Thursday was rough for DiamondCluster International (NASDAQ:DTPI) shareholders. This management consulting company issued nasty profit warnings for the next two quarters, and the stock plunged in response.
With two large business proposals delayed and a third piece of business lost to a rival, management guided quarterly revenue expectations down by 8% to 11%. Making matters worse, the company couldn't realize certain international tax benefits. As a result, the quarter's reported tax rate for will be astonishingly large: 140%. Instead of a profit of $0.09 to $0.10 per share, the company now expects a loss of $0.03 to $0.05.
Management also lowered estimates for September's second quarter. Instead of the consensus estimate of about $57.5 million, management is looking for a range of $52 million to $57 million. Here, too, the reported tax rate will be quite high (though lower than the prior quarter), and management predicted earnings of $0.05 to $0.09 per share (versus the present estimate of $0.12).
Along with the lower revenue and earnings, the company is also looking for lower free cash flow in each of the next two quarters.
From my perspective, DiamondCluster's outlook is tough to crack. Consulting can be a very lucrative business, but this company's recent results have been erratic. What's more, DiamondCluster's own survey results suggest that customers are beginning to pull back from the outsourcing/consulting industry in general. Any growth or continuance of that trend would obviously be bad news for the company and its sector.
Further complicating matters, competition is rampant in the consulting industry. Giants like IBM (NYSE:IBM), Accenture (NYSE:ACN), and McKinsey stalk the land, as do smaller players like Sapient (NASDAQ:SAPE). It's a shared joke that laid-off analysts, engineers, or managers use their severance pay to set up a consulting business and contract with the same firm that fired them.
Diamonds are legendary for both their beauty and their toughness, and men have gone stark-raving mad in pursuing them. Matters at DiamondCluster aren't that extreme, but they're not exactly sparkling, either. This stock may prove to be a diamond in the rough and a great buying opportunity, but investors need to dig deep with their due diligence before buying the shares.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (which means he's neither long nor short the shares).
