Robert Rozek
Okay. Good morning, good afternoon, everybody.
We are pleased with our results for the third quarter, which exceeded our expectations and really demonstrate the power of integrating our rich and unique IP data and content into solutions that drive organizational performance through talent.
The unique value our firm provides is really realized when we align and collaborate, when we show up as and we are Korn Ferry. In the third quarter, we continue to see a positive inflection in executive search and RPO growth, and our profitability remains strong with year over year growth in adjusted EBITDA margins in all solutions.
Now turning to company-wide highlights. Fee revenue in the third quarter was $669 million. That's a 2% year over year increase at constant currency. Our earnings and profitability continue to grow. Adjusted EBITDA increased 13% year over year to $114 million.
Adjusted EBITDA margin increased by an impressive 190 basis points year over year to 17.1% and adjusted EPS increased 11% year over year to $1.19. As Gary discussed, total company new business grew 13% year over year at constant currency, and that included $210 million of RPO new business, of which 65% was generated from new logos or new clients, which is really important to fuel future growth.
Excluding RPO, new business in the third quarter was up 1% at constant currency with particular strength in EMEA. We continue to diligently execute our go to market activities. Marquee and diamond accounts remain strong, very strong, at 39% of our total consolidated fee revenue.
Our cross solution referrals also held strong at 25% of total consolidated fee revenue, and we continue to see success with the integration of our recent interim acquisitions, achieving now close to 1,100 cross referrals into or from interim since our first acquisition in 2021.
As we signaled in our Q2 earnings call, during Q3, we began to ramp up our investment hiring, bringing on almost 25 new fee earners in the quarter. Last, we continued our balanced approach to capital allocation. During the third quarter, we invested back into the business, spending approximately $45 million on the Trilogy acquisition.
We also used about $18 million on share repurchases, and we paid $19 million in dividends. Year-to-date, we have repurchased slightly over 1 million shares, or about 2% of our outstanding share account, and returned $133 million to shareholders through both repurchases and dividends.
And as Gary mentioned earlier, we are increasing our quarterly dividend by 30%, and as you said, the 6th dividend increased in the last five years.
Now let me turn to some of the highlights by solution area. Starting with consulting. Our new business was $187 million. It's up 2% at constant currency. Our engagements greater than $500,000. So those are our larger engagements represented approximately 41% of new business in the third quarter, and that's up from 32% last year third quarter.
Our hourly bill rate climbed 5% year over year to $461 per hour, and profitability remains strong with an adjusted EBITDA margin of 17.7%. That's up 100 basis points year over year. Fee revenue for digital was $91 million. That's up 3% in constant currency, with 39% of total fee revenue generated from subscription and licenses, and that compares to about 36% a year ago.
Profitability remains strong there as well, with an adjusted EBITDA margin of 31.3%, and that's up 100 basis points year over year. Executive search fee revenue grew 4% at constant currency to $205 million with growth in three of the four regions, most notably in North America.
Our consultant productivity increased 7% year over year to approximately $1.5 million annualized per consultant, and profitability was strong with an adjusted EBITDA margin of 25%, up 320 basis points year over year.
Professional search and interim new business and fee revenue continued to stabilize and were flat year over year at constant currency. Our interim average hourly bill rate and perm placement consultant productivity remained strong at $129 per hour and $650,000 annualized per consultant respectively.
Profitability was also strong with an adjusted EBITDA margin of 21%. That's up 280 basis points year over year. Finally, RPO fee revenue grew 6% to $85 million in the third quarter. Fee revenue under contract accelerated sharply higher to $752 million and about 42% of that is estimated to be recognized in the next four quarters.
RPO profitability was also strong with an adjusted EBITDA margin of 15%, and that's up 360 basis points year over year.
To summarize, we're encouraged by our third quarter results and expect this momentum to carry into the fourth quarter.
Turning to our outlook for the fourth quarter of fiscal '25. Assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets, and foreign exchange rates, we expect fee revenue in the fourth quarter of fiscal '25 will range from $680 million to $700 million.
Our adjusted EBITDA margin to remain approximately 16.8% to 17%. Our consolidated adjusted diluted earnings per share to range from $1.22 to $1.30 and our GAAP diluted earnings per share to range from $1.20 to $1.28.
Now let me end the way we began. We have been and will continue to operate in an uncertain macroeconomic environment. As always, we'll continue to be focused on operating excellence and based on the results of our third quarter and our fourth quarter outlook, it is very clear that our strategy is working.
As I've said in the past, I truly believe our best days lie ahead of us.
With that, we would be glad to answer any questions you may have.
Operator
(Operator Instructions)
Trevor Romeo, William Blair.
Trevor Romeo
Thanks for all the detail and the results and the commentary for the team.
Just wanted to first touch on sort of margins and productivity. I think a lot of the productivity or revenue for consultant metrics across your segments are up quite nicely. I know you've been making some investments in technology, tools and such, and you recently started ramping up hiring again.
But what are some of the areas where you've seen the most success driving productivity for a lot of your businesses and how much room do you think you'd have to further increase productivity without seeing an uptick in your term market or macro demand?
Gary Burnison
Well, I think there's definitely an opportunity to improve productivity. We made a conscious decision going back now a couple of years that we would purposefully pivot. We saw the economic environment that was on the horizon.
And we made decisions to pivot to more profitable type work and you just see it across the board. You see it in, for example, the rate per hour, on both our consulting business, consulting solution and our interim solution.
The consulting solution, the rate per hour is up to $461 an hour. I mean that was $300 an hour three or so years ago. And the interim business, we're staying at the high end, which is $129 an hour this last quarter. And when you look at our productivity, we're producing probably 35%, 40% more revenue than we did right before the pandemic with the same number of employees.
And we made a conscious decision to manage the talent that we have in the company. And you'll see that for example in our PS&I solution, the number of the fee earners, client facing consultants that we have there is probably down 50% or so, 40% from where it was three years ago.
So we still think we have room to go even if the environment stays as it is.
Robert Rozek
Hey, Trevor. This is Bob. The other thing I would say is just in terms of looking forward, we continue to stay very close to where AI, GenAI is going, the direction it's heading in. And so as that continues to evolve, become more reliable, and so on, we do expect to get more productivity into the delivery of our services. Kind of hard to quantify at this very moment, but we do believe that there's more there.
Trevor Romeo
And then for my follow up. Wanted to touch on RPO, I guess. Could you help us understand the growth of the new business which again is really nice in the quarter? Is it mostly is it competitive takeaways or is it clients that haven't used RPO before that are now kind of looking to outsource, or are you kind of starting to see some increases in underlying hiring at your clients?
Gary Burnison
Well, it's a combination of all of that. Two-thirds of the new business was new logos. A lot of it was around marquee and diamond accounts that we purposefully targeted and been working on for quite some time. A good part of it was from healthcare and to some extent, life sciences.
And so it's all of those things combined. And I think the broader outlook here that is extremely positive for us is that there is a significant supply and demand imbalance that is coming over the next several years. And you look at it at major economies around the world and the hard cold truth is there's going to be less people coming into the workforce.
And take the US economy. Over the last five years, nonfarm payroll has only increased by $7 million or so over five years. And so what that means is people -- companies are going to have to make sure that they are reskilling their workforce, that they're retaining the workforce, that they're identifying the 20% that does the 80%, let alone the world in which we live today, which growth is elusive.
So I think all of those things point to significant opportunity for us.
Operator
George Tong, Goldman Sachs.
George K. Tong
Your digital new business trends inflected from 10% growth last quarter to an 8% decline in constant currency this quarter. Can you talk a little bit about what drove the decline in digital?
Gary Burnison
Yeah. It's quarter to quarter, you're going to see ebbs and flows. I mean a year ago, in the quarter, we had some significant, it's a tough compare. We had some significant deals that companies were licensing our top database and they were picking up several countries at a time.
And that led to a pretty robust compare to a year ago. But when you step back and look at it, it's been very, very stable in an environment that again has been less than ideal for a good eight quarters here. So that's the specific reason it was on the licensing of the compensation database.
But overall, it's been pretty stable in a tough environment over the last eight quarters.
George K. Tong
And then we're seeing real time changes in the macro outlook given potential headwinds from tariff policies. What are you hearing from clients during this elevated period of uncertainty, and do you expect hiring activity to pull back given economic uncertainty?
Gary Burnison
There's always uncertainty. It's just clouded in the illusion of certainty. I do not think that that is going to pull back. I think the reality is when you look at Peak 65 and you consider that over the next three years or so, at least in the United States. And it would hold true for other countries around the world.
In US, you're going to lose probably 4 million, 5 million executives that are turning 65 a year. And I think the other thing is that when you look at the C-suite, the people that are in the C-suite were probably leading an organization through COVID.
So from darkness to light in a very, very tough time. And then you had the great resignation and you had the pent up demand. And then you've got -- you saw companies raise prices, volumes were down, packaging got shrunk.
And now there's real price inelasticity. It's hard for companies to raise prices. And so you've got a real cost of living crisis. And so you look at those people that are -- that led organizations through a very, very difficult time in humanity. And you probably have a lot of people saying, is this -- do I want something else in life?
And I think we're actually seeing that play out. When you look at the search solution, the executive search solution, and you look at RPO, you're seeing -- we've seen significant uptick over the last three months or so. And I think it points to all of those factors combined.
And as I said, when you look out longer term, there's a significant imbalance between the supply and demand of labor. And as Bob said, he's right. How does that imbalance become rectified? Well, you look back in history and the way it gets rectified is through technology.
And so that's definitely a good part of the answer. But the other piece is that companies are going to have to do different things with their workforce because there's just not the supply of talent coming in. And so I think it's all of those things combined.
And I just -- I don't think -- the uncertainty that you've seen, it's been over the last couple of weeks. And that's people are negotiating that that's what's happening here. But I don't see that pulling back. I could be wrong, but it would be hard for me to believe that.
Operator
Mark Marcon, Baird.
Mark Marcon
Congrats on the good results.
Gary, you started out your discussion, which unfortunately was a little bit muffled. I don't know if you had a bad connection at the time or not, discussing some of the big engagements that you've been recently winning.
And I was just wondering if you could elaborate a little bit further with regards to the size, scope of those big engagements. And how you were able to get those? Who you ended up winning them from? Like if who else was part of the RFPs? Just to a little elaborate how you're moving up the food chain in terms of being a thought leader.
Gary Burnison
Yeah. It's definitely happened and sorry for that. Hopefully, and it's not not muffled now.
It's really a decision that we made several years ago that we would -- we want to get into more high impact engagements. And so what all of those engagements have in common is the environment today where growth is elusive.
And so the question for leaders is around transformation. And how do you transform your workforce giving given a shift in strategic direction. And so those engagements are scaled engagements. I mean where you're touching literally thousands of employees at a particular client.
And they involve largely either organizational design or far-reaching leadership development programs, professional development programs on how companies can shift their mindset and their employees' skill set to match a new strategic direction for the company.
And today, when you look at the consulting backlog, it's actually at an all-time high. And I think it's about 40% of that backlog are engagements that are definitely over $500,000 and actually could be over $1 million. Now there's good news, bad news.
The good news is that those are predictable, durable, revenue sources. The more challenging news is that it takes multi quarters to implement. And so you're seeing in our results that the new business in consulting is significantly ahead of revenue.
And so you're seeing a shift towards much more impactful assignments that take longer to implement. And then you're also seeing less quasi discretionary engagements than we've seen, say three or four years ago. And the primary reason for that is that companies don't have a lot of pricing power.
And they're cutting costs. And they've been cutting costs now for seven or eight quarters. And so anything that was somewhat discretionary is being put on hold.
Robert Rozek
And Mark, I would add that the discretionary engagement that Gary is referring to are generally the ones that are smaller which convert to revenue much quicker. So you kind of get the dynamics of the larger engagements which convert over a longer period of time, a little bit compounded by the smaller discretionary stuff not happening.
Mark Marcon
Gary, again, I apologize, I just did not -- was not able to hear very much of what you said up front. Could you just, you mentioned the 60,000 employee global energy company. Like what sort of projects are you doing for those companies?
And you mentioned a global insurer. You mentioned another company that was a really large employer, but again it was muffled. So I didn't quite get all of that. But what exactly are you doing and who did you beat out in order to get those engagements?
Gary Burnison
Many times, it's the large strategy firms that we're winning work against. Sometimes it's the Big 4. And for example, that the energy company. It's really around success profiles. And given a strategic change in direction and transformation, going in and saying based on that strategy, what type of talent do you need and how is that talent different from the talent that you have in-house?
Part of it is licensing our IP. We have like 12,000 success profiles. And that's really what it entails. And the other two that I mentioned were also around strategic transformation. And those are large, large far-reaching leadership programs on moving a workforce from what you were to what you want to be.
And so it is in an essence reskilling a workforce, but it starts with the company's strategic direction for sure.
Mark Marcon
Are the decision makers in terms of who they're going with when you're -- when they're selecting you versus a McKinsey or a BCG or a Bain or against one of the Big 4, who's the decision maker? Is that the CEO, the COO, or is it within the realm of the Chief of HR?
Gary Burnison
It's all of the -- it's all of the above. And I can think of one a different energy company that it's actually -- it's coming from the CEO. So it really depends, Mark. But it's starting with the leader of the business. And a new strategy or a different strategy.
And then where that gets purchased, sometimes it is the CEO or CFO and other times, it goes down to other parts of the organization including HR.
Mark Marcon
Well, congrats on that.
And then on interim and professional search, you've obviously made a lot of different acquisitions there with different profiles. Can you just discuss like within this quarter and even going back to the last quarter, which ones are performing the best? Which segments are performing the best? Which ones are perhaps being impacted a little bit more by the uncertainty that's out there?
And how does that inform what your future strategy is going to be in that space?
Gary Burnison
Huge market that has a visible predictable durable revenue streams. We are going to continue to lean in to the interim space. Today, that business is, that solution is probably $330 million something like that, $340 million, in that neighborhood.
I'll tell you that within the PS&I solution, where we have found the best success is where the company is operating at the higher end with really skilled talent. That's where our competitive advantage is. And I think we've been -- and Bob can clarify, I think we've landed something like 1,000 cross referral engagements since we've gotten into this business.
The ones where the least success and it's a little bit trickier for us is where the acquiree has a percentage of their business that is doing kind of contingent placement. That for us, on a number of dimensions is a little bit trickier, for sure given that our business is generally retained.
And so those businesses that would have a larger contingent portion in terms of hiring in the PS&I solution, those would be harder for us. And aren't -- they not as strategically aligned. So as we're looking at growing that solution to $1 billion, we're focused on the higher end of the interim business.
And we would probably shy away from things that have a bigger contingent solution for sure. But I just -- I think that what you're seeing in this Peak 65, I think you're going to see people that may say, hey, I don't want to work full time, but I want to work part time. And I want to have a different work-life balance.
They still want to contribute. And I think you're going to see more of that as people live longer. And I think with the impending supply demand imbalance on the labor front, I think that's going to play to that as well. At least that's how we're looking at things.
Robert Rozek
Yeah. Mark, when you think about the different verticals, the functional verticals that we have, they kind of -- with the diversification and being at higher levels in the organization as well as Gary just talked about the C-suite, I think that gives that business a bit more durability. When one of the particular verticals is up, no one might be down and vice versa at a later point in time.
Mark Marcon
I was just wondering if you could, Bob, you were beating me to the question in terms of the functional verticals. Which ones are you seeing the strongest performance in versus which ones may be challenged and how are you thinking about the IT vertical given that there's more and more discussion about AI potentially having an impact with regards to the need for coding or the increasing efficiency as it relates to coding?
Robert Rozek
Do you want me to take that?
Gary Burnison
Yeah, go ahead.
Robert Rozek
Yeah. So listen, I think as we sit there today, the IT vertical, it has some impact from the impending evolution of AI, GenAI, all that, although I would say today, it's still in the sort of what I would call infancy stages. It's making progress and it's accelerating. But it's still at a point where it's not particularly -- it doesn't have the efficacy yet that's needed.
And I think as IT organizations are trying to deal with it, we have felt some impact there. I would say on the F&A side, we've seen a little bit of bounce back in that particular vertical where we are right now. So it's again the two kind of counterbalance each other.
The C-suite area of the Patina acquisition as Gary mentioned is strong because of the dynamics that we're seeing in the Peak 65, if you will. And the other vertical we have is we play a little bit in the HR space and that one is kind of on the smaller side.
The thing I would say too is Gary's right on the contingent side, although it's not what I would call a massive part of our business at this point in time.
Mark Marcon
And then this last question and this is for Gary and Bob. Obviously, the uncertainty that's out there has recently unfolded and things are always uncertain. But what would you -- what would it take for you to see signs that, hey, maybe things are unfolding and even though we're going into Peak 65, the short term macro kind of overwhelms that?
What would you be looking for to say, hey, maybe we need to do even more contingency planning? I know you've always got contingency plans in place, but in terms of putting in place the playbook for things getting a little bit tougher.
Gary Burnison
Well, I think if the cost of living crisis is exaggerated, I think that's the big issue. And anything companies do not have pricing power today. It's pricing inelasticity. And so I think anything that materially impacts the consumer's ability to live and affordability, that's a problem.
Now on the other side of it, I think you're going to see because we are a very global firm. And you see it in our results. I mean the thing that I that I step back and look at this this firm over the last eight quarters and look at the overall results and the profitability in just a very, very challenging environment.
I mean it gives me tremendous confidence and hope. The other side of that though is within EMEA. And the conversations around, for example, in Germany. That are going to lift that debt ceiling. And that, some countries there are going to be increasing their defense spending is very, very good for us.
And so that is definitely could be a positive for sure. But I think the most basic thing here is around the cost of living. And anything that makes things more expensive is not a good thing. And I view the last couple weeks, and I could be wrong, but I view the last couple of weeks as negotiation.
And it's just hard for me to get my mind around that somebody would actually, you would do something that's very, very harmful that would make the cost of living even higher for say in America, the average American.
Robert Rozek
And Mark, this is Rob. I'll look at it a bit more technically. So what I look at our new business every day, look at our unit counts and look at volumes, and for me that's the real driver of when you start to see trends. Or give you an example of exec search, the unit count in the third quarter was up 3%. In the month of February, it was actually up low double digits.
But those are the things that I would pay attention to, myself is, okay, we've got the macro environment that Gary just went through and you have to understand all that, but then how does that translate to what we're seeing on a day by day basis in terms of levels of new business, volumes and so on.
And that would be one of the main drivers as we think about the need to take action or not.
Operator
Tobey Sommer, Truist Securities.
Tyler Barishaw
This is Tyler Barishaw on for Tobey.
You mentioned 25 new fee earners in the quarter. How should we think about that as a run rate going into fiscal year '26, or can you maybe bring some expectations for that?
Gary Burnison
Well, I think that's probably fair. We've continued to actively manage the talent that we have within the organization. You're going to continue to see us do that. And we're out. We have been for many, many quarters continuing to promote from within creating opportunities within the firm where we're a coveted career destination.
We're going to continue that. Just a couple of months ago, we promoted 1,000 people across the organization. And we'll continue to augment that by looking at the outside. We don't really publish targets per se like that.
But I think you're going to continue to see us make sure that we're pivoting towards profitable work. That we're raising the productivity, whether that's through technology and AI or other things, you're going to continue to see us do that. And we're going to aggressively bring in talent.
So it would be reasonable for the next quarter to kind of think about the number you said. But also that we're going to actively manage the workforce that we have today as well.
Robert Rozek
That's an important point, Gary, because I think the number is that we -- the 25 is a net number. So depending on what side of the equation you're leaning in on, it's going to influence that outcome.
Tyler Barishaw
And then just you mentioned on the C-suite churn, a lot execs over 65. How should we think about the swing factor of like capital markets recovery? Should we expect that to have a meaningful impact on demand for exec search?
Gary Burnison
The capital markets recovery, well, certainly there's a lot of pent up demand. There's no question about that. And there was a talk five, six weeks ago, there were a lot of animal spirits. In the last couple of weeks, that's been dampened a bit.
But I think the -- I actually think the bigger issue is the baby boomers. I think that's a big deal. I do believe that's going to have an impact. And it's going to create a significant imbalance along with lower birth rates when you look out a little bit longer term.
And I think the other thing too is that those leaders have guided organizations through arguably a very difficult time in humanity from COVID to the great resignation to a cost of living crisis. I think that's having an impact on executives as well.
So yes, clearly, I think the -- a swing in the capital markets could be for sure a positive. But I think the bigger thing that's just straight mathematics is the actual supply and demand imbalance that's heading our way. And that's good for Korn Ferry because it means that companies are going to have to do different things with their workforce.
How they empower, how they inspire, how they develop, how they reskill. All of those things that were talked about many, many years ago are actually at our doorstep and I think that creates opportunity for us.
Tyler Barishaw
And just one final one. Looks like '25 is going to be another year margin or will be a year of large margin expansion. How should we think about margin expansion in '26?
Gary Burnison
Well, Bob could definitely correct me. We've targeted kind of 16% to 18% margins. And we want to make sure that we are simultaneously delivering increasing earnings for sure for shareholders, investing in the business and returning cash to shareholders.
We're trying. And I think if you've looked, we've been very, very balanced around that. And I think right now as we sit here today, we're very comfortable with that 16% to 18%. We just have to make sure that we're not cutting our nose off, that we are investing in the places we need to invest to take advantage of what we think will happen over the next several years vis-a-vis labor and what companies are going to have to do differently.
Operator
Josh Chan, UBS.
Karandeep Singhania
This is Karan Singhania on for Josh.
So we wanted to ask on the Q4 margin guide. Typically, Q4 margins are higher than Q3, but it looks like you're getting margins down this time. So just wondering if you could maybe like give a bit more color on what you're seeing across the businesses. And well, what is different than prior years in terms of that just that sequential progression.
Gary Burnison
Well, yeah, I mean I think you have to first and Bob, you can take it, but first, you have to step back and say, okay, hold on guys, when you adjust for the change of mix in our business, pro forma, our margins are up like 350 basis points over the last several years.
These margins are incredibly healthy and whether it's 16.5 or 17.2, those are incredible margins. But Bob, I'll let you. Maybe you can.
Robert Rozek
I'm not sure where you got -- I mean the margin, if it's lower, it's like 10 basis points. So it's not -- I don't think there's really a question there to be honest with you.
Karandeep Singhania
And just like as my follow-up, I just wanted to ask on the North America executive search business. So growth in back came in strong at like 6%. And I think you briefly touched on that in one of the previous questions, but can you just elaborate on what drove that growth and can you expect a recovery in that business from your own?
Gary Burnison
Look, we're -- that business, that solution is, we've seen real strength, over the last several months. And I do believe that yes, does that reflect the success of our strategy? Yes. But I also believe that it reflects all the things that I've been talking about including Peak 65 and cost of living crisis and work-life balance.
I think it encompasses all of those things together. And this has been -- the last eight quarters have actually been quite unusual when you look at past employment cycles to see the temp penetration rate go down for almost three years and now it finally has kind of -- it looks like maybe it's stabilized at 1.6% to see the outsourcing solution that we have to see that go down at a time when companies are cutting costs.
It's been a very, very strange eight quarters, and that's why I would step back and look at the firm in total. And the fact that we are impacting a client's organizational performance. We have durable revenue streams, the solutions look to counterbalance each other.
And a macro trend ahead that would suggest that companies are going to have to do stuff, do things differently with their workforce. So that's how I look at the firm today. And the search is I think the -- it's the result of a lot of things we've been talking about on this call.
Operator
And that ends our question-and-answer session. I will now turn the call back over to Mr. Burnison.
Gary Burnison
Okay. Thank you, everybody. Again, I am enormously proud of our organization and how we have pivoted through a very, very difficult economic environment over the last eight quarters and have produced incredible results.
And more importantly, really driving clients' organizational performance. That's what Korn Ferry is all about, to enable people and organizations to do more than.
So with that, thank you for your time. Rob, thank you for hosting this, and we'll talk to you next time.
Operator
Ladies and gentlemen, this conference call will be available for replay for one week starting today, running through the end, March 18, 2025, ending at midnight. You may access the Echo Replay Service by dialing 800-770-2030 and entering the access code 1529021 followed by the pound key.
Additionally, the replay will be available for playback at the company's website, www.kornferry.com in the Investor Relations section.
This concludes today's conference call. You may now disconnect.
