Kforce Inc. (KFRC) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2017 Kforce Inc. 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 for how to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I now like to introduce your host for today’s conference, Mr. Michael Blackman, Chief Corporate Dev. Officer. Sir, you may begin.

Great. Good afternoon and welcome to the Kforce Q3 call. The prepared remarks of this call are available on the Investor Relations page of the Kforce, Inc., website in the Events and Presentation section. 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 this call over to David Dunkel, Chairman and Chief Executive Officer.

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. We have provided an additional table on our press release to reconcile our GAAP results with adjusted results which is provided to give you greater clarity and to operating trends. Adjusted results reflect $342.1 million in revenue and earnings per share of $0.45. The adjustments reflect the exclusion of hurricane impacts, the sale of our international operations in the Philippines to the management team and costs related to organizational alignment to serve our largest strategic lines. The remainder of our prepared remarks will reference adjusted results unless otherwise noted. We are pleased with the progress that we are making towards our long term goals and results for the third quarter, notably we were able to meaningfully accelerate year-over-year revenue growth rates and prove both growth margins, gross margins and the operating margins. Our success in accelerating revenue growth was driven primarily by Tech Flex, and the services portion of Kforce government solutions business which grew year-over-year by 3.6% and 12.7% respectively on a billing day basis. Our Q4 guidance contemplates Tech Flex accelerating the 5% which Joe will address later in this call. The revenue impact from the storms was only about 1 million, however the combined impact on EPS of the loss revenue and the actions we took in response was approximately $0.05. This disproportionate cost was driven by our decision to prioritize the care and safety of our core associates and consultants by continuing to compensate them while our clients were closed and providing additional support to those with more critical needs. We also felt compelled to more broadly support the communities we live in through a $1 million charitable donation to the Red Cross and other charities. I am extremely grateful to the unwavering efforts of our employees who persevered and ensured that our consultants and clients were well cared for. They rallied to help team members who lost their homes to flood waters bringing critical supplies to those without power for weeks, and shift and airlift supplies to Puerto Rico to assist those who are still suffering. We are encouraged by the recent trends on our Tech Flex business. The strength and the demand environment has not changed. We believe the secular drivers remain intact as companies increasingly look to technology that provide internal operating efficiencies, enhanced competitive position and enable sustained market relevance in today’s rapidly evolving market place. Technology initiatives transcend all industries, companies of all sizes and are increasingly focussed on customer facing applications. Competitive pressures and the need to innovate continue to intensify and technology investments in areas such as big data, artificial intelligence and machine learning received increasing prioritization. The areas of the highest demand include mobility, cloud computing, cyber security, e-commerce, machine learning and digital marketing. The shorter term project nature of technology requires specific skill sets which are increasingly driving companies to a greater use of flexible resources. Our KGS business had a very successful quarter as they secured two strategic prime contract wins under the T4 Next Gen contract vehicle of the U.S. Department of Veteran Affairs with a total award value of nearly $100 million which we expect will be realized over five years. These prime contract wins serve to increasingly build a solid, more profitable revenue base moving forward. This business now has long term services contracts in place capable of generating approximately $30 million per quarter on average. From an operating perspective, we are also pleased with both the improvements we saw during the quarter on Flex margins driven by improved pricing discipline as well as the improving productivity within our revenue generating population. Continued emphasis in these areas will be critical in meeting our longer term goals. Over the last two years we have been executing a strategic plan to refine our operating structure, improve our sales efforts and enable our associates with new technology and we are making progress and are committed to our plan. The third quarter brought little additional clarity on key political policy initiatives, including immigration reform, healthcare reform and financial deregulation. Corporate tax reform however took a step forward with the passing of the budget. If enacted is proposed, it would have a significant positive impact on Kforce financials result. While there is still great uncertainty as for the details and the impact of any potential reform, we believe the balance of any changes and the increasing trend on GDP now at 3% for the third quarter should be a net positive for Kforce and our industry. I will now turn the call over to Joe Liberatore, President who will provide further details on our Q3 operating results. Dave Kelly, Chief Financial Officer will then add further color on our Q3 operating trends and financial results as well as provide guidance on Q4. Joe?

Thank you Dave and thanks to all of you for your interest in Kforce. As we begin to see the benefits from the structural changes and investments we’ve made over the past few years, revenue growth rates are beginning to improve. Total firm revenues adjusted for lost revenue from the two hurricanes grew 3.3% on a year-over-year billing day basis. We are pleased that our Tech Flex unit which accounts for roughly two thirds of total revenues grew 3.6% year-over-year on a billing day basis. We continued to benefit in the third quarter in the third quarter from a positive trend in longer assignment lengths and new assignment starts volume remained solid. Consultants on assignment increased each month of the quarter and into October, which should also benefit gross prospects in the fourth quarter. Fortune 500 companies continue to be a largest consumer of Flex technology count and represent a significant majority of our revenues. We believe continued focus within growing industry verticals should allow us to expand the breadth of our service offerings to deepen our relationships with these larger, sophisticated buyers. Larger customers continue to concentrate spend with partners, such as Kforce that can meet their need nationally as well as ensure compliance with internal and external policies and regulations. We’ve been working to diversify our portfolio beyond our largest clients and more deeply into other Fortune 500 customers where we have established relationships. Much of the revenue growth in the quarter was a result of these efforts. As large clients opportunities outside of our 25 largest clients account for the greater share of growth in the quarters. This strategy is well supported by a mature centralized delivery platform which allows us to deliver consultants at scale for us at United States. This capability combined with improved execution in our field offices has also allowed us to increase productivity levels again this quarter. While these gains are welcome, we believe significant additional improvement is possible. During the quarter, we experienced year-over-year growth in six out of our top 10 industry. Communications, manufacturing and energy performed particularly well as well as certain professional services and solutions companies supporting the federal government. With the fourth quarter we expect Tech Flex revenues to improve sequentially and for year-over-year growth rates to accelerate from Q3 levels to approximately 5% on a billing day basis. As Dave noted, we recently sold our international operations in the Philippines, which took place in late September. Excluding this business from our base line, our core domestic tech staffing revenue growth rate is projected to be closer to 6% in the fourth quarter. Our FA Flex business which represents 23% of total revenues declined slightly on a sequential basis, but increased 4.6% year-over-year on a billing day basis. From an industry perspective, six out of our top ten industries experienced year-over-year growth, including financial services, business services, retail and energy. We experienced a slower than expected seasonal ramp in new assignments as the third quarter progressed but saw an acceleration in activity in September and October. We expect to resume sequential growth in Q4 but may see a slight decline year-over-year due to the lower base line from the end of the third quarter. Revenues for Kforce government solutions increased 13.9% sequentially and 0.6% year-over-year on a billing day basis. As Dave mentioned, KGS was successful in winning two strategic prime awards in the third quarter that are expected to provide a growth catalyst and a solid base to continue to build upon as we head into the fourth quarter of 2017 and beyond. This team has worked hard to improve its ability to win prime business and we are beginning to see the pay off. As KGS ramps up headcount in this new business during Q4, we expect double digit sequential growth. This predictable revenue stream also should allow for significant growth in 2018 for this business provided it can win the only significant re-compete which constitutes 20% of its revenue base scheduled for next year in Q1. We have a high degree of confidence and success with this re-compete as 2017 re-competes were 100% successful. Direct higher revenues which represent roughly 3.5% of total revenue declined 10.9% sequentially and 4.9% year-over-year. Our direct higher capabilities are an important element of our strategy and our objective is to meet the talent needs of our clients through whatever means they prefer. The fourth quarter is usually a seasonally low point and we expect those sequential and year-over-year declines in the fourth quarter. We are focussed on making investments to provide a revenue generating talent with the necessary training, methodologies and digitally enabled tools to engage in more strategic conversation and allow us to elevate the value we are bringing to our clients and consultants. These new tools should also contribute to productivity improvements. We completed the roll out of our new customer relationship management system during the third quarter and will continue to enhance that solution going forward. Excluding any impacts from our international operations in the Philippines, we have produced our revenue generating talent 8.5% versus levels a year ago. The process refinements we’ve been making coupled with improved business intelligence tools that allow us greater selectivity in acquiring the right talent, have allowed us to accelerate revenue growth despite this decline. We also believe significant capacity exists to continue growing revenue and expect associate headcount levels to be stable for the remainder in conjunction with third quarter levels. Looking forward, we will intensify focus on tools that we can further enhance the capability and output of the team to make our people more successful and reduce turnover so that we can limit adding in additional resources. Our success is tied to our ability to consistently improve associate productivity by ensuring they are engaging with the right customers and arming them with the best tools and leadership. I will now turn the call over to Dave Kelly, Kforce’s Chief Financial Officer who will provide additional insights on operating trends and expectations. Dave?

Thank you, Joe. Total GAAP revenue and earnings per share for the quarter were $341.1 million and $0.40 respectively. As has been mentioned hurricanes Harvey and Irma significantly impacted results. Additionally, earnings were positively impacted by a gain from the sale of our international operation in Manila which was basically offset by costs incurred to better align our operations to service our largest strategic clients. Adjusted revenues of $342.1 million improved by 3.3% year-over-year on a billing day basis. Year-over-year growth rates in each of our businesses accelerated in the third quarter as compared to the second quarter with the exception of Direct Hire which comprises less than 4% of total revenues. Adjusted earnings per share of $0.45 in the third quarter also continued to trend positively. Our adjusted gross profit percentage in the quarter of 30.7% reflects a 20 basis point increase sequentially as a result of an improvement in Flex growth profit margins that was partially offset by a lower mix of Direct Hire revenue. The 60 basis point year-over-year decline which compares favourably to a 120 basis point decline last quarter is a result of both a decline in Flex gross profit margins and a lower Direct Hire mix. Our adjusted Flex gross profit percentage of 28.2% improved 60 basis points sequentially. On a sequential basis, for the second quarter in a row, we saw improving spreads between bill and pay rates on new assignments in both our Tech Flex and FA Flex businesses. We believe these improvements are the results of reinforcing to our associates the need for a more disciplined discussions with our clients around pricing given the value that we provide. In addition, the prime contracts that KGS won during the third quarter that contributed positively in the KGSs Flex gross profit margin which improved 450 basis points sequentially and should continue to support higher margins in this business prospectively. Year-over-year bill pay spreads in our Tech Flex and FA Flex businesses remained down, though the gap is closing due to positive pricing trends in the last two quarters. The pricing environment is still very competitive and labor supply remains tight. As a result, we will likely face wage inflation and will work to pass through these increases in the form of bill rate increases. However, if the current economic landscape continues where many of our customers still lack pricing power spreads may continue to be under pressure. As we look to Q4, early quarter data suggest that Tech Flex and FA Flex spread may be stable to slightly down sequentially compared to Q3 levels. Flex margins are expected to be down seasonally due to paid time off for some of our consultants particularly in KGS. We continued to make progress in improving our operating leverage. On an adjusted basis, SG&A expenses as a percentage of revenue were 24.3% and if continued to decline due primarily to recent improvement in the productivity of our revenue generating talent in solid expense control. We expect to make ongoing investments in enabling technologies which will allow us to serve our customers more efficiently and result in continued declines in SG&A expense On an adjusted basis, third quarter operating margins improved 10 basis points sequentially to 5.8%. We expect to continue making progress towards our operating margin objectives as revenues accelerate further and productivity continues to improve. Our adjusted effective tax rate in the quarter was 38%, because our business is entirely domestic and not capital intensive, there is an extremely high co-relation between statutory federal and state rates and our book in cash tax rates. Our effective federal tax rate is approximately 35%, any reduction in federal rates would have a corresponding reduction in our tax rates and cash obligations. With respect to our balance sheet and cash flows, accounts receivable increased $18.4 million sequentially. This increase was a result of a combination of growth in our business, the timing and receipt of certain payments as well as certain clients extending payment terms. Long term debt at the end of the quarter was $128.9 million which is an increase of $1.5 million from Q2, 2017. We’ve already seen the acceleration in cash collections in Q4 and long term debt is currently $119 million. Capital expenditures for Q3 were approximately $1.1 million and we repurchased roughly 74,000 shares for $1.4 million during the quarter. Since the beginning of 2015 we spend approximately $82 million on repurchases and returned $34.1 million through dividend payments over the same period. In total, cash returned to shareholders has exceeded operating cash flows over that period. We will continue to appropriately balance the utilization of available capital between investing in the long term growth of our business through technology investments, potential tuck in acquisitions, investments in strategic partnerships reducing debt levels and returning capital to our shareholders. The fourth quarter of 2017 has 61 billing days which is two days less than Q3 and equal to Q4, 2016. As a reference point, we generate approximately $5.5 million in revenue for each billing day. We offer the following guidance which represents a significant increase relative to expectations. We expect Q4 revenues to be in the range of $338 million to $342 million which reflects and acceleration to approximately 4.3% year-over-year growth at the midpoint of guidance and for earnings per share to be between $0.42 and $0.44. Gross margins are expected to be between 30.1% and 30.3% while Flex margins are expected to be between 27.9% and 28.1%. SG&A as a percent of revenue is expected to be between 23.9% and 24.1%. Operating margins are expected to be between 5.4% and 5.8%. This guidance assumes an effective tax rate of 38%. Weighted average diluted shares outstanding are expected to be approximately $25.4 million for Q4. 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 tax or tax law – legal or tax law changes. Our guidance suggests continued acceleration in total firm year-over-year growth rates driven primarily by Tech Flex and KGS. In addition to the benefits we will see in the fourth quarter from the recent prime time contract awards of KGS; this longer term annuity business significantly improves our growth prospects in 2018. We are optimistic about our prospects after a quarter of improving revenue, gross margin and operating margin trends, and we believe we can continue to accelerate revenue growth. We remain on track to achieve operating margins of 6.3% and $1.4 billion in annualized revenue and 7.5% at $1.6 billion in annualized revenue and remain confident in our long term success. Jimmy, we’ll now turn the call over for questions.

Thank you. [Operator Instructions] Our first question comes from Tim McHugh from William Blair and Company. Your line is now open.

Thank you. First just, I guess I know you gave a lot of details which is helpful on the call, but more probably is the environment any difference from what you would have described either for FA or Tech versus three months ago? Or you put more of the improvement as we look at the fourth quarter. I’m just the internal initiatives kind of starting to work and kind of you had to pick one of those two? I’d be curious to hear your views?

Sure. Tim, this is Joe Liberatore. I’d say, we’re hearing from key customers and what we’re hearing for more people out in the field is very consistent operating environment and we’re seeing that reflected also in our key performance indicators. So we haven't seen anything really changed with the market. It’s remained intact and very stable. I would say, what you’re beginning to see here is the front-end of the execution which we’ve started down this path a while ago and we’re starting to realize some of the results to that execution.

Okay. That’s helpful. And then on the government side that you mentioned the renewal in Q1, can you remind us what that large contract is that’s up for renewal? What the nature of it is I guess how long you’ve been performing that contract?

Yes, Tim. This is Dave Kelly. So, this again is with the VA. This is actually a contract that we participated on, and we participate on as a subcontractor. We participated on it for multiple years. I don't know if its 10 years, it could be more than that. We’ve got a great partner and I just coming up as Dave said in the first quarter we feel very good about it. I’ll remind you our recomputed because last year it was 100% because of our long-standing relationship the VA, but that's what that contract is about.

Okay. That’s helpful. Thank you.

Thank you. And our next question comes from Kevin McVeigh from Deutsche Bank. Your line is now open.

Great. Thanks. Hey, Dave or I guess Dave. Any thoughts on kind of what the impact of the corporate tax reform would be if you go to 20% and then ultimately what we do with the proceeds?

Yes. So I'll give you the math and I’ll let Dave to talk a little bit about the proceeds, its pretty simple, the math pretty simple, right? So, I try to spell out in my remarks. So, our effective federal rate is 35% and there’s really – we’re very simple company. If it goes down to 20% depending of course on what are the changes there are, but there's not a whole lot that can impact our tax rate. If 35% goes down to 20%, our effective tax rate goes down to about 20%.

What would be the cash savings and then ultimately would be with the cash?

Yes. If you think about that based upon our taxable income again depending upon, if there’s any of the changes you could see $10 million at these current profitability levels of additional cash generated.

Kevin, this is David Dunkel. Couple of observations, I would say first of all from what we've seen the likelihood of a cut of some kind is increasingly more likely, whether it will be to 20%, hard to say, but clearly the momentum is building behind it and that's why mention my prepared remarks with the budget passing its not a simple majority. So at this point I would say the likelihood has increased and obviously with the shenanigans going on in Washington everything is sort of up in the air, but there seems to be momentum on both sides to try to get some tax reform passed. With that said, with the free cash flow we’ve got lots of alternatives. Their retirement is clearly one of them. Repurchasing stock has been a very, very high use of the past. We could certainly evaluate increasing our dividend and dividend yield. And then the Dave has also talked about pursuing tuck-in acquisitions and also our strategic investments as we look at different alternatives within the recruiting industry as a whole. There are some interesting options that we've seen. So we’ll have some options per sure and at this point we haven't concluded. We don't want to start spending something until we finally realized whether they get this thing through. So we’ll keep trying that it gets done.

Sure. That’s super helpful. And then just – its interesting because it seems like everybody's inflected in terms of kind of September into October and you see that the organic going 10 to 3 to 5.5. Is that the economy is at optimism? Is that just because we can't abandon this holding pattern for two years now? What do you hearing from your client that just gives them the confidence because it's really across the industry, right, even in the ASA [ph] data like you clearly see this acceleration?

Well, I think it was interesting back in 2011 and 2012 we were talking about what we call the secular drivers behind technology and the staffing industry per se has always been highly correlated cycles. We are seeing a very clear change and that the technology that was in the past part of the back-office support, enterprise projects has now been moved to the front of the organization. Customer facing product delivery, mobility, I mean, there’s so many drivers now of technology. It’s actually become part of the engineering of their product itself. So, when you think competitively about what's happening in the market? When an Amazon introduces a new vertical that they're going after their competitors are going to aggressively pursue and address those alternatives. Amazon being a disruptor of technology disruptor, the traditional competitors are now going to making investments in technology to effectively address that, and that just one simple industry and one simple example. So innovation and engineering applied to customer facing applications is a very very big part of what's happening. All that of course is aimed at remaining competitive and taking costs out of the system, looking for efficiencies, but I would say that technology has become embedded in all of the products virtually every industry of every customer that we’re dealing with today. So the very nature of what we do and the secular drivers behind it have changed dramatically during the cycle.

Got it. And then real quickly, could the decision to exit the Philippines?

That was a – it was a decision for lots for reasons. Number one we did not see it as a long-term service offering for our clients. It had been part of an acquisition that we had done a number of years ago and we didn't see it as a place that we would continue to invest. And so what we decided to do and it was actually very positive outcome was to work with our management team and the management in the Philippines has actually acquired the business and we have entered into a strategic alliance with them to serve our clients here and it also gives them a growth vehicle actually in the Philippines. The political environment there is also a bit shaky and as a result we wanted to derisk our geographical portfolio if you will, so that was certainly another consideration.

Yes, Kevin. What I would add on to that is just with that the scale and the service offerings that we provide within Manila, with the customer base that we interface with we need to be able to provide a broader array of services. So this provide us a greater opportunity to enter into additional partnerships so we can provide a broader spectrum of opportunities to the clients where we at the deep-seated relationship.

Got it. And then one more if I could. Just the comment on kind of the perm interesting I would've thought you would see more momentum there, just any thoughts on that? Was that just [Indiscernible] perm in terms of candidates as opposed to clients or just any thoughts on the perm trend?

I wouldn’t say there's anything material that’s been taking place from a worsening, from the perm standpoint. As you're well aware that it's an offering to you we view a value to our clients. As I’ve said there’s countless times when you look at the technology side of the equation we predominantly do that through a blended type delivery model, so we don't have a per se a dedicated technology are permanent placement individuals and so its going to bounce around on us a little bit from time to time just based upon what's happening with the client. I would say probably the better indicator of what's happening at the customer front is you know we still are seeing conversions at an elevated rate, in fact I think a year-over-year we are up about 12% so we’re out running those conversions and I view that as a healthy thing because that means that the customers really are using the flexible engagement type model as it means to identify the right talent, the talent they need to hold onto and then they’re retaining that talent in a full-time basis, and again I think any one of our associates or leaders would tell you. I don’t think there's a greater complement when we get then when we place somebody on a flexible assignment and they convert into a permanent employee there because we found somebody a great environment for them and we found end client, a great employee for the future.

Super. And congrats on the hurricane response as well.

Thank you. It’s an interesting comment you make because our people rallied in a way that was just living out our stewardship value, Kevin, it was really need to see. And when you're talking to some your consultants and they’ve just been evacuated from their home and their home has been totally flooded and wiped out. It makes it real and personal and we just made a decision that we wanted to do the right thing. Thanks for noticing.

Yes. So, I’d say, it even goes beyond what we've done is as a firm, I mean it's our people time and also on many of our people have made significant contributions individually in support of our hurricane victims as well.

Yes. This is just the corporate side, our individual contributions was just -- it was really interesting watch and see our values lived out. They are reaching out to the folks in the Puerto Rico now and we don't have any operations down there and we’ve sent container ships down, we sent air lifts down and you don't see it in the news now but it still very very severe down there. So we’re sending water purification units down next week, so are our people live in our values and we’re proud of them.

That’s great to hear. Thanks again.

Thank you.

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

Hi. This is [Indiscernible] for Tobey. Thank you for taking my questions. First off could talk about your plans for internal sales generating headcount growth hitting into 2018?

Yes. As I said earlier my opening comments, based upon some of the things that we’re experiencing from some technologies that we brought on as well as some talent analytics we’re seeing some improvement in terms of the selection and the ramp up people. So through the end of the year we anticipate headcount will remain fairly constant with where we were in Q3. As we move into 2018, we’ll make those assessments, but at this point based upon what we see from a productivity improvement opportunity, capacity standpoint, we believe we have a ample capacity that we’re not have to be adding significant amount of resources.

Got it. And on Tech Flex, what is the demand like among large financial services firms that given a more relaxed regulatory regime and rising expectations over rate hike in the next 12 months? Thank you.

Yes. We haven’t really seen anything materially changed in the financial services sector. I mean obviously we have certain players in that space that are dealing with different dynamics, but overall I’d say the sector is very strong. And similar to what Dave was talking about from a secular versus cyclical standpoint. There’s so many initiatives that they have going on which are customer facing, it was really what we’re seeing a lot of that the ongoing demand.

Thank you very much.

Thank you.

Thank you. [Operator Instructions]. Next question comes from Greg Mann from Baird. Your line is now open.

Hi. Thank you for taking my questions. This is a Greg Mendez on for Mark. I know it's still early but could you just talk about what you're seeing in the early days here with [Indiscernible] complete, how that’s going and kind of what’s your expectations? Or is that people continue to ramp on using it?

Yes. I’d say, we are very early on, probably the most significant thing that I could say at this point in time is that we haven't really noticed any disruption is our people have become acclimated to the system and I mean we hear about these types of implementations all the time and there is a lot of time is a decrease in productivity or distraction or rationalization of loss of revenue opportunity as people become accustomed to the new system. I mean obviously we haven't seen any of that and I would attribute that to -- I think our technology team did a fabulous job of picking the right technology, implementing the technology and I would also credit our overall field for all the efforts that they put forth in really learning ahead of the curve before the system went in of how to operate the system and I mean just our overall training department. So I couldn’t be more proud of the team. I guess what I’m saying is across the board. So, we really have high aspirations in terms of where this is going to lead us and its going to allow us a much better pipeline management, how we organize around the customer, how we bring additional services to the customer and understand what the customer needs are, not to mention all the prospecting aspects realizing we picked dynamic. So we have some pretty interesting linkage into our LinkedIn and tools and technologies and in around that. So we’re already now moving down the path of evaluating our TRM, which is really the ATS and it'll be a completely integrated system. And so I think if that comes online we will have the full solution for people with the best tool on the market.

That’s great. Thank you. On the commentary on under potential for more spread pressure going forward. Is there is any industry that jumps out where spreads are pressured here more than others? Or is it generally pretty much the same across the board?

Yes. It does. I think -- and we said this in the past thus vary a little bit in a couple industries in particular, right. So the financial services sector we said in the past certainly has a very large sophisticated buyer. So I think financial services is probably one that you see pressured. The other side interestingly as you think about an inverse because of a significant demand and of course we see it that and I’ve alluded to it in the spread improvements, we’ve seen in our government business, we’ve seen some increases in margins and that partially because we won some prime awards, but I think that they are receptive and their spending money in the new administration. So it's a mixed bag I would say. There are some pluses and then there are some that are more under pressure.

Okay. And last question, just any thoughts on the use of cash, you mentioned potential strategic investments or acquisitions. I mean, can you just provide us any additional commentary on what type of thinking you might look at, I mean, not specific but just it would be further down in Tech Flex or anything along those lines?

This is Dave Dunkel. I would say that we would be looking at geographical tuck-ins in traditional staff log. We’d be looking at tuck-ins and statement of work and managed engagements with specialized practices. So there's some real opportunities in certain specific geographies for us to enhance our existing presence. So also even potentially to enter customers. So I wouldn't look for a large-scale acquisition or transformational acquisition. I look for something more that would be of a tuck-in nature.

That’s great. Thanks a lot.

Thank you. And our next question comes from Michael Chao [ph] from JPMorgan. Sir, your line is now open.

Good evening guys. I was actually hoping I could just follow-up one more time briefly around your comments on recent October trends. I know you talked about maybe some secular driven demand that’s possibly come into fruition, but are there any other supply and demand dynamics in October that you can possibly provide any more incremental color on? Thanks.

I mean, I’d say, we did notice improvement as we went into October, we notice some ratio improvement, nothing radical in terms of front-end key performance indicators. I would just say overall I mean the environment has remained strong and remained intact and nothing materially has changed.

Okay. Thank you.

Sure.

Thank you. And our final question comes from Jonathan Mueller from Invesco. Your line is now open.

Hi, guys. Thanks for the time. Quick question just looking at your longer term targets, you reiterated that the 7.5% margin on $1.6 billion and then 6.3% on $1.4 billion and if we sort of look at your annualized guidance for this year that really acquires 3%, 4% growth next year to get into that $1.4 billion annualized revenue run rate. So just want to sure I’m thinking about that correctly. So you’re basically saying that if we can achieve that number, the margin we should be able to deliver at least 6.3% margin on that run rate?

Yes. That’s right. So I guess another way to think about as we look at a $350 million quarter, right?

Right.

You will get 6.3% and to some of the points they were making, there are some things that have happened as we see in the fourth quarter they’re going to help us. I would caution Jonathan, there are – I would say that would clean quarter we’d be looking at. So Q1, there are significant amounts of payroll taxes. So they’ll have an expectation of 6.3% margin and $350 million in revenue in Q1 is not realistic. So as we think about it there are some things obviously would help us, right? We’ve been talking a lot about a stable margin environment to last couple quarters and we've made the changes in the improving profitability trend that we think will get us on a path to that. And we still feel strongly about that. We will benefit incrementally from things like the prime win that we had at KGS which you’re going to have higher margins. Again I've alluded to the fact that it is an annuity business over the last five -- over the next five years you know that business now is trending on a quarterly revenue run rate of about $30 million a quarter to plus. So there are some things that we hadn’t contemplated I think that are positive to give this renewed -- I guess increased confidence I would say that we’re well on the path, and not only that but as we continue to grow upon that to that 7.5% level.

Jonathan, this is Dave. I would add to that, that’s not a destination, it just a place on the road, we’re going to keep ongoing. Historically we have performed at higher levels of – we have completely operating income. We’ve completely transform this model since 2012. We had a clinical business. We had health information management and we have gone through a very significant change and where the contribution of revenues come from. So, as we have retooled the mix double down intact and have not acquired in the permanent space because we believe that that the way that we deliver the Tech solution through the blend that Joe mentioned is really the better way to go. Our team has done a great job with that by the way our research team and they have embraced that mode. They’ve done a great job in the way that they serve the customers. So, I would say in general as you look at the model transformation as we’ve change from 2012 to 2017 we stabilize that. We've made technology investments as revenue growth accelerates and I’m not going to declare victory because I don't think we’re ready to do that yet. I'm sure there’ll still be some choppiness, but in general the trajectory is heading in the right direction, it’s accelerating in the 6.3 and the in 7.5 are just the milestones along the road, we’re going to keep going.

Right. And that's helpful. And less concerned about on the quarterly cadence and realize like Q1 you could have property, I mean payroll tax and different things, but per se just unclear if we hit 1.4 billion next year 2018 we would expect in a sort of consolidated full year to build it to deliver that 6.3 plus percent EBIT margin?

So Jonathan, yes, I’ll restate. So obviously the Q1 impact is significant. So if you at the whole year if they were $1.4 billion the total year operating margin would not likely be 6.3%, it would be close but because of that Q1 impact, we’re trying to convey in a clean quarter what type of profitability milestones that we have.

Okay, great. But even just back from math if you're pretty close to that I mean that's looking like $2 in earnings power for this company and you’re trying to $20 share to that. So I’m just trying to think about, so I’m thinking about that even directionally correct?

I would agree with you that we are undervalued relative to the peer group.

Okay. All right. I just want to clarify, that appreciated and good quarter and we’ll talk soon I’m sure.

Thank you very much.

Thank you.

Thank you. That’s end our Q&A session. I’d like to turn David Dunkey for any closing remarks.

All right. Great. Thank you. And thank you all for your interest and support for Kforce. And I’d also like to just say thank you to our team, all of our team for the way that they’ve embrace the change, the way that they responded to hurricane victims and help out each other just that was inspiring. I also want to thank our field and corporate team, our consultant and our clients for allowing the privilege of serving you. And that we will of course speaking with you again for Q4 call. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude the program for today. You may all disconnect. Everyone have a great day.