Kforce Inc (KFRC) 2007 Q1 法說會逐字稿

Good day, everyone. Welcome to the Kforce first quarter 2007 earnings conference call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to the Senior Vice President of Investor Relations, Mr. Michael Blackman. Please go ahead, sir.

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 in Kforce's Form 10-K and other reports and filings with the Securities and Exchange Commission. We cannot 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. Dave?

Thank you, Michael. You can find additional information about Kforce and 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 first quarter was an outstanding quarter for Kforce with revenues up to historical highs as we track toward $1 billion in annual revenue in 2007. The EPS of $0.21 was $0.02 ahead of consensus. We are particularly pleased with our search rebound as demand remains strong. We are making excellent progress as we move into year two of our strategic plan. Our focus remains on driving organic revenue growth and operating leverage.

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

Dave, I call the quarter "awesome". As I consider the current quarter results and our positioning for the future, I have to say that Q1 2007 was the most satisfying quarter I have had since joining Kforce in the spring of 1999. As Dave indicated, this is a quarter of all time record firm quarterly revenue and many other Q1 firm records as well. We are still extremely pleased with the progress we are making as we enter Year 2 of our current three year strategic plan which we call "The Road Map to 2008". Our vision is to be the firm most respected by those we serve. The key aspect of our vision is building a firm that delivers sustainable and consistent revenue and earnings performance.

Total revenues $252.3 million in Q1 represents a 3.8% increase sequentially and a 13.5% increase year over year. Quarterly revenues have out increased sequentially for five straight quarters. With Q1 results and encouraging trends to begin Q2, we are building confidence that 2007 could be our year to hit $1 billion in total revenues.

We are especially proud all our business segments grew sequentially from Q4 to Q1. Strong performance continues in technology staffing, which represents half of total revenues as this business has now grown five straight quarters. Our top two performance segments were health and life sciences and government solutions which both exceeded 6% sequential growth.

Our finance and accounting business grew 2.4%, driven by a rebound in search. Our F&A flex revenues have stabilized after our transition to higher gross margins for our lower end F&A business. These margins have improved 446 basis points since the beginning of 2006 and 728 basis points since the acquisition of OnStaff.

Mortgage related activity now constitutes only about 1% of our total revenues and recent trends suggest we have completed our transition to higher gross margin flex business and the mortgage related activity may have bottomed and therefore should have little or no drag on future F&A performance. I would like also to clarify we have no exposure to clients who are dedicated primarily to the sub prime lending business.

Our search business in both technology and finance and accounting rebounded from a decline in Q4 to post solid gains during Q1. Search revenues for Q1 2007 of $19.3 million represent 13.8% growth sequentially and a 14.7% increase year over year. Based upon recent key performance indicators and early Q2 trends, we believe the market for direct hires remains strong and that the rebound and search activity in Q1 reflects continuing strength and search demand that we'll be seeing in Q2 and beyond.

Our surge of new hires in the second half of 2005 and in 2006 are beginning to gain some traction. We believe we have significant capacity with our current search teams and know they have increased 45% year over year in headcount, so search headcount has only increased 4% sequentially as we move into a greater focus on productivity. While we have moderated our hiring, we expect to continue to build the team as KPI suggests is prudent. Because of our emphasis on trading, our excellent management team, good job order flow and solid KPIs, we remain bullish on our search prospects.

In terms of gross profit performance and profitability, Q1 was a record for first quarter flex gross profit dollars and income from operations. We are equally pleased with improvements in both our gross margins and operating margins in Q1. Gross margins improved 180 basis points year over year and operating margins increased by 140 basis points year over year.

Improving margins was a major focus in 2006. We believe 2007 will likely see moderation and gross margin improvements as we balance margin expansion with our desire to increase revenue growth.

As I indicated previously, in the second year of our strategic plan we will place greater emphasis on optimizing results. In following our plan, 2006 was a year of investment both in infrastructure and building our sales force. It was our intention to significantly increase our hiring in 2006. In fact, sales associate headcount has increased 17% year over year, so it was essentially flat sequentially. As our new associates mature in their roles and began to ramp, we expect to see increases in productivity.

During Q1, we saw productivity in our overall sales force improve for the first time since 2005. Revenue per sales associate improved 6.4% from Q4 and we anticipate this trend to continue. This trend should be a major contributor to our continued revenue growth as well as further enhancing our operating leverage. Additionally, we will continue to consider strategic acquisitions during this phase of our strategic plan but maintain a very high threshold on both profitability and strategic fit in our assessments.

Finally, we believe our back office continues to be one of the best performing in the industry. We have coupled great people with significant technology investment to provide exceptional service to our sales force and our clients. We expect to substantially complete the significant investment in new technology for our firm by this fall. When completed, we will have spent over $20 million installing a new front end system, a state of the art phone system, wireless connectivity in our offices, and a long list of infrastructure applications, including electronic client approval, PeopleSoft HR and financial systems upgrade, pay bill time and labor and a data center upgrades. These world class systems will provide our clients and associates with the finest tools available and allow us to reduce SG&A to efficiency gains.

As I take a moment to savor this quarter's results and think about our road map to 2008, I can't help but be excited. We have an excellent start to the second quarter and thus we expect revenue trends to continue on their positive course and that our team of great people will be able to improve productivity and results. We will also continue to strive for our target operating margins of 10% of revenue. I will now turn it over to our Chief Financial Officer, Joe Liberatore. Joe?

Thank you, Bill. I echo Bill's excitement about our Q1 results in our positioning for the future. This is my 19th year at Kforce and I can say with confidence the record results delivered in Q1 are attributable to the highest quality team in firm history executing on all fronts. The great people delivering the great results experienced in Q1 provides me with a high degree of optimism regarding our future prospects.

As Bill stated, first quarter revenues of $252.3 million represented a 3.8% increase over Q4 and 13.5% increase year over year and have now increased five straight quarters. For the first time in firm history, we exceeded $4 million in revenue per billing day and set an all time high for this metric for the seventh straight quarter. We continue to translate revenue growth into improving bottom line results as net income is increased 45.2% year over year to $8.8 million in Q1 2007 as compared to $6.1 million in 2006. This earnings leverage is also apparent in the operating margin line as we're making measurable progress towards our stated goal of achieving 10% operating margins at the peak of the current cycle.

Operating margins in Q1 2007 was 6.4% of revenues or $16.1 million versus 5% or $11 million in Q1 2006. Operating margins have now improved 330 basis points or 168% in the last two years. We are confident that we continue to manage the business to optimize earnings as you continue to see additional operating leverage as we focus on profitable growth and productivity moving into the second year of our three year strategic plan.

EBITDA, an indication of the firm's strong cash flow, increased 47.4% to $20.3 million or $0.48 per share at Q1 2007 as compared to $13.8 million or $0.33 per share in Q1 2006. This strong cash flow allows us to continue to invest in our growing business and also comfortably retire the debt incurred as a result of recent acquisitions.

During 2006 we borrowed in excess of $130 million under our credit facility to finance the purchases of PCCI and Bradson. As of last week, our debt outstanding was less than $80 million. Q1 2007 earnings per share of $0.21 increased $0.06 or 40% year over year and decreased $0.01 or 4.5% sequentially as a result of an approximately $0.04 impact of payroll related taxes typical in Q1.

Q1 2007 earnings per share before the impact of equity based compensation expense was $0.23, up 51.6% year over year increase from $0.15 in Q1 2006 and 188% increase from $0.08 in Q1 2005. We are very pleased with the progress we've made over the past two years.

In terms of revenue by time, Q1 flex revenue of $233.1 million were up 13.4% year over year and 3.1% sequentially. Total search revenues of $19.3 million for Q1 was up 14.7% year over year and up 13.8% sequentially. As expected, search rebounded from the fourth quarter. Revenue growth was driven through improvements in all our business segments.

In terms of intra-quarter revenue trends, January revenue was up from prior year levels and rebounded from end of year project (inaudible) in recent years and improved again in February and March.

In terms of revenues for the beginning of the second quarter, flex revenues for the first 3 weeks are up 11.2% and search is up 25.5% year over year. We caution that it is difficult to draw conclusions for Q2 based upon this limited data, but we remain optimistic about the near term prospects.

A key driver contributing to the current positive earning trends continues to be our ability to manage gross margins. Gross profit percentages improved significantly over the past two years. Our gross profit percentage of 35.1% is improved 180 basis points year over year and declined only 20 basis points sequentially despite the impact of payroll related taxes in Q1.

Our flex gross profit percentage of 29.7% in Q1 2007 improved 190 basis points year over year and has improved 380 basis points over the last two years. Flex gross profit decreased 80 basis points sequentially from Q4 2006 as a result of the previously mentioned payroll tax impact. We believe that continued improvement in our gross margin reflects the strengthening demand in professional staffing though we expect a rate of improvement in flex gross margin percentage to moderate as the economic cycle matures and we balance volume and rate objectives. We seek to balance current profitability with selected investments as we move into the optimization phase of our strategic plan.

In Q1, operating expenses decreased 20 basis points from the fourth quarter to 28.7% and has increased 40 basis points year over year. This year over year increase is attributable to building and training of world class sales and recruitment teams and support infrastructure, including technology improvements to take advantage of the increasing demand for our services across all business lines. We began to see these benefits for these investments in Q1 and expect to see additional benefits as we move through the second and third phase of our strategic plan.

In terms of other important financial metrics, capital expenditures in Q1 were $3.6 million are expected to peak in Q3 and total approximately $15 million for the year 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, 41.5 days compared to 40.3 days in Q4 2006.

Looking forward to the second quarter, we expect revenues may be in the $253 million to $260 million range and earnings per share of $0.23 to $0.25. This expectation assumes approximately $42.2 million weighted average diluted shares outstanding.

From a financial perspective, we are very pleased with the progress we are making and believe Q1 reflects the ability of the firm to manage the business to maximize profitability while still allowing flexibility to make key investments to build a business. Our profitability continues to improve. Our balance sheet and cash flows remain strong. We remain optimistic and confident in the near term and long term strength especially in staffing. I would now like to turn a call back over to our CEO, Dave Dunkel, for closing remarks. Dave?

Thank you, Joe. Demand for staffing services continues to be strong for both flex and search; Government Solutions is also experiencing strong demand. Talent shortages continue across each of our services and it is a constraint to growth. As both Bill and Joe indicated, we're focusing on balancing revenues and margins as we seek to accelerate our organic revenue growth. While we are pleased with our execution, we are not satisfied. Our team has worked hard to position Kforce for superior performance.

We're at that time where field leadership team and talented associates distinguish themselves competitively in delivering exceptional service to our customers. We have built an excellent firm of great people that is just beginning to demonstrate capabilities. We're looking forward to a strong Year 2 in our strategic plan.

Once again we wish to express our appreciation to our field and corporate teams, our consultants and our clients for allowing us the privilege of servicing them. Cecilia, we'll open up the call for questions now.

Thank you. The question and answer session will be conducted electronically. (Operator instructions). We'll go first to Mark Marcon with Robert W. Baird.

Good morning and congratulations on the terrific progress. Just wondering, with regard to - Joe, you made some comments with regard to getting to the 10% margin target and I think I heard you say by the end of the cycle. Could you clarify that in terms of how you're thinking about the time frame for getting to the 10% margin? And to what extent would that be driven by continued gross margin improvement which sound like it may be a little more modest going forward as you balance out revenue growth relative to margin and then the enhanced productivity in terms of the SG&A leverage?

Mark, this is Joe. Related to our target of 10% operating margin at the peak of the cycle, really a lot of that is driven by productivity. As Bill had mentioned, we've significantly added to our sales force and here in Q1 we saw our first productivity up tick since our high water mark in Q2 2005. A lot of this also comes into play if we reflect back to it Q2 2005, many of the investments that Bill is referencing in terms of the technology investments and support infrastructure investments we're making to further support the leverage of our sales force. All those things are starting to come together at this point time. So as we start to look out to the remainder of 2007 and 2008, our expectations are that productivity increases we'll continue to take place. That has a lot to do with obtaining the 10% operating margins.

Also, what comes into play in terms of the timing of when we potentially hit 10% operating margin a mix comes into play there. It becomes a greater mix. That time line could be accelerated. That's why we're really saying a peak of cycle because ultimately peak of cycle is going to be - one of the key drivers of peak of cycle is going to be when search opportunities are maximized in the marketplace. That's why it's really hard to sit there and give you an exact date of when we expect that to happen because all these things are moving pieces.

To be clear, you don't think you're at peak of cycle yet?

Not at this point. Based upon what we're seeing, we're still seeing tremendous demand from a KPI standpoint in terms of volume of job orders. We view at this point in time there's a lot of runway.

Mark, this is Dave. Just to comment on where I think we are in the cycle. There's been a lot of discussion about business cycle conditions and mid cycle slowdowns and what not. Clearly, in the knowledge economy we're seeing both secular and cyclical drivers that are fueling our business. We remain very confident that the demand for our services, particularly with a 1.8% unemployment rate, we're going to continue to invest in the business and move toward that 10%. But clearly, giving you a time frame would suggest that we're economists and can see the future and we're not going to do that.

Okay. That's fair. With regard to the balance sheet, you're making tremendous progress with regard to paying down the debt. If we assume that you don't make another acquisition through the balance of the year, how do think the debt is going to look by the time we end this calendar year?

Based upon our cash flow forecasts, if we start to look out toward the back end of 2007, our forecast has the debt somewhere around $60 million.

Great. With regard to your revenue guidance, the bottom end basically assumes no sequential growth which traditionally you've had sequential growth going from Q1 to Q2. Can you just clarify whether that's being conservative or do you see anything out there, any areas that could drop off?

Mark, this is Dave. We characterize the lower end of the revenue guidance as conservative.

Okay. Terrific. I'll jump back in the queue.

We'll take our next question from Tobey Sommer with SunTrust Robinson Humphrey.

Thank you. I wanted to hit on that productivity question again. If you could describe the typical life cycle of a productivity ramp of a rep. Is the biggest gain at the beginning or is it in the middle as they ramp up? Just trying to get a sense of how we could go about thinking of the productivity ramp in the next couple quarters? Thanks.

Toby, this is Joe Liberatore. If I were to break it into four segments; you have your initial productivity ramp up, somebody really covering their costs which we stated multiple times is typically a six to nine month window. And then the way that we look at our population is we look at our population of those associates that have less than two years of experience, those associates that have two to four years of experience and those associates that have four-plus years of experience. And typically what we see is we see a doubling take place in each of those trounces.

The point being, the average productivity of two to four year people in comparison to those with less than two years of experience is 2X. Likewise, as our people cross over the four year mark, their productivity doubles again. Needless to say, the most productive associates are obviously in that four-plus year category. Does that help provide you some clarity on that?

It does. To the extent that you could, could you give us some detail as to the proportion of associates in some of those buckets?

We haven't really broken out the stratification of our population in the past. I don't believe we're prepared to provide that insight from a competitive standpoint. The one thing that I will share is obviously our largest population, because of the hiring that we've been doing over the coast of the last 24 months, is in the zero to two year population. Many of those associates, when we really started to ramp up our hiring in the second half of 2005, you can see that many of those individuals that are still with us now are going to be crossing over that two year mark as we head into the back end of this year.

That's essentially where they can double their affected productivity and go from paying for themselves to earning the company some money?

Yes. On average, they double when they cross into that two to four year category. One of the other things, if we were to just look at pure search to give you example. If we were to look at the productivity levels in Q2 2005 of our search population, at this point time with the headcount that we've added to our search population, we realistically, if we were to get back to the same productivity levels at 45% capacity in sales associates.

Interesting enough, if you were to look back even further and the cycle and go back to what I would say is our low water mark from a search standpoint which was back in Q4 2002. Since that point time, we've grown search over 180%.

Okay. Thank you. The associate headcount, I think was up in your prepared remarks 17% year over year, but more or less flat sequentially. I was wondering I think you gave a perm increase or search increase that was higher. Is it fair to say on the temp side, you may have been down a little bit sequentially?

That is a fair assumption.

Okay. I just want to dig into an individual segment or two if I could that seem to perform quite well. The Health Information Management had some real nice year over year growth and the search revenue also. Could you talk about some of the drivers there and why that had such good growth?

Great leadership. Chris (inaudible) and [Sam Farrell] are doing an outstanding job for us. They build teams. These are two particular units that are all organic, built over time, and have taken the right move several years ago to continue building that group and that's basically the large project and CRS and medical coding and HIM. I attribute that to the leadership and great teams that they have built.

I want to ask a question about technology which has surprised many people at the strength and resiliency there. In terms of both demand and supply of candidates to take the jobs, what do you think the principle drivers are at this point?

This is Bill. It's certainly a war for talent out there as you look at these different skills sets that are hot in the market; Java certainly being the hottest thing, but ERP. As you look at PeopleSoft, SAP, Oracle, QA, business analyst, Information Security, cleared personnel; I think we're very early in the technology cycle and there is significant room to grow.

The drivers are - this is an activity where our clients are trying to drive costs down. They're doing that by improving their technology and therefore getting SG&A efficiencies. This has got a long way to go. Technology is in the early innings where finance and accounting and some of those other areas have had a pretty good run.

Tobey, this is Joe. I would add to that as well. I think what we're seeing is we're seeing company's focused on growing their infrastructure and enterprise application. I use Kforce as a microcosm of that versus supporting and maintaining existing legacy technology. I think those are some of the trends that we're hearing from our customers.

Thanks. Specific in the technology unit, a few years ago there were some large buyers who were reluctant to see the turn in the market and pay some of those higher market rates. I was wondering if you're seeing any of those larger customers come around and acknowledge that the market has changed and if you're seeing any of the customers that perhaps you had to cease doing business with come back to and say what can we do now.

Tobey, this is Dave. I want to say that the demand for technology is pervasive across all enterprise sides from what we call Segment One, which is the very large customers, all the way to Segment Three. They're all competing for pools of talent. Clearly from our standpoint, we value our large customers and there are efficiencies that are gained in selling to and delivering to these large scale customers. They recognize market changes. We don't set market rates and pay rates.

Obviously, from our standpoint, we are very sensitive to the fact that when we start a project we want to finish it. Consultant turnover is never a good thing. We work hand in hand with our clients to communicate where the markets are and make sure that we are delivering the talent for them. Clearly, they recognize that there is an increase in demand and correspondingly an increase in pay, but at the same time we don't get carte blanche and walk in and get to move rates.

There's still that pressure to make sure that we are maintaining good rates corresponding to the volume. When you're looking at tech today, the secular drivers are really the wind in the back. We don't have killer apps; the concern that everything was being outsourced and sent overseas. All those things have not proven to be anything that people had expected it to be. Technology is still at the heart of the economy and still at the heart of driving efficiency and productivity.

Tobey, this is Joe. What I would add to that as well when you look at opportunity and supply and demand, it's important to note that our tech flex margins year over year were up 200%, when our overall flex margins were up 190%' that being a little over 50% of our total revenue.

Tech search, of course, is up as you note, which is a substantial indication of demand in that area.

Thank you very much.

(Operator instructions) we'll go next to Mike Carney with Aperion.

Good morning, everyone. On the F&A side, that's obviously slowed quite a bit to the top line. I think as you already mentioned, Bill, it's been many years of very strong growth there so that's understandable. If you X out the mortgage that's continued to be a lesser piece of the pie there, what is the business look like? Is there weakness between retail versus the large accounts or is there weakness or strength between different occupations in there?

We look at F&A in three groups. There's a high end which is the CPAs, four-plus experience; and then there's the mid level, which is our real core business which is experienced accounts, budgeting, planning, financial analyst types; and then there's the lower level which is the AP Clerks, bookkeeping, mortgage processing. I can't group everything into the mortgage related activity group.

As I indicated, after we brought on staff and rolling these groups into our field offices, we really focused on upgrading that activity and those margins. I believe I said in my prepared remarks that over the last 15/16 months gross margins have been up over 400 basis points and over 700 basis points since we acquired OnStaff. It's more of the mortgage. It's a transition to real quality clients and the type of business that we do which is a higher level business.

So, no, if you were to X out that kind of activity when we look at our pure mid-level and high level F&A business we've seen excellent growth in those areas. Could it be better? I think it could be better but it has been strong. That does include significant large projects. There's three clients in there that have very significant (inaudible) related activities by us and those things have been winding down. So that has somewhat of a depressing effect on us. We are actually very pleased we're migrating that business because 2008 is our target and we think we are positioning ourselves very well for that.

So if you X out the large project on a high and mid level and excluding the lower level you're talking about, the growth you'd still see growth and these large projects plus the lower end has been weakening the overall pie? Is that right?

That is absolutely true.

Okay. Thanks. One more, just a follow up on Tobey's question. The productivity improvement of 6.4%; was that year over year?

Sequentially.

Sequentially. That's productivity looking at just the sales force or the overall per head?

That's looking at sales force productivity.

Okay. Thanks.

We'll go next to Josh Vogel with Sidoti.

Good morning, guys. If you could, could we get a regional snapshot of the U.S. where you're seeing any notable strengths or weaknesses; basically which regions you think will require more headcount and which, if any, a possible reduction in headcount?

This is Bill, Josh. We're seeing strength in almost every place except Michigan. You have some automotive effect, but the majority of our offices - all our offices, except a little dampening in the automotive sector in Michigan has been quite strong. We're pleased with the broad based improvement in revenue trends.

Josh, this is Joe. What I would add to that as well is we're seen tremendous strength on the coast. When you look at specifically California and the Northeast, when we look at our year over year bill rate increases, that's where we've seen the biggest gap take place. So that's telling you what the demand is in those marketplaces.

Okay. That's helpful. Thank you. I just want to get a better sense of the organic growth in I was curious what the contribution was from Bradson in the quarter?

I'm glad you brought that up. Bradson, first of all, I'll tell you their best quarter in the history of Bradson was this last quarter. So we're very pleased with the integration and work that everybody has done. [Pat Moneymaker and Larry Grant have done an excellent job. You what the percentage growth for the quarter? I'm searching here for it.

The percentage growth and dollars.

It was $8.2 million. It's up 13.1% and was $8,258,000.

Great. Thanks. What was the operating cash flow in a quarter?

This is Joe. It was approximately $9.4 million.

Lastly, Joe, we're obviously seeing an expected slight in CapEx this year. I was curious if we look out into '08, do you think CapEx will revert back to '05 and '06 levels?

Yes. We have the bulk of our infrastructure activities. We are really coming to a conclusion as we move through the remainder of year. Obviously, we're going to continue to have lease hold improvements and things of that nature on the move forward, but as we start to look at software and CapEx and those types of investments, that's coming to closure as we move to the back end of this year.

Great. Thank you.

We'll take a follow up from Mark Marcon with Robert W. Baird.

I'd like to drill down in terms of your tech flex gross margin improvement of 180 basis points which was impressive. Are you seeing improvements in terms of gross margins both in terms of small and medium size businesses as well as your larger accounts or is it focused in one particular client segment? I'm trying to ascertain what exactly is driving the flex gross margin improvements.

Mark, this is Joe. We're seeing wholesale across the board, so it's demand and large customers as well as mid size and small customers.

So no negative impact or dampening because of VMS or anything like that?

VMS is obviously becoming more prevalent in customers. I think VMS is playing out the way that many anticipated it would play out. It is really an ability to aggregate billing and control and understand what's happening with the population verses necessarily a price play as a lot of the initial expectations were with VMS when we start to reflect back to the 2001/2002 timeframe when VMS was gaining a lot of traction.

In a supply demand marketplace as we're operating today, they're having to price things according to what the market will bear, otherwise they are not getting the candidate flow; so VMS really more so. The thing of it is the aggregation and control of vendors.

Great. On HLS, just drilling down into clinical; you had a really nice rebound there. Did you get those big projects back? What drove the growth into that continue?

Yes and yes. As you know, this is a large project driven business and I don't know if you want to say we got them back. We continue to sell large projects and this team has been very successful. We expect that to continue although we do also expect it to be healthy.

I was referring specifically, Bill, to a couple quarters ago. There was the two large contracts that appeared to terminate either on a temporary or on a permanent basis. I didn't know if it was a resumption of those contracts or if there were new contracts that came on to replace those.

Our largest client has continued and we have continued to win new ones, Mark. I'm not sure exactly what two you might be alluding to, but we continue very strong relationships with our largest clients and we continue to win new ones.

Terrific. With regard to the systems improvements that you're putting in place, obviously you're investing behind that. At what point do think those system improvements are going to be completed and at what point should we start seeing a reduction in terms of SG&A as it relates to the system implementation costs and potentially getting rid of some redundancies that might be in the system?

We anticipate that those systems will be substantially complete this fall and as that activity winds through the firm we believe that we will see significant efficiencies in place for 2008.

Is it possible that we'd see anything in the fourth quarter? Or is the fourth quarter still unwinding that?

You are correct. We will still be unwinding it and it has a lot to do with attrition of people and the activities that take place. Hopefully we're continuing to grow very strongly and we will not have to add people because of that.

Mark, this is Dave. I want to refer you back to Bill's prepared remarks where we gave a roster of the things we have done. It is quite comprehensive. We're talking about ERP upgrades in HR, in financial systems, online client approval, online time sheets, pay bills system, new telephony systems. We're completing a very, very substantial technology investment and upgrade, including also I neglected to mention, our front end system.

When you look at a whole program and everything that we have done, it is very substantial and very comprehensive. I would really take our hats off to our technology team and the leadership and Mike [Ethorn]. They have done a tremendous amount and done so quite efficiently. When you look at where we stand relative to others that are making these investments and just beginning those processes.

As a follow up to that, David, if we think about 2007, what's the incremental spend that you've got budgeted for this year to accomplish all that? As we look out to 2008 and beyond, aside from not having that incremental spend, what are the potential projected savings from those systems?

There's a couple of things that come into play. This spend isn't substantially higher. If you look back at our CapEx, this is a project that we began three-plus years ago. The spend has not accelerated; in fact, it has remained constant or even declined somewhat. Deficiencies come from the scale and the leverage. For example, as we're adding additional revenues, it's no longer necessary to add the number of support staff for client billing and time sheets and collections and so forth because a lot of that is now done electronically. It gives us greater efficiencies in the way that we're doing our billing, if we're custom billing for clients.

When you look at it in that context, it has additional revenues and scales continue to evolve for the firm, we are actually able to do much more with less from the support infrastructure standpoint. That's really what we've been after here and exceptional service because our clients are looking to us for efficiency and streamlined processes for their own savings. A lot of these things are aimed toward achieving that and enabling our folks to deliver the service the way the customers want it.

Mark, this is Joe. I'd be remiss if I didn't also provide a little bit of insight in terms of our people in the back office. I'm really referencing our technology people as well as our user community. When you look at the type of initiatives that have been executed by the firm, typically what you would see is a much larger CapEx number because of bringing in third party external consultants while people continue to do their day jobs.

Our people have been juggling both those activities and have heavily contributed to delivering these initiatives while continuing to maintain their day jobs. We have a lot people burning the midnight oil and working weekends. I just wanted to acknowledge what the firm has accomplished and the great people here in the back of the house at Kforce to get these things done at the spend levels that they've been accomplished.

Great. With regard to the revenue projections for this coming quarter, I'm assuming that you would expect to see sequential improvement in tech, HLS and government. Is that correct?

This is Bill. That is correct.

And then F&A seasonally, usually when you go into the second quarter off of the closing of the book season, sometimes that pulls back a little bit.

Exactly, Mark.

Terrific. Thank you.

With no further questions in the queue, I'd like to turn the conference back over to David Dunkel for any additional or closing remarks.

Thank you. Once again we appreciate your interest in Kforce and we're very excited about delivering an outstanding quarter. As I mentioned, we have really seen this as just a first step in year 2 of our strategic plan. So thank you for your interest in Kforce and we'll be heading back to work. Have a great day.

This concludes today's conference, ladies and gentleman. Again, thank you participation in today's conference call. You may disconnect at this time. Have a great day.