Kforce Inc. (KFRC) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 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 will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Michael Blackman, Chief Corporate Development Officer. Sir, you may begin.

Thank you. Good afternoon and welcome to the Kforce Q4 conference call. Before we get started, I would like to remind you 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. 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 including 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. In addition, we have published our prepared remarks within the investor relations portion of our website. Before we discuss our Q4 and annual results, we offer observations on the dynamic changes in the market for our services, and what we foresee in the coming year. The demand environment continues to be very strong and has prospects to further improve. The U.S. economy is improving as reflected in GDP growth of 3.2% and 2.6% for the third and fourth quarters respectively. With the new administration, we have seen a reduction of regulations and with the passing of the Tax Cuts and Jobs Act a dramatic change in optimism investment plans particularly in technology. It has clearly given new life and energy to the economic cycle, and an expectation for continued growth. And in addition, companies are increasingly looking to temporary labor to meet their human capital needs as evidenced by another all-time high in December of the temporary penetration rate. The secular drivers Tech Flex continue to fuel demand for highly soft skills as the competitive battle driven by technology accelerates. Companies across industries and of all sizes continue to look to technology investments to improve internal efficiencies, enhance their customer facing applications in support of their business strategies and to sustain relevancy in the rapidly changing marketplace. Big data, artificial intelligence and machine learning continue to be in high demand as well as needs for cloud computing, cyber security, mobility and digital marketing. Some of the largest companies in the world have recently announced significant increases in their technology budgets to improve the experience of their customers and to meet the ever-growing risks of cyber security. Turning now to our quarterly results, I want to recognize the efforts of our team for what has been an incredible year of accomplishments in 2017. We began the year in the midst of a significant transition. We are in the very early stages of our sales transformation initiative whereby all of our sales associates were trained under new methodology. We also were still preparing for the implementation of our new CRM system, and crystallizing our customer segmentation strategy. Revenue growth heading into 2017 was also virtually nonexistent, however, we are confident that our course of action and are pleased that we made significant progress on all fronts through 2017. I’m excited to see the hard work of our team manifesting itself and accelerating revenue growth rates especially in Tech Flex as well as improved operating leverage. Total Firm revenue of $1.36 billion in 2017 grew 2.9% year-over-year with notable acceleration in the second half of the year to above SIA growth rates, and adjusted earnings per share of a $1.57 grow 8.3% year-over-year. More importantly, the hearts of our associates were on full display through our support of the victims of the hurricanes that devastated significant portions of our country in Puerto Rico. Stewardship in communities is a core value, and I could not be proud of our team. Fourth quarter results reflected continued momentum, led by an acceleration of growth in our Tech Flex business, revenue for the quarter of $342.6 million grew 5.1% year-over-year and exceeded the high end of our expectations. Earnings-per-share adjusted for the negative impact of the tax reform legislation of $0.45 also exceeded the high end of our expectations. As we head into 2018, we believe the actions we’ve taken over the past year and continue to build on have laid a solid foundation for strong revenue growth rates and improved profitability. Our plan for 2018 also contemplates continued technology investments in improving the productivity of our associates as well as positioning us to better serve our clients and candidates. We remain well-positioned to maximize our market opportunities and achieve our near and long-term goals. We expect to achieve our operating margin commitment of 6.3% and $1.4 billion in annualized revenue by the second quarter and remain on track to reach an operating margin of 7.5% and $1.6 billion in annualized revenue. I will now turn the call over Joe Liberatore, President who will provide further details on our Q4 operating results. Dave Kelly, Chief Financial Officer will then add further color on our Q4 operating trends and financial results as well as provide guidance on Q1.Joe?

Thank you Dave, and thanks to all of you for your interest in Kforce. We’ve been focused over the last 18 months on making necessary investments in structural changes to significantly improve execution and increase the value we will provide our clients in Canada. In the second half of 2017, we began to see the benefits of our actions, as associate productivity improved, and our year-over-year revenue growth rates accelerated meaningfully. Let me give you perspective on how each of our business performed. Revenue within our Tech Flex business which is roughly two thirds of overall revenues grew 5.4% on a year-over-year basis. Normalizing for the loss of revenue from the divestiture of our global business in the third quarter, our core Tech Flex business grew above SIA at 6.7% year-over-year. The strong demand for scarce IT resources has a result in healthy start activity and lengthening of average assignment length in our Tech Flex business to approximately eight months. Fortune 1000 companies continue to be the largest user of flexible technology talent. We’ve been working to diversify our portfolio beyond our largest clients and more deeply into other Fortune 1000 customers, where we have established relationships. The revenue growth in the second half of 2017 was largely a result of these efforts as Fortune 1000 client opportunities outside our largest clients accounted for the greater share of our growth. Larger customers continue to concentrate spend with partners such as Kforce that can meet their needs nationally, as well as ensure compliance with internal and external policies and regulations. We believe continued focus within growing industry verticals should allow us to expand the breadth of our service offerings to deepen our relationship with these larger, sophisticated buyers. This strategy is well supported by a mature centralized delivery platform, which allows us to deliver consultants at scale across the United States. This capability combined with improved execution and focus in our field offices has also allowed us to increase productivity levels again this quarter. While we are pleased with these gains, we believe capacity remains as a result of our investments and restructuring and we have significant room for additional improvements while maintaining current talent levels. During the quarter, we experienced year-over-year growth in seven of our top 10 industries. Communications, computer manufacturing and transportation performed particularly well, in addition to certain professional services and solution companies supporting our federal government. For the first quarter of 2018, we expect Tech Flex revenues to decline sequentially due to seasonal year end assignment end and for year-over-year growth rates to remain above SIA at fourth-quarter levels. Our FA Flex business which represents 23% of our total revenues exceeded our expectations in the fourth quarter and grew 0.3% on a year-over-year basis against the difficult comp. A portion of the stronger than expected performance was associated with clients needing resources for disaster recovery efforts stemming from the third quarter hurricane activities. From an industry perspective, we saw particular strength in business services, retail and insurance institutions. A significant portion of the hurricane recovery related roles will likely end in the first quarter, which would present a headwind to grow our prospects in the first quarter and may result in both sequential and year-over-year billing date declines in low to mid single-digits. Revenues for Kforce government solutions increased 25.7% year-over-year, and was driven by the expected increases in revenue from the two strategic time contract award in the third quarter, as well as an increase in product revenues. Our management team has worked diligently over the last several years to shift their business development and capture management efforts toward securing prime contracts such as these and we are pleased with their progress. KGS derived 53% of revenues from work as a prime contract compared to 45% a year ago. We continue to believe these prime contract wins served to increasingly build a solid, more profitable revenue base moving forward. As was mentioned on last quarter’s call, KGS has significant re-compete in the first quarter of 2018, which represents less than 18% of the revenue base. While we’ve experience a solid track record in winning our re-compete each has inherent uncertainties especially when we are serving as a subcontractor such as in this particular arrangement. We expect double-digit year-over-year revenue growth in the first quarter of 2018 though the rate of growth will decelerate give lower product revenue. Direct higher revenues which represent roughly 3% of total firm revenues declined 9.9% year-over-year. Our direct higher business is an important capability in ensuring that we can meet the talent needs of our clients do whatever means they prefer. The fourth quarter is normally our seasonal low point, so we expect sequential improvement in the first quarter along with slight declines year-over-year. We continue to be focused on embracing technology by making targeting investments in training, technology and other tools to enhance our customer experience and relationships, in addition to enabling our talent associates to be more productive. Improving productivity is the single most significant factor in meeting our profitability targets. The process refinements we’ve been making coupled with improved business intelligence tools that allow us greater selectivity in acquiring the right talent have improved the productivity over revenue-generating talent by approximately 15% year-over-year. We believe significant capacity exists to continue growing revenue and expect associate headcount level in the first half of 2018 to be stable with 2017 levels. Our success is tied to our ability to consistently improve associate productivity by ensuring they are gauging with the right customers and arming them with the best tools and leadership. I’ll 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. Revenues of $342.6 million exceeded the high end of our guidance. GAAP earnings were $0.24 per share. This includes a one-time non-cash charge to our provision for income tax; this is related to the revaluation of our deferred tax assets stemming from the Tax Cuts and Job Act. The amounts of the one-time charge was $5.4 million or $0.21 per share. Earnings adjusted for this charge were $0.45 per share and exceeded the high end of our guidance. Our gross profit percentage in the quarter of 30% reflects the 60 basis points decline year-over-year. The decline in gross profit margins was driven by a 30 basis point decline in Flex gross profit margins as well as a lower concentration of higher margin, direct higher revenue which represents 3% of revenues in the quarter versus 3.5% a year ago. Our Flex gross profit percentage of 27.8% decreased 30 basis points year-over-year primarily as a result of compression in the spread between bill rates and pay rates and higher health insurance costs. Our Tech Flex margins have declined 30 basis points year-over-year. However, since the first quarter, Flex margins intact have largely stabilized through a reinforcement to our associates of the need for more disciplined discussions with our client around pricing and the value of our services. FA Flex margins declined 60 basis points overall year-over-year, 20 basis points of which was related to spread compression. Margins in our government business were flat year-over-year. The prime contract business that KGS won during the third quarter has contributed positively in the KGSs Flex gross profit margin and is offsetting an increase in healthcare cost in this unit. The labor supply remains tight and we will likely continue to drive consultant’s wages – and will likely result in driving consultant wages higher. At the same time, many of our customers have lacked pricing power due to the sluggishness of the current economic cycle and exerted significant pressure on their suppliers. However, during this period we’ve been relatively successful in passing through wage increases. The reason acceleration of GDP growth has not yet resulted in widespread improvement in our ability to raise prices. However, we’ve begun to see select circumstances where the scarcity of talent has allowed us to improve bill rates. As a footnote the sale of our low bill rate global operations has resulted in a substantial improvement in our Tech Flex average bill rate which has increased from $67 per hour to $72. Not only is our core Tech Flex business growing at a faster rate excluding the global operations as Joe mentioned, but the resulting higher rates will help drive more gross margin dollars as we grow. First quarter Flex margins are expected to be stable excluding impacts from seasonal payroll tax resets. SG&A expenses as a percent of revenue declined 120 basis points to 24% in the quarter versus 25.2% in Q4 of last year. We continue to make progress in generating SG&A leverage by improving productivity y and controlling spend. This has allowed us to significantly increase our investment in technology such as our new CRM and sustain our sales transformation effort s. As we head into 2018, we expect to make additional investments in technology. Now that our CRM has been rolled out, we will focus on improving the candidate and consultant experience and further improving our business intelligence capabilities. While these investments will have upfront cost, they are directly linked to generating additional productivity improvements. Fourth quarter 2017 operating margins of 5.4% improved 60 basis points year-over-year, which reflects our ability to offset the negative impact from the compression in our Flex margin spreads through productivity gains and solid expense management. Our effective tax rate in the fourth quarter excluding the impact of the tax reform charge is 35.7% which is slightly more favourable than we had anticipated driven by higher than expected credits. As it relates to our effective income tax rate on a go-forward basis, we announced in December that we expected rates to be between 25.5% and 27.5% in 2018. Based upon our analysis of subsequent trends we expect that our effective tax rate for 2018 will be towards the lower end of this range. We do however anticipate subsequent regulations and interpretations to be released that will provide additional guidance on the application of the law and will provide updates of any impacts. We expect that we will generate an additional $10 million in cash as a result of the reduction in our effective tax rate in 2018. With respect to our balance sheet and cash flows, accounts receivable decreased $18.1 million sequentially. This reduction and strong earnings allowed us to decrease outstanding borrowings under our credibility facility at the end of December by $10 million dollars as well as returned significant cash to our shareholders through dividend payments and stock repurchase. That at the end of the year was $116.5 million. We repurchased roughly 451,000 shares for $10.8 million during the quarter, and paid approximately $3 million in dividends. Over the last three years, we’ve returned virtually 100% of operating cash flows to our shareholder. Looking to Q1 cash flows, we anticipate the receipt of approximately $7 million in previously unanticipated income tax refunds due to the actions we took in the fourth quarter as a result of the tax reform. We will continue to appropriately balance the utilization of this cash and other available capital between investing in the long term growth of our business through technology investments, potential tuck-in and strategic acquisitions, investments in strategic partnerships, reducing debt and of course returning capital through our shareholders. The first quarter of 2018 has 64 billing days, which is three days more than Q4, 2017 and equal to the number in Q1 of 2017. As is typical, first quarter revenues will be impacted by the rebuild to bill book instalment and assignment from the reductions we see at the end of the end of the calendar year. With respect to guidance, we expect Q1 revenues to be in the range of $343 million to $347 million and for earnings-per-share to be between $0.35 and$0.38. This includes the combined impact to Flex margins and SG&A of annual payroll tax resets in Q1 which negatively impact operating margins by approximately 150 basis points and earnings per share by approximately $0.14 per share. Gross margins are expected to be between 29% and 29.2% or Flex margins are expected to be between 26.5% and 26.7%. SG&A as a percentage of revenue is expected to be between 24.4% and 24.6%. Operating margins are expected to be between 3.8% and 4.2%. This guidance assumes our new effective tax rate of 26.0%. Weighted average diluted shares outstanding are expected to be approximately 25.4 million for Q1. This guidance does not consider the effect if any of charges related to the imperative intangible assets, any one time cost, 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 future tax law changes. We are excited for the prospects we see in the upcoming year. Based upon current revenue trends, we would expect to exceed $350 million in revenue in the second quarter, and for operating margins to be at least 6.3% should that occur. We also continue to be on track to achieve operating margins of 7.5% in the quarter without seasonality impacts where revenues reach $400 million. [Grace], we’d now like to open up the call for questions.

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

Yes. Thanks. I guess first, I just wonder if you could elaborate, I know you gave a little bit of color, but on the something like a better operating environment just in general given tax cuts and so forth, but you just talk a little bit about the activity levels, the job orders and so forth in terms of client behavior and what you're seeing, because I guess in term as you’re guiding to similar growth rates in Q1 from Tech and kind of slower for accounting and I get there some unusual items there, but I’m trying to reconcile if the environments really getting better versus I guess the guidance were kind of similar type of growth rate, so I'd wait there.?

Yes, Tim. This is Joe Liberatore. What I would say about environment is, the environment is very healthy. It’s been fairly consistent. We haven't seen any major changes at this point in the quarter relative to tax reform. And we’re hearing very positive things but we’re not seeing that manifest itself and what new were coming in. To get a little bit more specific on the guide on Tech being a comparable growth rate to Q4, part of that it was kind of embedded in my comment is we have to rebuild from year-end of assignments, and so that happens throughout the course of the quarter and based upon the pace of that would really tell us what kind of momentum we have coming on out of the quarter heading into Q2. So that's really what the dynamic is there, it’s not indicative of any concern or any lack of job flow. We’ve seen our activity levels in the beginning of the year are up pretty substantially over this time last year. So we’re pretty comfortable on our front. FA little bit more specific to projects as I’d mentioned, we had anticipated lower FA quarter in Q4. We had some of the FEMA work associated with the hurricanes that benefited us. In fact I think if you go back and look at my comments I’d guided down in Q4 on FA. So we benefited from that, all of that business rolls off here in Q1 as well as some normal project ends in Q1, so were facing those headwinds and that's really what embedded in our FA guidance.

And Tim, this is David Kelly. Just to kind of round up at the total guidance as David mentioned as Joe mentioned, we’re expecting in KGS, the product business sequentially here is going to be down further and impact the total number as well and we expect that to pickup as we move into the second quarter.

This is Dave. Tim, I want to add one other thing. If you've seen post the tax law changes there's been a lot of announcements from some of the larger employers where they've indicated they are going to be significantly increasing investment in technology. Many of those announcements are with customers that we do business with and so while they haven't manifested yet the planning is actually in process now. We expected that as the year unfolds we’ll see more of it.

Okay. I guess most of that probably were your discussion is on the Flex. What about on the Direct Hire, I guess I would have thought? Are there signs of improvement in that business, I mean, your metrics -- your revenue wouldn't show it, I guess for the quarter. But is that competitive trends? What’s the underlying activity there, because in a good environment I thought you would be seeing better growth returns in that business?

Yes. I would say, you have to understand our Tech business, we made a conscious decision coming out of 2001 and then especially after the last downturn, we run a blended model in Tech, so we don’t have a standalone dedicated search teams in Tech, so its blended model. I would say that environments been healthy. It’s really where the demands been from a Flex standpoint coming out of this specific customers that were involved with. I would say, the thing where we really see it manifesting itself is our year-over-year conversion rates are still substantially up in Tech. So we see a lot of our customers utilizing the Flex resources to identify the people who are right long term and then it's a right match for the consultants, so we’re seeing conversions. So those manifest themselves in permanent hires where we don't obtain a fee for that. Yes, we get a lot of goodwill with our customers as well as many of those individuals over time turn into hiring managers who then fuel the overall business. So that's really the dynamic within that the Tech side. FA, we do predominately run FA in a dedicated type model. And we’re only selectively making investments where we have capacity need, so we’re not doing new startups or really blowing things out from that standpoint which is part of the driver from our FA business maybe being a little bit -- maybe not aligned to what you've heard from some other competitors.

Okay. Thank you. That’s helpful.

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

Thanks. I was wondering if you could talk about gross margin trends. They been down for a while but at a declining rate, I think you talked about some stabilization in your Tech Flex margin. And maybe in addition to talking about that what you assume over the medium term to hit your operating margin goal. Do you assume stabilization or even expansion in gross margin? Thanks.

Yes, Tobey, this is Dave Kelly. Actually I can tell you. I’m quite pleased with where gross margins in our business and actually our success in particular in Tech Flex. I’d mentioned in my prepared remarks that we've seen actually the spread between bill and pay rates in Tech Flex be stable during the last three quarters, right. We had a tip in the first quarter, we actually clogged back some of that through some discipline throughout the course of the years. I think the way to think about spread if you want to think about that exclusively, both are Tech and FA business saw slight depression about 20 basis points year-over-year in spread. So very small, the real delta to the total gross margin decline, which is only 30 basis points by the way year-over-year in the Flex businesses is really healthcare cost. So as we look forward and again we’ve seen stability in Tech Flex the last couple of quarters, the FA business was somewhat of client mix dynamic. We still expect Flex margins to be flat from where they are prospectively obviously payroll taxes impact that in the first quarter but our expectations for stable gross margins and Flex margins I would say specially is where we have been for quite sometime and we continue to think about leverage and productivity as the key is Joe specially mentioned to driving the operating margin targets still feel very confident that we’re going to meet those.

And if I could follow-up on that, if the Flex gross margin is going to be stable yet you’ve got pretty healthy operating margin expansion just kind of dovetailing back to the question. Are you strategically going to -- try to grow the Perm business at the same rate as the company? Or if it grows at a slower rate which has been then it’s kind of a headwind to achieving you bottomline goals?

Yes. It’s great question Tobey. Our expectations I think Joe did a good job explaining our strategy around our Direct Hire, so that’s going to be become an increasingly smaller percentage of the revenue stream and that does not at all compromise our ability to meet these operating target – margin targets. As a matter of fact we’re expecting that. So, this is all going according to our plan.

Tobey, this is Dave. We modeled it way, this is by design. The search business per say is volatile. It takes a longer time to get a return. We’ve got a great team in place today. We’re adding selectively to it, but it’s not going to be linchpin, nor is it necessary for us to be able to hit our operating margins to have a substantial search practice. In fact we have modeled all of these things out and the indication of 6.3% operating margin is predicated on exactly the guidance that we’ve given you as we’ve talked about where we’re going with our mix of 97% Flex and 3% search. So the dollar of Flex versus a dollar of Search obviously is substantially different. So don’t look for us to be making substantial investments there. We don’t believe it’s necessary for us to hit our operating margin targets.

Last question from me and I’ll get back in the queue. In terms of the assignment links that you talked about hitting eight months. Could you provide some little more detail about when that started to occur and how that is different from prior contract links – assignment links? Thank.

Yes. Tobey, I mean we’ve seen that in inching up over the better course of this entire cycle. It’s probably started to move a little bit more over the course of last few years just as a supply demand to become even that much more unbalanced. So we see customers holding on to people for longer periods of time. I mean, to kind of give you a data point. If we were to go back to the prior cycle that average duration would've been probably closer to six months.

Okay. Thanks. I’ll get back in the queue.

Thank you. And our next question comes from John Healy with Northcoast Research. Your line is now open.

Thank you. Dave, I wanted to ask just a question on one of the statements you made early in the call. You kind of talk to stay optimism level amongst the large IT customers. I was wondering if you could share with us any sort of proprietary checking or database or indexing or scoring that you guys do that would maybe provide some context of – maybe the strength of that and maybe how it compares to previous years?

Yes, I think starting initially with just basically conversations we’re having with clients. We're having elevated conversations with clients and its more strategic discussion. Buy if you look at what’s happening in Tech as a whole what you see are traditional and non-traditional competitors that are crossing over industries. Amazon is a great example. So you see retail clients now. You see a grocery stores, you see anybody who sees Amazon as a threat making significant commitments to technology and investment out of necessity. You also see a tremendous amount of activity cross over from different skill sets, you’ve got cyber, you got business intelligence, the rush towards AI. There is so much happening and I would say basically that we’re seeing today is that the secular drivers of our business have overtaken the cycle. We’re in a position today and we saw the starting at the end of the last downturn where technology is fueling all of these businesses, their revenue stream, they interface with their clients, the productivity of their people, the efficiencies and even more than ever the competitive aspects of everyone of these verticals and every one of the specific technology skill set. So, non-traditional competitors are a viable threat, so therefore organizations have to make that investments. So the technology off and running and I don’t see it ending anytime soon. So when you couple that with the lot of the big announcements that we’ve seen from the major employers that are talking about things like cyber security NBI, NAI there is substantial energy behind that and commitment behind that and obviously we expect that to continue for sometime.

And one thing that I would add to that specific to the space where we play is we continue to see a lot of what historically has gone to the large solution providers coming down more to med market and wrapped in statement of work or managed engagement which is a space that we’re very equip to play in.

Great. Thank you. And just one question on KGS, is there any perspective you could give us initially if there is a government shut down maybe how much of the business may pause, is there a pause. Just kind of what your initial view could be if there’s disruption in Washington.

Sure, John, this is Dave Kelly. So as we talked about in the past a substantial portion of our business is in the VA, as the matter of fact by far largest clients in VA. So shutdowns and funding that the government might do, they typically and have always exempted the VA from that. So we feel well protected in the instinct of a government shutdown. There might be a couple of people here and there that might be impacted by, but it should have a minor impact in our KGS business if anything.

Great. Thank you. Congrats guys.

Thanks John.

Thank you. [Operator Instructions] And you next question comes from Ato Garrett with Deutsche Bank. Your line is now open.

Hi. Good afternoon. Just one more question about your guidance. Given your expectations were kind of flattish Flex and overall margins going forward, but you still have a very impressive operating market -- operating margin target in place. Just I want to think about that, because that suggests that you're going to see some kind of little bit of slowdown in your investment schedule that it might be reflected in the SG&A guidance that you also gave there, but at the same time there are some discussion about investing behind improving client and consultant experience. So, we just want to get your view on just what’s really behind that business strong operating margin, and then two, just thinking about the investments and whether we’re seeing a stepping down [Indiscernible] platforms?

No. So, just a little history. So we’ve been investing for the last couple of years in technology and improving productivity which is overcoming those incremental costs and driving, improving operating margins. As we look forward in 2018 and beyond we’ve got a robust I think schedule investments that we expect we want to and really continue to make all of which were tie to improving productivity as matter of fact 2018, I think our cost actually from an investment standpoint is going to be in excess of what they were in 2017. But part of that is because we’re seeing the productivity improvement that Joe mentioned then we expect continued improvement in those. So this is well thought out perspective strategy that we laid out a few years ago that again as I mentioned before going well according to plan and we don’t see a need to curtail any of the investment expectations that we have in order to meet our objectives.

Yes. The only piece that would add to that is while for Q1 on the Tech side we manage the expectations that growth rates would be comparable to what they were in Q4 realized in my statement I said first half of the year headcount was going to stay stable, which means productivity is a significant contributor to that operating margin as well.

Got it. Very good. And then have you had any other follow-ups you want to add about areas or investments and the ways that you’re looking at improving that client and consultant experience? Just any examples you can give there?

Yes. I mean, I’ll touch upon that. I mean, obviously everybody knows there’s a lot happening from a digital transformation in the marketplace, so we have a dedicated team that’s out exploring different tools, different models, partnerships relationships that we can leverage, different activities that are happening and that’s the whole spectrum of digital, everything from the marketing standpoint, all the way through how we work with candidate through the placement process in combination with -- we’ve been making pretty significant investments from a business intelligence standpoint, on how we look at our internal selection processes as well as how we provide business intelligence to client selection. So, it's really still a very high touch business, but we’re looking for where those windows of opportunities are where we can gain efficiencies and much more routine type activities were we don't get a lot of value out of people burning cycles within various steps of the process.

Okay. Great. Thanks. And just one last area of focus for me looking at the government acceleration, yet the two big contracts really, it sounds like they were the driving factors behind the improvement in revenue growth this quarter. So just two items there; one, are those contracts fully stood up and running? They are fully at capacity or we’re getting to see any incremental improvement looking forward in 1Q from that? And then also are those contracts have a recompete, that’s a e number of years out or is that some they might be coming up in that midterm or near-term even?

Yes. So specific to those two contracts, those are five-year contracts, much of the ramp that we saw in that occurred in Q3, Q4 hence the 26% year-over-year growth in KGS business. Now as we look forward, I would say for us, again, an intentional strategy five long term contracts that we can build on with a focus on new prime wins whether that would be in the services business using our competency there or even in our product business.

Got it. Great. Thanks.

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

Thanks. Two question on the government business I could. What did the recompete proposition of your business look like in 2018? How solid is it relative to normal year. And then strategically how do you feel that the business is sized to compete. You obviously had some real strong wins and to drive that growth, but relative what seems to be a consolidating market that still a relatively small business in that market? Thank you.

Tobey, I had mentioned in my opening comments that we only have one major recompete in 2018 which is approximately 18% of the revenue based. And that’s in process right now. In terms of the team’s ability to compete, I mean, I would say some of the wins that we discussed last year is a clear indication of all the work that’s been done by the team to set up their capture management, their proposals and everything else because those were not insignificant win by the team. We have a pipeline that continues to get filled by the team that were pursuing on a regular basis.

Okay. Could you maybe expand on the comment you made about statement of work. What is the company's exposure within the Tech business to statement of work and how important is it to the growth you’ve been seeing and the profitability?

Yes. I would say it hasn't been – it’s been growing propositional to what the rest of our business at this in time. Our objective is to grow that disproportional to the core contingent space. So we’ve spent quite a bit of time. The team working on organizing in and around that so that we go to market with a strategy and we can bring those higher value-added services into our customers, so I think I think we’re very well set up at this point in time, but we’re in the early stages of execution from that standpoint.

Thanks. Any comments you can make growth in the financial – among financial customers, financial services customers particularly in Tech Flex. And is the H1B Visa reform seeing in the market driving any business your way or is that mostly rhetoric and is not affecting demand?

Yes. I’ll take the last one first. We haven’t seen anything materially change from anything happen in and around each H1B Visa. I mean, when you look out there what they’re really talking about now it's really three major categories [Indiscernible] then the temporary protected status. And those don't really influence the Tech Flex space as much as the other one that was being talked about which is the proposed H1B changes which again is very targeted to those entities that are much more dependent north of 15% of their total population. So that's really geared towards a global providers and if you – that’s been pushed out for 2019 at this point in time. So nothing even going to be discussed about that at this point based on what’s out in the market place. So we haven’t seen really any opportunity nor impact associated with that. In terms of the technology, our financial services, its very specific to what’s happening within each entity, but overall I mean you heard [Jimmy Diamond] on his earnings call talk about investing $700 million in cyber security and risk as well as the amount of work that’s being done, and Dave had mentioned in his comments on the client facing. So they’re all competing for the same client base. So they’re all having to make those investments and we’re seeing that broad based across the financial services sector.

You see, a lot of things are happening in FinTech and that in and off itself is compelling their large financial services organization to invest in those areas, so it’s widespread. It digital experience, its FinTech, its Cyber Security, I mean, all of these things are affecting, everyone is looking across now not only their traditional competitors, but their non-tradition competitors. So, that is compelling greater and greater investment in technology. And by the way foreign nationals H1B Visa are critical part of the skills necessary to be able to do these things. So I think the administrations probably done an education on exactly how critical the foreign nationals are to keeping the infrastructure and the competitive status of our organization in Tech. So a lot of these things have changed and are evolving and it will to. And I’m sure we see how active the President is in getting inside businesses. If this H1B thing in 2019 comes back around I’m sure we’ll see him inside some IT shops and we step inside IT shops and sees that 30% to 50% of the workers are foreign national nature. I’m pretty sure that tune on that will change.

Thank you very much.

Thank you. I’m not showing any further questions. At this time I would like to turn the call back to David Dunkel, Chairman and CEO for further remarks.

All right. Great. Thank you very much and thank you all for your interest and support of Kforce. And again I want to say thanks to each and every member of our fields and corporate teams; to our consultants and clients as well for allowing us to privilege of serving you and now we look forward to speaking with you again [in Q2]. Thank you very much.

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.