Image Shown: Korn Ferry, an idea in our Best Ideas Newsletter portfolio, reported a strong earnings report on December 8. Image Source: Korn Ferry – Second Quarter of Fiscal 2022 IR Earnings Presentation
By Callum Turcan
On December 8, the consulting firm Korn Ferry (KFY) reported second-quarter earnings for fiscal 2022 (period ended October 31, 2021) that beat both consensus top- and bottom-line estimates. Strength was seen across the board at its ‘Consulting,’ ‘Digital,’ ‘Executive Search,’ and ‘RPO and Professional Search’ business operating segments which all reported nice fee revenue growth and non-GAAP adjusted EBITDA margin expansion. Please note that RPO stands for recruitment process outsourcing.
The company issued guidance for the fiscal third quarter within its latest earnings update that indicated the underlying strength in its business seen of late is expected to continue. We include shares of KFY as an idea in the Best Ideas Newsletter portfolio and recently updated our cash flow model covering the company. Our recently revised fair value estimate sits at $87 per share of Korn Ferry.
Earnings Update
The company’s GAAP revenues grew 47% year-over-year in the fiscal second quarter, hitting $643 million. Its Consulting sales were up 30%, its Digital sales were up 18%, its Executive Search sales were up 59%, and its RPO and Professional Search sales were up 76% year-over-year during this period (additionally, revenues related to ‘reimbursed out-of-pocket engagement expenses’ were up 68%).
On a non-GAAP basis, Korn Ferry reported that its adjusted EBITDA margin rose to 21.1% in the fiscal second quarter, up ~590 basis points versus levels seen last fiscal year. All of Korn Ferry’s core business operating segments reported meaningful adjusted EBITDA margin expansion on a year-over-year basis last fiscal quarter.
Economies of scale and pricing strength enabled Korn Ferry to more than double its GAAP operating income in the fiscal second quarter year-over-year, which hit $104 million. The ability to digitally deliver many of its offerings further supported improvements in its profitability levels. Korn Ferry’s GAAP operating margin rose by over 510 basis points year-over-year last fiscal quarter. Its GAAP diluted EPS came in at $1.38 in the second quarter of fiscal 2022 versus $0.51 in the second quarter of fiscal 2021. The company’s latest earnings report not only reflected strong growth on a year-over-year basis, but solid sequential growth as well.
Image Shown: Korn Ferry reported nice year-over-year and sequential growth in its key financial metrics last fiscal quarter. Image Source: Korn Ferry – Second Quarter of Fiscal 2022 IR Earnings Presentation
Both Korn Ferry’s fee revenue (core revenue excluding items such as reimbursed out-of-pocket engagement expenses) and adjusted EBITDA hit all-time highs in the second quarter of fiscal 2022. While the coronavirus (‘COVID-19’) pandemic created headwinds for its business, the company’s growth trajectory remained intact over the past several fiscal quarters. For the current fiscal quarter, Korn Ferry expects its fee revenue will come in at $640-$660 million, representing modest sequential growth over the $639 million in fee revenue the firm generated last fiscal quarter. The firm’s non-GAAP adjusted diluted EPS is expected to come in at $1.42-$1.58 this fiscal quarter (down modestly at the midpoint of guidance on a sequential basis and up sharply on a year-over-year basis at the midpoint).
Image Shown: Korn Ferry’s underlying business is firing on all-cylinders as it reported record fee revenue and adjusted EBITDA generation last fiscal quarter. Image Source: Korn Ferry – Second Quarter of Fiscal 2022 IR Earnings Presentation
Pristine Balance Sheet
At the end of October 2021, Korn Ferry had $997 million in cash, cash equivalents, current marketable securities, and non-current marketable securities on hand stacked up against no short-term debt and $395 million in long-term debt on the books. We are big fans of Korn Ferry’s $602 million net cash position at the end of this period, though please note that a sizable chunk of its cash equivalents position is effectively reserved for bonuses and deferred compensation purposes.
Image Shown: Korn Ferry exited October 2021 with a pristine balance sheet. Image Source: Korn Ferry – Second Quarter of Fiscal 2022 IR Earnings Presentation
Acquisition Closes
On November 1, Korn Ferry completed its acquisition of Lucas Group which was announced on October 23. In the October 2021 press release, Korn Ferry noted that (emphasis added):
The broader professional search and contract staffing market is a fragmented, multi-billion-dollar global opportunity. The addition of Lucas Group to Korn Ferry’s broader talent acquisition portfolio—spanning Executive Search, Recruitment Process Outsourcing, and Professional Search—is expected to accelerate Korn Ferry’s ability to capture additional share of this significant market. Terms of the deal were not disclosed. Upon closing, the acquisition is expected to be immediately accretive to Korn Ferry’s adjusted earnings.
Within Korn Ferry’s latest earnings representation, the company noted that it had “deployed $90 million of investment cash” for the Lucas Group acquisition at the start of the current fiscal quarter. Please note that there may be other financial considerations. We appreciate that Korn Ferry continues to scale up its business and improve its competitive edge in the consulting space.
Concluding Thoughts
We added Korn Ferry to the Best Ideas Newsletter portfolio on January 12, 2021 (link here). Since then, shares of KFY have surged higher by ~58% as of this writing before taking dividend considerations into account. As of this writing, shares of KFY yield ~0.6% and its income generation upside offers incremental upside to its stellar capital appreciation potential.
The top end of our recently-revised fair value estimate sits at $104 per share. Shares of KFY shifted higher in the wake of its latest earnings report as investors continue to warm up to its promising long-term growth outlook, pristine balance sheet, and resilient business model. We liked what we saw in its latest earnings update.
Downloads
Korn Ferry’s 16-page Stock Report (pdf) >>
Korn Ferry’s Two-page Dividend Report (pdf) >>
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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, Meta Platforms 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. Meta Platforms, Oracle Corporation, and Taiwan Semiconductor Manufacturing Company Limited (TSM) are all included in Valuentum’s simulated ESG 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.