Korn Ferry Posts Double Digit Revenue Gain

Nation's No. 1 leadership provider reports growth fueled by Hay Group acquisition. But recruiting revenues, now just 40 percent of the company's top line, are under pressure in North America. Let’s take a closer look at the just-released numbers.

March 7, 2017 – Korn Ferry (NYSE:KFY) has posted 2017 fiscal third quarter revenues of $381.9 million, an 11 percent increase compared to revenues of $344.2 million a year ago. Wall Street expected revenues of $382.3 million. The company’s growth was primarily driven by the acquisition of Hay Group.

Executive search revenues at Korn Ferry were essentially flat at $152.8 million for the quarter. That segment represented just 40 percent of the company’s overall revenue. Within that business, North America revenues fell nine percent to $84.8 million, EMEA rose 10 percent to $39.1 million, Asia Pacific increased 10 percent to $21 million, and Latin America climbed 20 percent to $7.8 million.

Revenue generated from Hay Group, which was acquired in the third quarter of fiscal 2016 and accounted for 46 percent of revenue in the current third quarter, was $175.7 million, compared to $140.6 million, an increase of 25 percent.

Futurestep, the company’s online recruiting business, saw revenues climb to $53.4 million, or 14 percent of its overall revenue, compared to $49 million a year ago, a gain of nine percent.

The Los Angeles-headquartered executive recruiter and leadership consultant — the largest in the Americas as ranked by Hunt Scanlon Media — recorded net income of $23.9 million, or 53 cents per share, compared to net loss of $16 million for the quarter, or 30 cents per share, last year. The results matched Wall Street expectations. The average estimate of five analysts surveyed by Zacks Investment Research was also for earnings of 53 cents per share.

“I am pleased to report an 11 percent increase in fee revenue to $382 million and strong profitability with adjusted diluted earnings per share of $0.53 and adjusted EBITDA of approximately $55 million during our recently completed third quarter, benefitted by the acquisition of Hay Group,” said CEO Gary D. Burnison. “I’m confident the steps we have taken since combining with the Hay Group – broadening our solutions, unifying two outstanding workforces and streamlining our operations – have not only created the world’s leading organizational and people advisory firm, but a transformational platform for growth and scale.”

Different Ways to Achieve Growth  

Unlike its chief rival, Heidrick & Struggles still banks on executive search mandates to provide the largest boost to its top line. Just last week, the company reported that 87 percent of its revenue in 2016 came from this one segment of its business – producing just north of a half billion dollars. Heidrick conducted some 4,310 searches that year, an annual increase of just over seven percent. The average revenue per assignment was $117,000, which dipped slightly from the year before. But productivity, as measured by annualized executive search net revenue per consultant, was $1.6 million in 2016, and that more or less fell in line with Korn Ferry reports ….. Here’s some further reading from Hunt Scanlon Media.

Heidrick & Struggles Posts Strong Global Revenue Gains
Europe showed strong gains of 18 percent for Heidrick in 2016, while growth in the Americas stood at 6.3 percent. These results were partially offset by a decline in Asia Pacific of 4.2 percent. Significantly, all industry practices contributed to year-over-year growth at the world’s fourth largest senior level talent provider.

Korn Ferry continued to repurchase shares in the open market with cumulative share repurchases of 893,000 since October 2016, representing a reduction of approximately 1.6 percent of outstanding shares of common stock. In addition, the firm declared a quarterly dividend of $0.10 per share.

Activity During the Quarter

During the quarter, Korn Ferry made a number of additions and upgrades to its general consultant and support staff across all three of its business lines. The company named May Knight as country managing director, Korn Ferry Hay Group. She is based in the company’s Hong Kong office. In her new role, Ms. Knight will drive Korn Ferry Hay Group’s growth in Hong Kong in alignment with its general regional strategy. She was previously managing director, financial services, Asia Pacific at Accenture.

The company also added Patrick Walsh to its global industrial search practice. He is based in Minneapolis. Mr. Walsh joined Korn Ferry from Spencer Stuart, where he was a leader and significant contributor to the firm’s growth in Minneapolis and the industrial market worldwide.

Futurestep launched a new academic healthcare practice. Sarah Taylor, a member of Korn Ferry’s academic healthcare practice, was named managing consultant. The Futurestep practice provides expertise in recruiting faculty, including funded educators, scientists, subspecialist physicians, and other critical faculty positions.

In December, Korn Ferry tapped Andrew Huddart to serve as president, global productized services. He is based out of the company’s San Francisco office. Mr. Huddart joined the firm from Deloitte Consulting’s human capital practice, where he was managing director. At Deloitte, Mr. Huddart launched a major new product, BersinOne, delivered double digit revenue growth, rebuilt the senior leadership team and significantly expanded its core research function.

Hedge Fund Investing Activity

Publicly held search firms, namely Korn Ferry and rival Heidrick & Struggles, have recently seen a flurry of investor activity. Hedge funds, in particular, have been acquiring new stakes in both companies, while others have been reducing positions and moving on to other investments throughout the talent management sector.

A number of institutional investors have recently added to or reduced their stakes in Korn Ferry’s stock:

Kenmare Capital Partners raised its stake in shares of Korn Ferry by 304.9 percent during the last quarter. The fund owned 208,917 shares of the company’s stock after buying an additional 157,317 shares during the period. Korn Ferry accounts for approximately 4.7 percent of Kenmare’ investment portfolio, making the stock its 9th largest position. It owned approximately 0.36 percent of Korn Ferry worth $6,148,000 as of its most recent filing with the SEC.

Other institutional investors have also recently added to or reduced their stakes in the search firm. Envestnet Asset Management boosted its position in Korn Ferry by 17.6 percent in the fourth quarter. It now owns 4,979 shares of the company’s stock valued at $147,000 after buying an additional 744 shares in the last quarter. Capstone Investment Advisors also purchased a new position in Korn Ferry during the fourth quarter valued at $915,000.

In addition, Basswood Capital Management recently purchased a new position in the firm valued at $2,414,000. Third Avenue Management also acquired a new position in Korn Ferry during the last quarter valued at $3,693,000. Finally, Dynamic Technology Lab Private purchased a new position in the firm valued at $602,000. Institutional investors and hedge funds own 87.7 percent of the company’s stock.

Analysts Weigh In

Several equity analysts have recently weighed in on the company. Zacks Investment Research cut Korn Ferry International from a “buy” rating to a “hold” rating in a report in February. TheStreet upgraded the firm from a “hold” rating to a “buy” rating in a recent report. Five analysts have rated the stock with a hold rating and two have assigned a buy rating to the company. Korn Ferry presently has a consensus rating of “hold” and an average target price of $30.

2017 Outlook

Assuming worldwide economic conditions, financial markets and foreign exchange rates remain steady, Korn Ferry expects Q4 revenues to be in the range of $398 million and $412 million. Analysts surveyed by Zacks had expected revenue of $408.1 million. Korn Ferry shares have climbed roughly five percent since the beginning of the year. In the final minutes of trading on Monday, shares hit $30.83, an increase of 9.5 percent in the last 12 months.

Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Managing Editor — Hunt Scanlon Media

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