Kforce Inc (KFRC) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter Kforce Inc. earnings conference call. [Operator Instructions]. I would now like to turn the presentation over to the host for today's conference, Michael Blackman, Vice President of Investor Relations. Please proceed, sir.

Thank you. Good afternoon and welcome to the Kforce's Q4 and 2004 year-end conference call. Certain of the statements made in this call are forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are within the meaning of Terms 27A of the Securities Act of 1933 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, in general economy, competitive factors, risks due to market demand, including, without limitation, shifts in demand for health and life sciences, finance and accounting, and technology groups, as well as for the market for flexible staffing assignments in general or 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 SEC, as well as the assumptions regarding the foregoing.

In particular, any statement related to Kforce's expected revenue or earnings or Kforce being well positioned for future profitability in growth are forward-looking statements. The words should, believe, estimate, intend, anticipate, foresee, plan, and other similar expressions and variations thereof identify certain forward-looking statements and speak only as of the dates in which they are made. Additionally, any statements related to the future improved performance and estimates of revenue, earnings per share are forward-looking statements as well.

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 those forward-looking statements as a result of the various risk factors. Listeners are cautioned not to place undue reliance on these forward-looking statements. I would now like to turn the call over to Dave Dunkel, Kforce's Chairman and Chief Executive Officer.

Thank you, Michael. I will provide some brief initial comments and then turn the call over to our Chief Financial Officer, Joe Liberatore who will provide some additional insight into our financial results and guidance for the fourth quarter. And then Bill will provide his insight and comments.

You can find additional information about Kforce in our 10-Q, 10-K, and 8-K filings with the SEC. This afternoon's press release is posted on our website, www.kforce.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.

Total revenue for the fourth quarter of 2004 was $190.2 million versus $188.9 million in Q3 and $125.7 million in the prior year's fourth quarter. The total revenues for 2004 were $661.5 million, an increase of $165.9 million over 2003. The fact that we were able to produce sequential revenue growth, despite the reduction in billing days from Q3 and the effect of vacations during the holidays, is, we believe, a reflection of the continuing improvement in demand for our professional staffing services and the improving economic conditions as a whole. This revenue growth was particularly strong in our finance and accounting and clinical research businesses.

Net income for this quarter was $17.6 million, or $0.45 per share, which was impacted by the reversal of the valuation allowance on our deferred tax asset, which Joe will discuss further later on. And compared favorably to the $6.047 million or $0.16 per share for the third quarter and $2.789 million or $0.09 per share year-over-year.

Earnings before taxes of $5.009 million or $0.13 per share was in line with analysts' expectations for net income, exclusive of the impact of the valuation allowance. From a cash flow perspective, our firm continues to benefit from its high quality customer base, which is reflected in DSOs on accounts receivable of 40.8 days at the end of Q4. The firm was able to pay down debt of $4.9 million in the quarter and fund approximately $3 million of capital expenditures to implement software that will improve the productivity of our associates and help us to deliver exceptional service to our clients.

These improving revenue trends and strong cash flows will also be enhanced by the addition of our new partners from VistaRMS who we want to officially welcome to the Kforce family. The transaction to purchase the asset of VistaRMS, a technology staffing firm with annual revenues of approximately $50 million was completed last week. We believe the addition of the great people of Vista to our already strong team in the Washington, DC area will allow the firm to be a leader in that market and improve our prospects in the growing area of government staffing.

Acquisitions will continue to be a part of our overall strategy. We are focused on making the acquisition of and the integration of high quality, professional staffing firms a core competency. We believe that the professional segment is the sweet spot of staffing, and that technology, finance and accounting, and health and life sciences are the sweet spot of professional staffing. I will now turn it over to Joe Liberatore, our Chief Financial Officer. Joe?

Thank you, Dave and thanks to all of you for your interest in Kforce. Net income for the quarter was $17.6 million or $0.45, and total year net income was $25 million or $0.69. Fourth quarter net income was positively impacted by the reversal of evaluation allowance on our historic deferred tax asset as a result of the continued profitability of the firm.

To provide an additional comparison of profitability, earnings before taxes increased 110% in 2004 to $11.5 million as compared to $5.5 million in 2003. Fourth quarter pretax earnings per share of $0.13 was impacted by approximately $0.05 of costs related to severance, integration expenses related to the re-branding, marketing material, expenses related to reengineering the Order to Cash cycle, and increased hiring of sales associates. We are pleased that these costs are less than the $0.07 we indicated on our last earnings call.

As Dave indicated, total revenues for the quarter were up sequentially to $190.2 million, which represents a 4% increase on a billing day basis, and a 51.3% increase year-over-year. Revenues continue to improve on a billing day basis for the quarter despite the loss of approximately $4 million in legacy Hall Kinion technology, low margin revenues that were terminated in late September.

All business units have contributed significantly to our revenue growth on a year-over-year basis. Finance and accounting, quarterly revenues have increased 95.3%, technology 50.3%. and health and life sciences 15%.

Total gross profit percentage for the quarter improved 100 basis points from 30.6% in Q3 2004 to 31.6% in Q4 2004, largely as a result of improvement in flex gross margin percentage. The flex gross margin improved 90 basis points to 27.1% from 26.2% in Q3 2004 and from 26.7% in Q4 2003. This is the third consecutive quarter of improvement in flex gross margin percentage.

We continue to see improvement in the spread between bill rates and pay rates in all three business segments. We attribute this to our continued focus on pricing, client mix, and business mix, and are optimistic that the improvement will continue.

Operating expenses increased 120 basis points to 28.6% in Q4 2004 versus 27.4% in Q3 2004 and 28.1% in Q4 2003. This increase was attributable to a number of previously disclosed charges, including severance costs, integration expense related to the re-branding marketing materials, impairment charges associated with the write-off of software related to reengineering the Order to Cash cycle for implementation of new state-of-the-art systems, and higher than anticipated costs related to activities around Sarbanes-Oxley compliance.

In addition, the firm continues to invest in the hiring of high quality sales associates whose population has increased 37% December 2004 versus December 2003. While we expect to continue investing in long-term growth initiatives such as the continued hiring of sales and sales support personnel and significant investments in our internal, front, and back office IT systems to drive productivity and exceptional customer service, improving productivity and operating leverage should keep operating expenses below 28% in 2005.

As previously mentioned, the firm reversed the valuation allowance on its historic deferred tax asset in Q4. In addition, goodwill was reduced by approximately $21.8 million as the result of the reversal of the valuation allowance attributed to the deferred tax asset acquired from Hall Kinion. These adjustments for GAAP accounting have no effect on the approximate 53 million federal NOL and $74 million state NOLs which will reduce future tax cash payments by approximately $23.5 million. As the results of the reversal of the valuation allowance, the firm is expected to record income tax expense for book purposes on a going forward basis. The firm is forecasting a 41% tax rate for 2005.

We continue to maintain a conservative balance sheet and build liquidity. EBITDA, a good indication of cash flow because we are currently are not a cash taxpayer, was $7.6 million or $0.19 per share for Q4 2004, versus $4.8 million or $0.15 per share Q4 2003. The firm's outstanding bank debt decreased from $39 million at the end of Q3 2004 to $34.1 million at year-end, our lowest point since prior to the Hall Kinion acquisition.

Gross receivables, which are the basis for our borrowing capacity were $96.9 million at year-end, a $12.5 million decrease from Q3 2004. Receivables past due over 60 from invoice date represented 6.9% of the total receivables in Q4 2004, down from 9.3% in Q3 2004. As of Q4 2004, DSO remains strong, while increasing slightly to 40.8 days versus the 36.9 days at Q3 2004.

The successful integration of the Hall Kinion acquisition, improved associate productivity coupled with continued earnings growth during the course of 2004 were contributing factors to the 87.5% increase of the total book value of the firm increasing from $91.4 million a year ago to $171.4 million at year-end. On a per share basis, the book value increased from $2.99 per share December 31, 2003, to $4.60 per share December 31, 2004. There were 37,276,773 shares outstanding as of December 31, 2004.

Capital expenditures in 2004 were $6.5 million. For 2005, we are planning to continue capital investments focused on a new front-end system and significant improvements in the Order to Cash infrastructure, including implementation of a back office upgrade project. Therefore, CapEx for 2005 may be in the $5.5 to $7.5 million range. Our cash flow, including these items discussed above, will continue to be positive in 2005. Excess cash flow will primarily be used to pay down our outstanding debt.

Looking forward to the first quarter, expenses will be affected by the normal seasonal increases in payroll-related taxes, applied to both our core and consultant population which is $0.04 to $0.05. In addition, we expect to incur $0.01 to $0.02 of integration expenses and redundant costs associated with running VistaRMS's back office as we integrate and minimize any impact to our ongoing Sarbanes-Oxley 404 requirements. We expect the integration to be substantially complete in the first quarter with elimination of all redundant operating costs early in the second quarter.

Although we remain cautiously optimistic about the foreseeable future, forecasting remains difficult. As a result, we will continue our practice of providing guidance for our quarterly forward look. After considering any incremental revenues included for the period between the closing date of the acquisition of Vista RMS and quarter end, first quarter revenues may be in the $197 million to $203 million range and tax affected earnings per share for Q1 of $0.06 to $0.08, which reflects approximately $41 million weighted average diluted shares outstanding including shares issued in the Vista RMS transaction. The quest, which is our internal stretch goal of 2005 EPS of $0.25 continues to be our objective and we continue to strive to meet that goal

In summary, our balance sheet remains strong and our revenue base has been strengthened through the acquisition of VistaRMS. We look forward to broad-based revenue growth and improved profitability during 2005. We believe we have assembled a talented team of great people that will continue to deliver great results. We confidently head into Q1 as we continue to work towards achieving our quest in 2005. I would like to now turn the call over to Bill Sanders, our President.

Excellent job, Joe. Thank you. We are very pleased with the diversity, quality and market drivers of our revenue stream. We believe we provide the skilled professionals that are in high demand with technology being 46%, finance and accounting 32%, and health and life sciences being 22% of our revenues. Also, while search is now 6.1% of our revenue, we expect to see that percentage grow to our goal of 10 to 15%.

Taking a closer look at our flex business. On a billing day basis, our technology flex business declined sequentially by 0.8% F&A, flex grew by 11.2%, and our HLS business grew by 4.8%, despite the impact of facility shutdowns during the holidays which impacts our clinical research unit in particular. On a year-over-year basis, technology flex grew 49.2%, finance and accounting flex grew 101.7%, and HLS grew 14.9%.

End of quarter billable STE's increased to 10,200 or 4.7% sequential and 58% year-over-year growth. Search revenues increased for the fifth straight quarter, up 2% sequentially and 59.9% year-over-year. We are excited to see the number of permanent placements continuing to increase and the average placement fee remaining strong. Search revenues are lumpy and we remain conservative in our estimate of first quarter production, but very positive for the ramp up in 2005. Now to provide some additional insight on a business unit basis.

Total revenue for technology, which is our largest business unit comprising 45.5% of current revenues, decreased sequentially 0.4% for the quarter on a billing day basis. As Joe mentioned, the firm elected to terminate low margin business in Q3, which was contributing approximately $4 million in quarterly revenue.

Technology search was up 6.3%, while it still remains volatile month to month. Gross billable hours declined slightly while flex margins increased from 24.9% to 25.9%. We expect technology revenues in Q1 to be negatively impacted by project ends that typically effect Q1, but for activity to improve as the quarter continues and also to benefit from the addition of revenues attributable to the acquisition of VistaRMS. We expect the spread between bill rate and pay rate to be stable to improving, but for margins to decline as a result of payroll-related taxes that typically effect Q1.

Finance and accounting, which comprises 32.4% of firm revenues was once again our best-performing business unit in the fourth quarter. F&A flex experienced significant demand which resulted in a 11.2 sequential growth on a billing day basis.

Finance and accounting search also grew 2%. Gross billable hours were up 5.6% and flex margins improve by 90 basis points. The demand drivers for F&A business remain strong. Sarbanes-Oxley related work is approximately 12% of revenue for finance and accounting and approximately 3.8% of total firm revenues, and we believe this work, though not a focus of the F&A group, will continue to be a significant contributor in 2005. We expect F&A to be a strong performer in the first quarter.

Lastly, is the health and life sciences business unit which represents 22.2% of revenues. Clinical Research Staffing or CRS now is 36% of HLS segment. CRS is a highly project-based business that provides solutions to the clinical research areas of the FDA approval process to farm, bio-farm, and medical device appliance. CRS exhibited strong sequential growth and flex revenue in Q4 despite the seasonal impact of holiday shutdown. This was largely 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 at the end of Q3. Though the search business at CRS remains unpredictable, we expect continued revenue growth from this unit in Q1.

Revenues for our health care nursing unit declined 3% sequentially after three consecutive quarters of improving flex revenues. We continue to focus our nursing business towards longer term contract assignments, with placement of RN's to primary health care facilities. We believe we are making progress in repositioning this business, particularly through the utilization of international nurses. We expect the nursing unit to continue to outperform its peers in this industry.

Our health information management group, which provides medical record staffing solutions to include medical coders and cancer registry professionals to hospital, GPO's and clinics, grew 5% sequentially on a billing day basis and has now grown revenues for three straight quarters. The demand for their services is steady and promising. HIM flex revenue is expected to grow sequentially in the first quarter.

The scientific staffing group, which much like our clinical research group is affected by year-end shut downs, had flat revenue sequentially on a billing day basis. The continuing demand for these services is a positive sign that the scientific and lab professional demands are firming and we remain cautiously optimistic. Scientists and lab professional employment is initiating its recovery from the highest historical unemployment rate that occurred in 2003, thus growth may be choppy. Scientific flex revenues should be stable in Q1.

As we look forward, we are continuing our emphasis on acquiring and retaining great people and believe that the acquisition of VistaRMS is a reflection of this commitment. As Joe noted, our headcount of sales associates has increased 37% over the past year. During the third quarter, we added 25% to our number of search and sales associates, and we note that it generally takes six to nine months for these individuals to become fully productive. The result with total revenues accelerating on a billing day basis within each month of the quarter being among the best three months of the last four years.

We plan to continue the hiring and training of field management and sales associates to provide them state-of-the-art systems and sales support to insure they can offer the best possible candidates in the shortest time possible.

As for January revenue trends, January revenue typically begins below December levels due to conclusion of projects at year-end, particularly in technology and F&A. January 2005 follows the same general pattern as 2004 with revenues falling off in early January and then improving on a billing day basis at the end of the month. The holiday impact and weather-related events in some of our largest markets like Boston and Washington, DC appear to temper the recovery during the month. On a year-over-year basis, January growth was 55.7% for flex, which was obviously influenced by the acquisition of Hall Kinion and 80.6% for search, which was not affected by the acquisition of Hall Kinion.

We believe all business units experience growth on an organic basis. We see nothing to lead us to believe that we wouldn't experience growth throughout 2005 that is similar to or better than 2004.

In conclusion, we look forward confidently to a continued improvement due to improved tools and crisp execution of our team. The goal of $250 million in revenue in the fourth quarter of 2005 was a stretch goal we established at the end of 2002. While this is a stretch goal, we do believe we have the momentum that just might get us there from here. Thank you very much for your continued interest in Kforce. Michelle, would you please open up the lines for questions.

Thank you, Mr. Sanders. [Operator Instructions]. Our first question comes from the line of Randy Mehl of Robert W. Baird. Please proceed, sir.

Good afternoon, afternoon. I wanted to follow up on the Q4 hiring in firm. I think you had mentioned last quarter you are going to add 25% to the perm sales force. Wondering what impact that might have, you know, on the first quarter that's within your guidance. Clearly you started off strong, if I heard that number correctly, 80% up in January. Is that the kind of momentum that we should expect for the entire quarter given the kind of limited visibility there?

Randy, this is Bill. We hired the 25% increase that we were talking about happened in the third quarter, and we were indicating it takes six to nine months for those people to become fully productive. They are beginning to become productive. As far as forecasting on a quarterly basis, as you know, that is a very difficult thing to do and in search it's really very lumpy and trends are what are important. But if we look at the increased headcount, you would expect count, you would expect to see some pretty solid improvement in search certainly beginning in the second quarter because that would mean they have been here a full six months as they ramp up into the summer months when you would see them fully productive. Whether we can see substantial growth in the first quarter, we certainly like the way we began the quarter, but because this is so lumpy and visibility is so difficult on search, I would be reluctant to predict that would happen for the entire quarter.

Okay. And then in terms of the capital spending plans, it sounds like you're doing quite a bit this year. And I know the fourth quarter was a bigger number than you usually would have in terms of CapEx. I'm wondering if you could elaborate a little bit on what you are doing with back office system and I think there was another system being influenced as well.

Randy, this is Joe Liberatore.

Hey, Joe.

What we're doing on the front end system is we're actually very close to rolling out an entire web-based front end system to our entire sales force that will allow our sales force to have access to national data, which should really provide some leverage opportunities for us, not to mention that this really moves us into the next level from just a tools standpoint being in the staffing sector for 16 year, we evaluated pretty much everything that was available on the marketplace. Our field participated very heavily in the decision process given it is ultimately their tool. So we're real excited about that and very optimistic about the opportunities that that's going to present for us, not just from a leverage standpoint, but what it also does is provides us a lot of efficiencies on some very standard processes that happen in the field, which should hopefully allow us continued leverage on productivity at an associate level.

And then what we have happening in the back of the house is we have been focused on the Order to Cash cycle for quite some time now. We've worked with some very respected third party consultants that have come in and analyzed our existing processes, provided us some recommendations on how we can enhance those processes, so we've been very focused on the process first and then looking at how we apply the technology to that process to get the leverage out of the technology once we've brought out our process. And so we're going to be working through that for probably the first six months of the beginning of the year. Obviously with Sarbanes-Oxley, we have timing issues that we have to look at on when we cut new systems over, so we're targeting a Q3 timeframe of cutting over on those systems. Providing that everything continues to move along based upon our project plan.

Okay. So Q3 timeframe on both?

No, Q3 timeframe on cutting over our back office. Q2 timeframe on the front office system.

Okay. Thank you. I appreciate that.

Our next question comes from the line of John Mahoney of Raymond James. Please proceed, sir.

Hello, John.

Mr. Mahoney, your line is open, sir.

Hi. This is John Mahoney. Couple of quick questions. What's the tax rate you are assuming for the guidance for Q1?

41%.

Okay. 41%. And you also mentioned that -- you mentioned this all along that VistaRMS will be accretive to earnings and this quarter will cost us $0.01 to $0.02. As an analyst sitting here, should I add that to the back half the $0.01 to $0.02 or is that going to that gets me to a break even situation. So if I'm looking at my model, my fully taxed model, would I add $0.01 to $0.02to the back half -- more than $0.01 to $0.02 to the back half?

Ladies and gentlemen, please stand by. Your conference call will begin shortly.

John, John are you still there?

We'll take our next question from Mr. Tobey Sommer of Sun Trust Robinson Humphrey. Please proceed, sir.

Good afternoon. I had a question for you regarding perm generally. I may have missed this on the call. How perm performed in the quarter on a segment basis and then I was wondering if you could give us a little bit more color on stepping back a little bit in how we should look at IT in 2005 coming out of Sarbanes-Oxley and what you are hearing from customers and how that may impact bill pay rate spreads in 2005.

This is Bill, Toby. It was -- search was up in both IT -- in technology and in finance and accounting 2% of quarter over quarter on a sequential basis. 50% year-over-year in total. Sarbanes-Oxley as it effects technology group that has been, I would say, nominal to the extent that it's affected technology. Now, we indicated on the call about 12% of finance and accounting revenues and 3.8% of total firm revenues. We are seeing some softening, that is to say in finance and accounting, that is to say that some of the higher level people in finance and accounting aren't as in demand as they were before and clients are not asking for as many people as they were before, but still continues to be a strong part of the business and we continue to receive job orders and make new placements in this area, so we see strength there. We believe it will continue for the foreseeable future.

Is that to say that you're not seeing sort of incremental customers either from customers that you did Sarbanes-Oxley work for or maybe had to remediate their systems post going through the Sarbanes-Oxley compliance?

Well, we are seeing that business, but on a net basis, there is not incremental business over the high point of the fourth quarter. So if -- we saw certainly accelerated demand in the fourth quarter, but we are not seeing that same level of demand in the first quarter. It has fallen off some.

Okay. You mentioned the sale force growth December to December up pretty nicely. I was wondering if you could give us the number of folks in the sales group overall and in the perm focused sales area.

The total headcount within the perm is approximately 1,700 people, approximately $114,000 in revenue for employee which we're pretty proud of. The total number of sales associates versus management versus sales support in the individual offices versus the corporate help, we haven't distinguished that in the past, and we would not want to start that kind of distinguishment at this point in time.

Is there any kind of percentage range you could give me as to generally how many folks are directly involved in sales relative to overall headcount?

It would be misleading the way that we have it. Certainly the major portion of the firm, but to give a specific number would be very difficult.

Okay. Thank you very much.

Our next question comes from the line of John Mahoney of Raymond James. Please proceed Mr. Mahoney.

Hi. Thanks for getting me back on.

We apologize, John. That was a -- technical difficulties here.

I understand. The quarter, the tax rate for the first quarter guidance is 41%?

Yes, sir.

And VistaRMS is going to be accretive to '05 earnings and if I am an analyst working with that model, which I happen to be, and take $0.02 to $0.02 out of the first quarter, I should add more than that to the back half, if it's going to be accretive?

That would be correct.

Okay. Then, I guess, on the perm side, I have been juggling a couple of calls here, but you said perm in January was up 80% year-over-year?

Yes.

That's pretty solid. I guess what I'm confused about is the comment earlier that you said that forecasting is difficult. That seems like some pretty good trends.

Yes, but it fluctuates so much. You can have three or four real good weeks and have two or three slower weeks and three or four positive weeks. So overall, are we positive on search? Very much so. Do we want to try to extrapolate from four-week trend and say that's what the quarter will be? We don't believe we would be credible if we did that, but we certainly are positive. We have added people to our sales staff, 25% in the third quarter, and they're becoming productive and we are optimistic.

I guess I'm trying to -- I guess it's an internal battle that I'm trying to get a feel for is the -- Bill Sanders is being very conservative and we have a stretch goal which is $0.25 by the end of the year seems like conflicting guidance or outlook.

Well, I'm hopeful and I'm optimistic and I'm giving the best guidance we can.

Okay. Thank you very much.

Our next question comes from the line of Mike Carney of Stephens. Please, proceed, sir.

Good afternoon. I hope you're not sending me to the receptionist.

No, -- depends on your question.

Couple of business questions. First is, did you lift the entire valuation allowance? In the fourth quarter?

No, we did not.

Because it should have been -- seems like the $28 million that offset goodwill was a little higher than what you expected, right? Is that maybe because Hall Kinion has been stronger than you had expected?

That was $21.8 million to goodwill.

Oh, $21 point.

The remaining outstanding on the valuation allowance is $3.7 million. We held the $3.7 million based upon some associated risks with that $3.7 million.

Okay. And then on the business, Bill, I think you said you were still hiring sales associate. Would that -- would the assumption be that you are still hiring more than normal or just still hiring?

In certain selected markets, Mike, where we have very strong management capability and strong field force, we look at the productivity and the economic development in that particular area and we continue to add if we can find people that meet our very high standards. Are we still hiring? Yes. Will we continue? Probably for quite a bit of time. I would believe that that would be true because we foresee an economy that continues to improve. But we make sure that the productivity and the individual office warrants that increase and we have the management capability in place.

And then also on the gross margins, continue to be up pretty strong. Is that-- assuming that you only got rid of one customer in the California area that was large, is the increase more from bill rate increases or just a shift of higher margin work?

This is Joe. It's actually attributed to the spread between the pay rate and the bill rate.

So you're just seeing more demand basically and increasing prices for it.

Well, I would attribute a lot to -- we have been after this for quite sometime and we have done quite a bit of training with our field representatives on pricing and how to effectively price and price to resistance. So I'd say is the market cooperating with us? To some extent. But it has a lot to do with the focus that we have on really going after pay rates and pay market as well as working with customers and educating customers on what's happening with the demand.

Okay. And last question, have you seen any signs or signals of good cross selling either with Vista or maybe not at Vista, but with on staff up to this point?

Now not with Vista yet, because disclosed the transaction, although we have been very cooperative between the two firms. But on staff in particular as they bring a different niche and professional and administrative staffing to the firm and RFP's and in other introduction we have made some significant sales and a number of other smaller sales. So we are very pleased with the cross selling effort and the combined work of all our business units with on staff. I think that's going to be a real leverage point as we go forward.

Okay. Thanks.

[Operator Instructions]. Our next question is a follow-up question from Mr. John Mahoney of Raymond James.

Hi. How you guys doing? I already asked that. Just another follow-up. For the remainder of the year the 41% tax rate, any chance that's going to come down and how have you estimated that? Have you worked with on that?

This is Bill, John. The tax rate obviously for us making the type of cash flow that we are is 35% for federal and a little over 6% overall for state. And that is at an accrual basis obviously and not a cash basis. So to bring that down will be quite difficult because of the -- because they're pretty standard in the industry. So I would expect most of the industry to be around 40%, 41%. Remember there is a positive and negative here. We are fully tax effected, but we're not paying cash. This is an accounting entry is all it is.

Also, on Vista RMS, will the revenues mostly going to fall in the IT side?

Yes.

Okay. So your comments that IT would be negatively impacted by the normal end of projects on a seasonal basis is exclusive of adding VistaRMS to the number, right?

That is correct.

You paid -- the acquisition was done with stock, right?

Yes.

So what is the share count going to look like? How many shares were issued?

This is Joe. There were 2,348,000 shares that were issued. A significant amount of that currently sits in escrow until some certain contingencies are resolved.

That is not really going to get released to the diluted share base until when--

It counts --

Automatically?

February 2 when we closed it, it becomes part of the EPS calculation.

That is why I mentioned it on the front end of the call just so that -- because we're dealing with a couple of things. We obviously have the payroll tax impact in Q1. We have the acquisition component because of the redundancy, which is really linked to Sarbanes-Oxley to allow us to work around those requirements and not expose the firm. And then we also have the share impact that is hitting that as well.

Okay. Thank you very much.

Our next question is a follow-up question from Randy Mehl of Robert W. Robert W. Baird. Please proceed, sir.

Hey, Randy.

On the IT flex business, very good gross margin trend in the fourth quarter. I'm wondering, do you expect higher temp or flex gross margins in 2005 versus 2004? For the full year?

For the full year, yes, we would. Now, on a quarterly basis, this varies a little bit because gross margin includes employer taxes. First quarter, you would expect it to be lower than normal and fourth quarter would be as highest point in a given year. But we believe -- we are selecting clients that value the proposition that we have to play and to a large extent that is a higher GP level.

But there was nothing in the fourth quarter that was unique to the fourth quarter.

No. No, that is a solid GP.

Great. Thank you.

[Operator Instructions]. Our next question comes from the line of Richard. Please proceed, sir. Mr. Richard Peterson (ph), your line is open, sir.

Okay, great. I wonder if Mr. Sanders would identify who he feels is the most effective competitor in each of his major markets?

Well, we have full respect for all of our competitors, and we believe that there are a number of very good ones as far as identifying specific competitors and their ability, that's not something that we would like to do.

Our next question comes from the line of Mr. Tobey Sommer. Please proceed, sir.

I was wondering if you could look at the health and life sciences group and talk to us about the opportunity for continued gains in contracts with among the pharmaceutical companies or perhaps that -- is there anything we should think about the large outsourcing exclusive agreement that you got towards the end of last year? Does that in some way limit your ability to replicate and get other big deals? Or do you consider that sort of a sign of increased opportunity?

I think that's a sign of increased opportunity. This is a stellar group of professionals in the CRS group, and we work with the very cream of the crop as clients. And we have alliances and ventures with these clients such that we believe that there is significant potential for this group to continue to grow while they have had exemplary growth over the last three or four year, we see no reason that they won't continue to -- this trend to be very growth oriented and very profitable.

Toby, this is Joe. What I would add in addition to that, where we -- have seen for the opportunity of continued expansion of CRS is in the customer share front, meaning typically when we get in on the front end with this very visible projects, it opens other doors for us, and that was reflected in how we continued to gain that customer share in the project that you were referencing. So it allows us to continually create a wedge to capture some of the CRO business because we can provide an alternative solution to the CRO in a much more cost effective manner. So that's where we're very much focused is leveraging that existing customer and getting deeper and wider in that customer.

And then one other follow-up as it relates to perm. Given your sales force additions there in historical out performance in that regard, should we think you will outperform the market in terms of perm growth in 2005?

Outperform the market? That would be an optimistic view. We would certainly seek to do that, but I don't know at this point in time that we can say that we have any reason to know that we would outperform the market. We continue to grow. We have added headcount as well as I know some of the competitors have, but we have no information at this point in time that we would outperform.

Thank you very much.

Our next question is a follow-up question from Mike Carney of Stephens. Please proceed, sir.

One last question real quick. Joe, you have the weighted average shares outstanding for the fourth quarter?

Yes, for the fourth quarter, weighted we're going to be at 39,139,000.

I'm sorry. The not diluted.

About 37 million.

Okay. Looks like there's a pretty big increase in shares from dilution. I assume that's just because of the early vesting of all the options?

That's not vesting. It depends upon when the stock price in relation to the vesting and more and more options are going into the money and therefore they --

Right.

It has a dilutive effect.

On the outstanding. Okay. Thank you.

Ladies and gentlemen, this does conclude the question and answer portion of today's conference call. I would now like to turn the presentation back over to Mr. Dave Dunkel for closing remarks.

Thank you. We want to acknowledge all of your interest in Kforce. We look back on 2004 and continue to believe that it was a very successful year and really a turning point for Kforce in the year of sustained profitability and growth. And we're very excited about our prospects for 2005.

As Bill mentioned and Joe, we're very focused on the quest. We have a road map that we're going to follow. We realize it's a stretch, but we are after it. Again, the quest for us includes multiple metrics that are operating metrics and it's a focus on internal excellence and operating excellence. The most tangible outcome in the eyes of the investor will be in the revenue front, which is a goal of the fourth quarter of $250 million and earnings per share of $0.25. That is our goal. It's a stretch, but we're after it.

We want to thank, again, all of the associates at Kforce for their hard work. We believe that we really have some of the finest people in the industry, great people do, in fact, equal great results as has been proven in the fourth quarter for Kforce. We thank you very much for your interest and will look forward to talking with you in the first quarter.

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