Kforce Inc (KFRC) 2003 Q3 法說會逐字稿

Good afternoon. My name is Stacey and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Kforce third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

At this time, I would like to turn the call over to Mr. Michael Blackman, Vice President of Investor Relations. Thank you, sir. You may begin your conference.

Good morning and welcome to the Kforce third-quarter conference earnings 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 discussion 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 a 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 our Chief Operating 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 third-quarter results and provide guidance for the fourth quarter. Then Dave will provide you his comments.

You can find additional information about Kforce in our 10-Q, 8-K and 10-k filings with the SEC. This morning's press release and the 8-K filed with this morning's press release and other SEC filings are also available on our Web site, 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 earnings stream and provide insight into future trends.

Our EPS exceeded Street estimates by 2 cents. We are pleased with the third-quarter EPS of 4 cents and year-to-date EPS of 8 cents, versus 2 cents in the second quarter and a 7 cent loss for the first nine months of 2002. Our cost containment and cost collection initiatives have been successful, and we continue to lower our breakeven point.

Revenues for the third quarter were down only 20 basis points sequentially to 123 million. Flex revenues, which represent 94 percent of our business, were up 80 basis points despite the impacts of Hurricane Isabel and the power outage in the Northeast, where we have our highest concentration of business.

Search revenues continue to be weak and were down 14.2 percent. Both our IP and F&A business units had sequential revenue increases for the quarter, which helped offset anticipated declines in nursing and pharmaceutical.

Overall, revenues continue to be flat due to the weak economy, although we're seeing positive trends, particularly in our Flex businesses.

In addition to the sequential increase in total Flex revenues, there were sequential increases in revenue per billing day, billable hours, quarter end billable FTEs and billable FTE to a sales associate. Thus, overall productivity of our sales force continues to improve.

On a billing-day basis, Flex revenues for July and August was flat and increased 3.4 percent sequentially in September. October, Flex revenues continued to improve the pace of September, which is a positive indication. Billable consultants on assignment for IT are higher than a year ago and up sequentially for the third straight quarter. The number of billable consultants was up 80 percent for F&A and down 6 percent for HLS.

Gross profit decreased 70 basis points to 30.8 percent in Q3, due primarily to the reduction in Search revenues as a percentage of total revenues, and a 10 basis points reduction in Flex margins.

Every quarter, we do a volume rate analysis. The analysis comparing Q3 to Q2 indicates a Search gross profits decrease of $1.1 million resulted from a 700,000 decrease in volume and a $400,000 decline in rate. Search continues to fluctuate quarterly and remains difficult to predict.

Our Flex gross profit increase of $200,000 was comprised of a $600,000 increase in volume, partially offset by a $400,000 decrease in rate.

Revenue increased sequentially 60 basis points for the quarter for IT, which is our largest business unit, comprising over 45 percent of revenues, as a result of a 1.6 percent increase in Flex revenue. IT Flex revenue is up sequentially for the second straight quarter.

IT Search was down 28.2 percent and it remains volatile, month-to-month, with limited visibility.

Gross billable hours were up 1.4 percent sequentially, while Flex margins decreased from 25.7 percent to 25.5 percent. We expect IT revenues for the fourth quarter to be up on a billing-day basis but be flat to up slightly in total.

The performance of our F&A business unit improved during the third quarter. F&A Flex was particularly strong with 8.5 percent year-over-year growth, which is the first since 2000. Sequential growth was 4.5 percent. Gross billable hours were up 6 percent and Flex margins improved by 10 basis points. We believe F&A Flex will be flat in total for the fourth quarter, but continue to improve on a billing-day basis.

Much like IT Search, F&A Search was down from Q2 and continues to be unpredictable.

Lastly is the Health & Life Sciences business unit, which represents 30 percent of revenues. Pharmaceutical, which is now 35 percent of the HLS segment, declined 3.1 percent sequentially, as anticipated. This is primarily the result of a delay in the start of a project by a major customer.

Healthcare revenues were down 3 percent sequentially due to anticipated declines in nursing, partially offset by the second consecutive quarter of sequential growth in Healthcare non-nursing revenues.

Scientific had a decline sequentially of 4.1 percent, though margins continued to improve as we shift the footprint for this business unit. We continue to focus our nursing business towards longer-term contract assignments with placement of RNs to primary healthcare facilities. Revenues continue to be weak in this sector as a result of hospitals experiencing lower census and reduced profitability. We expect revenues to be down in the fourth quarter as a result of this weakness and the impact of less billing days. We believe we're making progress in repositioning this business and continue to believe in the long-term dynamics of nurse staffing.

All business units in HLS will be impacted in Q4 by the reduction in billing days. In particular, a big pharmaceutical client, which has a high dollar bill rate, historically closed down the last two weeks of the year. Scientific revenues are also typically down in the fourth quarter because of industry holiday shutdowns. As a result, we expect healthcare non-nursing, Scientific and Pharmaceuticals to all show revenue declines in Q4.

Our strong expense controls and cost-conscious culture continue to reap benefits and provide a solid, leverageable foundation on which to grow revenue.

SG&A expenses were under 29 percent as the result of our cost containment initiatives and management of our write-offs and Accounts Receivable, which were a net write-on for the third quarter. We will continue to make tweaks to improve productivity and leverage efficiency and expect expenses to remain at or near these levels.

We currently have federal tax operating loss carryforwards of $41 million and state carryforwards 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 $23 million valuation reserve is realized.

We continue to maintain a conservative balance sheet and build liquidity. Our bad debt reserves to (indiscernible) Accounts Receivable remains strong at 7.8 percent. Our DSO of 33 days at the end of Q3 continues to be among the best in our industry. Capital expenditures remain low and are focused on incremental improvements in our infrastructure.

EBITDA -- (technical difficulty) -- indication of cash flow was $2. million (sic), or a per-share amounts of 9 cents.

We had no stocks repurchases during the quarter and debt balances remain steady at 22 million, while we built our cash balances to over 13 million from 9 million at the end of Q2.

Our focus continues to be on growing topline revenues. We are encouraged by the steady increase in activity and new business in our IT and Flex businesses, which are 70 percent of our revenue base.

As we look at the first two weeks of Q4, it appears that weekly revenue is continuing at the September billing day pace, which is a marked improvement over recent quarter beginnings. We believe this momentum may be sustainable, going forward, although overall Q4 revenues will be impacted by the reduction in billing days and the holiday season, as both Christmas and New Year's are on a Thursday.

Although we're cautiously optimistic about the foreseeable future, forecasting remains difficult. As a result, we will continue our practice of providing guidance for a quarterly-forward look.

Our guidance for the fourth quarter anticipates a continuation of the recent customer buying interest we are experiencing in our existing business and our increasing level of optimism about market conditions. Fourth-quarter revenues may be in the $120 million to $124 million range. The low end of this range is a slight sequential improvement on a billing-day basis, calculated with two less billing days than Q3. With revenue in this range, we anticipate earnings per share of 2 to 4 cents.

In summary, with a healthy balance sheet and enhanced operating platform and the recent addition of several people in key positions, we believe that our strengths are the right match for the coming market opportunities.

Now, I would like to welcome our new CFO, Derrell Hunter. to the Kforce family. We are pleased to be able to attract such an outstanding CFO and strengthen our executive team. Derrell will review an administrative matter we have concluded with the informative for this call.

Thank you, bill. The Kforce Board of Directors resolved, at its October 24th meeting, to modify the Company's deferred compensation plan to eliminate Kforce Stock as an investment option. This will result in the sale of approximately 217,000 shares held for this plan in the near future. It is currently expected that such shares will be purchased by the Company. There are some 16 B insiders in this plan, including all five named officers and one Board member, that will have reportable sales of Kforce stock to comply with this Board resolution. I am honored and very happy to be a part of the Kforce team, which as you know, is led by our CEO, David Dunkel. Dave?

I too would like to take this opportunity to welcome Derrell Hunter, our new Chief Financial Officer, to Kforce. At the same time, I would like to express my appreciation to CFO Bill Sanders for the outstanding job he has done at Kforce. Under Bill's leadership, our metrics -- like SG&A and DSOs -- have moved to industry-leading levels as we built our operating leverage. The back-of-the-house infrastructure that Bill and his team developed is well positioned to handle significant revenue growth. We are excited to see what he can now do with 100 percent of his time dedicated to driving profitable revenue growth. We expect nothing less than his prior levels of achievement in excellence. Bill is a proven leader.

Turning to our results for the third quarter, we were encouraged by the tone of business and feedback from our customers. It appears that the market is stable to improving and that Kforce is winning customers in the strength of exceptional service.

There have been three false starts to this recovery, so there's a lot of hesitancy to declare that we're out of the woods, but it does appears that the breadth and depth of what we're seeing is stronger than past inflections.

The fact that F&A Flex is up year-over-year for the first time since Q4 2000 and that IT Flex is up sequentially is well with being virtually flat year-over-year would seem to indicate that staffing has found its footing. Businesses cut their staffing levels deeply in recent years and we continually hear stories of people working at their limit. At some point, it is reasonable to conclude that they will add headcount, most likely through flexible staffing.

As we turn to Q4 in 2004, we are encouraged by the tone of business and believe that with over 75 percent of our business being IT, F&A and pharmaceutical exposed to growth segments, that Kforce is well positioned as the recovery takes hold.

We remain confident about the future prospects for our nursing business in view of the macro demographics, and also believe that HIM (ph) and Scientific are stabilized.

At Kforce, our focus is on customers and revenue growth. We are aggressively pursuing customer share and therefore, we continue to enhance and strengthen our sales model to accomplish this. The linchpin of our positioning of the right (indiscernible) through exceptional service is that great people equal great results, and our focus on attracting and retaining great people remains one of our highest priorities.

We remain confident in the future of the staffing industry and believe that the penetration of flexible workers as a percentage of the workforce will resume its long-term growth trend. While there is a well-documented history of flexible staffing being utilized coming out of a downturn, we believe that there will be a greater utilization of staffing as the economy moves into a "permanent-temp mode". We believe that increasing employment costs an burdensome regulations, when combined with shorter project lengths and highly specialized skills, make flexible staffing a convenient and cost-effective solution. For our customers, it is easier to end an assignment than to terminate someone. Kforce has used the downturn wisely to position the Company for future growth and profitability.

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.

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

(OPERATOR INSTRUCTIONS). John Mahoney of Raymond James.

Great quarter! Could you give us a little bit of feedback about -- I mean, I was really surprised at your ability to continue to manage the cost line -- the SG&A, rather. What's left there, if anything? That's my first question.

By left, do you mean can we continue to look for that percentage as we go forward?

Right.

I would say we certainly would like to keep SG&A under the 30 percent level, and it's going to fluctuate depending on revenue volume, obviously, and billing days and some of those other things, but we will continue to do that. We will keep it less than the 30 percent level, that's for sure.

What's going to be the key to Kforce gaining market share in some of your segments as the economy starts to show improvement?

John, we are continuing to work with our sales force in the alignment of roles and responsibilities. We also have a very strong national sales group, as well as our expertise in our verticals -- what we call our national champions that work with our field staff in skill-building. Our marketing department is working on tactical and product-oriented initiatives to go to customers to go to market with. The focus on customers, the focus on the value proposition and solutions to customers -- our response from them would suggest that we are bringing innovative approaches and increasing just -- in the short term that we've been doing this, increasing the forward look, if you will, and participating with them in shaping their staffing solutions.

So, the general sense is that the focus on the sales force, the skill-building and the increased attention to the way that we're offering our products is gaining traction with them.

I would add a little bit to that, John. I would say we are very big (indiscernible) great people equal great results. We've not only added Derrell Hunter to our executive management team, but we've added -- almost one-third of key positions are new people in the Company, and they are very, very high level. We're extremely happy with how this team is coming together. Now, we are continuing to do that as we go forward, so we're really big on getting great people in here.

Can you just remind me again on the tax, the NOL -- when you're going to be -- what the size is and when we are going to start to look at paying taxes?

We have a $23 million valuation reserve and so we have to add $23 million. Well, it won't be exactly that way, but we have to get to a position of somewhere around $23 million in earnings -- (technical difficulty) -- offset that.

Pretty simple?

Yes.

Randy Mehl of Robert W. Baird.

Good morning and good job, guys, on the quarter. Welcome, Derrell. I apologize. I was a few minutes late on the call, so please feel free to skip my question if you've answered it. I first wanted to look at the nursing area. When do you expect hours to bottom? You had talked about fourth quarter kind of being the trough. I'm wondering if that's for your expectations still are.

Randy, we would never skip your question! That's a good question and a hard question. Certainly, it would be difficult for the fourth quarter to show improvement. It may be flat on a billing-day basis because of less billing days. It would be very hard for that to go forward.

I would say, would be hopeful that the first quarter -- that we're seeing the trough of that now in first quarter, as the economy improves first quarter. Second quarter, we would see some flattening out here, and by the back half of next year would be promising. We have a number of different initiatives, including international nurses, that we believe will begin to have a real effect upon our nursing revenues. So, there are a number of things that are coming along, but they're coming along slowly in this economy.

Long-term, though, you're still -- (technical difficulty) -- sector in your approach?

Randy, the macro demographics are still there. The demand is still there, so what we're doing -- and I would point out, of course, that we have taken nursing out of what was formerly the HLS management unit and given it specifically to one leader, Howard Sutter. It's a unique enough business model. We want to give it the attention of one of our best executives. Howard has provided excellent direction. We have seen traction with a number of his initiatives. Given the macro demographics, given the leadership, we believe that it won't be too long before we start to see the positive results from there. I mean, it's undeniable what's happening in the nursing business and we think it's still a short-term aberration.

On the IT side, it sounds like trends remained stable, which is a victory, relative to the last few years here. So it seems to be going in the right direction. Have you found the bottom in terms of contract gross margin or Flex gross margin?

Well, certainly, as you can see, we were down 20 basis points. A number of things come into play here. As you've probably heard among many staffing companies, the mix is changing; there's a lot more infrastructure, or low bill rate; skill mix is increasing, and so that affects the margins somewhat. But I think that we are seeing less pressure on bill rates than we have seen in prior quarters as a trend. So, the pressure is lessening and therefore, you would think we're getting close to that bottom if are not at the bottom at this point.

So, at this point, influences such as employment, taxes and mix could continue to have an effect, but the actual pricing is less of a factor?

You have stated that correctly.

(OPERATOR INSTRUCTIONS). Your next question comes from Jay Wigdale of Lakefront Partners.

I was off the call so again if you answered this -- but the 1.7 million in savings, could you just kind of go over where those came from?

You're talking about SG&A?

Yes, on the operating expense line?

Well, it comes from a number of different areas, certainly from enhanced collection activities, which we have hit our lowest point ever, Jay, in 60-plus receivables outstanding, which is 3.4 percent. That means we've had net write-ons for the quarter, which has resulted in a need for less of an allowance account, although we continue with a conservative allowance account; we still have that. That is certainly one of the big areas. We have less real estate.

I guess could you quantify the write-ons in the real estate -- (multiple speakers)?

Well, the net write-offs for the year is 500,000. For the quarter, net write-ons are 270,000.

Okay, and the lower real estate?

Lower real estate -- as we continue to go out of offices that we have more room than we have individuals and move into smaller offices, there's a number of those initiatives -- the new data center that we're in that is certainly much less cost than prior periods. There's a number of those initiatives are just being wrapped (sic) into the everyday, recurring activity of SG&A.

Okay, so the largest single item in that 1.7 was the write-ons?

The largest single difference would be run through the bad debt expense, yes.

Okay, thank you.

At this time, sir, there are no further questions. Mr. Dunkel, are there any closing remarks?

I just want to take the opportunity to once again thank you for your interest in Kforce, thank our associates and field manager team for their hard work. We are excited about the prospects going into Q4 and 2004. We will look forward to speaking with you again in January, reporting our fourth-quarter results. Thank you.

Thank you for participating in today's Kforce third-quarter earnings call. You may disconnect at this time.