Kforce Inc (KFRC) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Kforce Q1 2004 earnings conference call. My name is Rachel, and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. If at any time during the call you require assistance press star followed by zero and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Michael Blackman, Vice President of Investor Relations. Please proceed, sir.

Good morning, and welcome to the Kforce Q1 2004 earnings call. Certain of the above statements contained in this call are forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are within the meaning of the terms 27-A of the Securities Act of 1933 as amended and section 21-E of the Securities Act of 1934 as amended. Factors that could cause actual results to differ materially include the following -- business conditions and growth in the staffing industry and general economy; competitive factors; risks due to shifts in market demand, including without limitation shifts in demand for our health and life sciences, finance and accounting, and information technology groups; as well as the market for search and flexible staffing assignments; (INAUDIBLE) and service mix; the ability of the company to complete acquisitions; and the risk factors listed from time to time in the company's reports filed with the Securities and Exchange Commission; as well as the assumptions regarding the foregoing. In particular, any statement related to Kforce's expected revenues or earnings or Kforce being well positioned for future profitability and growth are forward-looking statements. The words, "should, believe, estimate, expect, intend, anticipate, foresee, plan," and other similar expressions and variations there of identify certain such forward-looking statements which speak only as of the dates in which they were made. Additionally any statements related to the future improved performance and estimates of revenues and earnings per share are forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements. As a result, such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those indicated in these forward-looking statements as a result of the various risk factors. Listeners are cautioned not to place undue reliance on these forward-looking statements.

With that I'll turn it over to Derrell Hunter, our Chief Financial Officer.

Thank you, Michael. I will discuss our financial results and provide guidance for the second quarter, and then Bill and Dave will provide additional insight and comments. As you know, you can find additional information about Kforce in our 10-Q, 10-K, and 8-K filings with the SEC.

This morning's press release is posted on our website, www.kforce.com. Our press release contains a summary of operations including selected cash flow and balance sheet information for the quarters ended March 31, 2004, December 31, 2003, and March 31, 2003, as well as supplemental pages of key statistical data about each of our business units for those same quarters. This data is provided to help you better understand the sources and quality of our earnings stream and to provide insight into trends. Bill will have more comments on certain business unit trends and results in a moment.

Total revenue for the first quarter of 2004 was $130.2 million compared to $125.7 million in the fourth quarter 2003, our trailing quarter and $123.7 million in the prior year's first quarter. It was within our $129 to $133 million guidance. Net income for this quarter was $1,067,000 or 3 cents per share compared to 2,789,000 or 9 cents per share for the trailing quarter and $288,000 or 1 cent a share for the prior year. Our guidance had originally been 0 to 2 cents, and we updated that to say we may be above the guidance.

This marks the fifth straight quarter of profitability for Kforce. We're very proud of that. Total revenues were up 3.6% sequentially and 5.2% year-over-year. We had the typical slow start in January. We started recovering quicker than normal, and then we saw a very good momentum in March for both flex and perm. Flex revenue was up 2.9% sequentially. We had flex revenue increases in IT and F&A, and H L S in the aggregate was flat sequentially and down year-over-year. Flex revenue in total was essentially flat on a comparable billing date basis. However, sequential and year-over-year increases in billable hours and quarter end billable consultants on assignment indicate that flex has not only affirmed a higher level of revenues, but is now continuing the trend of growth begun in Q4 of 2003. Both the number of permanent placements and the average placement fee were up sequentially with perm revenue up a nice round $1 million, the second straight quarter sequential increases. As Dave mentioned in the release, we have now had two straight quarters of year-over-year increases in perm revenue after 11 quarters of decline.

Total gross profit moved down somewhat from 30.9% in the trailing quarter to 29.7%. Obviously this results from a decrease in flex gross profit partially offset by the increase in perm revenue. The flex gross profit percentage decreased 180 basis points from 26.7% to 24.9%, with approximately 140 basis points coming from the increase in payroll-related taxes. Kforce absorbs all of the effect of payroll taxes during the period when the applicable base sees have nos been exceeded; therefore, Q1 is always disproportionately impacted by payroll taxes, particularly in comparison to Q4, which is least affect. A portion of the increase in payroll taxes this Q1 relates to rate increases and unemployment tax in certain states.

Operating expenses were 29.% for Q1 versus 28.2% in the trailing quarter and 30.5% in the prior year. We previously disclosed a noncash expense of $672,000 related to the accelerated vesting of restricted stock in January because our stock price reached $10. Also as predicted, integration-related costs that must be charged to a period expense were incurred in the first quarter and amounted to approximately $600,000. If these expenses had not been incurred, the operating expense percentage this quarter would have been comparable to the low level attained in the trailing quarter. Kforce will continue to make tweaks to improve our productivity and leverage our efficiency, but offsetting investments in long-term growth initiatives likely will keep expenses at or near these current levels, at least for the near term.

Likewise, we continue to see positive outcomes in credit expense with a net credit this quarter of $226,000. This was the result of net write-ons and improved aging during the quarter, including over 60-day receivables of less than 5%. We obviously cannot expect to continue to have credits indefinitely into the future, but we're very proud of receivable position.

Kforce currently has federal tax net operating loss carry-forwards of approximately $38 million and various state carry-forwards of over $59 million which will positively impact future cash flow. We anticipate no more than nominal income tax expenses for financial reporting purposes until our over $21 million valuation reserve is realized or reversed. The income tax benefit of $562,000 in the first quarter is from the finalization in late March of a refund related to a state tax audit for which expense had been previously provided because of an assessment received for which there was no corresponding state NOL.

We continue to maintain a healthy balance sheet with current assets exceeding current liabilities by $42.9 million, up from 42.2 million at December 31, 2003. EBITDA, an indication of cash flow, was $2.5 million for Q1. We had no stock repurchase plan buybacks during the quarter, and debt balances remain steady at 22 million. Cash was at 10.2 million down from the 13.7 million at December 31, 2003, and up substantially from 1.8 million at March 31, 2003 -- March 31 of last year. Cash fluctuations, in part because of the natural period end fluctuations in receivables and payables balances, which more than offset the EBITDA generated. At this quarter end, approximately 5 million more cash was tied up in such operating assets and liabilities compared to December 31, 2003. We also had a million 450,000 in capital expenditures primary for software related to a new front-end system, net of about $650,000 that was financed through a vendor on very favorable terms. We are planning additional capital investments during the remainder of 2004 focused on incremental improvements in sales, delivery, and support systems infrastructure. Therefore, capital expenditures for 2004 are still expected to be in the 3 to 4 million range, and the remainder are currently expected to be cash purchases.

We are optimistic about the foreseeable future. The forecasting remains difficult. We will continue our practice of providing guidance for our quarterly forward look. This quarter the Hall Kinion merger further complicates guidance. We believe that we are in the final stages of clearance and effectiveness of our S-4, which would then allow the proxy mailing for a Hall Kinion shareholder meeting and the setting of a specific closing date. Since that date has not yet been set, we will provide guidance for Kforce alone. In other words, not assuming the consolidation of any Hall Kinion results for any portion of Q2.

The press release described an approximately $800,000 expense in Q2 related to an economically positive lease transaction, an office move that will have approximately $1.6 million of future expense savings to be realized over four years. Also Kforce continues to incur integration-related period expenses prior to the merger closing. They're expected to impact Q2 EPS by approximately 2 to 4 cents per share. This cost and the integration related period cost already being incurred by Kforce have been provided for in our Q2 guidance. However, no Hall Kinion revenues, or any other effects related to Hall Kinion, that would ultimately be included in Kforce's second quarter result subsequent to and as a result of a closing of the merger, have been included at this time.

On this stand-alone basis, we currently expect that revenue for the second quarter may be in the range of 134 to 138 million, while earnings per share may be between 3 and 6 cents per share. However, we ask you to understand that EPS guidance is expected to be negatively affected by the Hall Kinion merger closing. We believe, number one, that the merger will close before the end of the second quarter. Number two, that the merger plans already in place will allow us to migrate systems, wind down the corporate offices, and combine most field offices almost immediately after the closing. Three, that integration will be substantially complete by June 30. And four, that most of the synergies will be realized by the beginning of the third quarter. Therefore, we believe the merger will be accretive to Kforce's EPS in Q3 and thereafter.

Thank you very much for your attention and your continued interest in Kforce. Bill?

Thank you, Derrell. It's great to hear about several quarters of improving performance.

I'm especially proud that the field has been able to continue our growth during the quarter. Overall revenues were up 3.6% sequentially and up 5.2% year-over-year. Flex revenues, which represent over 94% of our business, were up 2.9% sequentially in total and were basically flat on the billing day basis. We also saw improvements in search, as revenues were up 14.2%. On a billing day basis, flex revenue dipped early in the quarter and rebounded at the end of February and during March. April flex revenue is continuing at the improved March rate. Billable consultants were up 10%, hours up 7%, and bill rates down 1% year-over-year. Billable consultants on assignment for IT were up 13.4% sequentially and improved for the fifth straight quarter. The number of billable consultants was up slightly for F&A and down 5.7% for HLS.

We are very pleased with the diverse revenue stream of our business units. This diversity of client base improves substantially this quarter with higher consultant volume at our Fortune 500 accounts. This client mix will reduce our gross profit percentage, but will increase gross profit dollars. This mix change will moderate somewhat as demand improves, and our clients will continue to be primarily middle-market companies. As for the flex search mix, we expect search to slowly move to the 10 to 15% range. Total revenue for IT, which is our largest business unit comprising more than 45% of firm revenues, increased sequentially 3.6% for the quarter and was up slightly on a billing day basis. IT flex revenue is up sequentially for the fourth straight quarter. IT search was up 5.5%, but remains volatile month to month with limited visibility. Gross billable hours were up sequentially, while flex margins decreased from 25.3% to 23.1%. We expect IT revenues to continue to improve for the second quarter. The performance of our finance and accounting business unit improved during the first quarter. F&A flex was strong with 5.9% sequential growth. Gross billable hours were up 4.3%, but flex margins declined 1.1%. The demand drivers for our F&A business remain strong and should offset the seasonal decline in this business. Lastly, as the health and life sciences business unit, which represents 28% of revenues. Pharmaceutical, which is now 38.8% of the HLS segment, continued its growth and increased 3.3% sequentially. Healthcare nursing had its first up quarter in two years with revenues up at .8 of 1% sequentially while there was a decline in healthcare non-nursing. Scientific has declined sequentially at 1.1%.

We continue to focus our nursing business towards a longer term contract assignment, with placements of R.N.'s to primary healthcare facilities. We believe we are making progress in repositioning this business and in the utilization of international nurses and continue to believe in the long-term dynamics of nurse staffing. We expect our healthcare non-nursing business to grow in Q2. Scientific is also expected to grow. Pharmaceutical is expected to continue its growth during the second quarter.

As we look forward, our operating model and our suite of products are well established, and our exposure to growth in the higher profitable permanent placement services all suggest that we are well positioned to drive profitable revenue growth. While productivity is good, we still have spotty unused capacity in our field sales force. We have selectively begun hiring to meet the demand with a net addition of 5% more sales associates in the quarter to meet increased job order flow. Sales trends rebounded in February after the expected beginning of the year project end, which increases our confidence that sales and delivery efforts are producing results. The first three weeks for April were up year-over-year 11% for flex and 3% for the lumpy search revenues. We expect continued solid demand for our professional. Accordingly, on a stand-alone basis, we believe second quarter revenues should be in the 134 to 138 million dollar range that Derrell has previously indicated. Projected second quarter flex sequential growth rates are approximately 3% for IT, 5% for F&A, and 4% for HLS, and improvement in search revenues.

The Hall Kinion staff integration is proceeding at a very rapid pace, and we are very pleased with the high quality of people at Hall Kinion and on staff. This week field leaders and top performers of both firms will be together developing the relationships that are necessary to make this combination a success. We know that integrations in staffing can be problematic, but we are well prepared and have teams of professionals that are working every issue with excellent cooperation between the two firms. Mercer consultants were just here to do an integration audit. In their conclusion they stated, "First, it is fair to say that the merger team was extremely impressed with the Kforce integration effort. The Mercer team has considerable cumulative experience working with integration, and on balance the Kforce integration is an excellent example of -- on how to run an integration." As I previously indicated in our last call, our integration priorities are to keep the great people, preserve the revenue streams of both firms, quickly make us one team, and to establish a platform for growth. We believe we will accomplish those objectives. As a combined firm we are now more confident than ever that our geographic and product positions will be greatly improved and the anticipated synergy capture will occur. We have completed the rules of engagement for clients and candidates and continue to work our project plan for substantial completion of the integration by June 30. We continue to look forward to our combination.

Over to you, Dave.

Thank you, Bill. I'll be brief.

During the first quarter, staffing recovery that began during the latter part of 2003 continued to build momentum and to broaden. It appears by most measures that 2004 will be a year of growth for staffing and for the economy as a whole. Trends that are manifesting themselves at this point in the recovery include, first, increased utilization of flexible staffing across all of our service lines, particularly finance and accounting. Second, the highly skilled workers are the ones that are most in demand. Three, permanent placement activities appear to be ramping. Four, the requirements to upgrade technology infrastructure and continue the work of web integration are continuing. And fifth, it appears that the predicted shortages of knowledge workers is now on the horizon. The competitive climate has changed in that there are now far fewer firms with national platforms focused exclusively on staffing. We believe that this positions Kforce well with our exclusive focus on professional staffing and diversified service offerings. We are pleased to have reached the revised merger agreement with Hall Kinion. We are excited about the high quality people we have met and the opportunities to deliver exceptional service to our customers. The combination of the outstanding associates of Kforce with those of Hall Kinion positions us well. As Bill indicated our integration efforts are going well.

In closing, it has been a long time since we have been this optimistic about the prospect for the staffing industry in general and Kforce specifically. Once again our thanks to all of our Kforce shareholders associates, consultants, and customers, and our welcome to our new associates at Hall Kinion and On Staff. We'll now open the call to questions.

Ladies and gentlemen if you do wish to ask a question at this time, please press star followed by one on your touch-tone telephone. If your question has been answered or you do wish to withdraw your question press star two. Questions will be taken in the order received. Please press star one to begin. And as a reminder we do ask that you do not use a speakerphone, but please pick up your handset. Your first question comes from Randy Mehl of Robert W. Baird. Please proceed, sir.

Yeah, good morning. I appreciate the detail. I wanted to pursue the IT flex bill rates and margins. They appeared to have a decline -- pretty steep decline just by historical measures, and I'm wondering if you could provide some color on that.

Hi, Randy, this is Dave. Yeah, I'll be happy to add some color to it. First of all, in many respects it's actually good news for us in that we have been very successful in penetrating what we would call our segment one customers. Those are the larger customers, the larger users. Part of our goal was to increase segment one as a percentage of our overall customer base. As I mentioned several quarters ago, I am the account executive on IBM. For example, and we have doubled our IBM business in the past six months. All of these things were done with an eye towards balancing our penetration and our customers. We also believe that as the market improves that we will see improved pricing power, and, of course, we will continue to balance our services between our segment one customers and our middle market customers. Approximately a half or a little over a half of the impact on margins in the first quarter was directly related to the change in the payroll taxes.

Okay.

The other half was related to that mix.

The mix in the segments.

Okay. The segment one customer mix, how much, I guess, would you expect that to change going forward? Are we at a reasonable level right now? Or will that mix continue to negatively impact the aggregate IT flex margin?

I would say that where we are in the penetration of segment one customers, our national account strategy and penetration strategies are actually taking hold. I do want to point out, by the way that while there may be some margin impact, the gross profit dollar impact is very positive to us because we get greater leverage and productivity over our sales force, but I wouldn't look for that to continue to grow at the level that it has as the economy takes hold. We will balance that penetration with our other segment customers. So I wouldn't be overly concerned about the impact of the future IT gross margins just as a result of that segment customer.

Okay. Thank you very much. I appreciate it.

Gentlemen, your next question comes from John Mahoney of Raymond James. Please proceed, sir.

Hi, guys, how are you doing?

Hey, John.

A couple of questions. First of all, the -- just to get my arms around this, in the quarter the three cents, we all -- the 672 from the restricted stock and the 600, what would the quarter have been net of those, and also backing out the tax benefit? Like 5 cents?

Just from those three we would have increased to 5 -- or between 5 and 6 cents, taking the net effect of those three discrete items. the Integration cost, the restricted stock net of the tax be.

Next quarter we've got two to four cents and we've got -- from the integration, then we've also got -- the one-time charge. What's the dollar amount, when you indicate 3 to 6 cents, or the dollar amount of that? Excuse me, 2 to 4 cents.

2 to 4 cents. That is in the range, we think, of about 600,000, which is what we incurred this quarter, up to probably a little over a million. We got a little over 30 million shares outstanding, so it's a little over $300,000 for the penny.

Okay. Given the one-time -- you hit -- the first quarter is most heavily impact by the payroll tax, et cetera. Can you give us some idea as to where you think Q2 gross margins will go, you know, on flex? Probably a very important number for the listeners.

Well, I think directionally, John, it will be impacted less, obviously, than the 140 basis points we showed coming from Q4, because what obviously happens is a lot of our flex employees will have moved out of the SUDA basis. Some of them, not too many of them, will have moved above the fica basis.

30.9 in the fourth quarter, the flex margin was -- well, total -- flex margin in the fourth quarter was the total company?

The flex margin for the total company was 26.7%.

Right. And the fourth quarter it was -- well, 24.9 down from 26.7. Are we going to be somewhere in the middle of that?

Yes, I think that's a fair assumption, and I think that while we don't have a prediction, obviously our flex employees are not all concurrent, so you have some new ones coming on that might be in those basis, but I don't think it would be unreasonable to assume that the 140-basis-point swing from Q4 to Q1, it would be somewhere in the range of half of that.

Okay. And then in the second half of the year? I know there's an impact of these tier one clients. By the end of the year, are we going to start to get closer to that -- will be back there because of these larger clients or will because of better utilization or?

Well, historically we've been certainly higher. This is probably our lowest point in several years, and so you would anticipate -- I think you could reasonably assume that would be the case. This mix of larger clients and smaller clients certainly will moderate over time, and it just so happens, I think, in the first quarter we had our focus on that and we penetrated it very well, and that's where the dollars were, and that's where we went. There will be -- that will moderate as we go forward.

Obviously, John, we expect the same phenomena as the economic recovery always brings, and that is that, you know, as demand increases, then the opportunities for greater margins should be there. But one thing that Bill said earlier, which I would reiterate from a financial point of view, we are far more interested in dollars of gross profit than drop income to the bottom line than we are in the raw percentage. And to the extent we have opportunities for our work that gives us those dollars of gross profit and allows us to utilize and leverage our staff then we're not going to be as intent upon whether the percentage follows it, but I think we are optimistic that we can see the percentage start to move back in the other direction.

Okay. Thank you very much.

Thanks, John.

Gentlemen, your next question comes from Mark Allen of SunTrust Robinson Humphrey. Please proceed, sir.

Hey, good morning, guys, nice to see sequential improvement.

Hey, Mark.

Question on the accounting side. Obviously you guys had good strong growth in your F&A business this quarter. Some other companies have been seeing as well. Do you have any guess as to how much of that -- how much of your business is coming from clients who are working on Sarbanes-Oxley compliance, and how sustainable do you think that type of activity is past the end of this year?

Hey, Mark, this is Bill. There's -- there certainly is an influence of Sarbanes-Oxley. The biggest influence Sarbanes-Oxley is having right now is it is depleting the talent pool of accountants out there, and it's becoming more of a war for the highly talented accountants, and, therefore, it's hard to give you an exact percentage whether you would say 10 or 15 or 20%. It's not significant stand-alone all by itself. What it is doing, though, is changing the marketplace in the supply/demand equation such that there is a greater need for these people all the way there the big four to individual companies. And, by the way, we believe that this pressure on the need for accountants will last for the foreseeable future. That is, several years, from my point of view.

Bill, following onto that, is that driving any type of usual inflation in the pay rates for your F&A employees? And if so, are you anticipating you will be able to pass that through to your clients?

Yes to both of those. In fact, I think that it's going to get pretty significant as we go forward. I know the big four have operating incentive bonuses and other type of activity, bonuses for individuals, referral bonuses to bring in two, three, four, five-year-type accountants that can work in this area. It will be significant. We are also seeing that because clients are in such demand for these type of people that we are being able to pass the pricing on fairly well.

If I can shift gears, one more question. On the health and life sciences side, tell us roughly what percentage of the business now is R.N. staffing? And you noted you had seen some sequential growth there, 1%. But can you give us what that revenue change would have been year-over-year as well?

Hey, Mark, this is Dave. The R.N.s as a component would be in the 60 to 65% range of the healthcare nursing business.

What we're really seeing that's helping that is our international nurses which are our R.N.-type nurses. We are starting to bring over substantial quantities of those and have very high goals for 2004, 2005 that is to exceed even 500 nurses full time for us that are in that category. So that's a -- that's one of the key parts of that strategy and why we are still very bullish on it.

Just one quick one. Your assignment links in that business bringing over the foreign nurses, I assume those are pretty long. What's the typical, you know, number of months assigned?

I was just going to comment on that Mark. They range anywhere from eight to twelve weeks or longer. Our experience with the customers has been that they like these folks so much for a lot of reasons. One is they work the shifts that nobody else wants to work. They work second and third shifts and they work weekends. Two is they have a great bedside manner. So they are very dependable; they are here for specific purpose, typically for two to three years; they have their own personal goals. So the work force is stable and predictable and very dependable, so the customer's response has been very positive. It's kind of a reverse offshoring, if you will. So from our standpoint, it gives us greater stability, greater predictability against the per diem stream and also allows us to fill a greater percentage of those more difficult to fill shifts.

Good luck this year. Thank you.

Thank you, Mark.

Ladies and gentlemen, again, if you do wish to ask a question at this time, please key star one. Gentlemen, this does conclude the question and answer portion of your call. I'd like to turn it back to Mr. Dave Dunkel for closing remarks.

Okay. Very good. Once again we wish to thank you for your interest and support of Kforce. And again our extension of our appreciation to all the Kforce associates, and our welcome to the associates at Hall Kinion and On Staff, we're looking forward to seeing you all tomorrow for our annual incentive trip. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect. Have a great day.