Ring, ring! Will somebody answer that? It's former Motley Fool Hidden Gems recommendation Talk America (NASDAQ:TALK) on the phone, calling with its Q4 and full-year 2005 earnings. And even though we no longer officially endorse the company as an investment, a lot of Fools still like to keep in touch, and want to know how the company's doing.

Oh, never mind. I'll get it myself.

Wall Street Wisdom:

  • General consensus. Only two analysts follow Talk, but both of them rate it a buy.
  • Revenues. You have to wonder why, though, considering that the analysts agree that Talk's sales are likely to decline by 12% year over year, to $110.6 million for the fourth quarter of 2005.
  • Earnings. And you have to wonder even more, when you notice that they're calling for Talk to report a 70% reduction in reported profits, to $0.12 per share.

Margin watch:
Flat to declining sales, plus fewer profits earned on those sales, is not a recipe for earnings growth. For that reason, the picture painted below has me concerned about Talk. Over the last 18 months, the company's gross margins have eroded by more than 500 basis points. Operating margins are down more than 200 basis points, and net margins have fallen by more than half.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

54

54.2

52.2

51.4

51

48.9

Op.

14.1

12.7

12.6

12.5

13

11.9

Net

18.4

7.5

7.8

7.9

8.2

7.4
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.

Foolish lookout: What has me more worried about Talk, however, is what's happening with its cash profits. Over the last year, we've seen Talk's cash generated from operations decline sequentially in every quarter, after rising during the four quarters previous to that. Meanwhile, capital expenditures are absorbing larger and larger amounts of Talk's cash flow. Result: Last quarter, Talk went free cash flow negative for the first time since March 2001.

Maybe it's a blip. Maybe just an anomaly. But watch that free cash flow, Fools. If Talk turns it around tomorrow, bully for it. If not, now might be a good time to start worrying.

Fool contributor Rich Smith does not own shares of Talk America.