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Text: This is the first call of the calendar year and before we talk about where we're going, I want to step back for a moment and discuss just how far we've come.
It was almost a year ago, the great uncertainty filled the world, and I predicted that we would see more change in sealing two years than in the past 10.
And as a leading global organizational consulting firm Korn Ferry is now right at the center of that stage.
During this time, our colleagues have shown incredible resilience.
Resiliency in purpose, resiliency in hope and resiliency in serving our clients.
And the success is deeply rooted in our vision, our values, how we see the world, how the world sees us and how we've been translating all of this into executing our strategy.
To fulfill our vision and position our company for accelerated growth in long-term success, we focused on a few key strategic pillars.
We're driving an integrated solutions based go-to-market approach that facilitates growth and enduring partnerships with our marquee and regional accounts that are central to more scalable and durable revenues.
We continue to advance Korn Ferry as the premier career destination to attract and retain top talent.
In the last two quarters, we've brought on about 70 senior commercial colleagues to strengthen our bench of talent across the globe.
And as we look forward, we're focused on opportunities that will strengthen our solutions and create shareholder value.
The focused execution of our strategy has transformed our business into a more efficient profitable, growth-oriented organization.
We are far less economically cyclical today than in any point in our history.
The time to recovery much shorter.
The trajectory of the recovery much stable.
Our revenues more visible and scalable.
Our client solutions more impactful.
Our people is the absolute best in the industry and our data and IT, it's deep, rich and absolutely best-in-class.
An important part of what differentiates us is we're the only consulting firm to combine Org strategy, leadership and professional development, assessment and succession, rewards and talent acquisition, and we're taking integrated approach across these categories to help clients execute on their strategy in a increasingly digitally enabled world.
Underpinning all of our offerings and solutions is our world-class IT, putting us in an unparallel position of strength.
As I think about it, we've got more than seven decades of experience data and innovation.
At the end of the third quarter we hold rewards data for over 20 million people, over 70 million assessments have been taken.
We've got organizational benchmark data on 12,000 entities.
We have 3,900 individual success profiles covering almost 30,000 job titles.
Our proprietary recruiting AI tool has compiled more than 550 million profiles of potential candidates across the globe.
Every year we train and develop nearly 1 million professionals.
And certainly last but not least each business hour we place a candidate in a new job every three minutes.
The best way to demonstrate all this goes through our performance.
During this last quarter our third fiscal quarter, we delivered results that were substantially higher than in prior cycles.
Our business rebounded dramatically.
Revenue was up 9% sequentially to $475 million and our earnings and profitability reached record highs with about $97 million of adjusted EBITDA and a little over a 20% adjusted EBITDA margin.
And the sharp improvement that we saw in fee revenue in our fiscal second quarter continued in the third.
And it just -- it doesn't just reflect improved global market conditions, these results are directly attributable to our strategy, and I'd like to share a few proof points from the quarter that highlights how far our long-term strategy is taking hold.
Our diversified business exhibited more resilience now than in the great recession.
Back then, our fee revenue in the quarter immediately following the peak quarter was down approximately 43%, two quarters out it was still down 32%.
Now if we fast forward a few years and look at the COVID-19 recession, the decline in fee revenue from the peak quarter was only 16%, in two quarters out, we're only down 8%, that's a substantial improvement from the great recession.
When looking more closely at our go-to-market strategy, we are seeing measurable progress in selling subscription-based solutions in our digital business.
Year-to-date subscription base fee revenue grew 27% while our third quarter new business that was subscription based was up a 123% year-over-year and almost 48% sequentially.
And we're also, as we've talked about, we're continuing to see success in capturing larger consulting engagements, we would classify those that have a value of $500,000 or more and these engagements are absolutely driven by our integrated solution strategy that provide us with more enduring client relationships of scale.
Year-to-date large new business consulting engagements were up 23%.
And these large engagements are also driving a growing backlog of 24% year-over-year which obviously enhances revenue visibility and durability.
As I mentioned earlier, our marquee and regional account programs continue to deliver less cyclical, more resilient new business in revenue than the rest of the portfolio.
In the third quarter, our marquee and regional account fee revenue declined only 2% year-over-year, while the rest of the portfolio was down about 11% and on a year-to-date basis, our marquee and regional accounts, they've have been relatively aggressive.
It's up 1% year-over-year, while the rest of the portfolio declined 13%.
And our cross line of business referrals again validates our strategy.
it is about three years ago, our cross referrals were about 15% of our portfolio.
Today that number stands at 26%.
We're proud of what we've accomplished and how we've continued to extend, elevate and recast the Korn Ferry brand, both externally and for our colleagues.
Our brand absolutely embodies the way the world sees us, understands us and wants to be a part of what we're doing.
We've never been more committed to helping people exceed their potential with an abundance of opportunity.
We're changing people's lives.
The work of our D&I practice is absolutely breaking barriers, which is one of the top areas of focus for our clients and we're the leader in that area.
I'm also very proud of the launch of Leadership U for humanity, a non-profit venture of the Korn Ferry charitable foundation, focused on developing the total mosaic inside communities and within corporations.
Our long-term goal is to take our expertise in IP and develop 1 million new leaders from diverse backgrounds using our Korn Ferry Advance and Leadership U platforms.
I've always said that it's our people first, clients next and everything else will follow.
That's why we're also offering Leadership U for Korn Ferry to develop our own colleagues from all backgrounds, providing them with opportunities to grow in advance.
It's this commitment and focus that made Korn Ferry a career destination, accelerating the development colleagues across the firm.
No doubt the pandemic has caused seismic changes in society and in business.
Different work is absolutely getting done and that work is getting done differently and Korn Ferry is at the center of that transformation.
We know that problems are never solved in the absence of people.
Solutions will only emerge by cultivating a workforce that is diverse, collaborative and motivated.
Looking ahead, it's about leveraging our data and IP, delivering larger more impactful consulting engagements, addressing the mega-trends that are reshaping the corporate landscape and driving accelerated revenue growth for the firm.
I truly feel we have the right focus, with the right people, at the right time to accelerate through the turn.
In calendar 2021, we will continue our commitment to build the pre-eminent global organizational consultancy.
As Gary said, we're very proud of our third quarter results.
We view them as a testament to the efforts of our Korn Ferry colleagues.
They also represent validation that we have successfully transformed into a less cyclical firm with more resilient and durable based fee revenue that will generate more sustainable, scalable earnings.
Gary made reference to mega-trends that are changing the corporate landscape items like accelerating digital transformation driven by the pandemic, calls for long overdue social change and increased corporate emphasis on ESG issues.
Our comprehensive set of solutions informed by a deep rich collection of data in intellectual property are highly relevant and aligned to help our clients needs in each of these areas.
And importantly, they serve as a real point of differentiation for Korn Ferry.
Now let me turn to some of our third quarter results.
As Gary mentioned, fee revenue in the third quarter was $475 million.
Now, that growth was broad based with fee revenue improving sequentially for the second consecutive quarter in each of our business units.
Additionally, fee revenue growth in the third quarter, this is measured year-over-year, was up 7% for RPO.
It was flat for North American executive search, which is actually seeing business activity back at pre-pandemic levels.
We also saw a substantial improvement in Consulting and that was only down 3% year-over-year, and in Professional Search, that was only down 2% year-over-year.
More importantly, earnings and profitability surged to record highs in the quarter.
Our adjusted EBITDA grew $31 million or 46% sequentially to $97 million and our adjusted EBITDA margin improved 510 basis points to 20.3%.
Adjusted fully diluted earnings per share also reached a record level in the third quarter, improving to $0.95, now that was up $0.41 or 76% sequentially and up $0.20 or 27% year-over-year.
Now, it's important to note that full employee salaries have been reinstated effective January 1, 2021.
In addition, we booked accruals for November and December to pay all employees their full salaries for both of these months.
So similar to the second quarter, our cost structure in the third quarter reflects 100% of all employees compensation costs.
Now let me turn to new business, that also continue to improve in the third quarter.
On a consolidated basis, our new business awards excluding RPO were down only 1% year-over-year.
On a sequential basis, the new business growth in the third quarter also showed broad-based improvement.
Consulting was up 8%, digital was up 14%, executive search was up 8% and professional search was up 31%.
Our balance sheet and liquidity remained very strong.
At the end of the third quarter, our cash and marketable securities totaled $897 million.
Now, if you exclude amounts reserved for deferred comp and accrued bonuses, our investable cash balance at the end of the third quarter was approximately $534 million, which is up $73 million sequentially and up $112 million year-over-year.
Our balance sheet strength is due in large part to the steps we took in late 2019 to refinance our debt with long tenured public debt securities and we also restructured our credit facility in anticipation of a potential downturn.
And we did that because we wanted to position ourselves to be able to weather the storm and invest into the recovery.
Now to date, obviously, we have successfully managed in the depth at our business to the changing environment and we are now investing back into the recovery, as Gary mentioned by hiring 70 senior commercial colleagues over the past two quarters.
Starting with our digital segment.
Global fee revenue for KF Digital was $76 million in the third quarter.
Consistent with the second quarter, the subscription and licensing component of KF Digital fee revenue in the third quarter was $23 million.
Global new business in the third quarter for the Digital segment grew 14% sequentially to $100 million, the best quarter of new business since the beginning of the COVID recession.
Additionally, 43% of new business in the third quarter was subscriptions and licenses, which is the highest portion of any quarter to date.
Adjusted EBITDA in the third quarter for KF Digital was up $4 million sequentially to $27.1 million with a 35.8% adjusted EBITDA margin.
Now turning to Consulting.
In the third quarter, Consulting generated $136.3 million of fee revenue, which is up approximately $9.5 million or 8% sequentially and down only 3% measured year-over-year.
Growth in each of our solution areas improved in the third quarter, enhanced by our virtual delivery capabilities.
Consulting new business also improved in the third quarter.
Sequentially global new business was up 8% with growth in every region.
Adjusted EBITDA for Consulting in the third quarter was up $7.3 million sequentially to $27.5 million with adjusted EBITDA margin of 20.2%.
RPO and Professional Search global fee revenue improved to $95.2 million in the third quarter, which is up 11% sequentially and up 4% year-over-year.
RPO fee revenue was up approximately 4% sequentially and professional search fee revenue was up approximately 24% sequentially.
As previously mentioned, measured year-over-year, RPO fee revenue was up 7% in the third quarter.
With regards to new business, in the third quarter, professional search was up 31% sequentially and RPO was awarded another $44 million of new contracts, consisting of $12 million of renewals and extensions and $32 million of new logo work.
Adjusted EBITDA for RPO and Professional Search in the third quarter was up approximately $5.8 million sequentially to $19.6 million with an adjusted EBITDA margin of 20.6%.
Finally for executive search, global fee revenue in the third quarter was $168 million, up $20 million or 14% sequentially with growth in every region.
Sequentially, North America was up approximately 16%, while EMEA and APAC were up approximately 14% and 4% respectively.
The total number of dedicated executive search consultants worldwide at the end of the third quarter was 522 which was up 10 sequentially.
Annualized fee revenue production per consultant in the third quarter improved to $1.3 million and the number of new search assignments opened worldwide in the third quarter was 1,300.
In the third quarter adjusted EBITDA grew approximately $13.4 million sequentially to $41.7 million with an adjusted EBITDA margin of 24.8%.
Over the past two quarters, the volatility challenged our visibility into monthly new business activity has subsided.
In addition, the global business environment appears to be becoming more stable.
We're now in a position to identify trends and how it will impact our business and as a result of that we've decided to reinstate guidance.
Historically, the fourth quarter has been our strongest quarter in any fiscal year.
If current new business activity continues in the normal seasonal patterns hold, we expect that new business in our fourth quarter will remain pretty strong.
Considering this and assuming no new major pandemic related lockdowns, changes in worldwide economic conditions financial markets and foreign exchange rates, we expect our consolidated fee revenue in the fourth quarter of fiscal '21 to range from $475 million to $500 million, and our consolidated diluted earnings per share to range from $0.95 to $1.05.
Our third quarter reported and our fourth quarter expected adjusted EBITDA margin -- margins are benefiting from elevated levels of profitability flow through due to our top line recovering faster with a trajectory that is much steeper.
However, our current execution capacity is pretty stretched.
Our current levels of utilization are not sustainable to support new business growth.
To that end, we are in the process of adding additional resources.
Further, we want to take advantage of the opportunity in front of us and as previously discussed, we've recently begun to aggressively invest back into our business, making a number of key consultant hires.
And we plan to continue such hires going forward.
With that as you think about our near-term operating boundary for our adjusted EBITDA margin, think about it along the following line.
If you go back prior to the pandemic, we were essentially a $2 billion business within adjusted EBITDA margin of around 15% to 16%.
As we return to the pre-pandemic levels of fee revenue, our business will benefit from previously mentioned structural changes and we're going to add around 200 basis points to our adjusted EBITDA margin, and as a result, we expect near-term consolidated margins beyond the fourth quarter to range from 17% to 18%.
We've taken significant steps in recent years to strengthen our business model, enhance our financial profile and really position Korn Ferry for success.
The sharp acceleration in our financial performance in the second and third quarters, gives us tremendous confidence that our strategy is working, that we have the right initiatives in place to continue to increase our market share and deliver sustainable value to all of our stakeholders.
With that I'll conclude remarks and we'd be glad to answer any questions you may have.

user
revenue and earnings guidance being reinstated starting with q4 fy'21.
sees q4 earnings per share $0.95 to $1.05.
q3 adjusted earnings per share $0.95.
q4 fy'21 fee revenue is expected to be in range of $475 million and $500 million.

assistant