Kforce Inc (KFRC) 2006 Q4 法說會逐字稿

Good day everyone. Welcome to the Kforce fourth quarter 2006 earnings conference call. Today's call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Michael Blackman. Please go ahead.

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

I would now like to turn the call over to David Dunkel, Chairman and Chief Executive Officer.

Thank you Michael, Senior Vice President. You can find additional information about Kforce in our 10-Q, 10-K and 8-K filings with the SEC. We provide substantial disclosure in our release, and our hope is that this will improve dissemination of information about our performance and the quality of this call.

After 27 years at Kforce, I'm very pleased to report that 2006 was the very best year in our history. We hit all-time high records in revenues and earnings. And I'm even more pleased to report that we believe 2007 will be an even better year.

Our performance in the fourth quarter included our fourth straight record quarter of revenues. We also achieved all-time high revenue in EPS for the full year of 2006. Fourth quarter marks the end of the first year of our three-year plan.

In 2006 we completed and integrated two acquisitions, Pinkerton in the first quarter and Bradson in the fourth quarter. The Pinkerton acquisition enhanced our technology staffing platform in the Northeast, and brought us a prime federal government platform in technology from which we plan to take advantage of the substantial investments in homeland security and the changing federal workforce demographics.

Bradson brought us a prime federal government platform in finance and accounting, from which we plan to take advantage of the heightened focus on improving financial controls and efficiency within the federal government.

Also in 2006 we moved closer to completing our back office technology platform aimed at increasing operating efficiency and delivering exceptional service to our clients. Our management team matured and we added strong leaders in our remaining key positions, supported by a substantial investment in leadership training.

We invested heavily in building our associate ranks, putting resources in place supported by substantial training, to enhance organic growth as their productivity improves. The table is now substantially set for 2007 and 2008, as we look to increase operating leverage through profitable revenue growth. Our goal is to surpass $1 billion in revenue for the first time in firm history, an important milestone, an indication of our success in delivering exceptional service to our clients. As we evaluate acquisitions we will be highly selective in evaluating candidates with a focus on leadership, markets and valuation.

We believe the knowledge economy remains strong, with both secular and cyclical drivers fueling excellent growth prospects. College-educated unemployment remains at record lows with no relief in sight. The premium for top talent will likely increase for the foreseeable future.

Overall an outstanding year for Kforce, as reflected in our operating results and the many significant advancements our team accomplished to further strengthen our platform.

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

Thanks to all of you for your interest in Kforce. As Dave stated, we are extremely pleased with the progress we made in 2006 on many fronts, and believe that 2007 will be another year of exceeding milestones and improving operating and financial performance. The year 2006 was our best ever in most respects, including revenue and earnings.

Our vision is to be the firm most respected by those we serve. A key aspect of our vision is building a firm that delivers sustainable and consistent revenue and earnings performance. Total revenues of $938.4 million in 2006 represents a 17% increase over 2005 revenues. We believe 2007 could be our year to hit $1 billion in total revenues.

We are especially proud that in 2006 all of our business segments contributed to our growth, led by a 23% increase in our technology segment, which comprised approximately half of our total revenues. In this knowledge economy, where skill workers are at a premium, we believe the demand for technology staffing services will continue to grow, and that we are well-positioned to take advantage of this increasing demand.

One indicator of this demand is how quickly flex revenues have thus far recovered in Q1 from projects' ends that occurred -- that occurred at the end of Q4. Flex revenues across all business lines have recovered at or near their fastest rate in the past six years. And we are nearly on par with December levels by the end of January.

Another trend that has contributed to both revenue and earnings growth in 2006 was the growth of our highly profitable search business. We're pleased with the performance of our search business. Search revenues for the year of $70.9 million represents 29.1% annual growth. Based upon key performance indicators, we believe the market for direct hires remains strong, and are optimistic about Q1 search.

We believe Q4 results in search are a reflection of our internal focus on talent acquisition. We believe we have capacity with our current search service teams, and note they have increased 60% year-over-year in headcount. As expected, a young team will often lead to uneven performance, and Q4 is clearly a period where we experienced some of the impact of the ramp up of our team. However, based on our emphasis on training, our excellent management team, good job order workflow, and solid KPIs we remain bullish on our search prospects.

As we moved into 2007 we shifted our focus to productivity improvements with moderate hiring. The emphasis on teamwork is being supplemented with special programs to help our new associates become more productive. While we have moderated on hiring, we expect to continue to build a team as KPIs suggest it is prudent.

We are equally pleased with the improvements in both gross margins and operating margins in 2006. Gross margins improved 240 basis points for the year, as a result of both our improving search business, as well as a 200 basis point increase in our flex gross margins. Improving margins was a major focus of 2006. And we believe 2007 will see moderation in gross margin improvement as we balance margins with our revenue growth goals.

The improving gross margins, coupled with careful management of controllable expenses, has allowed the firm to make significant investments in building sales and delivery capability, while not significantly impacting earnings. Sales associate headcount increased over 30% for the year. And accordingly, the firm made significant investments in leadership and sales training. These critical objectives have been accomplished and the level of these expenses will decline in 2007. We expect 2007 to be a year of transition from aggressive talent acquisition to more of a focus on productivity, which should further enhance our earnings capability.

We are very pleased that we have been able to produce strong results while integrating two acquisitions during the year. The acquisitions of Pinkerton and Bradson allowed us to both strengthen our technology staffing business and to build a solid, prime government solutions platform. We are very proud of the efforts of our team to once again seamlessly integrate these two companies into both our culture and processes with world-class efficiency.

We are especially excited about the opportunities in the technology and finance and accounting sectors in the government space, and believe that the government vertical allows us to leverage our nationwide recruiting and sales capability as the demand for services to the government increases. This new segment should also add stability to our revenue stream as a result of the long-term contract nature of the business.

And finally, we will substantially complete the significant investments in new technology for our firm by midyear. Over the last three years we have spent almost -- in excess of $20 million for a new front-end system and a long list of infrastructure applications, including electronic client approval, PeopleSoft HR, and financial system upgrades, pay bill time and labor, and a data center upgrade. These world-class systems will provide our clients and associates with the finest tools, and allow us to reduce SG&A through efficiency gains.

While our objective is to drive revenue, we will also focus our efforts on process improvement in 2007. We're proud that our infrastructure efforts have provided great results, such as reducing 1999 days sales outstanding of over 60 days and receivable charge-offs of $12 million to 2006 days sales outstanding of 40 days and receivable charge-offs of less than $1 million. While we do not promise results so dramatic in 2007 and 2008, we do believe significant opportunities are available.

We continue to believe that targeting operating margins of 10% of revenue remains achievable in this cycle. We have often talked about our three-year plan to optimize earnings. The first year 2006 was a year of great success and better than we expected. We believe we have a foundation for an even more successful 2007 and 2008.

As Dave indicated, our goal for 2007 is to be a $1 billion firm and even more profitable. We expect all units will contribute to achieving our revenue goal, and we are especially optimistic about our technology staffing prospects. I will now turn it over to our Chief Financial Officer, Joe Liberatore.

The fourth quarter was a cast on to our best year ever, as the firm delivered record EPS and revenue for the year. Fourth quarter revenues of $243.1 million represent a 1.8% increase over Q3, and 19.4% increase year-over-year.

The revenue per billing day of $4 million reached an (technical difficulty) straight quarter and continues to (indiscernible). Revenue on a billing day basis increased 5.2% over Q3 2006, and 19.4% year-over-year. We continue to translate revenue growth into bottom line results, as net income has increased 34.9% year-over-year to $9.3 million in Q4 2006, as compared to $6.9 million in Q4 of 2005. We very pleased with bottom line performance in Q4 despite a sequential decline in our search revenues, as Bill noted.

During the quarter we continued to make significant investments in training and sales support, which were partially offset by the reversal of a tax reserve that reduced income tax expense in the quarter. We are confident that we can continue to manage the business, optimize earnings, and should continue to see additional operating leverage as we move into the second year of our three-year strategic plan.

EBITDA, an indication of the firm's strong cash flow, increased 34.6% year-over-year to $19.8 million, or $0.47 per share, in Q4 2006, as compared to $14.7 million, or $0.36 per share, in Q4 2005. Q4 2006 earnings per share of $0.22 increased $0.05 or 29.4% year-over-year, and increased $0.01 or 4.8% sequentially.

In terms of revenue by time, Q4 flex revenues of $226.1 million were up 18.9% year-over-year and 3.2% sequentially. The growth in flex revenue was driven primarily through the continued improvements in our technology flex staffing business, which saw sequential growth of 6.5% on a billing day basis, and has now increased 27.5% year-over-year.

Our F&A flex business declined 1.8% sequentially on a billing day basis, predominately driven by my our mortgage-related business. Flex revenues in our HLS segment were up 1.3% sequentially on a billing day basis. Our government segment had revenues of $13.4 million for the quarter, which reflects a full quarter of Bradson revenues, as well as revenues from our Kforce Government Solutions subsidiary.

Total search revenues of $16.9 million for Q4 was up 26.4% year-over-year, and down 13.2% sequentially. Based upon extensive internal and external analysis, we believe the search market continues to be strong, and that the decline in the quarter is mainly attributable to productivity declines of less tenured associates, which make up a high percentage of our total search population.

In terms of revenue for the beginning of the first quarter, flex revenues for the first four weeks are up 19.6%, and search is up 3.4% year-over-year. We caution that it is difficult to draw conclusions for Q1 based upon this limited data; however, we anticipate sequential growth in all business segments in Q1.

As Bill indicated, we're moving into the second year of our plan where productivity of the team will be the focus. Productivity levels of our sales force have dropped from our Q2 2005 high by approximately 22.9% as a result of our aggressive hiring activity. This decline was anticipated and we believe necessary to build a team to take advantage of the continued strengthening and demand for our services. We have moderated our hiring and now expect to see improvements in productivity beginning in Q1.

A key driver contributing to the current positive trends continues to be our ability to manage gross margins. Gross profit percentage has improved significantly over the past year. Our gross profit percentage of 35.3% has improved 210 basis points year-over-year, and declined 50 basis points sequentially as a result of mix. Our flex gross profit percentage of 30.5% in Q4 2006 increased 40 basis points sequentially from Q3 2006, primarily as a result of the inclusion of higher margin Bradson business.

Flex margins in our staffing business were relatively flat, though we continue to see improvements in technology flex gross margins, which we believe is another indicator of strengthening demand. We expect the rate of improvement in flex gross margin percentages to moderate as the economic cycle matures and we balance volume and rate objectives.

We seek to balance current profitability with selective investments. In Q4 operating expenses decreased 30 basis points from the third quarter to 28.9%, and have increased 160 basis points year-over-year. This year-over-year increase is attributable to building and training a world class 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 see the benefits of these investments as we move into 2007, and therefore anticipate reductions in operating expense percentage, though Q1 will be negatively impacted by payroll tax-related expense that is expensed as incurred at the beginning of each year.

In terms of other important financial metrics, capital expenditures are expected to remain low, but to increase from 2006 levels as we complete our technology initiatives and upgrade our existing infrastructure and facilities. We also continue to actively manage our accounts receivable portfolio, which maintained a very low DSO of 40.3 days compared to 44.4 days in Q3 2006.

Our continued strong cash flow allowed us to reduce bank debt in the quarter to $86.4 million, which was a decrease from $103.5 million at the time of the purchase of Bradson Corporation on October 1. Our strong cash flows and improving earnings allow us to be confident in our ability to pay down this debt, as well as to invest in our growing business.

Looking forward to the first quarter we expect revenues may be in the $245 million to $252 million range, and earnings per share of $0.18 to $0.20, which reflects the impact of Q1-related payroll taxes, which may impact EPS by approximately $0.05. This expectation assumes 42.1 million weighted average diluted shares outstanding.

From a financial perspective Q4 reflected the ability of the firm to manage the business to maximize profitability, while still allowing the maturation of our search engine. We believe this capability will only be strengthened as we move into the optimization phase of our strategic plan when we will maximize our operating leverage in 2007 and 2008. Our balance sheet and cash flows remain strong. We remain optimistic and confident in near-term and long-term strength in specialty staffing.

I would like to now turn the call back over to our CEO, Dave Dunkel, for closing remarks.

We will now open the call up to questions. And, Steve, go ahead and open up the full line please.

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

Congratulations. The underlying metrics appear quite healthy in the business. And I was wondering if you could review with us the trends intra-quarter, maybe by segment to just kind of let us know which months were up and down sequentially? Thank you.

This is Joe Liberatore. From a flex standpoint, I will give you the high level. October was down, November was up, December was down, and the first four weeks of January were up. From a total current standpoint October was down, November was down, December was down, and we're up in January.

To break that down, in tech flex down in October, December -- up in December, and slightly down in the first four weeks of January. Perm from a tech standpoint was down in October, down in November, up in December, and down the first four weeks of January. Any other color you would like there?

No, I think that does it. When looking at the performance in perm in the quarter could you describe maybe the trends on the demand side? And your expectations, maybe refresh us on the ramp for new hires to eventually reach more productive levels?

This is Bill Sanders. A couple of things. Historically I think, as you know, fourth quarter search is seasonally slow for us. The context of this is over the last 18 months we have hired, as I mentioned in my prepared remarks, approximately 60% of the people in 2006. And when you have a young team like that I think you see higher peaks and lower valleys of revenue performance than you would if you had a seasoned team.

The vast majority of those hires were in Q1 and Q2. I believe it is 15% in Q1 sequential growth and then another 26% in Q2 sequential gross, and a 9% in Q3, and a 1.1% or so in Q4. So you can see how the build up was in the beginning part of 2006.

Our expectations for 2007 is the newer associates will become more productive, and therefore this band of revenue performance should tighten up as there will be hopefully not as high peaks and low valleys. But perm has been up for the last 11, or last 11 of the last 13 quarters, and we believe we have a real positive trend there.

This is Dave. Bottom line, this is internal, it is not market, and it is related to the tenure of our staff. KPIs are very strong. Job order activity, very strong. If there's any trend that we have seen it is the increased pressure on the supply side, and the candidates are getting multiple offers, and we are seeing counter offers. I would not consider the fourth quarter to be any indication of a change in the market. We would say that it is primarily internally related to the tenure of our staff.

This is Joe Liberatore. To give you a little bit more color related to our staff, approximately 30% of our total search population has less than one year of tenure. And as we have stated, our search associates begin to break even around month nine. And as we break down our search population we look at it in really three main groups, those with less than two years experience, those with two to four years experience, and those with four plus years experience. Our two to four year population on average produces two times what our less than two-year population produces, which is about 60% of what we view as capacity, which is our four plus year population.

Thank you for the additional color. I will ask one other question and I will get back in the queue. Over the last couple of years now you kind of have been going through a process where customers that were unwilling to recognize higher bill rate needs out in the marketplace, you were trying to educate and kind of teach them what the market rates were. Are you seeing some of those customers that in previous quarters were maybe a little reluctant to accept those higher bill rates? Are any of them coming back to you after maybe a period of absence and giving you more orders, and coming back to you and looking for more temporary professionals?

I won't be able to give you a large trend, but I will tell you there's certainly anecdotal evidence that some significant clients that actually closed us out because of that have come back and given us statements of work for special projects, because it is getting more difficult under low margin rate cards to acquire the sort of talent that they are seeking. So the answer to that is generally yes, but I don't have any particular statistics to give to you.

This is Joe Liberatore. Just to give you some flavor without getting into specific customers, from a topline service level standpoint bill rates on a year-over-year from Q4 '05 to Q4 '06, they are up across all service lines.

Mark Marcon, Robert W. Baird.

On the tech side obviously very strong flex growth. I am wondering if you can talk a little bit about some of the -- what you are viewing as the underlying factors there in terms of market growth relative to enhanced ability to penetrate different client segments? What are you seeing that is really driving that strong growth there?

Certainly it is quality candidates. In certain hot skill groups such as Java or programmers or ERP, PeopleSoft, SAP, that sort of thing. But it is a good point. November was our best ever year -- or best month ever on a billing day basis, and then December beat it. So we're up sequentially 6.5% in tech flex. We are seeing some very good metrics as we go forward. In the first month, meaning January of 2007, we were -- it is the second-best year out of the last six years from a recovery over December. So January usually has some fall off because of the year-end projects. So that as usual went away and we have recovered extremely well. So we are very pleased with all of that.

I would say client in general are looking for not only a technical fit for what they are after, but application knowledge. Financial services clients are holding up really well. So yes, we are very pleased, very bullish on the tech sector.

As it relates to perm you mentioned that your KPIs would suggest that this sequential downturn in the fourth quarter was a bit of an aberration and that it should bounce back. What specifically are you seeing in the KPIs? What are the specific indicators that would suggest that things should balance back?

This is David. You can imagine that we have placed quite a bit of scrutiny and analysis to understand this. We are very KPI driven. We monitor things like job orders and send outs and ratios and those kind of things. So given the concern last year and what was happening in the search market overall from a market perspective as opposed from a firm perspective, I think that clearly the concern is, is this a shift in the search market? And the answer is a resounding no.

We have studied it very carefully. As Bill mentioned, when you hire a number of new people fourth quarters are typically challenging. Clients have spent search budgets, and they typically don't want to bring on new staff in the fourth quarter. So it takes people with experience to sell through that process. And while we would certainly have hoped for a better quarter, we are 100% bullish on search. We see no indication at all of a market slowdown. If anything, we see increased pressure on the supply side.

But in terms of the specific KPIs that you're seeing strength in, is it orders, what specifically?

Orders, send outs ratios, fill ratios. Those are the things that we monitor, and we have seen no softening in them at all.

What specifically are you going to do to improve the productivity of the -- these newer folks?

Most of that comes from time in the seat. Clearly we have invested heavily in training. And we have a program in each of our locations where the experienced people are assisting the junior people and helping and them get ramped up. In a candidate-driven market such as this, the majority of the new people focus on the supply side, which is easier for them to ramp up than it is to work on the client side where selling skills and control over assignments and process require more experience.

So we have a plan. We have implemented the plan. And our experience would tell us as time in grade ramps that their productivity would ramp as well.

A year ago, two years ago you talked about how you were going to focus on getting the gross profits up. Obviously that is an efficient way of growing profitability, and you clearly accomplished that. Now you are turning your sights to increasing productivity within the organization. As we think about your SG&A as a percentage of revenue, what sort of leverage improvements should we get? And what would be the key drivers as you target this $1 billion revenue goal?

This is Joe Liberatore. Productivity is the key. When you look at the ripple effect of productivity when we can have an associate producing at 2X versus a newer associate, and to generate that gross profit, not taking another seat, another infrastructure cost, another benefits plan. So it is pretty substantial, which is why productivity is the name of the game.

When we start to look at leverage, we continue to -- our goal is 10% operating income percentage as we look out to Q4 2008. And we continue to make progress towards that goal, and we are going to continue to strive to obtain that.

I would add to that that we have spent substantial time and money over the last two years looking at data from the last ten years of how people are productive, who is productive. And so it is very important for us in our attraction of the right people, and then making sure that they are successful. Successful people then have tenure with the firm because this type of staffing business is high turnover business. If you're successful then you stay. And if you stay, then you are successful. And it is a continuing pattern.

We spend a lot of time, pick the right people. And we have spent -- we are spending a lot of time in making sure through a variety of programs that they are very successful.

Should SG&A as a percentage of revs decline by say a 100 bips, is that a good goal for 2007, or how should we think about it in terms of financial terms as it relates to your model?

This is Joe Liberatore. As you well know, we only provide one quarter forward-looking guidance, and not guidance for the overall year. The one piece of data that I could share with you, when you look at that cost being up 160 basis points on a year-over-year basis, virtually 100% of that 160 basis points is wrapped up in compensation and commission expense. And that is mainly attributed to the expansion of the salesforce and ramping those individuals, which are not contributing at the GP line.

Essentially what you're saying is that exclusive of the commissions that we would pay on the incremental revenues, the SG&A other than that should be relatively flat going forward? Is that correct or --?

No, this is Bill again. In my remarks remember I said were going -- after 2007, 2008 is not only a period of revenue growth, but we're really going after processes, the way we do things, how we drive revenue, and how we monitor expenses internally. We have spent $20 million on CapEx over the last three years. We have actually a business process, a management group within the firm. And I believe that we're going to make substantial dents in our SG&A expenses. To give you a number, I don't know. It is going to happen over time, especially over 2007 to really be in place by the beginning, hopefully, of 2008. But it is not just the productivity of our people. We're coming at this on a number of different fronts.

Craig Peckham, Jefferies.

I wanted to see if you could compare for us the levels of search productivity you're running at today versus say the last cycle peak in search volume?

We could tell you -- certainly Joe gave you some revs by individual, by the total firm as we looked at it. When you look at search, we are seeing productivity -- probably if I had to even hazard a guess -- I don't know if you've got the real numbers there, Joe. If we had to hazard a guess, we are somewhere 50 to 60% of where we were at the top of the market last time.

We have substantial -- now underlying and capitalize the word substantial -- capacity in our search team to meet the seasoning and the quality of people that we had at the top of the last cycle. Obviously when you have a very good economy and things are hitting on all eight cylinders, everybody is doing very well, and that creates an environment that we're seeking to achieve again.

Recognizing the considerable macro tailwinds that hit at that time, is there anything structural that you would point to that would make us think that that kind of productivity improvement would be any different going forward?

This is Joe Liberatore. I would say to expect, especially when you look at our search mixture at the peak of the cycle was about 50% F&A, 50% tech. Tech was in a very unique state at that point in time, as we are all aware, with the combination of Y2K, .com, and really that perfect storm in terms of supply/demand. So to expect the same productivity levels on the tech side, I would say would be optimistic.

However, we are in a very different state from an infrastructure standpoint today as compared to that point in time in terms of the investments that we've made in technology, infrastructure, some of the investments we made in support-oriented resources. So I do believe that we have opportunities to get back to those same levels, not mainly driven by the same market demand dynamics that we experienced at that put in time, but just through some of the leverage that we have created as we have really built out the overall support infrastructure for the associate population.

Thanks for that. A housekeeping items Joe, could you put a dollar value on the size of the tax reserve reversal?

The dollar value on that is approximately $900,000.

Could you give us a little bit of -- help us to how you're thinking about what your 2007 tax accrual is going to look like?

Yes. From an effective tax rate for 2007, we're projecting pretty comparable tax rate to what we experienced in 2005, which would be slightly below 40%.

Mike Carney, Aperion.

First, Bill, you may have mentioned this, but typically you provide a year-over-year growth in firm sales associates.

70.9. What did I say in my remarks? 78.9? Year-over-year -- no, that is not it. What I say in my -- year-over-year dollar growth in perm was $70.9 which is a 29.1% annual growth.

No, I'm sorry, the number of associates?

60% year-over-year growth.

That was 50%?

60.

Okay, thank you. Also, Joe, you said on January trends it was at 19.4% year-over-year growth in flex and 3.4% in perm?

That's correct. That is for the first four weeks.

There was obviously a nice acceleration in the gross margins on the IT side, and then alternatively finance and accounting was somewhat weak. I can see the bill rate changes. Was there anything else that would explain those two things?

I will explain F&A flex. I will put it in a total context, because I think that is something that you'll want to talk about. When we acquired Hall Kinion back in, let's say June 7, 2004, we understood at that point in time that the OnStaff group, which we put into our finance and accounting group was almost 100% mortgage-related, was at a peak. It was a refi business. We knew that that was going to tail off in time. We knew we were going to have to diversify that income stream. And we knew that we're going to have to improve margins. It would probably over that time go through some transitions.

At that point in time margin for them was approximately 21%. At the end of this year the margin for them is 27.1%, so about 600 or so basis point improvement as we went through the process of diversifying into financial institutions and getting somewhat out of the mortgage-related business.

When you look at that, the mortgage-related business is down about 20% year-over-year. Pure F&A was down in the fourth quarter approximately 3.7%, due primarily to billing days after being up an excellent of 5.3% in Q3. GPE was up -- gross profit was up 180 basis point. So we look at finance and accounting, we see it in pretty good shape, and its margins continue to be quite strong.

On the IT side is that just a bill rate, pay rate difference that accounts for an acceleration there?

This is Joe. That would be correct.

Then on breaking out the government -- prime government business, can you give us an idea in this first quarter of Bradson, how much revenue was in that number?

For Bradson specifically? $7.3 million.

Okay. Then basically if one of you would talk about -- there had been some weaknesses in probably mostly the Pinkerton business. Has that stabilized? Where are you basically at that point?

Yes. Pinkerton has gone through, as you would for any acquisition, Pinkerton, their government services, we hired a new executive in August to head that up. Larry Grant. Somebody that we're very, very high on. He has done an excellent job. Went into that group and restructured, reorganized in. And it is now -- I think is now hitting on all cylinders.

So however, its revenues for that period, as we go through the restructuring -- of course we then brought in Pat Moneymaker to lead all of our work when we acquired Bradson. There has been a decline from Q2 of 2006 of somewhere around $7.7 million down to Q4 of just over $6 million. So it is $6.1 million. So there has been some decline. We think that that is now stabilized.

And we expect what the winning of the EAGLE contract, the winning of the [Matos] contract, that they are in good shape to start a real growth pattern now. Of course their sales cycles and the task orders are coming in from those somewhat slowly, and so we're not -- it is hard to predict with any kind of accuracy when that stuff will come on board. But we have high prospects in place we think for the KGS group.

Pinkerton is primarily IT solutions, correct?

Correct.

And then on the prime side. So do you think that you got the same type of risk with Bradson that you had with Pinkerton, or do you think that the difference in the solutions is what really drove that risk?

They are not comparable whatsoever. I think there is a little bit more risk in IT. I think it is a little bit more of a commodity. More players out there. However, in this situation there was a lot of work that needed to done in the Pinkerton group. And we did not pay -- in fact we paid a very, very low premium for that work. Bradson, we paid a fair price. And that is an exceptional group, and we expect no deterioration whatsoever out of that group. We expect only growth.

This is Joe. I would like to add a little additional color there. We have a pretty thorough due diligence process that we go through. And there's one big dynamic on top of what Bill referenced in terms of our awareness as we went through the due diligence. We were fully aware that when we acquired the Pinkerton government business that there was a little to no pipeline on a forward-looking. So that is part of what we are seeing reflected at this point in time in terms of some of the short-term deterioration as we hit this bottom and trough off of it.

Now the reverse of that as we were looking at Bradson, a very robust pipeline in terms of -- I think you might recall if you had listened to the call when we announced acquisition, the amount of open seats that they had were basically they had the work already had been won, they just didn't have the resources to put into those seats. So we are comparing and apple and an orange here in terms of the pipelines that existed when we acquired businesses.

Just a couple of quick questions here. Joe, on the tax reversal, was that a state tax reversal or is that federal?

Federal. That was associated with actually going back to the Source Services transaction.

Okay. And also you mentioned a $1 billion revenue goal in '07. Is that -- am I correct in assuming that is not your internal goal?

That would be correct.

Josh Vogel, Sidoti & Co.

I'm sorry, did you say that the revenue contribution from Bradson in Q4 was $7.3 million?

That would be correct, $7.3 million.

Can you tell us what the contribution was for Pinkerton for all of '06?

No, because -- for which part of Pinkerton, just for the government component, because we do have the government component broken out because that is not integrated into our branch network operations. However, for the tech flex business, predominately based in the Northeast and New York marketplace, as we've stated in the past, we quickly integrate and fully immerse the operations and realign leadership and account structures, so we don't have the ability to break that out.

What was it for the government then?

One second, I just had that sheet in front of me. Government revenues for the year at $32.9 million. And if I back out the $7.3 million, $25.6 million.

What area specifically in the tech space are you seeing the strongest demand? Can you go a little bit more in detail there?

We are seeing, as I mentioned, Java programmers are by far the hottest. There is other programmers. There is ERP from PeopleSoft. SAP. Clear candidate particularly are very hot. I would say there's always -- there is a pretty significant need for highly skilled people throughout the tech sector.

The areas that you just mentioned, is most of that demand on the tech side, or are you seeing it spread across the search side also?

Highly skilled people, both areas.

Typically in the flex side of the business, the full-time requirements and the flexible set of solutions requirement, they pretty much mirror each other.

Tobey Sommer, SunTrust Robinson Humphrey.

I was wondering if you could comment on what internal turnover trends looked like maybe compared to a year ago and what you were expecting? Thank you.

This is Joe Liberatore. I would say from a high-level standpoint from a year ago our most seasoned staff turnover is at a lower rate than what it was a year ago. From the less than one year population I would say turnover is higher than what it was a year ago. And that is mainly driven by quite a few initiatives that we have put in place to monitor the ramp of newly hired associates quickly, and to be working with those associates on developmental plans or for us to be parting ways.

From a macro standpoint the more seasoned people, we have actually had a slowing of turnover for the more tenured people, and an acceleration of the newer people, by design.

I was wondering if you could -- I don't know if you hit this in the Q&A previously. If you did, I apologize. But could you tell us what the cause was of the tax reversal?

This is Joe. It actually goes back to the Source Services acquisition. It was related to transaction costs associated with that transaction, which we submitted a request in and around, and it had been hanging out there for whatever -- the past five years or so. And we received notification on that in early Q4. And then we are comfortable with reversing that.

Rick D'Auteuil, Columbia Management.

Just a quick one. I think the numbers as you broke them -- Bill broke out on the hiring front for the perm recruiter growth by quarter showed the last quarter of Q4 being 1.5%. Is that consistent with your thoughts on hiring for this year?

It depends -- this is Bill -- it depends on how our KPIs and all of the activities actually pan out. This always is in fits and starts as activity warrants it. I would say you would certainly see a moderation from this level. And if we don't improve over Q4, it will actually go the other way. We are after this. It is very important obviously to us, and it is an emphasis.

The number -- the headcount being up 60% in perm recruiting, what did that mean you had to hire? I guess with the turnovers that you just referred to -- turnover rate you just referred to -- does that mean you had to sort of I guess target hiring at 90% to net 60% or --?

This is Dave. As you know, we have indicated on average about half the people that we hire make it, and that happens over a period of time. The strategy that we employ is to rapidly determine whether they're going to make it in this business. We have applied in a lot of science and there is some art to it. But we monitor it very closely. And based on their ramp up in activity and performance, we will make an early call. So the game is to washout as quickly as possible in the early period, and focus the training to ramp up their productivity.

To give you an answer that says that 90% of them or 80% of them washed out in that period or year-over-year is really not relevant, because it is all driven by productivity. And that is what we're after. We will use the throttle and manage the productivity accordingly. As the ramp and start to achieve the levels that we expect and contribute to profitability, then we may increase hiring. If we don't see the productivity, then we will reduce the bottom performers in that group accordingly. So the most important thing for you to know is that we are on it, and we have a methodology that we are following.

Given the competitive environment out there for probably quality recruiters, and I know you said a lot of these people had less than one year tenure, is there a chance that some of the productivity issues you are experiencing are related to lower quality candidates coming to you to begin with, or is it just what you said, the ramping at an accelerated pace so the blend of inexperienced people is higher?

It isn't quality. They don't come through the door if they don't need our standards. In fact, our standards have been raised. And as we mentioned on past calls, we have gone through an extensive analysis in human capital study to evaluate the characteristics that will allow someone to be successful. And we're hiring to very tight characteristics.

We're not hiring a number of experienced people. So the difference is that we're not going to the market and paying up to bring other people and their book of business over to the firm. We're after the people for the long-term that are going to be a part of our culture. And our experience tells us that the people with no experience, with the right characteristics, are those that are going to be most successful.

So we're hiring to tight characteristics and focused on the training and ramping. So I think that what we are experiencing today is probably no different than what we experienced back in the late '90s. The same kind of market conditions. And we are -- we remain very confident that our program will yield the results that we're looking for. And as the year unfolds, we will see the productivity increase as these people get time in the seats.

Mark Marcon, Robert W. Baird.

As a follow-up to that, how many perm recruiters do you have now?

We don't disclose that information.

How many associates? That will come out on the 10-K?

Associate count, Joe?

Total associate count running around 1,100.

1,100, and that is up from -- what was it at a year ago?

A year ago, about 900.

Those are sales associates. So that doesn't include other support functions like [manning] the recruiting center and other support functions.

Do you have the total employee count?

Total employee count is a little bit over 2,000, about 2,100.

And that is up from --?

From a year ago?

Yes.

From a year ago it is up from about 1,700.

In terms of Bradson, can you talk about how they're doing on a year-over-year basis? Obviously we don't have the year ago numbers, but I assume that the growth has been pretty strong there.

Yes, the growth has been strong. I would say they tracked at little bit north of 40% year-over-year growth.

Then how would you expect that government -- or if we take a look at the Q4 contribution on the government side, what sort of growth rate should we assume as the year unfolds, given the momentum that they are currently seeing?

I think Joe and I on the last call had a little bit back and forth, and I indicated that we expect it to be over 20%.

On the F&A business, can you tell us what percentage of your current F&A book is mortgage-related?

We're calculating it. A little bit less than 20%.

It has really pulled back here.

Pardon me?

I said it has really pulled back.

Yes. As I indicated, we have been going after it. We have been diversifying that revenue stream. We've increased -- over the last two years we have increased GPE by 600% plus. And we have reduced the revenue stream.

With regards to the revenue guidance that you provided, can you give us a little bit of a feel for what your expectations are for perm in general? And then the various sub segments at a high level just in terms of year-over-year growth, or how should we do about that?

This is Joe. As I think I mentioned in my comments, we expect all service lines to be up on the Q1 over Q4. That is about as far as we break things out.

But I would imagine that IT should continue to see the strongest, whereas F&A, probably because it still has more mortgage exposure, would be a little bit --? Although the core F&A would seasonally be strong in the first quarter.

Core F&A is seasonally strong. IT is seasonally weak. HLS is going to be stronger because we had the two-week shutdown for CRS, which is the biggest unit, and scientific which is one of the smaller units in HLS. So you have a number of factors going on. You certainly would expect F&A and HLS to be strong. You would expect IT to be strong, but it has to overcome the year-end job fall off. So we expect growth in all units.

Craig Peckham, Jefferies.

Sorry, another tax question. Can you tell us in the first quarter of 2006 what the impact of the payroll tax was? You said it is going to be $0.05 in the first quarter of '07.

What the '06 impact was? The '06 impact was around $0.04 to $0.05. We expect that it will be much more solid around $0.05 this year, just because of the mix of our business, because we have brought on some of the government business, which are higher bill rate, higher comped individuals, which drives up that expense a little bit from a mix standpoint.

Dave, I appreciate the comments you made in terms of the high bar for acquisition quality here. But were the opportunity to arise, what kind of financing options would the Company consider, given that there's a little bit of debt in the balance sheet here still that is being paid down.

The nature of the acquisitions that we're looking at are what we would characterize as tuck-in. So clearly we evaluate the size and the financing capability that we have to actually execute them. We are balancing those two together.

I would point to -- with the significant cash flow in Q4 we reduced debt just south of $20 million in one quarter. It shows the strength of our cash flow. And our cash flow forecast suggest that we can certainly service this debt and continue to retire it at a rapid rate. We will balance that against the opportunities that we're looking at for the tuck-in. Certainly an acquisition at scale would be more difficult, but the tuck-ins we think we can handle. But they have to pass the high bar.

At this time I would like to turn the call over to Dave Dunkel for any additional or closing comments.

Great. We appreciate your interest in Kforce. And once again we're very pleased with 2006. And we're very excited about 2007 as we pass the threshold of $1 billion as our target. Again, the emphasis is on increased operating margins and profitable revenue growth for 2007.

Once again, I would like to express our appreciation to our field and corporate teams, our consultants and our clients for allowing us the privilege of servicing them. Thank you very much for your interest in Kforce.

It does conclude today's conference. Thank you for your participation. You may now disconnect.