It feels like a job fair on Wall Street. As is their wont, industries tend to report their earnings results in a group during earnings season, and this week, it's the headhunters on parade. Next up: Spherion (NYSE:SFN), which reports its Q3 2006 numbers Wednesday afternoon.

What analysts say:

  • Buy, sell, or waffle? Nine analysts follow Spherion, which garners six hold ratings and three sells.
  • Revenues. On average, they expect to see flat sales on Wednesday -- $493.9 million .
  • Earnings. . and flat earnings, too -- $0.10 per share.

What management says:
According to CEO Roy Krause, the "U.S. economy continues to grow, although the pace may be slowing, and [headhunting] industry dynamics remain favorable for the long term." In the more immediate term, Krause predicted in the last earnings release that the firm would book between $480 million and $500 million in revenue in the third quarter, and profit from continuing operations of $0.08 to $0.12 per share.

What management does:
Wall Street's pessimism aside, Spherion's recent performance supports this (long-term) optimistic view. Last quarter, the firm reported a 1% decline in revenues, yet net profits doubled year over year. That's hard to see in the firm's rolling margin results (shown below). But recall that in the September 2004 quarter, Spherion booked $27.4 million in earnings from discontinued operations. Those profits inflated the firm's rolling net margins through the July 2005 quarter. From October 2005 on, therefore, we've seen Spherion's numbers sans that one-time event.

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

20.8

20.9

21.3

22.0

22.5

22.9

Op.

1.2

1.0

1.2

1.5

1.5

1.8

Net

2.1

2.0

0.8

0.6

0.8

0.9
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
And what do the numbers tell us, discontinued operations aside? They tell us that year to date, Spherion's revenues have declined 5% (meaning that Wednesday's anticipated flat sales would actually be an improvement) while the cost of providing its services has fallen 7%, expanding the firm's gross margins. The fact that selling, general, and administrative expenses have headed the other way, rising almost 1.5%, hasn't been enough to prevent the upper-line improvements from benefiting both Spherion's operating and its net margins.

To this Fool, Spherion looks to be in a tenuous position, however. Sales are stabilizing, but it's a firm whose primary cost is the salaries it pays its associates. It's unlikely the company can depend on those salary costs continuing to decline in order to expand its margins. Spherion needs to grow its revenues and rely less on cutting its payroll if it's to get its bottom-line profit margins back out of the sub-single digits.

Customers:

  • Adecco (NYSE:ADO)
  • CDI Corp (NYSE:CDI)
  • Kelly Services (NASDAQ:KELYA)
  • Kforce (NASDAQ:KFRC)
  • Manpower (NYSE:MAN)
  • Robert Half (NYSE:RHI)

How is the rest of this industry doing? Find out in:

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