Kforce Inc (KFRC) 2006 Q1 法說會逐字稿

Good day and welcome to the Kforce first quarter 2006 earnings conference call. Today's call is being recorded. And now for opening remarks and introductions I'd like to turn the conference over to Mr. Michael Blackman. Please go ahead.

Great. Good afternoon. And welcome to the call. Before we get started I would like to remind you that this call then contains 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 in on Kforce's 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. Kforce provides extensive disclosure in our release with the hope that this will improve the dissemination of information about our performance in the quality of this call. The first quarter it was a very strong quarter for Kforce with revenues up to historical highs and earnings up 97% year-over-year. We are particularly pleased with our performance in search, up over 25% sequentially and our gross margin performance, up 220 basis points year-over-year. I will turn the call over to our CFO, Joe Liberatore who will provide his comments. Bill Sanders, Kforce's President, will then provide additional insights on operating trends and expectations, and I will then conclude. Joe?

Thank you, Dave. And thanks all of you for your interest in Kforce. We are excited and pleased with our first quarter operating results as the Firm delivered EPS of $0.15 and record revenues of 222.3 million. Net income increased 97% year-over-year to 6.1 million in Q1 2006, as compared to 3.1 million in Q1 2005. EBITDA, an indication of cash earnings, increased 70.7% year-over-year to 13.9 million or $0.34 per share in Q1 2006, as compared to 8.1 million or $0.20 per share in Q1 2005. Q1 2006 earnings per share of $0.15 increased 87.5% year-over-year and decreased 11.8% sequentially. The decrease from Q4 2005 is driven by first quarter payroll-related taxes and integration expenses, which had an impact of approximately $0.06 versus Q4 2005. It should be noted that earnings and earnings per share include approximately 400,000 or $0.01 per share of expense related to stock-based and long-term incentive compensation to Firm employees. The adoption of FAS 123R had no effect on the Firm's results of operations for the quarter because all stock options were previously vested.

Total revenues in Q1 2006 of 222.3 million represents an increase of 18.7 million or 9.2% sequentially, and 29.4 million or 15.2% year-over-year. In fact, revenue per billing day of 3.5 million reached an all-time high for the third straight quarter. The sequential billing day increase was driven primarily by our Search Staffing Business and the contribution of revenue from the acquisition of the Pinkerton Computer Consultants. Search revenues of 16.8 million for Q1 were up sequentially 25.4%, representing the highest sequential increase in Firm history, and now represents 7.6% of total revenues as compared to 7% a year ago. We have continued to see positive results from our investment in search and are focused on repositioning the Flex portfolio to higher value, higher-margin business. This focus has resulted in continued increases in profitability and positions the Firm to take advantage of the strong hiring environment as we move forward. We are very pleased with year-over-year earnings improvements and are optimistic that these positive trends will continue. We believe we continue to run an extremely efficient operating model that will continue to generate operating leverage and improve earnings as revenues increase. Earnings before taxes of 10.2 million or 4.6% of revenues increased 86% from 5.5 million, or 2.8% of revenues in Q1 2005. We believe we are making excellent progress towards achieving our peak cycle target earnings before taxes of 8 to 10 percent of revenues.

A key driver contributing to the current positive trends continues to be our ability to manage gross margins. Through our focus on spread rate -- spread between bill rates and pay rates at existing clients. Second, selectively deploying our assets to those clients that understand, appreciate, and are willing to pay for our value proposition we deliver in the supply constrained market. Three, exiting client relationships where the only differentiator is price. And four, investing in our highly profitable [search] business. As a result, our gross profit percentages improved significantly over the past year across all business lines. Our gross profit percentage of 33.3% has improved 220 basis points year-over-year and 10 basis points sequentially. Our Flex gross profit percentage of 27.8% in Q1 2006 declined only 70 basis points sequentially from Q4 2005, despite an approximately 80 basis point impact of higher payroll-related taxes in Q1. And has improved 190 basis points year-over-year. We will continue to focus on this area of our business to drive improvements, though we don't expect the level of improvements to be as great as seen in 2005 since we have substantially completed the repositioning of our client portfolio. However, over the course of 2006, we would continue to expect an additional degree of pricing leverage.

The Firm's ability to improve bottom-line results is also attributable to continued scrutiny of all controllable costs. Operating expenses of 28.3% in Q1 represent an increase of 100 basis points from Q4 2005. This increase is primarily the result of payroll-related taxes, integration-related expenses from the acquisition of Pinkerton, and an investment in the number of sales associates, which has increased 18.9% year-over-year excluding the addition of our new partners from Pinkerton. We expect operating expenses as a percentage of revenue to be flat to slightly down in Q2, even though we will continue to make investments in our sales capacity and infrastructure. A key to managing operating expenses is the management of our accounts receivable portfolio, which maintained a very low DSO of 39.9 days, compared to 37 days in Q4 2005. This disciplined management of our receivables is a key factor in our ability to quickly and efficiently integrate acquisitions, such as, Pinkerton. Our expectation of continued improvements and 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 Firm and back office IT systems. We are in the third leg of our plan to upgrade our IT systems, which has included upgrades our hardware and front office IT systems. This third leg focuses on improvements in back office efficiencies and systems and will continue into 2007. We expect these investments to drive both productivity and exceptional customer service. We expect capital expenditures to be at a comparable level in 2006 as 2005.

Productivity levels in our sales force remain near all-time highs in Q1 2006. Revenue per employee has increased 3.9% from a year ago. The quality of the revenue stream also continues to improve as gross profit per person has improved 11.1% over the same period. Cash flow from operations for the Firm in Q1 continues to be strong. At the end of the first quarter, bank debt outstanding under our credit facility totaled 62.4 million as a result of our acquisition of Pinkerton and associated costs. 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. Based upon current cash projections we anticipate being able to generate sufficient cash to pay off this debt in less than 2 years, absent any other currently unforeseen cash obligations. Looking forward to the second quarter, we expect to continue to realize the benefits of the leverage in our operating platform. We expect second quarter earnings per share will be negatively impacted by $0.02 to $0.03 of payroll taxes and integration-related expenses. Therefore, we offer the following guidance for second quarter: Revenue in the 230 million to 235 million range and earnings per share of $0.19 to $0.22, which reflects approximately 41.5 million weighted average diluted shares outstanding.

From a financial perspective, Q1 was very satisfying and is reflective of our strong operating platform as we leverage the increased scale of the Firm and improving market conditions, especially in search. Our balance sheet remains strong and our results demonstrate we are actively managing our business to effectively balance near-term results with long-term objectives. 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. I'd like to now turn the call over to Bill Sanders, our President.

Thank you, Joe. This quarter's results continue to reflect the success of our operating and acquisition-related activities. Margin expansion through clients selection is critical to our future productivity and profitability as the candidate shortage continues. Our road map to 2008 will be successful in part because of the foundation we continued to build this quarter. We are pleased with achieving record revenues of 222.3 million and revenue per billing day of 3.5 million in the quarter. As important, however, was our ability to couple this revenue growth with significant gains in gross profit percentages and operating profitability. Revenues were up 15.2% and gross profit increased almost $14 million or 23% year-over-year. Running higher gross profit business is our objective.

We were able to see tangible results in our investments and search associates as our Direct Hire revenues were up over 25% sequentially. We are also enjoying the efficiencies and leverage we have been able to extract from the acquisitions of Hall Kinion, VistaRMS, and most recently, Pinkerton Computer Consultants. At the same time organic revenues in search and HLS have grown 101% and 36% respectively in the last two years. It is important to note that growth of search and HLS revenues have not been influenced by acquisitions. To further comment on Pinkerton, I am pleased to note that we have substantially completed the integration and continue to be impressed by the quality and capabilities of our new partners. We have also made significant process -- progress in discussions with our client base to meet Kforce gross profit standards. Based upon the quality of the remaining business and our successful integration, this acquisition is expected to be accretive in 2006.

To provide further insight into the quarter results, overall demand for quality candidates remains strong across all service lines. Due to increased competition for candidates, clients have accelerated their interviewing process and have become more aggressive as candidates may receive multiple offers in the high demand skill sets in F&A, regional monitors in CRS, medical carding in HIM, and Dot Net in technology. We are also seeing some rotation in the nature of tech job orders as more clients are focusing on larger scale development projects as opposed to maintenance and support requirements. We have moved to the point in the cycle where recruitment is key. We are well-prepared for that part of the cycle. We are very pleased that the 25% sequential growth in our Search Business was the highest sequential growth percentage in Firm history. This growth has been dominated the past few quarters by S&A Search, but this quarter we saw Technology Search begin to join the party. We are bullish on the prospects for our excellent search team.

For Flex, we continue to enjoy profitable revenue growth across the Firm as a result of improving margins as we focus on higher value-added placements. We believe our diverse service offerings of Technology, Finance and Accounting to Industry Specialties of HLS, and now our Kforce Government Solutions Group uniquely positions Kforce in the business segments that will be in the greatest demand for the foreseeable future. We believe we have had excellent results in balancing bill rates and pay rates as we continue to work with our clients. Bill rates have improved across all business units and have increased 16% on average year-over-year. As a result, Flex gross margins have improved significantly across all business lines and have improved 190 basis points year-over-year from Q1 '05 to Q1 2006.

Revenue growth for the quarter was led by our Technology segment, which grew sequentially 16.6% and includes two months of revenue contributed by the Pinkerton team. HLS revenues increased 3.7%. Finance and Accounting revenues improved 2.1%, despite the effects of our continued repositioning of our mortgage-related business to higher bill rates, increase speed to conversions, and an approximately 30% reduction in SOX-related business. We expect F&A to encounter modest seasonal effects associated with the second quarter and be roughly flat in revenues. However, we have completed a one-year client portfolio transition of our mortgage-related business, the results of which is most impressive. Overall, F&A was able to achieve a 320 basis point increase in year-over-year Flex gross profit percentage and still report year-over-year revenue growth. My hat is off to our F&A team for this remarkable achievement. On a year-over-year basis, Technology Flex revenue per billing day grew 22.4% with a gross profit percentage increase of 170 basis points. And HLS grew 12.6% with a gross profit percentage increase of 120 basis points. The Firm's year-over-year increase and Flex gross profit percentage of 190 basis points is in-line with our plan and we expect continued improvement as we transition to Legacy Pinkerton portfolio.

Our third business segment is HLS, which represents 22% of revenues and has been our most consistent organic revenue grower. Clinical Research Staffing or CRS is now just over 43% of the HLS segment and [Chris Ellis] and her team had a strong eight plus percentage sequential growth for the quarter. 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. We expect CRS to grow once again in Q2. Revenues for our Health Care Nursing Unit were flat sequentially in Q1. We are making significant progress towards longer-term contract assignments with placements of our ends to primary healthcare facilities. The basis for this improvement is the increasing number of international nurses, which now represents approximately 30% of nursing revenue. We now have the largest pipeline since we started international sourcing three years ago. On the other hand, we have not seen the inflection upwards of per diem nurse staffing. We expect Q2 revenues to be flat to slightly improving in this business unit. With respect to our HIM unit, the demand for their services grew over 5% due to more strategic sales of longer-term multiple seat projects. [Fran Farrell] and her team delivered our highest margin revenue stream, and therefore, are a strong contributor to our Flex margin achievements. HIM revenue is expected to be up sequentially in the second quarter. Our Scientific Unit also is moving its business to higher-margin customers improving 160 basis points year-over-year. We expect the second quarter revenue to be up slightly.

As I stated, search revenues sequentially increased 25.4%, which represents the highest sequential increase in Firm history and are up 24.5% year-over-year. The growth is completely organic. Search is now 7.6% of total revenues. As we stated last quarter we have continued to aggressively hire search associates. We now have 42% more search associates than we had a year-ago. We remain optimistic about the growth opportunities in search and expect strong growth or lumpy for the foreseeable future. Tech Search is much earlier in its growth cycle than F&A Search. As the Technology Search market improves, we feel we are particularly well-positioned for growth as our tech staffing platform will provide significant leverage. During the peak of the last cycle, F&A Search and Tech Search were at comparable levels as compared to today. Where search, F&A search, is roughly double tech search. We continue to target search at 10 to 15% of total Firm revenues at the peak of this cycle. Overall, sales associate productivity continues near record high levels. Although, we believe these productivity levels will moderate as a result of accelerated hiring and training, we believe productivity improvements are significantly impacted by the investments we have made over the last two years and our sales support structure, which we believe is among the best in the industry. We increased the size of our sales force by approximately 11% in the quarter and plan to continue to add and reinvest in our sales associates, particularly in search, with an eye towards accelerating our profitable revenue growth. We also continued 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 by month for our Flexible Staffing Business, January exhibited a typical trend with assignments end resulting in a decline from December and improved in February and again in March. Search was up in January and improved in February and was very strong in March. Search growth continued in April. On a year-over-year basis, Flex revenues in April are up over 10% and Search in April is up 18% year-over-year and up 14% versus the first three weeks of the first quarter. Revenues will continue to feel some effect of the phase-out of the legacy Pinkerton low-margin business with a corresponding improvement on gross profits and operating margins. In conclusion, we remain focused on customer selection and profitability, and believe this focus has enabled us to continue to achieve improving results. We have achieved record revenues and improved total Firm gross profit margins 360 basis points over the last two years. As we look forward, we believe our recent aggressive hiring and intense focus on search revenues, strong pricing discipline, and client selection will allow us to drive revenue growth with margin expansion. My congratulations to our field teams and strong execution in the first quarter. I now turn it over to our CEO, Dave Dunkel.

Thank you, Bill. We are pleased with our execution this quarter and are aggressively fueling our growth by increasing our investment in our associate team. Our goal is to accelerate profitable organic revenue growth. Productivity is our key measure and we are seeing improvements even as we add significantly to our associate headcount. In addition to this investment, we have more than doubled the training budget for Kforce University from last year and increased our sales support team by over 44% year-over-year. This team includes our National Recruiting Center, National Sales Group, Product Managers and National Champions.

While our primary focus is on organic revenue growth, we continue to evaluate acquisition prospects that meet our stringent criteria. Since January 2002, we have made a total of three acquisitions, which evidence is are rigor and discipline. Additionally, we have developed a confidence in acquisition integration. Our acquisition integration plan involves immediate co-location of offices, realignment of leadership, account reassignment, and revenue transferred to designated servicing teams. We believe that this is the right way to integrate, and therefore, it is not possible to precisely track organic versus acquired revenue growth. We do know that we have significantly added to legacy Pinkerton accounts and have been transitioning out of low-margin customers. Our acquisition goal is to derive a return for our shareholders and that is reflected in earnings per share. We expect to be highly selective in valuating prospective targets with culture and valuation the primary factors. Looking forward, we are optimistic about the prospects for professional and technical staffing, and in particular, search as the business cycle evolves. We believe we are still early in the cycle. 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 servicing them. Millicent, we would now like to open up the call to questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Toby Sommer, SunTrust Robinson-Humphrey.

Congratulations on a good quarter and it looks like good guidance for Q2.

Thank you very much, Toby, we appreciate it.

I wanted to ask you a question about the tech market now. If you could give us a little bit of color for -- what did the tech market look like now relative to the last cycle? Any differences that you would know whether it's the number of players that are out there who can serve national clients or what have you? I'm just interested on your perspective there on what may be different this go-around?

I appreciate it. The last tech cycle was fuelled by several factors. Of course, the Internet bubble, and the tech bubble, and Y2K. We don't see this particular cycle as having those three dynamics, the trifecta, obviously influencing it. One thing we do note is that tech employment is now at the highest level even more than it was during the peak in 2000. So what kinds of things are we seeing in tech? We're seeing longer-term projects for ERP and large scale systems implementations. We're seeing web enablement of legacy applications. But overall, the basic tech market is very healthy and the research that we have done and the reports that we have read suggest that this should continue for the foreseeable future.

Thanks. And from an acquisition perspective, [inaudible] have gotten a pretty good system down for integrating acquisitions. Coming off of Pinkerton is, how is your appetite and what is the market look like for opportunities?

Well, I think that as I said in my prepared remarks, we are very disciplined and have a very stringent criteria. Throughout the past several years we have maintained a pipeline. That pipeline is always at various stages of process and I can tell you that we have continued to maintain a pipeline that we are evaluating. The best record of what we will do is based on what we have done in the past, and that is to be highly disciplined and make sure that the first culture and the people, and then evaluation are a good fit for what we are looking for. So we do maintain an acquisition pipeline and will continue to.

Thank you. I'll get back into queue.

Okay, thanks, Toby.

Our next question comes from Mark Marcon, Robert W. Baird.

Good afternoon and congratulations. Great quarter.

Thank you very much, Mark. We appreciate it.

With regards to the IT side, you mentioned that you're -- on the Pinkerton area you're still kind of pruning through some of the clients. As you do that how -- and plus, we are going to obviously benefit from the payroll taxes going through in the normal seasonal pattern. How much of an improvement can we get on the Flex gross margins on the IT side?

Yes, Mark, this is Joe Liberatore. From an enterprise direct standpoint when we start to look at the impact of payroll taxes bleeding off into Q2, we would anticipate roughly probably about 60 basis points related to those payroll taxes as we head into Q2.

Great. And then how much of an impact about with the pruning of the Pinkerton, the lower margin Pinkerton accounts?

Toby this -- or not Toby, Mark, this is Bill Sanders. As we continue to expect that we will see some expansion as you mentioned there is still the run off of some of the Pinkerton legacy low-margin business that we will -- we think will be phased out. Secondly, we are looking at the activity of all of our clients and relate adding to those clients that have a real value in the services that we offer. So we think that there will be a continued expansion. Whether it will be as dramatic as we have seen this last year, which was extremely powerful for us, I would think that that's a little bit on the doubtful side. But we certainly do expect to see expansion continue as we go through this cycle.

Great. Along those lines, what are you seeing in terms of some of those clients that you walked away from because they didn't ascribe the proper value? Are you seeing any of them come back or submit RFPs? What we're hearing is that the market is tightening and there are certain of those clients that do seem to be coming back and can't get the requirements filled with the bill rates that they had in mind earlier.

First, we don't walk away from any client. We certainly transition and phase-out of clients. A lot of this activity comes about from not responding to certain RFPs and to certain job orders and other activities at specific clients. But you are correct, the market is tightening. We are seeing that certainly from some of the larger firms and maybe a little less though from some of the votechs. But we expect that there will be continued tightening and we expect that those firms who are very strong at recruiting both passive and active recruits, recruitment will be key as we go forward. So we are seeing this happen, that is correct.

Okay, great. And then on -- last question before I jump back into queue. With regards to F&A, you mentioned that you are repositioning some of the old mortgage business. As you go through that, what would the impact be on the Flex GM on the F&A side? I imagine we would just continue to go up here?

Well, it certainly is substantial and we've been doing this for a year already. So we are -- we believe we are actually the first quarter was a completion of that process. And just in the mortgage-related business itself it was 200 basis points. So we're excited about that turnaround and where we have taken that business and we see that as real growth potential for the Firm.

Great, thank you.

Thank you, Mark.

And we'll go now to Josh Vogel, Sidoti & Company.

Hi, thank you for taking my call. I just want to touch on one of the earlier questions about the Pinkerton business. Now that Pinkerton is substantially integrated, do you have a better idea of what kind of run off from their original business?

Well, we had mentioned in prior calls and we have no reason to doubt that, although, we don't -- we are unable to track all of the new revenue streams, and we believe that that will be somewhere around the 10% range and that's what we have indicated on prior calls. But when we fully integrate management teams and client assignments, candidate database, all of those sorts of things, we lose the ability to track that information.

Okay. And shifting over to the Search Business, I know you mentioned that productivity levels are improving with your consultants, is there still a lot of room with the current consultant base before they fully mature?

Oh, absolutely. When you think of 41% have increased in headcount over the last year, there is substantial capacity as these people ramp-up. We have a rigorous training program that's in place. We have people here that are going through that. And while Search associates ramp faster than Flex associates, we believe that there is significant capacity in our existing group as we look at productivity per individual.

Yes this is Joe Liberatore. I'll add a little bit more color to that. When we look going back into 2004, we went through really the first traunch of hiring in a number of people and they have really peaked out in Q1 of 2005, our Q1 of 2006 gross profit per producer month is -- there's about 50% improvement opportunity to versus where we were in Q1 of 2005 with those new individuals that we brought on board. So we do view that we have some capacity, but we will continue to hire into search because of the extense of ramp-up period that these individuals take.

And Josh, this is Dave, keep in mind that search is not linear. We would love to be able to tell you that we're going to tack on these kinds of sequential quarters, but the truth is, as Bill said, it's lumpy, and it comes in spurts. Although, we do expect search to continue to be one of our top performers.

Okay. And how many new hires did you bring on in the first quarter in search and in flex?

We increased search, our headcount 42% over last year.

And about 13.5% sequentially.

And 11% for the [inaudible].

That's total associates not just search.

Okay. And I'm sorry I just missed what you said earlier. Search was up 18% year-over-year in April. What was it in the first three weeks versus quarter one?

Dave, what did I say?

I believe it's 14.4%.

Great. Thank you very much.

Thank you, Josh.

And our next question will come from Mike Carney, Aperion Group.

Good afternoon, guys.

Hey, Mike.

Joe, I'm sure you already mentioned this. I missed some of the comments at the first, but on the integration expenses like as a percent of revenue, how much would that have accounted for in Q1?

Percent of revenue?

Or what were your comments on the integration expenses?

My comments is I grouped payroll-related and integration expenses together impact about $0.06 in the quarter. Our expectations are, from an integration expense standpoint, it was greater than $0.01, but we really weren't [inaudible] $0.02 from an integration expense standpoint in the first quarter. The bulk of that $0.06 was payroll-related taxes.

Okay good, thanks. And then obviously you've done a great job in selecting clients with the gross margin up significantly. And it looks like -- I mean when I look at the F&A margins up over 300 basis points year-over-year, and then I can honestly tell from all the detail you give that the bill rates are up 22%. But that seems to be high relative to what you've probably done in the past, even though you haven't given those numbers. So, Bill, I know you mentioned conversions and the repositioning of mortgage, but is there anything else there in -- I mean are you very confident that you can continue to get Bill rating increases that high?

Mark, this is Dave. I just want to be clear on one thing that any conversions are booked as search revenue. So --.

Oh, they are. Okay.

-- when you're valuating that I suspected that you might be thinking that the conversions are, in fact, reported as search revenues. So those are pure Flex numbers.

Okay. So basically I guess the increase in those margins are the repositioning of mortgage and then you said there is a -- Bill, I think you said 30% reduction in SOX-related?

Yes, there was in the quarter, A 30% reduction.

But wasn't SOX always a higher margin business?

Absolutely. Now, let me point out that a lot of the people that were working on the SOX activities have been redeployed into other assignments. So as has been stated by others in the space, the hire and accounting space, the folks that were working on SOX projects in most cases, although there may be gaps, do end up getting redeployed because, again, the demand for high level Finance and Accounting talent is quite strong.

So how did you get those bill rate increases? Was it just simply, I mean literally picking the better paying clients?

I'm going to have to get all the credit to Bill and the operating team. It is through a very complete process. It's through client selection. It is through training. It's through pricing. It's through the field leadership. So this is an initiative that Bill spearheaded and the field team has done a fantastic job in executing. So it isn't one thing. It's all things taken together.

And do you think 33.5%, is that sustainable over the course of the year or the long-term?

With the 33% [multiple speakers] --?

Actually, maybe Bill's right.

Are you saying the actual dollars?

I'm sorry. The 30.5%, on the Flex gross profit?

Yes, from a Flex gross standpoint, as we stated earlier, we believe there is still margin expansion in all of our business lines. So there's margin expansion opportunity.

And then also on F&A Search that was obviously very strong also, so -- but I know that you were primarily hiring IT recruiters that was last quarter. Have you picked any of that up or is that all productivity gains in the F&A search?

Yes, F&A would be -- that would be correct. F&A is more productivity based upon the timing of when we started to hire into the F&A pipeline and start to rebuild our F&A practice out. So many of those people that we hired back in 2004 or early 2005 are moving up to a much higher productivity levels on an individual basis. We do continue to add to our F&A search population as we headed into Q1. But from a Q4 to Q1 sequential, we were probably about 2-to-1 hires technology to F&A at this point in time.

Okay, thanks a lot. Congratulations.

Thanks, Mike.

[OPERATOR INSTRUCTIONS]. We'll take a follow-up question from Mark Marcon, Robert W. Baird.

A couple of questions. First of all, on Pinkerton, how much more do you have to go through in terms of the integration?

Well, the integration is substantially complete, if that's what you are referring to. There are some trailing issues, as there is normally are that will be over this quarter. There'll be some redundancies, but I don't think it will be an effect of any EPS, if that's the question, Mark.

Yes, Mark, we closed that transaction at the end of January and integrated at the end of March. That included co-office relocations, leadership assignments, account reassignments -- we did this technology, this is a very quick integration and our team worked very hard to get it done. I mean 60-day integration is unbelievable.

That is. That's quite rapid. What's the -- what sort of retention are you seeing in terms of this permanent staff within Pinkerton?

Yes, Mark, this is Joe Liberatore. One of our key montrose's, which really we lead all integrations, which is to keep the great people. So at this point in time we're seeing very similar trends than what we experienced with Hall Kinion and what we experienced with Vista. Which is those individuals that are performing at what we would consider our top performance levels. Those individuals, we've done a very good job of retaining those individuals and we continue to work with those individuals to make sure they are leveraging all of the opportunities that are created by being part of Kforce.

However, without any integration, we also evaluate those individuals that are performing below our standards. Our objective is to work with those individuals to try and ramp them up and move them up to standards. And if they don't move up to standards then those individuals typically do not move forward with us longer term.

Okay, great. And then CapEx was down significantly on a year-over-year basis. How should we think about CapEx for the year?

Yes, this is Joe. I mentioned that in my comments. CapEx for 2005 was about 10.7 million. CapEx at this point in time based upon the investments that we're continuing to make in our back office and back office processes is going to be in a comparable range for 2006.

Around that 10.7 million?

Yes, comparable range.

Okay, great. And then the bad debt did pick up a little bit. What's that attributable to?

Yes, bad debt. We typically see a spike. We saw the same thing in Q1 of last year. I think if you were to go back and look at bad debt from Q1 2005, actually bad debt was below the levels of Q1.

I think you had to add to that a little bit of the Pinkerton portfolio comes over and we tried to get that down to a DSO the same level as ours. We use a mathematical formula for past due days to calculate our bad debt expense and that will improve as we go forward.

Great. Super, thanks.

Thank you, Mark.

And our next follow-up question will come from Toby Sommer, SunTrust Robinson-Humphrey.

Thank you. I was wondering, on the Clinical Research side, what you're hearing from some of your larger clients and how they're comparing and contrasting the CRO Service and what you're providing out in the marketplace? Kind of if you can give us a little more color from what you're hearing from clients there?

Sure, this is Bill Sanders, Toby. We're hearing very strong demand. We're hearing longer-term projects. We're seeing that the post [inaudible] creates a more rigorous drug safety awareness in pre and post-market drug introduction. We're seeing that the flexible staff is increasingly attractive to the clinical trial process much more so than the CROs. We're seeing an increase quality of trial and reducing the reductions of cost. And we are seeing trends that our long-term prospects are very strong. We're still very, very high on this group in the next three to four years. Look, we have good visibility and we believe that we will perform as an employer of choice in this particular market.

Thank you. And then shifting gears, in a more supply constrained environment, how do you assess your needs when it comes time to advertising more for jobs or investing more in internal resources and databases? I'm just trying to get a sense for how your processes and allocation of resources may shift as you see that shift in the marketplace?

Toby, this is Dave. One of the things that we have done is to leverage the technology. A lot of the technology and the business process is that we developed at the time that we had Kforce Interactive. In fact, the National Recruiting Center is, in fact, a rebirth and outgrowth of many of those processes. So we are very sophisticated in the way that we're working in the active channel. We also have a number of initiatives and extensive training for the passive channel as well. Recognizing, of course, that this is a market that is significantly influenced by technology. There are new communities, new blogs that are popping up all the time. And the leader of our team down there has done an outstanding job in identifying those new resources and areas to go. So it's not just a matter of advertising, in fact, many of the reports state, and we have experienced the same, that newspaper advertising, in fact, is a declining media for the sourcing of good candidates anymore.

Toby, this is Bill. We -- I'll add to that. We study this quite a bit and as we know as we progress through the up cycle, that there's going to be a rebalancing of sales associates and recruiters. At the bottom of the cycle you might see 1.5 sales people to one recruiter, and at the top of the cycle you will see two recruiters to 1. -- or to one sales associate. So as we analyze this and we monitor this closely and as we do our hiring, we go through this rebalancing process. So we think we're on top of this with some pretty good statistics, and we continue to rebalance as we go forward.

Thank you very much.

Thank you.

Your next question will come from Mike Carney, Aperion Group.

A couple of follow-ups. First, Bill, can you discuss a little more about the repositioning in the mortgage group?

Yes, it's really pretty simple. As we look at we were doing a lot of activities in the lower bill rate range of 15 to $20 bill rate range of very low mark-ups. Just actually focused more on volume than on rate and we believe that as we go forward in this cycle, that there will be a demand for higher quality talent and we have again to position ourselves for that. So we have actually phased out of certain clients and they have very high volumes, but very low rate. And we have focused on bringing quality candidates to those clients that don't focus just on pricing but focus more on high quality talent.

Okay. And is that -- was that for all the legacy OnStaff or was that just mortgage?

That would be primarily legacy OnStaff.

Okay. And then also, you mentioned 10%, in April I think revenues were up 10% year-over-year. Does that include -- I'm sorry on the Flex side, does that include Pinkerton?

Yes.

And so I know gross profit is obviously a lot more important, but just talking about the revenue, that is -- I mean your guidance is more like 17 or 18% year-over-year growth. And so is there -- monthly trends are obviously variable, but you obviously expect that to increase on the Flex side in May and going into June?

Yes, we don't -- this is Dave. We're not going to give you guidance by month. As Joe stated we expect overall revenues to be in the 230 to 235 range in the second quarter. Those revenues, as the quarter unfolds will materialize from different sources, so I would caution you not to get too mired in the weeds and try to figure out whether it's in tech flex or what the year-over-years are on it.

Okay.

And we will return now to Mark Marcon, Robert W. Baird.

Is there any geographic differences that you're seeing across on the tech side and then on the F&A side?

Yes, very much so. There are some markets have come back much more quickly than others and they are all in different phases, I guess, of coming back. And some are even surprising. For example, the Midwest you would think with the auto industries and their problems that you would see more difficulties there, and it is surprisingly strong. Probably due to the execution of our people rather than just the environment. Is there [inaudible] differences? Yes. But it's more by market rather than trying to say region-by-region. So that would be real difficult for me to do.

Mark, this is Dave. In general, as Michael and I have gone on our cross-country tours and met with customers, it's been fairly consistent in the markets that we've been in. So I would say that, in general, the tech rebounds flex and search seems to be relatively strong in most of the markets that we have been in.

Okay. And similar dynamic in F&A?

Yes, F&A has, as you know rebounded earlier than tech and has been strong and clearly remains strong. F&A today is restrained primarily by supply shortages.

Great. And then in terms of the April numbers, did that include -- I mean I know it was just asked, but just to be clear, did that include Pinkerton or not?

All the numbers that we give are including all revenues for the entire firm.

Okay.

As I mentioned in my acquisition comments, right after the acquisition after account reassignment leadership revenue streams moved to new teams, they were immediately indistinguishable. We don't fly them or even attempt to track them. Our focus is to make sure that we are delivering exceptional service to the customer, and that's what we're after.

And does it -- in terms of your April comment, does that include the shift in Easter?

I believe on a billing day basis it does, yes.

Okay, great. Thanks.

Thank you.

And at this time we have no further questions. I'd like to turn the conference back to Mr. Dunkel for any closing remarks.

Okay, thank you. We wish to once again thank you for your interest in Kforce. We're very proud of a great quarter. So hats off to our entire team. We look forward to seeing you again at the end of the next quarter. Have a good day.

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