Korn On The Job

Seems so. Shares of Korn/Ferry International (KFY) jumped 12% to a two-year high of $11.22 on Wednesday after the executive-recruiting firm reported its first profit in nine quarters. The Los Angeles company attributed the black ink to its aggressive cost cutting and an uptick in corporate hiring.

"This is the first time in 2 1/2 years that Korn/Ferry is profitable, and that's a reflection of the jobs market," says Don Spetner, Korn/Ferry's senior vice president of global marketing. "It's also our first increase in revenue quarter-to-quarter in two years. So, it's a sign that executive-level hiring is starting to pick up again."

Korn/Ferry posted earnings of $2.2 million, or six cents a share, for its second quarter ended Oct. 31, reversing a net loss of $18.0 million, or 48 cents, a year earlier. That blew away the Thomson First Call consensus estimate of two cents a share. The year-ago quarter included $16.3 million in restructuring charges related to layoffs and office closures. Excluding the charges, last year the company posted a loss of $1.7 million, or five cents. Total revenue slipped 4% to $82 million.

The upbeat numbers jibe with last Friday's report from the Labor Department that showed the November unemployment rate falling to 5.9% from 6.0% in October. Nonfarm payrolls grew by 57,000 during the month, a bit lower than expected but a positive trend nonetheless. Since July, 328,000 new jobs have been created, the best four-month period since February 2001. On Tuesday, the Federal Reserve cited the brightening employment picture in its decision to keep rates steady but move away from concerns over deflation.

Korn/Ferry, with 70 offices in 36 countries, recruits chief executives, chief operating officers, chief financial officers, board members and other senior-level executives through its Management Assessment business. Its Futurestep division conducts searches for middle managers.

"This is also the first quarter our Futurestep division has been profitable since its inception in 1999," says Spetner. Futurestep reported operating income of $500,000, compared with an adjusted operating loss of $500,000 in the previous quarter, and an adjusted operating loss of $1.8 million in the same period last year.

But it was the cost cutting more than the improved hiring landscape that positioned Korn/Ferry for its quarterly profit. The company slashed its work force in half over the past two years to the current level of 1,400 employees. In addition to the savings resulting from the sharp reduction in staff, Spetner says Korn/Ferry also pocketed millions by subletting 400,000 square feet of its empty office space around the world.

"The cost cutting is the major reason why even with falling revenues year-over-year, we are posting profits," says Spetner. "And that speaks to how profitable we will be as revenue keeps ramping up."

For its current third quarter ending in late January, Korn/Ferry expects revenue in the range of $72 million to $78 million, about flat with the fiscal second quarter after accounting for seasonal factors. Earnings are expected to be between a penny and eight cents a share, bracketing Wall Street's forecast of five cents. In last year's third quarter, the company had a net loss of $2.6 million, or seven cents a share, on revenue of $80.7 million.

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"I believe it's solidly in the black," says Bob Labick, of CJS Securities, a brokerage and research firm in White Plains, N.Y., who rates Korn/Ferry's stock at Market Perform. "We've seen a broad-based pickup. The restructuring is behind it and revenues per consultant grew 9% this quarter. So, the combination of lower costs and more productivity per consultant has brought the company into the black. And with the bullish outlook on job activity in the financial-services and technology sectors, Korn/Ferry is well positioned to grow earnings from the current level. The outlook is strong and I'm bullish on the fundamentals. Is all the potential good news reflected in the stock price? I think a lot of it is." (Labick doesn't own shares of Korn/Ferry International; CJS Securities doesn't have an investment-banking relationship with the company.)