Foolish Forecast: Hailing Heidrick & Struggles

Recruitment specialist Heidrick & Struggles (Nasdaq: HSII  ) reports its Q4 and full-year 2006 numbers Tuesday morning. Once again, we'll take the temperature of the world economy, using this workforce supplier as our proxy thermometer.

What analysts say:

• Buy, sell, or waffle? Nine analysts now follow Heidrick, up one from last quarter. But sentiment has turned less positive, with holds now outnumbering buys 5-to-4.
• Revenues. On average, they think quarterly sales grew 20% to $127 million.
• Earnings. Profits are predicted to be flat at $0.36 per share.

What management says:
Pronouncing himself "pleased" with the firm's performance through the first three quarters of 2006, CEO Kevin Kelly argued that Heidrick is now in a "good position to meet our objectives for revenue growth and profitability for 2006." Speaking of which, having begun digesting new acquisition Highland Partners from Hudson Highland Group (Nasdaq: HHGP  ) , Kelly updated investors on what those objectives will be, now that it has added Highland's revenue stream to that of the firm. Specifically, he expects to report full-year revenue of about $470 million, and operating margins of 11% to 12% on that revenue. Kelly did not put a number to net profits expectations, but did say the firm expects profits to be taxed at a full-year rate of approximately 40%.

What management does:
As you can see, how much Heidrick nets out of each dollar of revenue can vary widely (perhaps the reason Kelly was so reticent to name a net profit estimate). Operating margins are much smoother, and they've been trending upward all year long.

Margins	6/05	9/05	12/05	3/06	6/06	9/06
Operating	10.0%	12.0%	10.0%	11.3%	12.0%	12.8%
Net	17.6%	9.5%	9.1%	8.8%	11.9%	7.3%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
How has Heidrick has kept its margins expanding? By growing revenues while controlling operating costs. The former are up 16% year over year for the last six months; the latter, just 12%. According to management, it's been making a conscious effort to improve its "operating cost structure," as well as benefiting from "the increase in operating leverage inherent in the company's business model at higher net revenue levels." Simply put, the more dollars Heidrick takes in, the more pennies from each dollar drop to the bottom line.

Although Heidrick noted that it has been bringing more consultants on board and paying out higher bonuses, this doesn't seem to have had much effect on its profitability. While it's true that salary and benefits payments sucked up a larger portion of the firm's revenue stream last quarter, Heidrick managed to reduce its general and administrative expenses nearly 1% in comparison to last year, which more than made up the difference. So far, things look to be working out right according to plan. We'll look for more of the same next week.

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.