By Karen Lentz
Los Angeles-based executive search firm Korn/Ferry International reported $23.9 million, or 42 cents per diluted share, in third-quarter earnings Monday, rebounding from a loss of $16 million, or 30 cents per diluted share, in the same quarter last year.
Korn/Ferry reported adjusted earnings per share of 53 cents, based on an exclusion of $8.6 million for restructuring, acquisition, and integration costs, representing 15 cents per share.
The consensus analyst estimate of adjusted earnings compiled by Bloomberg for the quarter ended Jan. 31 was a profit of 53 cents per diluted share.
Total revenue rose to $394.2 million from $358.9 million. Fee revenue was $381.9 million, compared with $344.2 million in the year-ago quarter. The 11 percent revenue increase was primarily due to the company’s acquisition of human resources consultancy Hay Group in December 2015, CEO Gary Burnison said on the investor conference call.
“After a full year of work, our integration activities related to the Hay Group acquisition are substantially complete,” Burnison said, adding that some remaining costs for office co-location and systems conversion are expected to be realized in the fourth quarter.
Korn/Ferry reported $103.8 million in new business for Futurestep, which it identified as its fastest growing segment, with $83 million coming from recruitment process outsourcing. Fee revenue for Futurestep was $53.4 million, up 9 percent from $49 million a year ago.
Recruitment process outsourcing involves performance of a company’s internal recruitment function by a third party which assumes the role of the client’s recruiting department by owning and managing its recruitment process and supply chain partner relationships, and is commonly used as a method for employers to recruit direct-hire personnel in the U.S., according to the workforce terminology lexicon developed by advisory firm Staffing Industry Analysts.
Korn/Ferry’s new business in the quarter came primarily from companies that had not engaged recruitment process outsourcing services previously, Burnison said.
The company’s executive search unit saw decreased fee revenue in the quarter, coming in at $152.8 million, down 1.2 percent from $154.6 million in the year-ago period.
“Monthly new business trends in the quarter were negatively impacted by both pre-election uncertainty and year-end holiday seasonality,” Robert Rozek, executive vice president and chief financial officer, said on the conference call.
Higher compensation and benefits costs and unfavorable currency exchange rates also impacted the company’s operating income in the quarter, Gregg Kvochak, senior vice president of investor relations, said on the call.
Timothy McHugh, global services analyst at William Blair & Co. LLC, cited a quarterly industry survey showing that executive recruitment demand has improved since the summer, but is still less positive than reported in the last two years.
“We do not expect significant profit growth for the company in the near to medium term,” McHugh wrote in a research note, adding that Korn/Ferry has struggled in the past to drive significant organic growth in this segment.
The company said it expects fee revenue in the range of $398 million to $412 million, and earnings per share of 41 cents to 49 cents, in the fourth quarter of its fiscal year, based on current trends.
“Following historical patterns, executive search new business activity in both March and April is expected to be seasonally strong,” Rozek said on the call.
Burnison put leadership development offerings at the top of a list of strategic growth initiatives for the company, calling the area a growing market that currently represents about $160 million in revenue.
Burnison added that the company has been transformed into something that looks more like a global management consulting firm, noting that 55 percent of its employees are millennials, 70 percent are located outside the U.S., and 61 percent are female.
Korn/Ferry shares edged up Tuesday to close 20 cents higher at $31.04.
The company has repurchased over 800,000 shares for $21 million in the open market since October 2016, a 1.6 percent reduction in outstanding shares of common stock.
Total revenue for the fiscal year to date is $1.2 billion, up 29 percent from $929.6 million in the year-ago period. For the first three quarters, the company has reported net income of $57.3 million, or $1.00 per diluted share, more than double the $25.1 million, or 48 cents per diluted share, reported for the first three quarters of the prior fiscal year.
The company reported $33 million in restructuring charges in its previous fiscal year, largely due to severance costs related to the Hay Group acquisition, according to the company’s Securities and Exchange Commission filings.
Asked about the global economic outlook, Burnison said CEOs continue to face uncertainties including the impact of the U.K.’s Brexit decision on leaving the European Union, and France’s presidential election in April.
“Certainly, with an equity market that’s at an all-time high, you have CEO confidence that probably goes hand in hand with that. But I think there has been more intent but kind of less action, so I can’t say that the CEO confidence has really translated into something we can put our fingers on,” Burnison said.