Kforce Inc (KFRC) 2003 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Kforce fourth quarter 2003 earnings results conference call. At this time all participants are on listen only lines. At the end of our host remarks we will open the call to your questions. Should you require operator assistance at any point, key star zero on your touch-tone phone. And we will be happy to assist you.

We would like to remind you today's call is being webcast and recorded for replay. Now I would like to turn the call over to Mr. Michael Blackman, Vice President of Investor Relations.

Good morning. And welcome to the Kforce fourth quarter 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 discussion of these and other factors affecting the company's performance 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 our Chief Operating Officer, Bill Sanders.

Actually, Michael, we will start with Derrell today and let him do his thing, his maiden voyage as our Kforce CFO. Derrell?

Thank you, Michael and Bill. And thanks to all of you for your interest in Kforce. I will discuss our financial results and provide guidance for the first quarter and then Bill and Dave will provide additional insight and 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 is posted 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 help shareholders and analysts understand the quality of our earnings stream and provide insight into trends.

We are very pleased with fourth quarter EPS of 9 cents, as well as full year EPS of 16 cents. Q4 marks the fourth straight quarter of increased earnings for Kforce. Substantive growth in revenues, and a lower-than-expected expense levels, were accomplished this quarter. Total revenues for the fourth quarter were up 2.3% sequentially, to $125.7 million. Which notably was a 5.6% increase on a comparable billing day basis.

In addition to a sequential increase in both flex and search revenues, there were sequential increases in billable hours, quarterly-end billable FTE's and billable FTE's per sales associate. Thus, the overall productivity of our sales force continues to improve. Overall, we are optimistic about recent trends, particularly in our flex businesses.

Total revenue for the year, 2003, was $495.6 million compared to $513.5 million in 2002. Net income for 2003 was $5.1 million, compared to the substantial loss in 2002. Total gross profit moved slightly upward in the fourth quarter from 30.8% to 30.9%. Due primarily to the increase in search revenues. Flex gross profit percentage was flat at 26.7%.

Our strong expense controls and cost conscious culture continue to reap benefits and provide a solid leverageable foundation on which to grow profitable revenue. Operating expenses were 28.2% in Q4. And were 29.7% for the full year. Compared to 34.7% for 2002.

Contributing factors in this significant positive movements in expense levels throughout 2003 include: significant improvement in credit expense, with DSO of only $37.5 at year end, very significant reductions in the cost of our internal I.T. systems and support services, and productivity improvements in sales and delivery.

We will continue to make tweaks to improve productivity, and leverage efficiency, but offsetting investments in long-term growth initiatives, likely will keep expenses at or near the current levels, at least for the near term. We currently have federal tax net operating loss carry-forwards of approximately $38 million, and various state carry-forwards of approximately $59 million which will positively impact future cash flow.

The minor amount of income tax expense in 2003 is for state tax expense, for which corresponding state carry-forwards are not available. As a result of our tax valuation reserve, we anticipate no more than such nominal income tax expenses for financial reporting purposes, until the $22 million valuation reserve is realized. We continue to maintain a conservative balance sheet and to build liquidity.

Our bad debt reserves to gross accounts receivable remain strong at 8.2%. EBITDA, an indication of cash flow was $4.8 million for Q4, or a per share amount of 15 cents. We had no stock repurchases during the quarter. And our debt balance remains steady at $22 million.

Cash and cash equivalents increased to $13.7 million from the $13.2 million at the end of Q3. Capital expenditures remain low in 2003, at only $1.3 million. For 2004, we are planning some capital investments focused on incremental improvements in sales, delivery, and support systems infrastructure. Including implementation of a new front end system. Therefore, cap ex for 2004 may be in the $3 to $4 million range.

Looking forward to the first quarter, expenses will be affected by the normal seasonal increases in payroll-related taxes, estimated at 4 cents to 5 cents per share. And by integration expenses being incurred by Kforce related to the merger with Hall Kinion. Which could be in the 2 cents to 3 cents range. In addition, the first quarter will absorb a noncash expense charge of approximately 2 cents, related to restricted stock issued to members of senior management, in early 2002, in exchange for voluntarily reductions in cash salaries and bonuses for that critical turn-around year.

The otherwise five-year vesting of this restricted stock was automatically accelerated in early Q1 '04 by attainment of a predetermined stock price target. Which target had been set at almost double the January 2002 stock value. The unamortized portion is required to be accounted for in the quarter during which such prices reached.

Although we are 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. Without considering any incremental revenues that might result -- that might ultimately be included for the period between the closing date of the acquisition of Hall Kinion, and quarter-end first quarter revenues may be in the $129 million to $133 million range.

Also without considering any of the other effects of the merger, except those integration expenses already being incurred by Kforce, we anticipate earnings per share for Q1 of break-even to 2 cents. In summary, with a healthy balance sheet and a proven operating platform, which will be strengthened and enhanced by the great people that will join Kforce from Hall Kinion, we believe that our strengths are the right match for both the coming market challenges, and the exciting opportunities. Thank you. Bill?

Thank you, Derrell. Great job. And it is a real pleasure to have you as a member of our management team. We are excited. Real team, real leaders and are very excited, we're excited about the quarterly numbers, we're excited about the January flash numbers, and we're very excited about the combination with Hall Kinion and the chance to soon join these two great firms. The fourth quarter was a good quarter for us.

Flex revenues which represent over 94% of our business were up 2% sequentially in total in the holiday shortened quarter, and a 5.3% on a billing date basis. We also improved -- we also saw improvement in the volatile search revenues which were up 7%. On a billing day basis, flex revenue was consistent each month of Q4, at a level of debt of Q3. January flex revenue for billing day is off slightly from Q4 level, as a result of year-end jobs, plus showing improving each week.

Billable consultants on assignment for I.T. were up 3.5% sequentially, and improved for the fourth straight quarter. The number of billable consultants was up 8.3% for F&A, and 9.8% for HLS. Every quarter we do a volume grade analysis. The analysis comparing Q4 to Q3 indicates the search gross profit increase of $500,000, resulted from a $300,000 increase in volume and a $200,000 improvement in rates.

Search continues to fluctuate quarterly and remains difficult to predict. Our flex gross profit increase of $600,000 was comprised of a $700,000 increase in volume, partially offset by a $100,000 decrease in rates. Total revenue for I.T., which is our largest business unit, comprising more than 45% of firm revenue, increased sequentially 3.2% for the quarter, and up 6.4% on a billing day basis.

I.T. flex revenue is up sequentially for the third straight quarter. I.T. [inaudible] was up 41%, but remains volatile month-to-month with limited visibility. Gross billable hours were up 3.4% sequentially, while flex margins decreased from 25.5% to 25.3%. We expect I.T. revenues to continue to improve for the first quarter, and be up from Q4 even though seasonal impacts are historically negative.

The performance of our F&A business unit improved during the fourth quarter. F&A flex was particularly strong with a 3.9% sequential growth. Gross billable hours were up 4.4% and flex margins improved by 40 basis points. We believe F&A flex will continue its strong growth during the first quarter which is typically its strongest quarter, due to seasonal effects. F&A search was flat from Q3. However, we are seeing indications of improved demand.

Lastly, is the Health and Life Sciences business unit which represents 30% of revenues. Pharmaceutical, which is now 37.5% of the HLS segment continue to out perform expectations, and increase 7.2% sequentially. Health care revenues were down 3.9% sequentially, due to anticipated declines in nursing, and a 5.8% sequential decline in health care non-nursing revenues.

Scientific had a decline sequentially of 4.1%, though margins continue to improve as we shift the footprint for this business unit. We continue to focus on the business toward longer term contract assignments with placements of RNs, to primary health facilities.

Revenues continue to be weak in this sector as a result of hospitals experiencing lower expenses and reduced profitability. However we expect revenues to be flat in the first quarter and believe we may be nearing a turning point in this business. We believe we are making progress in repositioning our business and continue to believe in the long-term dynamics of nurse staffing.

We expect our health care non-nursing business to be flat to slightly down in Q1 as a result of year-end job ends. Scientific is also expected to be flat to slightly down. Pharmaceutical is expected to continue its growth during the first quarter.

As we look forward, our field restructuring efforts are complete. Our suite of products are well positioned and our exposure to growth in the higher profitable placement services all suggest that we are well positioned to drive profitable revenue growth. Those trends continue to improve throughout the fourth quarter which increased our confidence that sales and delivery efforts are producing results. Accordingly on a stand alone basis, we believe revenues should be in the $129 to $133 million range, for the first quarter.

The Hall Kinion integration is proceeding at a very rapid pace and we are very pleased with the high quality of people at Hall Kinion. There have been several meetings with both field management and service center personnel to identify opportunities and to build consensus. These meetings focus on how to capture the synergies of client service, of sales practices, while integrating employees and systems and building a strategic platform for our client value proposition.

In addition, we discussed how to accomplish our integration objectives while continuing to build revenue momentum. We are pleased to continue to see that the economies of scale from the combination will allow us to deliver higher staffing value with a lower more efficient cost structure.

This week, representative field leaders of both companies are here developing the rules of engagement related to client activities, and a team of service center personnel are in Nevada, developing system and process integration road maps. We know that integrations and staffing can be problematic, but we are well prepared and have the teams of professionals that are working every issue with excellent cooperation between the two companies.

Our integration priorities are to keep the great people, preserve the revenue stream of both companies, quickly make us one team and to establish a platform for growth. We have a ruthless focus on execution and the appropriate cadence and we believe we are expanding and accelerating the synergy capture. It continues to be clear that there is a significant product overlap and that we are expanding our existing expertise with supplemental skill sets from Hall Kinion.

We continue to believe the normalized effect of synergies will be in the range of $2 million a quarter beginning in the third quarter and the transaction will be slightly accretive for 2004. These synergies follow the non -- these synergies follow the nonrecurring integration period costs that will effect the first and second quarters. We have identified as day one priorities and continue to work our project plan for complete integration no later than June 30th. We continue to look forward to the combination. Now, over to our CEO, Dave Dunkel.

Thank you, Bill. Thank you, Derrell. And thank you, Michael. I will comment briefly on our fourth quarter results, then focus my comments on the industry, and 2004, and 2005. We had several goals for 2003. The most important of which was to deliver a full year of profitability while preserving and fine tuning our infrastructure to support future growth. We have accomplished that goal.

Congratulations to all Kforce associates and leaders. Your hard work over the past year is greatly appreciated. As we reflect back on 2003, and Q4, we are starting to see indications of the operating leverage resulting from increased revenues across our diverse service lines, flex, and search.

As we look at the staffing industry in the future for Kforce, we have several observations. Economic conditions appear to be stable to improving. Yet the economy has changed. We now see a work force that is made up predominantly of skilled professional and technical workers. The knowledge force from which we draw our name. And the trend is accelerating. We believe that we will see increased utilization of flexible workers as the economy accelerates and the staffing industry penetration into total employment will also grow significantly.

The competitive landscape has changed. The recession has claimed many public staffing companies through consolidation and closing. Others do not have sufficient scale to serve large national customers and their diverse requirements. Additionally, there has been a dramatic reduction in the number of smaller privately-owned firms. We believe that the survivors, particularly the larger healthier ones, including Kforce, will benefit as the expansion accelerates.

We believe supply and demand are coming back into balance, which is beginning to be reflected in pricing stability. We believe that as demand accelerates, we will see a steady to improving pricing climate. Over the next several years, macro demographic trends will begin influencing the supply side of many of the services Kforce offers, which we believe enhances our role as a staffing partner for our customers. We have taken several steps over the past two years to refine and enhance our candid delivery platform through centralized servicing and support.

To address the needs of our customers, we have refined our sales force to focus on customer segment, customer buying models and selling multiple service offerings as a staffing solution. We have been and will continue to invest in training our sales force as well as our account servicing teams, to ensure that we deliver the right match through exceptional customer service. Our customers are responding enthusiastically to our intense and relentless focus on service.

Looking forward towards 2004 and 2005, Kforce has established certain specific objectives that we call the quest, to be obtained by the end of 2005, with milestones along the way. The quest is designed to focus and stretch our team, to achieve these specific goals, and take a broader step towards achieving our vision of becoming the most respected staffing firm by those we serve.

In addition, to several specific operating metrics, we have established internal financial goals of achieving a $1 billion revenue run rate and a $1 earnings per share run rate by Q4 of 2005. These goals are to be attained by a combination of 20% to 25% organic growth, and disciplined strategic acquisitions. We will maintain our intense focus and diligence on achieving these objectives. Our fourth quarter results and the planned merger with Hall Kinion are indications of progress toward these goals.

In the end, great people equal great results. Great people for Kforce, and great people for our customers. We believe our balanced service offerings and flex search mix position Kforce to benefit from improving economic conditions through profitable revenue growth. On behalf of the executive team, I would like to thank our customers, sales associates, management team, and corporate support teams for their hard work and persistence. Their efforts drove our stock price to a year-over-year appreciation of 121% for 2003, leading all professional staffing firms. Congratulations to all of us. Now operator, I would like to open up the call to questions.

If you have a question, key star one on your touch-tone phone, if you want to withdraw your question, key star two. Again, star one for questions, we will pause for just a moment while the signals register. We will remind to you pick up your handset while you ask your question and unmute your phone. Our first question will come from Mark Allen from SunTrust Robinson Humphrey.

Good morning, guys and congratulations on the revenue momentum.

Thanks, Mark.

You mentioned, Dave, you guys have put together some internal financial targets, and I just wanted to focus, if I could, on the permanent business, the search business, and could you -- I guess try to give us a little bit of extra color on that, do you have a target mix between flex and perm long term, and also, maybe speak to a little bit about the profitability of those revenues, in a more favorable part of the cycle, how profitable would perm be on say an operating margin basis?

I won't comment on the operating margin I will turn that over to our financial guy. We will just comment on the permanent business as a whole. At our peak, our firm business was at 22% of our revenue stream. Our target has been to keep that in the 10% to 15% range. And that would be contemplating at the peak of the perm cycle. So today, if you look at where we are, at approximately 6%, and you look at where we would like to be at the peak of the cycle 15, I think you can see there is quite a bit of room for growth in search. However, I will point out that we have tweaked the model in the way that we deliver. Because as you know, search is real estate intensive and people intensive and we have made some adjustments to the model to allow us to realize and improve search revenue but to do so on a much more efficient delivery method. Bill, do you want to comment?

I would add to that Mark, a couple -- a little bit more specificity. I think our top quarter was $45 million in search and that's when we were at $800 million run rate. Of course, it depends on how hot the search market gets. We certainly could go over 15% if the market gets as hot as it did last time. At the same time, when you look at the margin level, obviously it is 100% drop of the gross margin. And -- but when you get down to EBIT, if you are trying to look at a number like that, it depends on a lot of allocations and those sorts of thing, that you would expect to see in the 20% to 25% range, dropping down to (indiscernible).

And just a follow-on with that. I hear what you're saying about using efficiencies to improve the delivery, and help out with the margins there. Any comment relative to the -- I guess what I would call the fee structure on your search business? Are you still getting roughly the same you know, percentages of annual comp in the search business? As you were, you know, say a couple years ago?

Well, this is Bill again. The percentages are down slightly. If you want to look over from the peak to the trough, and where obviously the trough is just starting to come out of the trough of the search business, they have come down, but the gross fee, the average fee that we are getting may be 5% to 10% lower, but not that much. Our averages during the good time may have been in the $12, the $12.5, maybe as high as $13,000 a placement and that would be in the 30% range, and now we're at about $11,500, $11,600. And that is a little bit below the 30% range. So not big changes, Mark.

And obviously, if labor markets heat up, you might have more wage inflation and that would help your dollar fees, right?

Mark, this is Dave. Yeah, that would be true. And I'm a little cautious to comment on what is going to happen with search going forward. You know, as we know, it is traditionally lagged in a recovery by anywhere from 6-12 months. If you were to bench mark the recovery at the time we saw consistent uptick in flex, we're probably at that point now where we would start to see improvement in the search business. Antidotally, we're hearing the tone from our sales associates and the customers that that's happening, but it would be premature to start to dial in a search ramp at this point, although clearly at the peak of the cycle, we think search can be very profitable product for us.

I will get the champagne on ice for you and congratulations again, thanks.

Thank you, Mark.

And our next question will come from Randy Mehl from Robert W. Baird.

Good morning, guys. And congratulations on a great quarter.

Thanks, Randy.

Just wanted to discuss a couple of things. Monthly trends in January maybe you could discuss them by segment. I think directionally, you commented on them, I'm wondering if you might be able to quantify the year-over-year growth that we saw in January.

Randy, this is Bill. Why don't I just give you the macro view first. I think as we indicated, I think in the press release, we -- 7 or 8 of our best weeks of the year are actually in the fourth quarter, yeah, eight weeks -- in the fourth quarter, our best quarter. We, as you know, historically, January is a difficult month because of the year-end job orders, and start coming back. The last week of January, that is, the week of January 30th, we are within just a couple hundred thousand dollars of our best week, I believe, in the last part of Q4. Maybe -- I just don't have all the numbers for Q4 by week in front of me. But basically, the last week of January, we have dug ourselves out of the hole and we are back at the run rates, if this continues, that we were at the strong part of Q4. Now, that is -- that is much faster than we historically have experienced. We normally see getting back end of February, early March, digging out of the hole, so that's one of the reasons as I indicated we were really excited about January numbers to be back so quickly is promising, it keeps us optimistic.

Okay. And in terms of the guidance, I think I understand the one-time items and the anomalies that you're looking at for the first quarter but I'm trying to understand the gross margin decline that you're expecting, in flex, in first quarter, versus the fourth quarter?

Well, Mark, this is Bill. I do not expect to see a decline. I'm not sure where that would come from. It certainly wouldn't come from recurring business. There could be a mixed shift. There could be less search, for example. I don't -- we are not predicting less search. There could be more lower skill set, lower bill rates, type of activity, that's always a possibility. But if you're going all the way down to the EBIT line, is that where you're going?

Well, let me ask this a different way. There is a 4 cents to 5 cents impact from seasonal costs. And maybe we could break up, you know, or explain what those are, and what the 4 cents to 5 cents is compared to.

Hi, Randy. This is Derrell, how are you doing today?

Good.

There will be an effect on the margin from that payroll tax piece. That's something we always expect and we always plan for. And a portion of that will hit in the gross profit line, as it relates to the salaries to our consultants. The other portion of that will hit in SG&A, to the extent it is affected on the commissions, on our base salaries. So you've got a somewhat of a split. We're thinking that somewhere in the first quarter, that we're probably looking at a 3-4 point drop in flex GP. Both from the 26.7 that we're experiencing now, probably in the low 26, 26.3, 4, 5, in that range.

Okay. That's helpful. And then just finally, I wanted to talk about the merger. Have you changed -- has there been any changes, as it relates to the restructuring charge post merger, in terms of a size or the major components of that? Maybe you can discuss or give us an update on that.

You're speaking about the amount we were talking in the call in December about adding to the purchase price?

Right.

Frankly, we think we're going to be lower. We don't know how much lower. Until everything is completed. But we think that we will be slightly lower than the range, and I believe we've referred to the mid to upper teens, and I think we will be on the low end of that.

Okay. Thank you very much.

Thank you, Randy.

And our next question will come from Paul Glaser from Glaser Capital Management.

Yes, just a further technical question about the merger that's coming up. Will you have to file your 10-K before you're able to file your S4, complete your S4, in order to complete the merger?

No, we will not. Unless the merger were to -- the finalization of the S4 and the mailing of the proxy were to occur after our due date for our 10-K.

What is that due date?

Our due date is March 15th. On an accelerated basis this year. And we fully expect to complete the proxy and mail it to our shareholders before that.

Have you given a target date publicly about when you think the merger will be completed?

We have not. In terms of completing the merger, you noticed I referred to if we didn't include any incremental revenues. We still are optimistic we can close it by the end of the first quarter. But it would be inappropriate for us to guess on exactly what date that would be.

Thank you.

And our next question will come from John Mahoney from Raymond James.

Good morning. Hi, it's Doug Thompson for John Mahoney. Nice quarter. I believe I understand the seasonal down tick in the charges for integration in the first quarter, but just looking at the acceleration and the growth that we're seeing here in the 9 cents this quarter, can we get some color, perhaps of the seasonality of the trends, looking out through '04? I know we're not talking about '04 guidance, but --

Doug, this is Bill Sanders. I'm not sure what you mean the seasonality, IP is usually lower in the first quarter and F&A is usually better in the fourth quarter, and first quarter. Nursing usually is slower in the summer. Pharmaceutical, scientific normally has a -- the worst quarter for them is the fourth quarter because they shut down the last two weeks of the year. Are you talking about those kind of seasonality trends or are you asking something else?

No that's helpful. Perhaps can you compare this 4 cents to 5 cents impact on the payroll, how does that relate relative to last year and the first quarter?

It is relatively the same. I mean, you know, we're providing for perhaps a little bit of movement upward in some of the peripheral taxes, but it -- the big portion of that is just the fact that particularly with our higher paid consultants, you know, you have a base that we have to overcome, and FICA and other things, that's the big dollars, and that happens every year.

Right. Okay. That's fine. Thank you.

Thank you, Doug.

As a reminder, key star one if you have questions. And the next question will come from Rick Docheal from Columbia Management.

Good morning and nice quarter.

Thanks, Rick.

Thank you, Rick.

Number of questions. First last year in the first quarter, you showed a pretty significant increase in search. I think 21%+, the $8.3 million level. Seasonally, can you comment on that and your expectations, I know it is sort of hit or miss, but is there a seasonal -- is there a seasonal effect to search in Q1?

Not really, Rick. We would hope there would be. Actually, quite often we would see, although last year we thought was an anomaly, quite often the first quarter isn't a good quarter, because the ramp up period to go hire people in the fourth quarter but not as much as in the first quarter, so it is real hard, especially at these levels, because we are dealing with smaller number, things goes up and down, and we're only talking a million dollars between the fourth quarter of this year and first quarter, it is real hard to estimate those with any precision.

Okay. On the second quarter conference call, you made I thought an interesting comment, I think it was you, Bill, on the incremental gross margin, I mean I'm sorry, on the incremental operating margin of 18.5% of $10 million over the 125 a quarter kind of revenue run rate. What -- have you put the pencil to the paper on re-quantifying that today? And with the hacky -- with the hacky deal, post hacky deal?

Not tried to refine that particular percentage. Certainly because of the redundancy that happens in the first two quarters and the integration cost, you won't see it. You will start seeing it, to what extent, we're really not sure. How much custom billings that will be brought over that we wouldn't have anticipated, that 18.5% was based upon organic growth. And our number will be less certainly as we bring in Hall Kinion until we get them fully integrated into our system. But it is still directionally within the range of what we would expect.

And lastly, what is the current NOL?

The federal NOL is $38 million. For tax purposes and we have a $22 million offset against the -- what would otherwise be the deferred tax benefit of that $38 million of NOL's. And the state is $59 million.

Is there any impact from the acquisition on the NOL?

No impact whatsoever on Kforce's NOL. We will actually get the benefit of some Hall Kinion NOL's. Those will be limited and there will be a cap on how much of those we can use in any one year. It will have to be spread over time. But we will get some benefit for those in the future.

Okay. Thank you.

And that was our last question. I will turn the call back over to our host for closing statements.

Okay. I want to thank all of the folks that have been a part of making 2003 such a successful year. Obviously, at this point, we're feeling pleased with the efforts and the results for 2003, and more importantly, we're looking forward with certainly a much higher level of optimism in 2004 than we have in quite some time. Both for Kforce and for the industry as a whole. We're looking forward to bringing Hall Kinion on staff and Kforce together, and we are maintaining our intense focus on delivering our commitments to our shareholders. So we would like to thank you for your support. And look forward to speaking with you again. Thank you.