Korn /Ferry: Out of Pocket Conundrum

Mar.10.08 | About: Korn/Ferry International (KFY)

Korn/Ferry (NYSE:KFY), one of the world's premier recruiting and head hunting firms, announced a 22% Increase in Fee Revenue in Q3 of Fiscal 2008. CEO Gary D Burnison provided this quote:

As the world has flattened demand for talent worldwide has intensified. Our performance this quarter has set a new industry record and is indicative of the ongoing need for organizations to recruit and develop their people. We are focused on using our global scale, our diversified services, and our strong brand to help our clients identify, hire and develop the best leaders in the world.

Blah blah blah. The press release provided precious little commentary about actual market conditions, either by industry sector or geographical orientation. The economy in North America is looking more difficult every day. Yes, you always need really good people, so recruiting will not go away. But what are the real market prospects? Korn/Ferry needs to provide a great deal more color on this topic.

While looking at the income statement there is a curious issue of reimbursed out of pocket expenses. It seems that in Q3 Korn/Ferry could only recoup 77% of these expenses from the client. In Q3 this leakage is equivalent to 20% of net income. 20% is huge... When you talk about margins you need to consider this drag on earnings. Why is the shareholder paying for it?