Kforce Inc (KFRC) 2003 Q1 法說會逐字稿

Good morning. My name is [Kenisia], and I will be your conference facilitator today. At this time I would like to welcome everyone to the Kforce Q1 2003 earnings release conference call. (Caller instructions.)

Mr. Blackman, you may begin your conference.

Good morning. Welcome to the Kforce Q1 conference call. Certain statements made during this call relate to future results and events and are otherwise forward looking statements in nature. Such statements are based on the company's current expectations. Actual results or events for the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired as a result of a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the company's reports filed with the SEC. Additional discussions of these and other factors affecting the company's business and prospects are contained in the company's filings with the SEC. Listeners are cautioned that any such forward looking statements are not a guarantee of future performance and that actual results and events may differ from those indicated herein. Such differences may be material.

I would now like to turn the call over to Chief Operating and Chief Financial Officer Bill Sanders.

Thank you, Michael. And thanks to all of you for your interest in Kforce.

I will discuss our financial results, provide performance indicators behind the first quarter results, and provide guidance for the second quarter. And then Dave will provide you his comments. You can find additional information about Kforce in our 10 Q and 10 K filings with the SEC. Press releases and the aforementioned SEC filings are also available on our web site, Kforce.com.

Our press release contains two supplemental pages and key statistical data. This data should assist shareholders and analysts to understand the quality of our earnings stream and insight into future trends.

Revenues for the first quarter were $123.7m, which represents a sequential increase of 20 basis points, our first consecutive quarterly increase since the third quarter of 2000. While we are not declaring victory, this sure does feel good.

The winter storm during the quarter impacted our largest offices, which are on the East Coast, as well as other offices and negatively affected revenue by approximately 2 percent.

Our F&A Flex and pharmaceutical business lines continue their strong growth with 5.9 percent and 13.1 percent sequential increases. We are also encouraged by the 21.6 percent sequential increase in Search. IT was down slightly, and our health care business continues to be weak. Overall revenues continued to be under pressure because of the weak economic and labor environment.

On a billing day basis revenue for January and February was primarily flat. This is as expected with seasonal declines in IT and improvements in F&A. March improved approximately 5 percent. Billable consultants on assignment for IT are higher than a year ago, flat for F&A, and down for HLS. Revenue per field sales associates is up 11 percent sequentially and 30 percent year over year to an annualized rate of over $725,000.

Gross profit decreased 30 basis points to 31.1 percent in Q1 due primarily to higher first quarter employer tax and benefit costs, [indiscernible], bill rate, pay rate, margin compression, and payments to salaried consultants who could not work due to weather conditions.

Every quarter we do a volume rate analysis. The analysis comparing Q1 to Q4 indicates the Search gross profit increase of $1.5m resulted almost entirely from increases in volume; that is, placements increased 23 percent with a slight reduction in fee.

Our Flex gross profit reduction of $1.9m was comprised of $1.2m from reduction in rate which is primarily taxes and $700,000 from volume. This suggests we have room for improvement on labor cost to increase margin.

For our IT business unit revenues declined sequentially 1.2 percent for the quarter. Gross billable hours were essentially flat sequentially, while Flex margins declined by 190 basis points due to seasonal tax effects, bill rate, pay rate, margin compression, and payments of salaried employees who did not work due to weather issues.

While Flex revenue was down slightly, IT Search did improve 5.8 percent but remains volatile with visibility limited. We expect IT revenues for the second quarter to be flat to up slightly. Our F&A business unit performance improved for the second consecutive quarter. F&A Flex grew 5.9 percent sequentially. This traditional positive trend will be negatively affected in the second quarter by seasonal trends.

F&A Search, also particularly strong, with a 22 percent increase. We would like to see another positive quarter before we believe that F&A Search has momentum.

Lastly is the Health and Life Sciences business unit, which represents 30.5 percent of revenue. The future prospects of the business units in the HLS [indiscernible] provide us with additional revenue, growth opportunities, and a diverse revenue stream.

Pharmaceutical continues to be the star of the HLS Group, with over 13 percent sequential growth and now the largest business unit in HLS.

Health care revenues were down 14.7 percent sequentially due to the anticipated declines in nursing as well as weakness in non nursing.

Scientific had a slight decline sequentially of 1.6 percent and is doing a good job moving our footprint to higher margin clients.

Our focus in HLS is the repositioning of our nursing business to longer term contract assignments, replacements of RNs to primary health care facilities. We expect revenues to be flat to down through at least the next two quarters. One bright spot, however, we are finally seeing the flow of international nurses making it through the [INS] with 15 on assignment currently and more than 40 expected by year end.

Hospitals, who are our primary clients, continue to experience lower census and reduced profitability; however, we believe this is temporary and continue to believe in the long term dynamics of nurse staffing and non nurse staffing.

We expect non nursing and scientific revenues to be stable in the second quarter. Pharmaceuticals should continue to expand its market presence and to continue its growth. Overall, we expect HLS to be stable for the second quarter.

Our better than anticipated earnings were due to revenue mix and strong expense controls. Our earnings exceeded street consensus by $0.03 per share. As evidence of the financial and operating leverage we have built through our cost cutting process and reorganization of our field and corporate platform, SG&A expenses were 29.6 percent, and total operating expenses were 30.5 percent. This is a low water mark for the last five years, and we will continue to make tweaks to improve productivity and leverage efficiency.

We currently have a federal tax net operating loss carry forward of $39m and [save] carry forward exceeding $62m, which will positively impact cash flow. As a result of our tax valuation reserve, we anticipate only nominal income tax expense for our financial reporting purposes until the $24m valuation reserve is realized.

We continue to maintain a conservative balance sheet. Our bad debt reserves to gross accounts receivable remains strong at 8.9 percent with receivable write offs remaining moderate.

Our DSO of 33 days is down from 38.5 days at the end of [two four] and continues to be among the best in our industry and is our lowest benchmark ever.

Capital expenditures were $400,000. EBITDA, an indication of cash flow, was $1.9m or a per share amount of $0.06. We had no stock repurchases during the quarter, and debt balances remain steady at $22m.

Though economic conditions remain uncertain, we believe second quarter 2003 revenues may increase over the first quarter. Revenue may be in the $123m range to the $127m range. With revenue in this range we anticipate earnings per share of $0.00 to $0.03. The consensus estimate for 2003 is $0.06 per share, assuming a continued weak economy and labor market is in a range we are confident is achievable.

In summary, we are pleased with our financial and operating position and are happy to see a quarter of sequential revenue improvement and a return to profitability.

I will now turn it over to our CEO, Dave Dunkel.

Thank you, Bill. The staffing environment remained stable throughout the quarter despite the war in Iraq and other geopolitical concerns. We think this is a positive sign against this background. There have been three false starts in the recovery since the summer of 2001, and expectations continue to be further out into 2003. While we cannot say for certain when the recovery will occur, we have noticed a more positive tone, which would suggest at least continued stability and potentially gradual improvement.

Our customers continue to focus on optimizing their staffing levels by mixing core and flexible staffing. They are also continuing to consolidate suppliers and look for ways to reduce costs.

IT remained relatively stable throughout the quarter with a marginal increase in RFPs for projects, particularly infrastructure and other near term payback investments. Project life cycles have gotten shorter, which we believe is a positive for our Flex business.

F&A performed well in a still somewhat challenging environment. it appears we gained market share, and a pleasant surprise was the dramatic improvement in F&A Search.

HLS performance ranged from excellent in our pharmaceutical business to unsatisfactory in nursing. Our business model transition focused on specialized RNs towards hospitals and away from long term care, and the introduction of contract staffing is starting to take hold.

And it is now clear that the health care industry is not immune to economic cycles, as hospitals rein in costs, and core nurses work more shifts to supplement their income. We remain confident that the longer term demographics in this space will lead to improved performance for our nursing business. We also remain confident in the future of the staffing industry as a whole and the penetration of flexible workers as a percentage of the work force as it resumes its long term growth trend. This bodes very well for staffing.

Unemployment is still substantially below the 7.2 percent of the last recession. And the shift toward a skill based service economy suggests substantial opportunities for future growth in the professional and technical areas.

We are continuing to emphasize market share in this challenging environment. Our focus is on the capability building of our sales force, and we are achieving much success on that front. We believe we are positioned for improved performance in 2003, as great people will produce great results.

We have lowered our break even revenue point and will continue to do so as conditions warrant; however, we are emphasizing future revenue production over cost reduction as the key to optimal profitability.

We are at the point where our base infrastructure is prepared to absorb rapid organic growth and/or acquisitions.

On behalf of the executive team I would like to thank our sales force and management team for their hard work and persistence. And adversity has, indeed, made us much stronger.

I'd now like to open up the call to any questions.

[Kenisia]?

(Caller instructions.)

Your first question comes from Randy Mehl.

Yeah. Good morning, and congratulations on a solid quarter.

We know it's really Randy Mehl, [inaudible].

Okay. It's Mehl on these conference calls.

It's almost lunch time in the east.

I wanted to just pursue a couple of items here. Gross margin on the contract side. Bill, I think you'd mentioned room to lower wages. And I'm just wondering how confident you are in that and where we should expect the IT gross margin to settle out. We've had a few years now decline in that number. I was wondering if 25 percent is a reasonable long term target, or do we need to go lower?

First, Randy, I guess I'll take it on a consolidated basis. Then I'll take you to IT.

Yes, taxes certainly employer taxes are a big part of this as well as benefits and the other items I had mentioned. For example, for us, margin January overall, the total company was [twenty five eleven]. In February it was [twenty six twelve]. In March, [twenty six nine]. So you would think, on a normalized run rate for the rest of the year, that we certainly should approach [twenty seven]. Whether we do better or worse depends on how we do on pay rate labor costs.

From an IT standpoint, I assume from what I just said that normalized is somewhere around 26 percent. And we should get somewhere up around [twenty five seven, twenty five eight] at a normalized rate where we are today. Now, how that holds and whether that goes up or down, certainly we have a focus on labor costs. Because, as I'm sure you're aware of, bill rates have dropped rather substantially, and it takes more time to get pay rates in line with bill rates.

Okay. Great. And then I'm a little surprised that buy back activity wasn't more robust in the quarter. Maybe you could speak to your plans there as it relates to financial position.

Well, yeah. We monitor very closely, obviously, the stock price and what's happening on any particular given day. And we also monitor very closely our cash position. When we went into the Iraqi war situation, we became very conservative on cash and decided that we were going to go make sure that we had plenty of room to do all of the possible activities we would like to do this year as well as protect a very conservative balance sheet. And so we thought it was prudent, until things settled out a little bit, that we would no longer purchase stock on the open market until it was more clear where we were going. And we have, as you know, significant room on our debt line. But we thought it was important and prudent to conserve cash during this quarter.

Okay. That's fair. And just final follow up here. What kind of tax rate can we expect going forward given your comments about [ENOL]?

Well, I'll tell you until we realize the $24m valuation allowance, you would expect it to be zero.

Okay.

It was basically zero with this quarter, and I wouldn't expect it to have changed until we have the operating income that overcomes the $24m.

Okay. So the EPS Guidance does assume that there are no tax [inaudible] then?

That's correct.

Okay. Thank you very much. I appreciate it.

Okay. Thank you, Randy.

Your next question comes from Mark Allen.

Hey, good morning, guys, and congratulations on getting back to profitability.

Thank you.

My first question is on the F&A Search business. And I guess I'm curious. Why don't you think that business was so strong this quarter? And maybe just kind of remind us what type of position you recruit for in F&A and who the customer base is.

Mark, this is Dave. I wish I could tell you the answer. I will say that we bounced off of a pretty low fourth quarter number. So, from a comparative standpoint, the fourth quarter was certainly worse than we expected it to be. So we were pleased to see that the first quarter did recover to this point.

We have seen in our key performance indicators greater stability in F&A Search than we've seen in IT Search. The positions that we're filling range all the way from the entry level to lower experienced accountants up to CFOs. I don't think that there's any one thing that's been driving it. Anecdotally we have heard that certain companies perhaps cut too deeply during the slow down, and given the new governance requirements and reporting requirements that they may, in fact, be beefing up. The KPIs would suggest the stability coming out of the first quarter has pretty much continued into the second quarter.

Okay. And I have a similar question related to your pharmaceutical business. And in that division, again, give us a little color on the size of it what are the relative margins, what type of positions do you fill, what's the customer base.

I'll defer to our CFO/COO for the financial statistics because he eats, drinks, and sleeps those.

The positions that we fill are really all within the clinical trials, data management, pharmaco vigilance within the new drug approval process. I certainly would take my hat off to the leadership of HLS and, in particular, our pharmaceutical group, for the work that they have done. They have evolved a very sophisticated customer partnership model in working with many of the big pharma companies and executing their clinical trials in partnership with them. And that model has gained traction with several of our large customers like the Amgens, for example. And we've also met with success now in utilizing that model with other big pharma companies.

We have also seen significant penetration into the biotech space. So I would say that our success there, in the trials area in particular, is a result of our long tenure in leading market position there. And, frankly, we're expecting continued growth going forward. We think that's an area that could sustain that growth.

As far as the financial statistics, Bill

Mark, first I would say, yes, the pharmaceutical group has been a real star. They have a real leader in [Chris Ellis], and we're very proud of what they have been doing. Their margins in the last six, seven quarters have ranged in the mid 28 percent to a low last quarter of 27.3 and then 27.6 this quarter. So I think they are maintaining solid margins throughout these difficult economic times.

Okay. And then your Health and Life Sciences Division, I understand you're repositioning your nurse staffing business. Any comment relative to the timetable? When do you feel like that repositioning process will be completed and you'll start to build traction in your new target market?

Mark, this is Dave. We have our best guy on that, Howard Sutter, who, as you know, is a founder and a very experienced operator and has been a great leader. Howard assumed responsibility for health care when we felt that, given its size, it was time to pull it out and give it focused leadership and also, due to its unique business model. Howard has been in there now about three months, and I would say that he's really made great progress in a very short period of time in the efforts that he's done.

With those things being said, we would as a general sense, the rate of deterioration will slow going forward, and we would expect that by the fourth quarter of this year we're hopeful that we'll start to see an upturn. But I wouldn't look at the rate of decline to continue at this level. I would look to that to slow as we make progress in this transformation of the business model.

Okay. Final question regarding IT staffing. Do you feel like IT staffing has bottomed, is it stable, or is there more risk that it could contract as we go through the year? And I guess I was asking your opinion. Do you think it's stabilized now?

Company Representative Mark, I would say that I think it has stabilized. You know there's been some positive noise, I guess is the best way to characterize it, in some of the project areas. Certainly not the large scale projects, but infrastructure upgrades, some of the deferred maintenance, certain lower cost/higher return near term payback kinds of application development projects.

Again, I would say that IT was cut back significantly during this downturn, and a lot of the compelling reasons to do things the upgrades of servers, for example the costs of a lot of these things are coming off of [indiscernible], the need to upgrade the current releases of software, and so forth. Those things seem to be starting move to the front of the radar screen in a more project oriented basis, and we're seeing more of those. So, while we're not ready to declare victory, it does appear that it's stabilized, and we are cautiously optimistic as we go forward for the balance of the year.

Okay. Thanks, and good luck to the rest of you guys.

Okay. Thanks, mark.

Your next question comes from John Mahoney.

Hey, good afternoon, guys. And I must admit I'm very impressed. Congratulations.

Thanks, John.

First of all, the D&A sequential decline, could you speak to that just real quick? I'm not sure I was prepared for that.

What particular segment are you talking about? I'm sorry.

Depreciation and amortization went from $2,016,000 to [a million and one].

Yeah. We have continued to reduce the amount of leaseholds and computer equipment that we have. And we've been substantially reducing that and writing off those type of capital expenditures. But this is starting to come home to improvement.

Okay. And where do you think firm research is going to be in the second quarter? Are we going to give any of that up?

Wow. That's a very, very difficult question.

I'm just only asking because I know you mentioned IT could be flat, total IT. So you got some idea?

Well, we are hopeful that it will be flat to up, but this is the one area that certainly is very low visibility and is very volatile. And we are so very early in the quarter that it's difficult to predict. And hope is [that much] of a battlefield strategy.

Right.

But we do hope that it is flat to up.

Well, as you mentioned earlier, the fourth quarter firm was [6.8] down from [nine million]. So you haven't quite bounced back. But it's nice to see it go up.

How much of the growth in firm was from I might have missed this in which area segments?

Most of it was in finance and accounting.

Right.

That was up amount 23 percent.

And can you give us some idea about April?

From which way?

Just in the firm.

On the firm side

Not by segment, but just how did it look relative to March?

Relative to March the [fifth] quarter is always a tough one. I would say it is down slightly relative to March. And relative to January, which is the first month of the year, it is also down slightly. But, as as I said, it's very lumpy, very volatile earnings, and it's hard to predict from that. But it is down at the moment.

Yeah, John, I wouldn't draw a lot of conclusions from that. That's kind of normal at the end of a quarter. The anecdotal evidence would suggest that it's still stable. I don't think it's improving, but it's still stable.

Okay. And I don't know how to ask the $64,000 question, but it wasn't that long ago you guys were doing $25m to $30m a quarter in firm.

Love to have it.

Yeah. This economy obviously still is kind of stalled, but is there structural changes that would keep that from happening within 24 months?

We have very carefully and surgically worked with each of the business units. As we look at the search business, we are retooling the model somewhat, particularly on the delivery side, which is on the candidate generation side. Hopefully as the market starts to recover, some of the initiatives that we've taken to allow us to participate in that growth will allow us to ramp back up again.

Based on where we are today, and historically against our gross profit per employment month metric, there is existing search work force as well as a model that would allow us to flex our own work force, if you will, to changes in demand. So I would not say that there's any reason that we could not return to those levels over that time frame. In fact, I believe that we can.

So in a two year period we could be back in the $25m to $30m a quarter range?

Assuming the demand was there and all other factors being normal, there's nothing structurally that's changed that would prevent it.

Okay. Thank you very much.

Thanks, John.

At this time, sir, there are no further questions.

Okay. I want to go ahead and conclude and thank all of our sales force again, our management team, and all of our corporate team for the hard work that they have put in. And we look forward to talking with you in the end of the second quarter, and hopefully another successful quarter for Kforce. Thank you.