Good day ladies and gentlemen, and welcome to the Kforce Inc., Second Quarter 2015 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Michael Blackman, Chief Corporate Development Officer. Mr. Blackman, you may begin.

Great, thank you. Good afternoon, and welcome to the 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 SEC. We cannot undertake any duty to update any forward-looking statements. You can also 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 and better understanding our performance and to improve the quality of the call. I would now like to turn the call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you, Michael. We are very pleased with our results which represent our eight consecutive quarter of double-digit year-over-year organic growth and the achievement of a significant operating margin benchmark in the path to our longer term profitability goals. Second quarter revenues of $337.4 million and earnings per share of $0.41 both exceeded our expectations and consensus estimates and new records for the firm. In their operating margin this quarter 6.1% confirms that our plan is working. Strong growth was seen across our staffing business lines and profitability has also improved through both expanding gross margins and improving SG&A leverage. Secular drivers continue to be key factors in flexible staffing growth against the backdrop of a non-traditional economic recovery. The disproportionate chair of job growth continues to come from the temporary staffing sector. The temp penetration rates remaining above prior peak cycle levels. Highly skilled specialty staffing demand in particular remains robust, staffing industry analysts continues to predict 6% or greater annual growth for technology staffing through 2022, which represents approximately 70% of our business. This ranks among the fastest growing staffing segments in the U.S. We are also seeing continued migration of traditional technology project based work into statement of work opportunities as organization look to reduce costs by utilizing a higher percentage of highly skilled contract technology resources. FA staffing is also expected to grow at 5% or greater annually over the same period. Our domestic portfolio remains balanced with strong year-over-year growth to both Tech and FA Flex as well as direct hire. Our government division remains stable. The 9.6% year-over-year growth rate in Tech Flex, which accelerated from 8.3% in Q1 and the 21.2% growth rate in FA Flex which accelerated from 15.9% in Q1 both suggest that we continue to take market share. We are…

Thank you, Dave and thanks all of you for your interest in Kforce. I'm very pleased with our performance in Q2 as we delivered revenue that exceeded expectations across the spectrum of our offerings. We are now 2.5 years into the new era. The simplification of our business model continues to provide a platform focused upon execution to better serve and delight our clients, consultants in Canada. This has been and will continue to be critical to our success in delivering above market revenue growth and improving profitability. Year-over-year growth rate from Tech Flex, our largest business unit accounting for 67% of total revenues accelerated to 9.6% this quarter as a result of the 8.4% sequential improvement. Overall, our key performance indicators for technology continued to be a record high levels in Q2 and our pipeline remain strong. Demand is strong across many industries with our most significant being financial services, manufacturing, healthcare and insurance, which we continue to see out performance related to our overall Tech Flex growth averages. The ability to assess talent continues to be the most significant constraint in Tech Flex. Convergence has been elevated for the past year and our reflection of this constraint against strong demand environment. Though this has short-term impact on revenue growth, it is a positive indicator of strength in overall tech stuffing demand and customer confidence as we look ahead. As we look forward into Q3, we expect to sustain similar year-over-year growth rates in this business. Finance and accounting Flex, which represents 22% of our total firm revenues experienced an acceleration in it's year-over-year growth rate to 21.2% year-over-year as revenues grew 9.9% sequentially. This business is also experiencing all time high KPIs. Growth by industry is diverse. The contributing drivers to the year-over-year success continue to be financial…

Thank you, Joe. Total revenues for the quarter were $337.4 million which represented a 7.9% sequential increase and an 11.4% increase year-over-year. Our Flex staffing revenues collectively grew 12.2% year-over-year and our government business increased 1.3% year-over-year. Direct higher revenues of $14.4 million increased 14.7% year-over-year. Second quarter income and earnings per share from continuing operations were $11.6 million and $0.41 respectively, which represents 46% and 71% year-over-year improvements versus $8 million and $0.24 in Q2 2014. Earnings per share exceeded the top end of our guidance by $0.05. Our gross profit percentage in Q2 of 31.4% increased 110 basis points sequentially and 20 basis points year-over-year. The sequential increase from gross margins is primarily the result of an expected seasonal reduction in payroll taxes which positively impacted Flex margins and an increase in the mix of direct hire as a percentage of total revenues. Our Flex gross profit percentage of 28.4% in Q2 increased 90 basis points sequentially and 20 basis points year-over-year. As it relates to the 20 basis points year-over-year improvement in Flex gross profit percentage, we are beginning to see favorable trends in federal and state unemployment tax rates, which is the main driver to the year-over-year improvement. After years of very high costs, states are beginning to lower the rates slightly. These reductions coupled with increasing assignment lengths than our Tech Flex business are driving unemployment taxes down and we expect to benefit from these perspectively in the form of slightly higher Flex margins. Bill pay spreads in our Tech and FA Flex businesses are flat year-over-year prior to this quarter, spreads have been compressing slightly over the past year to have more rapid revenue growth in our larger clients which are slightly smaller spreads. However, as a result of the sequential spread improvement we…

Thank you, sir. [Operator Instructions] Our first question is from Mark Marcon of R. W. Baird. Your question please.

Good afternoon and congratulations on a terrific quarter.

Thank you, Mark.

Thanks Mark.

Can you talk a little bit more about the share gains that you are getting particularly in Tech Flex where your actually experiencing improvement with regards to the margins. What's the key driver behind the share gains and what are you seeing in financial services because we have been hearing mixed things about that vertical?

Yes, Mark. This is Joe. I guess to start on the revenue side; the revenue growth has really been broad based. I think six of our top seven industry verticals actually outgrew the total Tech Flex revenue number that you are looking at. So I would attribute that to the focus and the concentration and the alignment of our teams executing in and around those customers within those verticals. So it's broad based. Specific to financial services, we have a fairly diverse portfolio within financial services and I would say it's a whole lot what we are seeing. Yes, we are seeing a little bit about market in terms of the growth that's happening within overall financial services at least within those areas that we are playing within the customers. And so related to the margin profile, we are seeing a nice balanced margin profile within our Tech Flex business. We are seeing the pay bill spread remain somewhat constant and that bodes within our large customers as well as within the spot market. So they both need pretty much in concert this past quarter on a year-over-year basis they are very balanced from that standpoint as well.

That's great. And then with regards to your FA business, can you talk a little bit about what you are seeing on the healthcare side, a little more color there in terms of that particular vertical?

Yes. Healthcare specifically we are seeing a lot of opportunity within rev cycle, which really plays well to our NRC alignment because typically those types of projects are bulk hire type projects. We are regaining exclusive bulk needs within those clients, so there is usually a short duration for delivery. It's kind of crisis mode. And the NRC, the location that we have here in the east to service those clients as well as the location we opened a little bit over a year ago in the west to service the West Coast clients have really uniquely positioned us to be able to go after that business. So we continue to see exceptional growth in that area.

Can you talk a little bit more about the specific types of clients that you have in that healthcare business?

It's probably a little bit heavier on the provider side of the house that we are actually working with clients both in the payer and on the provider side within that space.

Great. And then you made a comment about lengthening assignments, can you give a little bit more color there just in terms of dimensionalizing that?

Yes. I mean, I would say we haven't seen anything materially changed from lengthening the assignments. Historically, our average assignment duration has pretty much been in about that six month window from a Tech Flex standpoint. We have seen that migrate here over the last several quarters closer to about seven month window. And that helps us from some of the statutory cost standpoint when we are holding on those people longer.

Great. And then the margin guidance on the gross margin is obviously favorable, where is the biggest level of increase that you would expect because you are expecting direct hire to come down a little bit as a percentage, so I was wondering if you could give just a little bit more color there?

Sure, Mark. This is Dave Kelly. So really two areas, I have mentioned at some length our discussion around the reduction in insurance costs. As we move into the year in addition to that favorable trend that we have been seeing with the states reducing their rates to us, we continue to see as the year progresses, our reduction in insurance costs as a percentage of revenues so we are going to get some benefits for that going from Q2 to Q3 just as we do every year. And then we are expecting – it fluctuates a bit, but we are expecting some mixed changes in our government business to impact rates. So as Joe said, we are really expecting pretty stable spreads in Tech and in FA. And so those are the two big drivers.

Great. And then last question and I will jump back in the queue. You are part of a big Pentagon contract, can you talk a little bit about how we should think about government longer term beyond the current quarter?

Sure. This is Dave again. Very much as we have been saying, the government procurement environment is very difficult to pace and tough to gain any longer term visibility. We have seen a relatively flat for a number of quarters as we look out into the third quarter and beyond. I don't know I would expect anything different from that. As it relates to recompetes and some of the things that we have been talking about in the past, almost all of our recompetes are behind us this year. So we have got some pretty good visibility as we look into at least Q3 for that business. One of the larger contracts that we have talked about in the past as continued to get pushed to the right terms of an award. So we are continuing to work on that contract. We have been a contractor there for many years. So it would actually benefits us that the government hasn't made any decision on that. So that's where we are in that business.

Mark the other thing I would add on that front is, obviously, you are aware we brought Pat Moneymaker back in as CEO of that entity. Pat has a very longstanding track record of success. And I think he and the team have really done a lot of heavy-lifting here over the course of the last 18 months on realignment of that as well as on pursuit of business. Also I say their pipeline is building nicely realizing that it is very competitive landscape. So I think the teams have really made some nice progress on those fronts in terms of the quality of the pipeline and the focus of the business and they are doing very similar things that we started down the path three years ago within our staffing business which is really narrowing the focus, getting after execution blocking and tackling not looking for the shiny objects and really going after customer share and capturing and penetrating those customers.

It's pretty clear. Thank you.

Sure.

Our next question is from Tobey Sommer of SunTrust. Your question please.

Thanks so much. This is actually Frank in for Tobey. I wanted to ask first about the hiring environment for recruiters and kind of your comfort level for where you stand in terms of capacity on that side?

Yes. Frank, I would say, the hiring environment, it's a competitive environment but it's one of the top priorities of all of our leaders in the field as well as we support them. It's a component within our centralized services to help from a hiring standpoint. So it's brought in center every applicant that we bring in, the first thing that we look out are – would they be a good quality talent acquisition for Kforce. So we haven't really seen any constraints on our ability to hire top talent from a recruiting or an account management standpoint. And then I say, relative to our plans as we look forward as I mentioned in our comments. The target we have put out there was pretty much target growing that population by roughly about 10% realizing it's not a precise science based upon turnover and other dynamics. So we found a little bit short here on the last couple of quarters and we are hoping that here on the back half of the year that we will come in closer to that 10% target. But one thing that I would give you just a little bit of awareness in and around when we are just talking pure percentages on a year-over-year basis, is actually Q3 on last year was a low watermark. Of course, I think our headcount growth was about 2.9%. So it is possible that we could be in the lower teens this quarter, if we were to hit what our net hiring target is.

So Frank, this is Dave Kelly to add just a couple of other things to Joe's comments. You asked about capacity and productivity. So we have been hiring although I could imagine last year we didn't hire as many we have in our and consistently for a number of years now and so when you think about moving forward, we certainly have the resources and the capacity with our hiring plan the people we have in place to sustain the revenue growth levels that we have established. It's all part of a longer term plan. So it will fluctuate quarter-to-quarter. We continue to invest. But, we got the benefit, people have been hearing two years and they are really starting to hit their stride now which actually give us incremental capacity and productivity. So we think we are in a pretty good place right now.

Yes. And just to give you a statistic in and around that. If we were to look back eight quarters ago, we have seen our two-plus-year population grow by about 41%. I mean those people are a much higher contributor when they get into those ranges. Likewise, what we did see here in Q2 as we saw our year-over-year both revenue and GP productivity levels moved up nicely on a year-over-year basis.

Thanks. That's helpful. I wanted to ask a little bit about kind of revenue by client size, particularly on the Tech Flex and FA, are you seeing broad based versus large clients as well as the smaller clients, do you love that demand?

Yes. We are seeing that demand across. It's really across the spectrum which is nice because where we are concentrated within some of the larger clients to see those revenue growth levels being at or in many cases actually higher than even what we are seeing in the spot market. It gives me confidence that the plan that we laid out that the team is executing up on it. And we are gaining customer share within those clients. Because on average when we look at just pure Tech FA, if we look at top 25, the top 25 grow historically a little bit above average to what we are seeing in the spot market. Then when we look at our enterprise top 25 customers, we typically see them gapping the average growth rates even by a little bit more when we look at the collective top 25.

All right. Great. Thanks very much.

Sure.

Our next question is from Kevin McVeigh of Macquarie. Your question please.

Great. Thanks. And congratulations on – just a great outcome. Hey, I wonder if you could – I tend to get a little too optimistic, can you help us with the 6.1% margin, how should we think about that in the back half of the year and just as we think about the progress towards 10.5%, the $1.6 billion mark. Is there any type of seasonality we should think about not getting too far out in terms of Q4, but just at least to think about that margin within the context of the great outcome?

Yes, Kevin. This is Dave Kelly. Again, just a couple of over looking comments and I will talk about seasonality. We are pleased with 6.1%, we think Q3 and our guidance is another good step toward our business goals, our operating margin goals. As we look forward, we have historically targeted that $1.6 billion to be at 7.5%, we still think that is the right benchmark. We are in this and have been on a consistent plan on a sustained basis investing in our business. We expect to continue to do so and making those investments is going to impact some of those – the cost structure. So we will make our way from where we are today and to that 7.5% level – at that revenue level and we don't believe it, in fact that it has changed and the plan is working that we laid out. In terms of any seasonality as we look into the fourth quarter as we historically do, there is a lot of holidays that take place in the fourth quarter. So it impacts some gross margins, so you typically see a little degradation there. And because there are a little bit less billing days, the revenue growth trajectory that we see in the middle of the year gets slanted a little bit. And then of course, we got Q1 as we did last quarter or two quarters ago now and we see every year the payroll tax impact pretty significantly impacts margins again because you start the year, you got the rebuild and particular in our Tech Flex business the revenue stream it takes some time. So again, the revenue growth is kind of muted in the first quarter. So there is still that same seasonality effect we have seen in years past.

Understood. And then just – we have just seen the release, is that primarily Tech right now and would you expect that to expand into FA next year or is it broad based?

Yes, Kevin. We have mentioned [indiscernible] on Tech, of course, we benefit from the fact that the turnover isn't as great and that helps us. But, we are seeing broad based in both Tech and FA and our government business as well. Not all the states would have, fair amount of the states who have really gotten their unemployment pools in order reducing the rates to us a little bit. And so both in Tech and in FA, we are seeing the benefit of that. And so I think we believe these types of pseudo costs that we have seen are something that are sustainable and we will benefit from it and I think you will probably see that across the space.

Awesome. Thanks guys.

Thanks Kevin.

Our next question is from Randy Reece of Avondale Partners. Your question please.

Hi, guys. This is Ben on for Randy Reece. Congrats on a good quarter. Just a couple of things, on the contingent search side, how should we think about that going forward as part of the broader business?

I think Dave mentioned that in his opening comments. And we pretty much modeled in for that to stay somewhat constant on a percentage revenue basis. And that's pretty much we have been tracking in this 4% range for quite some time. And we wouldn't anticipate anything materially changing from that one direction or the other this point in time.

Okay. Cool. And then on the – within FA anything about your current book of business that can make for difficult comps next year?

The only thing that's going to make for difficult comps is that the rates were growing. I mean obviously that – I don't know another way to answer that. But, in terms if you are asking if there is anything material that we see in size inside the business with major project and that we have to over come or things of that nature, not at this point, I mean, the pipeline is very deep. And we continue to build the pipeline. So we are pretty confident that the team has done a great job from an execution standpoint.

This is Dave. We only have 3% market share in both of our businesses. So we think that there is still a lot of runway ahead and as we have said we are starting to take market share. But the 800-pound gorilla in that space still as a lot that we like to have. So we will keep going.

Got you. Thanks. And then just one last thing, on the Tech Flex side, can you just speak to kind of where you are seeing hot and cold spots and how you guys are doing, addressing those particular segments of the market?

Yes. Say from – as I mentioned in earlier comments from a vertical standpoint, I mean six of seven top verticals and that's from a revenue scale standpoint. They outgrew our top line Tech Flex of 9.6. So we are seeing it, it's very broad based, we are not seeing anything specific to geography. We are seeing in East Coast to West Coast. We are seeing it north to south. So it's pretty much across the spectrum. In terms of skillset, it's the standard skillsets we are seeing demand. We continue to still see a lot of opportunity in the active areas as well as the project and program management areas. And then needless to say, one of the things that we have been seeing a little bit more here more recently. As we continue to see more business come down out of the solution space into the statement of work space. And I think this is really playing well with our larger customers, strategic account focus where we haven't seen at the table and we have deep relationships because it's giving us an opportunity to capture a greater share of that business. And we like that business because that business is typically more exclusive in nature. So we have a higher probability of outcome. So when we get those requirements, we know when our people are working hard, they find the right people; we are going to get the placement because we are not competing with other firms for that business. And that space is coming down I mean in reality, I have heard things as large as it's 5x the size of the general staffing space. I have been out in the markets meeting with top level executives inside these organizations. And they are saying it, I mean I can't put it any other way, they are basically narrowing those vendor list to work on the what they say are the [C suite] [ph] exposure projects that they are doing a major ERP implementation that's still going to the solutions provider. But, a lot of the other business that they used to push to the solution providers that don't have that visibility. They are driving down to the statement of work business and that's an area that we are very well equipped to play in and our teams are organized and going after that business.

Perfect. Thank you so much. Thanks guys.

[Operator Instructions] Our next question is from Ato Garrett of Deutsche Bank. Your question please.

Great. Thanks. Most the questions I had already been answered. I just got one quick one regarding that -- your strong results within Tech on search and direct hire. Are you starting to see any scarcity coming up out of that just given the strong [prem] [ph] results you have had for the last two quarters?

Yes. I mean that business has been a nice way. I would say it's actually we are seeing the same thing from a candid demand standpoint on the FA side of the house. I mean it's been a tight candidate for quite some time now, so we see counter offers up. Fortunately, we have some very tenured people working both within the Tech side as well as the FA side that really buttoned down the process and work very good on the matching of the right people with the right clients and orchestrating that a little bit. It's going to continue to be a challenging environment, but it's been challenging for quite some time at this point.

Actually -- and just one more quick one on – just how to think about SG&A expense going forward because what the – about 7% increase in revenue generating headcount this year or this quarter maintaining your target for 10% of the year. It sounds like you are going to have ramp in the back half of the year. I want to think about how that foots with your SG&A guidance for the third quarter and what kind of implications that might have as a percent of revenue in the fourth and third, do you have any comments you can make on that?

Yes. This is Dave Kelly, again. So as it relates to third quarter and I would say as it relates to third quarter, our plan has been no different than it has been for the last couple of years. So it's very much baked into the whole model. Looked hired, we hired at 7.7% in the second quarter, it will be approximately at or slightly more in the third quarter. So when we think about incremental cost. It is not a big incremental cost. When we think about SG&A perspectively we have indicated to you in our guidance that we expect to gain some additional SG&A leverage, big drivers of that. And again, this is all part of the plan that we have been talking about for a long time is we have done consistent hiring. We found efficiencies in our model but the productivity improvements that we see in the associates that we had on board and continue to hire and as they ramp drive down the cost of compensation as a percentage of gross profit that we generate. So that's really is the key to the model. And so as you look forward from where we are today so that 7.7% we have mentioned a number of times gross margin expectations are flat. So the benefits that we are going to get here as we move from where we are to the revenue levels that get us to 7.5% are going to come from scale and are going to come from productivity. So therefore, SG&A.

But I want to clarify what Dave saying from a productivity standpoint. We are not saying, we are going to do anything that history has not proven more capable of doing from a productivity standpoint. So this is really the portion of people that are in the tenure bucket, which is the comment that I made earlier as we continue to see our 2-plus year population expand. We are modeling that they are going to perform at the same levels that we have historically perform. If we get any productivity to live on that population on a per person basis that would actually be an addition too, but we are not banking on any of those things happening in our models.

Got it. Thank you.

Our next question is from Anjaneya Singh of Credit Suisse. Your question please.

Hi. Thanks for taking my question. I just wanted to hit productivity that you are referencing earlier. As we think about productivity on your revenue generating head count, you talked a little bit about, its being a little bit better than what you had anticipated at this stage. Now, is that result of the NRC, is it more just that the cycles at a point or the revenue is frankly easier to generate. I guess, if you could help us put that in context of how productivity for those head counts fares versus – or looks like versus prior cycles? And how we should be thinking about it going forward.

Yes. I would say the best advice that I can give there is, to be following what Michael and Dave are talking about in terms of the full cash that we put out there the 7.5% at $1.6 billion, I'm not trying to get too sophisticated in terms of productivity because it's complex. I mean we are in the bouts of the system and based upon how people are moving through tenure gate and what's happening with productivity. So we are – from time to time in a given quarter, going to have some people that bigger population to transitions into one of those tenure categories which will artificially move productivity for that period of time. So that's really the guidance that I would have is, is not try and decipher all those productivity because it's a complex volumes.

Okay. Fair enough. And then earlier on the call, you mentioned that some there is chatter on the uncertainty about where the cycle is currently. Could you just give us some context around that with regards to how you are client conversations are proceeding. Is this something your clients are even mentioning or bringing up at this stage or is it generally cost over in light of the longer assignment once you are seeing in secular trends you pointed to?

Actually – this is Dave. Actually, the clients aren't saying anything about this cycle. They are saying can you hurry up and get us some people. It's a – from our perspective, it's been business as usual, the demand is very high for our services. I think it's pretty clear what's happening in technology. Technology in the 70s, 80s, 90s was relegated really to support functions and now it is the product. It's how most of our clients are interfacing with their customers. You see macro trends of mobility in business intelligence and you have got security in all these drivers that are continuing to increase demand. So I would say that the technology explosion is one of the principle reasons for the underpinning of the secular drivers. So when you add to that uncertainty about government regulations and all of that chatter that's going on there healthcare and all of those kinds of things, I think what you are seeing is a shifting of resources towards the flexible staffing firms which ultimately I think is going to be sustained. We have clients talking about target percentages of their staff and that's going up. So at this point, which we have been saying for several years now, we would say that the secular drivers have really over taken the cyclical drivers for the industry. Not that the cyclical owned impact because it will but it won't be as dramatic as in the past because these clients are still having to invest in their service offerings and in their support infrastructure. So we think that we are actually in the best time ever in the history of staffing.

A piece that I would add to that is, I would say what we are seeing is disciplined growth as we are hearing from the clients. So unlike back in the [dark armor] [ph] where people are willing to spend money without any clear ROIs on that. That's not what's happening within the majority of the entities out there outside if you are doing some business with – a VC based entity or somebody who is getting ready to IPO or things like to that nature where they don't have quite the same cost constraint. The cost is something that we hear on these hiring authorities mind. So they are looking for how they can gain efficiency; how they can gain leverage, which is why we continue to see a significant vendor consolidation going on around the industry because they are looking to concentrate their revenues and we get some leverage associated with that. And I think if you were to look at our portfolio over time, I think we have done a very nice job of balancing the ability to capture those greater revenues while maintaining our margin profile and not having to give away the form to basically buy that business.

Got it. Okay. That's interesting. I appreciate the thoughts there. Thank you.

At this time, I show no further questions in the queue. I would now like to turn it back over to Dave Dunkel, Chairman and CEO, for closing remarks.

Well, thank you very much for your interest and support of Kforce. In closing, I'm proud to share that we will be recognizing our 20th anniversary as a public company on Thursday, August 6. And I will be ringing the closing bell at NASDAQ to mark the occasion. I would also like to say thanks to each and everyone member of our field and corporate teams and our leaders, you guys crushed it. And now, we want you to do it again. So it's time for you to get back to work as you get off this call. And also we want to say thanks for our consultants and our clients for allowing us the privilege of serving you and helping us to reach this milestone. Thank you very much. We look forward to talking to you soon.