KORN FERRY quarterly report, Q1 FY2023

Korn Ferry Form 10-Q Summary

Business Context and Reporting Period

Korn Ferry is a global organizational consulting firm providing Consulting, Digital, Executive Search, Professional Search & Interim, and Recruitment Process Outsourcing services. This report covers the three months ended July 31, 2022, the first quarter of fiscal 2023, with comparative results for the three months ended July 31, 2021.

Beginning May 1, 2022, Korn Ferry separated its former RPO & Professional Search segment into Professional Search & Interim and RPO, resulting in eight reportable segments. Prior-period segment information was revised for comparability.

Key Financial Metrics

Metric	Q1 FY2023	Q1 FY2022	Change
Fee revenue	$695.9 million	$585.4 million	Up 19%
Total revenue	$703.1 million	$588.1 million	Up 20%
Operating income	$111.6 million	$101.3 million	Up 10%
Net income attributable to Korn Ferry	$77.2 million	$74.8 million	Up 3%
Diluted earnings per share	$1.45	$1.37	Up 6%
Adjusted EBITDA	$132.2 million	$121.3 million	Up 9%
Adjusted EBITDA margin on fee revenue	19.0%	20.7%	Down 170 basis points
Net income attributable to Korn Ferry margin	11.1%	12.8%	Down 170 basis points

Compensation and benefits expense rose 18% to $465.6 million, while general and administrative expense increased 28% to $64.5 million and cost of services increased 73% to $38.0 million. The effective tax rate increased to 25.0% from 23.8%, partly due to withholding taxes that were not eligible for credit. Interest expense, net increased to $7.6 million from $5.4 million.

Revenue and Segment Developments

Consulting fee revenue increased 12% to $166.5 million, supported by workforce transformation, organization design, change management, and compensation-related demand.
Digital fee revenue increased 4% to $83.8 million, but Adjusted EBITDA declined 5% to $24.2 million; margin decreased to 28.9% from 31.8%.
Total Executive Search fee revenue increased 7% to $232.8 million. North America increased 9%, EMEA increased 10%, and Latin America increased 15%; Asia Pacific decreased 8%.
Professional Search & Interim fee revenue increased 91% to $98.9 million, primarily from the Lucas Group and Patina acquisitions. Adjusted EBITDA increased 51% to $29.2 million, but margin declined to 29.5% from 37.5%.
RPO fee revenue increased 30% to $113.9 million, and Adjusted EBITDA increased 22% to $17.7 million. Margin decreased to 15.5% from 16.6%.
Foreign exchange reduced reported fee revenue by $24.4 million, or approximately 4%, compared with the prior-year quarter.

Cash Flow, Liquidity, Debt, and Capital Allocation

Cash and cash equivalents were $639.8 million at July 31, 2022, compared with $978.1 million at April 30, 2022. Cash, cash equivalents, and marketable securities totaled $896.4 million versus $1.211 billion at April 30, 2022.
Operating activities used $231.9 million of cash, compared with $160.5 million used in the prior-year quarter. The principal drivers were annual bonus payments, changes in accrued liabilities, and higher receivables.
Investing activities used $40.4 million, including $16.6 million of capital expenditures and net purchases of marketable securities.
Financing activities used $51.0 million, including $22.4 million of share repurchases, $8.7 million of dividends, and $21.9 million of tax-withholding payments on vested restricted stock.
The company had $395.7 million of net long-term debt, consisting primarily of $400 million of 4.625% senior unsecured notes due December 2027.
A June 2022 credit agreement amendment provides a $650 million revolving facility and a $500 million delayed-draw term loan facility. No amounts were outstanding under these facilities at July 31, 2022, and $1.145 billion was available after letters of credit.
Korn Ferry reported compliance with its debt covenants and stated that available cash, operating funds, and borrowing capacity should be sufficient for anticipated requirements over the next 12 months.
The quarterly dividend increased 25% to $0.15 per share. The board declared another $0.15 per-share dividend on September 6, 2022, payable October 14, 2022.
Approximately $306.7 million remained available under the share repurchase program at July 31, 2022.

Material Changes Versus the Prior Comparable Period

Revenue growth was broad-based, with particularly strong contributions from Professional Search & Interim and RPO.
Profit growth was slower than revenue growth because of higher compensation, acquisition-related costs, cost of services, general and administrative expenses, taxes, and interest expense.
Adjusted EBITDA margin declined from 20.7% to 19.0%, reflecting integration costs, increased headcount, higher service delivery costs, and investment in growth initiatives.
Cash declined substantially because of annual bonus and retention payments, debt interest, capital expenditures, dividends, and share repurchases.
The company completed a major credit facility amendment and extended revolving facility maturity to June 2027.
On August 1, 2022, after the reporting date, Korn Ferry acquired Infinity Consulting Solutions for approximately $100 million net of cash acquired. The acquisition will be included in Professional Search & Interim.

Outlook, Risks, Contingencies, and Unusual Items

Management expects current cash, operating cash generation, and borrowing capacity to support working capital, capital expenditures, debt obligations, dividends, and share repurchases for the next 12 months. Management noted that inflation, a potential recession, deteriorating credit or labor markets, or weaker demand could reduce operating cash flow and may require additional borrowings or reductions in repurchases and dividends.

Key risks include macroeconomic and political conditions, inflation, recession risk, foreign currency fluctuations, competition, automation, consultant retention, utilization and billing rates, seasonality, acquisitions and integration, cybersecurity, data privacy, legal and regulatory matters, and potential goodwill or intangible-asset impairment.
Foreign currency exposure remained material; management estimated that a 10% movement in relevant currencies could produce an approximately $13.8 million foreign exchange gain or loss.
Accounts receivable increased to $637.1 million, with days sales outstanding rising from 58 to 69 days. The allowance for doubtful accounts was $39.4 million.
Unusual or non-recurring items included $3.6 million of integration and acquisition costs excluded from Adjusted EBITDA and the post-quarter acquisition of Infinity Consulting Solutions.
The filing reports no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Management stated that disclosure controls and procedures were effective as of July 31, 2022, with no material changes in internal control over financial reporting.

Important Facts for Investors to Verify

Whether Professional Search & Interim and RPO sustain growth after the Lucas Group and Patina acquisitions and how margins evolve as integration progresses.
Whether the decline in Adjusted EBITDA margin persists amid higher headcount, compensation, service delivery costs, and acquisition-related spending.
Cash conversion and working-capital trends, particularly receivables, days sales outstanding, bonus payments, and accrued compensation.
Use of the $1.15 billion credit facilities, compliance with leverage covenants, and the impact of variable interest rates.
The financial contribution, purchase accounting, and integration costs associated with the Infinity Consulting Solutions acquisition.
The sustainability of dividends and share repurchases under the company’s debt agreements and changing macroeconomic conditions.
Exposure to foreign currency, recession-related demand declines, cybersecurity events, consultant retention challenges, and goodwill or intangible-asset impairment.