Good day, ladies and gentlemen, and welcome to the Q2 2017 Kforce Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today’s conference, Mr. Michael Blackman, Chief Corporate Development Officer. You may begin.

Good afternoon and welcome to the Kforce Q2 call. The prepared remarks of this call are available on the Investor Relations page of Kforce, Inc., website in the Download Library under Shareholder Tools. Before we get started, I would like to remind you that this call may contain certain statements that are forward-looking. These statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce’s public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. I would now like to turn the call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you, Michael. You can find additional information about Kforce in our 10-K, 10-Q and 8-K filings with the SEC. We also provide substantial disclosure in our earnings release to assist in better understanding our performance and to improve the quality of this call. In addition, we have published our prepared remarks within the Investor Relations portion of our website, as Michael indicated. We are now nine years into a cycle, where flexible staffing revenues have continued to capture an increasing proportion of the total workforce as the temp penetration rate recently hit an all-time high at 2.07%. The specialty staffing market growth rate continues to significantly outpace total flexible staffing growth. Domestic IT staffing specifically has grown from $15.8 billion in 2009 to an estimated $30 billion at the end of 2017. This does not include technology services and solutions. We’ve taken significant steps to position our firm to take advantage of the long-term growth prospects of this vibrant market. Though second quarter revenues of $340.3 million and earnings per share of $0.44 fell short of our expectations, the underlying improvements we have made in our business model provide an excellent foundation for growth. Over the last 18 months, we’ve been executing a strategic plan to refine our operating structure, rebalance our revenue-generating talent, and make prudent and necessary investments to improve our sales efforts and enable our associates with new technology, including a new CRM system. These efforts are not yet complete. And with regard to our sales transformation investments, the anticipated return on investment is taking longer than we had originally anticipated. However, the improvements we are beginning to see in activity levels and the quality of client conversations provide confidence that those returns are forthcoming. Joe will comment further later in the call on these sales…

Thank you, Dave, and thanks to all of you for your interest in Kforce. Our top line results for the quarter reflect growth on a sequential and year-over-year basis of 1.9% and 1.6%, respectively, but fell short of our expectations. Tech Flex, our largest segment, which accounts for roughly 65% of total revenues, increased 2.7% sequentially and 1.5% year-over-year. The momentum in new starts activity that we generated in the first quarter and carried through April plateaued in May and June. We also experienced slightly higher than anticipated assignment ends and higher conversions during the quarter. Critical to the long-term success of our Tech Flex business is the ability to deliver at scale to larger consumers of flexible technology talent, and further deepening our expertise within growing industry verticals to allow us to expand the breadth of our service offerings to these larger, sophisticated buyers. Larger customers continue to concentrate spend with firms, such as Kforce, that can meet their needs nationally as well as ensure compliance with internal and external policies and regulations. We are one of the few providers that can meet these client needs on a national basis. We continue to focus efforts to optimize driving efficiency in sales, delivery and our back office within this segment. Our mature platform within Centralized Delivery remains a significant element in our efforts to reduce overall servicing cost, while allowing us to maintain bottom line contribution within this important segment within our overall portfolio. Our 25 largest Tech Flex customers comprise nearly 50% of Tech Flex revenues. Our largest customer represents 8% and our top five represent 23%. We believe we are well-positioned to gain further client share in this portfolio, while further diversifying within other significant consumers of flexible resources where we already have relationships. We are also investing…

Thank you Joe. Total revenue for the quarter of $340.3 million represents growth of 1.6% on a year-over-year basis. All of our staffing businesses grew year-over-year and our government business declined slightly. Earnings per share of $0.44 in the quarter improved $0.03, or 7.3% over the second quarter over a year ago, reflecting continued progress towards our long-term – longer-term profitability objectives. Our gross profit percentage in the quarter of 30.5% increased 140 basis points sequentially, which slightly exceeded expectations, due to a greater mix of Direct Hire revenue than anticipated. The 120 basis point year-over-year decline is the result of a decline in Flex gross profit margins. Our Flex gross profit percentage of 27.6% in the second quarter improved 100 basis points sequentially. On a sequential basis, we’ve seen improving spreads between bill and pay rates on new assignments primarily in our Tech Flex business, while FA Flex spreads have been stable. We have reinforced our internal messaging to ensure that, during pricing discussions, our associates appropriately consider the value of services that we provide to our clients. The recent improvements have allowed overall spreads to remain essentially stable, as the higher spreads this quarter are helping offset some of the lower spread business booked previously. As anticipated, we also experienced a 100 basis point sequential improvement from the reduction in seasonal payroll taxes. Year-over-year, bill/pay spreads are down and we expect pay rates will continue to rise as tight labor supply in our candidate population persists. We will work to pass through these increases in the form of bill rate increases. However, if the current economic landscape continues, where our customers still lack pricing power, spreads may continue to be under pressure. As we look into Q3, early quarter data suggests that Tech Flex and FA Flex spreads…

Thank you. [Operator Instructions] And our first question comes from Tim McHugh with William Blair & Company. Your line is open.

Thank you. First, just on the competitive environment, and I think there’s a fair amount of mention of that in the opening remarks. So is that getting more challenging, or is it changing in anyways versus what you would have said six months ago?

Yes, I mean, I wouldn’t say, it’s changed materially over the last six months. I’d say probably the biggest dynamic within the competitive environment would really be two things if you look at the two major populations that we compete with, which are the smaller more localized operators and then the larger more at scale national operators. We’re seeing more aggressive on pricing to go after large bulk-type arrangements. So – and we’re seeing that mostly from the large providers that can provide at scale. And then what we’re also seeing is at this point in the cycle being about nine years into the cycle, there’s more mom and pops out there, which is typical for the later part of the cycle. And they typically are willing to sacrifice a little bit more margin to capture business realizing that many of those owners are leaving for a lifestyle. So an incremental dollar, they’ll do it at a much lower margin, which puts a lot of pressure on our people to be stringent in terms of our pricing.

Okay. And I guess, when you – there’s a number of facets to kind of the efforts to accelerate growth here. And you talked about, you’re still confident in those playing through, I guess, but it’s just taking a little longer. Is there – can you dissect a little bit more, I guess, just – or maybe summarize for us a little more. I guess, what pieces feel like it’s taking longer to really change behavior, and I guess, then why you’re confident those will eventually translate for you?

Yes, I’d say, the taking longer is we were probably a little bit too optimistic as we rolled out our sales methodology transformation on the back-end of last year. I realize by the time we rolled that out and then took all of our leaders through certification to be equipped to train and as well as stay on top of and monitor that business, which we really didn’t complete until the end of Q1. So it’s really – it comes down to execution and the basic fundamentals of blocking and tackling on top of. And again, I don’t say these things to make excuses, but it is just the reality. We went through a major organizational shift last year as we’ve communicated on these calls. We went through one organizational realignment around the March timeframe in 2016, and then we realigned a lot of our regions to gain a lot of efficiency and span of control in the September type timeframe. So, we’re still settling in from that. So we’re confident that we have the right people in the seats and the strength of our team and it’s about execution.

Okay, great. And then just one, numbers one, how many billing days in the fourth quarter of this year, if you have that?

Yes, sure, Tim. So there are 61 billing days in the fourth quarter of this year.

Okay.

So that compares – there were 61 last, year 61 this year.

Okay, thanks.

Thank you. And our next question comes from Tobey Sommer with SunTrust. Your line is open.

Hi, this is Kwan Kim on for Tobey. Is the new CRM system dampening sales productivity at all as your teams migrate to it and or trained? Thank you.

Yes, we’re on the front-end, so we’ve rolled out a number of our offices in Q2 and we’re really ramping that rollout up at this point in time from our experiences with the offices that we initially rolled out. We wouldn’t tie anything back to any dampening of productivity because of the rollout and implementation of those tools.

Got it. And on the shrinking bill/pay spread, what needs to happen to reverse the spread compression?

Yes. So, as I mentioned in my prepared remarks, actually, and it’s been seen most significantly in our Tech Flex business recently. During the quarter, actually, we saw a stabilization, actually a slight improvement in the spread between bill and pay rates. We had spent sometime last quarter talking about the fact that in this environment a lot of what we had seen, we think were – it was our own doing. So we spent quite a bit of time this quarter and continue to make sure that we’re reinforcing to our associates that we’re providing valuable service and to be appropriately compensated for that makes sense from our clients. And as a result, we’re driving the stabilization as we look forward and you think about the guidance that we show in the third quarter, we expect continued stabilization actually mild improvement there. So we think we actually have turned the tide, it is a tough environment, but we think we’re doing the right things to stabilize and improve those spreads.

Got it. Thank you very much.

Thank you.[Operator Instructions]. And our next question comes from Kevin McVeigh with Deutsche Bank. Your line is open.

Great, thank you. Hey, I wondered, can you give us just some commentary on how trends are at the larger clients versus smaller clients in terms of hiring outlook and that factored into some of the delayed revenue?

Yes, Kevin, this is Joe.

Hi, Joe.

I’d say, we haven’t seen anything materially changed in the marketplace in terms of demand. The demand has been robust. All of our front-end performance indicators remain very strong. So I don’t – we don’t really partition and see any difference between what the large customers where we do business versus the large consumers where we’re not quite as mature within those relationships. I mean, we’re seeing broad-based demand across the spectrum.

Got it. And then just any thoughts, I mean, it seems like perm has definitely been pretty strong relative to temp. Do you expect that to kind of revert back to normal, or is that just supply demand imbalance?

Yes, I’d say, our Tech Direct hires has remained pretty consistent. The strong performance we had in Q2 was through our Finance & Accounting, Direct Hire. And that that’s just was some pent-up demand. So I mean, it still seems to be robust. We see clients continuing to try and bring people on from a permanent standpoint, which, as I had mentioned in my opening remarks, we did see a little bit of an uptick in terms of conversion, which we look at those as positive indicators in terms of where clients view we are in a cycle and the amount of work that they have to get done, as well as and I’ve said this before. There’s nothing that we look at, it’s a greater compliment to a job well done on our behalf. And when our client has one of our flexible employees and desires to convert them, because that’s a win-win for us on both ends. So it causes them short-term pain, but we’re in it for the long haul and those individuals become hiring managers over time and they remember the people who help them find the right opportunities.

No, understood. And then just I wanted to make sure I understood. You had an 8% reduction in your revenue-generating talent, is that right? And did that span Tech Flex all verticals, or was that focused one place more than the other, or was it primarily the NRC, or it was that at branch level?

Yes, it was – it really – it’s spans across the spectrum. It’s much more heavily weighted on the delivery side, because when we had gone through our realignment, one of the things when we started looking at ratios, we had overstaffed on the delivery side. So ultimately, we weren’t providing those people an environment where they could become successful. So that was really the rebalancing of that, and the numbers that I had shared were on a year-over-year basis. And as I mentioned, our objective here forward is to hold stable through the remainder of the year, because we believe we have ample capacity to not impair near-term or longer-term growth.

Got it. Okay. And then just one last one, if I could. Any reason why you didn’t buy any stock in the quarter?

Hey, Kevin, this is Dave Kelly.

Hey, Dave.

So, I think, a couple of things. One, part of it, there was a disruption for us, because we put a new credit facility in place. The other is, we’re balancing debt levels and cash flow and, as you recall, the first quarter was a little bit worse than we had anticipated. So nothing in particular other than as we balanced our decisions. We thought that was the right way to go.

Okay. Thank you.

Thank you. And I’m showing no further questions. At this time, I’d like to turn the call back to Mr. David Dunkel, Chairman and CEO for any closing remarks.

All right. Well, thank you very much. We appreciate it and thank you for your interest and support of Kforce. And once again, I want to thank each and every member of our field and corporate teams, and our consultants and our clients, for allowing us the privilege of serving you. Thank you very much. We look forward to speaking with you again at the end of Q3.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.