Recruitment specialist Heidrick & Struggles (Nasdaq: HSII) reports its Q3 2006 numbers tomorrow morning, so hold on to your hat. This is not a company that treats analyst estimates gently -- over the last four quarters, actual results have differed from those projected by Wall Street's best and brightest by an average of 26%. So whatever happens tomorrow, one thing seems certain: It won't be what we expect.
What analysts say:
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Buy, sell, or waffle? Eight analysts follow Heidrick, and buys outnumber holds 5-to-3.
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Revenues. On average, they think sales grew 8% since last year, to $118 million ...
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Earnings. . as profits fell 26% to $0.54 per share.
What management says:
There appears to be a consolidation wave afoot amongst the nation's headhunters. (Would it be too graphic to say the headhunters are turning on themselves?) In another column published today, we discussed Kforce's acquisition of Bradson Corp. Nearly simultaneously with that announcement, Heidrick announced the completion of a purchase of its own: the Highland Partners executive search business of Hudson Highland Group (Nasdaq: HHGP). Heidrick paid $36.6 million up front for its new prize, and may pay as much as $15 million more over the next two years, depending on how well business goes. Heidrick advised that its purchase will "be slightly dilutive to earnings and cash flow for the full year 2006, due to integration costs and the amortization of intangible assets, but it is expected to be accretive to earnings in 2007." The firm intends to update investors on how things are going in tomorrow's release.
What management does:
Heidrick has recorded a series of one-time charges and benefits over the past 18 months, including a $20.8 million restructuring charge in the June 2005 quarter, followed quickly by a $15.5 million income tax benefit in the September 2005 quarter, all of which makes discerning a trend in net margins next to impossible. That said, the trends in rolling gross and operating margins both look favorable. Rolling gross margins have held above the 95th percentile for the past nine months, and operating margins, too, appear to be rising strongly.
|
Margins %
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3/05
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6/05
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9/05
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12/05
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3/06
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6/06
|
|
Gross*
|
94.4
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94.6
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94.9
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95.3
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95.7
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95.6
|
|
Op.
|
8.1
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10.0
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9.8
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10.0
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11.3
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12.0
|
|
Net
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20.7
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17.6
|
9.5
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9.1
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8.8
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11.9
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*Revenue less reimbursement expenses as a percent of revenue
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:
Heidrick's sales are up 9% on average year to date, while cost of services (reimbursing expenses to its associates) are down 7% during the same period -- that explains the mild expansion in gross margins. What's really important to this business, however, is the operating margin, which is where you see the effect of paying the placement associates their salaries and benefits, as well as the firm's overhead costs for general and administrative expenses. On this line, we see that, year to date, these costs are up only 5% against the 9% rise in sales -- which explains why the operating profitability has shot through the roof (up nearly 50% over the last 18 months).
If our economy slows as much as many pundits are now saying it will, and hiring slows with it, Heidrick's commitment to controlling operating costs -- demonstrated already in a strong employment market -- will become even more valuable. Long story short: Watch selling, general, and administrative costs tomorrow, and the operating margins they yield. That's where the story is here.
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Fool contributorRich Smithdoes not own shares of any company named above. The Fool has a disclosure policy.
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