Kforce Inc (KFRC) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2004 K Force Incorporated earnings conference call. My name is Amanda and I will be your coordinator for today.

At this time, all participants are in the 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, please key 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 like to hand the conference over to your host for today, Mr. Michael Blackman (ph), Vice President of Investor Relations.

Thank you. Good afternoon and welcome to the Q3 K Force earnings call. With me today in the room are David Dunkel, our Chairman and CEO; Bill Sanders, President of K Force; and Joe Liberatore, Chief Financial Officer. Certain of the statements 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 27A of the SEC Act of 1933 and section 21E of the Securities Act of 1934's 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 change in market demand, including without limitation demands; shifts in demand for our health and life sciences services; finance and accounting; and technology staffing; as well as for the Search market and Flexible staffing assignments in general; or the ability of the company to successfully complete acquisitions and the risks factors listed from time to time in the company's reports filed with the SEC; as well as the assumptions regarding the foregoing.

In particular, any statement related to K Force's expected revenue or earnings or K Force 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 thereof, identifies certain forward-looking statements, which speak only of the dates in which they are made. Additionally, any statements related to the future improve performance and estimates of revenue 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 involved risks, uncertainties, and actual results may differ materially from those indicated in those forward-looking statements as a result of the various risk factors. Listeners are cautioned not to place undue reliance upon these forward-looking statements.

I would now like to turn the call over to Bill Sanders, President of K Force.

Thank you, Michael. I will discuss our financial results and guidance for the fourth quarter and then Dave will provide his insight and comments. You can find additional information about K Force in our 10Q, 10K, and 8K filings with the SEC. This afternoon's press release is posted on our website, www.K Force.com, and contains a summary of operations including selected cash flow and balance sheet information and includes supplemental pages of key statistical data about each of our business units.

Net income for this quarter was $6,047,000 or $0.16 per share, and exceeded analysts' expectations by $0.02, and compared favorably to $251,000 or $0.01 per share for the second quarter and $1,354,000 or $0.04 per share year over year. We were pleased that the firm was able to quickly integrate their recent acquisitions without significantly impacting earnings for the quarter and to start realizing the anticipated PCS depletion. Total revenue for the third quarter of 2004 was $188.9m. A sequential improvement of 24.1% from the $152.2m in the second quarter and a year over year increase of 53.6% compared to the $123m in the prior year's third quarter.

These growth percentages are obviously influenced by our successful acquisition and integration of Hall Kinion and OnStaff. But we believe exclusive of these impacts organic revenue growth of the combined firm was approximately 6% sequentially and 15% year over year. We are beginning to click on all cylinders as every one of our business units contributed to the revenue growth in the quarter.

On a monthly basis, Flex revenue in July and August was relatively flat with a strong June level and then accelerated in September. October Flex revenue is continuing at the improved September rate. K Force's technology Flex business grew sequentially by 27.7% and F&A Flex grew by 39.6% with year over year increases of 58.8% and 94.5%, respectively. End of quarter billable STE's increased to $900,741 from $8,895 or 9.5% sequential growth.

Although we cannot precisely estimate sequential combined organic growth, we believe combined Technology Flex sequential growth, revenue growth was between five and six percent and F&A Flex grow between eleven and twelve percent organically. HLS Flex revenues, which are not impacted by the acquisition, grew by 4-5.4% sequentially and 13.4% year over year.

Search revenues, which were only nominally impacted by the acquisition, increased for the fourth straight quarter and we were up 15.2% sequentially and 57.7% year over year. We were excited to see that the number of permanent placements increased over 20% of Q2 and the average placement fee remains strong. Search revenues are lumpy and we remain conservation in our estimate of fourth quarter production but very positive for the ramp up in 2005.

Now to provide some additional insight on our...on a business unit basis. Total revenues for technology, which is our largest business compromising 48% of firm revenues, increased sequentially 27.8% for the quarter. Technology Flex revenue is up sequentially for the sixth straight quarter. Technology Search was up 30.9%. So it remains volatile month to month. Gross billable hours were up sequentially while Flex margins increased from 24.8% to 24.9%.

We expect Technology revenues to continue to improve on a billing day basis for the fourth quarter despite the loss of approximately $4m of legacy Hall Kinion low margin revenues that were terminated in late September. We expect margins to be stable to improving despite the negative impact of consultant paid-time off during the holidays.

Finance and accounting, which compromises 30% of firm revenues was our best performing business unit in the third quarter. F&A Flex was strong with 39.7% sequential growth. Search grew almost 11%. Gross billable hours were up 44.5% though Flex margins declined by 30 basis points, primarily as a result of the inclusion of a larger mix of professional and administrative positions contributed by the OnStaff group.

The demand drivers for our F&A business remains strong. Sarbanes-Oxley worth at approximately 12% of F&A revenues and approximately 3.8% of the total firm revenues and we believe this worth, though not a focus of the F&A group, will be sustained the remainder of the year. We view the Sarbanes work as an attractive compliment to our core S&A business, which has allowed us to expand our customer base and provide additional S&A opportunity outside of Sarbanes Oxley. We expect S&A to continue a strong performance in the fourth quarter.

Lastly, is the health and life sciences business unit, which represents 22% of revenues. I am pleased to report that our healthcare nursing business had a third consecutive up quarter with revenues up 7.9% sequentially. We continue to focus our nursing business towards longer term contract assignments with placement of RN's to primary healthcare facilities. We believe we are making progress and reposition this business particularly to the utilization of an internal or of international nurses. We are cautiously optimistic about the nursing group's growth pattern. A stronger performance in HLS for the second straight quarter comes from the health information management group, which provides medical records, staffing solutions to include medical (inaudible) and cancer registry professionals to hospitals, GPO's, and clinics.

(Inaudible) Flex revenues sequential growth percentage for Q3 was 15.6% while gross margins continue to exceed 30%. Demand is steady and promising HLM Flex revenue is expected to grow sequentially in the fourth quarter on a billing day basis. Critical research staffing or CRS now owns 35% of the HLS segment. CRS is a highly project based business that provides solutions to the chronicle research areas of the FDA approval process to farm, bio-farm and medical device client. Flex revenue was flat from Q2 to Q3. However, as a result of a major exclusive long term project with a very large pharma- company which began in September along with the effect of two other significant project wins, revenues are expected to grow significantly on a billing day basis in Q4. These large clients, these large projects and valued clients will have an adverse effect dollar growth as we grow the K Force consultant head count in the fourth quarter and in 2005.

Our scientific staffing group showed both sequential and year over year Flex revenue growth. This is a positive sign that the scientific and lab professional demands are firm. However, we are cautiously optimistic. Scientists and lab professional employment initiating it to recovery from the highest historical unemployment rate which occurred in 2003, this growth maybe choppy. Scientific Flex revenue per billing day should be stable in the fourth quarter. Total firm gross profit declined to 30.6% from 31.1% in the third quarter, primarily as a result of an increase of Flex revenue as a percentage of total revenues. We were pleased to see our Flex gross profit percentage remain essentially flat at 26.2% in the quarter even with the inclusion of $4m of low margin business acquired from Hall Kinion that was terminated late in the quarter. We are optimistic that we will keep see some improvement going forward as we continue to assign the acquired revenue stream and demand continues to be strong.

SG&A expenses we 26.5% of revenues in Q3, down from 29.8% in Q2 and down from 28.6% in the prior year. Our integration expenses are mostly behind us. The largest remaining expense is the re-branding and marketing of materials which will occur in the fourth quarter. Our operating structure is efficient though we continue to make improvements that will allow us to support our growth. We have determined that we will re-engineer our order to cash processes to support a new state of the art filing system which will also include time expense entry, electronic pay bill, and commission. We expect to see a one time expense in the fourth quarter and substantial savings in future quarters from initiating these systems. We expect our SG&A percentage to decline as revenues grow and we continue to realize additional operating leverage from our streamlined profit. K Force's balance sheet is healthy with current assets exceeding current liabilities by over $45m. EBITDA and in the case of cash flow, was 7.9 million in Q3. Cash increased to $2.9 million at the end of Q3 while outstanding debts decreased to $39 million. DSO's remain strong at 37 days which is down from 42 days for the second quarter. As we look forward we are continuing our emphasis on acquiring and obtaining great people. We continue the hiring and training of field management and sales associates in order to have a team of the most talent in the industry. A current emphasis of our business model is on growing our search capacity and integrating all service offerings across our office network. We are making excellent progress in both areas.

During the third quarter, we had a 25% (inaudible) to the number of our search sales associates. It generally takes 6-9 months for these individuals to become productive. Our field operating model is shifting to more emphasis on our strong heritage which is recruitment and delivery. As the war for talent begins, we are prepared to bring great people to our clients. Fourth quarter revenues will be impacted by a reduction in billing days where all of our business units as a result of the holidays. While most of our business will see a reduction of two billing days in the quarter to 52 days, our CRS and scientific business unit typically experience a reduction of 10 total billing days as a result of plant shut downs at major customers at year end. As we compared billing days between Q3 and Q4 based upon the distribution of our revenues across business lines, we expect total billing days to be approximately 61 days first versus 54 days in Q3.

Revenues for the fourth quarter maybe in the $185-$188m range. Which represents at 3%-5% sequential increase in the revenues per client billing day and an equivalent billing day basis in adding back the $4m for the loss of the low margin client, revenues would be in the $198-$201m of more than a 5% sequential growth. Fourth quarter EPS will be negatively impacted by severance costs, integration expenses related to re-branding marketing material, expenses related to re-engineering the order to cash cycle for implementation of new state of the art systems and for the increase of hiring of such sales associates in the third quarter. We expect these costs to approximate 7 cents per share. Therefore, based on these observations and subtracting the 7 cents, we believe EPS on an operating basis for the fourth quarter maybe in the range of 11 cents to 14 cents.

In addition, EPS in the fourth quarter maybe positively impacted by the reversal of some or all of the valuation reserves on our deferred tax asset if we continue to be profitable as expected. The current valuation allowance totals approximately $40m. If all of the reserve were to be reversed approximately $19.3m or 50 cents per share would positively impact the income statements and approximately $22.8m would reduce goodwill. $42.1m would increase tangible book value per share. These adjustments for GAAP accounting purposes would not affect the approximately $54m of federal NOL and $105m state NOL, which would reduce future cash back payments by approximately $30m.

In summary we are increasing broad based revenue growth. Our balance sheet remains strong and we believe that we have a very talented team that has been that has integrated the acquisition of Hall Kinion and expanded our business model and that our market penetration and service offering has been enhanced and are providing the anticipated growth trends. We would look forward confidently to a bright fourth quarter and achieving our quest in 2005.

Thank you for your continued interest in K Force and now over to our CEO David Dunkel

Thank you president Bill.

Thank you.

The first quarter of the first full quarter of operations since completing the integration of Hall Kinion and my sincere thanks goes out to all of those who worked so hard to make this so successful. We believe that our third quarter results are an indication of the proof of these efforts. It appears that we are in the early stages of a job creation cycle for the professional and technical specialties within the staffing industry. As suggested by the increases in temporary health employment and our fourth consecutive quarter of sequential search and proofing (indiscernible). The bureau of labor statistics in the case of the college educator unemployment rate is at al low of 2.6% suggesting strong demand for the higher skilled and better educated. The staffing industry is within 1/10th of 1% of its historical high in terms of penetration and to total employment. We believe that the flexibility and convenience of staffing offers a real solution to the dynamics of shorter project lengths and greater uncertainty in the labor markets. In the first quarter of this year, when we announced our goals for 2005, which we called The Quest. Those goals include achieving a revenue run rate in Q4 of 2005 of $1 billion on an annual basis and $1 per share of earnings per share.

We have worked hard to position K Force to achieve those goals. As a part of that process we announced today, certain executive management changes. The first of which is Bill Sanders promotion to president, the K Force board of directors and I have worked hard to build a strong executive management team. We believe we now have one of the best executive management teams in the industry. And one of the key members of this team is Bill Sanders. Bill joined K Force in 1999 as CFO and his positive influence on the firm was immediate. Due to his success and to expanded his positive impact in late 2002, Bill was promoted to the position of Chief Operating Officer with an additional challenge, prepare our field operations to achieve our quest. Obviously, with our recent results Bill and our outstanding field team have made major strides and advances in this regard. We now ask Bill to once again assume a new expanded role, that of President of K Force. In this new role, Bill will have responsibility for both field and back office operations.

The second is Joe Liberatore's appointment to Chief Financial Officer. Joe has been with us for 16 years and his career promotions have taken him through virtually all parts of our firm. He started with us as a recruiter, became an account manager, then eventually moved into various field and sales management positions including group president for one of our business units and chief sales officer. Most recently, Joe has served as Chief Talent Officer with responsibilities for human resources, compensation and benefits. As CFO Joe will assume responsibility for our financial growth. Joe will report directly to Bill Sanders.

It is with regret and concern that I announce (technical break) that Derrell Hunter will be leaving the firm. Health issues have arisen that will prevent Derrell from giving his full attention to business matters over the coming months. In consultation with Darrell it was determined he should leave the firm to attend to these issues. We thank Derrell for his many contributions and wish him all the best in the future. It is our depth of management talent that will make this departure one which we will manage effectively.

Finally I am also very pleased to announce the creation of a new position of chief services officer and that Mike Eatore has accepted this role. Mike joined K Force in 1999 and has served as CIO for the past two years. He has successfully lead major projects and departments serving as the program manager for the Hall Kinian (ph) integration and managing the development of our training and program management departments. Mike holds a Masters degree in business administration and management and prior to join K force was an award winning officer in the United States Marine Corp. I this role Mike will greatly expanded his responsibilities in K Force technology services and much of the K Force Service Operation included billing , credit, collection and accounts payable, mike's superior and proven ability to organize, direct and lead critical process oriented functions have proven him fully capable and deserving of this new and increased responsibility. Mike will report directly to Bill Sanders.

We are focused on achieving our vision and are executing well. The result is great people delivering great results for our customers.

Once again our thanks to all of the K Force associates who continue to delver exceptional service to our customers. Our appreciation goes out to our consultants for the opportunity to serve them. And we now will open up the call to questions.

Ladies and gentlemen if you would like to ask a call in today's conference, please key star followed by one on your touch tone telephone. To withdraw your question, please key start followed by two. So again ladies and gentlemen that is star one for questions. And your first question comes from Randy Dale of Robert W. Bayard.

Good afternoon everyone, congratulations again Bill and to you if you are out there as well Joe.

Thank you Randy. He is sitting right next to us.

I wanted to pursue, it sounds like you first of all good results in the quarter across the board, this is great. I wanted to pursue the integration apart form the $4m in business that you terminated, has other business gone away as a result of the integration, either initiated by you or by the client and by that I mean meaningful sums of business.

I know we have been very - this is Bill Randy - we have been very happy with the outcome, we has to have very little turn over of people and virtually no other client termination other than the one we mentioned which was necessary.

Okay so it is gone very well there.

Yeah very well.

Okay I don't want to read too much into the quest but I have to ask a question about it. I think you said that it assumed potential acquisitions through the remainder of this year and into next year, what is the acquisition strategy, how has that changed recently or how is it likely to change in order to achieve The Quest.

Randy this is Dave, let me be clear on one thing, that we are going to maintain the discipline on the acquisition, the quest on our internal goal, we are not going to do something stupid from an acquisition standpoint just to achieve it so, let me just deal with that right up front. The opportunities that we are looking at are really in two or three of the areas, technology, finance and accounting and then certain of the house and life side of the business units. We have done only one acquisition as you now in the last two years, three years, so we have looked at a lot of potential candidates and dismiss them. Some of which as you have seen over the last six months or so have been publicly announced acquisitions. As we go forward what we are going to do is to look at operations that will fit our existing foot print to either supplement existing servicing that will make us stronger in a specific market or could potentially bring us into a new niche within one of our existing services for example technology. So while we have not - let's say we have not closed off any areas we are going to maintain the focus primarily in those F&A and technology areas for acquisition candidates. We have a number that we have gone through and we have several in the pipeline but we have nothing at this point that we are prepared to announce.

Okay and I was going to ask about the average activity in the pipeline is it better than it was earlier in the year or I should say more full than it was earlier in the year?

No I would say that there really hasn't been that much change I think the success of the Hall Kinian acquisition and the subsequent integration has raised the visibility of our ability to do these but I wouldn't say that we have seen a big jump at all. I would say the flow has been fairly constant over the last 12 or 24 months.

Okay thank you I appreciate it.

You're welcome thank you.

And your next question comes from Toby Summers (ph) of SunTrust Robinson and Co.

Congratulations on a strong quarter.

Thanks Toby.

A couple of questions on your sales force in ramping up search capacity could you give us a little more color on where your sales force currently stands in terms of the quantity and maybe compared to a year ago? And give us a little bit more color on how many people you added in search capacity? I think you said it takes maybe a couple of quarters, 2 or 3 quarters for them to reach productivity. And then on a separate issue I was curious what the -- of the different impacts of incremental expenses in the fourth quarter maybe what we should think of as maybe on going expenses in terms of that search capacity addition. It seems like that would be an expense that you know continue on into '05?

Toby this is Dave I'm going to have Joe answer the first part of the question in this capacity as Talent Officer, he's more qualified to answers those questions and I'll have Bill address the expense one. Joe you want to go ahead.

Yes Toby one of the things back in 2002 that we did is we worked on re-engineering all of our comp plan. And they are very performance based comp plans so we report on and measure the ramp up of new associates coming on board as well as existing associates and we monitor that on a month-by-month basis. So we are seeing acceleration and ramp up across all business line as well as we're seeing good improvement year-over-year from what we call GP for our employment month, from that stand point on a year-over-year basis. And we are seeing that collectively across all business lines and year-over-year improvement from that stand point. We've ramped up head count about 35% on a year-over-year basis, which is all-inclusive.

And I would add to that Joe the 25% -- the answer to the second part of your question - the 25% ramp up in search ended - sales associates in the third quarter is unusual and that's why I mentioned it as something different than what we normally had done. There are I mentioned a number of cost I think to answer the question, all of the cost that I suggested are incremental costs or unusual costs I don't like the word non-recurring. But they are incremental cost that we normally don't incur except for the addition of people, of course we normally do that. What we don't normally do is increase head count by such an - in search associate by such an extent. However, we are very positive about the future of search we need to ramp up and be ready as the work for talent by next summer we'll be very strong.

A quick follow up could you tell us how many associates you added in the quarter and may be how many you added in the first quarters of the year as well? Thanks.

Do you mean just in search or in general?

Both if you don't mind.

Well as we mentioned it's a 35% growth that we haven't previously disclosed the exact numbers. We had approximately (indiscernible) 1500 (indiscernible) professional in the firm and approximately 60, 65% of those are in sales force. So that's about 35%. The search is approximately 20% of the total sales force. So as those numbers calculate out it should give you some indication.

Thank you very much.

Thank you Toby.

And your next question comes from the line of John Baker of Raymond James.

Hi guys how are you doing.

Hi John.

Great quarter, first of all I just want to wish every body the best on their new careers and hope that the health is getting better for your CFO.

Thank you I'm sure he will appreciate that. He remains in our thoughts and prayers and we're hopeful that he'll make a full recovery.

Okay Derrell if you're out there I hope you get better. In the third - you mentioned - I'm just looking to use in the fourth quarter there is an incremental $7m how does that compares with what you had in the third quarter and will it continue in the first?

The incremental 7 cents and not $7m --.

7 cents I'm sorry.

Yes that's fine we had - how does that compare to the third quarter is that the question?

Yes.

We had less than $1m and what we would call redundant costs in the third quarter some of that will carry over but most of the things that I talked about here are not integration expenses they relate to other activities that we are engaged in. So for example severance was very small in the third quarter, re-branding cost most of these re-branding cost, the marketing material they were very low in the third quarter because of the integration it took a while to get all of this together and we're doing the printing and putting that together in the fourth quarter. And the re-engineering of the order to cash processes that's all happening in the fourth quarter none in the third quarter. And the 25% more search associates we hired them throughout the third quarter and therefore they came in at various times at really a year ago begin at the fourth quarter.

So what about the first quarter how are we to think about the 7 cents because if you think about it you really - it's either a kind of one time or these are re-branding efforts. The quarter the fourth quarter will really be you know 18 to 21 cents or you have in the EBITDA margin of around 5% in the fourth quarter excluding these items.

Right.

Should we think about the first quarter you know ex the additional payroll cost starting from a base of 5% we go down a little bit because of that?

You're correct John these cost were not - they would not be in the first quarter.

Okay so we're not going from 11 to 14 up we're kind of going down from 18 to 21 just because of normal (indiscernible). And off setting that might be depending on Perm (ph) accelerates in the first quarter.

Exactly that's a big wild card. That's a huge wild card to always keep in mind because of the volatility that is just --

John I would just say we're going to manage that productivity as well. There is an assumed ramp, we've invested in the training, we've invested in the tools that they need. And included in the forth quarter head count is an assumed ramp that really wouldn't have an impact until the first quarter.

Can you talk--?

We're going to watch that very carefully. Go ahead.

Okay I'm sorry could you tell us a little bit more about the 20 - about the people you've hired in Perm (ph) I mean where did you get them and what's their level of experience better?

John this is Joe Liberatore.

Hi.

We're really targeting from a multi prong (ph) approach. We have a substantial (indiscernible) base here in Tampa that drives our internal recruitment. So we work collectively with our field operations on generation of lead of how to get highly talented individuals in the market place. So we're going after from a directly (indiscernible) stand point and targeting individuals specifically on the end industry with industry experience. Obviously taking into consideration any existing agreements they have and not looking for any body to breaching the agreement. As well as we're looking for people who come from out of the industry who have what we've identified as the profile into the search business line where we have proven history that we can ramp up certain types of profile rapidly. Back in 2002, 2003 we deducted a major capital analysis where we analyzed 10 years of performance data of associates that we've brought in over that period of time. And that has helped us really formulate cutting down the hiring profile as well as where we should establish expectations to people ramp.

Okay well thanks a lot and congratulations.

Thank you John.

And ladies and gentlemen as a reminder that is star one for questions. And your next question comes from Rick Tutella (ph) of Columbia Management.

Actually these guys have already got to my questions but terrific quarter guys thanks.

Thank you Rick, we know you Rick. Thanks Rick.

And that does conclude your questions.

Well thank you very much once again we want to thank you for your interest in K Force and once again my congratulations go out to Bill Sanders or new President and also to Joe Liberatore. And our appreciation to all the K Force associates that are delivering exceptional results and exceptional service for our customers. Great people (indiscernible) and equal great results. Thank you very much for your interest. Bye-bye.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude your conference have a wonderful day.