Headhunter Korn/Ferry (NYSE:KFY) reports its fiscal Q3 2007 earnings results on Thursday. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Nine analysts follow Korn/Ferry, with ratings unchanged from last quarter: three buys, and six holds.
  • Revenues. On average, they're looking for 19% revenue growth to $163.3 million.
  • Earnings. Likewise with profits: 19% growth, and $0.32 per share, are predicted.

What management says:
CEOs are usually loath to wax emotional in their quarterly earnings reports, preferring cautious enthusiasm instead. Not so with CEO Paul Reilly, however; last year, he exulted about the "exciting times at Korn/Ferry." In addition to strong global demand for talent, Reilly said he saw good things ahead: "... [We] have been pleased with the favorable acceptance by our clients to our non-search related offerings. Despite normal year-end seasonality, we are optimistic about the second half of our Fiscal Year."

What management does:
Sales grew 24% on average in the last couple of quarters, and Korn/Ferry did a fair job of holding the line on overhead, keeping its costs rising not much faster (about 25% year over year). Result: operating margins that remain firmly tethered to the 14th percentile.

Margins

4/05

7/05

10/05

1/06

4/06

7/06

Operating

13.8%

14.1%

14.1%

14.0%

14.2%

14.1%

Net

8.1%

8.4%

8.5%

9.6%

10.8%

10.5%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Korn/Ferry's been having the most trouble with rising costs -- the same place that rival Heidrick & Struggles (NASDAQ:HSII) has been, well, struggling. Last month, that latter firm reported a 24% surge in its operating costs, attributable in large part to rising wages. Likewise at Korn/Ferry, where compensation and benefits paid to its employees have outpaced sales growth 30% to 25% so far this year. Only by constraining other overhead costs to 13% growth has the firm managed to keep costs so closely aligned with sales growth. I'm guessing we'll see a continued rise in compensation costs for both firms as they compete for the best talent in the pool of search consultants -- at least until the economy shows signs of real slowing.

Speaking of which, I want to highlight one looming threat to Korn/Ferry, to Heidrick, and indeed, to all the firms whose stock in trade is providing workers to a booming economy, including Spherion (NYSE:SFN), Manpower (NYSE:MAN), and Kforce (NASDAQ:KFRC).

On Monday, the Institute for Supply Management issued a downbeat report on the U.S. economy for February. Business activity in the service sector clocked in at 54.3, down from 59.0 in January. That's still an expanding economy, mind you -- anything higher than 50 is supposed to be good -- but it does suggest that the economy is cooling off. "Services" account for about 80% of the U.S. economy, giving rise to a (potential) new saying: "As the Hair Cuttery goes, so goes the economy."

Speaking of which, how are Spherion, Manpower, and Kforce doing these days? Find out in:

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