Zions Bancorporation, National Association Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 6, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Second Quarter Fiscal Year 20 24 Conference Call. As a reminder, this conference call is being recorded for replay purposes. We have also made available in the Investor Relations section of our website at kornferry.com a copy of the financial presentation that we will be reviewing with you today. Before I turn the over to your host, Ms. Gary Burnison.

Operator

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 participants not to place undue reliance on such statements. 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 in the company's soon to be filed quarterly report for the quarter ended October 31, 2023.

Operator

Also, some of the comments today may reference non to GAAP financial measures such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning those measures, including reconciliations in the Investor Relations section of the company's website at www.kornferry.com. With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr.

Operator

Burnison.

Speaker 1

Okay. Good afternoon, everybody, and thank you for joining us in season's greetings. The team is going to get into this in more detail, but There is 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 and cross referring those solutions to our clients.

Speaker 1

We generated $704,000,000 in fee revenue in the quarter, Which was down about 3% year over year. Despite a persistent uneven economic environment, earnings and profitability held are in the same position. 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 participants are participating in a rapidly changing world.

Speaker 1

In particular, our consulting and digital businesses now generate almost are in the range of 40% of our top line and in fact, digital achieved an all time record revenue At constant currency during the quarter. 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 $100,000,000 company. Today, our firm generates several $1,000,000,000 in revenue. And now we're at the threshold of even greater opportunity.

Speaker 1

More importantly, we have the possibility of accelerating the trajectory of At the same time, we have to acknowledge that most of the business world It has become clear that the economic environment will continue to be challenging in the months ahead. Countries have been transitioning from almost 3 decades of cheap money to substantially higher interest rate. This reset will require companies and our clients to not only adapt, but adjust, optimize and innovate, are in a position to be in a position to be in a position to be in a position to be in a position to be in a

Speaker 2

position to be in a position to be

Speaker 1

in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to In times like these, that's how great companies 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 3 point strategy. Number 1, optimize number 2, innovate and number 3, consolidate.

Speaker 1

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

Speaker 2

Great. Thanks, Gary, and good afternoon or good morning. Similar to Gary, I'm very pleased with our performance this quarter. Clearly demonstrates that our broader 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 are in the company's sequentially stable adjusted EBITDA despite an increasingly complex and uncertain macroeconomic backdrop.

Speaker 2

I'm also pleased with our cost management as the company's adjusted EBITDA margin marked the 2nd consecutive quarter Additionally, at the end of the second quarter, we took actions to right size our workforce capacity to better align it with are in the range of the current business realities as well as to take advantage of productivity gains we're realizing in this new world of work. These actions will help us to continue with our adjusted EBITDA margin improvement by driving approximately $110,000,000 to $120,000,000 are 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 3 point strategy. He said optimize, innovate and consolidate. Let's start with Optimize first.

Speaker 2

We're going to continue to drive productivity by leveraging our cost base. In fact, if you take Q2 of FY 'twenty four and compare that to Q3 of FY 'twenty, and that was the quarter right before the pandemic, Our fee revenue per employee is up 23%. And if you were to pro form a a full quarter of the impact from our recent restructuring actions, 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 3rd are in the same period of time.

Speaker 2

We are also actively embedding AI into our existing solutions and services to drive greater delivery efficiencies Last, we'll continue with our investments to monetize our data, content and IP through our digital business. Now I'll touch upon consolidate, where our efforts are going to be focused on continuing our investment in strategically aligned, less cyclical, faster growing, and largerable addressable markets. With all of our recently acquired interim businesses now being fully integrated and 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. Lastly, we will continue to expand our leadership and professional development business by replicating our success in delivering leadership coaching at scale Now let me turn the call over to Greg, who will take you through some overall company financial highlights.

Speaker 3

Okay. Thanks, Bob. In the second quarter, global fee revenue was are $704,000,000 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 continue to be stable, each growing approximately 3% in the 2nd quarter. For Talend Acquisition, permanent placement fee revenue continued to moderate from post pandemic pies with executive search, RPO And professional search down 7%, down 18% and down 29%, respectively.

Speaker 3

Fee revenue in the 2nd quarter for interim services was also more stable, down sequentially approximately $2,000,000 or 2%. Consolidated new business in the 2nd quarter, excluding RPO, was down 3% year over year at actual FX rates are down 4% at constant currency. Consulting new business in the 2nd quarter was strong, up are 10% year over year, driven by EMEA, which was up 34%. Digital new business was up sequentially in the 2nd quarter, but down 15% measured year over year due primarily are subject to a strong fiscal Q2, which included several large contract wins. Similarly, RPO had a strong quarter with new business at $141,000,000 New business in the 2nd quarter for executive search was down 10% year over year and for professional search and interim was up 1% year over year.

Speaker 3

In line with guidance, 2nd quarter earnings and profitability remained sequentially stable. Adjusted EBITDA in the 2nd quarter was $99,000,000 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 2nd quarter were $0.97 down $0.46 in line with the call. Or 32% year over year. Adjusted fully diluted earnings per share excludes $70,000,000 $1.01 per share of restructuring charges related to the realignment of our workforce and integration and acquisition costs associated with our recent acquisition.

Speaker 3

GAAP diluted loss per share in the 2nd quarter was minus $0.04 Our investable cash position at the end of the second quarter remained strong at $464,000,000 Through the end of the second quarter, we deployed $65,000,000 of cash using $28,000,000 for share repurchases and dividends, $28,000,000 for capital expenditures and $9,000,000 for debt service. Now I'll turn the call over to Tiffany to review our operating segments in more will

Speaker 4

be available. Thanks, Greg. Starting with KS Digital, global fee revenue in the 2nd quarter was $97,000,000 which was up 3% year over year and up 1% at constant currency. Digital subscription and license fee revenue in the 2nd quarter was $32,000,000 which was approximately 33 percent of fee revenue for the quarter and up 12% versus Q2 of last year. The strategy of multi year subscriptions has created some resiliency in digital's revenue as this quarter marked a near all time high and fee revenue for the segment.

Speaker 4

Global new business for digital was $95,000,000 with $34,000,000 or 36% of the total tied to are in the same store. 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 2nd quarter was $178,000,000 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 are in the range of $4.13 an hour, which is up over $42 an hour from just 1 year ago. Additionally, global new business for consulting in the second quarter was up 10% year over year with continued double digit growth in EMEA resulting from large organizational will be in the U.

Speaker 4

K. And Middle East. Total fee revenue in professional search and interim in the second quarter was $138,000,000 up $3,600,000 or 3 percent versus Q2 of FY2023. 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 $82,000,000 up from $55,000,000 in the same quarter of the prior up from $107,000,000 just 1 year ago.

Speaker 4

Permanent placement fee revenue declined by $23,000,000 to $56,000,000 year over year, are down 29% at actual and down 30% at constant currency. The professional search and interim new business increased 1% in the quarter are participating in the Q2, driven by growth in EMEA and aided by the most recent acquisition. Moving on to recruitment process outsourcing. New business for the Q2 was $141,000,000 comprised of $53,000,000 of new logos and $88,000,000 of renewals and total revenue under contract at the end of the quarter was approximately $681,000,000 Fee revenue totaled $88,000,000 which was down $20,000,000 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.

Speaker 4

We see this slowdown as transitory and believe RPO is well positioned to benefit when hiring returns to more normalized levels in the base and the larger more recent wins begin converting to

Speaker 5

are subject to revenue at their full contract value.

Speaker 4

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 2nd quarter was $203,000,000 and as expected experienced a year over year decline of 9% at constant currency compared to the accelerated growth rates during the pandemic recovery last year. Demand continued to moderate across most regions with the exception of Latin America. Global new business in the 2nd quarter for executive search are 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 are in the Q3 of fiscal 'twenty four.

Speaker 2

Great. Thanks, Tiffany. November new business came in line with our are in 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 Q3 of fiscal 'twenty four to range from $645,000,000 are in the range of $665,000,000 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 Q3 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.

Speaker 2

There's a war for talent. Companies are looking for better talent, different talent, talent with IT skills and so on. The collection of our IP data and content woven through our core integrated solutions really creates a unique and symbiotic ecosystem 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

First question comes from George Tong with Goldman Sachs. Please go ahead.

Speaker 5

Hi, thanks. Good morning. New business ex RPO in flooded during exiting the quarter and if November trends suggest that we've essentially formed the bottom in terms of new business?

Speaker 1

The new business trends over the last 5 months have been pretty flat. That's number 1. And it does appear that search has stabilized, particularly taking a look at even the last four quarters. October was substantially better than September, which we would expect November came in, which is November is a seasonal month, and it came in exactly where we thought. So it's been Fairly stable, pretty consistent in terms of trends.

Speaker 5

Got it. That's helpful. You additionally talked about increasing cross referrals among large marquee and regional accounts. Can you provide some metrics on the extent of cross selling and where you're seeing the most amount of cross selling, which divisions?

Speaker 1

Well, the cross selling, look, the marquee in regional accounts is the anchor of our strategy. It's 38% of our top line and in fact this quarter it was 38% of new business. And if you look, overall, across referrals right now, I think year to date or something around 25% of the company's top line. And in some businesses, the percentage is higher and some it's lower. When we look at RPO, It's tend to be a very high percentage, substantially higher than 25%.

Speaker 1

We've certainly been very, very thrilled by saying the level of cross referrals into our new Internet business We didn't have 3 years ago and then that continues to bear fruit. So even though parts of the business it's That's the anchor of our strategy. They have multiple panel offerings, they have reasons to talk to clients participants are in the range of $1,000,000 of organizations.

Speaker 5

Are very helpful. Thank you.

Operator

Next question comes from the line of Mark Marcon with Baird. Please go ahead.

Speaker 5

Hey, good morning or good afternoon, depending on where you are. I've had several questions. Gary, you started out by basically talking about, hey, we've got this big reset in terms of getting ready for Changes in rates, from your conversations and with your top consultants and the feedback that they're giving How are they viewing this reset? Like how long do they think it's going to take? How is that impacting talent plans?

Speaker 5

What are you just seeing from that perspective? Because things have been stable And in addition to that, we are seeing some chatter about Goldilocks Maybe a soft landing instead of expected recession. So I'm just wondering how that all melds together.

Speaker 1

Well, in my conversations with clients and in our consultants, it varies. It varies depending on where you are. There's parts of the world that are investing heavily and there's others that are not. My look, you step back and This is my read of things is that number 1, there's no question the labor market is softer. I mean, a couple of years ago, the United participants were producing like 600,000 jobs a month.

Speaker 1

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 coming off this Incredible surge after the pandemic that the labor market has moderated. I would expect Deflation. I think that is going to happen.

Speaker 1

Corn and wheat prices are back to pre pandemic levels. You look at company's results over the past few quarters and there's a consistent theme, volume down, prices up, participants are in the range of $1,000,000,000. I would expect that there to be deflationary pressures, broadly speaking. And I'm certainly not an economist, but I would think that central banks are going to hold pretty in where the rates are for the next several months and mid to late 'twenty four maybe there's some are in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range with a higher cost to carry, but it's just it's clear to me that prices have to come down overall.

Speaker 5

Great. I appreciate the perspective. With regards to capital allocation, Congratulations on 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 How should we interpret that with regards to further investments in terms of areas like Interim or professional search?

Speaker 1

Confidence, confidence, confidence. I mean, that's the answer. We have a completely different company today than we did are in the range of $1,000,000,000 and we have confidence in our ability to generate sustainable profits. It is not by any stretch of the imagination A deviation from our strategy, we have a multi $1,000,000,000 opportunity ahead of us. We're going to continue to make investments to do acquisitions, But it reflects confidence in what the business is today and you can see it in the results.

Speaker 1

I mean you can see a soft labor market And clearly, the perm recruiting side of the business would ebb and flow with that. But you look at the other parts and it's buoyed. It substantially lifted the firm's results. So it's all around confidence. And you look at our growth rate for 20 years, it's probably about 14%.

Speaker 1

I think last 10 years, it's 12%. 40% of that has been M and A, 60% has been organic. Are participating. We're continuing to think that will be the playbook going forward. It could change if there is a big opportunity that comes our way.

Speaker 1

And that's one of the reasons why we took the actions we did unfortunately is to make sure that we're breaking and that we can make investments And deliver returns to shareholders. So we think that a balanced approach is the best way. Number 1 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 buybacks.

Speaker 5

Participants. Really appreciate that. I'm sure that shareholders do as well. With regards to just the separation and the restructuring that's occurring, pertain. 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 are in terms of cost reductions, which divisions are being impacted the most there?

Speaker 1

It was fairly broad based and it kind of follows the trend in new business. Look, this is something that I just absolutely, it's gut wrenching. And it's a decision that was not taken slightly thought months about it, tried a lot of different things and it's something that just weighs heavily are 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 That was the decision that I took and unfortunately it impacted about 8% of the organization And it pretty much followed what the trends that you see in new business for the most part,

Speaker 2

The broad based outcome really relates not only to the fact that we're getting taking out excess capacity, But remember, we also are taking advantage of some of the productivity gains that we're getting in the world of work today, and that's

Speaker 1

what gave us participants The opportunity

Speaker 2

to be more broad based with this versus more surgical.

Speaker 5

Great. I've got lots of other questions, but I'll

Operator

And our next question comes from the line of Tobey Sommer with Truist Securities. Please go ahead.

Speaker 6

Have gone from like $31,000,000 in fiscal 2021. It looks like we're on a run rate for over $80,000,000 this year. Could you talk about that? What your goals are for what it will achieve and if there's a potential for it to normalize down

Speaker 1

Tobey, the first part of your question That was cut off. Could you?

Speaker 6

Yes, absolutely. So I wanted to ask about capital intensity. In recent years year to date, CapEx has gone up significantly. It's more than doubled in sort of 3.5 years. So I want to know what the goals are, what you're achieving in or what you

Speaker 1

can achieve in

Speaker 6

the future and whether that could normalize down as

Speaker 5

a percentage of sales and operating cash?

Speaker 1

Yes. Well, look, it's number 1, it's around the IP and embedding the IP in everything that we do. And with all the conversations around AI, it first starts with data and proprietary data, and that we have We develop over a 1000000 professionals a year. We've done 100,000,000 assessments. So the CapEx And the investment there is really around data and IP and how we blend together the entire platform.

Speaker 1

In the same way. But in fact, they very much go hand in hand in that consulting uses the IP of the firm in many of its engagements. So, I think that's fundamental, to the company's future is around proprietary IP data knowledge, particularly with these conversations around AI. I don't think it will be as quite as high as 80, but I do think that there is a level And so when we look at this, we our track record and we've got 20 years, you look, it's been fairly balanced in terms of our strategy. We say what we mean, we do what we say.

Speaker 1

And 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 But we have to invest in the monetization and the integration of our IP

Speaker 2

Hey, Tobey, I think your Toby, I think your the number you mentioned, the $80,000,000 is high. You should be thinking this year CapEx is probably $60,000,000 plusminus.

Speaker 6

Okay. So it does edge down from last fiscal year.

Speaker 2

Yes. Last year was yes, I'm sorry, go ahead.

Speaker 6

How do we assess the effectiveness of those investments because they're multi year in nature and It's a process. Is it more rapid growth in the licensing piece within digital? Is it 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?

Speaker 1

Well, I think the first thing is number 1, this is 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 what are those solutions doing in the range of market expectations. And so today that business is are in the range of $1,100,000,000 and as we talked about, look at the consulting growth rate, I mean, the new business in October was up like 10%.

Speaker 1

Have gone from like $300 to $413 in the matter of 2, 2.5 years. That's a direct result 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, the success in the RPO business is because of the account are ready because of the talent that we have, but the big part is around the IP and the technology that we'll bring to clients. Now, With what I've called previously labor hoarding.

Speaker 1

It's difficult to really to assess it in this particular 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 $50,000,000 Today, the run rate is more like $320,000,000 $350,000,000 something like that. I think you would look at that as well.

Speaker 2

And Tobey, the other thing you have to think about too The total capital spend is a portion of that goes to infrastructure, right, whether we're updating systems or are strengthening the foundation to keep the bad guys out. Probably 15% to 20% of what we spend is infrastructure spending.

Speaker 6

Gary, how do we think about and how do you think about the internal recruiting capability 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 dividend itself as demand to corporate?

Speaker 1

Well, I think ultimately depends on the quality and the knowledge that we bring. Clearly, We have seen companies retain a larger share of But you look at the business today and for example, the search business is essentially where it was 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 data shows that the IP and the insight that we bring participants is pretty special in the marketplace. So I wouldn't expect that to have a big negative overhang

Speaker 6

Something you said earlier. You said perhaps general deflation. How could that manifest itself

Speaker 1

Well, there is going to I think there is going to continue to be some wage pressure, but you've seen that really moderate big time over the last are in the same period. I mean, the quit rate has gone down substantially, and that's what happens in cycles. It goes from an employer market to an employee market and back and forth. Will be able to see the results in central banks revisiting the levels of rates. And I think that could create freedom for companies in terms of investment.

Speaker 1

So I would view that have a good thing. I mean, it's clear what the central banks and its unprecedented move that they've made over many months here, it has had a big, big impact on the economy. There's just No question about it. In the United States going from 600,000 jobs a month to now this month probably 100,000 That's incredible. That's unbelievable.

Speaker 1

So it's had its impact and I have to believe that at say 5, 6 months down the road, there has to be

Operator

Next question comes from the line of Trevor Romeo. Please begin.

Speaker 7

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

Speaker 1

First overall, when we Historically, look at our results, you would tend to think that the 3rd quarter, based on historical averages would be down about 5% from the 2nd quarter. And Basically, our guide is in line with that. And I would expect that in terms of new business trends. So I would probably expect the search business to be down 10% or so. I would expect the consulting business to be strong, are in a relative term in this kind of economy, for sure.

Speaker 1

And so that's how I would think about it. On the interim side, I would expect that the technology area would improve slightly over what it's been. And so that's kind of broad based how I would look at the components of the business. On a geographic basis, I would EMEA 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 flat.

Speaker 1

Asia, historically, I mean, Asia over the last Several quarters has been off. China has been a drag on our results of about are in the tune of about $50,000,000 a year. The good news in the last 2, 3 months is we've seen some improvement In Asia, which would be great for us. We have a great team there. So that's how I would think about it.

Speaker 1

The RPO business, The level of new business, the new wins this quarter was it's about 100, almost 150, 141, so 6 100,000,000 that's kind of what it was excluding last year after the pandemic, it was kind of 600,000,000 a year.

Speaker 7

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 progress toward that opportunity the past several months and how significant that could be to the company in the future?

Speaker 1

Well, it comes back to Toby's question around Investment in capital, I mean, part of that investment in capital is around some of our training businesses and we have to continue to invest in that. So that training business is roughly, call it, 10% of the overall company's in a revenue footing. It's an enormous market. It's probably are in the range of $100,000,000,000 I mean it's massive in terms of the market opportunity there. We continue to win mandates of not just teams, but thousands of people within an organization, particularly at a time like this when companies have to really adapt and adjust Innovate and optimize and think about AI and think about their talent strategies.

Speaker 1

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 to enable the development to create real learning journeys

Speaker 2

And Trevor, this is Bob. The one thing we are seeing right now on the leadership 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. In these times, we're trying to optimize costs.

Speaker 2

We're starting to get mandates around the cost optimization of their are in the range of leadership development spend through our diagnostic tool.

Speaker 7

Great. Thanks. And then if If I could maybe sneak one more in, just to follow-up on the restructuring. I think 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 there be some offsets there? And then on kind of a 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?

Speaker 7

Thanks.

Speaker 2

Participants. I'll jump on that one, Gary. So I'll answer the second part first. The majority of the saves We would expect to see in Q3, there are some situations in foreign countries where, for example, people participants are in garden leave and so on. And so getting the costs out of the business takes a bit longer.

Speaker 2

But I would say for for the most part will realize the savings in the Q3. You heard Gary talk about are sort of breaking before the turn and then accelerating through it. And so part of the reason why we took the actions is give us the ability to make investments as we go through this cycle. So the 400 basis points that you're referring 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, participants are in the range of $1,000,000,000 and then obviously once the fog lifts and the world gets back to more normal are in the range of the 16% to 18% range that we previously talked about.

Speaker 7

Okay, understood. Thank you very much.

Operator

And our next question comes from the line of Josh Chan with UBS. Please go ahead.

Speaker 8

Hi, good morning. Thanks for taking my questions. So just one question on the guidance. You mentioned that in in the Q3, you'd 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 improvement?

Speaker 1

Well, we want to see it in all of them. 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. And when you pro form a that out participants are in the range of $15,000,000 to $13,000,000 are something like that. And so what we're guiding to here are participating in the for the years, as Bob talked about in terms of productivity improvements, using AI and the like, we better

Speaker 8

And then just a last follow-up, I guess, on the restructuring. Could you kind of 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. So is it more of a catch up and an acknowledgment that the

Speaker 1

Well, it's never a great thought process. And it was, for me personally, many, many months are in the making and we tried a lot of different things, but at the end of the day, You look at the firm's history and we have a clear and demonstrated track record of powering through cycles. And if you look, we have a history So that when there is volatility and dislocation, we can take advantage of that. And that was the reason. And it's one it's just something that I hate to do.

Speaker 1

Are participating in the Q2. It weighs on my heart, but we have to make sure that we have the financial freedom should be able to invest because this is a multi $1,000,000,000 opportunity from where we are today.

Operator

Are in the line of Mark Marcon with Baird. Please go ahead.

Speaker 5

Thanks for taking my follow ups. Gary, 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 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 Describe like how morale is, how is retention with regards to the consultants that you want to To what extent do all the consultants appreciate the necessity of doing what you did?

Speaker 1

Well, that's a loaded question. It's our just based on data, our are participating in 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 has been at very, very reasonable levels. These decisions are not easy ones. And At the end of the day, we have a multi $1,000,000,000 opportunity ahead of us.

Speaker 1

To be able to seize that opportunity, we have to have the financial flexibility to make investments, to do M and A, return capital to shareholders. And again, on an apples to apples basis, with the investments I think we should be more profitable than we were. And before the pandemic, we were running apples to apples kind of are 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 now the guide at 15% reflects a step up in profitability are participating in the pre pandemic levels, and I think that is absolutely warranted given the investments that we've

Speaker 5

Great. The digital business, despite the economic softness, has been growing Modest 2.9 percent 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 just How should we think about the lumpiness with regards to new business trends

Speaker 1

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

Speaker 1

And as Tiffany said, it's about a third, 36%, something like that, participants continue on that. I do think you really do need to look at the consulting and digital businesses together to get a true picture. And the digital business feeds a lot of other I mean, the digital part of that's feeding our professional development business. So To just look at that on a stand alone basis, and it was my decision to break that out several years ago, I mean, you do really need to look at it participants are in the same store. There's really 4 things on the digital business that we're focused on right now.

Speaker 1

1 is around rewards, 2 is around sales and service, 3 is around assessments and 4 is around renewals. And if I added a 5th, it would be around developing an are in the areas. We have comp data monetize even further. The sales and service, we made an investment right before the pandemic in a company called Miller Heiman. We've got incredible IP there.

Speaker 1

We've got to make sure that that's being digitized and brought into Today's reality, assessment is a linchpin of the company. We've done 100,000,000 assessments. We've got to make sure that we are digitizing that, embedding AI into it. We have to focus on renewals and part of that's around Activating and enabling our learning content for sure.

Speaker 2

Hey, Mark, it's Bob. The other thing that you should think about with the new business in digital As we start to sign up more longer term engagements, you sign it up in the past, you do 1 year, then another year, So each sequential year, you'd have that same renewal happening. Whereas now, if we sign up a 3 year deal, you don't get the renewal in year 2 year 3. So you're seeing some of that influence the new business in digital as well, which is a good thing. We want to get this for

Speaker 5

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? How referenceable are they going to be?

Speaker 1

Well, I look at just the again, I'm going to look at the consulting and digital together, I mean, you look at the shift that's been made in those businesses over several years And you're clearly seeing a move towards more scaled assignments. There's no question about it. And a lot of those are around organizational strategy, which is around companies rethinking their organization, setting up a new organization, Adapting, optimizing, innovating. And the success of that is due not only to the talented people that we have, but the IP that we have to and that's really bearing out.

Speaker 2

And Mike, when you think about our largest clients, You should be thinking about it more from a kind of a 1 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 we offer is what creates the largest accounts that we have.

Speaker 5

Yes. I was just talking about

Speaker 1

that one contract that you know what I'm talking about

Speaker 5

in terms of how well that's are very excited. You know what I'm talking about in terms of how well that's going. So just 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

Speaker 1

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 2 months make a trend, but That's $50,000,000 in terms of going back to pre pandemic off the company's top line. It's not insignificant in terms of the impact that it's had. So I'm not going to sit here and say that 2 months

Operator

And it appears there's no further questions, Mr. Burdissen.

Speaker 1

Okay. Thank you, everybody. It's time of year where there's a lot of reflection and a lot of thankfulness despite what's happening in the world today. And I thank you all for listening, taking an interest,

Operator

Ladies and gentlemen, this conference call will be available for replay participants are for 1 week starting today at 3 pm Eastern Time running through December 13, 2023 at midnight. You may access the AT and T Executive Playback Service by dialing 866-207-1041 and entering the access code 917, may dial 402970-0847. That does conclude our conference for today. Thank you for your participation and for using AT and T conferencing service. You may now disconnect.

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Earnings Conference Call
Zions Bancorporation, National Association Q2 2024
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