad-based in it and it kind of follows the trend in new business. Look, this is something that and I just absolutely it's gut-wrenching and it's a decision that was not taken lightly. Five months about it tried a lot of different things, and it's something that just weighs heavily on even even today. And but the reality is that great companies make their best moves in times that aren't as rosy.

And to do that, you have to make sure that you have financial freedom and flexibility to keep making investments. And now the decision that I took, and unfortunately, it impact is about 8% of the organization and is pretty much followed with the trends that you that you see in new business for the most part, both geographically by industry and by solution.

hey Mark, it's Bob. But the US, the broad-based outcome really relates not only to effect that we're getting from taking out excess capacity. But remember, we also are taking advantage of some of the productivity gains that we're getting in a world where that gave us the opportunity to be more broad based this versus more surgical.

I've got lots of other questions, but now I'll jump back in the queue.

Tobey Sommer, Truist Securities.

capital intensity. Over the last few years, your CapEx has gone from like $31 million in fiscal 21. It looks like we're on run-rate for over $80 million this year. Can you talk about that what the what your goals are for what it will achieve and if there's a potential for it to normalize down as a percentage of sales and or operating cash flow.

So the the first part of your question was cut off. Could you?

Yes, absolutely. Thought I wanted to ask about capital intensity in recent years and year to date, CapEx has gone up significantly more than doubled in sort of 3.5 years. So I want to know what the goals are, what you what you're achieving in our northern achieve in the future and whether that could normalize down as a percentage of sales and operating cash?

Yes. Well, look, it's number one. It's around the IP. and embedding the IP. and everything that we do. And you know, with all the conversations around AI. It first starts with data and proprietary data and that we have that. I mean, we develop, as you know, over 1 million professionals a year. We've done 100 million assessments. So the CapEx and the investment there is really around data and IP and how we blend together the entire platform on

And for example, in both consulting and digital. We break those segments out separately, but in fact, they very much go hand-in-hand in that consulting uses IP as a firm in many of its engagements. So I think that's fundamental to the company's future is around proprietary IP data and knowledge, particularly with these conversations around AI.

And I don't think it will be as quite as high as $80 million. But I do think that there's a level that we're going to want to maintain to seize the opportunities going forward. And so when we look at this we have, you know, our track record and we've got 20 years and you look, it's been fairly balanced in terms of our strategy. We say what we mean we do, what we say and I would I would expect that it's going to continue to be balanced. Would that moderate somewhat this year?

I think it probably will in the back half of the year. But we have to invest in the monetization and the integration of our IP into the solutions that we offer, including in search economy reshape.

I think you're still be I think your number you mentioned that $80 million is high. You should be thinking this year. Capex is probably $60 million plus minus.

Ok.

So does edge down from last fiscal year and last year.

Yes, I'm sorry. Go ahead.

after that that detail. How do we assess the effectiveness of those investments because they're they're multiyear in nature and it's a process, is it more rapid growth in the licensing piece within digital? Is today also a boost in the medium term growth rate of consulting like sort of from where we sit outside the company, how do we assess the efficacy of those investments?

Well, I think the first thing is number one, this is this is the whole bigger than the sum of the parts. And so how does the firm perform overall when you start to peel back. I think you first have to look at consulting and digital together and you know, what are those solutions doing relative to any kind of market expectations. And so, you know, today that that business is [$1 billion, $2 billion] to come.

And as we talked about, let's look at the consulting growth rate. I mean, the new business in October was up by 10%. And the wins that we're getting are complex engagements, bigger sizes look at the rate per hour rate per hour on our consulting business has gone from like $300 to $413 in the matter of 2, 2.5 years. That's a direct result of the investments we've made the strategy around the marquee and regional accounts, the strategy around going to bigger engagements. So I think that's something you can look at.

The RPO business on the success in the RPO businesses because of the account strategy because of the talent that we have. But, you know, the big part is around the IP and the technology that we'll bring to clients. Now this is a pretty tough compare with what we're saying and what others are seeing in the RPO industry with what I called previously, labor hoarding. And it's difficult to really to assess it in this particular cycle.

But I think you can look at that. And again, just look back over many years. I can remember 10 years ago that business was $50 million today in run rates, you know, more like [$320 million , $350 million] , something like that. And I think you would look at that as well.

until then the other thing you have to think about to the total capital spend is a portion of that goes to infrastructure right, whether we're updating systems or strengthening the foundation to keep the keep the bad guys out and probably 15% to 20% of what we spend is size, infrastructure spending.

Sure. Gary, how do we think about how do you think about the internal recruiting capability that your customers have retained during this uncertain economic period of the last seven or eight quarters?

And on what does it mean to the ability of the company to sort of grow as perhaps marginal demand increases? How much will be retained internally at the customers versus represent given itself as demands that corporates?

Well, I think ultimately depends on on the quality and the knowledge that we bring on. Clearly, we have seen companies retain a larger share. You know, areas of shared services that I wouldn't have guessed. I mean, there's there's no question about it some, but you look at the business today and for example, you know, the search businesses essentially and where it was, you know, pre pandemic levels. And so do I think that that's going to have a negative impact when it's a little sunnier?

No, I don't think it's going to have a material negative impact because I've got a lot of confidence. And I think the daily data shows that the IP and the insight that we bring and is pretty special in the marketplace. And so I wouldn't expect that to have a now a big negative overhang on what we do around recruiting in the labor market.

If I could sneak one last one.

I want to react to something you said earlier, you said perhaps in general deflation, how could that manifest itself in wages in how does that representation wages impact your growth in a year or two things?

Well, you know, there's going to continue. I think there's going to continue to be some wage pressure, but you've seen that really moderate big time. And over the last few months, I mean, the quit rate has gone down substantially, you know, and that's what happens in cycles. You know, it goes from, you know, an employer market to an employee market and back and forth.

And but I do think overall that that deflationary impact will ultimately result in central banks on revisiting the levels of rates. And I think that could create freedom for companies on in terms of in terms of investment. So I would view that as a good thing I mean, it's clear with the central banks and this unprecedented move that they've made over many months here, it is had a big, big impact on the economy.

There's just no no question about it in the United States going from 600,000 jobs a month to now this month, probably 100,000. I mean, that's incredible, but that's unbelievable. So it's had its impact on. And I have to believe that at, you know, say five, six months down the road, there has to be a way to look at that on Yes.

Thank you for being so generous MedQuest.

Trevor Romeo.

Thanks so much for taking the questions on first one, just on the revenue guidance. I was just wondering if you could talk about your expectations for each segment and in total, it's maybe a mid to high single digit decline sequentially. That's embedded kind of on that on a consolidated basis. Just wondering if you could kind of talk about the various factors for each of the businesses.

The first overall, when we historically well, look at our results, you would tend to think that the third quarter based on historical averages would be down about 5% from the second quarter. And basically our guide is in line with that. And I would expect that the results in the third quarter are going to mirror what we've talked about here in terms of new business trends. So I would probably spike the search business to be down 10% or so on. I would expect the consulting business to be strong, a strong and a relative term. And this kind of economy for sure. And so that's that's how I would think about it.

On the interim side, I would expect that the technology area would improve slightly over over what it's done and so that's kind of broad based how I would look at the components of the business, Steve, on a geographic basis, I would expect Amea to continue to perform well and again, that's relative to the economy that we're dealing with, but that could be moderate growth. It could be twice and Asia has store historically in Asia over the last, you know, several quarters as been off, China has been a drag on our results of about to the tune of about $50 million a year.

The good news in the last two, three months as we've seen some improvement in Asia, which would be great for us. We have a great team there. So that's that's how I would think about it. The RPO business you know, the level of new business, new wins this quarter was it's about $100 million, almost $150 million, $141 million, so $600 million. That's kind of what it was excluding last year, even after the after the pandemic, it was kind of $600 million a year. And so that's how I tend to think about it.

Okay. Thanks, Gary. That's helpful. On the leadership development outsourcing or the coaching at scale business, you've been talking more about lately. Just kind of wondering if you could talk about how you progressed toward that opportunity the past several months and how significant that can be to the company in the future?

Well, it comes back to Toby's question around around investment and capital. I mean, you know, part of that investment in capital is around some of our training businesses and we have to continue to invest in that. So that that training businesses, you know, roughly call it 10% of the overall company's revenue leading. It's an enormous market. It's probably $100 billion.

I mean it's it's massive in terms of the market opportunity there. And we continue to win mandates of not just teams but thousands of people within an organization and particularly at a time like this when companies have to really adapt and adjust and innovate and optimize and think about AI and think about their talent strategies. So it does present an incredible opportunity for us, but the key is around the IP. And we have to make sure that we're making the investments on to enable the development to create real regional learning journeys for companies and their employees.

And Trevor, this is Bob. One thing we are seeing right now and the leadership development outsourcing on our the journey to stand that up is clients are coming to us. Now we have a leadership development outsourcing diagnostic. So we're helping clients to understand most clients. Their spend is so dispersed across the organization. And in these times, we're trying to optimize costs. We've started to get mandates around the cost up the optimization of their leadership development spend through our diagnostic tool.

Great, thanks. And then if I could maybe sneak one more in. Just to follow up on the restructuring, I think the the annual cost savings, I think is about 4% of the current revenue run rate. I mean, just simplistically, would you expect that to have about a 4% positive impact on margins on an ongoing basis? Or would be would there be some offsets there? And then on kind of the phasing or the timing, will all of that benefit be captured by the end of Q3? Or would there be some lagging impacts beyond that?

Yes. Well, Doug, I'll jump on that one Gary. So I'll answer the second part first. The the majority of the saves we would expect to see in Q3. There are some situations in foreign countries where for example, people are in garden leave and so on. And so getting the costs out of the business takes a bit longer. But I would say for the for the most part, we'll realize those savings in the third quarter.

You heard Gary talk about sort of breaking before the turn and accelerating through it. And so part of the reason why we took the actions is to give us the ability to make investments as we go through this cycle. And so the 400 basis points a year referring to you should be thinking about this business from a, I would say, for the near term, kind of a 14.5% to 15.5% margin -- adjusted EBITDA margin. And then obviously once the five lifts in world gets back to more normal environment, we would expect to be in the kind of 16% to 18% range that we previously talked about.

Okay.

Understood.

Thank you very much.

Josh Chan, UBS.

Hi, good morning and thanks for taking my questions. So just one question on the guidance. You mentioned that third quarter you expect about 15% EBITDA margin, which is obviously higher than what you did in Q2. So I was just wondering in what businesses do you expect to see that most of that sequential margin impact?

Well, we want to see it in all the before the pandemic, we were kind of consistently running at 14%, 15% EBITDA margin. Then we entered into a brand-new market around interim services now. And when you pro forma that out and look at the history, the immediate history before the pandemic, that kind of 14.5%, 15% historical number translates to about know, 12.5%, 13%, so something like that. And so what we're guiding to here is a 15%. So so we would think on an apples to apples basis, this would be 200 to 300 basis points higher than pre pandemic. And with the investments that we have made over the years, as Bob talked about in terms of productivity improvements, using AI and the like, we better see that kind of profit increase. So that's how we're thinking about it.

Okay. That's helpful. Thank you on. And then just a last follow up, I guess on the on the restructuring, just could you guys just run through the thought process and timing behind that because it didn't seem like any business took a leg down in the quarter really. And so is it more of a catch-up and an acknowledgment that the recovery may may take a little bit of time or I guess what was the thought process behind doing that now?

Well, that's never a great thought process. And it was for me personally, many, many months in the making. And and we we tried a lot of different things. But at the end of the day and you look at the Firm's history on and we have a clear and demonstrated track record of powering through cycles. And if you look, we have a history of taking actions on unfortunate actions and earlier than later. And we do that so that when there's volatility and dislocation, we can take advantage of that. And that was the reason.

nd it's one, it's just something that I hate to deal on ways on my heart, but on now we have to make sure that we have the financial freedom to be able to invest because this is a multi billion-dollar opportunity from where we are today, frame out. Appreciate the color there and good luck in the second half of the year.

Mark Marcon, Baird.

Just thanks for taking my follow-ups. I wanted you to expand if possible on your last comments with regards to the rationale for doing it. I think you've always been very clear and it's very thoughtful in terms of the on the reduction. And it seems like everybody who is with the firm and coming through this on the other side is going to benefit from it. But I'm wondering if you can and describe like what how morale is, how is retention with regards to the consultants that you want to keep and how to what extent due to all that the consultants appreciate the necessity of doing what you did?

Well, that's a loaded question. You know, it's our just based on data, our turnover is really low relative to a professional services firm. And it was it was low actually even during the great resignation relatively speaking. And so that's when you actually look at the data. And that is the fact is that the turnover and it has been at very, very reasonable levels.

These decisions are not easy ones and you know, at the end of the day, and we have a multibillion-dollar opportunity ahead of us to be able to seize that opportunity we have to have the financial flexibility to make investments to do M&A, to reward our talent and to invest in data and AI and the things that we've talked about and at the same time return capital to shareholders.

And you know, again on an apples to apples basis and with the investments that we've made, I think we should be more profitable than we were. And you know, before the pandemic, we were running apples to apples kind of 12.5%, 13% adjusting for the interim mix and with the investments that we've made, you have to see a return on those investments and our profitability level at now, the guide at 15% reflects a step up in profitability and from the pre-pandemic levels and I think that is absolutely warranted given the investments that we've made in the business.

Great. The digital business, despite the economic softness has been growing and, you know, modest 2.9% year-over-year growth but strong sequential growth. Can you talk a little bit about the areas that you're seeing the greatest success in the digital business? And then you also earlier referenced bigger projects on the consulting side. And I'm wondering if you can talk a little bit about that. And then just how should we think about the lumpiness with regards to new business trends as it relates to digital,

yes, you're going to continue to see lumpiness in digital. We've got some very tough compares on you could land multimillion dollar engagements that hit in the quarter. And that's and that's actually what you're what you're seeing. So there is going to be some lumpiness. I mean that's why we've tried to move this towards and you know, a software as a service business.

And as Tiffany said, it's about a third, 36%, something like that. Some of our new businesses are around licensing we made that move a few years ago on we're going to continue on that. I do think you you really do need to look at the consulting and digital businesses together to get a true picture on. And the digital business feeds a lot of others that I mean, the digital part of that feeding our Professional Development business.

So to just look at that on a standalone basis. And it was my decision to break that out several years ago. I mean, you do really need to look at it as an integrated whole there's really four things on the digital business that we're focused on. You know right now, one is around rewards twos around sales and service stories around assessments and floors around renewals.

And then if I added a fifth, it would be around developing an ecosystem of channel partners. It's a couple of days because of the areas we have comp data, it's owned by millions of people, 30 million people around the world 10,000 companies like that that have been able to monetize even further sales and service. We made an investment right before the pandemic in a company called Miller Heiman. We've got incredible IP there. We've got to make sure that that's being digitized and brought into today's reality.

Assessments is the linchpin of the company. We've done 100 million assessments. We've got to make sure that we are digitizing that embedding AI into it. We have to focus on on renewals and that, you know, and part of that is around activating and enabling our learning content for sure.

I'm Bob, the other thing that we should think about with the new business in digital is as we start to sign up more longer-term engagements. You tie it up in the past, you do one year than another year than earlier. So each sequential year you'd have that same renewal happening. Whereas now if we sign up a three year deal, you don't get that renewal in year two and year three. So you're seeing some of that influence the of the new business in digital as well, which is a good thing that we want to. We want to get this out for long term subscriptions.

And can you talk about like on the digital side with your largest client there, how is that progressing? What are you hearing on saw referenceable? Are they going to be?

Well, I look at just the again I'm going to look at the consulting and digital business together. I mean, you look at the shift that's been made in those businesses over several years. And you're clearly clearly seeing a move towards more scaled assignments?

There's no question about it. And a lot of those on our around organizational strategy, which is around companies rethinking their organization, setting up a new organization, adapting, optimizing, innovating on. And the success of that is due not only to the talented people that we have, but the IP that we have to on and you know, that's really that's really bearing out.

And Mark, when you think about our largest clients, you should be thinking about it more from a kind of a one Korn Ferry integrated approach where the real power of the firm comes in when we've got multiple lines of business into a client. So rather than looking at a large client relative to digital or RPO, it's really the whole suite of services that we offer, what creates the largest accounts that we have.

Yes, I was just talking about that one contract that you know what I'm talking about in terms of how well that's going on. So was curious there. With regards to China, you did mention it's been soft and a big drag. But Gary, you mentioned it's starting to pick up a little bit or stabilize. Can you expand on that?

Well, we've seen a little bit of green shoots over the last couple of months, and I'm not going to sit here and say that two months significant trend. But you know, that's, you know, that's $50 million in terms of going back to pre pandemic off the company's top line. You know, it's not insignificant in terms of the and the impact that it's had. So I'm not going to sit here and say the two months make a trend but it has worked better the last couple of months.

Great to hear. Thank you very much.

And it appears there are no further questions, Mr. Burnison.

Okay. I want to thank everybody that's time of year where there's a lot of reflection and a lot of things from us despite what's happening in the world today. I thank you all for listening. Taking in interest, and we'll speak to you next time. And thank you, everybody.

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