Korn/Ferry's Earnings Preview: 3 Things to Watch

Korn/Ferry International (KFY 1.39%) is a Los Angeles-based staffing and talent consulting business. While the company is typically categorized with staffing agencies like Kelly Services (KELYA 0.20%), ManpowerGroup (MAN 1.25%), and Robert Half International (RHI 2.46%), it is starting to exploit the key differences that could help it pull away from the competition.

 

Korn/Ferr reports second-quarter earnings on Dec. 4; here are three key things to watch.

 

Will the good times keep rolling? 

Performance has been strong across the staffing industry for years now. Korn/Ferry, Kelly, and Robert Half have all met or exceeded Wall Street's expectations for three straight years. However, Korn/Ferry's most recent quarter showed that it may be ready to break out from the pack.

 

In its most recent quarter Korn/Ferry beat expectations by $0.03 per share, on revenue growth of 8% (excluding acquisitions). EPS grew a whopping 50%, and margins fattened, as each business segment grew organically.

 

Talent management, consulting, and margins
In terms of recruitment, Korn/Ferry is slightly different than most publicly traded companies, because it focuses solely on direct hire placement. One thing that it does share in common with temporary service providers like Manpower and Kelly is that it has pushed hard in recent years to move into consulting services.

 

RPO (recruitment process outsourcing) products are aimed at giving clients the flexibility of having one provider fill all openings, usually with a guarantee, and they're growing quickly throughout staffing right now. Clients like them because they have a single point of contact; if the RPO provider can't fill their vacancy, they outsource it to other firms. 

 

In-terms of RPO offerings, Manpower has Tapfin, Kelly has "Kelly OCG," and Korn/Ferry has FutureStep.

 

While Tapfin, OCG, and FutureStep serve different industries, they still are all higher-margin businesses. There's very little overhead, aside from software and salaries, associated with RPOs and consulting services.

 

That said, Korn/Ferry's services offer a bit more than traditional RPOs. For instance, it also offers employment branding services and talent management services. Rather than simply "fill vacancies," Korn/Ferry can provide employers with data to explain why they constantly have vacancies. Furthermore, Korn/Ferry can even offer suggestions for succession plans, or effectiveness in an organizational chart.

 

Korn/Ferry has always tried to fix clients' "pain" by filling vacancies, it's only natural that they solve other types of workforce "pain." That's what these services do, and they separate Korn/Ferry from the rest of the industry.

In its most recent quarter Korn/Ferry reported 40% of its earnings from broader talent management offerings, and the sector grew 3%. While any growth is great, let's hope that this promising sector shows revenue growth above that 3% mark this quarter.

Executive search and hiring trends
Korn/Ferry's good quarter was driven by growth in its executive search business, which grew 7%, and the company needs this trend to continue. In Manpower's most recent workforce shortage survey, which highlights the most in-demand occupations, typical fields like accounting were listed. While that's certainly good news for Robert Half's Accountemps division, Korn/Ferry may benefit from the newly added field of executive and management positions.

This year was the first time in five years that management positions were listed on the survey. While the past five years have been tough on the economy, companies like Robert Half have defied experts because skilled temps stayed in demand.

That's really not that surprising if you think about it. Accountants have been a "top five" in-demand position for nearly a decade, and in tough times businesses wanted "temps" for added flexibility; Robert Half has benefited from this trend greatly.

While businesses kept IT professionals and accountants on through the recession, on a temp basis, they cut management  positions drastically starting in 2008. If a management shortage trend is on the horizon, then Korn/Ferry will see much higher fees for its executive search services.

Since Korn/Ferry only does direct placement, all revenue in executive search is good revenue. Since it has no reason to turn down lower-margin or high-risk work, like Manpower or Kelly might, the top-line results will tell us if this management shortage thesis is sound.

With that said, the final key to watch for is (hopefully) a double-digit gain in executive search revenue. If that happens, the stock should be bought and held for a bit.

Foolish conclusion:  A great quarter... or something more?
Korn/Ferry had a great result in its most recent quarter, and we'll need to pay close attention this quarter to determine if a trend is brewing. The business has a profitability advantage over traditional staffing providers that simply "dabble" in direct hire placement. Since Korn/Ferry only does direct placements and consulting, it has very low overhead, but less stable revenues than temp providers do.

With that in mind, if the company meets these three keys to success, the sky really is the limit for it.