Kforce Inc. (KFRC) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Kforce Incorporated Q4 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to introduce your host for today’s conference, Mr. Michael Blackman, Chief Corporate Development Officer. Please go ahead.

Thank you. Good afternoon, and welcome to the Kforce Q4 and year-end 2014 earnings 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 upon current assumptions and expectations, and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce’s public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. I would now like to turn the call over to David Dunkel, Chairman and CEO. Dave?

Thank you, Michael. You can find additional information about Kforce in our 10-Q, 10-K, and 8-K filings with the SEC. We also provide substantial disclosure in our release to assist in better understanding our performance and to improve the quality of this call. We are very pleased with our performance in the fourth quarter, as Kforce achieved quarterly revenues of $318.7 million and earnings per share from continuing operations of $0.31. Our growth is being driven across all business lines, including Tech Flex, our largest business segment. We continue to invest in our Tech and FA Flex and selectively in our search businesses, given the excellent market opportunities that we see, as demand remains very strong across all industries and geographies. Before we focus on Q4, I’d like to take a moment to reflect on what has transpired over the past year both at Kforce and in professional staffing. The industry is very healthy with specialty firms leading the way. The Tech space continued its strong growth trends in 2014, and is projected to grow at high levels for the next several years. The FA market also was robust, which contributed to our strong growth performance. The secular shift continues as the need for flexibility and specialized skills, the project nature of work and the regulatory environment for our customers to greater use of flexible resources. At Kforce, 2014 revenues were $1.2 billion, which is a 13.4% increase year-over-year. Growth in Tech Flex, which is 68% of our revenue, was 14.3%, which is double staffing industry analyst estimates for the industry, and FA Flex grew total year revenues by 16.9%, which is triple the industry rates. Our Government segment, which provides Tech and FA staffing and solutions to the federal government also performed well, contributing 6.6% to our year-over-year revenue expansion in 2014. Adjusted earnings per share for 2014 on continuing operations were $0.97, which is a 45% improvement from adjusted earnings per share in 2013 of $0.67. During 2014, we returned $115 million of capital to our shareholders in the form of $102 million in share repurchases and $13 million of dividends. We also increased our dividend 10% in Q4 two years after initiating our dividend program. I’m proud of our team’s execution and what remain an uncertain non-traditional recovery, but what appears to be an improving employment environment. U.S. job growth has improved over the course of 2014, as temporary positions continue to contribute at historically disproportionate share of this expansion. The temp penetration rate is at near record levels and college educator unemployment is at 2.8% of our half of the overall employment rate. Expectations for Tech demand remain high as mobility, big data, data security, project and program management and post-recession IT rebuild continue to fuel needs for talent in virtually all roles in commercial IT organizations. 2014 was a year, where we saw the results of strategic decisions our executive team has made over the past two years. We simplified our business model to narrow our focus on our core offerings and accelerate investment in revenue generating resources to build the model that drive sustained organic double-digit revenue growth. We streamlined our processes, simplified our organizational structure to be more client centric approach and aligned resources to target the industries and skill sets, where we have the greatest opportunity to capture client share and accelerate growth. We targeted stronger partnerships with our premier partner clients and we saw optimization and efficiencies in our revenue enabling support. This is translated to accelerated growth year-over-year and has laid the foundation for continued growth in a clear path, 7.5% operating margins at $1.6 billion in annualized revenues. In August of 2015, Kforce will be celebrating its 20th Anniversary as a publicly traded firm. Over that time according to SIA, U.S. staffing revenue grew $55 billion to an estimated $132 billion, and professional staffing grew as a percent of overall staffing from 31% to 63%. A secular trends and economic indicators continue to move favorably. We believe our footprint and recent strategic decisions position us well for near-term and future success. I will now turn the call over to Joe Liberatore, President, who will provide further details on our Q4 operating results. Dave Kelly, Chief Financial Officer, will then add further color on our Q4 operating trends and financial results, as well as provide guidance on Q4. Joe?

Thank you, Dave, and thanks to all of you for your interest in Kforce. I echo Dave’s comments and my excitement over our team’s execution in both Q4 and full-year 2014. Our New Era strategy is generating results that are in line with our expectations. And we remain hyper focused on delivering revenue growth in excess of market trends and attainment of our operating margin objectives. All lines of business show sequential growth on a billing day basis in Q4. Tech Flex and FA Flex growth continues to grow significantly in excess of industry averages and our Government business has now achieved four consecutive quarters of sequential growth. Search experienced a slight sequential decline, which is typical in Q4, though performed better than historical patterns. Tech Flex staffing, our large business unit, revenues 3.3% sequentially on a billing day basis and 9.9% year-over-year. Overall our key performance indicators for technology remain at very high levels for job orders, external submittals, and send-outs. The strength of our leading indicators, specifically the high job order volume and quality of order confirms, demand remain strong and new start acceleration is expected in the coming week after a slightly uneven January. Demand is positive across many industries with our top five being financial services, communications, health services, insurance, and computer manufacturing. We continue to outperform overall Tech Flex growth averages within these units. Intra-quarter trends for Tech Flex revenues increased in October, dips slightly in November, and rebounded quarterly peak levels in December. We anticipate Q1 revenues to be down slightly on a billing day basis due to typical fall off in head count at the beginning of each year and an elevation in conversions in Q4, which reduced the baseline of Flex head count going into the beginning of the year. The increase in conversion reflects positively on the overall Tech demand. We expect continued year-over-year growth in Q1, near Q4 levels. As a result of success capturing some large long-term multi-year statement of work engagement and both staffing project visibility is improving in our Tech Flex business. Revenue for our Finance and Accounting Flex business represents 21.3% of total firm revenues. Q4 revenue growth accelerated to 9.1% sequentially on a billing day basis, and 22.2% year-over-year. This business is also experiencing strong starts, job order flow, and external submittals. Growth by industry is diverse, the contributing drivers, the year-over-year success, our continued expansion in healthcare project revenue and increasing financial services revenue, both of which the National Recruiting Center positions us to maximize. Intra-quarter revenues grew each of the month of the fourth quarter, we are benefiting from investments and management and operating model adjustments made in this business over the past two years to diversify our client base and capture market share. We expect Q1 Flex revenues to be down slightly on a billing day basis to the end of your recovery and year-over-year growth remaining near 20%. Revenue increases for the fourth quarter for our Tech and FA Flex businesses were driven from a diverse blend of clients. Our top 25 clients contributed 37.6% of total revenues, an increase of 340 basis points year-over-year from 34.2% in Q4 2013. This along with our above market growth rate suggest that we remain successful in taking customer share within our largest clients as we continue to invest to further delight these customers. Our service capability is further enabled by our national recruiting center, including our new Phoenix location, which opened in mid-2014 and is better situated to serve our Western U.S. client needs. Revenues for Kforce Government Solutions increased 10.6% sequentially on a billing day basis in Q4, up for the fourth consecutive quarter and are now 22.4% year-over-year. We are proud of the team’s success in both the services and product basis as it works through the ongoing challenges within the federal government. As we noted last quarter, we expected stability in the services revenue and a significant product revenue increase in Q4 and this was executed as planned. Q1 expectations include continued steady performance in services revenue and an additional quarter of product revenue consistent with Q4 levels, followed by product revenue declines in Q2. As we look ahead into 2015, 36% of this unit’s revenue is scheduled for recompete. We are still awaiting news on the award of our largest contract, which we mentioned last quarter. Our historical success on recompetes and our strong relationships with the end-user customers give us confidence in our ability to retain this business though the increasing trends for awards to be based on lowest cost technically acceptable provide somewhat greater uncertainty. Direct higher revenues from placements and conversions declined 4.7% sequentially, but increased 2.9% year-over-year. Our objective is to meet the talent needs of our clients through whatever means they prefer, and providing a meaningful capability to deliver resources through direct hire will remain important in meeting those needs. In Q4 2014, direct hire was 3.7% of total revenues versus 4.1% in Q4 last year. We expect direct hire as a percentage of total revenues to continue to decline, but be relatively stable from a dollar perspective as we move forward. Revenue generating head count increased 6.3% year-over-year in Q4. We continued to invest an additional revenue generating pro forma growth and anticipate year-over-year head count growth to remain at or above these levels respectively though below revenue growth rate. We believe capacity exists and a significant opportunity to improve productivity remains, as our newer associates become more experienced. Through this balanced approach, the hiring, we will drive both the same revenue growth and operating leverage. Our execution in 2014 has set the stage for continued success in 2015 and beyond. We remain committed to expanding market share, evolving our relationships with our premier partners, becoming a top provider within all of our clients in achieving our operating margin objectives. I’ll now turn the call over to Dave Kelly, Kforce’s Chief Financial Officer, who will provide additional insight on operating trends and expectations. Dave?

Thank you, Joe. Total revenues for the quarter of $318.7 million increased 4.9% sequentially on a billing day basis and 13% year-over-year. Our Flex staffing revenues collectively grew 12.7% year-over-year and our Government business increased 22.4% year-over-year. Search revenues of $11.9 million, increased 2.9% year-over-year in the quarter. Fourth quarter income and earnings per share from continuing operations were $9.1 million and $0.31 respectively, which represents 22% and 35% year-over-year improvements versus Q4 2013 normalized results. Inclusive of discontinued operations, GAAP net income and earnings per share in Q4 were $8.9 million and $0.30. Gross profit percentage in Q4 was 30.9%, which is down 40 basis points sequentially and down 80 basis points year-over-year. The year-over-year decline in margins is due to a combination of the decline in search revenues as a percentage of total revenues due to the relative strength of our Flex revenue growth and the decline in Flex margins. Flex gross profit percentage of 28.2% in Q4 decreased 30 basis points sequentially and declined 60 basis points year-over-year. The sequential decrease is primarily attributable to business mix driving pricing compression in our KGS business and a Q4 true-up of $500,000 on a terminated contract. Also contributing to the decline in the slight compression is a slight compression in Tech bill pay spreads year-over-year due to a change in client mix, as larger clients who have slightly lower margins have grown at a faster pace than the rest of the portfolio over the past year due to our investment efforts to gain share in these clients. Specifically, Tech Flex spread has declined 20 basis points year-over-year, while FA Flex spread has been flat over the same period. Looking forward, assuming a consistent operating environment in economic landscape, we expect pay rates and bill rates to continue to increase in tandem, leading to a stable Flex margin environment. However, if economic growth should accelerate, we may see an improvement in Flex margins to an expansion in bill pay spreads similar to what we’ve seen historically. Q4 2014 SG&A percentage of 25.5% was flat relative to normalized Q3 2014 results and decreased 80 basis points from 26.3% in Q4 2013, excluding nonrecurring charges that occurred last year related to organizational changes made to drive operating efficiencies. We expect continued reductions in SG&A percentage as revenues improved. As we look at our balance sheet and cash flows, our accounts receivable portfolio continues to perform well and write-offs remain at low levels. Capital expenditures for Q4 were $1.5 million. Bank debt at the end of the quarter was $93.3 million as compared to $12.7 million at the end of Q3. The increase in debt was driven by the repurchase of 1.9 million shares in Q4 for $42.4 million and $38 million in federal income tax payments related to the August sale of our HIM business. During Q4, we completed the redeployment of all the HIM sale proceeds through stock repurchases. The repurchases combined with operating efficiencies identified in late 2014, have allowed us to fully recapture the contribution of the HIM business to our earnings more quickly than we had originally anticipated and we remain on track to meet our longer-term operating margin target of 7.5% at $1.6 billion in annualized revenues. Also, during the fourth quarter, we increased the size of our credit facility and extended its term five years to provide additional flexibility and support of our growing business. With respect to guidance on continuing operations, the first quarter of 2015 has 63 billing days, compared to 62 billing days in the fourth quarter of 2014. We expect Q1 revenue to be in the $312 million to $317 million range and for earnings per share from continuing operations to be between $0.17 and $0.19. Given our concentration of business in the Northeast corridor, we’ve lost approximately $2 million in revenue through last week. This does not contemplate any weather impact this week or the impact on lost hours, delayed starts or extended assignment closing processes. Gross margins on continuing operations are expected in Q1 to be between 29.9% and 30.1%. Margins will be negatively impacted by approximately 140 basis points due to increased payroll taxes in Q1. SG&A as a percentage of revenue is expected to be between 26.3% and 26.6%. Operating margins are expected to be between 2.7% and 3%. We expect the increase in payroll taxes in both cost of sales and SG&A combined to negatively impact EPS by approximately $0.14 relative to the fourth quarter. Our effective tax rate in Q1 is expected to be 39.8%. This guidance assumes weighted average diluted shares outstanding of approximately $28.5 million for Q1. This guidance does not consider the effect, if any of charges related to the impairment of intangible assets, any one-time costs, costs related to the settlements of any pending legal matters, the impact on revenues of any disruption in government funding or the firm’s response to regulatory, legal or tax law changes. We believe we’ve made significant progress over the past two years building a foundation and executing our plan for achieving sustained revenue growth well above the industry averages, while also accelerating operating margin improvements. We have continued to hit all of our internal financial targets and first quarter expectations are for continued improvement in operating leverage. We remain on track to achieve our targeted operating margin goals. We will focus on the continued execution of our plan in 2015, inclusive of consistent investment and head count growth to sustain revenue growth, while maintaining progress toward our profitable goals. Amanda, we’d now like to open the call up for questions.

Thank you. [Operator Instructions] Our first question comes from Mark Marcon with Robert W. Baird. Your line is open.

Good afternoon, and congratulations on a great year. I was wondering if you could talk a little bit about the - about your pay and bill rate expectations with regards to Tech Flex. You gave some comments with regards to what you’ve seen and - that you are expecting to go up in tandem, but just wondering what rate of increase would you expect them to go up at?

Sure, Mark. This is Dave Kelly. So we expect really the same trajectory that we’ve seen over the course of 2014. Bill rates and pay rates in 2014 went up year-over-year about 5% and - in a consistent bill and pay increases. And I think that trajectory we’ve seen in the last couple of years, we expect to continue to go up because we talked a lot about, we are still at a very supply constrained environment, so having to pay more being able to pass those bill rates through allowed us to maintain stable margin, but certainly, we are not looking at Tech Flex for the change at this point.

Yes, Mark, this is Joe. What I would also add to that is, we are seeing that consistent with our strategic account portfolio clients, as well as the spot, they’ve pretty much moved in tandem through the entire year.

Great. And what are your expectations with regards to the mix of clients, you clearly saw faster growth with some of the larger ones? Do you expect the smaller ones to catch up in terms of the growth rate, or should we continue to see the same dynamic?

I anticipate we’ll continue to see the same dynamic based on how we are aligning our resources to capture greater client share on those clients where we are doing business. That’s not to say, we are not going to be on-boarding new accounts as well as servicing accounts that are earlier in there maturation stage, but we’re very focused on those customers whether a significant trend within them and where we’ve aligned our resources. And you saw some of the movement in terms of our top 25 and even when we get into our Tech Flex service line, it’s even a little bit more proportional related towards the top 25 as a percentage of revenue.

Just under that circumstance, could you still end up seeing 5% increases in terms of the bill rates, given the mix shift?

Well, that’s part of why earlier when I tacked on to Dave’s response, we’ve seen the same level of bill rate increase within our strategic account portfolio as we’ve seen in the spot market. In fact, even though, a little bit further than that, what we’ve seen happened over a time, probably last four to six quarters is where we’ve seen the delta between those two in terms of the level of bill rate has really compressed a little bit. So they are much closer to each other than what they were, if we were to look back 8 to 12 quarters ago.

Okay. But just with the - if I take a look at the last quarter, your bill rates on the Tech Flex side were roughly equivalent to a year ago?

So, Mark, if you’re just doing a simple math, when we look at the transactional level rates, they are up about 5%. We did see some additional cost in the system as a result of furloughs that we saw in some clients. So if I can parse the answer between bill rates and pay rates, strictly at a transaction and some other costs that might be impacting that calculation that really is what’s driving the math for you there.

Okay. Great. And then, can you just add a little bit more color with regards to the commentary with regards to the KGS contract that’s coming up for renewal. There you mentioned something about the sensitivity on the lowest price. How should we think about that?

Mark, this is Dave again. I think as we think about the government contracting space in general, no different than what we’ve been talking about. Each procurement that we see, those contracts that come up for renewal, certainly lowest price, technically acceptable low procurements are becoming more and more common. And that’s what we were referring to when we talk about that the gross margin compression in KGS over the course of the last year, that’s a big driver to that. I don’t think that that will change. I mean, I think we’ve over the course of the last couple of years seen that. That’s driven gross margins down. Certainly, the procurements going forward in our mix of renewals of what were previously lowest cost technically acceptable, replaced with new ones. And there may be a few new contract procurements that are lowest cost, technically acceptable that was previously not. So that’s certainly, I think, continued pressure in our margins is there, but we’ve done a nice job I think the management.

Yes, and Mark, this is Dave. I wouldn’t focus too much on that one client specifically. As at the same time there are other customers that we are closing new work on. We have substantial opportunities that we are also pursuing at the same time. So if you are to look at that revenue and assuming an absolute worst-case-scenario, it’s less than 3% of Kforce’s revenue. And we certainly don’t expect that to happen. And that would discount any other business that we’re seeking aggressively. So we feel pretty comfortable with the relationship and with the stability of it. Obviously, we felt it was important enough to point out that shift towards the lowest price technically acceptable contract vehicles.

And so therefore in terms of the trends that we’re seeing in terms of year-over-year in terms of the gross margins on that KGS side, and you’re not signaling a major departure from that trend.

No, we’re not.

Okay. Great. Thanks.

Our next question comes from Tobey Sommer with SunTrust. Your line is open.

Thank you. I think you said something about the both higher outlook for Tech getting better. Is that related to your direction of resources or is it also of market related external characterization?

Yes, Tobey, I would say it’s a combination of both. So where we’re seeing those opportunities is where we have the relationship, so we’re further entrenched in those organizations, which is bringing opportunity for us because of past performance. So that’s what I would say on the one side of equation. On the second side of the equation relative to the market, this is just part of the bigger dynamics within the market of consolidation of vendors, opportunity to look for cost efficiencies while directing a higher percentage of revenue to fewer vendors. So that I would say, so it’s a combination of both.

I would add to that also that we’ve seen customers moving some of their statement of work business and project business to firms such as ours that have the capability to handle that in a way from some of the larger higher price consulting firm. So I think that that we’ve cited that in the past and certainly those appear to be continuing.

Sort of that mix shift within IT services favoring staffing at the expense of some of the other categories.

Yes, it’s obviously a much larger market than staffing as whole.

Right.

And customers have figured out that the resources that are often presented to them are coming through staffing firms and under the management - project management of the larger consultant firm, so depending on the size and the scale of the projects that may be more advantageous to them to procure that directly with a team that’s designated from the staffing firm with leadership of a project manager to take on these specific aspects of their project. Large scale stuff like an ERP implementation is still going to be done with the larger consulting firms.

Okay. I wanted to ask you about some of the incremental cost efficiencies that we talked about on the call a couple of quarters ago, maybe over the summer in kind of where you stand with those, whether those are in the P&L now or something prospective as we work our way through 2015 that will be additive to your margin?

Yes, sure, Tobey, this is Dave Kelly. Yes, just to refresh your memory from last quarter, you’re right. As we look at the fourth quarter, certainly there is a continued progression, and we’re able to realize a portion of those efficiencies in Q4. As you kind of look at Q1, we’ll see some more of that, which for us, if you kind of look at our guidance, suggests we are getting some operating leverage, that’s the result of some of those efficiencies. And I think we’re planning to be completely done with those in the second quarter. So I think we’ll see improvement here in the first-half of the year from those efficiencies and on top of that obviously another big piece of that is our ability to scale and use the foundation that we have. And the last biggest piece as a remainder is as we look at the tenure of our associate population, as they generate tenure and productivity in our system we get some operating margin improvements from that. So it’s really those three things you need to think about when you think about the earnings power of the firm.

Thank you. Our next question comes from Kevin McVeigh with Macquarie. Your line is open.

Great. Thanks. Hey, if you’ve said this, I apologize, but can you remind us what the EPS impact is from a payroll tax reset as well as SUTA. And if you’re seeing any relief on the SUTA line as we’re working our way through 2015 just as State budget start to firm a little bit.

Sure, Kevin. So we had indicated our expectation in Q1 relative to Q4 was about a $0.14 impact for payroll taxes. And in terms of relief our expectation as we move into Q1, we’re not seeing a lot of relief. Our business has a big impact Q4 to Q1, predominantly because we are a Tech business. These are longer term assignments, higher pay, so there is a significant impact in Q1. Relative to other quarters, because of the length of those assignments we’re not really seeing any change right now. We’re hopeful, right, as the States get more solvent, that we’re going to see some benefit there, but we’re not seeing any big potential impact. FA, a much higher velocity business, is more consistent throughout the course of the year, so most of the driver of that $0.14 into Q1 is Tech.

Got it. And then just on the journey to the 7.5% margin, any puts or takes in terms of potential upside to that as we think about the mix going forward or still on kind of - on part of - to hit that 7.5%?

Yes, Dave may have a couple of things to say about this but I’ll start by saying, as far as puts and takes, 7.5% is the target that we put out there, based upon our revenue expectation. It’s certainly not where we’re stopping or looking at all, efficiencies that we can find and opportunities to improve that. I think the other thing I would comment on is a lot of things that we’ve done really in the hiring that we continue to do and the efficiencies that we’ve previously identified, we’ve already undertaken a lot of that hard work. So executing on the business on a day-to-day basis, as we grow this business should drive a lot of those operating efficiencies and the margins that we’re looking for.

Hey, Kevin, this is Dave.

Yes.

The 7.5% is a milestone. It’s not a stopping point. So we’re going to continue to look at efficiencies. And as Dave and Joe both indicated, a big part of what we expect in the future is going to be the productivity of these teams as they continue to mature. And based on our human capital model, we see that their productivity increases and that in turn gives us additional leverage in the future. So the 7.5% is something we’re holding ourselves accountable to. At that revenue stream, our model tells us that we can get there, so we’re focused on it, but it’s not, it isn’t a stopping point.

Got it, and then one more if I could, in terms of FX and offshore and coming back, has there been any change in terms of strategy around that, Dave? Is it - and companies look at their 2015 from a offshoring versus near-shoring versus bringing it back on to the States out right given the narrowing spread on wage rates and so on?

Haven’t seen anything that would suggest that there has been any material change, I think the skill shortages are probably still the primary driver of decisions, whether it’s onshore or offshore versus the dollar.

Super. Thank you.

Our next question comes from An Singh with Credit Suisse. Your line is open.

Thanks for taking my questions. So earlier you had talked about the bill rates of these larger clients continuing to convert to the spot rates. I was wondering if you can give us a sense of how much that delta is now. I think you said, it was about 5% difference last quarter. Just trying to get a sense of what’s driving this convergence and how long it might take to close that gap?

Yes. So within Tech Flex, the bill rate delta between strategic accounts spots about 4.7%, so you are correct. It continues to inch its way down closing that gap.

Okay. And then the growth from these top 25 clients have been really impressive, but it’s come at the expense and gross margins. I’m trying to understand if there is any risk hitting your long-term margin targets if these accounts continue to grow at this pace or ask another way, how much margin degradation are you weighing from these top clients or should we assume them to be stable from this juncture?

Yes. I would say - I would assume on stability, I think that was in Dave’s opening comments, because that’s all built into our models, because actually when we look at what our mark-ups are within our spot market, as well as our strategic accounts especially within Tech Flex, which is, roughly 70% of our business. Those have really migrated and there is a nominal delta in terms of the mix there that shouldn’t really drive any significant difference from a margin standpoint over time.

The other thing that I would add to those comments is, we think about that client base. You need to think in terms of scale and the ability to deliver with large clients. So operating margins is what we’re driving to, right? So as gross margins might be slightly lower at larger clients of scale, you only have one bill, you only have one - call to make et cetera. So you don’t need the operating costs to drive the same operating margins even with slightly lower gross margin, so we get the benefit of scale there. So we’re comfortable with the mix as large clients grow in those operating targets - operating margin targets.

Okay, that’s helpful. And then also just wanted to touch on revenue generating head count, it looks like 2014 average in the mid-single-digit type of range, just trying to get a sense of what might drive the additions towards that 10% number you’ve talked about versus the mid-single-digit type of growth we saw in 2014?

Yes. I would say, we felt sort of our targets in 2014 Q3 put us behind the curve and part of that was driven through some of the restructuring we had going on within the organization post the divestiture of HIM. So we lost a little bit of traction there and it put us behind the curve. So we’re - we have everything in place at this point in time and we’re marching back towards that 10% year-over-year growth target here in Q1.

Great. Thanks a lot.

Our next question comes from Ato Garrett with Deutsche Bank. Your line is open.

Yes, thanks for taking my question. Building on the question regarding head count additions, are you running into any supply constraints or any difficulty in finding candidates as you work back towards the 10% target?

Now, actually, we haven’t really seen any constraints in terms of being able to go out and select top talent in the marketplace. And then we have an internal team that supports our field operations, as well as that’s - obviously one of the priorities of all of our field leaders is getting the best talent in the marketplace. So it’s never easy, but the talent is out there, so we don’t believe that’s going to be any constraint on our ability to hit our targets.

Okay, great. And then also from early in the call I missed your expectations for Tech Flex in 1Q. Could you run past those again?

Yes, Tech Flex in the first quarter, we anticipate that the business will remain pretty constant where we were in Q4 from a year-over-year standpoint.

Okay, great. Thank you.

Our next question comes from Randle Reece with Avondale Partners. Your line is open.

Good afternoon.

Hi, Randy.

The volume growth you had in Finance and Accounting was strongest, I guess, since the beginning of 2011. And could you give me a little more insight into how you got there, that was a huge number?

Yes. It’s really the same story that we discussed in our last quarter. I mean, it’s broad based. It’s across all marketplaces. It’s coming out of project-based business, as well as the transactional accounting, and we are seeing that within especially on the project side within healthcare associated with rev cycle, we are also seeing in the financial services sector. And so on the bulk or high volume business, I think we’re really benefitting from our NRC, which is servicing close to 87% of that business at this point in time. So I think that also gives us leverage in our other base of businesses, where it’s operating at the local market in that more transactional, traditional, accounting space.

And on the tax side, I’ve heard reports of some serious competition for labor in the cyber security area. How does a company like yours adjust to what seems like rapid shift in the marketplace as far as labor supply demand in a particular area?

Yes. I mean, it’s one of the reasons why, we really like the business that we’re in, because we are not a manufacturer that dependent upon having the best features advantage or benefits on what we’re bringing to the customer, so we adapt to what the market dynamics are. And I’ll go back to, I think, recruiting is one of our strongest core competencies, it’s always been one of the greatest competencies of the firm. Cyber security, partly when you look at cyber security, the demand is through the roof in terms of talent, but it’s not as broad-based as what we are seeing in many other skill areas at this point in time. Not to say that it won’t become that. So we’re really seeing a lot of the niche players that are capturing more of the project at the entry point, just because of where that is in its overall product evolution. I do think over time, you’ll see that move really into the main sweet spot of professional staffing. But right now, I would say probably the solutions companies are really catching a little bit more of that, which is the natural growth curve of how these different products or services evolve in the marketplace.

Okay, great. Thank you very much.

Sure.

[Operator Instructions] Our next question comes from Tobey Sommer from SunTrust. Your line is open.

Thanks. Just a few extra, you mentioned the Tech Flex flat year-over-year in 1Q. What was your commentary about the other segment?

Well, FA we pretty said, we’ll remain in roughly this 20% year-over-year growth range. Search we remain that it was pretty much from a dollar, what we produced in dollars would remain pretty constant for the foreseeable future. And then KGS, really on a kind of flat from where we were from a revenue standpoint in Q4, realizing that we are going to have another big product quarter there and we do see that potentially tailing off in Q2.

Understood. Is there a tailwind in terms of the share count declining a little bit further in the first quarter from the repurchases in the fourth?

No, it’s not, and so - and I think we guided an expectation of 28.5 million shares. So that will give you a full look at and what we are talking about here in terms of expectations for shares in Q1 that’s obviously related to the fact that we repurchased throughout the fourth quarter.

Okay. And then my last question is just kind of a broad one, maybe, I’m not sure who to direct to do, so I’ll let you guys choose. We talked about staffing companies maybe being directed more statement of work business from customers who want to have some more control and realize that’s where the resources are coming from many ways, so maybe save a little bit price as well. Do you think that there are government, excuse me, there are IT services firms that because the market is so tight, may actually want to have a recruiting engine. Do you see any of them kind of getting into the staffing space even on an ancillary basis? Thanks.

Yes. I would say, if we were to look at real world, so let’s look at the government space, which is very mature from the type of providers that you’re talking about. What we’re seeing with our KGS unit right now is, our ability to deliver and truly from a staffing standpoint, as well as leverage the NRC, it’s a key differentiator for that business within the marketplace. So - where I was really going with that, if you don’t just create a staffing entity over night, I mean, it’s taken us 50 years to evolve models and processes systems and so and so forth. So I can’t really tell you what’s going on inside their strategic discussions in terms of looking to do that, now whether they come in and acquire and then bolt that in, then you go back to same place, where we’ve been before which is when you try and blend solutions and staffing together, there is a lot of channel conflict that comes into play there.

I think more than likely they’re just going to use us as a supplier, because we have an engine, which by the way we found has also been a competitive advantage for us in our KGS unit. The NRC has become a primary supplier for KGS and the larger firms can’t really compete with the staffing engine that can deliver at scale, and that’s actually, we believe is going to help us even more in KGS. So the engine as Joe said, that’s a competency to us. So I think the services firms and the consulting firms will come to us to procure talent rather than buying - trying to buy us or something like that.

Thanks for the color. I appreciate it. Have a good afternoon.

Our next question comes from Mark Marcon with R.W. Baird. Your line is open.

Thanks. Just a couple of quick follow-ups. First, I missed, what did you say the tax rate would be in the first quarter?

39.8%.

Great. And then with regards to the head count additions, the 10% target, do you expect to get there all within the first-half of the year, first quarter. You mentioned you’ve got a little bit behind in the third quarter, so how should we think about that in terms of scaling it up over the course of the year?

Yes, in an ideal state we would have looked to net up 10% year-over-year each quarter and trying to be consistent with that. The practical reality of it is, it’s very difficult to be that precise with, when you’re dealing with turnover, when you’re dealing with performance management, and then you’re dealing with hiring. So that’s why when we put that 10% out there, that’s our goal is over time be consistent with 10%, but not necessarily on a quarter-by-quarter basis. There is going to be some variable aspect associated with that.

And the predominant folks who are being brought on are newer or brand new to the industry and, therefore, the wage rates obviously, your internal comp doesn’t go up 10% as it relates to this group that’s coming on?

we :

Great. Thanks for the color.

Thank you. I’m showing no further questions. I would like to hand the call back to David Dunkel, Chairman and CEO for any closing remarks.

All right. Well, thank you very much. We appreciate your interest and support for Kforce. I would like to again say thanks to each and every member of our field and corporate teams and also to our consultants and our clients for allowing us to privilege of serving you. We look forward to speaking with you again with our first quarter results. Have a good evening.