Korn/Ferry’s Stellar Fiscal Picture Tarnished by Losses at Online Unit

There’s nothing like a hot job market to grease the profit of an executive recruiting firm, Korn/Ferry International proved Thursday in announcing record financial results for its latest quarter and fiscal year.

The Los Angeles-based company, which is paid to find executive candidates for its clients, saw its annual revenue soar to $500.7 million, up 29% from the previous year, making Korn/Ferry the first recruiting business to top the $500-million plateau.

“The key message is that their core business was extraordinarily strong by any measure--revenue growth, profits and the number of executive assignments,” said Arnold Ursaner, an analyst with CJS Securities in White Plains, N.Y.

Yet while the financial fundamentals look great, Korn/Ferry’s share price has fallen 41% since Jan. 1. On Thursday, it plunged $4.81, or 18.4%, to close at $21.38 on the New York Stock Exchange. Investors have grown skittish about the company’s investment in a subsidiary that recruits middle managers via the Internet.

Windle Priem, Korn/Ferry’s chief executive, told Wall Street analysts Thursday that the subsidiary, Futurestep.com, will continue to lose money throughout the next fiscal year as the company spends heavily on marketing and advertising.

Priem said the expenditures are necessary to build a database of middle managers who would consider jobs with Korn/Ferry clients. Futurestep.com has built a database of about 700,000 names in two years. That compares with a 1.3-million-name database, built over 30 years, for its core business of placing chief executives and seniors managers.

Priem blamed the decline on the stock market’s current impatience with Internet stocks. But he notes that Korn/Ferry has $150 million in cash, which he said was more than enough to bring Futurestep.com to profitability. He also noted that if Korn/Ferry failed to make the investment in Internet recruiting, it would find itself chasing nimble competitors such as TMP Worldwide, which operates the Monster.com job-search Web site.

Even with its strong growth, Korn/Ferry has just a small piece of the executive recruiting business. The top five players, including Korn/Ferry, only have 13% of the estimated $10-billion global market. The other major companies include Heidrick & Struggles International Inc., Russell Reynolds & Associates and SpencerStewart & Associates.

Ursaner, the CJS analyst, said he believes investors will eventually agree with Korn/Ferry’s strategy, and he predicted that the stock will climb above $50 over the next year.

Perhaps the biggest limiting factor to Korn/Ferry’s growth in its main recruiting business is human inventory, as the demand for executives far exceeds the supply of candidates.

“The appetite for people is just insatiable right now,” said Caroline Nahas, who is managing director of Korn/Ferry’s Los Angeles office and Southwest region. “I have been doing this for 23 years and I have never seen as explosive a market.”

The job market has become so hot that Korn/Ferry is working hard to fill its own positions, including finding a chief executive for Futurestep.com.

Korn/Ferry, which first sold stock to the public last year after nearly three decades as a private company, collects about $30,000 for each middle manager placed through Futurestep.com, and roughly $80,000 for each senior executive that takes a job through its main search business. Over the last year, the company placed 7,800 executives in new jobs.

For its fourth fiscal quarter, profit rose 73% to $10.4 million, or 27 cents per share, compared with $6 million, or 18 cents a share, excluding a one-time $79.3 million charge related to the company’s initial public offering. Revenue rose 72% to $157.6 million from $91.7 million in the same period a year earlier.

For the year, profit surged 77% to $30.8 million, or 82 cents per share, compared with $17.4 million, or 62 cents, excluding the charges, in the prior year.

In California, the tremendous growth in so-called “new economy” jobs--those focused on the Internet and technology in general--have created a scarce supply of executives and managers willing to change jobs, Nahas said. Other factors are compounding the shortage as well.

“We are seeing executives in all industries retiring earlier than anticipated--sometimes at 50 rather than 65 or 70--because of the wealth they have accumulated in the stock market,” Nahas said.

This is creating a domino effect where middle managers are plugging the gaps in the top ranks, leaving companies scrambling to replace them.

“The demand for people is quite frankly outstripping the supply,” Nahas said.

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Creamed Korn

The tight labor market has been a boon for executive recruiter Korn/Ferry International. But despite a year of strong earnings growth, its stock has tumbled 41% since Dec. 31 on concerns that its investments in its online subsidiary won’t pay off for at least another year. Monthly closes and latest on NYSE:

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Thursday: $21.38, down $4.81

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Source: Bloomberg News