Kforce Inc (KFRC) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to the Kforce third-quarter 2006 earnings conference call. Today's conference is being recorded.

Now, for opening remarks and introductions, I would like to turn the conference over to Mr. Michael Blackman, the Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning and welcome to the call. Before we get started, I would like to remind you that this call 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 the factors listed in Kforce's 10-K and other reports and filings with the SEC. 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 and the quality of this call.

The third quarter was a strong quarter for Kforce with revenues once again up to historical highs. We were particularly pleased with our performance in our technology segment and search services.

As we mentioned on our last call, we believe that the drivers for professional staffing remain strong, supported by both cyclical and secular trends. The demand for our services also remains strong, and skill shortages are prevalent in each of our skill offerings for both flex and search.

We have mapped our strategy to optimize returns at appropriate periods in the cycle. During the third quarter, we continued our accelerated hiring of new associates, particularly in search to allow training and ramp-up time that they may be productive as we enter our optimization phase moving into 2007. Our goal remains operating margins of 10-plus% in the optimization phase, a target we reached in the past cycle.

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, and I will then conclude. Joe?

Thank you Dave, and thanks to all of you for your interest in Kforce. We are pleased to have delivered another quarter of record revenues in the third quarter and operating earnings at their highest level since Q4 1998.

Third-quarter revenues of $238.7 million represent a 1.8% increase over Q2 and a 15.2% increase year-over-year. Revenue per billing day of $3.8 million reached an all-time high for the fifth straight quarter and continues to trend upward. Revenue on a billing day basis year-over-year increased 17% with technology experiencing the greatest year-over-year increase of 33%.

We continue to drive improving bottom-line results, as net income has increased 31.7% year-over-year to $8.8 million in Q3 2006 as compared to $6.7 million in Q3 2005. Earnings before taxes of $14.9 million or 6.2% of revenues increased 33.9% from $11.1 million or 5.4% of revenues in Q3 2005. We believe we are making excellent progress towards achieving our peak cycle target earnings before taxes of 10-plus% of revenues.

EBITDA, an indication of the firm's strong cash flow, increased 34.2% year-over-year to $19.1 million or $0.45 per share in Q3 2006 as compared to $14.2 million or $0.35 per share in Q3 2005. Q3 2006 earnings per share of $0.21 increased $0.04 or 23.5% year-over-year and increased $0.01 or 5% sequentially.

In terms of revenue by time, Q3 flex revenues of $219.2 million were up 13.5% year-over-year and 1.1% sequentially. The growth in flex revenues was driven primarily through the continued improvements in our technology flex staffing business. We saw sequential growth of 1.9% and now has increased 29.7% year-over-year. Our F&A flex business improved 2.8% sequentially, and flex revenues in our HLS segment were down 2.3% sequentially, as anticipated, as the result of significant project adds.

Total search revenues of $19.5 million for Q3 were up 38.1% year-over-year and 10.3% sequentially and now represent 8.2% of total revenues as compared to 6.8% a year ago. During the third quarter, the firm continued to invest in building our search capabilities in order to position the firm to achieve our target of 10 to 15% of total revenues at the peak of the cycle.

A key driver contributing to the current positive trends continues to be our ability to manage gross margins. Gross profit percentages improved significantly over the past year across all business lines. Our gross profit percentage of 35.8% has improved 280 basis points year-over-year and 130 basis points sequentially.

Our flex gross profit percentage of 30.1% in Q3 2006 increased 90 basis points sequentially from Q2 2006 as the result of improving the spread between pay rates and bill rates. Flex gross profit percentage has now improved 200 basis points year-over-year. We will continue to focus on this area of our business to drive improvements, though we expect the rate of improvement to moderate as the economic cycle matures and we balance volume and rate objectives. We seek to balance current profitability with long-term investments.

In Q3, operating expenses increased 110 basis points from the second quarter to 29.2% and has increased 180 basis points year-over-year. Approximately one-third of the increase in operating expense is related to the increase in search as a percentage of total revenue with the balance attributable to our commitment to building a sales and recruitment team and support infrastructure, including technology improvements, to take advantage of the increasing demand for our services across all business lines.

We expect to continue these investments and for the operating expenses as a percentage of revenue to be relatively constant in Q4. Capital expenditures are expected to remain at comparable levels in 2006 as 2005.

A key to maintaining and increasing profitability is our ability to manage our accounts receivable portfolio, which maintained a very low DSO of 44.4 days as compared to 40.3 days in Q2 2006. Our disciplined management of receivables provides a platform to quickly and efficiently integrate acquisitions and is a key factor in our ability to generate strong cash flows. Improvements in operating efficiency coupled with careful management of sales performance metrics will allow us to continue the hiring of sales and sales support personnel with minimal effect on earnings.

During the third quarter, the firm was able to reduce bank debt by $9.7 million and also fund $2.9 million of capital expenditures. At the end of the third quarter, bank debt outstanding under our credit facility totaled $38.3 million. As you are aware, the firm recently increased the size of its credit facility to $140 million to accommodate the $73 million purchase of Bradson Corporation on October 1. Our strong cash flows and improving earnings will allow us to be very confident in our ability to pay down this debt as well as invest in our growing business.

Looking forward to the fourth quarter, we expect to continue to make investments that will benefit the firm long-term. We expect revenues to be in the $243 million to $248 million range and earnings per share of $0.21 to $0.23, which reflects continued investments in hiring, training and infrastructure and approximately 42.1 million weighted average diluted shares outstanding.

Q4 2006 projections include $7.5 million of revenue contribution from the acquisition of Bradson. We expect the transaction to have minimal impact on EPS in Q4 after considering integration-related activities.

From a financial perspective, Q3 reflected a continuation of revenue, gross profit and earnings growth as well as sustaining our long-term investment strategy to position the firm for prosperity through the next phase of the cycle, which we believe will be 2007 and 2008. We will maximize our operating leverage, revenue and earnings growth during that period.

Our balance sheet and cash flows remain strong. We remain optimistic and confident in the near-term and long-term strength of specialty staffing.

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

Thank you Joe. We are pleased with our momentum of quarterly record revenues and continued margin expansions. We continue to successfully execute on our strategy to invest in our staff in alignment with economic conditions, which we believe will result in continued growth in revenues and earnings.

As for revenue trends for our flexible staffing business, we saw improvements monthly during the third quarter, led by the strength in technology. The firm also exhibited strengthening throughout the quarter.

In terms of revenue for the beginning of the fourth quarter, flex revenues for October are up 17% and perm is up 25% year-over-year. Though these intra-quarter trends are positive, it is difficult to draw conclusions for Q4 based on this limited data. We anticipate growth in both technology and F&A in Q4 on billing day basis and for HLS to be flat to slightly up.

On a particular note in the third quarter was the continued improvement of our perm business. As Joe stated, perm revenues were $19.5 million and grew 10.3% sequentially. We remain very optimistic about the prospects of perm and note that it has grown over 185% since its recent low watermark of $6.8 million in Q3 of 2003.

Of particular note is the accelerated improvement and technology perm, which has increased 18.7% sequentially and 54.8% year-over-year. If the economic conditions continue to improve, we believe perm could return to our previous peak of $47.4 million in Q2 2000. That is consistent with our long-stated desirable mix of 10 to 15% for perm.

We also continue to believe that the growth in our technology perm revenues will continue to outpace the growth in F&A perm. At the peak of the last cycle, technology perm was at approximately 50% of our total perm practice. Today, it is approximately 38% but has recently picked up momentum. Because of this historical pattern and the fact that technology is 50% of our flex practice, we anticipate this quarter's momentum to continue into the foreseeable future.

A key driver to future perm revenue growth will be the increased productivity of our recently-hired perm associates. As we have stated in our past four quarterly earnings calls, we believe the current business environment has very strong prospects for the perm business. We have accordingly been aggressively adding to our direct-hire staff.

Perm sales staff has increased by 64% over the past year with particular emphasis on adding technology perm associates. They have increased 97% year-over-year. While we expect to continue to add perm associates as economic conditions and our investment criteria allow, we also expect to see strong gains in productivity as our new staff ramps up.

We also remain bullish on the prospects for our flex business. We have added 27% to our flex sales staff over the past year with a concentrated focus on technology flex, which has increased 39% year-over-year. Productivity levels of our sales force have dropped from our Q2 2005 high by approximately 17% as a result of our aggressive hiring activities initiated in mid-2005 in anticipation of a strengthening environment for specialty staffing.

Our past experience suggests that overall productivity levels will improve significantly as we enter a more gradual pattern of hiring over the next year. We expect this improving productivity because we have made considerable investments in training and technology.

In addition, we are very impressed with the success of our search power centers, where critical mass in key markets is proving to be a successful platform. We are successfully meeting our objective, which is a larger staff that is well-trained with outstanding tools that is maturing into productive contributors to our team.

The bottom line is we are building the underpinnings of future strong organic growth for the next phase of the economic cycle, which we believe will be in 2007 and 2008. We will maximize our operating leverage and revenue and earnings growth during that period.

There is another reason why I'm so pleased. It is because we are successfully executing the plan we developed last year. We call it the road map to 2008. A significant element of that plan was expansion of gross margin. Our gross profit percentage has increased 130 basis points sequentially and 280 basis points year-over-year with a growth in perm being a significant contributor.

Our flex gross profit percentage has also continued to improve and was 30.1% in Q3. This represents a 90 basis point improvement sequentially and 200 basis point improvement year-over-year. I should note that our flex GP percentage has now increased to its highest level since Q3 2000 as a result of the strong focus in both our acquired businesses and in our core flex segments.

We have largely completed this process in our current portfolio of business and will now seek a more balanced approach to volume and rates. The result will be for margins to continue to improve but at a slower rate than during the last 18 months as we focus on accelerating organic revenue growth.

On October 1, we completed the acquisition of Bradson Corporation, a financing and accounting prime contractor to the federal government. To date, we are very pleased with the assimilation of Bradson into the Kforce family and are increasingly excited about the quality of this team led by David Halstead and the opportunities that exist when combining an exceptional prime government contractor in the F&A space with $1 billion national staffing firm.

As we look into the next phase of our strategy, which is to optimize our performance in 2007 and 2008, we are intensely focused on the next nine quarters. We will continue to build on our infrastructure with additional hiring and alignment with economic conditions and to focus on improved productivity to fuel more profitable organic growth.

We remain optimistic about both the near-term and long-term prospects of Kforce and the specialty staffing sector. I'm very excited about the future for the firm. Our field and support teams are all in sync in executing our plan. We have our eye on the prize. And over the next nine quarters, we will deliver.

I will now turn it over to our CEO, Dave Dunkel.

Thank you Bill. I would like to again welcome our new division, Kforce Government Holdings, to the Kforce team. We are energized and encouraged by how quickly the team is coming together and our prospects moving into 2007. We believe that with this acquisition and management team, we now have in place the platform for organic growth in the government solutions sector.

Future acquisition prospects for Kforce as a whole will again require compelling, strategic and valuation characteristics. As we discussed in our second-quarter call, we are in the investment phase of the cycle, which will then transition into the optimization phase where we seek to maximize our return on investments and drive significant operating leverage. That transition process will likely begin as we move into 2007.

Looking forward, we are optimistic about the prospects for professional and technical staffing. We have been successfully executing our three-year plan, which began in 2006. The first major steps of improved margins and significant increases in search staff have been accomplished. We now look forward to the next nine quarters. 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.

Amanda, we would now like to open up the call to questions.

(Operator Instructions). Tobey Sommer, SunTrust Robinson Humphrey.

It's Mike Vincent for Tobey this morning. I am just wondering if you could comment a little bit on what your customers or customer activity looks like in a -- just from kind of an economic standpoint and what you're seeing in the market?

Our customers are -- we have two customers. We have the organization clients and we have consultants. If you think in terms of consultants, the market is tightening up but certainly in F&A and in certain skill sets and technology. And we are -- this is the type of environment that we excel in.

We believe that our client orders on the other hand are strong. Job orders continue to come in. We are being very, very disciplined in our clients' selection and job order selection. So from our standpoint, the environment is strong for specialty staffing and it continues to be so.

We've heard some commentary out in the market that it's becoming a pretty supply constrained environment. Just wondering what you're seeing out there. And then from a sense of hiring, I know hiring has been pretty robust lately and maybe talk about moderating the pay (technical difficulty). Just wondering how difficult it is for you to find people to put into your position?

You're talking about core people, core staff?

Both actually.

First, core staff, certainly, we hire people from the industry. We hire people that are expertise in accounting or technology. And then, we hire people that we believe are just very good at sales. From that standpoint, we're not having any difficulty finding the type of people that will contribute to the type of team that we're creating. So we're very pleased with our ability to hire.

We are being very careful about that because we have very high standards. But, we're not -- that is not a problem.

As I indicated earlier, certainly in certain areas, particularly let's say a three to five-year CPA, is very difficult to find. But in most places, while the markets have strengthened, we can find people that have the desire to change jobs because of location, because of responsibility, because of changes in pay. There's a number of reasons why people would do that. And when it tightens up a little bit like this, this is when a quality firm like ourselves excel.

Then just one follow-up on the core hiring. Just wondering if you could maybe give us a little bit better sense on what pace you expect that to continue going forward.

We expect to continue to consider a number of things -- the environment itself, our own P&L and the ability to invest. We are committed to continue to grow our earnings per share. But we also understand this takes revenue primarily to do that.

So we will continue to grow in maybe a little bit more gradual pace than we have before. We are still very, very bullish on perm. We are still very bullish on technology. Finance and accounting, we have a strong staff. We will continue to add to that but not at the same rate that we may have in the past.

Mark Marcon, Baird.

On the IT side, obviously quite strong there. Was wondering, can you talk about the areas in particular where IT is strong? In other words, what skill sets are you seeing that are in high demand, what regions, what types of clients?

That's a lot of questions there. Certainly, the type of skill sets on the front end of the development cycle when you look at senior technical analysts, they are very popular. Then, the old ERP, PeopleSoft, SAP, C++ -- the normal candidates are still there. Cycles of assignments and the length of assignments are lengthening somewhat. What were the other parts of the question?

Just geography types of clients.

Geography, certainly the Northeast is very strong and really across the country is very strong. We don't see any real pockets of weakness. It is certainly a matter of selection of the right candidates and looking at job orders and simply doing the right match.

Then with regards to -- with regards to your SG&A, you mentioned the additions that you made on a year-over-year basis. Bill, do you have that sequentially in terms of what it looked like in terms of how many people you ended up adding relative to the second quarter?

This is Joe. It was about 4% sequentially from a headcount standpoint, realizing we have a much larger base that now we are adding to. And so to what Bill mentioned earlier, we do see that more so moderating, meaning on a percentage basis sequentially of what we experienced over let's just say the last four or five quarters for that to moderate a little bit more than maybe what we saw back in Q1 to Q2 and Q2 to Q3, mainly because we've been building -- we've been building the capacity as Bill referenced.

We hit our high in Q2 of 2005 in terms of productivity per person. And so, as we've been hiring, that provides some of that capacity aspect. But obviously, we're staying very close to what we are experiencing from the market in terms of demand and adjust accordingly.

Joe, how many people would that be in terms of the 4% sequential increase?

We haven't historically shared specific headcount numbers. So, I would prefer not to do that from a competitive standpoint.

Okay, but it was a 4% sequential increase and you probably increased also in the second quarter relative to the first quarter. Is that a fair statement?

Yes, that's correct. Actually, the increase from Q1 to Q2 was more substantial than that 4%. And realize there is a lot of embedded costs that are associated with the individual. It's not just the salary of the individual. It's the training. It's the infrastructure ramp-up for the individual. So that's why we're very conscious on this productivity and moving back towards the levels that we obtained in Q2.

So when we think about things going forward internally, is it going to be more like kind of a 2%, 1%? Are you basically going to play it by ear, depending on how the market ends up unfolding?

Yes, we have to keep very close to the market and what opportunities exist in the market, positive and/or negative shifts. The one thing when we look at the SG&A as a percentage of revenue, realize that when we look at all the line items in our SG&A, all line items are constant or decreasing as a percentage of revenue. The full -- the increase is fully attributed to comp benefits and commissions, which is our most variable expense.

Can you talk a little bit about the incremental bonus or comp that this goes with the perm folks just to help us understand the business a little bit better? Because obviously, the SG&A associated with the incremental reps there are higher.

That was the comment that I made in my opening statement in terms of one-third of that expense really being attributed to the shift in perm as a percentage, moving from 6.8% to now 8.2%. Because perm, to be competitive in the marketplace from a permanent standpoint, realizing a perm dollar is in theory 100% gross profit outside of your comp-associated costs with that. So the commission structures on the perm front on each dollar are higher than what you typically see on the flex side.

So, perm kind of operates from a laddering standpoint, and it fluctuates based upon performance. So as people produce more throughout the course of the year, the percentage payout on each incremental dollar they bring in accelerates.

Then, I will jump back in the queue after this question, but Bradson -- can you tell us a little bit more about how you think it's going to end up impacting next year? Obviously, it seemed like a really good acquisition, particularly with regards to the profitability levels that they have. Can you give us anymore color there?

Well, one, we expect it to have a very positive influence. This is Bill. We expect it to have a very positive influence on both on the revenue line and the EPS line. On the revenue line, as you know, they've been growing when we bought them in the 30% range. And so, we certainly expect them to grow 20-plus%, as I mentioned on the call. I would love to see them grow at the 30% line -- 30% as well.

Now, on the EPS line, we haven't given guidance obviously for next year. And so, for us to say what the contribution would be is a little problematic at this point in time. But we certainly do expect that they will contribute to the bottom line.

Do you expect that their EBITDA margin will remain relatively constant or is it going to come down as you integrate it?

I believe it will come down some as we integrate it. We need to continue to have a real focus on growth in that area. We believe there is significant opportunities. And so, there will be investments in sales personnel.

But at the same time because of the staffing engine that is behind them, we're able to fill the positions much more quickly than they were used to. So again, we're very optimistic that we can get significant growth at a much higher EBITDA level than Kforce standalone was achieving.

Michael Carney, Aperion.

First, Joe, do you have any guidance or any range for us on the intangible amortization now?

No. we're still in the process of that valuation. So, until we lock down the valuation, it's pretty much what I had stated on the day when we announced the acquisition. We do expect that intangible to be higher than what we have experienced with our prior acquisition, mainly driven by the nature of the contracts being longer-term within the government space. But, I can't give you any better ballpark than that at this point.

Well, I mean Bradson has a couple million dollars of profit each quarter. And so, when you mention that there should be minimal impact in the fourth quarter due to integration, that seems like it's fairly high integration expenses given the nature of the business. Can you talk about that?

Well, you've got a couple of pieces moving around there. You have the integration activities and you also have servicing of the debt in terms of the additional debt we've taken on from the Bradson acquisition. So, we're looking at it collectively.

Then Bill, can you just go over what you expected for the fourth quarter again in terms of growth? Between the three segments, you mentioned something about that; I missed it.

Well, from a general standpoint, I expect technology to be up, finance and accounting to be up and HLS to be flat to slightly up. I certainly think overall flecks will be up significantly. Search, when you -- December is always -- the holidays are always the wild-card. A historical pattern is hard to determine. And when you have a significant amount of newly-coined people in our perm practice, it really is a wild-card and is unpredictable.

Certainly on a billing day basis, flecks will be up. Search, we have to wait and see because of the volatile nature of it. For the month of October, flex was up 17% and perm was up 25%.

It just seems like -- I'm assuming that we're still expecting as the -- even though the percentage increase in the perm recruiters is going down now but it's still very significant that this perm should continue -- the year-over-year growth in perm should continue to increase, correct?

It should continue to be strong. I'll even give you a number. If during the last couple of years, before we started the aggressive hiring and if we took that average productivity rate and we applied it to our people today, we could grow another 30% in perm just through productivity and not hiring anything to the net headcount. So while we think we'll continue to gradually increase the net headcount, we expect productivity to improve -- to be such that we look for strong improvements in our search numbers.

This is Joe. I would add a little bit more to that. Realizing what the ramp-up is on a typical associate being on average about six months in terms to ramp them up and also realizing that our people when they move to being a two to four-year person versus less than two-year person, their productivity on average is more than double. And then, when we hold onto them for four years plus, it actually doubles again.

So, the point being, it's not like a water spigot that once you turn it off, you're going to feel that ripple effect down the road. So that's why we're closely monitoring the market and what we are experiencing in the market and make sure that we continue to hire in on the front end just because of that productivity ramp and then how these people also ramp up from year one to year two and so on and so forth.

Right. So, obviously, extremely volatile business month-to-month. But, when you only have 25% perm growth in October year-over-year, you would expect to have in the fourth quarter a lot more than that if these -- to get to productivity improvements, right?

Well, to get to the productivity improvements, yes, again the holidays and with a young staff, it is very, very unpredictable. When you look at year-over-year October, particularly the first month or the first week of this quarter was unusually low. And then all of a sudden, we picked up and now we are exceeding even at greater percentages. But obviously, we had to give you the month versus the month on a year-over-year basis. And so, we have high expectations. We'll have to see how it goes.

Then on the operating expenses, Joe, this is -- it ended up being a little bit higher than you expected last quarter and I understand the search. That's easy to understand. And then, Kforce has made huge strides for a while now in increasing the temp gross margins. And so, that's what you're talking about when you talk about the two-thirds of the increase in operating or SG&A expenses coming from sales and infrastructure. Is that correct?

That's correct. You have one-third of that that is purely attributable to the difference in the commission structures associated with the search dollar versus flex dollar. So, one-third of it is purely wrapped up in the commission structure.

Just the commission structure and not the increased headcount?

It has to do with the mix. Because of that mix shift going from 6.8% of total revenues to 8.2% of total revenues, that contribution is embedded in there from a commission standpoint because of that mix shift.

Right, but is that just in increased commissions, or is it -- is the one-third that you're mentioning also the increased commissions plus the increased hiring that you've done?

No, it's purely associated with the compensation aspect, okay? Not the hiring. The other two-thirds is associated with the hiring, the training, the infrastructure investments. And as I mentioned, the bulk on a percentage basis if you look at a percentage at an SG&A line item is wrapped up in compensation, benefits and commissions.

Right, but on the two-thirds part, does that include -- obviously, the flex individuals are making greater commissions also because of the higher gross profits there. So, is that included in the two-thirds part?

That is embedded in the two-thirds part. Again, the one-third is specifically related to the mix shift that has taken place on a year-over-year basis. The other two-thirds as I continue to mention, what's mainly driving that is compensation and benefits. Now, when I say compensation benefits and commission, that's the additional hiring. That is flex personnel being more productive, so you have a lot of things embedded in that other two-thirds.

Got it. Then, you said constant in the fourth quarter. But is there anything you can talk to us about when we should expect that to start getting back to a leverage standpoint?

We don't really provide guidance more forward-looking than one quarter. But I will echo what Bill stated in his comments. We are focused on 2007 and 2008 as the optimal operating environment, realizing if we're stating it's the optimal environment, we would expect our associates on average to be more productive to take advantage of the overall market climate. So, I mean I don't know if that gives you a feel.

Rick D'Auteuil, Columbia Management.

Let me just jump right to that point. If I look at the SG&A percent over the periods that you presented in your release, SG&A was 28% this quarter, sequentially up 1% from the prior quarter and up 1.7% or 170 basis points from the prior year. What would the model look like under this optimization kind of thoughts as we get out of the hiring phase? What would SG&A look like?

Where I would take you is to the earnings before taxes line, which is even in light of SG&A going up -- and this is part of that phenomenon that happens with mix shifting that SG&A goes up but operating margin expands. That line has expanded form 5.4% a year ago to 6.2%. It also improved 20 basis points sequentially.

So, in terms of running any type of model, as I've stated, we're working towards at the peak cycle, 10% at that line. So, that's I guess the best way that I can answer the question versus going back to the SG&A line item.

Is there any reason today to not think by the end of next year that we could get to that kind of operating leverage?

This is Bill. Certainly, we're moving in that direction and we think that there is a ramp-up period. As we get there 2006, we really focused on staff growth and margin expansion and acquisitions. 2007, we will be focusing on revenue growth and SG&A reduction through process efficiencies. In 2008, we will be focusing exclusively on earnings growth.

When that exact point will come is difficult for us to determine. But we are certainly looking for that type of percentage for the year 2008. That has been -- that's our roadmap to 2008 and that's one of the benchmarks that we're after.

You made a comment -- I think it was you, Bill -- earlier on perm. Did I understand the peak of the last cycle, did you say -- I forget what's Q2 -- but perm was $47 million a quarter, right?

A quarter, correct.

And it was 19 something in this quarter, right?

That's correct.

So we're looking at -- with the hope of approaching those kind of numbers again more than double -- significantly more than double the dollars. In the past cycle, I think your mix of business was different, so I'm not sure we get back to the same percentage of revenues given your acquisitions. But, do you have any thoughts on that?

Yes, several things. First, $47 million, that was a 22 to 23% mix. We are going for 10 to 15% mix. At current -- if we were -- just go two years ago at our normal productivity levels and take that productivity level per associates and apply it to our associate staff count today, it's about 30% higher. So, 30% on 19.7 is about $26 million. So you can see that we are well on the path to that type of growth.

And that certainly is our goal -- is to reach that level again. We don't think we would be overextended by doing that and taking on too much real estate and affecting future bottom lines. But we do believe that there is very strong prospects to getting there. We're hiring good people. We are training them. The technology is there. We are excited about what we can do in perm and we continue to add to that headcount.

Just taking a step back but when you guys announced Bradson, you did a presentation. In the presentation, it became clear that your -- as I think you've put this down, your KGS slide 12, where your year-to-date information on the government side was weaker than we had anticipated and I think that you had anticipated. Can you give us an update -- there was mention of the EAGLE contract in the startup phase, employee poaching, contracts ended. Maybe you can bring us up-to-date on what's going on there?

Sure. I think as we mentioned on that call that we were very pleased with the team we put in place with Pat Moneymaker, Larry Grant and David Halstead. That's over our entire government practice.

On the KGS or our legacy practice that we brought in from Pinkerton, we have changed our top management there. That's Pat Moneymaker and Larry Grant, and we have restructured that group. There was some people that needed to leave, and there were some client activities that resulted in some reduction in that run rate. We believe that that run rate has now stabilized -- the $30 million run rate activity, which is very similar to what you have on the finance and accounting side. So basically, those two will start out with somewhere around a close to a $60 million run rate.

On the technology side of our government practice, we have several wins. We were one of the people to win on the EAGLE contract past quarters -- are just now starting to come out into that particular contract.

We have won a nice contract at the FDIC and a few other nice wins there. But it takes time for those to build. The nice thing about those, they are two and three-year contracts or longer. And so, it's a very stable business and it's a good annuity upon which to build.

Now, Bradson comes in with a very strong client base. We do not expect Bradson to go through the same type of change management that was necessary with the Pinkerton acquisition.

But I would say at this point in time, I'm extremely pleased with the leadership team and where this group is going. We have very high prospects there, and we believe we can accomplish a lot.

I don't know if you track this, but I will throw it out there. I assume to the extent that it was off plan, do you have a sense of how dilutive that acquisition is so far this year?

Well, it has two pieces to it. It has the commercial IT space, which we immediately integrated into our practice and then we have the government group. The government group came in at about a $33 million run rate. And they are now at about a $30 million run rate so that's 10 million.

Provident, which was at their Manila group, has continued to produce and has had no falloff. The commercial IT sector has completely blended into ours, so we can't really follow it. But I can say generally from the people that are here and the activities that are in place, let's say I think their number -- their top producer is now number three in our firm.

So, I'm encouraged with it and I don't believe it has been dilutive. I think it has been a solid acquisition, particularly when you consider the price we paid for it. To get a $30 million government practice, it would -- commercial IT practice would be almost free if you looked at it that way.

And vice versa, the commercial is worth $30 million and we got the government practice free. So we still believe that was a very solid acquisition for us.

Then my last question is we -- are you through weaning off the low-margin accounts? Are we looking at growth that is not constrained by shedding poor-margin business? Or I guess where do we stand in that process?

Yes, this is Bill. We had low-margin business in the acquisitions. We have shed those, and we've told you about those over after the Hall Kinion merger and there was a small part of it in the Pinkerton merger. So, the gross margin business from acquisitions is gone.

We had also started at the beginning of this year a real strong initiative to increase our pricing and client selection and job order selection. For the most part, that is over. That has gone extremely well. I compliment our market presidents because they've demonstrated incredible margin discipline.

And, in fact, we may have become a little too good at this. Our culture is such that we are after very high margin business. As you and I know, GP percentage does not put bread on the table, only GP dollars do.

So, we have begun a subtle shift to balance volume and rate. So, we are now moving into this second phase of our roadmap to 2008 where organic growth is going to become more of an emphasis and so that we can continue to have strong margins. But we need some revenue growth here to pick up to the levels that I know this team can produce.

Mark DeRussy, Raymond James.

Bill, feel free to put up 10% EBIT margins by the end of next year by the way! First question is kind of a follow-up to the last question. Looking at your F&A flex business, it seems as if after a couple of quarters of declining revenue, we actually saw a pretty nice sequential uptick. I am wondering if you could kind of give us some color around what happened. And is -- have we hit an inflection point where we think that that business is going to start growing again on the top line?

This is Bill. Our F&A business has two sides to it. Or the F&A business, pure and simple, you are correct. However, if you take the mortgage-related business out of it, a significant part of that is in our on-staff group. But we have parts of it in the rest of the business as well. You would see a trend line that was much stronger and certainly closer to some of the top industry performance of other groups.

The mortgage-related part of it is a wild-card, as you and I both know. Interest rates, where they're going and what they're going to do is an important component of that. We are very strong in that practice, probably a market leader in mortgage-related type of personnel. And that has had two quarters, what's been down about 7% sequentially.

We need to take that into consideration. We believe it is moderating. However, I can't predict that that is the case. F&A, generally speaking, is stabilized at a very high level. And we believe that will continue to be a strong performer for us.

Next question I guess, just directed more towards Dave from a strategic standpoint, two components here. One, your nursing business continues to somewhat struggle. Obviously, there is some supply constraint issues out there. I don't know if they are going to abate anytime soon.

You guys have obviously on the M&A side have been acquiring companies. Any reason to think or have you thought about maybe getting out of the nursing business? Is there a strategic imperative to be there?

Then, the next question, Dave, would be on the Bradson call, you kind of indicated that for the foreseeable future, it looks like we're going to throttle way back on the M&A and kind of look to harvest all your investments and optimize the business over the next couple of years. Are you still of that thought that you are going to focus less on M&A and more on optimization?

Let me take each one individually. Nursing, nursing has two pieces. It has per diem, and it has what we call our international nursing group, which has characteristics that are more like travel. They are longer-term contracts. We made a conscious decision a couple of years ago to invest in that area.

And the per diem business, as you can see in the market as a whole, has been challenged for a number of reasons. Customers and -- predominantly are driving that shift. So, if you look today, our international or global services component of that business as we move to the end of September is actually running at approximately 40% of the total revenue and a higher component, up to 50%, of gross profit. And that's as of the end of September.

So, the shift that we started a couple of years ago has in fact taken route. We are after profitability in this particular group. As the component of international nursing overtakes the per diem runoff, we believe that that business will stabilize and actually start to turn up.

With respect to any strategic value in nursing, clearly as we've managed it to profitability and shifted the model, we are always assessing value of each of our business units. And long-term shareholder value is a piece of that. We have not pursued anything on the M&A side on that front. But clearly, we are always going to evaluate strategic value. But, right now, our focus is to drive increased operating leverage and to continue the shift towards the international nursing and longer-term contracts.

With respect to your question on acquisitions, as I mentioned earlier, we are after a very disciplined approach. There are valuation characteristics that are very important to us. We're going to be highly selective in looking at acquisitions. They're going to have to have a compelling valuation and fit a real need. I will never say never to say that we would not do one. And in fact, if the right opportunity came to bring the right people as we have seen with Vista, Pinkerton and Bradson, and even Hall Kinion before that, we would certainly examine it very carefully.

But right now, I think the word "harvest" is a good one. We're moving into a phase that we are very aggressively pursuing organic growth and operating leverage. So, the level of scrutiny that we will apply has been heightened substantially.

Josh Vogel, Sidoti & Company.

I think I may have missed a couple of questions. So, I apologize if I repeat any. But how was October looking in terms of flex/perm business?

October, flex is up 17%, and perm is up 25%

Okay, great. So, if everything goes according to plan here '07 as year of revenue growth; '08, you were going to focus on earnings growth, so we should not be expecting really any heavy investing into headcount again through '08?

No, no. I would not conclude that. We will continue -- to continue revenue growth, we have to continue to invest in headcount. But there is a lead lag effect going on here. That is we have over the last 18 months been hiring people. Those people over a six-to-nine-month period become productive. Therefore, the people we have hired become more productive. They earn through draw, and they continue to increase their ability to produce. At the same time, new people are coming onboard.

So the effect shouldn't be necessarily as great because of the higher revenue levels and productivity of our current staff. But we will continue to add people so that we can achieve a strong revenue growth line.

And lastly, David, you in the past had discussed your key performance indicators. And I was wondering what they were forecasting for the near-term.

KPIs remain strong. Those are activity-based KPIs. And as I mentioned, we believe that the specialty staffing -- the professional and technical staffing component of the staffing industry remains strong. Forward-looking KPIs are important indicators for us when it comes to determining the investments that we make in additional staff. So, those continue to be strong.

Jeff Bernstein, Manhasset.

Can you just touch on the CRO business and the health information businesses? It looked like they were down a little bit sequentially. They are a little bit lumpy. Can you just give an update?

Sure. CRS revenues are up 11.2% year-over-year and margins are up 100 basis points. This is a project base business with a lot of large clients. And we -- the last couple of quarters, we have seen some big project ins and that means our staff spends more time deploying the existing consultants than they are growing overall headcount. So, that group has struggled the last two quarters.

I think that we just about have that completed on a billing day basis. They should be probably slightly down as they ramp all this up in the fourth quarter. We have some significant company closings. They almost -- not all of them but most of them -- certainly the large ones close between Christmas and New Years.

For the first quarter, I believe the first quarter 2007 is when they will really start the growth pattern again. HIM is up 11% year-over-year and GP is up an amazing 510 basis points and 280 basis points sequentially. Obviously, been focusing very hard on getting the right quality of job orders and very strong client selection. We believe fourth quarter will sequentially grow on a billing day basis.

So, I do recognize their performance in the fourth quarter. I am looking forward to both of them going after the different areas and being successful.

Scientific, the only other area in HLS we haven't mentioned, was 5.5% sequential growth on increased demand. And gross margins have been up for the last three consecutive quarters, totaling about 230 basis points year-over-year.

So, HLS struggling a little bit. Peter Alonso and his team are out there making it happen. I have confidence in them that they will be back next year.

You will be pleased to know that Pete's 49ers jacket is on the line for the first quarter.

The DSO looked like it was up a little bit. Any commentary there?

This is Joe. It's more timing. Q3 is always one of the more challenging quarters for us just because of you have a lot of vacations going on. So access to the individual is inside from a collections standpoint.

Okay, at this time, I would like to go ahead and turn the conference back over to Mr. Dunkel for any closing or final remarks.

Okay, we appreciate all of your interest in Kforce. And as we've mentioned, we're very pleased with the execution of our plan. What you're seeing is a highly-disciplined approach to a three-year plan. As we move into the next phase, we're very excited about our prospects. We appreciate your interest in Kforce. Once again, thanks to all of our hard-working associates. Have a great day.

That does conclude today's conference. We thank you for your participation. Please have a good day.