Categories Earnings Call Transcripts, Industrials

Korn Ferry (KFY) Q2 2021 Earnings Call Transcript

KFY Earnings Call - Final Transcript

Korn Ferry  (NYSE: KFY) Q2 2021 earnings call dated Nov. 23, 2020

Corporate Participants:

Gary Burnison — Chief Executive Officer

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Gregg Kvochak — Senior Vice President Finance, Investor Relations

Analysts:

George Tong — Goldman Sachs — Analyst

Sam Kusswurm — William Blair — Analyst

Tobey Sommer — Truist Securities — Analyst

Kevin McVeigh — Credit Suisse — Analyst

Mark S. Marcon — Robert W. Baird & Co., Inc. — Analyst

Marc Riddick — Sidoti — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Second Quarter Fiscal Year 2021 Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference 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’ll be reviewing with you today.

Before I turn the call over to your host, Mr. Gary Burnison, please let me first read a cautionary statement to investors. Certain statements made in the call today, such as those relating to future performance, plans and goals, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, investors are cautioned not to place undue reliance on such statements. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, which are beyond the Company’s control. Additional information concerning such risks and uncertainties can be found in the release relating to this presentation, and in periodic and other reports filed by the Company with the SEC, including the Company’s Annual Report for fiscal year 2020, and the Company’s soon-to-be-filed quarterly report for the quarter ended October 31, 2020.

Also some of the comments today made may reference non-GAAP financial measures, such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measure 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.com.

With that, I will turn the call over to Mr. Burnison. Please go ahead, sir.

Gary Burnison — Chief Executive Officer

Okay. Thank you, Greg, and good afternoon, or good morning, and thanks for joining us. This is the 11th hour of the 11th month of the year like no other, and the good news is that our business has rebounded dramatically.

Revenue was up 27% sequentially to $435 million. And our earnings and profitability, they were both very good, with $66 million of adjusted EBITDA, and a 15.2% adjusted EBITDA margin. I’m also pleased with the work we did to ensure a strong balance sheet and position of liquidity. This has served us well, not only weathering the pandemic storm, but being able to invest back into the recovery that we’ve seen.

I’d attribute these results to what I’m calling the three Rs. First, the actions, strategy, solutions and messages we’ve taken have resonated in the marketplace. Secondly, our clients have responded. And third, our colleagues have been resilient through a year that none of us have experienced in our lifetimes. Yeah, it’s a testament to our strategy, but it’s really about the resiliency of our colleagues across the globe. I couldn’t be more proud. And while I’m pleased with the progress in the path we see ahead, there is no question that the magnitude of the humanitarian economic impact brought on by this pandemic will continue to permeate and shape the global landscape for quite some time.

And as we’ve said since early March, I do believe there will be more change in the next two years than in the last 10 years, and that brings tremendous opportunity, real tangible opportunity for Korn Ferry. Almost every company on the planet is, and will have to reimagine their business. Quite simply, different work needs to get done and work needs to get done differently. And to get work done differently, companies will need to rethink their organizational structure, roles and responsibilities, how they compensate, engage and develop their workforce, let alone the top, the type of agile talent they hire, and how they hire talent in a virtual world, which will depend to a greater extent on assessment. And these are Korn Ferry’s businesses and that’s real opportunity for our Company. As an organizational consulting firm, we enable people and organizations to exceed their potential. And to exceed potential, people need an abundance of opportunity, development and sponsorship, which is foundational to our service offerings.

We’ve also affirmed that changes people’s lives. As previously mentioned, I’m very proud to say, we’re launching 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. One of our partners will include the Executive Leadership Council, a preeminent organization, whose mission is to develop and increase the number of successful black executives. Across the globe, our 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. We’ll also be offering this to all of our colleagues.

We’re also using this time of change as an opportunity to reimagine our business. For example, we’re moving from analog to digital delivery of our assessment in learning business, which represents about 23% of the Firm’s revenue in FY ’20 in a way that makes our IP more relevant and scalable. To give you some perspective on how far we’ve come, at the start of the pandemic, we flipped the switch almost overnight, with nearly all of our assessment capability converting to a digital environment. And on the recruiting side, we’re further refining our platform processes such as AI, video and technology. More and more, search will not simply about discovering and validating with someone who has gone, but finding out who they are. We have this capability to differentiate our strategy.

And our strategy is absolutely taking hold and we see that payoff with our approach to clients as we create loyal, repeatable, sustaining relationship with clients who scale, and that’s where we’re moving our business. That’s our true north. We have about 300 marquee and regional accounts, representing about 34% of global revenue, which we’d like to increase to 40% or so. As such, we’ll continue to develop account leaders from within, as well as hire from the outside.

So forget the new normal. This is normal. It’s nearly nine months since the pandemic was declared. And as I’ve said before, it’s not just a marathon, but an Ironman triathlon of endurance, agility and change. Embracing this change, we absolutely can make tomorrow better than today. I truly feel we have the right strategy, with the right people, at the right time to accelerate through the turn. And as we enter 2021, we will continue our strategic commitment to build the preeminent global organizational consultancy. I look forward to what the new calendar year brings us.

And before we take your questions, I’m joined by Bob Rozek and Gregg Kvochak. And Bob, I’ll turn it over to you.

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Great. Thanks, Gary, and good morning, and good afternoon. As Gary said, the rebound in our business has been tremendous. The sharp improvement in fee revenue in our fiscal second quarter is more than a result of improved global market conditions. In fact, it really attributed to the resilience of our diverse mix of product and service offerings, our disciplined client management activities, and the growing relevance our solutions have in today’s business environment.

Coming to the last nine months of economic upheaval, we now have a number of proof points that our strategy is succeeding. The business we have today is less economically cyclical, with the time to recovery shorter and the trajectory of our recovery even steeper. Our operating experience through the COVID-19 recession, thus far, demonstrates a number of important points.

First, our more diversified business is clearly demonstrating greater resilience than in the Great Recession, where fee revenue in the quarter, immediately following the trough quarter, was approximately 43% less than the prior peak quarter. For the current COVID-19 recession, the decline in fee revenue from the peak quarter to the quarter immediately following the trough is only 16%. So you can see a very dramatic improvement.

Gary mentioned our marquee and regional account programs. These are client relationships that continued to deliver less cyclical, more resilient revenue than the rest of our portfolio. And we achieved this result by actively managing the accounts with global account leaders who use a disciplined talent management strategy. Through the first six months of fiscal ’21, we saw our marquee and regional account fee revenue decline approximately 14% year-over-year, which compares favorably to the decline in the rest of our portfolio, which was down 23%.

In our digital business, we continue to see meaningful progress selling subscription-based solutions. Our FY ’21 Q2 subscription base fee revenue was $22.7 million, which was up 43% year-over-year, and up 7% quarter sequential. Subscription-based new business also improved in the second quarter, reaching $29 million, which was up 39% year-over-year, and 25% quarter sequential. While the shift to more subscription-based fee revenue will have a short-term negative impact on fee revenue growth, it clearly positions us with more durable fee revenue for the long-term.

In our consulting business, we continue to see success with our effort to capture larger engagements. And as we said in the past, those that are valued at 500,000 and more. These engagements provide us with incrementally better visibility in a more durable stream of revenue. In FY ’21, our Q2 consulting new business was pretty steady with the prior year, despite last year’s number being an all-time high, which included a single non-recurring engagement of $12 million. And these large engagements are also driving rapidly growing consulting backlog, which again enhances our revenue visibility and durability.

And last, our RPO business continues to enjoy great success, especially as companies increasingly look to outsource and variabilize their cost base. RPO new business in the second quarter was $120 million, which is just shy of an all-time high. So as I said when I started, we now have real proof points that our strategy is working.

Now turning to our quarterly results. In the second quarter, all of our business segments were up sharply from the trough of the first quarter, with a significant improvement from the rate decline that we saw in the first quarter. For the second quarter of FY ’21, our fee revenue was $435 million, which was up $91 million or 27% sequentially, and down only 12% measured year-over-year. Fee revenue declines improved consecutively year-over-year each month of the quarter.

On a quarter sequential basis, fee revenue in the second quarter for exec search was up 23%, RPO and pro search was up 25%, with pro search being up 20%, and RPO up 27%, consulting was up 28%, and digital was up 34%. More importantly, as fee revenue has improved, we’ve been able to drive higher earnings of profitability by leveraging the cost-saving actions we recently put in place, as well as the productivity and cost efficiencies resulting from our emerging digital and virtual delivery processes.

Adjusted EBITDA in the second quarter was up $56 million sequentially to slightly over $66 million, with an adjusted EBITDA margin of 15.2%. Our adjusted fully diluted earnings per share were also up in the second quarter, reaching $0.54, which was up $0.73 sequentially.

Our balance sheet and liquidity remained very strong. At the end of the second quarter, cash and marketable securities totaled $774 million. When you exclude amounts reserved for deferred comp arrangements and for accrued bonuses, our investable cash balance at the end of the second quarter was approximately $458 million.

Finally, during the last couple of quarters, we have discussed a number of restructuring and cost-saving initiatives designed to help the Firm through the trough of the COVID-19 crisis. Some of these cost-saving actions, like salary cuts, were highlighted as being temporary in nature. And it is important to note that based on our Q2 performance, we have in the second quarter made an accrual to pay all of our employees 100% of their salaries for the second quarter. And therefore, our cost structure in this quarter is fully loaded as it relates to current compensation expense.

I will now turn the call over to Gregg to review our operating segments in more detail.

Gregg Kvochak — Senior Vice President Finance, Investor Relations

Thanks, Bob. Starting with our digital segment. Global fee revenue for KF Digital was $75 million in the second quarter and up 34% sequentially, and up approximately $9.3 million or 14% year-over-year. The subscription and licensing component of KF Digital fee revenue in the second quarter was approximately $23 million, which was up 7% sequentially, and up $7 million or 43% year-over-year. Global new business in the second quarter for the digital segment was up approximately 17% year-over-year. Adjusted EBITDA for the second quarter of KF Digital was up $15.1 million sequentially to $23.1 million with a 30.8% adjusted EBITDA margin.

Now turning to consulting. In the second quarter, consulting generated $126.7 million of fee revenue, which was up approximately 28% sequentially, and down approximately 12% year-over-year. Demand for our consulting services continues to strengthen, enhanced by our growing virtual delivery capabilities. And in particular, growth was strong in some of our virtually delivered solutions in leadership and professional development, and assessment and succession, which were up sequentially 53% and 38%, respectively. New business in the second quarter for our consulting services was also up sharply. In the second quarter, consulting new business was up approximately 17% sequentially, with growth in North America, Europe and APAC. Adjusted EBITDA for consulting in the second quarter was up $13.5 million sequentially to $20.1 million, with an adjusted EBITDA margin of 15.9%.

RPO and professional search generated global fee revenue of $85.6 million in the second quarter, which was up 25% sequentially and down 10% year-over-year. RPO fee revenue was up approximately 27% sequentially, and professional search fee revenue was up approximately 20% sequentially. With regards to new business in the second quarter, professional search was up 9% sequentially, and RPO was awarded a near record $120 million of new business, consisting of $59 million of renewals and extensions, and $61 million of new logo work. Adjusted EBITDA for RPO and professional search in the second quarter was up approximately $7.8 million sequentially to $13.8 million, with an adjusted EBITDA margin of 16.1%.

Finally, for executive search, global fee revenue in the second quarter of fiscal ’21 was approximately $148 million, which was up approximately 23% sequentially with growth in every region. Sequentially, North America was up approximately 32%, while EMEA and APAC were up approximately 5% and 21%, respectively. The total number of dedicated executive search consultants worldwide in the second quarter was 512, down 73 year-over-year, and up two sequentially. Annualized fee revenue production per consultant in the second quarter was $1.16 million, and the number of new search assignments opened worldwide in the second quarter was 1,331, which was down approximately 15% year-over-year, but up 19% sequentially. Executive search also benefited from cost reductions, productivity enhancements, and streamline virtual delivery processes in the second quarter, as adjusted EBITDA grew approximately $20 million sequentially to $28.2 million, with an adjusted EBITDA margin of 19.1%.

Now I will turn the call back over to Bob to discuss some of our recent monthly new business trends.

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Great. Thanks, Gregg. Globally, our monthly new business trends continue to improve throughout the second quarter. Excluding new business awards for RPO, our global new business in the second quarter measured year-over-year was down only approximately 7% and that was from record-high new business in the second quarter of fiscal ’20. With the year-end holidays approaching, both November and December are typically seasonally slower months for new business. However, on a month-to-date basis, what we’re seeing in November is that it is in line with last month and last year. With our typical seasonal patterns hold this year, we would expect January to be our high month of new business in the quarter.

Now approximately three months have passed since our last earnings call, and while our advances have been made in the science, societal and economic impacts of COVID-19, there remains significant uncertainty about the ultimate consequences. Now on the positive side, there have been several announcements regarding vaccines that have greater than 90% effectiveness. In addition, the world has adopted new ways of working and interacting with substantial acceptance of business being conducted virtually. On the negative side, there are number of unanswered questions regarding the capacity to manufacture the vaccines at scale, as well as how they will be distributed and administered to the population at large.

In addition, we are seeing governments reinstating lockdowns as the number of COVID-19 cases and hospitalizations reach all-time highs. With also an unprecedented nature of what we are currently experiencing, combined with so many unanswered questions and ever-changing data points that does continue to cloud near-term predictability of our business. So consistent with our approach for the prior three quarters, we will not issue any specific revenue or earnings guidance for the third quarter of FY ’21.

Despite November new business, again, that is as of today, in line with prior months and year ago levels, we would remind you that our third quarter is our seasonally low quarter due to time of around the year-end holidays. Typically, what you would see is the sequential decline from second to our third quarter, does range sort of 3% to 5%. Ignoring any incremental impact from COVID, we would expect that pattern to be the same in the current year. But what we’re not able to determine the levers if the — if and when to what extent there will be any incremental impact from COVID-19, which potentially could have the effect of exacerbating our typical sequential decline.

That concludes our prepared remarks. We’d be glad to answer any questions you may have.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of George Tong from Goldman Sachs. Please go ahead.

George Tong — Goldman Sachs — Analyst

Hi, thanks. Good morning. Your digital business had significant rebound in terms of new business, up 17% in fiscal 2Q. Could you elaborate on some of the trends operationally that you’re seeing? Which specific areas within digital were strong? And what types of customers took on most of the business within the quarter?

Gary Burnison — Chief Executive Officer

Well, the customers were pretty broad based. As you know that the digital business encompasses several different service offerings. Training and development is a big piece of it. The other piece is compensation. And the third piece is around assessment and succession. There is a fourth piece around Org strategy, but that’s a — that’s as much smaller piece of the business. And so, for several quarters, we’ve made a move that said we’ve got all this great IP and how can we monetize that IP. And so, I think, this is a continuation of the strategy to really change thousands of peoples lives through our IP. So that’s what we’ve seen. The customer base was pretty broad-based. Certainly, the professional development piece of it has been driving a fair share. And that’s a big market. We look at the market opportunity for us at about $250 billion. And when you look at that market, you start to break it apart. Training and development is an enormous piece of that.

And so, we’ve certainly made a move over many, many quarters, but particularly since the pandemic started to move that business to virtual delivery. And so, when you look at the virtual instructor-led delivery days, they’re up 21% sequentially in the second quarter. So we did a 1,651 delivery days versus kind of 2,200 in Q4. So we’ve shifted almost all of our training now is virtual, it’s like 97%. Bob has got the exact numbers. Now, we’re still off. We’re still down in terms of delivery days about 27% from Q4. And I think you’ll continue to see us eat into that. Now the third quarter will be a very tough compare, because in the last — a year ago, we had the impact of the Aspen acquisitions that we made, and those gave us tremendous capabilities around training and development, particularly around sales effectiveness. So you’ll definitely see in the third quarter a decline, but we had anticipated that. So I think it’s all of those factors coming together.

George Tong — Goldman Sachs — Analyst

Got it. That’s very helpful. And then just as a follow up. Your EBITDA margins in the quarter were not too far off from the levels seen last year, just down a little bit. As you begin to take on some of the cost — the cost combat with improving revenue trends, how do you expect incremental margins to perform in fiscal 3Q and beyond? Should we see something similar to 2Q? Or would you expect some of the permanent cost savings that you talked about to you have more of an impact as some of your variable costs start to come back? How do you think about the margin profile going forward?

Gary Burnison — Chief Executive Officer

Well, I do think that over time here we can be easily at a situation where our margins are actually better. And we’ve — look, we’ve re-imagined our own business, and I think part of that is reflective in the results here. So when you look at our 15% margin, as Bob talked about, in the Great Recession, one quarter out, our business was down. I mean, one quarter out from the trough, our business was down 43%. I think now it’s down like 16%. So clearly the strategy has absolutely played out.

And with respect to profitability, you could say the same thing. And so, we definitely have plans around real estate that takes a much longer time to actualize, but we’re going to continue to move forward with a different real estate footprint. And I think people — the way people get work done, as we’ve talked about, is changing. And I think half of that’s going to be permanent. I really do. So in terms of the flow through, I mean, Bob can comment on, on what we’re targeting, but I kind of think that, as we used to look at flow through — I don’t know, it was 25% or kind of flow through to EBITDA, I think that’s probably going to hold through, and there could be some upside to that. Bob, do you want to comment further on that?

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Yeah, I would say that in the foreseeable future that our flow through is really what we have experienced in the second quarter was much higher than the 25% as we continue to see some of the efficiencies, as well as people not traveling and so on. We will continue to see calculated accelerated rate. I would say, George, over the long haul, we’re right now coming through well over 100 leases. So we’re coming through each of our office locations with a point of view in terms of the reduction of our footprint. We’re looking at all the business development and travel that we used to do, and coming up with new policies and approaches to that. So I would say, from a long-term perspective, you should expect a minimum of sort of a 2 percentage point increase in our long-term profitability. We will have [Indecipherable] in the future as we conclude our analysis.

George Tong — Goldman Sachs — Analyst

Very helpful. Thank you.

Operator

Your next question comes from the line of Sam Kusswurm from William Blair. Please go ahead.

Sam Kusswurm — William Blair — Analyst

Hey, guys. Am I coming through [Phonetic] all right?

Gary Burnison — Chief Executive Officer

Great.

Sam Kusswurm — William Blair — Analyst

Excellent. I was hoping you could help characterize how much of a sequential increase in revenue was due to pent-up demand versus general strength in market? Trying to understand how we should be thinking about the strength in this quarter as we model out the rest of the year, here. Thanks.

Gary Burnison — Chief Executive Officer

Well, I — pent-up demand is always a phrase that I don’t know what the hell really — what it really means. I look at the results, and we’d say number one, years ago, we went down the strategy of how can we have greater impact with clients, how can we have reasons to broaden the conversation, how can we take our IP and change thousands of peoples lives. And then what you’re seeing in the results is exactly the strategy playing out. And what you see is that parts of the business are substantially less cyclical than other parts. And so, when I look at the just trailing four months of new business, overall, it’s down 4% as a Company platform-wide, but when you look at that, you’d find that the pro search business has been probably the most cyclical. It was down 21% in terms of new business. Executive search less cyclical than pro search, down 17%. RPO is actually up, it’s up 1%. Consulting is up 5%, and digital is up 11%. So I think, first, you’re seeing the strategy play out. And as we’ve indicated to see one quarter out of the trough, the business reacting completely differently than the Great Recession is very encouraging. And I think that’s more than pent-up demand.

I think it really has to do with, number one, the resiliency of our colleagues. So I can’t say enough about what our colleagues have done. I think the messages, the solutions, the actions we’ve taken have resonated in the marketplace. I would point to, for example, our D&I consulting business. I mean, that’s now almost on an annual run rate basis, it’s almost a nine-digit business. And I attribute that to the quality of the people we have, the solutions, and a very strong stance we’ve taken with respect to D&I. I think the other piece is that, whenever you go to transformation, there’s always a period of pause. There is a period of reflection. There is a period of neutrality. And I think what you’re seeing is that, companies are some faster than others, have moved from defense to offense. And I think that’s also played a pretty big part in the business. I think our marquee and regional accounts, the fact that they’ve outperformed the portfolio is again a testament to the strategy. And so, I think all of those things working together explain the results. So I’m incredibly encouraged by what we’ve seen.

Sam Kusswurm — William Blair — Analyst

That’s helpful. And kind of unrelated, I guess, you’ve spoken about the desire to increase the number of large engagements as a percentage of revenue mix. I’m wondering what type of products tend to perform those larger engagements? And then can you share what the margin profile and project length they tend to have?

Gary Burnison — Chief Executive Officer

Could you repeat the first part of the question. I’m sorry, I missed the first words.

Sam Kusswurm — William Blair — Analyst

Yeah. You’ve spoken about the desire to increase the number of large engagements as a percentage of revenue.

Gary Burnison — Chief Executive Officer

Yeah. Yeah. Yeah. Thanks for the question. It’s a couple fold. I mean, one is around organizational transformation. And again, it’s a theme around companies moving towards offense and different work needs to get done and work needs to get done differently. So how an organization gets things done, which is really the definition of culture, that’s certainly been a driver.

The other piece is helping companies go from analog to digital. That’s probably the second driver. And the third driver is around career transition services, where some time ago, we started a B2C business called Korn Ferry Advance, and we’ve put 100,000 people through that, using our IP, trying to be the world’s gymnasium for people to exercise their careers. And we’ve really taken that platform and we’ve been able to have a bigger impact with companies, one is around career transition. So as companies look to reconfigure their workforce, how they do that going from analog to digital, as well as how they take care of their employees. And even if they have to make tough decisions, that’s played a role as well. And so those large engagements fall along those lines, as well as D&I.

Sam Kusswurm — William Blair — Analyst

Thanks for the color there.

Operator

Your next question comes from the line of Tobey Sommer from Truist Securities. Please go ahead.

Tobey Sommer — Truist Securities — Analyst

Thank you. Sounds like you made good progress in digital and moving towards virtual delivery. How would you characterize progress in moving towards more recurring business models? And any kind of update on what your goals maybe over the longer term will be helpful? Thanks.

Gary Burnison — Chief Executive Officer

Well, the RPO businesses has turned out to be, you could say, a recurring business model. But the contracts are long with a multi-year contracts. We — this last quarter, Bob can certainly provide the detail. But we had a combination of renewals, which is just a great sign, as well as new logos. And so, we’ve seen that business, as Bob said, I mean, this last quarter, in terms of new business was — I think, it was the second highest quarter. We’re almost tied our highest quarter ever. So you could look at that and say, wow, that’s really good.

And even on the consulting side and digital, digital clearly has a recurring business model. There is no question. And Bob talked about the percentage of subscription-based revenue there. That clearly has been working. And consulting, that — I’m just — I’m very, very pleased with what we’ve done with our consulting business and to see new business being up in this difficult time, just take trailing four months, ended up 5%.

So I think it’s those as well as the focus that we’ve had for now quite some time around what we would say, house accounts, marquee and regional accounts, is about 300 accounts and we have dedicated account leaders on those accounts. Typically an account leader only has two or three maybe accounts that they lead. And I think that intimacy that we’re creating with clients, creates that platform for recurring revenue. And when I look at some of the big engagements that we have — we’ve won, many of those are coming from our marquee and regional accounts. So when you look at any world-class professional services organization, you’d find that about 40% or so, it’s going to vary a little bit, but 40% would be from proactive, loyal, repeatable clients of scale. And that along with our IP is really the bedrock, the foundation to the strategy, and I think it’s all of those pieces.

Tobey Sommer — Truist Securities — Analyst

Okay. [Technical Issues] shifted, are those take-or-pay contracts or do those modulate down as customers’ demand declines?

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Yeah. Go ahead, Gary.

Gary Burnison — Chief Executive Officer

Go ahead. I’m sorry.

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Yeah. I think most of them, Tobey, have some modulation depending on what customer is using our RPO contracts. And we kind of — as we’ve talked about this over time, if you look at like in executive search, we often refer to that as a light switch to see they are on or off versus RPO is more like a demo switch that somebody could sign up to do 10,000 hires a year, and then if you go to a challenging time and they may dial that back to 6,000 or 7,000 or 8000 hires that year. But they are still going to be doing some hiring. And I would say most of our consulting business is of that nature.

I want to think like, I took a look at, as we were preparing for the call, look at the new business by client last year versus this year, because as I said on the consulting side, it was extremely challenging compare, but we were essentially flat year-over-year, which in this environment is really good. And, yeah, look at the clients, and it was — last year versus this year was kind of a mere image of each other. So I would say that the recurring kind of nature of what we have, as Gary was indicating by client, we’re doing business with the same clients year in and year out. So I think it’s actually pretty high.

Tobey Sommer — Truist Securities — Analyst

Okay. And just a last one follow-up on this one line, then I’ve got another question. Within digital, how much is genuinely recurring as defined by accounting norms so that you could kind of count a hard backlog as opposed to a soft backlog, which we characterize most of the other business?

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Yeah, that would be the subscriptions and licenses. So we had almost $23 million of revenue in the quarter for that business. And again that was a few number from the [Indecipherable] like $29 million of its new business, which grows 30%, 40% year-over-year earnings in a quarter sequential. So we’re seeing that the subscription and licensing in new business really getting traction.

Tobey Sommer — Truist Securities — Analyst

Perfect. Switching gears, if I could ask a question about the acquisition strategy, because in the context of what seem to be prospects for higher margins over the longer-term, does this inform and kind of shape your future acquisition strategy? Because if the Company is really able to get to a high-teens EBITDA margin, then acquiring inefficient businesses with mid- or high-single digit EBITDA margin, even with cost cutting could end up being dilutive. So I was wondering if your kind of target profile needs to change as a result?

Gary Burnison — Chief Executive Officer

Well, you certainly raised a very interesting point, Tobey. I think that I would tend to look at it from a client perspective and without regard necessarily to the margin. Obviously, the margin, clearly plays a role. There is no question about it. What’s going to be also meaningful is the return on capital. And that’s certainly going to be a measure that we’re going to look out, which does go hand in hand, obviously, with the margin, then the purchase price, but I think we are at the very beginning.

I really believe we’re creating here a multi-billion dollar organizational consultancy that’s unique that is — I think we’re the only ones pursuing this endeavor, not only strategy, but how do you synchronize a strategy with your talent in an organization. So I think what we’ve seen here over the last several months is that, if you can have loyal repeatable clients and you can put a focus on those and you have quality solutions, we will create a firm that has bigger impact. And that’s really what we’re trying to do at the end of the day. But why for us is to change peoples lives is to enable people and organizations to exceed their potential. And so, regardless of margin, if we see that there are solutions and capabilities that give us the ability to change more peoples lives, we’re going to be extremely interested in that.

Now the other thing I would say is the — I don’t use this word, we will do the cross sales, but the amount of the top line that comes from introductions across business lines is really impressive. I mean, when you look at this last quarter and you look at the total revenue, you’d find that about 25% of the top line is driven by cross referrals. And for some parts of the business, it’s substantially higher than that. And for other parts, it’s lower. So I think that the theory and the strategy is very much playing out, that if you can anchor yourself around proactive, loyal, sustaining clients of scale, you can bring quality solutions. I think we’ve demonstrated that we can actually have bigger impact. In other words, we can cross sell, which, I don’t particularly like that word, but we can have bigger impact with clients.

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

And Gary, just to elaborate on that point, if you go back to fiscal 2018, that number was 14.5%. So, we’ve taken it over the past two years or three years from the 14.5% up to the 25% that you just referenced.

Tobey Sommer — Truist Securities — Analyst

Speaking numerical question, I’m going to have to ask another also. So, two more and then I’ll get back in the queue. When you said margins could be higher potentially over the long term, should we think of a comparable improvement in free cash flow? So should the sort of EBITDA conversion rules stay intact?

And then, how do you think about the Company’s real strong sequential improvement in the third quarter? And parse out what is sort of an undoubtedly very rapid economic rebound in the quarter after the nature of a recession which differs from the 2009 period, which was kind of a longer slog. How do you parse out sort of the economic macro impact and then the diversification that you just mentioned [Phonetic] in your prepared remarks?

Gary Burnison — Chief Executive Officer

Bob, you want to take that?

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Yeah. So on the –I would say, Tobey, on the free cash flow, we would expect — I think, historically, we’ve been in the 70%, 75% range, and we would expect to continue right around that level. I think one of the things that we’re doing now is we tamped down our capital spending as we’re going through the downturn, and that will have to ramp back up again. So, we continue to drive the digital business and investments that we’ve made into that business over time. But I would expect the free cash flow to be in the 70% to 75% range of our EBITDA. I would expect that to continue.

And then in the third quarter, I guess, what we’re seeing right now as we said in the remarks is the new business is actually in line with October and last year, which obviously were strong. We would expect, absent any real negative impact from the lockdown activity, that we would go back to our sort of a typical pattern being down 3% to 5%. What we don’t know is what the impact of that is — the potential lockdowns, what they could have on us. And then, we would — over quarters, I would expect over time to get back to once businesses — we have the vaccines in place and the business is back to usual, then we would expect there to be probably a more rapid recovery than what we saw in the great recession back to normal levels.

Tobey Sommer — Truist Securities — Analyst

Right. I was really referring to the third quarter comments about how quickly the business bounced back, it’s been sort of evidence of the diversification working, but the economic backdrop, as a whole, rebounded very quickly. So how do you tease out the Company specific, the business model attributes of the firm as being more resilient versus the economy just improving a lot?

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Yeah. When we were making those comments, Tobey, they were more relative to the second quarter. That’s why I got confused on your questions.

Tobey Sommer — Truist Securities — Analyst

Sorry. My bad. I was confused in the calendar and fiscal. I was referring to 2Q. I apologize for that.

Gary Burnison — Chief Executive Officer

Yeah. Well, listen, I mean, it’s hard to pinpoint exactly what’s driving. I guess, as we step back and — each recession obviously is different. As we step back and look at our performance coming through this recession and you look at the five or six proof points that we have, we believe that, that demonstrates the resilience, the durability and the impact of us diversifying this business as we’ve talked in the past.

One of the things we’ve chatted, you heard us talk to investors, everybody that we talk to would indicate, yeah, what you’re saying makes sense. But until we see you come through the next downturn, it’s really hard to give any credit for what you’re suggesting. And coming through this, I think — again, I think we’ve demonstrated that those proof points are now in place. And it is really hard to pull apart and say exactly what contributes to what we’re seeing, but our performance in the quarter we think substantially serves proof points.

Tobey Sommer — Truist Securities — Analyst

Thank you.

Operator

Your next question comes from the line of Kevin McVeigh from Credit Suisse. Please go ahead.

Kevin McVeigh — Credit Suisse — Analyst

Great. Thanks so much for slotting us in here. [Technical Issues] Gary or Bob or Gregg, just a sense of kind of the type of engagements that from a C-level perspective what people are so focused. Is it just to be more kind of revenue generative expense management or just IT? Just any thoughts [Technical Issues] talented people a little bit more?

Gary Burnison — Chief Executive Officer

Well, part of it is clearly, I don’t know if I would say expense driven, but it’s certainly of a humanitarian nature where companies — you ask five people the definition of culture and you’ll get 10 different answers. For us, it’s the way an organization gets things done. And there is certainly a piece of this that has been driven by companies looking at the way they are getting work done and then what they do with their employees. So part of it could be around what we call career transition services, that would be a piece, where they’re looking or they’re having to make adjustments to their workforce and they want to be compassionate or around how they do that, and we offer our KF Advance. Essentially our KF Advance platform, that’s a piece of it. Another is around organizational transformation that is — that certainly has been driving it. And what goes with that is what I’ve said for a couple of calls now that at some point companies would be moving from defense to offense and that has certainly played out. The analog to digital is clearly another thing that’s driven the business.

We haven’t seen much yet on M&A, but we do have world-class M&A services. We’ll see if that picks up here in 2021, that could be a huge opportunity for us. But it’s really those types of engagements. And then the final piece is around D&I. And it was about eight years ago, we made an investment in, what I believe to be at that time, the absolute preeminent D&I consulting business in the world, and we’ve taken that business which at that time was really very low eight-digit business. And over a series of years, we’ve continued to build on that. And then after the pandemic and with the recognition of changes, societal changes that needed to be made and then the positions that we have taken in the marketplace and the resiliency of our colleagues, that certainly has played a role as well.

And I think when you look at the — when you look at — if I turn now to the recruitment side, there was a period of time where the world paused. I do believe that there is going to be probably as much C-suite change happening over the next few quarters than we’ve seen in many, many years, and that could be because executive saying, well, you know, as they’ve reflected in pause, maybe they want to do something else, maybe it’s because as the Board looks at our Company strategy, they want to take it in a different direction. But I would expect that to actually increase over the next few months and quarters.

Kevin McVeigh — Credit Suisse — Analyst

Got it. Very helpful. And then just real quick on — any thoughts as to just what it would take to restore the guidance. Is there any thing that you’re looking for particularly, Gary or Bob? Or is it just a — just a little word [Technical Issues].

Gary Burnison — Chief Executive Officer

Well, we — yeah, no, I think we tend to be rather conservative in our thinking. And what gives us pause is what we’re seeing. You look, we said this was going to be an Ironman. At the very beginning, we said this was going to be 18 months to 24 months. I have publicly said I thought a vaccine would be widely available in the U.S., kind of, in October of next year. I’m not a scientist. But it certainly seems like that is the way things are headed, maybe it could be sooner. But clearly, the lockdowns that we’ve seen in Europe and in different cities in the U.S. has given us pause and we want to be prudent about it.

I do think though that, and you see it, unfortunately, the level of cases is staggering, it’s absolutely staggering, 200,000 cases a day. It’s amazing how you hear that number and your psychological reaction is so different than it was eight months ago when we were talking about 30,000, 40,000, 50,000 cases. I mean, I think the psyche has changed and I think that same psyche holds true for business. This will not be our first rodeo through this pandemic.

And so, I do believe that as hard as it is, people are incorporating this bizarre reality into their psyche, which is reality, right? So, I would not expect the world to pause. So, I just — I really don’t see that. But at the same time, we’re just trying to be prudent with all of our constituencies, not only our shareholders but also our colleagues and our clients. And so, it’s these kind of incremental lockdowns that give us a little bit of pause.

Kevin McVeigh — Credit Suisse — Analyst

That’s very helpful. Thanks so much, Gary.

Operator

Your next question comes from the line of Mark Marcon from Baird. Please go ahead.

Mark S. Marcon — Robert W. Baird & Co., Inc. — Analyst

Good morning. Wondering if you could talk a little bit about, Gary, how you’re approaching this investing in the business, when we think about your consulting headcount and the types of people that you’re [Technical Issues]. Historically, there was a time to play defense but also to play offense and upscale the talent. So I’m wondering if you could just give us a little bit of a feel in terms of how you’re approaching the next six months to nine months.

Gary Burnison — Chief Executive Officer

We had a handful — when this thing broke out, we had a contingency playbook that we pulled out a year ago. And when it broke out, we — there were a handful of things that we said we wanted to accomplish. One of it was to continue to grow from within and use our own IP on our colleagues for sponsorship and mentorship and development. The other was to look to the outside.

And you don’t see it in the numbers yet because garden leaves and the like, but we’ve been very aggressive in the marketplace. We’re looking at talent and that would encompass the entire platform. And we’ve been out looking account leaders, we’ve been out looking and hiring consulting talent, digital talent and recruiters. And so, you don’t see that fully in the numbers, but we’ve been very aggressive, Mark.

Mark S. Marcon — Robert W. Baird & Co., Inc. — Analyst

Okay. Great. And then with regards to — what are your clients telling you now? I mean, [Technical Issues] high level conversations with regards to how they’re approaching this triathlon? How — what sort of pace would you expect to see in terms of the business coming back? And once we have a vaccine, how quickly do you think things rebound at that point?

Gary Burnison — Chief Executive Officer

I think that as I talked to CEOs and it was in my prepared remarks, there was this thing around the new normal. Well, forget it, this kind of is normal. And I think that sentiment, more than any has started to really hold true in people’s minds, as tough as it is, I think that there is a growing acceptance and an incorporation that this is reality.

For us, we’ve seen a pretty big increase sequentially. When I look at the industries and kind of across the board, actually even consumer was the highest performing. But I think when you look at the portfolio today, the industrial piece and the consumer piece are still behind where they where, if you will. And we need to see those come back, and undoubtedly they will come back. So barring any kind of national or country-wide lockdowns and assuming continued government stimulus, I’m pretty optimistic. And even with the political changes in the U.S., I stand pretty optimistically that companies are making the pivot to offense. And they’re saying, wow, the world has really changed, different work needs to get done, it needs to get done differently and how do we do that. And that’s essentially the business that we’re in. So I’m — Mark, I’m probably — as I sit here today, I’m certainly more optimistic than I was six months ago.

Mark S. Marcon — Robert W. Baird & Co., Inc. — Analyst

Great to hear, Gary. Are you seeing any clients that are pulling back just with recent spike in terms of…

Gary Burnison — Chief Executive Officer

No. No.

Mark S. Marcon — Robert W. Baird & Co., Inc. — Analyst

But that’s…

Gary Burnison — Chief Executive Officer

Now, again, this is whatever, November 23, okay. So — but as of this moment, for November, what we’ve seen in new business and what we’ve seen in existing mandates is very much a continuation. Now, November and December, I’m not expecting great things. I think that a lot of people are going to really unplug, particularly in December. So, I just think by the seasonal nature of where we are, I do believe you’re going to find the delivery days, the consulting days are going to be actually down, maybe even more than what we’ve experienced historically.

And as I indicated on the digital side, there will be a tough compare in the third quarter, even with the increase that we’ve seen in the new business. The reality is that the virtual instructor-led delivery days, it’s still off about 27%. So we’ve made this enormous improvement converting essentially almost a 100% of our training to virtual delivery to this quarter doing in at 1,651 delivery days. I mean, we’re still off. And so, I think you will see that in the third quarter for sure, but again I’m optimistic.

Mark S. Marcon — Robert W. Baird & Co., Inc. — Analyst

Great.

Operator

Your next question comes from the line of Marc Riddick from Sidoti. Please go ahead.

Marc Riddick — Sidoti — Analyst

Hi, good afternoon.

Gary Burnison — Chief Executive Officer

Hey, Marc.

Robert Rozek — Chief Financial Officer, Executive Vice President, Chief Corporate Officer

Hey, Marc.

Marc Riddick — Sidoti — Analyst

First of all, I want to thank you for all the commentary and color that you’ve provided. I wanted to ask specifically about those who have made that switch from defense to offense. I was wondering if you could talk a little bit about what that means for you in dealing with them and working with them going forward, because I wanted to get a sense of does that then provide maybe greater insights as to maybe the short and longer term plans, future visibility, things like that. I was wondering if you could talk about that a little bit.

Gary Burnison — Chief Executive Officer

Well I think, overall, I don’t want to sound like a broken record, but there certainly is a couple broad things around an organization and what it looks like. And that is playing out. How do you onboard people virtually, how do you train people virtually, how do you move your business from analog to digital, those types of engagements clearly have been playing out, as well as the D&I side. So I think that, again, people have pivoted and they’re looking at what their organization is going to look like in 2022, not only 2021, and what does that mean, what type of talent do they need.

A year ago, if you would have asked me would somebody hire an executive, a CEO or even a board member without physically meeting them, I would have said you’re crazy. But the reality is, that’s actually what’s happening. And the good news for all of us is that unfortunately as human beings, we’re very biased and we sometimes make long decisions within the first seven seconds of meeting somebody.

So the IP that we have around who somebody is as opposed to what they’ve done, I think is really playing out in the marketplace and we’re seeing that today. I just wouldn’t adjust it. I wouldn’t adjusted a year ago. And I think there’s just so many examples of that playing out through the corporate world where somebody took a trip and man, did you really have to take that trip. And so, although the Microsoft Teams and the Zoom is not the most intimate for sure, and it can be quite isolating for all of us.

I think there is a recognition that when we get into 2022, latter part of 2021, I think that half of the stuff that we used to do, just won’t be done. I just — I don’t see it. I think there is going to be a little change. And so, we’ve definitely — we’ve certainly seen that over the last several weeks.

Marc Riddick — Sidoti — Analyst

That’s really helpful. And then, I guess, the last one from me. For those who have moved into the offensive camp, is there any differences that you’re seeing from a regional standpoint? I mean, obviously, different parts of the world experienced COVID in different ways, in different — slightly different timing, but I was wondering if you’re seeing any difference in that pace of shifting from defense to offense? Thank you.

Gary Burnison — Chief Executive Officer

Well, I think, in North America, look, North America has outperformed. There is no question about it. When you look at the trailing four months new business across the entire Korn Ferry platform, it’s up 7% in North America. Whereas if you look at EMEA and Asia Pacific, those are going to be down 12%, 13%, 10%, in that ballpark trailing four months for just new business.

So that — there is no question at least for Korn Ferry, and I think Korn Ferry is a good reflective of the economy that North America has been very, very agile. Part of that has to do with, I think, the laws and the ability to make changes, but that piece of the business has certainly been heartening to see. And I’m not — by that, I’m not suggesting that companies in EMEA and Asia haven’t made those moves, because they certainly have. But the North American business for us has been a shining star.

And when you look at the Company overall, the last two quarters before COVID, we were doing about $560 million of new business. This last quarter, we did $560 million in new business. So what we’ve seen, I hate to use alphabets, I think it’s so ridiculous, but we have seen a V. I mean, you just — you can’t deny it. And when you look at that V, certainly the entire platform has benefited, but North America has certainly outperformed by far.

Marc Riddick — Sidoti — Analyst

Thank you for that. And then the last thing from me. I was sort of thinking about, going back to 2008, whatever going — let me do that. One of the things I recall is there is a lot of the C-suite leaders who maybe had thought about retiring or making changes and things like that, really kind of hung in there until they had gotten to the other side of the greatest of difficulties, and then you saw a pickup of C-suite moves. Are you getting a sense that there might be — going back to the pent-up term, I’m not sure if that’s the best way to put it, but are you getting a sense that there are those who may be ready to move on once we get to the other side of the challenges of this pandemic? Thank you.

Gary Burnison — Chief Executive Officer

Yeah. Yes. Yeah, I was talking to C&O long go, I mean, this person had said that they thought they would hang in for — but before COVID, it was several years, and then even as recently as a few weeks ago, they thought they’d hang in for a year and then that has changed. So, I think what this has done is people have — again, there has been a period of pause, a pause towards purpose, a pause towards reflection, a pause towards you’re real why as a human being, and I believe that to be the case. Yes, we have certainly — we’ve seen that.

The other thing we’ve seen is, and again it may be rather intuitive, but just the amount of people that have moved, like just have relocated and because they can kind of do their job anywhere. So — yeah, we’ve certainly seen those beginning signs, and I would expect that, that kind of C-suite turnover is joined to stay pretty high over the next several months and quarters, I do.

Marc Riddick — Sidoti — Analyst

That’s really helpful. Thank you very much.

Operator

And at this time, there are no further questions. I’d like to turn the call back to Gary Burnison for any closing remarks.

Gary Burnison — Chief Executive Officer

Okay. Greg, it was, I think, about a week ago, somebody said to me Happy Thanksgiving and I was a little jarred. I was jarred by the comment because every kind of Blursday, the months and the days have run together, but certainly this is a special time of the year. I wish everybody a wonderful Thanksgiving in the United States. Thank you for joining us, and we look forward to talking to you next time. Thank you. Bye-bye.

Operator

Ladies and gentlemen, this conference will be available for replay for one week starting today at 3:00 PM Eastern Time running through the day November 30, ending at midnight. You may access the AT&T Executive Playback Service by dialing 866-207-1041 and entering the access code 5073726. International participants may dial 402-970-0847. Additionally, the replay will be available for playback at the Company’s website, www.kornferry.com, in the Investor Relations section. That does conclude your conference for today. Thank you for your participation and for using AT&T TeleConference. You may now disconnect.

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