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Why Korn/Ferry International Stock Just Dropped 21%

By Rich Smith - Updated Sep 7, 2018 at 11:39AM

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Korn/Ferry is changing its Korn Ferry.

What happened

Shares of executive search firm Korn/Ferry (KFY -0.65%) are down a whopping 21.1% (as of 11:35 a.m. EDT) after reporting fiscal Q1 2019 earnings results that may (or may not) have fallen short of expectations. 

On Wall Street, analysts went into earnings looking for Korn/Ferry to report a $0.72 per share profit. Instead, management reported a $0.70 per share loss -- but also a pro-forma profit of $0.78 per share.

Thus, depending on how you look at it, Korn/Ferry may have both missed and beat expectations on Friday, missing badly on its GAAP number, but eking out a respectable beat on pro-forma profits. However, sales came in ahead of estimates, at $478.4 million, so that's good news at least. So why are investors ignoring the good news to focus on the bad?

Man ripping up a contract

Korn/Ferry secures employment contracts for a living. Today, investors ripped theirs up. Image source: Getty Images.

So what

Maybe they're hyper-focused on the bad news because they didn't realize just how bad this quarter's loss would end up being. Although revenue rose 18% year over year, Korn/Ferry took a large charge to earnings based on its decision to "sunset" its several sub-brands and use just "one unified brand" -- Korn Ferry -- to describe itself going forward.

Last quarter, investors absorbed that news with equanimity. This quarter, seeing the effects in dollars and cents -- a big $0.70-per-share loss -- they appear to be having a rethink.

Now what

Might investors change their minds about Korn/Ferry yet again? Perhaps, but it's by no means certain. In updating guidance for the rest of this year, Korn/Ferry management told investors to expect that it will quickly bounce back to book a profit of between $0.73 and $0.81 per share in fiscal Q2 2019, on revenue of between $470 million and $490 million.

On the sales side, the midpoint of that guidance is once again a bit better than what Wall Street has been looking for -- $477 million in Q2 sales. The middle of the range for Korn/Ferry's guided profits, however, is only $0.77, and that is quite a bit below the $0.80 per share that Wall Street had been expecting.

Unless Korn/Ferry can find a way to eke out a bit more profit in Q2 than it's currently promising, investors could sell off this stock once again in three months' time.

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