Kforce Inc. (KFRC) Q1 2016 Earnings Report, Transcript and Summary

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 digit growth rates, so our current pipeline of projects activity and difficult year-over-year comparisons suggest near term growth rates maybe in the mid to upper single digits. The market here also continues to be strong across various skill sets in industries as we continue to invest in this business. U.S. economy continues to be sluggish, but modest GDP growth levels in recent quarters including a recent downward adjustments in Q1 GDP estimates. Despite the slow moving progress in the economy, we are seeing continued stability and areas of strength in this skilled labor markets and a low unemployment rate for college educated professionals particularly in the Tech and F&A specialties that we serve. BLS temp penetration number remains near record high since the secular shift towards temporary staffing is continuing. We believe the average spending regulatory requirements particularly around employee classification and created a higher risk employment environment for clients. This trend should continue to benefit the staffing industry and in particular larger staffing firms with greater capacity and infrastructure around areas of compliance. Now I’d like to discuss some exciting developments in our KGS business. The vision we had when we built our KGS government business was to capitalize on Kforce’s core competency of being able to quickly identify and provide, out-scaled talent to the world’s largest user of technology resources. We felt this capability would be differentiator as it is always represented a significant challenge for government contractors. We have been patiently working on and investing in this business over the past several years even as many questioned why. We are pleased that Rear Admiral Patrick Moneymaker, CEO of KGS is here with us today. Welcome, Pat. Pat and his team had diligently positioned KGS for long-term success by building a first class leadership team and focusing KGS’s business development efforts on prime solutions in our areas of competencies. These efforts were rewarded during the first quarter of 2016 with the selection of KGS as one of nine large businesses and 12 small businesses to be awarded a prime contract of the United States Department of Veterans Affairs on its T4 next generation contracting vehicle. For Pat, this is a game changer for KGS. T4 Next Gen as it's referred to will be focused on procuring services for the VA areas that include information technology infrastructure improvements cyber security and operations in network management. The contract vehicle is an overall program ceiling of approximately $22 billion which is expected to be released over a period of 10 years. As a point of reference, the VA procured over 7.47 billion of services from 15 prime contractors over its five year term on the original T4 contract with the smallest total awards to any one prime contracts of being $83 million and the largest single contractor which is a small business receiving over 1.4 billion in awards. The fact that KGS has been supporting the VA for over 20 years most recently as a sub-contractor on the original T4 vehicle just to be very optimistic about our prospects to capture a meaningful share of this significant opportunity in a prime role. KGS has successful past performance and providing solutions for the VA supported by the backing of Kforce centralized delivery capabilities which we believe were key elements in KGS’s receiving this award. The T4 Next Gen contract vehicle could provide KGS with an opportunity to experience exponential growth over the next several years beginning in Q4 2016. We are focused on making the necessary investments in KGS to capture the significant future business potential this contract provides couple of important points for our investors who are not familiar with the government contracting environment. Our prime award on this contract is expected to yield higher gross profit in operating margins than we are currently experiencing. Additionally, this provides a stable and more predictable revenue stream over the 10 year life of the contract vehicle. It also raises KGS’s visibility within the government services contracting space which we expect will pour us opportunities to propose on future prime opportunities in other areas within the government. We are very proud of our KGS team accomplishments and will provide updates on a quarterly basis as to the anticipated timing of scale of revenue capture opportunities around T4 Next Gen as well as other developments within KGS. We remain confident in our prospects and therefore maintaining an investment posture as it relates to revenue generating talent additions, technology investments to enable our associates and the necessary investments in KGS to maximize the opportunities that exists under T4 Next Gen. With that said, we remain committed to our profitability target of 7.5% when annualized revenue $1.6 billion is achieved. I will now turn the call over to Joseph Liberatore, President, who will provide further details on our Q1 operating results. Dave Kelly, Chief Financial Officer, will then add further color on Q1 operating trends in financial results as well as provide guidance on Q2. Joe?

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 KPI levels. However, as we seen in our Tech Flex business conversion activity remains elevated due to a shortage of available talent. The end of these significant projects in Q1 will moderate year-over-year growth in the near term for this business unit, though still outpace industry levels. We expect Q2 Flex revenues to increase mid to high single digits year-over-year. Revenues for Kforce government solutions decreased as expected by 10.7% year-over-year. We expect KGS revenues to improve in Q2 from Q1 levels and to improve slightly year-over-year. We are focused on building a solid foundation to capture the significant opportunity that we believe exists under the T4 Next Gen award that Dave spoke of earlier. Direct hire revenues from placements and conversions increased 4% year-over-year and remains approximately 4% of total revenues. Following the relatively strong start to the quarter, direct hire revenues flats out a bit in March and continued into early April. Our objective is to meet the talent needs of our clients through whatever means they prefer and providing the highly skill capabilities to deliver resources through direct hire remains important in meeting those needs. We expect direct hire revenues to be consistent to slightly up with first quarters. We continue to add to our associate population with a focus on Tech Flex sales and as a result revenue generating talent has increased 10.6% year-over-year in Q1. The focus of our hiring has been and continues to be to add resources at some of our largest clients and diversify within our current portfolio within Tech Flex and FA Flex clients. We believe our shift in revenue generating investment and expansion where our focus to greater number of larger clients that began in Q4 of 2015 will result in greater client penetration, market share and better execution of delivery. We believe we are taking the appropriate actions to take advantage of our platform, infrastructure and client base to put our great people in an environment where they could be successful accelerating revenue growth while delighting our clients and consultants. I’ll now turn the call over to Dave Kelly, Kforce’s Chief Financial Officer, who’ll provide additional insight on operating trends and expectations. Dave?

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 basis point improvement in bill pay spreads. As we look forward after taking into account the sequential improvement in Q2 from the impact in Q1 as seasonal payroll tax increases, we expect Tech Flex and FA Flex margins to continue to be relatively stable at these levels. So alone impact Q2 margins our government business should benefit from the T4 Next Gen prime contract award as it begins to contribute to the top line greater this year since prime contracting arrangements typically carry 3% to 5% higher gross margins than subcontracts. The current mix of subcontract to prime contract revenue at KGS is approximately 60% subcontract and 40% prime, and we expect this mix to reverse over time. SG&A as a percentage of revenue declined 30 basis points year-over-year to 26% in Q1 2016 versus 26.3% in Q1 2015. We expect SG&A as a percent of revenue to improve into Q2 with the decline in payroll taxes and to remain in the low to mid 25% range in the short-term, as we absorb the costs of increased associate levels and investments in KGS that we believe are necessary to generate long-term shareholder value. We also expect to see some increased costs for technology investments later in the year as we consider replacement of our existing front office tools. The aggregation of these costs has an impact of approximately $0.02 in Q2 and may increase slightly in the second half of 2016. Q1 2016 operating margins of 3.4% improved 20 basis points from 3.2% in Q1 2015. With respect to our balance sheet and cash flows, our accounts receivable portfolio continues to perform well. Operating cash flows in the first quarter were $3.1 million. Capital expenditures for Q1 were approximately $1.3 million. We continue to maintain significant borrowing capacity under our $170 million credit facility. Long-term debt at the end of the quarter was $107 million compared to $83.8 million at the end of Q4, an increase of $23.2 million. We returned approximately $23 million to our shareholders during the first quarter through the repurchase of 1.1 million shares at a total cost of $19.8 million and a $3.1 million outlay for the payment of our $0.12 per share quarterly dividend. In the seven quarters since the divestiture of our HIM business, we've continued to provide liquidity in our stock and return cash to our shareholders through share repurchases and dividends. Approximately $160 million has been returned and outstanding shares have been reduced by approximately 20% over that period. There is approximately $33 million available for repurchases under current Board authorization. We expect to continue balancing the allocation of our capital, after capital expenditures and dividends, between stock repurchases and debt retirement as conditions warrant. With respect to guidance, the second quarter of 2016 has 64 billing days, which is the same as the first quarter of 2016 and the second quarter of 2015. We expect Q2 revenue to be in the $332 million to $337 million range and for earnings per share to be between $0.39 and $0.42. The combined seasonal improvement to Flex margins and SG&A due to annual payroll tax decreases in Q2 relative to Q1 is expected to be approximately $0.11 per share. Following two consecutive quarters of sequential revenue decline and significant efforts to refocus our activities, our revenue guidance for Q2 implies sequential growth in the range of 3% to 4.6%. Gross margins are expected to be between 31.4% and 31.6%. SG&A as a percent of revenue is expected to be between 25.3% and 25.5%. And operating margins are expected to be between 5.2% and 5.5%. Our effective tax rate in Q2 is expected to be 39.3%. This guidance assumes weighted average diluted shares outstanding of approximately 26.3 million for Q2. 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 any pending tax or 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 continue to remain very focused on the actions necessary to reaccelerate revenue growth, in particular in our Tech Flex business, as well as making the necessary investments in KGS to position us for success in capturing the significant opportunities that we expect to present themselves beginning in the second half of 2016 under the recently awarded T4 Next Gen prime contract. We believe these investments, as well as increases in technology spend, are in the best long-term interests of our shareholders. Our client relationships remain strong and our sales metrics are trending positively. We remain very confident in the demand environment within the markets and clients that we serve and still expect to meet or exceed our 7.5% operating margin target when $1.6 billion in annualized revenue is reached. Liliana, we'd now like to open up the call for questions.

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.