Kforce Inc (KFRC) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Kforce fourth quarter 2005 earnings conference call. Today's call is being recorded. Now for opening remarks and introduction, I would like to turn the call over to the Senior Vice President of Investor Relations, Mr. Michael Blackman. Please go ahead sir.

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 and Chief Executive Officer.

Thank you, Michael. You can find additional information about Kforce in our 10-Q, 10-K and 8-K filings with the SEC. Please note that we have significantly increased our disclosure in our release, including information we previously included in our prepared remarks. Our hope is that this will improve the dissemination of information about our performance and the quality of this call.

The fourth quarter marks the end of a three-year plan we embarked on in the first quarter of 2003. During that period, we have seen our stock rise 164%, which is first in our peer group, earnings increase from $0.01 to $0.17, and revenue increase from 123.7 to 203.6 million for the quarter.

Since 1999, we have repurchased over 20 million shares at an average price of $5.64, yielding an approximate 130% return to our shareholders, based on today's closing price. While we did not achieve all of our aggressive goals from our plan, we are extremely pleased with our accomplishments and extend our appreciation to our associates, consultants and clients.

The fourth quarter was a strong quarter for Kforce, with revenues up to historical highs on a billing day basis and EPS of $0.17. Revenues for the year exceeded 800 million, and earnings per share were $0.55.

During the past 12 months, the Firm added two new sell-side analysts, and we are actively seeking to broaden our coverage. Today we are followed by four sell-side analysts, all carrying their highest rating. Overall, a very good year for Kforce, and we are very pleased with our results.

I will turn the call over to our CFO, Joe Liberatore, who will provide his comments, and then Bill Sanders, Kforce President, will provide additional insights on operating trends and expectations. I will then conclude. Joe?

Thank you, Dave, and thanks to all of you for your interest in Kforce. Before I discuss fourth-quarter results, I'd like to reflect on the financial accomplishments of the full-year 2005.

Total revenues for the year of 802.3 million have increased 21.3% from 2004, and we are within $3 million of the Firm's all-time high revenues of 805 million in 2000. Net income, if you exclude the effect of the reversal of our tax valuation reserve on 2004 net income, was a record 22.3 million in 2005.

Positive trends continued, particularly our ability to generate cash, as evidenced by EBITDA of 49.1 million for the year, a 149% improvement from 19.7 million in 2004. We retained much of this cash flow in 2005 as we utilized our tax loss carryforwards during the year, and have approximately 46 million of federal and 55 million in state tax loss carryforwards available for use in 2006 and future years, representing over 18 million in cash tax savings.

Our ability to grow revenue profitably, both organically and through strategic, efficiently-integrated acquisitions, has positioned us to take advantage of opportunities across our service offerings over the upcoming years, even through times of economic transition.

Our translation of topline growth to bottom-line profitability is being reflected in the market, as the Firm's stock hit a five-year price high in January, and the Firm's market capitalization reached approximately 500 million.

Now, on to the quarterly results. Total revenues in Q4 2005 of 203.6 million represent an increase of 3% sequentially on a billing day basis. In fact, revenue per billing day of 3,338,000 reached an all-time high for the second straight quarter.

Year-over-year, our revenues per billing day have increased 8.8%. The sequential billing day increase was driven primarily by our flexible staffing business. Search revenues are up 14.5% year-over-year, and revenues of 13.4 million for Q4 were down for the first time in eight quarters. Searches increased as a percentage of total revenues year-over-year from 6.1% to 6.6%.

Net income for the quarter of 6.9 million was $0.17 per share, which equals the results in Q3, despite the reduction in billing days and associated 3.7 million decrease in revenues. As stated, we continue to focus on profitable revenue growth and cash generation.

EBITDA, an indication of cash earnings, was 14.7 million, or $0.36 per share, which was an all-time high for the Firm. We are very pleased with the year-over-year EBITDA growth of 95.1%, and are optimistic that these positive trends will continue in 2006.

Overall, positive operating trends for the Firm continued in Q4 2005, reflective of our improving profitability.

We continue to make excellent progress towards achieving our peak cycle target earnings before taxes of 8 to 10% of revenues. Earnings before taxes of 11.4 million for the quarter were 5.6% of revenues and have improved 300 basis points from Q4 2004, and are roughly equal to the earnings before taxes generated for the entire year of 2004.

Operating income for the quarter of 11.8 million is now 5.8% of total revenues, and reflects another high watermark for the Firm. Operating income has improved 290 basis points from 5.5 million in Q4 2004.

We believe we have built a firm that can continue to extract leverage from its operating structure as revenues continue to grow, and to react quickly to changes in market conditions and optimize profits.

A key driver contributing to the current positive trends continues to be our ability to manage gross margins through -- one, a focus on spread between bill rates and pay rates that exist in clients; two, selectively deploying our assets to those clients that understand, appreciate and are willing to pay for the value proposition we deliver in this supply-constrained market; and three, exiting client relationships where the only differentiator is price.

As a result, our gross profit percentage has improved significantly over the past year across all business lines. Our gross profit percentage of 33.2% has improved 160 basis points year-over-year and 20 basis points sequentially. Our flex gross profit percentage of 28.5% in Q4 2005 improved 40 basis points sequentially and 140 basis points year-over-year. We will continue to focus on this area of our business to drive continued improvements, though we expect Q1 margins to be lower as the result of the annual impact of payroll taxes at the beginning of the year. However, over the course of 2006, we will continue to expect an additional degree of pricing leverage as the market remains supply constrained.

The Firm's ability to continue to improve bottom-line results is also attributable to the 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, which continues near an all-time low, and an industry-leading DSO of 37 days. Our expectation of continued improvements in operating efficiency, coupled with careful management of sales performance metrics, will allow us to accelerate the hiring of sales and sales support personnel with minimal effect on earnings.

Continued improvements will also support 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 impacts on profitability. As a result, we expect capital expenditures to be the same levels in 2006 as 2005.

We expect operating expenses to remain near or below these low levels moving forward, though we expect some impact in Q1 as a result of higher payroll tax and costs associated with the integration of Pinkerton.

Productivity levels in our sales force remained near all-time highs in Q4 2005. Revenue per employee has increased 5.4% from a year ago. The quality of the revenue stream also continues to improve, as gross profit per person has improved 10.8% over the same period.

Cash flows from operations for the Firm in Q4 hit an all-time high. The strong cash flow in Q4 allowed the Firm to further strengthen an already conservative balance sheet. At the end of the fourth quarter, cash on hand totaled 37.1 million, and bank debt outstanding under our credit facility totaled 35 million.

The Firm added to its cash balance in January, which, together with an all-time high in borrowing capacity, allowed us to purchase Pinkerton Computer Consultants. Our bank debt outstanding under our credit facility after this $60 million acquisition totaled 53 million, and cash on hand totaled 1.1 million. We are comfortable with the current debt balance and confident in our ability to generate sufficient cash to service and pay down this debt, as well as invest in our growing business. We also expect to substantially integrate this acquisition by March 31, and for it to be accretive in 2006.

Looking forward to the first quarter, we expect to continue to realize the benefit of the leverage in our operating platform. We expect first-quarter earnings per share will be negatively impacted by $0.05 to $0.06 of payroll taxes, which historically impact the first quarter most significantly, and $0.01 to $0.02 of integration costs. Therefore, our expectations are first-quarter revenues in the 222 million to 228 million range, and earnings per share for Q1 of $0.11 to $0.14, which reflects approximately 41 million weighted average diluted shares outstanding.

The Firm is required on a move-forward basis under 123R to expense equity compensation. There will be no impact to Q1 earnings per share guidance.

From a financial perspective, 2005 was very successful and provides these platform upon which the Firm can confidently grow. Our balance sheet remains strong and our results demonstrate we are actively managing our operating platform. 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 Q4 2005 results, we are pleased the Firm achieved all-time quarterly highs for revenue per billing day and net income. However, our talented and competitive team is not satisfied.

I would like to now turn the call over to Bill Sanders, our President. Bill?

Thank you, Joe. Let me begin by personally welcoming our new business partners from Pinkerton Computer Consultants. We are excited about this acquisition, and we believe the employees and clients of Pinkerton will be a great complement to our existing business. The integration of this business is well underway and we expect to be substantially complete with the integration by the end of the first quarter. In fact, last week, the day after the close, all Pinkerton management and sales associates were in Tampa for our welcome aboard meeting. Each person left last Friday with an understanding of our culture, and their roles, responsibilities and compensation plan.

We are excited about the strong leadership and sales team from Pinkerton that will be joining us, including Doug Sabo, who will be the market President in one of Kforce's largest markets, which is New York/New Jersey, and Bill Parker, who will be leading the Kforce Government Solutions Group as its President.

Now to provide you some details on the quarter's results. We had excellent results in staffing, with less success in the lumpy revenues from the direct hire business. We are particularly proud to have hit another all-time high on a revenue per billing day basis. I support Joe's comments as to how much we have accomplished over the past year, and the fact that we are better prepared than ever before to take advantage of changes in the marketplace and deliver exceptional results for our clients and shareholders.

We believe our diverse service offerings of Technology, Finance and Accounting, and the industry specialties of HLS, and now our Government Solutions Group, uniquely positions Kforce in the areas that will be in greatest demand for the foreseeable future.

The success of our business is also dependent upon our ability to attract qualified candidates. We believe the supply demand curve has shifted back to the advantage of the candidates in 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 per billing day growth in the quarter. There were 61 billing days in the fourth quarter, versus 64 days in the third quarter and 62 days in Q4 of 2004.

Our across-the-board improvement was led by our Technology segment, which grew 4.1%, followed by Finance and Accounting at 3%, and HLS at 2.3%. The HLS growth was fueled by another strong quarter of growth in our clinical research and health information management businesses.

On a year-over-year basis, Technology flex revenue per billing day grew 9.7%, FA flex grew 1%, and HLS flex grew 15.2%. These are historical highs in flex revenues for all business segments on a billing day basis. We are also pleased to note that our focus on increasing the business mix to higher-level [assignments] has resulted in an average 13.1% increase in bill rates year-over-year.

Search revenues sequentially declined 5.1%, the first time in eight quarters, but are up 14.5% year-over-year. Search is 6.6% of total revenues. We remain optimistic about the growth opportunities in search, and target search at 10 to 15% of total revenues at the peak of this cycle. We had a strong beginning in search in the first quarter of 2006, and we believe that revenues will resume their upward momentum.

We have been somewhat deliberate on ramping up search recruiters, waiting for clear evidence of growth potential and seeking a return before extensive investment. We believe the job order trends now support more rapid acceleration of hiring, as we staff five new search power centers. Accordingly, we began to aggressively hire search recruiters in the fourth quarter and in the first quarter, to take advantage of the improving market for direct hires. Our search recruiters headcount is now 15.6% more than a year ago.

Now to provide some additional insight on a business unit basis. Total revenue for Technology, which is our largest business unit, comprising 46% of Firm revenues, decreased 1.2% sequentially. Flex revenue per billing day, however, increased 4.1%. Gross billable hours were flat sequentially despite the decrease in billing days, and flex margins were essentially flat.

On a year-over-year basis, hours were up 2.9% and flex margins improved 90 basis points. Bill rates for this business unit have improved by 5.3% over the past year and, along with a management of pay rates, are driving our improving margins.

Technology search decreased sequentially 9.3%, but has increased 23.7% year-over-year. We see the market for technology staffing continuing to improve, especially in the higher-end roles, which should continue to drive margin improvements. Skill sets in demand continue to be ERP, especially in Oracle and PeopleSoft, .net, DDAs and business analysts. We expect Technology revenues in Q1 will be up on both a billing day basis and in total over Q4. We also expect the spread between bill rate and pay rate to be stable to improving, excluding the impact of first-quarter payroll taxes, as we continue to focus on margin improvement through pricing discipline.

Total revenue for Finance and Accounting, which comprises 30% of Firm revenues, declined 2.2% sequentially and is flat compared to last year's record performance. Flex revenue per billing day increased 3% sequentially. Flex margins were up sequentially by 110 basis points, as we continue to make significant [billing] improvements. Bill rate has improved 19.5% year-over-year. This increase is the result of the combination of growth in our higher-end assignments, while our professional clerical finance business has been down over the past year as the result of a drop-off in mortgage-related staffing needs, and a refocusing of efforts by our OnStaff group to higher-margin business.

Finance and Accounting search declined by 4.2% sequentially, but was up year-over-year by 7.2%. The demand for F&A staffing remains strong, and cyclical trends overall remain positive, as Sarbanes-Oxley and its (indiscernible) continue. Much like Technology, we believe F&A will improve on a billing day basis in Q1, and in total, we expect revenues to improve in the first quarter.

Our third business segment is Health and Life Sciences, which represents 24% of revenues and has been our most consistent revenue grower, declining 2.3% sequentially as a result of the decline in billing days. Flex revenue per billing day, however, increased 2.3% sequentially and is up 15.2% year-over-year.

Clinical research staffing, or CRS, is now just over 41% of the HLS segment, generating approximately 80 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 provides solutions to the clinical research areas of the FDA approval process, to pharm, biopharma, and medical device clients. CRS had sequential growth in flex revenue in Q4 of 2.5% and year-over-year growth of 28.4%. Flex revenue per billing day increased 7.5% sequentially and 30.5% year-over-year. We expect CRS to grow once again in Q1.

Revenues for our healthcare nursing unit declined 12.9% sequentially in Q4. We continue to focus our nursing business towards longer-term contract assignments, with placements 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.

On the other hand, we have not seen the inflection upwards of per diem nurse staffing, and thus expect Q1 revenues to be flat to slightly down in this business unit.

HIM revenues were flat sequentially and up 27.8% year-over-year. On a billing day basis, flex revenue was up 3.9% sequentially and 30.5% 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 first quarter.

Revenues for our scientific staffing group decreased 4% sequentially and was flat on a year-over-year basis. Flex revenue per billing day was up 2.7% sequentially. [Data] order trends are increasing and activity levels are improving for scientific and lab professionals. However, we expect the first quarter to be revenue flat, as this group aggressively manages its client portfolio for improved profitability.

Overall, sales associate productivity continues near record-high levels, although we believe these productivity levels have begun to moderate as we accelerated hiring and training, offset by improvement in productivity due to the significant investments we have made over the last two years in a sales support structure, which we believe is among the best in the industry.

We increased the size of our sales force by approximately 4% in the quarter, and plan to continue to add and to 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 we offer our clients the best candidate in the shortest time possible. Our formula is to hire and retain great people and provide them the highest-quality training and tools in order for us to maximize productivity.

As for revenue trends, on a same-day billing day basis, October was the best month for flex revenue in the Firm's history, November was down slightly, and then December was again a record month. We have been in the typical pattern in January as activity declined from year-end levels, largely as the result of year-end assignment (indiscernible) technology. Though we still only have limited data, the rebound in revenues in Q1 appears to be occurring faster than last year.

As I stated earlier, we have also seen a promising start in our search business in Q1 as well. On a year-over-year billing day basis, January flex revenues are up over 13%, and search revenues are up over 36%, with the Vista acquisition accounting for a portion of the flex revenue growth.

Based on these trends, we expect revenues in the range of 222 to 228 million for the first quarter, which has 63 billing days. This represents a range of 208 to 213 million in [organic] revenues, and a range of 14 to 15 million of revenues for the two months of Pinkerton. We expect runoff for Pinkerton revenues to be less than 10% for 2006. As you know, these estimates are subject to the risks mentioned at the beginning of this call.

In the last two years we have focused on customer selection and profitability. We have achieved record revenues and have substantially completed our efforts to reduce revenues from high-volume, low-margin clients, which resulted in a revenue loss of approximately 40-plus million, but helped increase our flex gross profit percentages 120 basis points in 2005. Since 2003 we have increased the number of associates by 50%, revenue by almost 60%, successfully integrated two acquisitions, and are successfully completing our third integration. As we enter 2006, we are very optimistic. We believe an intense focus on direct hire revenues, strong pricing discipline and superior execution will allow us to drive revenue growth with margin expansion.

Thank you very much for your continued interest in Kforce. I will now turn it back over to our CEO, Dave Dunkel.

Thank you, Bill. As I mentioned at the beginning of the call, the end of 2005 marks the end of our prior three-year plan. We now embark on our next three-year journey, excited about our prospects and the future of Kforce professional staffing.

We are off to great start with the addition of our new partners from Pinkerton, who have just left our welcome aboard meeting in Tampa and are now back in their markets operating as Kforce Technology Services and Kforce Government Solutions. Welcome again to all of you.

Looking forward, we are optimistic about the prospects for professional and technical staffing, and Kforce specifically, as the business cycle evolves. We believe we are still early in the cycle and, therefore, we are investing in additional associate hiring in all of our services, particularly search.

Additionally, we are training our associates and equipping them with tools to further accelerate overall productivity and deliver exceptional service to our customers.

Our performance over the past few years, and in particular last year, has been strong. If we continue this high level of performance as this economic cycle evolves, I expect our future valuation multiple will achieve a premium level. Clearly, Kforce has moved into the top tier of the professional staffing segment, with a strong brand recognition, diversified service offerings and outstanding financial performance. Once again, we wish to express our appreciation to our field and corporate teams, our consultants and our clients for allowing us the privilege of serving them. Lisa?

(OPERATOR INSTRUCTIONS). Toby Sommer, SunTrust Robinson Humphrey.

I wanted to talk about perm for a little bit. [Growth is decelerating], and I think you hit on it that you're accelerating hiring heading out of the fourth quarter and into the first. But I wanted to get a sense for what hiring was like in search in the previous quarters. Is the somewhat lower growth in the fourth a function of not a lot of hiring in the first and second? Could you walk us through how that may have played out?

We have done moderate hiring as we have gone through the prior year, year and a half, as we looked at search. But the net increase in search recruiters has also been somewhat moderate. And as we look at that, we've had eight straight quarters of improvement, and I think this quarter was down. Is there anything particularly important or that stands out that this quarter would be less than the eight straight quarters that went up? Nothing in particular is pointed out to me. I also shared with you that the first month of January we were up 36%. So I think it was just a little bit of a lull in timing, and I don't see anything particularly trend-wise in that number.

Anything from a geographic perspective in terms of either strength or weakness?

No, we certainly are very strong in the East, especially the Northeast. But I would say it's somewhat the same across the board. I don't see any particular geographic issues that I would point out to you.

In the last conference call you had mentioned taking a look at a number of potential acquisition targets, and then at that time you had passed on all of those. I was wondering if you could comment about the state of the pipeline and activity in the marketplace.

The consummation of the Pinkerton transaction was our third transaction in the last five years now. One of the things that we committed to was a disciplined and focus, and I think that we have maintained that. One of the key things that we are focused on, of course, is the people and the culture. We believe that Pinkerton fits our culture very well, and we're very pleased with the great people on their team. With that said, we continue to evaluate our pipeline. Clearly, we're going to evaluate it against our geographical needs and service needs. We're going to maintain that discipline. The pipeline, I would say, is not any greater than it's ever been and not any worse, so I'd say it's about average.

Turning to Pinkerton, I'll ask one last question and then I'll get back in the queue. I think you mentioned perhaps a $0.01 or $0.02 impact on the quarter. I was wondering two things. Would that impact not be there in the second quarter? And maybe could you give any color, quantify the acquisition costs as opposed to whatever SG&A and other expenses you may be able to pull out (indiscernible)?

As I mentioned in my comments, we believe during Q1 we'll be substantially complete with the acquisition, which means we'll be absorbing the majority of the integration costs in the first quarter. There might be some slight trailing issues, but not anything that would be of a material nature.

What those reflect are maintaining back-office functions for Pinkerton up until we actually bring their back-office functions to Tampa, so there's some redundant corporate activities. We had the welcome aboard meeting, which we mentioned to you as well. There will be ongoing training and integration activities related to the field. And as Joe mentioned, we expect that the majority of those will be complete by 3/31.

I'll ask one last question and I'll get back in queue. You've done a good job of increasing flex gross margins through, I'm sure, both a rigorous internal process of selling new customers, as well as looking at existing ones and pruning where needed. I'm wondering if you could comment on what the market is like in your different end markets for those higher-margin customers at this point, now that you've maybe lapsed some of this pruning effort, if there's an opportunity to grow perhaps at a slightly faster pace than in recent quarters.

It's a very interesting story out there. While there are still some people, some clients and companies in the United States really becoming fed up with the vendor management systems and the pricing activities, and hiring managers and working around procurement, and then there are certain other companies who are going just the opposite way, where they are putting it in VMS systems and procurement has the upper hand. It's really moving around.

However, in Finance and Accounting and most of our industry specialties, there is a real constraint of candidates out there. And there is a lot of opportunity, and we expect pricing to remain very disciplined, and we think we can continue to improve in that area.

In Technology, it has not reached the peak levels that we have seen in some of the other up cycles, and therefore there is still an adequate supply of technology people in most skill sets. There certainly are some skill sets that there is high demand. But at the moment, we continue to believe that there will be good pricing activity that will be adequate to meet the needs that we are requiring for our placement.

Mark Marcon, Robert W. Baird.

Congratulations on the year. Wondering with regards to -- on the tech side, how much did Vista contribute in the quarter?

That's very difficult. We acquired them, as you know, a year ago, and then we melded them into our Washington D.C. office. And how many of those clients still exist and have we built or have we grown? It's very, very difficult to know. You could take a number around 40 million and spread that among quarters if you wanted to; I think that is very hypothetical and has a lot of assumptions. It's probably not very good. But that would be the type of dollar amount that you could spread around, I guess.

That's the reason why I was asking, just trying to get your sense in terms of what that could be. In terms of F&A, it's kind of interesting, just looking at the trends between the quarters and comparing and contrasting the hours on the flex side relative to the revenues in the bill rates. And it seems like you're being very selective in terms of going after the best potential clients. Is that a correct interpretation? Or are you seeing any sort of decline in some of the more clerical -- and I guess you mentioned [mortgage] areas across the board? How should we think about that? Is it just mortgage that's falling off, or is there anything else that's going on?

There's two pieces of information there. There's our pure Finance and Accounting activities, which are growing because of Sarbanes-Oxley and the need for higher skill set individuals in Finance and Accounting. We are seeing higher bill rates and better margins. At the same time, we have our -- are doing a real diligent work in our OnStaff group, which is the higher-end clerical, financial, people in finance, insurance, mortgage banking activities. And we are being very aggressive in maintaining that client portfolio to maximize profitability there. So you have a couple of things going on that you're witnessing. We're doing the same thing in scientific, by the way. But that's what you're seeing in Finance and Accounting as you view the change in bill rate and hourly rates.

How aggressively are you going to be hiring on the perm side? How much -- in order to achieve your goal of -- in terms of perm mix, how much more are you going to have to increase your perm staff at this point?

First of all, we're very bullish on perm. As I said, we have been watching this very closely. We didn't want to jump out too quickly and not have a return on our investment. As we have been watching our job order trends, we started -- and certainly in the fourth quarter building what we call some additional power centers, which are centers of excellence, where we bring a significant number of people together in regional locales to pursue the direct hire business. So we are real pleased with that. We have -- we're up 15.6% year-over-year. Most of that is in the latter half of the fourth quarter and in this first quarter. While we continue to do that, we will continue to hire very aggressively. As we have mentioned, we are looking for 10% to 15% of our total revenues to be in search. So we will continue to be aggressive in that area. The actual number of how many people that takes is significantly more people than we have at the moment.

How many people do you have now in perm?

We'd rather not give that actual amount right now, but I think Joe is going to -- can give you a little bit more information.

I can give you a little bit more, because part of this is productivity based upon tenure -- really drives it. So to answer that question -- it's a tough question to answer, because it depends on what point in the cycle we're at.

To give you a little bit of color on that, if we look at our more seasoned person, somebody that has been with Kforce for, we'll say more than four years, the one-year person in comparison to that person is running at about 25% of contribution. And then we start to segment it and start to look at our one to three-year people; they're running at about 33 to 40% of contribution. So we've added a lot of people into the front-end of that pipeline, but search is a very relationship-driven business, which is -- we can speculate all day long -- which has some of the impact on Q4 for us, because search -- the most difficult time for search transactions is in the fourth quarter, because if you don't have those long-standing client relationships that you can get transactions consummated, with vacations going on and holiday impact. So we've been adding people into that front-end of the pipeline, and those people now have more seasoning underneath their belt. But we're going to continue to accelerate into the front-end of the pipeline.

So it sounds -- I guess how much room do you have for productivity growth within your perm staff in terms of trying to get --

If you were to look at our segmentation without going into specific ratios of how our population breaks out, we have capacity within our pharma operations based upon individuals that we've hired over the course of the last 18 months. But again, it doesn't happen all of a sudden when they go to year two, that now they start to exponentially perform and contribute. (multiple speakers) we continue to hire into the front-end.

One of the things that as we look back on '04, if there's anything that we were guilty of it was probably being too conservative -- or in '05 rather -- on the search side. We look -- tech search really didn't start to materialize until about the second quarter or so of '05. And we've now seen the tech search, the breadth and depth of tech search joining F&A search now suggests that we're entering a much more stable and more positive part of the cycle. Therefore, as we look back on it, we probably could have been more aggressive in ejecting additional resources. With that said, we have been hiring; however, as Bill said, we're going to accelerate that hiring, because we do see that opportunity. And we're going to focus them in areas that we believe we can get a faster and higher return.

Great. With regards to Pinkerton, aside from melding the back-office, can you talk a little bit more about the integration plan? And what sort of margins should we expect out of Pinkerton in terms of the operations (indiscernible) they currently exist and then maybe going forward?

We are going to take the commercial side, as Dave calls it, which is made up of IT staffing and their Provident division, which is in Manila -- we are going to meld that into our Technology group. That is approximately 67% of their revenue, 61% of their EBIT. And we will totally integrate those, co-locate and co-manage those. As I indicated in my prepared remarks, Doug Sabo is going to -- their President, is going to be the President of that particular marketplace for us. So it will be a complete integration.

The Government Solutions Group, which we now call the Kforce KGS group -- which was 30% of their revenue, (technical difficulty) of their EBIT -- that's located primarily in Washington D.C. in their own specific location. It's a solutions group. While we are going to work very close together and I think they will be great synergies, we are not going to co-locate those two particular groups.

From the margin standpoint, their bill rates were on par with ours, and their margins were also on par with ours, if you compare those to our Northeastern group. So we see pretty solid bill rates and margins coming into the Kforce combination.

So prior to the co-location, the gross and operating margins would be roughly equivalent?

Yes.

Josh Vogel, Sidoti & Co.

A couple of my questions have been asked, but can you share with us your hourly flex bill rates achieved across each segment?

Across each segment? Okay. The average bill rates for Finance and Accounting in Q4 were $32.45, Technology $60.61, HLS $46.16, or an average of $45.80.

And looking at F&A, you had nice growth year-over-year the first nine months. Is there any fundamental reason for the slowdown in the fourth quarter in year-over-year growth?

There wasn't a slowdown on a billing day basis, it was only because there were less billing days with their less gross amount. So it continued to accelerate.

With Pinkerton aside, you guys have a history of successively culling out lower-margin business. Was there any business that you culled out in the fourth quarter?

Yes, we continued to cull out business. Some of that was in Finance and Accounting. But we continue to scrutinize those. We are basically -- we are primarily or substantially complete, I guess I would say, but we still have some of that activity going on in a couple of our units.

And approximately how much was culled out in the fourth quarter?

I can't -- I can tell you it's 40-plus million over the last two years. I don't have an exact figure on the last quarter all by itself.

Mike Carney, Aperion.

A couple of questions. First on the IT side, if I look at IT gross profit year-over-year, it looks like at 11 to 12% year-over-year growth that the last couple quarters at least, that the business is not really growing on a topline basis, even at gross profit. So is that something in the market? Or, I know that, obviously, with considerable acquisitions that you have been making, you still feel very strongly about the IT business. Or is it that in weeding out some of that business, you're actually weeding out business that was just simply unprofitable all the way down to the bottom line, so you're getting rid of it? How should I look at that?

I would say it's a little bit of a combination of both of those, but I'm not sure what you mean by it's not growing, because on a revenue -- on a revenue per billing day basis it continues to grow. Last quarter it was $1,411,000 on a billing day, and this quarter it's 1,467,000.

I guess when I take out -- when I take out the Vista acquisition and I look at just the gross profit, obviously, because you're increasing your margins as you get rid of the lower margin business.

Okay. I don't know how you can take out the Vista acquisition. Generally speaking, we --

I'm sorry; I'm talking about organically, it doesn't look like the business is growing, or de novo, however.

I think you can -- I'm not sure how you draw that particular conclusion. However, are we taking business -- have we taken business the last two years? That $40-plus million is -- the majority of it, or a significant portion of that in Technology it is. In fact, I think we disclosed two or three calls ago that 20 million of it was from one client that was part of the Hall Kinion acquisition. So there is that type of activity. At the same time, we continue to merge offices and develop staff and competency for the combined offices -- the combined teams' expertise. So, I don't necessarily see that it's not growing. However, Technology certainly is not growing as quickly as Finance and Accounting or our CRS units, or HIM units. That would be a true statement.

I'm not trying to beat a dead horse on the perm, but obviously there was, I guess, negative productivity on the sales associates side in the fourth quarter, but it looks like January was very strong productivity growth from perm. And Bill, you mentioned that you were aggressively hiring in perm in the fourth quarter, I think you said. And you said that sales associates were up 4%. I don't know if you meant -- did you mean overall sales associates were up 4%, or was that just in perm?

In perm, through the end of January compared to 12/31/04, we are up 15.6%. A significant portion of that growth, in terms of number of search recruiters, occurred in the fourth quarter and first quarter year-to-date. The 4% that you're referring to was all associates in the entire firm through 12/31/05.

And then I think at the end of the third quarter, you said it was up 8%. So did -- all sales associates.

Up 8% year-over-year?

I believe that was what it was last year. I'm sorry; last quarter, on last quarter's call.

I'm sorry; I don't have that particular quote. If I said that --

Could you just tell me is that -- do you think that you've actually expanded hiring in the fourth quarter, or has it decelerated a little bit?

Hiring has accelerated. That 8% you're probably referring to is sequential growth.

Okay.

I'd have to see it. I'm sorry; I don't have it right in front of me.

That's fine. Joe, you also mentioned that -- did you happen to mention the actual cost for the integration expenses for Pinkerton in the first quarter? Did you say $0.01 to $0.02?

Yes, $0.01 to $0.02.

(OPERATOR INSTRUCTIONS). Mike Fitz, SunTrust Robinson Humphrey.

Just a couple of quick questions. I was wondering if you could comment on the monthly trends you saw on the business, kind of on a same day -- same billing day basis through the quarter, and then maybe into January.

It was a record month in October, it was down slightly in November, was another record month in December, and in January we -- I said in my prepared remarks we were up 13% flex and 36% search.

I apologize; I guess I was trying to get that on a segment basis if possible, a little bit more clarity.

On a segment basis? Boy, that would be a lot of numbers.

Maybe if you could just hit IT and F&A particularly.

In the press release it gives you all those particular numbers. Tell me one more time. On a month (indiscernible). Technology was up 5% in -- you're saying to do this on a billing day basis, month by month. I don't -- that would take me some time to make sure on a billing day basis that I could go through each segment. I've done it on a -- just on a consolidated basis, not on a billing day basis per segment.

It's fine; I can circle back later off the call so we don't waste time. One other question I have is could you just comment on kind of the travel nurse segment, maybe what trends look like in the quarter in that business?

We only have per diem nurses, and those nurses are made up of two components, which is the per diem nurses in the United States and the international sourcing of nurses that we do. International nurses are up to our highest level since we began sourcing. Joe, you want to add onto that?

Currently we're running about 119 nurses on billing. We just had 17 nurses which we delivered to our field operations, which will be added to billing in March. And we just started our February class, which has about another 13 nurses in that class. (multiple speakers) international firm.

On the per diem front, which is another 3000 shifts or so that we will staff, on a daily basis or on a weekly basis, that -- the industry and Kforce continues to struggle. We think we're bumping along the bottom of where that's going to go, but we're not real sure yet when that will take old. But we're certainly pleased with how the international nurse activities are growing.

On the domestic per diem side, what kind of trends are you seeing as far as bill rates and pay rates there?

They continue to hold very stable.

Mark Marcon, Robert W. Baird.

Dave, I wanted to go back to your comments with regards to the pipeline and what you're seeing. Historically you've been quite prudent in terms of not layering on to many acquisitions all at once. And it certainly sounds like with Pinkerton in the Northeast, you're going to go through a fairly comprehensive integration. Wondering -- what's your appetite for doing another acquisition? I know you're seeing a lot of things, but it's about the same amount as what you've seen in the past. Are you anxious to do anything else, or would it have to just be an absolute blockbuster to do something while you're integrating Pinkerton?

No question that one of the considerations is that in the process of integrating Pinkerton, any other opportunity that comes up we would need to evaluate it in the context of what we currently have on our plate and what that opportunity represents to us. I don't think that our past performance has in any way indicated that we would do something stupid, if you will, and go out and try to bite off more than we can chew. Keeping a steady pipeline and recognizing that the realization of any one of these transactions in the pipeline could take anywhere from 90 to 180 days to see them all the way through to fruition. From our standpoint, we believe that it's prudent to continue to maintain an active pipeline.

With that said, I will also say that we don't have anything imminent at this point. And certainly we would balance that against what we have going on with Pinkerton. So I certainly don't want you to get the impression that we're running out and pursuing other transactions aggressively at this point, or would do something that would in any way impair our ability to bring Pinkerton into the fold.

You mentioned that the -- or it was mentioned that the margins pre-integration would be -- are roughly in line with your current margin structure. Post-integration, how much do you think you would add to the contribution in terms of the margins?

As Bill mentioned, the margins are very similar to Kforce margins in that region, which is in the Northeast. He also talked specifically about Government Solutions. One of the things that we dial in to our integration plan -- we expect some revenue runoff. Of course, we consider that in our pricing and return on capital calculations as well. So our goal is to, first and foremost, hold on to the great people from Pinkerton, and second, obviously, to aggressively and diligently integrate the customers that Pinkerton brings to Kforce.

A lot of ways to do that, multiple touch points. We introduce them to additional services from Finance and Accounting. We'll introduce them to Technology search. But there's no question that when you go through an acquisition like this, there are certain risks associated with that revenue stream.

Unlike past acquisitions, we think the margin profile here is very close to Kforce, and Vista was very close as well, and we held onto most of that revenue. But our goal is to identify the customers that are going to value our services and pay market rates for them. We don't want to unnecessarily burden our infrastructure in the interest of having good revenue optics, while at the same time not driving appropriate gross margins and operating margins. So we believe at this point in the cycle, the most prudent thing to do is to aggressively manage our client portfolio to make sure that we are getting the kind of customers that realize the value of our services and will pay for them.

I would add, because a couple of people have asked this -- I'll give you the number. There's no reason not to give you the -- what we anticipate that Pinkerton is going to bring to the table, and that's a margin of around 27.2%.

On the technology services.

27.2 in terms of the gross margin?

Correct.

And if you were -- in our press release you can see we are at 26.8%, so they're very, very close in terms of the GP percentage we expect to get.

And then the operating margin would be roughly equivalent as well?

Well, of course when you're adding $100 million on top of our fixed costs, you would hope that there would be certainly incremental EBIT, EBITDA margin to us, and not the same as -- not an average that we have.

That's what I was trying to get at, was pre and post-integration, just in terms of what the margin contribution would be from the revenues that you've got from Pinkerton.

Nice try, but I think we're only giving one quarter's forecast. And for me try to tell you what would happen for the year would be quite difficult.

I'd go back to what I stated in my comments, is we stated this is an accretive transaction for '06. We'll continue to provide quarter-by-quarter guidance, but we can't break this out and provide annual guidance.

I was just trying to get a sense of where you -- as you made the acquisitions, just where you thought the contribution margin could get to relative to (multiple speakers)

If you look at what we did with Hall Kinion and you look at what we did with Vista, I think we demonstrated our ability to realize the accretion, recognize the synergy savings and get a nice return on capital. So the best predictor is the past, and we've demonstrated that.

We want to thank everyone for your interest in Kforce. We look forward to a very strong first quarter, and look forward to talking with you again in April.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation and you may disconnect your phone lines at this time.