Kforce Inc (KFRC) 2003 Q2 法說會逐字稿

Welcome to the Kforce.com second quarter 2003 earnings results conference call. (CALLER INSTRUCTIONS). I would now like to turn the go over to Mr. Michael Blackman, Vice President of Investor Relations. Please go-ahead, sir.

Good morning. Welcome to the Kforce Q2 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 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 our Chief Operating and Chief Financial Officer, Bill Sanders. Bill?

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 second quarter results and provide guidance for the third 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 website, kforce.com. Our press release contains supplemental pages of key statistical data about each of our business units. 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 down .5 percent sequentially to $123.2 million. Flex revenues, which represent 94 percent of our business, were essentially flat while search revenues were down 3.5 percent.

Our pharmaceutical business line continues to be our top performer with 5.7 percent sequential revenue growth and we are pleased to see sequential growth in our IT and health-care non-nursing business. F&A was impacted by seasonality and declined 3.9 percent sequentially and our nursing business declined 4.9 said sequentially. Overall, revenues continue to be flat due to the weak economy though we are seeing positive signs in our core businesses.

On a billing day basis, revenue for April and May was down slightly and increased 4 percent sequentially in June. Billable consultants on assignment for IT are higher than a year ago and up sequentially for the second straight quarter. The number of billable consultants was flat for F&A and down for HLS. Revenue for field sales associates is up 6.6 percent sequentially and 26 percent year-over-year to an annualized rate of $775,000.

Gross profit increased 40 basis points to 31.5 percent in Q2 due primarily to an improvement of Flex margin of 70 basis points, which more than offset the reduction in search revenues.

Every quarter, we do a volume rate analysis. The analysis comparing Q1 -- or Q2 to Q1 indicates a search gross profit decrease of $300,000 resulted from an $800,000 decrease in volume offset by $500,000 improvement in rate.

Search continues to fluctuate quarterly and remains difficult to predict. Our Flex gross profit increase of $700,000 was comprised of $1.1 million of improvement in rate offset by a $400,000 decrease in volume.

Revenue increased sequentially 80 basis points for the quarter for IT, which is our largest business unit, comprising 45 percent of revenues, as a result of a 90 basis point increase in Flex revenue. Search was down slightly and remains volatile month to month with limited visibility.

Gross billable hours were essentially flat sequentially, while Flex margins increased from 24.1 percent to 25.7 percent. We expect IT revenues for the third quarter to be up slightly.

As expected, the performance of our F&A business unit reflected a seasonal slowdown usually exhibited in the second quarter. As a result, F&A declined -- F&A Flex declined 4.3 percent sequentially. After the fall off in activity in early April, activity was relatively stable throughout the quarter. We believe F&A Flex may have bottomed and should be stable to improving. Much like IT search, F&A search was down slightly from Q1 and continues to be unpredictable.

Lastly is the health and life science's business unit which represents 30.8 percent of revenue. Pharmaceutical, which is now 35 percent of the HLS segment, continues to be the strongest component with 5.7 percent sequential growth and Flex margins over 28 percent. Health care revenues were down 1.4 percent sequentially due to the anticipated decline in nursing, partially offset by a rebound in non-nursing revenues. Scientific had a decline sequentially of 3.3 percent but continues to do a good job, moving our footprint to higher margin clients.

We continue to make progress repositioning our nursing business to longer-term contract assignments with placement of RNs to primary health care facilities. We expect revenues to be flat to down through at least the third quarter. 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.

We expect non-nursing and scientific revenues to be stable in the third quarter. Pharmaceutical should be flat for the quarter as a major client project has been delayed. Overall, we expect HLS to be stable for the third quarter.

Our strong expense controls and cost-conscious culture continue to reap benefits and provide solid leverageable foundation on which to grow revenue. Our earnings of 2 cents exceeded street consensus by 1 cent per share. As evidence of the financial and operating leverage we have built through our cost cutting process and reorganization of our field corporate platforms, SG&A expenses were under 30 percent and our total operating expenses were 30.8 percent. We will continue to make tweaks to improve productivity and leverage efficiency and expect expenses to remain at or below these levels.

We currently have federal tax operating loss carry forwards of $39 million and state carry forwards exceeding $52 million which will positively impact cash flow. As a result of our tax valuation reserve, we anticipate only nominal income tax expense for financial reporting purposes until the $24 million valuation reserve is realized.

We continue to maintain our conservative balance sheet. Our bad debt reserves to gross accounts receivable remains strong at 8.6 percent with receivable write-offs remaining low. Our DSO of 32 days is down from 33 days at the end of Q1 and continues to be among the best in our industry and is our lowest benchmark ever.

Capital expenditures were nominal. EBITDA, an indication of cash flow, was 2.2 million or a per-share amount of 7 cents. We had no stock repurchases during the quarter and debt balances remain steady at $22 million while we build our cash balances to over $9 million.

Our focus is growing topline revenues. We have in place several initiatives and are very excited about the very high caliber of new hires we have made in the last 90 days. Dave will discuss some of our revenue generation program. However, one important note; the operating profitability on incremental revenues should be significant. For each additional 10 million in revenue, operating profit should be approximately 18.5 percent.

Though economic conditions remain uncertain, we believe third quarter 2003 revenues may increase over the second quarter. Revenues may be in the 123 million to $126 million range. With revenue in this range we anticipate earnings per share of 1 to 3 cents.

In summary, we are pleased with our financial and operating position and are happy to see continued profitability. I will now turn it over to our CEO, Dave Dunkel. Dave is traveling so therefore, is on another phone, so there may be a little coordination issue here but I am sure we will work it out. Mr. Dunkel?

Thank you Bill. In the face of continuing economic uncertainty, we experienced stabilization as we moved into June, which has continued into the first week of July. There are indications we may experience improved economic conditions as we move into 2004. We remain cautiously optimistic given there have been three false starts in the recovery since the summer of 2001. As we have stated previously before revenues can go up, they have to stop going down and it appears that is happening.

At Kforce, our focus is on our customers and revenue growth. The customer focus throughout the organization is strong and we are seeing progress in our efforts to gain customer share and in turn, marketshare. Several initiatives designed to accomplish these objectives are in process. For example, great people equal great results. Our focus on attracting and retaining great people has been one of our highest priorities. In June, we recognized our top performers in Aruba at our annual recognition incentive trip. Additionally we've attracted several outstanding professionals to our national sales team, field offices and corporate staff.

Second, executive sponsorship of major accounts. Each executive is responsible for leading a team in servicing and penetrating target accounts.

Third, training. We have been and will continue to invest in training our associates and leadership to develop selling skills and services skills.

Four, alignment. This involves the further definition of customer segments and sales channels to enhance accounts targeting and rev our sales engine.

Five, cross-selling. We believe we have unique opportunities to sell Flex and Search Services across each of our specialties to existing customers. We've developed tools to measure the effectiveness of our account penetration efforts by customer.

These initiatives in addition to others, are aimed at driving revenues by leveraging our existing customers. As revenues increase, earnings will increase significantly, reflecting our operating leverage but also significantly the reduction of our shares outstanding by 37 percent through our repurchase program.

We remain confident in the future of the staffing industry and believe the penetration of flexible workers as a percentage of the workforce will resume its long-term growth trend. Our base infrastructure is prepared to absorb rapid organic growth and or acquisitions. The table is set.

On behalf of the executive team, I would like to thank our sales associates, management team and corporate support teams for their hard work and persistence and at this time, I would like to open up the call for questions. Operator?

(CALLER INSTRUCTIONS). Mark Allen of SunTrust Robinson-Humphrey.

Good morning guys. Nice to see the progress on profitability.

Thanks Mark.

Specifically, can I ask what you saw by month in your IT Flex business and also, any comment on what you have seen so far in July?

Bill, do you want to handle that one?

Sure. It was primarily flat in April and May. June is up slightly and July is back to flat, I would say, Mark, if you want general statement.

Okay. Sticking with IT flex, I guess a simple question, why are the gross margins in that division up year-over-year?

It's a combination of factors but the primary factors are as follows -- first, we are doing more work in infrastructure. Infrastructure is a higher margin type of business. Secondly, we have reduced exposure to some lower margin business and therefore, bringing up the overall margin of activity that we are involved in. But actually, we are focusing, as you know also -- as you know, we also have a big focus on expanding margin and particularly looking at payrate. When you put all those three together, we've made dramatic improvements in IT certainly more than we have in the other two units.

Is there, I guess specifically have you been able to do any adjustments I guess to compensation of some of the contractors? Is that a factor at all in terms of the improved margins?

It certainly is a factor but it's not the major factor. I would say the major factor is the percentage of infrastructure business we are doing which carries with it a higher margin.

Okay and final question, I guess kind of an open big picture question. What do you think about the threat of offshore IT? How if at all, do you think that would impact you?

Mark, this is Dave. Obviously, there has been a lot written about the outsourcing and utilization of offshore resources. I believe in many respects over the last year or two that there have been a number of companies that have utilized those resources and I think as experience has taught many customers, there are times to use it and times not to use it. But overall, we believe that the utilization of offshore resources will become one of the tools that the companies will use. India, the eastern block, China, Mexico are countries that are being evaluated but I do believe that the majority of companies are going to utilize offshore resources to some degree and will use that as just one of the tools in their quiver to reduce costs. Interestingly, we have seen particularly with India, as more companies have utilized those resources, we have seen wages come up and what we are really seeing is the impact of the Internet and connectivity to be able to utilize resources regardless of where they sit and this is a trend that's not going to go away. It is similar to manufacturing offshore and we expect this will continue and we will make it an offering within our overall offerings to our customers in IT and the other business units.

Thank you and good luck in the second half, guys.

Thanks a lot.

Dave Koning of Robert W. Baird.

Good morning.

Mr. Koning, your line is open.

Good morning.

Are you through with your question? At this time, there are no further questions.

Bill, do you have any other comments you would like to add?

No, go ahead and close Dave.

We want to thank again all of you for your interest in Kforce and we look forward to improved economic conditions as we move into the back end of this year and 2004. We also want to thank our associates for their hard work and commitment during these challenging times and we look forward to talking to you again at the end of the third quarter. Thank you very much.

Thank you.

(CALLER INSTRUCTIONS).

(CONFERENCE CALL CONCLUDED)