Image Shown: Shares of Korn Ferry have surged higher year-to-date, and we see room for additional capital appreciation upside. We added shares of Korn Ferry as an idea to our Best Ideas Newsletter portfolio back in January 2021 and continue to be huge fans of the name. The top end of our fair value estimate range sits at $104 per share of Korn Ferry.
By Callum Turcan
Organizational consulting firm Korn Ferry (KFY) posted results for its first quarter of fiscal 2022 (period ended July 31, 2021) on September 8 that smashed past consensus top- and bottom-line estimates. Korn Ferry commented in the earnings press release that it had generated record quarterly fee revenue, the source of the lion’s share of its sales (alongside modest ‘reimbursed out-of-pocket engagement expenses’), and that its operating income, adjusted EBITDA, and diluted EPS all came in at all-time highs last fiscal quarter. The company’s business is rebounding strongly from the worst of the coronavirus (‘COVID-19’) pandemic with room to run.
We added shares of Korn Ferry to the Best Ideas Newsletter portfolio back on January 12, 2021 (link here) and since then, shares of KFY have boomed upwards by 50+% versus a ~19% gain for the S&P 500 (SPY) during this period (before taking dividend considerations into account). Our fair value estimate for Korn Ferry sits at $87 per share, and the top end of our fair value estimate range sits at $104 per share of KFY. We see ample room for additional capital appreciation upside going forward.
Financial Update
Last fiscal quarter, Korn Ferry’s GAAP revenues rose 70% year-over-year to $588 million with strength seen across the board as sales grew at each of its ‘Executive Search,’ ‘RPO & Professional Search,’ ‘Consulting,’ and ‘Digital’ business operating segments during this period. Surging revenues enabled Korn Ferry’s GAAP operating income to flip from an operating loss in the first quarter of fiscal 2021 to an operating profit of $101 million last fiscal quarter. Its GAAP diluted EPS stood at $1.37 in the first quarter of fiscal 2022 compared to a negative GAAP diluted EPS figure in the same period last fiscal year. Korn Ferry’s non-GAAP adjusted EBITDA performance at each of its four core business operating segments improved on a year-over-year basis last fiscal quarter.
Image Shown: Korn Ferry’s business experienced a rebound across the board last fiscal quarter. Image Source: Korn Ferry – First Quarter of Fiscal 2022 IR Earnings Presentation
At the end of the first quarter of fiscal 2022, Korn Ferry had ~$0.9 billion in cash, cash equivalents, short-term marketable securities, and long-term marketable securities on hand with no short-term debt and ~$0.4 billion in long-term on the books. Korn Ferry noted that when removing cash-like assets that are effectively reserved for bonus and deferred compensation purposes, it had ~$0.6 billion in cash and equivalents on hand at the end of July 2021. Please note that the firm also has sizable operating lease liabilities to be aware of, however. We are big fans of Korn Ferry’s pristine balance sheet as its net cash position is an immense source of strength during these turbulent times.
Image Shown: Korn Ferry has a pristine balance sheet. Image Source: Korn Ferry – First Quarter of Fiscal 2022 IR Earnings Presentation
Margin Improvement and Outlook
For comparison purposes, Korn Ferry’s non-GAAP adjusted EBITDA stood at 16.1% and 15.7% in fiscal 2019 and fiscal 2018, respectively (the company’s fiscal year ends in April). Additionally, Korn Ferry’s GAAP operating margin stood at 7.1% and 11.5% in fiscal 2019 and fiscal 2018, respectively. This is Korn Ferry’s performance before the COVID-19 pandemic struck.
In the first quarter of fiscal 2022, Korn Ferry posted an adjusted EBITDA margin of 20.7% and a GAAP operating income of 17.2%. During Korn Ferry’s latest earnings call management noted “that’s our third consecutive quarter with an adjusted EBITDA margin over 20%. Our earnings and profitability continued to benefit from higher consultant and execution staff productivity and lower G&A spend driven by virtual delivery processes and reduced levels of related business development spend.” Korn Ferry’s margins are on a nice upswing of late and that supports its free cash flow growth outlook.
Furthermore, management recently commented that “annualized fee revenue production per consultant in the first quarter improved to a record $1.59 million” and that “we do expect employee productivity to remain strong in G&A spend to remain at or near current levels in the second quarter, keeping both earnings and profitability strong,” which we really appreciate. The company’s near term outlook is quite bright.
During Korn Ferry’s latest earnings call, management noted that the company hired additional “fee earners” while also promoting from within over the past few fiscal quarters to keep up with surging demand for its offerings. Looking ahead, Korn Ferry intends to continue bulking up its professional workforce as the company entered the fiscal second quarter with a lot of momentum in the wake of the recovering global economy. Management had this to say on the issue during the firm’s latest earnings call (emphasis added, lightly edited):
“…New business in the [fiscal] first quarter grew to a new all-time high. So we’re really starting [the fiscal] second quarter with a strong backlog of work. August is historically a seasonal month influenced by summer vacations. But new business for August was up approximately 41% year-over-year and was in line with our expectations.
Now, if monthly trends in each of our lines of business are consistent with historical patterns and market conditions remain strong, we expect demand to continue to accelerate with new business up sequentially in September, peaking at a quarter high in October. Additionally, as previously discussed, we are going to continue to make near-term investments in consultants and execution staff to fuel future growth.” — Robert Rozek, CFO, Executive Vice President, and Chief Corporate Officer of Korn Ferry
Korn Ferry recently noticed that demand from its smaller customers, those with “assignments” that are smaller than $500,000, is starting to rebound as volume of these assignments grew sequentially last fiscal quarter. Management specifically noted that it was the firm’s “smaller regional clients” that were beginning to return in earnest. This dynamic occurred as the company’s “engagements” worth over $500,000 “remained strong” last fiscal quarter, indicating Korn Ferry is now firing on all-cylinders.
Geographically speaking, Korn Ferry’s business witnessed strong growth across the board in the fiscal first quarter. Strength at Korn Ferry’s Digital business last fiscal quarter was a welcome sign as this segment carries adjusted EBITDA margins that are significantly stronger than its company-wide performance. Management noted that digital delivery processes are a source of strength for the company, given how these operations can improve Korn Ferry’s efficiency and ultimately profitability going forward.
On a final note, Korn Ferry’s “marquee and regional accounts” that “represent about 35% of our portfolio” continued to grow at a brisk pace last fiscal quarter (up 70% year-over-year and 4% sequentially according to management). Strength here supports Korn Ferry’s cross-selling abilities with management recently noting that “about 30% of our revenue was driven by cross-referrals in all-time high” last fiscal quarter.
Concluding Thoughts
We appreciate that Korn Ferry was able to achieve several all-time highs in the first quarter of fiscal 2022, and there is ample room for the company to continue hitting it out of the ballpark going forward. Korn Ferry allocated some of its cash balance towards buying back its stock and making good on its dividend obligations last fiscal quarter. We view its share repurchases as a solid use of capital considering Korn Ferry’s stock price has been trading well below its intrinsic value for some time, in our view.
Shares of KFY yield a modest ~0.6% as of this writing, offering incremental upside to its immense capital appreciation potential. We continue to like Korn Ferry as an idea in our Best Ideas Newsletter portfolio.
Korn Ferry’s 16-Page Stock Report >>
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Callum Turcan does not own shares in any of the securities mentioned above. Apple Inc (AAPL), Cisco Systems Inc (CSCO) and Microsoft Corporation (MSFT) are all included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Alphabet Inc (GOOG) Class C shares, Facebook Inc (FB), Korn Ferry (KFY), PayPal Holdings Inc (PYPL) and Visa Inc (V) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Oracle Corporation (ORCL) and Qualcomm Inc (QCOM) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.