CTPartners Improved Demand Environment and Cost Management Starting to Shine Through

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Consistent with CTPartners’ preannouncement in early January, the company reported strong fourth-quarter results that were well above the company’s original guidance. Revenue came in about $1 million above the high end of management’s guidance, and adjusted EPS of $0.12 were about $0.04 above our estimate and $0.02 above the high end of management’s guidance range. In addition to confirming strong fourth-quarter results, CTPartners announced strong guidance for the first quarter. We estimate that management’s first-quarter guidance calls for organic growth of roughly 20% year-over-year and a 5% operating margin.

We believe that the company’s results corroborate the improvement that we have seen in the executive search sector through our quarterly surveys, results at competitors, and estimates from industry associations. The executive search sector appears to be seeing increasing tailwinds from portions of the industry that used to be a drag, particularly financial services and Europe. The combination of an improving environment and CTPartners’ strong recruiting success (as well as continued low turnover rates) is starting to drive improved revenue growth. Management’s cost-cutting initiatives also appear to be having a meaningful impact on profit margins, with management noting that the full impact of its restructuring actions should be reflected in the first quarter.

Importantly, we see room for these trends to continue having a positive impact on the company’s results. We believe that the demand environment will remain strong, many of the high-end consultants added in late 2013 are still ramping up, and the company’s recent acquisition of Johnson will not have a full quarter’s impact until the second quarter. Management also described its currently strong recruiting and acquisition pipeline. We note that the first quarter is usually a seasonally weaker quarter for profit margins, so it is reasonable to believe that profit margins will improve from the 5% operating margin that management has guided to for the first quarter.

CTPartners management has said during the last few years that if its consultants were just a little more productive, the company’s profit margins would improve meaningfully. Given the improved demand environment, we expect the productivity of consultants to improve a bit. Based on our experience with other executive search firms, we continue to view a 10% operating margin as a reasonable long-term target.

Yet given the company’s ups and downs during the last few years, we are going to maintain some conservatism in our estimates. We are increasing our 2014 adjusted EPS estimate by $0.20, to $0.48, and our 2015 adjusted EPS estimate by $0.23, to $0.58. Our estimates reflect organic top-line growth of 9% in 2014 and 8% in 2015, with a 4.5% operating margin in 2014 (up 210 basis points) and 5.0% in 2015 (up 50 basis points).

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