Korn Ferry

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Korn Ferry is a global organizational consulting firm, primarily known for its talent-related solutions, but also provides management consulting and other related services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Korn Ferry operates in two main segments: Consulting and Digital, and Executive Search.

  • Consulting: This segment provides various consulting services aimed at improving organizational structure, culture, and performance. It focuses on organizational strategy, leadership development, and HR solutions, and talent strategy and succession. Services include consulting, assessments and analytics, and leadership development and learning.

  • Digital: The Digital segment offers technology based solutions such as subscriptions for talent acquisition and management. The company has made some acquisitions in this space to bolster its digital offerings.

  • Executive Search: This segment is the firm’s oldest and most traditional division. It focuses on placing senior executives (typically C-suite executives, vice presidents, and directors) for large multinational corporations and other organizations.

Revenue Distribution:

Korn Ferry generates revenue primarily through fees from its consulting and digital services, and from retained search fees of its Executive Search division. From their Q1 2025 transcript, we can see the geographic breakdown of fee revenue:

  • North America: 48%
  • Europe, Middle East, and Africa (EMEA): 32%
  • Asia Pacific: 20%

Korn Ferry’s client base is quite diversified and encompasses various industries.

Industry Landscape and Trends:

  • Growth in Global Market: The global professional services market is anticipated to continue its robust growth, and this trend would continue to benefit Korn Ferry.
  • Increased Demand for Leadership Assessment and Strategy: As competition grows companies are putting more and more emphasis on their leadership capabilities and cultural transformations. This shift drives the demand for specialized consulting services.
  • Importance of Digital Solutions: With a growing focus on technology, the demand for digital talent solutions has increased.

Margins and Profitability:

Korn Ferry’s gross margins are typically strong, though they can fluctuate from quarter to quarter. What’s more important is to track the adjusted EBITDA margins over time. We will revisit this information when discussing their financials. The company is seeing a significant impact on their operating profitability due to investment made for growth in new offerings. Their focus is on the long term.

Competitive Landscape:

The consulting and search industry is fragmented and highly competitive. Korn Ferry competes with larger management-consulting firms (McKinsey, BCG, Bain), global staffing and recruiting agencies, and boutique firms specializing in leadership, talent management or executive searches. This landscape highlights the importance of economic moats for creating outperformance.

What Makes Korn Ferry Different?:

While the general concepts of leadership and consulting have become commoditized over the years, and many smaller players have entered the market, it is very hard to scale these businesses due to the nature of the business and personal relationship with the client. That is what makes Korn Ferry different.

  • Global Scale and Brand Recognition: Korn Ferry is a well-recognized global leader in executive search and HR consulting, a brand that has been built over time, and it has connections and a reputation across the globe.
  • Integrated Talent Solutions: Korn Ferry offers integrated services across leadership, talent, and consulting. This allows the company to provide a broader set of services, differentiating it from its competitors.
  • Proprietary Data and Analytics: Korn Ferry’s integrated and proprietary database and analytics tools enhance the quality of services that they provide. It is a key differentiator to attract clients.
  • Data-Driven Insights: In the call, the management noted that “Korn Ferry Intelligence Cloud” is becoming an indispensable tool in serving their clients. The intelligence platform uses vast amounts of client information to deliver the best data-driven solutions to its clients.

Moat Assessment: 2/5

The factors that contribute to a low moat rating are:

  • High competition: The consulting space is one with low barriers of entry as it is based mainly on individual relationships.
  • Not differentiated enough: Although the company provides some differentiated offerings with their data tools, the majority of their business comes from the old and more commoditized areas of executive search. They also do not seem to have a clear advantage over other consulting companies in general, despite its high brand.
  • Limited Pricing Power: While they can get good earnings, they can’t raise prices indefinitely due to intense competition.
  • No clear competitive advantage: They seem to rely mostly on their brand and good client relationships to do business. It may or may not be a sustainable competitive advantage over time.

There is little to no presence of network effects, switching costs, and unique resources in their business. Therefore, they get a rating of 2 out of 5 for their moat. However, it is possible that these may improve with their focus on Digital Solutions.

Risks that could impact the moat and the business resilience:

  • Economic Downturn: The consulting industry is heavily linked with global economic growth, making it vulnerable during recessions.
  • Competition from Technology: AI can be used to automate their services, cutting them out.
  • Employee attrition: High employee turnover can be an issue for professional services firms like them. If they cannot retain the right talent they won’t be able to serve their clients effectively.
  • Pricing pressure: Given the high competition, competitors might try to gain market share by offering lower prices, negatively affecting margins.
  • Integration risk: Integrating all the acquired firms and their solutions can be a source of risk.

Business Resilience:

Korn Ferry is a global company with a well-known brand and is highly diversified in the services it provides as well as its geographical locations. Therefore, it is reasonably resilient against temporary slowdowns but it may struggle if the entire global economy comes down for a long time. It also has a strong client base with many large multinational companies. However, the company is inherently tied to the economic cycle and can lose earnings in recessions. The company’s focus on digitizing its business could provide resilience in the long term, while adding to the moat.

Financials:

Let’s look into their financial health. I will mostly rely on the reports of the last year, and their latest quarterly report.

  • Revenues: Korn Ferry’s fee revenue for fiscal 2023 was 2.79 billion, a growth of 10% year over year, but 7% lower in Q1 2024 year-over-year. The last quarter reported a revenue of 672.2 million, as compared to 700.9 million from last year. This shows that the strong revenue growth that they were posting recently may be over, though we need to observe a few more quarters to be more certain.
  • Gross Profit: Their gross profit shows similar trends as their revenue growth, showing 1.761 billion for fiscal 2023 and 432.1 million for Q1 2024, compared to 454 million for last year Q1. Although the margins have been mostly similar, a notable jump was observed in gross margin from FY22 to FY23.
  • Expenses: Compensation costs increased to $1.5 billion in fiscal 2023 from $1.3 billion in the prior year. This has come with the increase in staff and talent development. Also, a slight increase in operating expenses was observed, showing that they were finding it hard to cut costs in general. The total operating expenses are around 2.4 billion which includes COGS of 1.1 billion, compared to 2.2 and 1.07 respectively of the last year.
  • Profitability: Net income attributable to Korn Ferry is around $185 million in the full-year 2023 results and is at 0.11$ EPS from a net loss of -0.17$. The last quarter reported the net income attributable to KFY as a 27 million with EPS of 0.49, compared to 63 million and 1.12 EPS from the last year.

  • Return on Invested Capital: The return on capital is currently at around 13%, which is better than their cost of capital of around 8%.

    It shows a reasonable financial standing for the business.

Balance Sheet Health: 4 / 5

  • Current Ratio: Their current ratio stands at 1.24 which suggests that the company has enough cash and assets to cover liabilities in the short term.
  • Debt to Equity: They have a debt to equity ratio of 1.4. This shows an aggressive use of debt for financing operations and that the company could be vulnerable if the revenues decline.
  • Cash and Equivalents: The company maintains a cash balance of around 684 million and has a good cash buffer.

Given this, their financials present a generally good health, though some areas need monitoring. Their long-term stability will depend on their ability to create and sustain competitive advantage and improve earnings.

Understandability: 2 / 5

Although the business is basically a professional service provider, there are a number of areas that need analysis.

  • Multiple Segments: It operates through multiple divisions, each having different dynamics.
  • Global Presence: It operates in various geographies with each geography having different characteristics, necessitating an in-depth understanding of the world’s market dynamics.
  • Complex Accounting: The accounting includes multiple non-recurring items that need to be considered before deriving accurate figures for profitability.

Therefore, the business may be a bit harder to understand, and this results in a score of 2.

Additional Points *The company has an impressive global presence and a brand that has been built over several years, giving it a head start compared to newcomers.

  • They are moving towards providing more and more data-driven and technology-based solutions that will provide a differentiated offering in their services.
  • The acquisition of the technology startup, could be seen as a positive for their long-term growth as it aims to make them more relevant in the future with the use of tech in their services.
  • It’s also worth noting that their CEO Gary Burnison is very experienced and is a capable leader. The company’s future performance will depend on his leadership abilities.

Based on my analysis, Korn Ferry seems like an average business and not one with very high competitive advantages. However, it can be a good investment if bought with a reasonable valuation, and a good option for value investing.