KFY - NYSE

Ladies and gentlemen, thank you for standing by and welcome to the Korn Ferry Second Quarter Fiscal Year 2023 Conference Call. [Operator Instructions] 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 we turn the call over to your host, Mr. Gary Burnison, let me first hand the call over to Tiffany Lauder [ph], Vice President, Investor Relations, to read a cautionary statement to investors. Please go ahead, Ms. Lauder [ph].

Thank you, Amy. 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 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 the other periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year 2022 and in the company's soon to be filed quarterly report for the quarter ended October 31, 2022. Also some of the comments today 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 measures is contained in the financial presentation and earnings release relating to this call, both of which are posted in the Investor Relations section of the company's website at www.kornferry.com. With that, I'll turn the call over to Gary Burnison. Please go ahead, Gary.

Good afternoon and thank you, Tiffany and thank you, everybody, for joining us. Our fiscal second quarter results were very good. We generated about $728 million in fee revenue which was up 20% at constant currency and 14% at actual rates. I'm really proud of our performance given that the global economy has been in transition for several months now. We're seeing change on every front from over a decade of high liquidity and historically low interest rates to changes in central bank policies, significant shifts in global trading partners and persistent inflationary pressures. In response, companies and our clients will undoubtedly have to continue adjusting their organizational and workforce strategies to tomorrow which is opportunity for Korn Ferry. As we come to a close of another calendar year, I think it's good to take stock of just how far Korn Ferry has come and how much more capable we've become. First, when we look at our historical performance through the cycles, it's clear our diverse offerings and larger scale have resulted in progressively better results from peak to peak and trough to trough. In other words, the ceiling and the floor continue to be incrementally higher through each term. For example, our peak and trough revenues from the Great Recession to the COVID recession are more than 3x higher. And over the long run, our 10-year CAGR has been 13%. There's no doubt that we're a substantially different firm today than we were even just a few years ago, with far greater scale and relevance of our offerings. Our evolving capability and broad offerings are propelling Korn Ferry and our clients through this moment this transitory period. This combines organizational strategy, leadership and professional development, assessment and succession, rewards and talent acquisition, capabilities to help clients execute their business strategy. We've anchored a firm around a well-balanced, diverse slate of solutions. Number one, a major account strategy that now represents 37% of our portfolio, consulting and digital capabilities that represent almost 40% of our firm. And the integrated go-to-market strategy, One Korn Ferry that's resulted in almost 30% of our revenue coming from cross line of business referrals, a new Korn Ferry that trains and develops over 1 million professionals a year on compensation and rewards advisory and digital offering would comp out on more than 25 million executives, a new interim transition management staff capability with about $225 million of annual revenue on a run rate basis. And this offering essentially didn't exist for us a little over a year ago. An award-winning RPO business with consistent top line growth which now represents 14% of our firm. Today, RPO has nearly $1 billion of revenue under contract. This includes 2 major 3-year contract wins with a combined value of nearly $200 million that we secured in the second quarter. And we're a much, much more globally, geographically diverse firm today. No doubt there's economic uncertainty as we enter 2023. But this transitory time like others in the past is also the proving grounds for the effectiveness of our strategy, the strength of our culture, the resilience of our colleagues, the relevance of our solutions and our offerings and the potency of the Korn Ferry brand. The truth is that great companies make their best moves in times like these. And Korn Ferry is a great company. Looking forward to 2023, we're going to continue to refine our account strategy to take advantage of changing global trade lanes, putting further emphasis on our regional accounts. We're going to pursue a larger addressable market, almost $100 billion in the U.S. alone of interim and transition management, particularly around the skilled positions of finance and accounting, digital and technology, supply chain and legal, just to name a few. We're going to build on our health care expertise, particularly in the RPO area. We're going to further develop our partner ecosystem to distribute our consulting and digital capabilities globally. We're going to invest in our professional and leadership development offerings, especially our digital platforms, upskilling technologists as well as sales professionals. And we're also going to pivot towards cost optimization solutions that will be even more relevant in the current environment. We're going to carefully balance our cost structure and profitability to seize both short and midterm opportunities. And finally, we're going to continue to deploy a systematic and balanced approach to capital allocation between share repurchases, dividends and M&A. I'm confident that we've built a company that provides a suite of core and integrated solutions that line up perfectly with the talent and organizational issues our clients are wrestling with today. In addition to Tiffany, I'm joined on this call by Bob Rozek and Gregg Kvochak. And Bob, I will turn it over to you.

Great. Thanks, Gary and good afternoon or morning, depending where you are. As Gary said, the global economy is in transition. Today, unprecedented economic forces are driving companies to rethink their business and their talent strategies. As this transition continues to unfold, it is also clear that the organizational and talent issues facing businesses are more complex than ever. Today, companies are seeking new ways of filling essential roles while also keeping their existing workforce retained, engaged and developed. Our company is built to help our clients navigate through this transition. Today, our suite of workforce solutions is aligned with the needs of the market even as economic growth slows. This transition provides an opportunity for us to guide clients through these uncertain times with the same unparalleled service and expertise that has built our strong brand over the last 50-plus years. Now as our clients adjust their strategy, organization and workforce for the realities that lie ahead, we stand ready to partner with our broad range of core talent solutions which were outlined by Gary. When we take bits and pieces of these core solutions and package them together into an integrated solution, we believe our ability to service our clients is unparalleled. It gets even more interesting when we leave our industry-leading data into our integrated solutions is then we can form unique and differentiated points of view that our competitors simply cannot. Now, let me turn to our second quarter results. Fee revenue grew to $728 million. It's up $88 million or 14% year-over-year at actual rates and 20% at constant currency. Growth by line of business was mixed. We saw good demand in consulting, digital, in the interim portion of professional search and interim. As we anticipated, this was partially offset by moderating demand in executive search in the permanent placement portion of professional search and interim from the elevated levels that we saw during the pandemic recovery period. At constant currency, measured year-over-year, Consulting was up 12%, digital was up 15%, RPO up 19%. Professional Search & Interim which was aided by the recent acquisitions, was up 147% and Executive Search was down 4%. The consolidated new business, excluding RPO, was seasonally strong in the second quarter, with year-over-year growth in nearly every line of business. Similar to fee revenue, we continue to see new business demand moderating in the permanent placement portion of our talent acquisition businesses which was more than offset by our recent acquisitions and new business growth across the rest of the company. Consolidated new business, excluding RPO was up 8% year-over-year at actual rates and 14% at constant currency. As Gary indicated, RPO was awarded a record $290 million of new business in the second quarter which included the 2 large assignments that also Gary referenced. Synergies between Professional Search & Interim and our other lines of business have been very strong. If you go back to November 1, 2021 and that's when we did our first acquisition, in the Pro search & Interim business. Referrals between Pro Search & Interim and our other lines of business have resulted in approximately 600 new assignment wins with a combined contract value of nearly $36 million and that really reinforces the complementary and synergistic nature of our core solutions. Earnings and profitability also remained strong in the second quarter. Adjusted EBITDA in the second quarter was $131 million at a margin of 18%. The earnings and profitability in the quarter were impacted by a mix shift in fee revenue by line of business as well as our continued investment spending into digital. Finally, our adjusted diluted -- fully diluted earnings per share were $1.43 which was down $0.10 or 7% year-over-year. Now. it's important to note that our adjusted fully diluted earnings per share were negatively impacted by $0.09 due to a higher tax rate which was 27.8% and that compares to 25.1% in the second quarter of fiscal '22. Our investable cash position remained strong. At the end of the second quarter, cash and marketable securities totaled about $831 million. Now if you exclude amounts reserved for deferred compensation and for accrued bonuses, our global investable cash balance at the end of the second quarter was about $457 million. Our capital deployment continues to be well balanced. Through the second quarter, we repurchased approximately 992,000 shares of stock using about $56 million. We paid cash dividends of about $17 million, funded about $33 million of capital expenditures that again were directed towards our digital business. And we deployed about $99 million on M&A. With that, I'll now turn the call over to Gregg to review our operating segments in more detail.

Thanks, Bob. Starting with KF Digital. Global fee revenue in the second quarter was $94 million which was up 6% year-over-year and up approximately 15% at constant currency. Digital subscription and license fee revenue in the second quarter was $29 million which was up 12% year-over-year and was approximately 31% of revenue for the quarter. Global new business for KF Digital was $112 million, with $40 million or 36% of the total tied to subscription and license sales. Earnings and profitability in the quarter were marginally impacted by investments in both commercial sales representatives and product development initiatives. In the second quarter, Digital generated adjusted EBITDA of $27.5 million with a 29.2% adjusted EBITDA margin. For Consulting, fee revenue in the second quarter grew to $173 million which was up 5% year-over-year and up approximately 12% at constant currency. Fee revenue growth continued to be broad-based with growth in almost every solution area and was strongest regionally in EMEA and North America which were up 17% and 11% respectively, at constant currency. Additionally, global new business for consulting in the second quarter was up 2% year-over-year at constant currency. In the second quarter, adjusted EBITDA for Consulting grew 3% year-over-year to approximately $31 million with an adjusted EBITDA margin of 18%. Growth in Professional Search & Interim remained strong in the second quarter and was aided by new and enhanced capabilities recently acquired from Lucas Group, Patina and ICS. Fee revenue tied to permanent placement search was $79 million in the second quarter which was up approximately $24 million or 44% year-over-year and was positively impacted by our recent acquisitions. Our Interim Service fee revenue in the second quarter grew to $55 million, driven in part by the recent acquisitions of ICS -- acquisition of ICS which primarily provides on-demand, high skilled IT professionals on a flexible or project basis. Our Interim Services average bill rate was approximately $107 per hour and we generated $850,000 of fee revenue per billable day in the second quarter. In the second quarter, adjusted EBITDA for Professional Search & Interim was up $10.7 million or 49% year-over-year to $32.5 million with a 24.1% adjusted EBITDA margin. The outlook for Recruitment Process Outsourcing business remains strong. As previously mentioned, RPO was awarded a record $290 million of new business in the second quarter, including 2 large 3-year contracts totaling almost $200 million. This brings the total revenue under contract at the end of the second quarter to approximately $958 million. Fee revenue in the second quarter was $107 million which was up $11 million or 12% year-over-year and approximately 19% at constant currency. Sequentially, RPO fee revenue was down 6% in the second quarter, primarily due to moderating volume tied to a few of our life sciences and technology clients. Additionally, going forward, it is also important to note that larger, long-term RPO assignments like those awarded in the second quarter are more complex to set up and therefore, there is a timing delay between initial startup and implementation costs and the recognition of revenue. Adjusted EBITDA for RPO in the second quarter grew to $16 million which was up $1.6 million or 11% year-over-year with an adjusted EBITDA margin of 14.9%. Finally, global fee revenue for Executive Search in the second quarter was $218 million which was down 7% year-over-year and down 4% at constant currency. Growth in EMEA which was up 21% year-over-year at constant currency, was offset by slower demand in North America and APAC which was primarily tied to China. North America and APAC were each down approximately 10% year-over-year at constant currency in the second quarter. Global new business in the second quarter for Executive Search was down 8% year-over-year and down approximately 4% at constant currency. At the end of the second quarter, the number of dedicated Executive Search consultants worldwide was 621 which was up 51 year-over-year and up 2 sequentially. Annualized fee revenue production per consultant in the second quarter was $1.41 million and the number of new search assignments opened worldwide in the second quarter was down 11% year-over-year to 1,637. In the second quarter, Global Executive Search adjusted EBITDA was $54.5 million with an adjusted EBITDA margin of 25%. With that, I'll turn the call back to Bob to discuss our outlook for the third quarter of fiscal '23.

Great. Thanks, Greg. Our third quarter is historically our seasonal low quarter for both new business and fee revenue and that's really due to the slower calendar year and holiday season. Consolidated new business in November followed our historical patterns and was in line with our expectations. If current trends remain consistent with historical seasonal patterns, we expect December new business to be down sequentially from November and for January to rebound slightly. We are evolving to an organization that is selling larger, integrated solutions. And we're doing that in a world that is moving from offshoring to nearshoring. Because of these factors, in the recent moderation in our permanent placement talent acquisition solutions, we are in the process of developing a plan to realign our workforce, making investments to match the right resources with the right skill sets in the right geographies as well as reductions where we have excess capacity. Also in this review, we'll be looking at further reductions in our real estate footprint, along with reductions in other discretionary operating costs. We expect that the plan we are developing will generate $45 million to $55 million in annual run rate savings and will cost $25 million to $35 million to implement. Now with respect to the realignment of our workforce, we expect the plan to be completed and implemented by the end of the third quarter. We expect annual run rate savings of between $40 million and $50 million, starting in the fourth quarter. Now certain of the real estate savings are included in this run rate, with the remaining amounts are going to be realized in future periods as we execute the plan. Now in summary, assuming no new major pandemic-related lockdowns, further changes in worldwide geopolitical conditions, economic conditions, financial markets and foreign exchange rates, we expect fee revenue in the third quarter of fiscal '23 to range from $660 million to $690 million. Also, given the factors leading to the development of our realignment plan, we expect our adjusted EBITDA margin in the third and fourth quarter to temporarily fall to a range of 14% to 15%. And our consolidated adjusted diluted earnings per share in the third quarter to range from $0.88 to $1. Finally, when you include the charge for the previously discussed plan, we expect our GAAP diluted earnings per share in the third quarter to range from $0.40 to $0.66. Now, while the transition in the economy will result in some short-term volatility for our business, it's also an opportunity for us to prove the value and relevance of our solutions and the power of our brand. We remain more confident than ever that our strategy is the right strategy. We've built a firm that provides the right core and integrated talent solutions that help solve the talent and organizational issues our clients are facing. Today, more than ever, we believe our clients realize that an integrated talent management strategy is essential for their long-term success. And working with the right partner is critical and we believe that Korn Ferry is that partner. With that, we would be glad to answer any questions you may have.

[Operator Instructions] Our first question comes from George Tong of Goldman Sachs.

George, we lost you. Why don't we move on to the next question.

Mark Marcon with Baird.

Could you describe a little bit about like what you ended up seeing in terms of the sequential trends in terms of new business and confirmed orders coming through on the Executive Search side and how that ended up flowing through? And what you're hearing from your clients right now in terms of the prospects, in terms of further confirmations as we go into December, January and February?

Well, I'd say, first of all, November new business compared to October, so sequentially was exactly like we would have imagined it to be and it's in line with historical trends, Mark. The new business for the firm overall in November was up 6% [ph] at constant currency. Now to your question on Executive Search, we've been now seeing this, as you know, for several months. There's been a moderation from the very heightened levels that we saw 1.5 years ago. And with respect to Executive Search, we saw in the -- take the second quarter, we saw a new business down about 4%. And we saw the same thing in November. So both in the quarter and November, this is constant currency, Mark, we saw declines in both of those. And the outlier was EMEA. EMEA was actually very strong. EMEA was up 13% in Executive Search in the quarter, again, constant currency. And constant currency in November is up 17%. So clearly, we've been saying the air we got out of the tire in the global economy for several months; and that's what we saw in as recently as November.

The only thing I would add to that is in my remarks, I commented that the -- if you look at the volumes that we're seeing in Executive Search today and this is probably over the past 4 or 5 months, they've moderated but they've moderated back to sort of the, what we would call, a good month in the pre-pandemic period, right? So I'll give you North America as an example. Prior to the COVID shutdown, a good month for us is about 250 to 275 searches. Coming through the recovery, we had bumped up to elevated levels. There were 325, 350. And for the past 4 or 5 months, they've come back down to somewhere in the 260, 265 range. So right back to where we were pre-pandemic.

And Bob, would you expect that to hold here as we think about like the way the new orders are going to trend over the next 3 to 6 months. I mean, obviously, you guys are sharp. You read all the headlines. You could see it. I'm not sure what your clients are saying. But most CEOs are basically expecting a recession, so you would expect some belt tightening. So how are you thinking about the new orders on a go-forward basis?

Yes. I think we have some -- Q3 is our seasonal low. So obviously, December will be the worst month of the year. So we're going to follow that pattern and then we'll have a slight rebound in January. Kind of what we're -- as we're looking at things going forward, we're kind of holding serve with where we are today from a unit volume perspective. When I talk to folks in the field, what I hear the most is it's not that people are saying, "No, we're not going to do this. It's just taking longer for compensation letter to get signed." And so for the foreseeable future, that's what we expect to continue.

Great. And then can you talk a little bit about what you're seeing on the Professional Search & Interim on an organic basis or a pro forma basis? Obviously, the numbers are skewed by the acquisitions. But how is that looking on a pro forma basis?

The interim business is looking good, Mark. On an organic basis, looking very good as recently as November. So no pullback at all on the Interim which isn't -- that's -- I think given career nomad landscape. In Pro Search, we're seeing the same thing that we're seeing in Executive Search. The -- what I want to go back to your question because when you look back at the last 3 recessions, they were all event-driven. This one seems to be a slower leak and there's massive changes that are happening under our feet from the inflationary pressure to changing global trade lanes, to near shoring, a lot of companies are making moves around transformation. But the one thing that's substantially different this time around and I'll just take the U.S. as an example, is the labor force. And the reality is the labor force, 164 million Americans in the workforce hasn't changed in almost 3 years. And the labor participation rate at 62%, as you know, is a historical low. So you can talk about uncertain times and you can talk about recession but that's a huge, huge difference. And I think companies are going to be pretty hesitant in doing any kind of massive downsizing of the workforce. And you're seeing the quit rate falling, you're seeing job openings falling which you would expect. But I think the general makeup of the labor force is a substantially different and new variable compared to past cycles. And the firm today is a much, much different company. When I look at the Q2 results and I compare them to the quarter before the pandemic, our revenue is up 40%. And our EBITDA is up 70%. The Q3 guide to that same period of time, going back to pre-pandemic at the midpoint of the guide it's suggesting revenue up 30% and EBITDA [ph] up 22%. So you have a completely different firm today, where Executive Search clearly gives us a tremendous access in the marketplace. But you've got a firm now that has broader capabilities. I mean our consulting new business, I mean I don't want to take 1 month and make it a trend. But in November, our consulting new business was up 20% at constant currency. Now for the quarter, it was in an elevated level but it was still on the positive side. So I think you've got just a completely different paradigm and then you throw in the RPO business, where this has been unbelievable the new logos we've put on. And as a firm overall, this new -- in the quarter, I mean, our new business was almost $1 billion. I mean, this is the highest in the company's history.

Congratulations on that with regards to the RPO side, particularly. Can you -- the 2 big contracts that you ended up winning during the quarter, adding $200 million in annualized revenue. Were those brand new to RPO? Or were those switches that you gained from other players? And then you mentioned that you're going to try to become a bigger player in health care on RPO. Is that going to be organic? Or are you looking at some things?

Well, we're looking at both. Those were both taken -- they were taken from other firms that operate in that space. And they're -- it's really because of our account strategy. That's really where it began. And so those are takeaways. Our health care business, one of the things we have to do is with this movement around near shoring, you could call it nationalization, however you want to characterize it, we have to be much more agile with our regional accounts. And we're putting a tremendous amount of focus on how we should rearrange resources in our portfolio to match changing global trading partners. So one of the areas that we've targeted is health care. Health care today represents about 7% of Korn Ferry globally. And clearly, in the RPO area, we think we've got an enormous opportunity. So clearly, we're going to pursue that on an organic basis. We've got a fabulous team. And if we could do something inorganically, we do that as well, Mark.

Great. And then 1 last one and then I'll jump in the queue. With regards to the expense reductions that you outlined, how much of that is going to be rightsizing the personnel versus the real estate footprint?

Yes. We're going to continue to look at real estate. I mean this is transitory period in many, many respects and one of those is hybrid working for sure. And so we've got to continue to look at that. We would actually like to do more there but it just doesn't make economic sense. So it's something we're going to look at our total cost base which does include the real estate. I would assume we're finalizing the plans right now but I would assume probably 2/3 or so, maybe something like that is from rebalancing the workforce. And what we've been doing is we've picked up some major contracts. And over the last few months, we've been working very, very hard to see how we can shift our own resources around. But at the end of the day, we're going to have a mismatch between language, geography, skills between some of the areas where we're seeing pullback than some of these new exciting wins. And so I -- this is not a broad-based layoff, it is nowhere near that. It's very, very targeted. It's something I wrestled with for several months. Absolutely, hate to do it but we have to rebalance our workforce to take advantage of the opportunities that we see on the horizon.

Our next question comes from George Tong, Goldman Sachs.

Sorry for the audio difficulties earlier. So a question around the cost savings program. It sounds like it's going to be a balance of personnel, real estate. Are the cost cuts going to be more concentrated, perhaps in Exec Search where you're seeing more of an inflection in new business trends? Or is it going to be relatively broad-based across the company?

No, it's very targeted and I'm not going to get into exactly where it's going to be because we're still finalizing the plans. But I would tell you that we have secured some major wins for the organization, strategic wins. And as we've looked at meeting those demands, we have an imbalance. And there is excess capacity that we cannot solve because of language and location and things like that. So that it's very targeted and we'll, certainly, on our next call, we'll tell you what we did.

Got it. And then related to that, as you think about the recovery in margins back to -- call it mid- to high teens, what would the time frame be for when margins can get back to historically what you said would be the long-term margin target of circa 18%.

Well, look, I think there's a couple of wildcards. We do see a massive market opportunity around the Interim Services. And when I sit on account calls, it is absolutely clear with the career nomad landscape that this is a really, really good way to further differentiate our firm. And so you've got a huge market. It could be as big as $100 billion. We've taken that from essentially 0 to a run rate this last quarter of $225 million. And I think over a 3- or 4- or 5-year period of time, that could be a big driver of differentiation for Korn Ferry. So we're pursuing a larger market there. Now what comes with that is lower margins that you would have, say, compared to Consulting or Executive Search. And so there is a mix change that's happening. And so when we talked about the 18% to 19% long-term margin target, when we were coming out of COVID, we did not have the shift in business mix that we've seen today. And that shift in business mix between RPO and Interim, it could be as much as 150 basis points or so. So, when we -- so when you model out the future, that's one thing that you have to take into account is that shift in mix. And in terms of returning to this last quarter, we did 18%. That's really hard to say right now, George. I mean the word uncertainty is such an overused word. There's uncertainty and like every single day. But uncertainty creates opportunity and we have to continue to be very nimble and make sure that we are shifting our account strategy to where there's opportunity.

Got it. And then lastly, on the Consulting business, you've seen actually some pretty resilient and positive trends lately. Historically, how cyclical has the Consulting business been? And how would you compare the macro sensitivity of the Consulting business relative to the Exec Search business?

Well, we haven't had it for that long. I mean, we've got today -- when I started with the company, it was 0 but today, it's about $700 million. I mean the truth is that we do not have enough resources. We are completely undersized given the market opportunity. So we that's an area for us that over the 3 to 5 years has to be a large part of Korn Ferry's future. I am really proud of the team that we have and looking at what we did even in new business in the quarter or even November and the kinds of things that we're doing is inspiring to me. I would say that without substantial amount of data because we don't have a long track record with it. But I would say that compared to Executive Search, it's probably half is cyclical. I mean, all consulting services are cyclical. But I would -- my instincts would be half. And actually, when we went through the COVID recession, that's kind of what we saw was that the -- what you would intuitively think the more cyclical parts of our business, the Executive Search and Perm Recruiting, those were hit harder. And the Consulting, the Digital, even the RPO was substantially less cyclical than the Search business. And now with the Interim capabilities we have, I think that even makes that story more compelling. You just have to recognize that the margins in that business are different. And they are not as strong as, say, the Executive Search or Consulting margins. But with the Interim business, we are definitely going to stay at the high end. There's no question about that. We're not going to go into general staff and anything like that. We're going to stay very specialized.

George, just to maybe pile on a little bit. The -- if you go back to the pandemic, it was a firm overall. Peak to trough quarter, we were down about 30%. Consulting was in the 20% to 25% range down. And then if you look at the whole year period that we're going through the recovery, our RPO business actually grew 7% year-over-year.

Our next question comes from Tim Mulrooney with William Blair.

That was helpful color on the cyclicality, how you're thinking about the business. Just on the guide, real quick, for the third quarter. Your guidance assumes revenues down, I don't know, $50 million at the midpoint from the second quarter to the third quarter. But EBITDA is expected to be down like $35 million from second quarter to the third quarter at the midpoint. I would have thought the decremental margin would be, I don't know, somewhat less than that. So can you just talk about the primary factors that led to that guidance range? Are there large investments happening here? Are there near-term fixed cost that just don't come down as fast as revenue?

No, that's a good question. First of all, the guide reflects what we would view as seasonality of 4% to 5% on the top line. So that's number one. And then the second contributing factor is this moderation that we've seen for a long time that we've been living with around Executive Search and Perm Recruiting. Now the -- you're right that in terms of the impact on the margin and what we've been trying to really carefully look at is rebalancing the workforce and how we do that because this is not a situation where what I don't want to do is going to make draconian changes that compromise our ability to see short and midterm opportunities. So we've wrestled with this how we can reallocate resources. And that reflects some of that carry -- that we decided to carry longer as we really thoughtfully planned out how we could redeploy resources. So that's really the answer to your question. And we'll execute on this plan and we'll talk to you about it in the beginning of calendar 2023.

All right, great. That's helpful color. And I would agree. I feel like your investor base are also long-term focused. I would rather see you make those long-term decisions than the short-term gains for sure. One more for me. on Executive Search. I'm curious what your expectations are for this business in the third quarter based on what you used to build up your total revenue guidance for this segment? And more specifically, what I'm really curious about is -- how are you thinking about this business in the third quarter in terms of moderating engagements versus maybe executive compensation flattening or coming down from the really high levels we saw last year? I mean I remember last year, talking to some privately held executive search companies in the space and I'm talking about how comp was up 100%. It was just huge and that was driving higher revenue for the search business. How much of that now if this Executive Search business is decelerating, how much of it is that versus actual volumes? Sorry for the long-winded question.

Well, I think, look, Bob and Gregg can give the real data behind that but there's no question that over the last couple of years that there's been significant wage pressure which has lifted our Executive Search fees. And when you look at it, in the guide, I think we're planning on something like 13% or so, could be off a little bit, down in top line and that's probably a little bit higher on the volume and more steady on the fee. I really do believe that this is a substantially different labor market which is a huge wildcard in what happens to these kinds of businesses. I think this labor participation rate is shockingly low. When I look back at the -- great Recession as an example, in the United States, we lost 7.9 million jobs. It is really hard for me with the labor participation rate of 62%, 164 million Americans in the workforce. It is hard for me to come to anywhere near that kind of number, even as companies are looking at costs and they're doing all this stuff and waiting for what the Central Bank is going to do and if indeed are going to [indiscernible]. But it is really hard for me to come to a conclusion that 8 million jobs in the United States are going to be lost like they were in the Great Recession.

Gary, it's Bob. And Tim, just to add a bit more color. Gary spot on. It really is all unit count and volume related. We did see increases in our average search fees coming through the recovery but that's pretty much plateaued at this point. Now we're actually just dealing with volume.

Our next question comes from Marc Riddick with Sidoti.

So I did want to follow up and I appreciate all the color that you gave and your thoughts behind what it is that you'll be doing for the remainder ballpark -- let's call the remainder of this fiscal year, though it seems as though a lot of it will be concentrated in the third quarter. I was wondering if you could talk a little bit about maybe without giving -- without too much granularity, I guess but sort of big picture-wise, what sort of led to that process of what you're seeing as needing to take place? And also whether that was more a function of the marquee accounts that you talked about. I think you said that's now up to 37% of revenue and substantial progress made over the last few years in that part of the business. And certainly, that would be understandable. But also, you've talked about new business wins. So I'm sort of trying to get thoughts as to how much of that is being driven by the marquee accounts and kind of trying to get to where they are or get ahead of where they're going versus some of the big picture, big ticket wins that you'll be pursuing?

Well, we hope it's -- look, we hope it's one and the same. We hope we're thinking about where the market is going to be going. Clearly, we have enjoyed some incredible success securing very large engagements. And at the same time, as you read about in the paper, we've read with this like for 5 months now, we've seen companies moderating what they're doing in terms of costs overall as well as their workforce. So what you've seen and what we've seen in parts of our business is some pullback in what I would call either base or legacy business and that's been coupled with major new wins. And the reality is when you compare those as hard as we've worked over the last few months, there's just a mismatch that you can't solve because of language and because of location. And so there is excess capacity in some places. And you could guess, I mean, when you read the paper, you could guess without mismatches, particularly given the megatrend around the changes in global trading partners and global trade lanes and nearshoring, there's a mismatch. And unfortunately, we have to address that and position the company for opportunity and that's what we're doing.

Great. And then I wanted to sort of highlight just given the ability to generate -- the cash that you're able to generate and the -- what the market is done with your as well as other personnel and consulting-related names, I just wanted to talk a little bit about your thoughts around what to do with cash and share repurchase activity and dividends and the like.

Well, the plan right now, I think fiscal year-to-date, we've repurchased $70 million of stock. We've continue to, as Bob indicated, the dividends are a good part of our capital allocation strategy as well. But we tend to look at this in a very balanced way and we look back over the past couple of years, that's what we've done. We certainly made a conscious effort to invest in the Interim businesses, where we didn't have capability. And that would be my answer. Now if valuation levels, if they change, then our capital allocation strategy would change somewhat as well.

Our last question comes from Tobey Summers with Truist Securities.

I just wanted to double check something to start off. What was the implied revenue decline on a sequential or year-over-year basis, if we kind of take the midpoint of the January guidance.

The implied, you mean from 728 to 675.

Well, it can either be sequential as you just did or year-over-year? I just want to get organic changes in either a sequential or a year-over-year basis.

Organic constant currency. Sure. So last year, our third, I'm going right off the top of my head, so you're going to have Bob and Gregg correct me. But I want to say last year, actual is 681. I think when you dial it back for constant currency, that 681 translates to something like 650, 645 in that kind of neighborhood. The midpoint of the guide is 675. So constant currency, that's up 4%, 5%. And clearly, that is benefited from the investments that we have made in the interim business and it reflects moderation in our Perm Recruiting businesses.

Okay. I'll move on to a couple of other questions and maybe you can arrive at a number.

I said those -- Gary's numbers were pretty close to...

I get it. So what was the -- what's the acquired revenue so that I could just get to the answer for organic?

Yes, I would take you back, Tobey to -- you have to go back to the run rate when we acquired the companies. Because once we integrate them, we lose the ability to specifically identify and Lucas Group has been integrated for -- since the beginning of the year. So I don't have the ability to identify that. But if you go back to sort of the run rate that we said when we bought those companies, you're talking somewhere in the $55 million to $60 million range.

Okay. Could you give us some color about the 2 major RPO wins? I know you talked about it a little bit already but maybe in terms of number of annual hires, types of occupations, geographies and differentiators that might have prompted the client to choose you over the incumbents

Well, I'll let Bob -- we're not going to reveal the client or the industries. But I think one of the key differentiators that we have is, number one, the success and the high-quality of referenceable clients now that it's pretty incredible and success begets more success. So that's number one, incredible team and process, number 2. And the three is the IP and the ability to integrate that solution with other things that, that particular client wants to achieve, whether that's org strategy, whether if it's compensation advice and so this integrated platform is also a major reason why we continue to enjoy success in that part of the business

I think you described the -- correct me if I'm wrong, the cost cut is sort of substantially smaller than a classic one you might have taken [indiscernible] in the prior downturns. So it seems like you're assuming some level of stability in demand headed into calendar '23. How is the organization feeling? You've undergone a lot of volatility as the world has really with the roller coaster of '20, where job cuts, furloughs, then rapid hiring and now sort of more measured realignment that you described. Could you just speak to that. I know that wasn't a specific question but I think hopefully, you get.

Well, I think it reflects where the world is. In April and May 2020, I said that the COVID -- it would be a couple-year journey then 2 years of a transitory period. In a transitory period from a whole different -- a whole range of aspects from how people are entertained to how they consume, to how they produce to where they were. And when you go back, 3 years ago, it was scary. And even this morning, very early, you hear a story somebody that got COVID. If you had heard that story 2.5 years ago, you would have fallen over and wondered was that going to be you next. So I think that we're in a very, very unique time as human beings. Now I think part of that answer is where you are in the world as well. I mean, I was on an account call a couple of nights ago in China, for example. And our team in China has more fortitude and more perseverance and they've been in a very difficult situation. It's been 3 years. So I really do think it kind of -- it depends on where you are in the world. And I think it's a very spiritual and a very human question to ask. For us, what I'm really proud of is our purpose is to change people's lives, to enable people and organizations to exceed their potential. And when we see something. We don't just talk about it, we'd be about [ph] it and whether that's -- whether that's George Floyd, whether it's our charitable foundation, whether it's Leadership U for Humanity where we put over 1,000 people of color through our leadership programs, whether it's our own Mosaic programs where we, again, put 1,000 people now through that. And I think that we're a firm that walks the talk. And at the end of the day, I think that's what it's about. Are you working for an organization that you believe in its purpose that inspires you. And the truth is, like in personal lives, companies are going to go through cycles. And this is a cycle for sure that we're in right now. And Korn Ferry has an incredible track record of accelerating through the turn. And I think that probably reflects most people's views.

I'll try to sneak in a last brief one. Could you provide some color on the drivers of digital growth? We haven't heard as much about KFL [ph] or the other individual products recently. So I want to you to refresh us.

Well, I think the -- look, the -- this is definitely more of a medium-term play because there's 2 aspects. One aspect is the digital offerings and the products that you have. And what are you trying -- who are you trying to reach? And for that part of the business, what we're trying to do is, number one, sales professionals; and two and this is relatively new, is creating a platform where we can upskill technologies. So those are the 2 areas that we're really focusing and the latter being one that is brand new to us. On the distribution side, I believe that when you look at world-class consulting firms, you'll find that they have partners that help to enable further business growth and that's something that Korn Ferry historically hasn't really attempted. And I think when we look forward, that a big, big part of that is to what extent are we going to have successful developing an ecosystem of partners that can help distribute our IP and that is not a 2-day exercise. And we're working very, very hard. In fact, as we speak, there's a team that's working on that right now at a client to -- at one of those partners. So it's certainly more of a medium-term undertaking. And that's what I'm expecting and we're working very hard on it.

And Gary, I would just a little bit more color on that, Toby. One of the things you'll notice when we went back to Q1, we talked about where Digital landed and the lack of large deals in that quarter. In this quarter, they actually rebounded nicely and they had 7 deals above $1 million, 2 of them were about $5 million and 1 was north of $900,000. So it's also a function of selling -- continuing to be able to sell the larger deals.

Okay. Amy, I want to conclude and thank everybody. And despite all of this talk that you read about every single day, there is opportunity. And that's what we have a demonstrated track record of seizing and that's what we're going to continue to do. And so -- during this festive season, I wish everybody Happy Hanukkah [ph], Merry Christmas, happy holidays and we'll talk to you in 2023. Thanks, everybody.