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Kforce Inc. (KFRC)

Q3 2010 Earnings Call· Mon, Nov 1, 2010

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to your Q3 2010 KForce Incorporated Earnings Conference Call. (Operator Instructions). Now I would like to introduce your host for today, Michael Blackman, Chief Corporate Development Officer.

Michael Blackman

Management

Great, thank you. Good afternoon and welcome to the Q3 KForce conference call. Before we get started I would like to remind you that this call may contain certain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially because of factors listed in KForce’s public filings, and other reports and filings filed with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. I would now like to turn this call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

David Dunkel

Chairman

Thank you, Michael. You can find additional information about KForce in our 10-Q, 10-K, and 8-K filings with the SEC. We provide substantial disclosure in our release, and our hope is that this will improve the dissemination of information about our performance and the quality of this call. Once again we’re very pleased with our firm’s performance for the Q3 of 2010, with revenues exceeding the EPS at the top end of guidance. It is now clear that this recovery is different than past recoveries in staffing. Historically, tepid GDP growth of 2% or less meant flat revenue performance and limited penetration. Since the beginning of the year, private sector jobs have increased by 602,000, with temp help jobs accounting for 217,600 of those net job ads – roughly 36% of the net job ads despite temporary staffing accounting for only 1.6% of total payroll dollars. We believe this is evidence of a secular transition to a flexible workforce, as our clients seek greater flexibility in an uncertain economic, regulatory, and tax environment. KForce’s results have been strong throughout the downturn and now into the recovery. Recent staffing industry data and our KPIs suggest continued strength in our staffing business. During the Q3 we adjusted field and NRC delivery to align better with the very high demand from our strategic accounts and field clients, in finance and accounting and in particular, technology. This significant increase in demand that began in March and April has continued at levels we have not experienced in prior recoveries. On a sequential basis, flex revenue increased 5.7% in tech and 16.5% in F&A. Total firm revenue increased $31.2 million, or 13.7% on a year over year basis. Surge also had another outstanding quarter with our surge teams in all three regions performing exceptionally in delivering…

Bill Sanders

Management

Thank you, Dave, and thanks to all of you for your interest in KForce. We are very pleased with our Q3 performance, and the continued strong environment for professional staffing as clients dare to be looking increasingly to our services to meet their hiring needs. In particular, our technology and finance & accounting flex businesses continued to show strong growth in the quarter; and the continued growth in our permanent placement business contributed to overall revenue growth and profitability. Our firm is well positioned to take advantage of our clients’ increasing desire for a more flexible workforce, driven by an uncertain economic environment in what we believe will be a secular shift towards flexible staffing. We achieved record revenues in the Q3 for total firm flex revenue, tech revenue, and tech flex revenue. Our Q3 revenues of $259.5 million grew 5.4% sequentially and 13.7% year over year. Additionally, our operational performance metrics continued to trend positively into the Q4, further suggesting that demand for our services continues to increase. Our diversified revenue stream is concentrated in some of the areas of greatest anticipated demand. We believe that KForce is well positioned with great people and an operating platform that delivers exceptional results for both our clients and our shareholders. Flex revenue trends improved sequentially each month of the quarter, and perm. continued its growth trends in August and September after a typically slower July, which is always impacted by summer slowdowns in hiring. In many respects, our clients are accelerating a flexible staffing model at a faster pace than we have historically experienced. We are well prepared to provide our clients with solutions to surges in demand. Our largest business unit, technology flex, which represents 53% of total firm revenues, increased 5.7% sequentially and 19.6% year over year. Tech flex…

Joe Liberatore

President

Thank you, Bill. The firm continued its strong performance in the Q3, exceeding the high end of guidance for revenue and coming in at the high end of guidance for earnings per share. Revenues for the quarter were up $259.5 million, increased 5.4% sequentially, and 13.7% year over year. Quarterly revenues for flex reached an all-time high of $249 million, and increased 5.4% sequentially and 12.3% year over year. Surge revenues of $10.6 million increased 7% sequentially, and are up 61.2% year over year. We continue to see momentum early in the Q4 as revenue trends are up from September levels and key indicators continue to trend positively. For the first three weeks of October, tech flex is up 19.8% year over year, finance & accounting flex is up 26.9% year over year, and HLS is up 3.5% year over year. Surge revenues are up 53.5% year over year for the first four weeks of Q4 2010. We caution that it’s difficult to draw conclusions for Q4 based upon this limited amount of data. A combination of the increased revenue and gross margins, coupled with SG&A leverage, resulted in an increase in net income of $6.4 million and earnings per share of $0.16 in Q3 2010. These results represent sequential increase of 25.3% and 23.1 % respectively. Year over year net income and earnings per share increased 183.6% and 166.7% from $2.3 million and $0.06 in Q3 2009. Our overall gross profit percentage of 32.2% increased 30 basis points sequentially and 50 basis points year over year as a result of the increase in surge revenue as a percentage of total revenue and a sequential increase in flex margins. Our flex gross profit percentage of 29.3% in Q3 2010 increased 30 basis points sequentially and decreased 40 basis points year…

Operator

Operator

(Operator Instructions.) And our first question is coming from Evan McVeigh from Macquarie. Evan, please go ahead. Evan McVeigh – Macquarie: Great, thanks. Great, great job; just continued really good execution overall. I wonder if you could, David if you have any sense on early indication of 2011 budget shifts specifically within IT. And just if you could help us understand, obviously the tech flex and just flex overall has been really, really strong but just the strength in perm seems really, really intriguing, particularly at this point in the cycle. So if you could just talk about those two things that’d be great.

David Dunkel

Chairman

Yeah, I’ll comment on the tech flex budgets, and basically, Kevin, I’ll just say that it’s probably a little early. The indications are that tech is continuing to be strong as we go into Q4. Last year we saw an acceleration in November and December which resulted in a much lower fall off than we typically experience in December. So as we look at this year we’ll be monitoring it to see if that trend continues. We have several client trips coming up over the next few weeks – myself, Michael, Joe, and several of our senior team will be out meeting with clients and our investors out at some of the conferences, so during that time we’ll certainly be asking about 201 budgets. But at this point we don’t see any indication of a tail off but it’s too early to say how much of a fall off we’ll see at our normal year end. And as far as perm’s concerned, we’re delighted with how we’ve done. We still believe that most of the hiring today is a reflection of the deep cuts and adjustments in staff levels, so we don’t believe it’s the beginning of a great perm cycle, and if we look back historically at our prior peaks I would say that certainly we’re far away from where we’ve been previously. So as far as we’re concerned right now we’re very pleased with how perm is doing, we’re proud of our team. But we’re not ready yet to declare the beginning of a great perm cycle. Thanks. Evan McVeigh – Macquarie: Great. Thanks, Dave.

Operator

Operator

Thank you. Our next question is coming from Mark Markham from Robert W Baird. Please go ahead. Mark Markham – Robert W Baird: Hi, it’s Mark, congratulations. I was wondering if you could talk a little bit more about what you’re seeing on the F&A side. That was a pretty impressive sequential jump. Was it due to any individual projects coming on or really big client demand in one particular area? How would you describe that? It looks like you’re outperforming the other players in the space.

Bill Sanders

Management

Mark, this is Bill. It was very broad based. Of course we moved our mortgage related foreclosure business from 18% to 20% of our overall F&A model, so we had some staffing and bunches in that particular area. But I would say to you it’s very broad based, the skill sets are the skill sets that you hear about all the time, from accounting specialists to accounts receivable people, controllers, auditors, tax people. So it’s broad based, there’s nothing really to single out other than we did see the mortgage related activity grow 30% over the quarter.

Joe Liberatore

President

Yeah Mark, this is Joe. The other thing that I would reference is it’s very balanced across different industries as well, so it’s not just all concentrated just in the mortgage industry. It’s in the banking/credit unions as well as the mortgage industry as well as the insurance, as well as some of the securities and brokerage areas. So it’s pretty balanced across those types of industries. Mark Markham – Robert W Baird: And it sounds like you’re basically saying as we look out towards the Q4 we should see revenue per billing day continue to increase, which would suggest that you’re continuing to see more and more new orders come in in that area.

Joe Liberatore

President

Yeah, this is Joe. I would say as I mentioned in some of my earlier comments, some of our early indicators on the quarter are very positive. That’s a pretty big number that F&A was up on the first three flex weeks of the quarter, so we hope that that’ll continue through the quarter. Mark Markham – Robert W Baird: And the gross margins are pretty strong. I mean you mentioned there’s an excessive or a greater share that’s coming from the mortgage side, which typically would be viewed as being lower margin. And yet your margins are up year over year and sequentially. Can you talk a little bit about that?

Joe Liberatore

President

Yeah. I would say from a margins standpoint, which is really the spread from the pay bill, while that business is a little bit lower bill rate from an absolute margin standpoint, on a percentage basis it’s somewhat constant although albeit the dollars are a little bit less. Mark Markham – Robert W Baird: That’s terrific. And can you talk a little bit more about, do you feel like you’re gaining share in that area as well? Or do you think that F&A in general is starting to pick up?

Bill Sanders

Management

Well, I think F&A in general is picking up a little bit. I think we are also gaining market share through our strategic accounts group. And so I think all that is a positive and so yeah – we’re gaining both market share and client share in our different clients. So we’re pleased with what the team is doing and as I said, in some clients, especially that come through this mortgage financing, there’s staffing in bunches where it’s 100 or 200 or 300 people at a time. Mark Markham – Robert W Baird: Great. Thanks. I’m going to jump off and come back on.

Bill Sanders

Management

Thanks, Mark.

Operator

Operator

Thank you. And our next question is coming from Paul Ginocchio from Deutsche Bank. Paul Ginocchio – Deutsche Bank: Thanks. My question, you talked a bit about field sales reorder and the NRC, is that just a continuation of the optimization of the NRC? Or is that something specific that happened in the quarter?

Bill Sanders

Management

This is Bill. Nothing particularly happened in the quarter in the NRC. We built that up, dramatically doubled the staff through the first two quarters of the year. We think we have it at the optimum size for the current demand that our clients are asking of us. So we really didn’t grow that, in fact it was down slightly quarter over quarter. We’re very pleased with the NRC and how it’s coming together, but certainly when you ramp something so quickly there’s a lot of existing capacity in that group, and we expect that to really work well with our tenured staff in the field. So you put those two together and that’s very dynamic for our firm. Paul Ginocchio – Deutsche Bank: Great. If I could just follow up with SG&A Q on Q, with revenues sort of flattish Q on Q because of the fewer billing days, would we expect the same for SG&A? Thanks.

Joe Liberatore

President

Yeah, from an SG&A standpoint, obviously when we look at guidance and we contemplate some of the margin compressions that’s taking place, that would actually imply that SG&A, we’d have to get a little bit of that SG&A leverage in Q4 to deliver the EPS numbers that I put out. Paul Ginocchio – Deutsche Bank: Thank you.

Operator

Operator

Okay, thank you. Our next question is coming from Kelly Flynn from Credit Suisse. Kelly Flynn – Credit Suisse: Thanks. My question relates to Q4 guidance. It looks like on a year over year growth basis you’re forecasting kind of a plateauing or even a slight deceleration in your rear growth versus Q3, so I wanted to dig into that. First of all, on the billing days, you said that there were 61 in Q4, I just want to double check, is that the same year over year?

Joe Liberatore

President

Yes, that would be the same on a year over year basis. So Kelly, maybe did you mean from a sequential revenue standpoint on an absolute basis, that would be correct. The top end of guidance would be flat on an absolute basis of (inaudible). Kelly Flynn – Credit Suisse: I’m talking- sorry, I was talking year over year so it’s sort of in the 13-ish percent year of year growth range is what your forecasting for Q4 to be the same roughly as the growth rate in Q3?

Joe Liberatore

President

Yeah, I’m sorry, I thought you were talking on an absolute number basis and that’s why I was a little bit confused. That would be correct on a growth rate year over year, pretty much in the same type of ballpark. Kelly Flynn – Credit Suisse: Okay, so I just want to clarify. I think you said, I think Joe you said in talking about the early quarter trends that the year over year growth for both tech and accounting finance was higher so far in the quarter than in Q3. Is that right? I’m talking year over year growth.

Joe Liberatore

President

Yeah, that’s first three weeks of Q4 in comparison to the first three weeks of Q4. So typically what happens, if the quarter start out stronger in Q4 and then you start to get post-Thanksgiving, things start to slow down, you start to get a little bit of a tailing off effect going on. So we have sorted out the quarter very strong, but you know especially when we, you know, we have government and HLS that when you bring that into the mix, they start to drag those things down. Kelly Flynn – Credit Suisse: Yeah, that’s kind of what I was getting at. And first of all, did you give the early quarter trends for KGS? And what is that…

Joe Liberatore

President

Those businesses are much more difficult to kind of give a week over week comparison like they are in more the Tech Flex and F&A business because they’re more very project based, so when you look at those short period of times to do year over year comparisons, it can be very misleading in one direction or the other. But however I will mention we’re not seeing anything that’s alarming us in either of those businesses. Kelly Flynn – Credit Suisse: Okay, I guess what I’m getting at is it seems like if it weren’t for those two businesses, Health and Gate TVS, I mean you’d be forecasting a continued acceleration in year over year growth, is that fair?

Joe Liberatore

President

Very fair statement. But you know this goes back to really what I think we share on a regular basis. We’re very comfortable with the four legs of the stool that we have our businesses with them no different than during the recessionary times. You know, KGF and HLS were the stellar performers that allowed us to hold onto more of our field performers in tech and F&A during recession and vice versa. You know, now we’re in a situation where we’re virtually in what I would consider a government recession when it comes to the contracting business, no different than a commercial recession.

David Dunkel

Chairman

Kelly, this is Dave. I also want to remind you that the, on a billing day basis and then also because of holidays and paid time off, KGS and HLS are impacted much more significantly than a traditional staffing business. In a government they’ll typically take the last week of the year off and in our case, see our business, the last two weeks of the year. So those two are more significantly impacted than the traditional staffing business. Kelly Flynn – Credit Suisse: Okay, but that’s more of a sequential phenomenon than a year over year, is that fair?

David Dunkel

Chairman

Well depending on whether you look at where they were last year and then the declines throughout the year primarily as a result of the government in-sourcing. So the comps become a little more difficult. Kelly Flynn – Credit Suisse: Okay, and just one more. Sorry to beat a dead horse. On the health business, can you go back to what you were saying about clinical research and I guess the question is what’s going to disappear in Q4 that was in there in Q3 from a revenue perspective?

Joe Liberatore

President

In Q4 KCR, our clinical research group, their large customers, they closed down the last week and sometimes last two weeks in the year. And so that’s sequentially is adverse effect on our firm. I’d also point out that, adding to what you were talking about earlier, the pharmaceutical industry is second behind the government in the most layoffs of any business segment in the United States this year. So when you really look at that, you will see that. I think the last piece of it to tell you about is we had a major project in in Q3 and we won’t get the full effect of that in Q4. However I would tell you that I’m real pleased that KCR is beginning to spread its wings more for major accounts and they’re working with a number of smaller accounts to diversify that revenue stream. So we’re working on that but that is certainly the case for this quarter. Kelly Flynn – Credit Suisse: Okay, great. Thanks for taking all those. I appreciate it.

Joe Liberatore

President

Okay, thank you Kelly.

Operator

Operator

Thank you. And we’ll take our next question from Tobey Sommer from SunTrust Robinson Humphrey. Tobey Sommer – SunTrust Robinson Humphrey: Thanks. I was wondering if you could comment on the sequential growth in your recruiter headcount. Because I seem to remember that was a pretty decent figure maybe 2% or 3% in Q2 and I’m wondering what kind of editions you made in the third.

Bill Sanders

Management

This is Bill. Now when we talk about revenue responsible activities of our people so we include our NRC as part of our recruiter base. And so when you look at that as a total and even if you split it apart, it’s about the same, which is it is flat to down very little in Q3 of the year. Tobey Sommer – SunTrust Robinson Humphrey: Okay, were there any other expenses in Q3? Because, at least by my calculations, incremental margin was a little bit lower than in Q2. Was there anything else that may kind of thrown off the proportion of incremental revenue that slowed down operating income?

Joe Liberatore

President

Toby, this is Joe. I mean in any given quarter we have things going in both directions. You know, we had a couple things that were favorable in the quarter as we did our workers come true-up as well as some of the things we’re experiencing from a credit standpoint in terms of our bad debt reserve. And also as we referenced in our 10-K and 10-Q, we had a suit in California as a pending legal matter. I’ve been advised not to discuss that matter in great detail, but I will share with you that we don’t expect that to have any material impact at the firm. So nothing major in one direction or the other. Tobey Sommer – SunTrust Robinson Humphrey: Okay that makes sense then. Over time, what kind of incremental margin range should we expect, do you think, in this kind of top line growth environment? Thanks.

Joe Liberatore

President

Yeah, where we are is, and I believe I’ve referenced this before in terms of our tenured workforce, that the bulk at this point in time is our fixed infrastructure. We’re very comfortable with where our fixed infrastructure. So it’s gotta come through performance management and we’re very confident that we’re doing all the right things and we’re starting to see some of that leverage from the NRC in our overall sales population. Our number of two plus tenured associated continues to grow as well as performance of those individuals continues to grow. This all goes back to, based upon Q3 data for example, our most productive group this population, they on average produce 50% more than our other less than two year populations. So there’s a lot of leverage there and everything we’ve build and invested is to continue to drive performance management. Based upon our calculations, we still have 25% in field capacity from where we were prior (inaudible) and then when you look at the NRC with doubling that over the course of the last year, very, very less tenured population there so our expectations are to get a lot of leverage from those investments as well. Tobey Sommer – SunTrust Robinson Humphrey: Okay, thanks. My other question’s been answered; I’ll just end with one. You mentioned, I think, in terms of your guidance that it doesn’t include any acceleration of equity. Is there any other color you could offer there? Is there something that could be accelerated here at some point?

David Dunkel

Chairman

No, I mean just I think we’re all well aware there’s unknowns right now in terms of what’s going to take place between now and the end of the year from a number of aspects, so we’re constantly evaluating what the impacts to the firm are going to be and make decisions accordingly.

Bill Sanders

Management

I maybe can build on that a little bit. As you know, we’ve tried to incentivize management only by performance, and part of that performance is based on stock price. So we issue, instead of stock options we issue often performance-based restricted stock. So those pars have to reach a certain stock price, which is 50% higher than when the pars were granted. So basically the next traunche, when the stock price gets in the $18.90 plus, that’s when we hit the next traunche. So if we were to hit that, that would result in a larger expense number. And so we’re just trying to make sure that we don’t have to go out and do a press release and say EPS is down because stock is up so much. So we think it’s aligned management and our shareholders very well, so that’s the number – $18.90. Tobey Sommer – SunTrust Robinson Humphrey: Thank you very much.

Operator

Operator

Okay, thank you. And our next question is coming from Mark Markham from Robert W Baird. Mark Markham – Robert W Baird: Just to go back to KGS, how should we think about that for next year in terms of what you’re hearing?

Bill Sanders

Management

That’s a very good question, Mark. Mark Markham – Robert W Baird: Or how are you planning for it given there’s lots of uncertainties out there.

Bill Sanders

Management

Well, we’re trying to stay very light footed I guess. But I would say certainly most competitors in this space are being impacted by contract protests, low funding for the new projects, continued resolutions, uptick in-sourcing. They have all this kind of activity going on. At the same time, our KGS unit has a record amount of contract bids outstanding, has very solid $170 million total backlog. So we have a lot of things going for us but at the same time we want to do better. So as we normally do in these difficult times, we have a philosophy that we really rebuild for when and how we can do better. And I think as we mentioned on the last call we’ve hired a new person in charge of our business development efforts and he’s building a very strong A-team around him as well as all the other activities we have focused on that particular group. I would say if we guessed, and I’m going to tell you it’s somewhat of an informed guess but it’s a guess, I would look at the- It certainly depends on what happens in this election, and we look at the latter half of next year to see it start to really move if that’s when it’s going to move.

Joe Liberatore

President

Hi Mark, this is Joe. I would also add, I mean the pipeline continues to build. It is a very profitable business at the levels it is and it’s providing us a lot of opportunity, no different than when our core businesses go through recessionary times, to really work on the business and enhance the overall operating model, some of what Bill had mentioned in his open comments. So we’re very confident with the team that’s in place and with the things that we’re doing. So we’re doing everything within our power. Mark Markham – Robert W Baird: Great. And then can you talk a little bit more about the capacity that you have on the IT side? You’ve already surpassed prior peak revenue there, margins continue to look good. Can you talk about how much capacity you have there, how you think that’s going to unfold next year?

Joe Liberatore

President

Yeah, from a capacity standpoint I would say in all of our populations it’s pretty balanced, so the numbers I put out there, you can pretty much apply those to most of our operating units, because we’re always balancing and rebalancing our head count. So I mean that’s the best that I can answer on that question specific to IT. Mark Markham – Robert W Baird: There’s no big step up in terms of investment that you need to make. We should continue to see continued leverage on the SG&A there despite the fact that you’re already past peak.

Joe Liberatore

President

That’d be correct. Mark Markham – Robert W Baird: Great, thank you.

Operator

Operator

Okay, thank you. And I’m showing no further questions in the queue at the moment. I’d like to turn the conference back to your host.

David Dunkel

Chairman

Okay, well thank you very much. We appreciate your interest and your support for KForce. And once again, we want to take the opportunity to congratulate our team for performing very well and for really going out and winning on the field. So thanks to each and every member of our field and corporate teams, and also again to our consultants and our clients for allowing us the privilege of serving you. So we appreciate it very much. We hope you all enjoy your Thanksgiving and Christmas holidays, and we’ll look forward to speaking to you next year. Thank you.

Operator

Operator

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.

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