Kforce Inc (KFRC) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kforce, Inc. Third Quarter Earnings Conference Call. My name is Amanda, and I will be your coordinator for today. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. Michael Blackman, Vice President of Investor Relations. Please proceed, sir.

Thank you. Good afternoon and welcome to the call. Before we get started, I would like to remind you that this call may contain statements that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially because of factors listed on Kforce's Form 10-K and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. I would now like to turn the call over to David Dunkel, Chairman, Chief Executive Officer. Dave?

Thank you, Michael. You can find additional information about Kforce in our 10-Q, 10-K and 8-K filings with the SEC. We are very pleased with our results. This was a great quarter for Kforce. I will turn the call over to Joe Liberatore, our Chief Financial Officer, who will provide his comments on our results for the quarter, and then Bill Sanders, Kforce President, will provide additional insights on operating trends and expectations, and I will then conclude. Joe?

Thank you, Dave, and thanks to all of you for your interest in Kforce. Total revenues in Q3 2005 were 207.3 million, exceeding our guidance of 200 to 205 million. Flex revenues were 193.2 million. These quarterly revenues represent all-time highs in Kforce's history. Search revenue of 14.1 million increased for the eighth consecutive quarter. Total revenues increased 18.4 million or 9.8% over Q3 2004 and $8.8 million or 4.4% sequentially. Revenues for the nine months ended September 30th, 2005 are 598.7 million or 127.4 million or 27% greater than for the same period last year, or up 471.2 million.

Net income for the quarter of 6.7 million was $0.17 per share, exceeding our guidance of $0.14 to $0.16. Net income for the nine months ended September 30th, 2005 of 15.5 million were 8.1 million or 110% greater than the same period last year of 7.4 million.

To assist in the comparison with prior quarters as a result of the firm beginning to book income tax expense in the first quarter of 2005, it's useful to look at EBITDA, an indication of cash earnings per share. EBITDA for the third quarter 2005 was 14.2 million or $0.35 per share, an all-time high, versus 12 million or $0.30 per share in Q2 2005 and 7.9 million or $0.21 per share in the third quarter of 2004. We are very pleased with EBITDA sequential growth of 17.9% and year-over-year growth of 79.7%. We believe this is an indication of improving operating leverage. Overall, positive operating trends for the firm continued in Q3 2005, reflective of our improving profitability.

Operating income for the nine months ended September 30th, 2005 of 27.2 million were 19.6 million or 257% greater than for the same period last year of 7.6 million. Operating income for Q3 2005 was 5.6% of revenue versus 3.3% in Q3 2004, and earnings before taxes for Q3 2005 was 5.4% of revenue versus 3% in Q3 2004. EBITDA for the third quarter of 2005 improved to 6.9% of revenue from 4.2% in Q3 2004. We believe we have built a firm focused on profitable revenue growth that is nimble, and we'll be able to take advantage of this rapidly changing business and economic climate.

The firm's continued progress on improving its gross profit percentage has contributed significantly to its profitability. Our gross profit percentage of 33% has improved 240 basis points year-over-year from 30.6% in Q3 2004 and 70 basis points from 32.3% in Q2 2005. Our flex gross profit percentage of 28.1% in Q3 2005, improved 90 basis points from 27.2% in Q2 2005, and 190 basis points from 26.2% in Q3 2004. Gross profit improvement was driven primarily by improving spread between bill rates and pay rates. We attribute this improvement to our continued focus on pricing, client mix and business mix. We continue to see improvement in gross profit and are optimistic that the improvements will continue.

Operating expenses for the first nine months of 2005 have declined 130 basis points to 27.6% of revenue from 28.9% of revenue for the same period last year. Quarterly operating expenses remains flat to Q2 2005 and Q3 2004 at 27.4%. The firm's ability to maintain operating expenses with revenue growth is attributable to continued scrutiny of all controllable costs, including the management of our accounts receivable portfolio which had only 3.9% of all receivables past due more than 60 days and a DSO of 36.4 days.

Our expectation of continued improvements in operating efficiency, coupled with careful management of sales performance metrics, will allow us to increase hiring of sales and sales support personnel. Continued improvements will also support our ongoing investments in both our front and back office IT systems. We expect these investments to drive both productivity and exceptional customer service with minimal impact on profitability.

We expect operating expenses to remain below 28% of revenues through 2005. Productivity levels in our sales force remain near all-time highs in Q3 2005. Revenue per employee has increased 5.9% from a year ago. The quality of the revenue stream also continues to improve as gross profit per person has improved 14.1% over the same period.

We continue to maintain a conservative balance sheet and build liquidity. I note that working capital is currently 66.9 million and has increased by 21.7 million versus Q3 2004. As of December 31st, 2004, Kforce has recorded federal and state net operating loss carry-forwards of approximately 75 million and 83 million respectively with an expected cash tax savings of approximately 30 million.

Cash flows provided by operating activities for the nine months ended September 30th, 2005 of 26.6 million, were 25.3 million greater than for the same period last year of 1.3 million. Our cash flow from operations in the quarter of 10.6 million allowed the reduction of the outstanding balance on our credit facility by $8 million. At the end of Q3 2005, bank debt was 22 million and I'm happy to report as of today it's 17 million, compared to 30 million at the end of Q2 2005.

We are also pleased to announce that we recently amended and extended our credit facility for another five years with our current bank syndicate and improved pricing and terms. The amended $100 million credit facility also contains an accordion feature that will allow for a $40 million increase in borrowing capacity to 140 million. We believe this line is adequate for current M&A activity and operating needs.

We expect the level of capital expenditures to remain flat at approximately $2 million in Q4 2005. Total 2005 expenditures may be 8 million to 10 million. Looking forward to the fourth quarter, we expect to continue to realize the benefit of the leverage in our operating platform. We believe revenues may be in the 203 million to 208 million range, and earnings per share for Q4 of $0.15 to $0.17, which reflects approximately 40.5 million weighted average diluted shares outstanding.

The talented team of great people we have assembled in our field and support entities remain sharply focused on strategically balancing revenue growth and profitability. As we reflect on year-to-date and Q3 2005 results, we are pleased the firm achieved all-time quarterly highs for EBITDA and for revenue. However, our talented and competitive team is not satisfied. We look forward to exceeding the firm's $0.20 per share record for normalized quarterly EPS in the near future. In closing, the firm's balance sheet remains strong, and our team is sharply focused on driving profitable revenue growth. I'd like to now turn the call over to Bill Sanders, our President.

Thank you, Joe. Wow, record revenues. That's something we are all very proud to accomplish. We are pleased with our broad base success this third quarter, as all business units grew revenue and improved profitability sequentially and year-over-year. This sustained improvement reinforces our optimism about the quality and market demand drivers of our diverse revenue stream, both short-term and long-term. We believe our diverse service offering uniquely positions Kforce in the areas that will be in the greatest demand for the foreseeable future.

We believe the skilled professionals our clients demand and Technology, which represents 46% of revenues, Finance & Accounting, which is 30%, and Health & Life Sciences, which accounts of 24% of third quarter revenues. The success of our business is also dependent on our ability to attract qualified candidates. We believe the supply-demand curve has shifted back to the advantage of the candidates and most of our business units, and we continue to have success balancing this shift as evidenced by our improving margins.

As we look at business mix by time, we are pleased to note that each business segment experienced both sequential and year-over-year flex revenue growth in the quarter, led by our HLS and our F&A segments, which both grew 6.5% followed by Technology at 2.6%. The HLS growth was fueled by another strong quarter of growth in our clinical research group. Health information management also grew substantially. On a year-over-year basis, Technology flex grew 4.5%, F&A flex grew 9% and HLS flex grew 18%. End of the quarter billable FTE's were up slightly, sequentially and flat from Q3 2004.

Search revenues increased for the eighth straight quarter and were up 1.5% sequentially, despite the summer months being a traditionally slower quarter and are up 23.1% year-over-year. Search revenues continue to gradually improve primarily due to higher fees per placement and represents 6.8% of total revenues. We believe direct hire activities are at an inflexion point for accelerated growth. And thus, we have stepped up our aggressive hiring program of search recruiters and that will continue over the next year. We are targeting for search to increase to 10 to 15% of total revenues.

Now to provide some additional insight on business unit basis. Total revenue for Technology, which is our largest business unit, comprises 46% of firm revenues, increased 3% sequentially. Gross billable hours were flat sequentially, bill rate was up and flex margins increased 100 basis points from 25.9% to 26.9%. On a year-over-year basis, hours were down slightly, but flex margins improved 200 basis points as we continue to focus our offerings in the areas that provide the greatest value to our clients.

Technology search increased sequentially 11.3% and 44.9% year-over-year. We see the market for Technology staffing continuing to improve, especially in the higher-end roles, which continued to drive margin improvements. Skill sets and demand continue to be ERP, especially Oracle and PeopleSoft, .NET, DDAs and Business Analyst. Technology revenues in Q4 will be up on a billing day basis, and in total are still expected to be flat to slightly up over Q3. We also expect the spread between bill rate and pay rate to be stable to improving as we continue to focus on margin improvement through pricing discipline.

Total revenue for Finance & Accounting, which comprises 30% of firm revenues, improved 5.2% sequentially and increased 9.7% year-over-year. F&A flex increased 6.5% sequentially and increased 9% year-over-year. Flex from margins were up sequentially by 90 basis points.

Finance and Accounting search declined by 2.9% sequentially, but was up year-over-year by 14.2%. The demand for F&A staffing remains strong and cyclical trends overall remain positive. While we are seeing a drop-off in mortgage-related staffing needs, our clients are looking increasingly at staffing firms for higher-end consultants that were traditionally sourced from accounting firms. So represents only 5% of revenues, Sarbanes-Oxley related assignments and their ripple effects continue to provide significant revenue.

Much like Technology, F&A may be up on billing day basis in Q4, and in total we expect revenues to be flat in the fourth quarter. Our third business segment is Health and Life Sciences, which represents 24% of revenues and has been our most consistent revenue grower, growing sequentially for the past eight quarters. Clinical Research Staffing or CRS is now almost 40% of the HLS segment, generating approximately $75 million in annualized revenues with a strong pipeline of job orders particularly in regional CRAs and in product safety.

CRS is a highly project based business that provide solutions to the clinical research areas of the FDA approval process to pharm, bio-pharm and medical device clients. CRS had sequential growth and flex revenue in Q3 of 7.1% and year-over-your growth of 35.5%. We expect CRS to grow once again in Q4 despite significant holiday shutdowns at a number of major clients, which will result in a reduction in billing days for this unit of between five and eight days.

Revenues for our healthcare and nursing unit improved 1.2% sequentially in Q3, and have increased in six of the last seven quarters. We continue to focus our nursing business towards longer-term contract assignments with placement of RNs to primary healthcare facilities. We believe we continue to make progress in this business, particularly through the utilization of international nurses, which now has the largest pipeline since we first started international sourcing two years ago. We expect Q4 revenues to be flat to slightly down in this business unit.

Our largest sequential growth in Q3 was in our highly profitable Health Information group. HIM revenues increased 18.6% sequentially and are up 30% year-over-year. The demand for their services is growing due to more strategic sales of longer-term multiple seat projects. HIM revenue is expected to be up sequentially in the fourth quarter despite less billing days.

Revenues for our Scientific Staffing Group increased 60 basis points sequentially and 20 basis points on a year-over-year basis. Job order trends are increasing and activity levels are improving for scientific and lab professionals and we believe we have momentum to grow sequentially. Overall, sales associate productivity continues near record level -- record high levels. We believe that ample demand exists in the market for our services in both search and flex. As a result, we increased the size of our sales force by more than 8% in the quarter.

We plan to continue to add to, and reinvest in our sales associates, particularly in search, with an eye towards accelerating our profitable revenue growth. We also continue to provide state-of-the-art systems and sales support to ensure our associates offer the best candidate in the shortest time possible. Our formula is to hire and retain great people and provide them the highest quality of training and tools in order for us to maximize the productivity.

As for revenue trends, the first two months of the third quarter were up from June levels and activity continued to ramp in September. October was the best month for flex revenue in the firm's history. This strength was exhibited across all business segments. We have also seen a promising start in our search business in Q4, but remain cautious as this revenue stream is difficult to predict.

In the last two years, we have focused on customer selection and profitability. We have reduced revenues from high volume, low margin clients of $40 plus million resulting in dramatically increased gross profit percentages. We have increased the number of sales associates by 50%, revenue by almost 70% and successfully integrated two acquisitions.

My compliments to all my partners in our firm on our record revenue levels as this reflect the success of our efforts. We look forward to a greater focus on direct higher revenues, stronger pricing discipline, and superior execution, which will bring more record bests in both revenues and profitability. Thank you very much for your continued interest in Kforce. And now, I'll turn it over to our CEO, Dave Dunkel.

Thank you, Bill. Third quarter was a great quarter for Kforce with the highest revenue quarter in Kforce's history, which reflects a balance across all service offerings. Certainly, our best performance in some time, and we believe another important milestone in the firm's evolution. We believe the professional and technical segments of special staffing -- specialty staffing where the action is and will be for the foreseeable future.

The US economy has evolved into a knowledge-based economy where higher skills are at a premium. The unemployment rates for college educated and managerial professionals are less than 2.5% which reflects the demand for the talented consultants Kforce provides. We are very pleased with our 100% domestic professional and technical revenue footprint and believe Kforce is in the sweet spot of the staffing sector.

Looking forward, we are investing in training our associates and equipping them with the tool to further accelerate overall productivity and deliver exceptional service to our customers. Additionally, we are aggressively hiring to fuel future revenue growth and earnings accelerations. Once again, we wish to express our appreciation to our field and corporate teams, our consultants and our customers for allowing us the privilege of serving them. Amanda, we'll now open up the call to questions.

(Operator Instructions). And your first question comes from Tobey Sommer with SunTrust Robinson Humphrey.

Good afternoon. Congratulations on a good quarter.

Thanks, Tobey

Thanks Tobey.

And a question for you related to cash flow and uses of cash. You're generating quite a bit of cash flow over the last couple quarters. It looks like the outlook will be relatively positive as well. In the context of also increasing your access to cash, I was wondering what the uses of cash are going forward and how you characterize the acquisition market?

Yes. Tobey, this is Joe Liberatore. We continue to evaluate the acquisition market actually during the third we had seven potential targets that we are active with. A number of those we've elected to bow out of, because they didn't meet our standards or certain things were discovered during due diligence. So we've remained or we continued with our disciplined focus and then around blushing through the acquisitions, number one making sure that the people come first and then the structure of the arrangement to make sure that it's going to be a profitable and accretive transaction for us, and then also looking at the strategic opportunities and geographic overlay.

So in terms of cash flow we'll continue to use cash flow to pay down debt. We'll look at cash flow from a stock repurchase standpoint based upon what type of trading range we're trading within, and where our multiple is relative to our peer group, and we'll also look at cash flow utilization from an acquisition standpoint.

Within the activity in the acquisition market you're seeing, is there a - do you have a disposition to kind of increase your exposure to one of your end markets over another?

Tobey, this is Dave. We're looking at several different factors. We're looking at geographical footprint, we're looking at -- for the compliment -- customer compliment, we're looking for sector exposure -- for example the VISTA transaction that we did had extensive government exposure. So there's a lot of factors that we're evaluating. But as Joe mentioned, first and foremost are the people. The people have to fit our culture and also have to -- we believe have to fit well with the offices and the overlays where we're bringing them in.

We experienced in Washington Post VISTA a significant increase in activity. In fact, this past month they had their highest record number placements in Tech. Our F&A business has also seen similar increases in activity and it's the power of bringing the two teams together under the leadership of Ky Mitchell (ph), who came with us from that transaction. So when we're looking at acquisitions, it starts with the people. We look at the fit -- the overlay and in the end we have to balance all those things against the economics.

I think that -- I would add to that Dave - this is Bill - we have certainly done a lot of work in the last two years making sure that we could not only acquire but integrate these acquisitions very successfully. We think that's a core competency of ours, and so that the acquisition trail we believe is one of those ways that we certainly can add profitable revenue growth.

I want to ask two more questions and then I'll get back in the queue. It sounds like you touched on the progress you made in the health care segment in CRS a little bit more maybe than you had incurred in the past. Did you -- is that a result of increased optimism and kind of opportunity you see before you in that market? I wonder if you could give us a little more color.

Well, certainly the -- we are excited about the performance of that group. Two, particularly two of those groups have just been outstanding. They have all been all of organic growth, when you're talking about CRS and you talk about HIM. The activity post Vioxx(ph) and product safety, that activity in CRS is been very important and we have developed a number of alliances with some major pharma companies that continue to expand. While those are of high-volume, a little bit lower margin clients -- those are still - have turned out to be excellent alliances with us.

HIM has gone out and done an outstanding job in working with clients and providing a multiple large product, a large number of seat-type of performance in the product that we offer for them, and I think they've just been successful in what they're doing. So color from our standpoint is we still see growth continuing in each one of those groups, even though the fourth quarter, particularly CRS, has significant closures at the end of the year between Christmas and New Year's.

And then I'll - I'll just throw in two more questions, if I could. One, you mentioned the International pipeline of nurses being at a record. Any changes regarding the Visa rules that is propelling that? Or is that Company-specific success? And then, I are wondering if you could comments on your plans to hire -- focus on hiring more permanent placement people? Thank you.

Yes. Tobey, this is Joe Liberatore. I'll handle the international nursing question. Yes, actually there was some retrogression that took place earlier this year, but that's all behind us at this point in time. So we actively continued to penetrate the offshore marketplaces to continue to build our pipeline. This is an initiative we've been working on for several years, and what we're seeing as we head into 2006 is we're really starting to optimize and maximize our pipeline.

So we have a pretty significant pipeline that's teed up and we're not seeing -- we're seeing really traditional things I'd say at this point in time from the Visa processing standpoint, and we just have a significant backlog because we were one of the first players over in India and we've established quite a brand there. So now we're starting to feed off of all the referral aspects.

This is Bill. I'll take on the direct hire question that you had. Our pipeline continues to be quite strong there. We're seeing good seat expansion. As we look at this area of staffing is certainly one of our areas of expertise. We have over the last year added to this group and we are going to now even more significantly add to the number of associates and recruiters that work in search because we feel that we now do see across the bridge and believe that direct hire activity placements in this area will be continuing at a strong level for the foreseeable future.

So we're going to jump in a little bit stronger than we have before. We've increased overall staffing associates by 8%. But we're going to make even more investments, particularly in the search area to accomplish our objectives of reaching 10 to 15% hopefully in the future, which I hope is very soon.

Tobey, let me add some real quickly, if you'll note, the technology search performance for us has really started to ramp substantially over the last couple of quarters. Prior to that, it had been primarily within F&A. So with technology search now showing up consistently, it's really given us a sense of confidence in the broad opportunities that exist in search. Technology is up 44.9% year-over-year.

Yes. I would say we're bullish on search.

Thank you very much.

Thank you, Tobey.

(Operator Instructions). Your next question comes from Mark Marcon, an investor.

Hi, Good afternoon. It's Mark Marcon from RW Baird.

We know that Mark.

Congratulations on the good quarter. I was particularly impressed by the flex gross margin. And I was just wondering if you could talk a little bit more about -- it certainly seems like you've moved away from some of the lower gross margin clients. I'm wondering are you kind of done with that process or is there still more upside that we can see on the flex gross margin side?

Mark, are you sure you used the right adjective? You said a good one. Did you mean a great quarter? I know you were trying to say great. Congratulation on a good quarter I just wanted to encourage you if you thought it was great quarter to go ahead and say it. As major shareholders you and I - we want to see great quarters, don't we?

Yes. This is Bill, Mark. When you think about how we are doing in a project or initiative we really started two years ago, which was to take the client selection to a client where we worked with the client that valued high-quality exceptional service, and we're not just at the low price. And that client selection is something we've been working through. I would say by the end of the third quarter, in other words, there were several of those situations that we transitioned out of during the third quarter, but I would say at the end of the third quarter we are 90% done.

I believe there are two or three situations we'll continue to transition out of in the fourth quarter. We are very pleased with the results. It certainly had an effect on our topline, as I mentioned in my scripted comments it's probably exceeds $40 million over the last two years. But we are very pleased with the ramifications of that move, which is very high -- much higher gross profit percentage and it starts moving the firm in the direction we want to. So pricing discipline is very important for us. We will continue to do that, and I look forward to still seeing maybe not quite as dramatic, but still seeing improvements in gross profit percentage from the actions we've taken.

Yes, Mark. And this is Joe. I would add to that the ripple affect on client selection and going after the most profitable businesses that's out there where the customers value our business relationship. I mean, it ripples through the front and the back office. It impacts associate productivity and the amount of billables that they can support, which reduces our real estate cost, which reduces computer expense, which reduces telephone expense. It also is reflected in the amount of back-office personnel that we are required to support the customer base. You see it showing up in DSOs in those customers who appreciate the services that we bring to the table. And at the end of the day, it aids us in retention of the billable consultants and replacement of them.

That's terrific. Is it your sense that the -- you mentioned a couple of times that it's shifting over to more of a candidate-driven market. It is it your sense that across the board, across all types of clients that you're starting to see them open up their wallet a little bit more? Or is it really pockets of clients where you really need to focus?

This is Dave. It's actually pretty consistent across all of our segments. And interestingly, I know there was a lot of discussion in the past several quarters about where technology was, and believe it or not it has even hit technology. The laws of supply and demand have not been suspended. Clearly the customers are seeing the need for improved pay rates in order to attract the quality candidates that they need. There was a lot of discussion over the last couple of years that all the jobs are going to India. Certainly, to some extent we've seen the lower level positions, but again this is a knowledge-based economy.

When you look at the bill rates and you look at the margins, the customers are willing to pay for the talent that they need at the higher levels. And ERP opportunities, business analysis, database management, project management, those are all higher skills and that's where the action is in technology. Finance and Accounting is well advertised. Clearly, a significant shortage is there. In the Health and Life Sciences business unit, we're particularly pleased with what CRS has done. This is a business we started just less than 15 years ago. It's all organic. It's at a $75 million run rate today. And we believe that we're a market leader there and we've benefited from cross selling with CRS, and bringing finance and accounting technology into the same customers, and big pharma and Biotech. So when you look at what's happening today there's no question that the skills that are in demand are the higher skills, the knowledge-based skills, and that's right in the sweet spot of where we are.

Right. So how much more can the gross -- the flex gross margins go up?

How much more? Well, we continue to work on pricing discipline. We continue to believe that they will improve. To try to even guess how much further they will go up that's going to be difficult. They should improve in the fourth quarter. As you know, in the first quarter we have payroll picture and things that come into play. But certainly over a year-over-average basis I still look for marked improvement in what we're doing.

Something similar to what we saw this year relative to last year?

That would be nice.

That would be nice. But that will be also a little optimistic because as we mentioned earlier, we have selected certain clients and transitioned other clients out. And so I think that's had certainly some effect on this, but we would expect -- from Flex we would expect to continue to see solid improvement. Now, of course because of more perm, if we can add that percentage that will increase the overall gross profit percentage and profitability. I think back at the top of the market back in 1999, 2000 we hit actually 45 to 47% gross profit percentages. So if you think in terms of -- of course that was at 22% perm. If you start looking at those kinds of mixes and start playing with it, I think you could see where this could go.

Yes. This is Joe. I would close with also we have a keen focus on gross profit dollars. Because as we go upstream in certain areas and bill rates escalate, on a percentage basis you have to be real careful there. So we're focused on driving gross profit dollars to the bottom-line.

Great. In terms of the capacity that you currently have, it sounds like on the perm side you might be capacity constrained and so you need to hire some additional folks. First of all, correct me if I'm wrong on that. And then secondly on the Flex side do you also need to add some capacity or are you okay there?

Yes. This is Joe. I mean we look at capacity at the market level. So it's really where the opportunity is and where the synergies are taking place. I guess, the best way I can answer that question is when you reflect back on the earlier question about CRS and HIM, and looking at the sequential or the year-over-year growth that's taken place in those units, it's because when we gain a certain mass you get that momentum from that mass. So what we do as we analyze our overall population and we're confident, I mean this isn't something that you start and stop, this is basically an ongoing evolution. We have all of our managers evaluating talent in the marketplace. And so I would say from a search standpoint we add capacity? No, we have bandwidth from us, from a search standpoint. We have people who are at different stages of their development and tenure with the firm.

I would add to that, Tobey, this is Bill. That -- if you would look strictly at the numbers, and which it would be revenue per sales associate, we are near all-time record-highs. However, what we have done in the last three to four years, which bringing in new front end systems, bringing in additional sophisticated tools in order that our associates maybe as productive as possible, we're not sure where the maximum is. We do know though that it is time to -- as we have -- we look out into the future, we do know that it's time for us to continue to add people.

We watch very closely those that are successful, we retain and promote and provide all of those accoutrements that you can to someone successful, and those that are not successful we make sure that we transition them out very quickly.

40% of our sales population has been with the firm greater than four years. Those people are obviously closer to capacity because of the relationships and the footprint that they have.

The other 60% of our sales force is divided between people that have been here less than two years and people who've been here two to four years. So there's a constant balance there. We have different attrition in each one of those groups so that's how we look at our sales force. We look at people less than two years, two to four years, and then greater to four years, because history has proven to us, as we went through our human capital study, that when people are here greater than four years, the attrition rate of those individuals decreases substantially.

Do you have the organic revenue growth numbers for the individual divisions?

This is Bill. As we have indicated before, it's very hard because we integrate these in very quickly. However, if I were to do some rough math, which is to say when we did -- before we did our first acquisition, we were at about $125 million a quarter, and when we look in that Hall Kinion was 130 million that we purchased and VISTA was 50 million, and then we had run off approximately 30 to 40 million of that business, that gets me to about $160 million a quarter, that means there is $47 million that is organic growth, which is about 15% organic growth over the last two years. And so, I'm telling you how we do it, because it's so hard our records don't -- because of the way we integrate this fully into our systems, we don't have that precisely.

Okay. And in terms of F&A should -- you mentioned, the mortgage business dropping off a little bit. How big is the mortgage business at this point?

Well, as you know, when we did the Hall Kinion and we brought the on-staff group, and they're really related to financial institutions. We also had some -- a good percentage of mortgage-related activity. So the refi business has slowed down, the origination business is also a little bit slower nowadays, but the servicing business continues. We would say that the mortgage business itself would be somewhere around $5 to $8 million on a quarterly basis.

Super. I'll let Tobey ask some more questions and I'll jump back on.

Okay. Thank you.

And indeed your next question does come from Tobey Sommer with SunTrust Robinson Humphrey.

Well, thanks. I had a question regarding bill pay rate trends, in -- specifically I think in the nurse staffing unit. I was wondering if you could comment on those because I see your gross margin performed well. And I wanted to get a sense for the bill pay rates.

The -- this is Bill. When you look at that group, remember what we have been doing. We haveabout 80% of that business is per diem business and approximately 20% of that business is through our international sourcing. Those are more contract basis and longer-term. When I look at nursing itself, the average bill rate per hour is approximately $39 an hour and so that pays the approximate bill rate. And look at what we did in the press release at the GP and therefore compute what the average pay rate with the -- as you see it. That business -- because of the international sourcing continues. We have a full pipeline, as Joe mentioned earlier and that's continuing to grow. We're starting to gain good momentum in that area. And we're very pleased with how that's going.

Would you describe -- is it a market that you're getting bill rate increases in currently?

Well, it's pretty flat. As I look across the last 1.5 years, I would say Q3 2004 was $37.48. In this quarter it's $38.92. So you're looking at $1.50. So it's up slightly.

Okay.

But I wouldn't want to call it dramatic.

Sure. And then in -- I was wondering if you could give us the monthly revenue kind of trends by segment if you happen to have those, and maybe what early read is on -- at least the first couple of weeks of October?

Well, we said in my remarks that the month of October was the best month in the history of the firm. In fact, every week of the month of October was near the highest -- the high watermark of where we are. So generally speaking, we're very pleased, particularly when you look at that -- what October has done and realize, thought, that we have a billing day constraint in Q4 versus Q3. Billing day should be around 60 in Q4 and there were 64 in Q3.

As I mentioned in my remarks, we expect most of the units to be flat to up slightly. I think the only one we said may have a little bit of an issue was nursing. And I think we were most bullish on clinical research and scientific technology may be up some. Finance and Accounting as an interesting story, Sarbanes-Oxley, we believe is about 5% of our revenue. And we've think that this is an interesting situation because we saw some of it last year in the fourth quarter, we think that there will be some surge of activity in November and December as management go through their assessment. They've already designed their processes and procedures. They had to test them and get ready for their assessment so in later part of the quarters and of course early January, mid-January of next year there will be some activity. So generally speaking, that's where we see it, Tobey.

And just to follow-up on Sarbanes-Oxley, I guess from what I recall of prior quarters, this maybe 4 and change percent of revenue, does that represent the high mark even relative to when people are going through their first year of the larger companies were going through their first year of compliance testing?

It would probably be - it's the high water mark for us, yes. Whether it is throughout the entire industry, I don't know. But we saw some very good activity in Q3, and you see this expanding a little bit. So you have technology being part of the play, you have risk-management, internal audits, the ripple effect of all of this activity, as you look at all that together, I think you are seeing a little bit more of a sustained effort by the firms and they are bringing in outsiders as this activity ripples through their organizations.

Thank you very much.

Thank you, Toby.

(Operator Instructions). And you have another follow-up from Mark Marcon.

I was wondering with regards to the additions in terms of search, as we think about your operating expenses, how much of -- should that be balanced across the year in terms of the pick-up there? Or is it going to be front loaded in either this quarter or in the first quarter of next year? How should we think about that?

This is Joe. It's balanced. So the way that we -- we work off of a 12 month rolling forecast as part of our financial model, so that we can really understand what impacts we can expect down future quarters, as well as -- So what we're looking at when we look at any headcount additions as we're driving in anticipations on productivity ramps of existing, which helps start to fund bringing in the new people that was Bill earlier point now continuing to reinvest in our sales force. So, we do it from more from a balanced approach and I think that would be reflective of if you were to look at what our year-over-year headcount increases have been and what our headcount increase has been over the course of the last two years, as Dave mentioned. Head count's up 50% over the last two years, while operating expenses have decreased 310 basis points. So we're constantly balancing those things, which is why I provided the guidance through 2005. We're keeping operating expenses below 28%.

Great. And then with regards to -- going back to Tobey's original question with regard to acquisitions, would you envision doing something that would be smaller in line like VISTA or is it possible that you'd do something that would be Macki(ph) like?

Mark, this is Dave. We've seen them all the way from $10 million to 300 plus. Each one of them has their own unique characteristics, each one is assessed against the criteria we gave you earlier. First and foremost the people in the culture and then measuring it against our need and the market match and then of course the economics. So I wouldn't say that a large transaction is something that we would or would not do. We would certainly consider it.

I think we've demonstrated our ability to execute those transactions successfully, integrate them and derive the return on them. And at the same time, we're not out looking just to get something large. We want to make sure that whatever we do is going to be a good fit and it's going to give a good return based on invested capital. We have demonstrated we can grow organically. We've demonstrated that we can acquire and integrate successfully.

We don't have to do a transaction, which, as Joe mentioned, we had seven in the pipe as we're coming out of '03. We still have a number that is still on the pipeline, but many of those we've terminated discussions on for a number of different reasons. So one of the commitments that we made over the past couple of years is that we wouldn't do a transaction unless it made sense to do so. We were not going to lose our discipline and I think we've delivered on that promise.

That's terrific. In terms of gaps that you might have geographically, can you enlighten us in terms of where those might be?

It's certain markets. Midwest, there's some fill in markets we would like to see in technology. And then from there you go geographically looking at individual markets. Some may be stronger than others, but I would say Midwest as a whole would be an area we would have a keen interest in.

Okay. And we probably shouldn't anticipate any new segments, or how should we think about that?

It's not likely that we would do it. As a rule, it's difficult to enter a new segment without any confidence in it. And you're making a big bet on management. We defined staffing particularly the professional and technical staffing, I think our diversified service offering has demonstrated that we can manage some pretty sophisticated businesses.

Each one of those has a business model that's a little bit different than the others. So if you think about where we are today, we probably have seven or eight different business models that we're managing across all the different skill spectrums. With that being said, we're confident that we can handle a staffing firm that would be in the professional or technical segment, one that would be a stretch, we wouldn't -- probably not do that. We really don't see the need given where we are market share and where the opportunities are.

Great. I'll follow-up with some more questions offline. Thank you.

Thank you.

And that does conclude your questions for today.

All right. We want to express our appreciation again to all of our associates and -- for their efforts and our consultants and customers. It's been a great quarter. And we're thrilled with what we've accomplished yet there's still quite a bit to be done. So we appreciate your interest in Kforce and we look forward to speaking to you again with our fourth quarter results. Thank you.

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