Headhunter Korn/Ferry (NYSE:KFY) reports its fiscal Q2 2007 earnings results on Wednesday. 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, but they're considerably less optimistic than they were six months ago: The stock scores only three buy ratings and six holds.
  • Revenues. On average, they're looking for 21% revenue growth to $161.2 million.
  • Earnings. Profits are predicted to grow even faster, up 24% to $0.31 per share.

What management says:
Korn/Ferry started off its fiscal year 2007 with a bang back in September, boasting of 25% revenue growth and a 22% increase in adjusted earnings per share. CEO Paul Reilly credited "the continued global economic expansion" for helping business to remain "vibrant."

Global growth is all well and good, but what about what's happening here in North America, where Korn/Ferry collects 57% of its executive recruiting fees? According to the Institute for Supply Management, in October we saw "the 27th consecutive monthly increase in non-manufacturing employment" here in the U.S. However, hiring does appear to be slowing. October showed weaker employment growth than September. ISM reported that "eight industries reported increased employment [in October], eight reported a decrease, and two indicated employment is unchanged from September." The research agency's November report is not due out until Tuesday.

What management does:
Focusing on how this affects Korn/Ferry, we see a bit of a mixed bag. Rolling gross, operating, and net margins each dipped a few fractions of a percentage point.

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

33.1

32.9

22.5

47.2

32.4

31.5

Op.

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:
A Fool has to wonder whether the same strong hiring environment that has helped fuel Korn/Ferry's revenue growth is also the reason behind the margins slippage. The decline in gross margins came about from cost of services -- composed almost entirely of compensation and benefits costs -- rising slightly faster than revenues (22% versus 21% over the last six months, for example.) In contrast, the firm kept its general and administrative costs below the rate of sales growth, which is why you see the top-line damage having such a small effect on operating and net profitability above.

If that's the case, then while it may sound counterintuitive to say so, I think investors should be rooting for Korn/Ferry's cost of services to keep rising tomorrow and its gross margins to keep shrinking. Because the very moment the firm is able to get its wage expenses under control may mark the turning point in U.S. employment trends -- the moment when its impressive double-digit revenue gains start to disappear.

Competitors:

  • Adecco (NYSE:ADO)
  • Heidrick & Struggles (NASDAQ:HSII)
  • Kforce (NASDAQ:KFRC)
  • Monster (NASDAQ:MNST)
  • Robert Half (NYSE:RHI)
  • Spherion (NYSE:SFN)

How have Korn/Ferry's peers been doing lately? Find out in:

Whatever your investing style, the Fool has a newsletter for you! You can check out any of them free for 30 days.

Fool contributorRich Smithdoes not own shares of any company named above. The Fool has a disclosure policy.