Good day, ladies and gentlemen. And welcome to the Kforce’s Q1 2016 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 call is being recorded. I would now like to introduce your host for today’s conference Mr. Michael Blackman, Chief Corporate Development Officer. Sir, you may begin.

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 understand 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. You can find additional information about Kforce in our 10-Q 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 this call. We have published our prepared remarks within the Investor Relation’s portion of our website. Over the past two quarters, we have been aggressively taking actions particularly in our Tech Flex business to reduce reliance in a few large customers by strengthening our position more deeply in our client portfolio and having sales talent at an accelerated level. Now we are seeing signs of recent improvement from these efforts first quarter results of $322.2 million of revenue were below our expectations. Our earnings per share of $0.24 adjusted for certain non-recurring charges built within guidance. The overall demand environment remained strong. We’ve begun this year gradual reacceleration of activity in those few large clients that have slowed their usage of flexible staffing due to transactions and conversations require representatives at this client to adjust the strong pipeline of projects. Additionally, as we further deepen relationships more broadly in our portfolio, we continue to identify new opportunities they are building significant presence within these large customers will happen gradually and take some time. We believe the secular drivers of technologies such as mobility, cloud computing, cyber-security, e-commerce and the desire of companies to leverage technology for efficiency gains within their organizations are still intact. Continued high levels of key performance indicators point to a strong market. We are confident that the steps we have taken or result in sequential growth in Q2 and ultimately through reacceleration of year-over-year growth rates in our Tech Flex business in the second half of 2016. FA Flex experienced its ninth consecutive quarter year-over-year double…

Thank you, Dave and thanks all of you for your interest in Kforce. Our top line performance in Q1 was slightly below guidance. Tech Flex our largest business unit which accounts for 66% of total revenues performed as we expected as total revenues grew 1.3% on a year-over-year basis. As Dave mentioned, the disproportionate decline in few of our largest clients is embedded in the first quarter of 2016. It is worth pointing out to this clients along with many of our largest clients have provided significant growth over the last several years and we continue to believe our long standing relationship with these clients provide longer term strength to our overall revenue base within these clients. Demand remained strong and broad-based across the industries we serve and the skill sets we provide. The ability to access and retain talent continues to be the most significant constraint in Tech Flex as exhibited by the continued high level of conversation which has disproportionately impacted our largest clients over the last several quarters. We believe we were having success as we diversify our resources within the existing client portfolio and our activity levels have increased year-over-year. However, we have not seen acceleration in starred activity as it typically takes time to turn activity in start their larger clients. We expect Tech Flex’s revenues to increase sequentially in the second quarter. However, year-over-year growth will likely decelerate slightly due to a challenging comp versus last year. Finance and Accounting flex, which represents 23% of our total revenues, grew 13.8% year-over-year. We did experience unexpected ends within some relatively significant projects midway through the quarter. These were primarily concentrated in the healthcare industry as several client converted a high percentage of consultants to full time employees. This business continues to experience high command and…

Thank you, Joe. Total revenues for the quarter were $322.2 million which represents a 3.1% increase year-over-year. Our flexible staffing revenues collectively grew 4.3% year-over-year, while our government business have climb 10.7% year-over-year. Direct hire revenues of $12.6 million increased 4% year-over-year. GAAP earnings per share were $0.14 in a quarter, which includes non-recurring charges which impacted EPS by $0.10. The non-recurring charges included $1.7 million or $1 million after tax in severance charges related to our recent reorganization and a $1.7 million charge to income tax expense for certain non-cash tour ups related to prior period. Further commentary around our first quarter results will exclude the effect of these charges to focus on our core operating results. First quarter net income and earnings per share were $6.4 million and $0.24 respectively which represent increases of 10% and 20% on a year-over-year basis. Gross margins of 30.2% declined 10 basis points year-over-year as a result of a slight decline in Flex margins. Our Flex gross profit percentage of 27.3% in the first quarter declined 20 basis points year-over-year. The decrease was primarily due to higher than anticipated health insurance expenses in our FA Flex in government businesses. Larger than anticipated enrollments in our FA Flex health plans drove increased costs as consultants have been increasingly willing to utilize the firm’s health plans rather than pay the individual mandate penalty under the Affordable Care Act. We continue to educate our clients that have been successful as impurities [ph] cost. Year-over-year spread has improved 60 basis points in FA Flex. The increase in healthcare cost in our government business was a result of several large claims which we don’t expect to persist at these levels in future orders. Tech Flex margins 30 basis points year-over-year primarily as a result of a 50…

And our first question comes from the line of Randy Reece with Avondale Partners. Your line is now open.

Afternoon. First question was regarding the Tech Flex business, what kind of sequential growth is implied in your total guidance for Tech Flex?

Randy at midpoint of guidance, it would imply 4.1% sequential growth and that's coming off of a negative 3.9% this quarter and negative 2.9% in Q4.

Very good. I wanted to honing on the KGS segment and some expected changes there. First of all, I wondering if you could give us an idea what the gross margin in that business might look like the next couple of quarter because it's been a little difficult for us to predict gross margin for KGS. And then when the revenue starts to move on your new prime contract. Congratulations on that by way. How will that effect gross margin from KGS?

Yeah sire, Randy this Dave Kelly. So, yeah that has bounced around a little bit. Part of that is a result of some of the volatility will make surges in sales of our products in that business, but when you kind of think about that, gross margins in that businesses were Q2, Q3, a probably in the low 30s percent. And then as I mentioned when we get into winning the awards and the people next-gen contracts and I'll let Pat speak if he wants do since it was a prime contracts, we're going to be see some benefit there, typically as a margins on gross margin have I met in gross margin typically matching gross margins on that type of businesses, 3% to 5% higher. So, as that bleeds-in over time, that's going to improvement. So, we expect an uplift in gross margins as we look into Q4.

As far as potential significance of the revenue there, should we start to think about an impact on 2017 and what's a conservative way to go back then?

Hi, Randy this is Dave. As we mentioned, we anticipate based on the timing of the award and the task orders coming out that we will see a significant increase in KGS revenue in Q4 2016. It's really difficult for us to give you an indication of what the impacts is going to be in 2017, because we don't yet know exactly how many of those task orders, we will capture. But I would say to you that we expected to be significant and we will be updating you again in Q2, when we'll have a much clearer picture we hope as some of these task orders wants to be awarded and will some visibility and for the starts and the timing. Do you want to add something there?

So, Dave made up an important point on just comparable marks. These contracts, the task orders are usually awarded for three to four years. So, they are very stable and so new task orders build on half of those task orders that are won. So, longer sustain growth in that contract.

My last question --

I wish we could give you a clearer indication for 2017 really. And I know part of this is going to be a little bit frustrating for some of you that -- don't yet have experience with government contracting business, but we would expect that this is going to be exponential growth in the KGS. We mentioned that the prior -- and T4, the first contract the smallest was 83 and the largest was 1.4 on a contract. That's a third of the size of this one. So, we think it's going to be substantial.

That makes sense. My last question was regarding the severance expense. What kind of cost did you take out during the quarter?

Yeah, so Randy this is Dave again. So, in the second quarter, we're still working through some of the things -- one of the things that we're dealing we mentioned is focusing on repositioning the portfolio, our associate talent to focus on sales. So, this all happens very gradually over the course of the quarter. So, when you think about the impact in the second quarter, not that significant.

Very good. Thank you.

And our next question comes from the line of Tobey Sommer with SunTrust. Your line is now open.

Thanks. Start-off by asking a question on KGS. Could you maybe break apart the addressable part of the contract to Kforce? Because I'm sure with that kind of dollar value, you got a more specialized niche than being able to compete through all that. So, if you size, what you think you can viably compete for task orders that would be helpful.

Tobey, this Pat Moneymaker. Just to give you a kind of frame of reference from our performance in the T4 as a sub, okay. With that [Indiscernible] participated as a sub for 54 submittals bids and they range anywhere from infrastructure, to IT, across the Board. Of those we won collectively 22 of those bids, again, as a subcontractor for about 40% win rate. That -- if you look at where we're investing now, display in our business developments, capture, and proposal excellence and the fact that we're prime now where we have -- I think you understand, we'll be able to control over the bid as it goes in as opposed to a sub that doesn't. We would expect to at least achieve a similar success rate, although I'll note that we won't go after every bid. There's -- as I said there were 600, we went after 54 which was less than 10% in -- as a sub in the T4. Does that help?

Okay. Yeah, it does. Thank you. And I guess is there a specific set of task orders that are your -- getting for bid and proposals in that give you confidence in the fourth quarter specifically?

Those are still being revealed by our government customer. They come out and traches every month or so. Right now, we're still in a period of protest with some of the bidders. But we already have probably 25 that we're looking at the moment just to give you a rough order of magnitude.

Okay. Thanks. And then in -- just a broad question about gross margins if I could. Down a little bit in the quarter and I think you explain why, but I'm curious why would they be stable sequentially in 2Q and not see a little lift?

Yeah. So, Tobey, maybe tough to drift [ph] through the language. We expect gross margins will be up Q1 to Q2 because of the relief of payroll taxes. The point that I made was from those levels, so when we think about spreads, we don't expect big improvement, but certainly, we expect that typical 1% to 1.2% gross profit lift from the payroll tax, in fact Q1 to Q2.

Okay. Thanks. And one question for me on the Tech Flex, you've had some opportunity now to see the pause or slowdown from some large customers and digest it and see it evolve. Do you still remain confident that these customers are going to overtime remain as significant users of staffing or are they shifting their format in which they are consuming IT services to buy more outsourcing or consulting, or offshoring? Thanks.

Tobey, we at this point in time, we're pushing now three quarters into some of the transformation that those organizations are going through. We haven’t seen any major shift in terms of their intended buying patterns. So, we would believe that there would be continued opportunity. Meaning we're still generating a nice amount of money out of customers, so there's ongoing activity. Where we really saw the impact was the letting of new work [ph] coming. So, we really had that pause there and now starting to people as well we're seeing in terms of job order flow, as I said number of those tasks are being replaced.

Thank you very much. I'll get back in the queue.

Thanks.

And our next question comes from the line of Kevin McVeigh with Macquarie. Your line is now open.

Great. Thanks. Hey wonder if you could just spend a moment or two on where you were from a sales force perspective given the slowing IT. Are you ramping up the investment there to try to offset some of that or is it going to be more focused of KGS given he incremental upside that's been driven there?

Yeah. Nothing changed in terms of what we've laid out going back several quarters now in terms of our 10% target on netting-off in Tech Flex and with a heavier disproportional amount of that being on the sale side. So, we're staying after that. We were kind of right in that zip code in Q1. We'll probably be a little bit lighter based on some of the things that I'm seeing here in Q2, but not anything materially probably upper single-digits would be my guess. So, we're staying after continuing to build. We see solid demand within Tech Flex. All of our KPIs remain very -- at very elevated levels. KGS is really more of unique investment specific to that business for the capture aspects and then the recruiting dynamics in those aspects. So, we're looking at those as two separate, we're not blending it together.

Got it. And then estimating on maybe the pricing environment and how it's been sourcing candidates on the IT side. And then just along those lines, can you help us understand where conversions are and I would have thought you would have seen a little more uptick in perm given it sounds like you've seen some full-time conversions. Is that manifesting itself on the conversion line, or is that just converting away?

Yeah, Kevin, so relative to pricing environment, the way that I would categorize what we're seeing in Tech Flex from a pricing standpoint is stable. Our spreads have remained pretty constant. Our bill rates have remained pretty constant. So, outside of some slight skill that can happen in the quarter-to-quarter basis. I would say stable at this point in time. When we look at conversion, our conversions have been at elevated levels for quite a period of time. And they haven't really changed and the reason that we don't see that show-up in our direct higher number is because typically what we're seeing is the client is converting longer term people that have been there and now they are making the decision that they want that resource as an ongoing full-time employee, which as painful it is to lose those people, we view it as very much positive because at the end of the day, our responsibility is to connect the right people with the right opportunities and the right opportunities all our clients with the right people. So these are people's carrier, so I don’t think there is greater compliment that we received that we have done a Job well is when a client basically elects that they want to bring somebody on full time and that person wants to go there. So that’s why we don’t typically see much of a uplift in terms of direct hire with the conversions, because they are no fake.

Okay. Thank you.

Sure.

[Operator Instructions] And our next question comes on the line of Anj Singh with Credit Suisse. Your line is now open.

Hi. Thanks for taking my questions. I guess first off last quarter you had helped us sizing the impact of revenue for largest clients as you go through this little bit of a transition period, could you give us the same this quarter just trying to get a sense of what Tech Flex outside of these particular clients was growing?

Yeah. Probably the best way to look at it again going back for the better part of the last six months or little bit over that one of things that we were very clear on was adding sales people through diversify deeper into all those customers all those customer where we already have relationships and a good footprint. So I guess this is probably the most relevant number. Our top 25 Tech Flex clients on a year-over-year basis actually grew 7%, against the backdrop of the overall Tech Flex business being 1.3%. We’ve seen our top 25% Tech Flex clients the concentration within those clients in Q1 2016 was 47.3% in comparison to Q1 2015 at 42.8%. Now where that becomes really relevant is the significant customers that we have been had headwinds again were significant contributor. So they haven’t participated in any of that growth and actually they have gone in the opposite direction. So it gives you a sense that we are diversifying that revenue across a much broader base of large customers.

Okay. Okay. That’s helpful. And then with regards to your comment that you are building the presence with the significant customers, but it will be a time consuming gradual process. And I realize you don’t give longer terms guidance, but could just frame for us how long that make take are we talking two or three quarter, are we talking longer than that, just anything to help us there?

I guess the best thing that I can point to is when we were on our Q3 call I think we had put out there. And it probably take us two to three quarters, so really start to see that momentum. Here we are looking into Q2 now which is much exactly to that timeline that we put out there. And as I stated we are anticipating at the mid-point of guidance 4.1% sequential growth. So I believe the plan is working pretty much along the same time lines that we had anticipated when we set out with the plan.

Okay Got it. And one last one from me with regards to KGS, could you for perspective give us the size of the contract that you had won on the original T4 five year contract? And another question related to that could you help us understand what may go into their decisions what sizing of the piece of the contract that you get this time around and how Kforce may fair on those conditions?

Our largest task order, that’s where things are these are task orders underneath the umbrella contract this quarter clarity. Unless about a $100 million it was the largest that was left and we were set to a small business in that one that was called the decapt past quarter and it service data centers. And everything the other 21 wins that we had were spread around everything from IT support to cyber intelligence cyber security data analytics kind of across the board as they are asking. So, in this in the new order here the preference that if they are going to stick to the same way that they conducted Q4 they won’t get preferences to small businesses first, because they like to support the decronome small businesses and that’s where we would come in and be a partner and a sub. For there they will open it up to broader full and open competitions they will play very well as well. I am not sure that answers the specific question you have regarding the way four and how they saw that.

And this is Joe. I just want to add a little bit of color that might help bring this into light. So David mentioned this resulted in common. We have been doing business with the VA over 20 years. It currently is roughly 40% of KGSs total revenue, so this is – we already have a very strong foothold and good standing here. The other things that are very important to know is even when you look across the government you look exposure in different governmental areas based upon sequestration and various other cut backs the VA is pretty much been immune to all of those exposures. I mean we all see what – we all see the headlines and we see the news and we know the dynamics that they are facing in terms of the amount of technology upgrades and just overall process enhancement that have to be taken place. So we feel very confident that there is a place we wanted to be playing within the government this is the area where we want to be at.

Other characterize that the 20 years of relationships and knowing the people if you think about the captures the hunt we know where the animals are hiding.

Okay. Got it. That’s really helpful color. I was just trying to get a sense of if there were any benchmarks or benchmarks done across the different people competing for the contract and if Kforce if you guys had any sort of metrics as to where you stood on those benchmarks and so forth. But it sounds like it's more length of relationships that you guys have there?

Certainly big part of it.

Absolutely.

Got it. Thanks a lot.

And we have a follow-up question from the line of Tobey Sommer with SunTrust. Your line is now open.

Thanks. On the KGS side do you have to do much in a way of investment augment your bidding proposal group, so you can hand over the taskforce and capture your fair share?

Tobey top money maker again. Yes, there is an investment but I would characterize it is as modest the interesting phenomenon as developed here we are one of the nine large winners. We began to see that the talents in the small universe that it is that supports VA were gravitating towards us that challenge we feel like we -- I would say assembled in 18 that is based on seasons people that participated they were capably in the orders arena. And also ones that no VA customer inebriety have the relationships across the VA spectrum.

As you all know when these major top charts were awarded you typically at a whole rotating of populations you have those that were deselected out and you see peoples just exiting those organization because they are leveraging and partnering their relationships and Pat and his team to credit because Pat being pretty humble here have really attracted some very top talent that have long standing relationships that we are very excited to have on board as part of the KGS team.

Great. And then you mentioned something that fair remarks I wanted to ladder down a little bit if you could. You talk about investing in replacing some systems, could you give me color on the costs when you decided to do that and kind of what you might hopes to achieve? Thanks.

Tell the Joe no, we are not talking about the systems I am talking about the amount of work that’s necessary at the VA internal there are internal Kforce actually KGS we have gone through all of our upgrades, so that’s all behind us we will be a very good shape from an internal system standpoint.

So I think yours questions may have been--

Yeah. I think it’s related to the France systems that you talked about.

So we are looking at upgrading and providing new tools to our associates front end tools and so we are doing our diligence around those things and we are starting to spend some money as you look to the back half of this year. We think it’s a slight increase in cost in the second half of this year. In our commercial staffing business support we will give you more colors of unfold but we are looking full word to a longer term view on replacing those tools.

And I'm showing no further questions at this time. I would now like to turn the call back over to David Dunkel.

Okay, great. Thank you for your interest in support of K4. So I would like to say thanks again to each and every member of our field and corporate teams and through our consultants and our clients. Thank you for allowing us to fulfilling and serving you and Pat congratulations on your big win. We look forward to speaking with you again soon.

Ladies and gentleman, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.