Korn Ferry Announces Record Second Quarter Fiscal 2022 Results of Operations

Highlights

• Korn Ferry reports record quarterly fee revenue of $639.4 million in Q2 FY’22, an increase of 47% from Q2 FY’21 and a sequential increase of 9% from Q1 FY’22.
• Record net income attributable to Korn Ferry of $75.8 million and record diluted and adjusted diluted earnings per share of $1.38 and $1.53 in Q2 FY’22, respectively.
• Operating income and Adjusted EBITDA were both all-time highs in Q2 FY’22 at $103.8 million (operating margin of 16.2%) and $134.9 million (Adjusted EBITDA margin of 21.1%), respectively.
• Declared a quarterly dividend of $0.12 per share on December 7, 2021, which is payable on January 14, 2022, to stockholders of record on December 21, 2021.

Korn Ferry (NYSE: KFY), a global organizational consulting firm, today announced record second quarter fee revenue of $639.4 million. In addition, second quarter diluted earnings per share was $1.38 and adjusted diluted earnings per share was $1.53, both an all-time high.

“I am extremely pleased with our results during the fiscal second quarter, as Korn Ferry once again achieved all-time financial performance highs. We generated a record $639 million in fee revenue, up 47% year over year. Our diluted and adjusted diluted earnings per share, at $1.38 and $1.53, respectively and Adjusted EBITDA margin of 21.1% were also record highs,” said Gary D. Burnison, CEO, Korn Ferry.

“Our solid performance over recent quarters speaks to our agility, execution and operational excellence amid a time of great change. The new world of work is all about career nomads, aging demographics, a real war for talent, work from anywhere, anytime and the digitization of everything. Companies are re-imagining their businesses, from strategy to people to culture. This constant state of flux represents opportunity for Korn Ferry and we look forward to continuing to drive performance for clients in the New Year ahead.”

Selected Financial Results

(dollars in millions, except per share amounts) ^(a)

The Company reported record fee revenue in Q2 FY’22 of $639.4 million, an increase of 47% (up 46% on a constant currency basis) compared to Q2 FY’21. Fee revenue increased in all lines of business. The increase in fee revenue when compared to Q2 FY’21 was primarily due to the record levels of new business in the quarter driven by the relevance of the Company’s solutions in helping businesses solve their organizational and human capital issues driven by secular changes (i.e., workforce transformation, Diversity, Equity & Inclusion (“DE&I”) and Environmental, Social and Governance (“ESG”)) in today’s business environment. Further, the coronavirus pandemic (“COVID-19”) adversely impacted the Company on a worldwide basis in Q2 FY’21.

Operating margin was 16.2% in Q2 FY’22 compared to 11.1% in the year-ago quarter. Adjusted EBITDA margin was 21.1%, compared to Adjusted EBITDA margin of 15.2% in the year-ago quarter. Net income attributable to Korn Ferry was $75.8 million in Q2 FY’22 compared to net income attributable to Korn Ferry of $27.8 million in Q2 FY’21.

The year-over-year improvement in operating margin was due to the increase in fee revenue discussed above, as well as cost savings realized from work being conducted virtually. Partially offsetting this were increases in compensation and benefits expense, general and administrative expenses and cost of services expense. The increase in compensation and benefits expense was driven by higher salaries and related payroll taxes and performance-related bonus expense due to the increase in fee revenue combined with increases in overall profitability and headcount. The change in general and administrative expenses was primarily due to integration and acquisition costs incurred in connection with the Lucas Group acquisition and the impairment charges associated with the execution of the Company’s real estate footprint reduction strategy. In addition, the Company incurred higher marketing and business development expenses which contributed to record fee revenue and new business in the quarter, as well as increased legal professional fees.

The year-over-year improvement in Adjusted EBITDA was the result of all of the factors above with the exception of integration and acquisition costs and impairment charges which are adjusted out when calculating the metric.

Results by Line of Business

Selected Consulting Data

(dollars in millions) ^(a)

Fee revenue was $164.9 million in Q2 FY’22 compared to $126.7 million in Q2 FY’21, an increase of $38.2 million or 30% (up 29% on a constant currency basis). Growth in Consulting fee revenue continues to be driven by significant client workforce transformation initiatives including DE&I and ESG, delivered through our Organization Strategy, Assessment, and Leadership Development solutions. In addition, Total Rewards offering has increased as clients address compensation and retention issues associated with labor market dislocation and pay governance issues. Further, COVID-19 negatively impacted the Company on a worldwide basis in Q2 FY’21.

Adjusted EBITDA was $30.1 million in Q2 FY’22 with an Adjusted EBITDA margin of 18.2% compared to Adjusted EBITDA of $20.2 million with an associated margin of 15.9%, respectively, in the year-ago quarter. This improvement resulted from the increase in fee revenue outlined above, as well as cost savings realized from work being conducted virtually. These changes were partially offset by increases in both compensation and benefits expense and cost of services expense. The increase in compensation and benefits expense was driven by higher salaries and related payroll taxes and performance-related bonus expense due to an increase in fee revenue combined with increases in overall profitability and headcount.

Selected Digital Data

(dollars in millions) ^(a)

Digital leverages an artificial intelligence powered, machine-learning platform to help identify the best structures, roles, capabilities, and behaviors needed to drive business forward. This end-to-end platform combines Korn Ferry proprietary data, client data, and external market data to help make better, faster decisions about organizations, leadership, and people.

Fee revenue was $88.6 million in Q2 FY’22 compared to $75.0 million in Q2 FY’21, an increase of $13.6 million or 18% (up 17% on a constant currency basis). The increase in fee revenue was primarily due to growth in total rewards offering as companies deal with elevated levels of attrition due to dislocation in the labor markets and professional development around sales effectiveness as companies reassess their commercial models in a post-COVID world.

Adjusted EBITDA was $28.6 million in Q2 FY’22 with an Adjusted EBITDA margin of 32.2% compared to $23.1 million and 30.8%, respectively, in the year-ago quarter. Contributing to the increase were higher fee revenues as well as cost savings realized from work being conducted virtually. Partially offsetting this were increases in compensation and benefits expense and cost of services expense. The increase in compensation and benefits expense was driven by higher performance-related bonus expense, salaries and related payroll taxes and commission expense as a result of increased fee revenue.

Selected Executive Search Data^(a)

(dollars in millions) ^(b)

Fee revenue was $235.5 million and $148.1 million in Q2 FY’22 and Q2 FY’21, respectively, a year-over-year increase of $87.4 million or 59% (up 58% on a constant currency basis). Fee revenue increases were driven by an increase in the number of new search engagements as well as an increase in the average fee revenue per search. These increases were across all regions with the largest increase in North America.

Adjusted EBITDA was $66.1 million in Q2 FY’22 with an Adjusted EBITDA margin of 28.1% compared to Adjusted EBITDA of $28.2 million and Adjusted EBITDA margin of 19.1%, respectively, in the year-ago quarter. This improvement resulted from the increase in fee revenue discussed above, as well as cost savings realized from work being conducted virtually. These changes were partially offset by increases in compensation and benefits expense due to an increase in performance-related bonus expense and salaries and related payroll taxes as a result of increased fee revenue combined with increases in overall profitability and headcount. Also partially offsetting the increase in Adjusted EBITDA was an increase in general and administrative expenses due to higher business development and bad debt expense.

Selected RPO and Professional Search Data

(dollars in millions) ^(a)

Fee revenue was $150.5 million in Q2 FY’22, an increase of $64.8 million or 76% (up 74% on a constant currency basis), compared to the year-ago quarter. The higher fee revenue was driven by an increase in recruitment process outsourcing (“RPO”) fee revenue of $39.3 million or 69% (67% at constant currency) and an increase in Professional Search fee revenue of $25.5 million or 88% (86% at constant currency). The increase in RPO fee revenue is due to the wider adoption of RPO services in the market in combination with our differentiate solution, while Professional Search fee revenue increased due to an increase in both the number of engagements billed and the weighted-average fee billed per engagement.

Adjusted EBITDA was $36.3 million in Q2 FY’22 with an Adjusted EBITDA margin of 24.1% in Q2 FY’22 compared to $13.8 million and 16.1%, respectively, in the year-ago quarter. The increase in Adjusted EBITDA was due to the higher fee revenue discussed above, as well as cost savings realized from work being conducted virtually. Partially offsetting this were increases in compensation and benefits expense and cost of services expense. The increase in compensation and benefits was driven by higher salaries and related payroll taxes, the use of outside contractors and performance-related bonus expense as a result of increased fee revenue combined with increases in overall profitability and headcount.

Outlook

Assuming no new major pandemic lockdowns (including emerging variants), and worldwide economic conditions, financial markets and foreign exchange rates remain steady, on a consolidated basis:

• Q3 FY’22 fee revenue is expected to be in the range of $640 million and $660 million; and
• Q3 FY’22 diluted earnings per share is expected to range between $1.38 to $1.56.

On a consolidated adjusted basis:

• Q3 FY’22 adjusted diluted earnings per share is expected to be in the range from $1.42 to $1.58.

Earnings Conference Call Webcast

The earnings conference call will be held today at 12:00 PM (EST) and hosted by CEO Gary Burnison, CFO Robert Rozek and SVP Finance Gregg Kvochak. The conference call will be webcast and available online at ir.kornferry.com. We will also post to this section of our website earnings slides, which will accompany our webcast, and other important information, and encourage you to review the information that we make available on our website.

About Korn Ferry

Korn Ferry is a global organizational consulting firm. We help clients synchronize strategy and talent to drive superior performance. We work with organizations to design their structures, roles, and responsibilities. We help them hire the right people to bring their strategy to life. And we advise them on how to reward, develop, and motivate their people. Visit kornferry.com for more information.

Forward-Looking Statements

Statements in this press release and our conference call that relate to our outlook, projections, goals, strategies, future plans and expectations, and other statements of future events or conditions are forward-looking statements that involve a number of risks and uncertainties. Words such as “believes”, “expects”, “anticipates”, “goals”, “estimates”, “guidance”, “may”, “should”, “could”, “will” or “likely”, and variations of such words and similar expressions are intended to identify such forward-looking statements. Statements that refer to or are based on estimates, forecasts, projections, uncertain events or assumptions, including statements relating to expected demand for our products and services, the magnitude and duration of the impact of the COVID-19 outbreak on our business, employees, customers and our ability to provide services in affected regions, and the potential opportunities for our business as a result of worldwide changes in how companies conduct business as a result of COVID-19. Readers are cautioned not to place undue reliance on such statements. Such statements are based on current expectations; actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties that are beyond the control of Korn Ferry. The potential risks and uncertainties include those relating to the ultimate magnitude and duration of COVID-19 and any future pandemic or similar outbreaks, and related restrictions and operational requirements that apply to our business and the businesses of our clients, and any related negative impacts on our business, employees, customers and our ability to provide services in affected regions, global and local political or economic developments in or affecting countries where we have operations, competition, changes in demand for our services as a result of automation, the dependence on and costs of attracting and retaining qualified and experienced consultants, our ability to maintain relationships with customers and suppliers and retain key employees, maintaining our brand name and professional reputation, potential legal liability and regulatory developments, the portability of client relationships, consolidation of the industries we serve, changes and developments in government laws and regulations, evolving investor and customer expectations with regard to environmental matters, currency fluctuations in our international operations, risks related to growth, alignment of our cost structure, restrictions imposed by off-limits agreements, reliance on information processing systems, cyber security vulnerabilities, changes to data security, data privacy and data protection laws, limited protection of our intellectual property, our ability to enhance and develop new technology, our ability to develop new products and services, the utilization and billing rates of our consultants, dependence on third parties for the execution of critical functions, our ability to successfully recover from a disaster or other business continuity problems, changes in our accounting estimates/assumptions, technical guidance relating to the Tax Act, treaties, or regulations on our business and our company, impairment of goodwill and other intangible assets, deferred tax assets that we may not be able to use, our indebtedness, the phase-out of the London Interbank Offered Rate, the withdrawal of the United Kingdom from the European Union, expansion of social media platforms, seasonality, ability to effect acquisition and integrate acquired businesses and employment liability risk. For a detailed description of risks and uncertainties that could cause differences, please refer to Korn Ferry’s periodic filings with the Securities and Exchange Commission. Korn Ferry disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Use of Non-GAAP Financial Measures

This press release contains financial information calculated other than in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). In particular, it includes:

• Adjusted net income attributable to Korn Ferry, adjusted to exclude integration/acquisition costs, impairment of fixed assets, impairment of right of use assets and restructuring charges net of income tax effect;
• Adjusted basic and diluted earnings per share, adjusted to exclude integration/acquisition costs, impairment of fixed assets, impairment of right of use assets and restructuring charges net of income tax effect;
• Constant currency (calculated using a quarterly average) percentages that represent the percentage change that would have resulted had exchange rates in the prior period been the same as those in effect in the current period;
• Consolidated and Executive Search Adjusted EBITDA, which is earnings before interest, taxes, depreciation and amortization, further adjusted to exclude integration/acquisition costs, impairment of fixed assets, impairment of right of use assets and restructuring charges, and Consolidated and Executive Search Adjusted EBITDA margin.

This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial information determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Management believes the presentation of non-GAAP financial measures in this press release provides meaningful supplemental information regarding Korn Ferry’s performance by excluding certain charges that may not be indicative of Korn Ferry’s ongoing operating results. These non-GAAP financial measures are performance measures and are not indicative of the liquidity of Korn Ferry. These charges, which are described in the footnotes in the attached reconciliations, represent 1) costs we incurred to acquire and integrate a portion of our Digital business as well as cost incurred to acquire an RPO & Professional Search business, 2) impairment of fixed assets associated with the decision to terminate and sublease some of our offices, 3) impairment of right of use assets due to the decision to terminate and sublease some of our offices and 4) charges we incurred to restructure the Company as a result of COVID-19. The use of non-GAAP financial measures facilitates comparisons to Korn Ferry’s historical performance. Korn Ferry includes non-GAAP financial measures because management believes they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its evaluation of Korn Ferry’s ongoing operations and financial and operational decision-making. Adjusted net income attributable to Korn Ferry, adjusted basic and diluted earnings per share and Consolidated and Executive Search Adjusted EBITDA, exclude certain charges that management does not consider on-going in nature and allows management and investors to make more meaningful period-to-period comparisons of the Company’s operating results. Management further believes that Consolidated and Executive Search Adjusted EBITDA is useful to investors because it is frequently used by investors and other interested parties to measure operating performance among companies with different capital structures, effective tax rates and tax attributes and capitalized asset values, all of which can vary substantially from company to company. In the case of constant currency percentages, management believes the presentation of such information provides useful supplemental information regarding Korn Ferry's performance as excluding the impact of exchange rate changes on Korn Ferry's financial performance allows investors to make more meaningful period-to-period comparisons of the Company’s operating results, to better identify operating trends that may otherwise be masked or distorted by exchange rate changes and to perform related trend analysis, and provides a higher degree of transparency of information used by management in its evaluation of Korn Ferry's ongoing operations and financial and operational decision-making.

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