Please ensure Javascript is enabled for purposes of website accessibility

Investors Swiftly Pan Korn Ferry's Outlook

By Asit Sharma - Jun 23, 2019 at 1:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shareholders reacted adversely to the company's forward guidance when it unveiled quarterly results on Friday.

Global consulting and executive search services provider Korn Ferry (KFY 2.65%) found itself mired in an earnings-precipitated sell-off on June 21. To be more precise, the company's fiscal fourth-quarter 2019 report revealed solid double-digit year-over-year growth, but a rather cautious outlook for the first quarter of fiscal 2020 soured shareholders' reception of the results, as shares plummeted 17.5% on the trading session. 

Let's review the important details from the last three months and put next quarter's guidance into context. Note that in the discussion that follows, all comparative numbers are presented against the prior-year quarter.

Korn Ferry results: The raw numbers

Metric Q4 2019 Q4 2018 Change (YOY)
Revenue $502.5 million $488.4 million 2.9%
Net income $50.3 million $41.2 million 22.1%
Diluted earnings per share $0.89 $0.73 22%

Data source: Korn Ferry. YOY = year over year.  

What happened at Korn Ferry this quarter?

  • Fee revenue increased by 3% to $490.8 million, which management attributed to organic growth of 20% in the Recruitment Process Outsourcing (RPO) and Professional Search segment. RPO and Professional Search notched reported top-line growth of 20.4% to $92.8 million. 
  • Korn Ferry's two larger segments turned in flattish results. Executive Search and Advisory reported revenue of $195.3 million and $211.4 million, respectively; both figures were essentially unchanged against the prior-year quarter.
  • Operating margin slipped 70 basis points to 12.4%, as compensation and benefits, Korn Ferry's biggest expense, rose as a percentage of sales against the comparable period.
  • The company achieved an all-time quarterly high in adjusted EBITDA of $82.2 million.
An overhead shot of a business manager and job applicant shaking hands.

Image source: Getty Images.

A disappointing outlook

Korn Ferry doesn't provide extremely detailed forward guidance each quarter, typically issuing instead a forecast for revenue and diluted earnings per share. The company expects fee revenue in the coming quarter of $466 million to $486 million and projects diluted earnings per share of between $0.73 and $0.81.

These guidance ranges indicate little potential improvement over prior-year results. In the fiscal first quarter of 2019, Korn Ferry recorded fee revenue of $465.6 million. And after accounting primarily for a $106.6 million charge related to a companywide rebranding, Korn Ferry earned $0.78 in adjusted diluted EPS in the first quarter of fiscal 2019. 

In the company's earnings conference call, CFO Robert Rozek provided investors with the following detail on the company's outlook for next quarter, illuminating why growth targets have been sketched out to reflect minimal progress: 

As we exited fiscal '19 and we're entering fiscal '20, our monthly new business trends have been choppy as global economic issues and geopolitical concerns have escalated. Globally, for Executive Search, new business awards in April were up nearly 5% year-over-year, but up only approximately 1% year over year in May. If monthly new business trends continue, we expect year-over-year growth in Exec Search new business awards to remain essentially flat in June and July.

For Advisory, new business in the first quarter is typically down sequentially from the fourth quarter. Similar to Exec Search, Advisory had a good month of new business in April, up nearly 5% year-over-year, but May was soft -- down approximately 7%.

For Professional Search, new business measured year-over-year for May was up approximately 4% in constant currency. For RPO, both business under contract and the pipeline of potential new business opportunities remains strong and we expect accelerated growth to continue in the first quarter.

In essence, the professional search and RPO business remains vibrant, but it still comprises only 17% of total revenue. Executive search and advisory have hit immediate headwinds following a strong fourth quarter.

During the earnings call, both Rozek and CEO Gary Burnison pointed to the ongoing trade disputes between the U.S. and China, as well as Brexit-inspired uncertainty in Europe, as specific economic and geopolitical concerns among buyers of headhunting and advisory services.

Investors' severe reaction to the first quarter outlook reflects not only disappointment in the projected weak earnings growth, but skittishness around the effect of any global economic slowdown on Korn Ferry's business. Executive search and consulting organizations are particularly vulnerable to the cutting of corporate budgets in low growth environments: Shareholders may need to see Korn Ferry exceed its modest earnings guidance next quarter to feel reassured about its prospects in its new fiscal year.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Korn/Ferry International Stock Quote
Korn/Ferry International
$57.25 (2.65%) $1.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.