Kforce Inc (KFRC) 2007 Q2 法說會逐字稿

Please stand by. We're about to begin.

Good day, everyone. Welcome to the Kforce Second Quarter 2007 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 SVP of Investor Relations, Mr. Michael Blackman. Please go ahead.

Good morning, and welcome to the call. Before we get started, I would like to remind all of 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 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, our Chairman and CEO. Dave?

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 second quarter was another outstanding quarter for Kforce, with revenues again up to historical highs as we track towards $1 billion in annual revenue in 2007. EPS at $0.25 was $0.01 ahead of consensus, and reflects the increasing operating leverage. We established several new firm records this quarter. We are particularly pleased with our performance in technology, CRS, HIM and KGH as growth continued. We are making excellent progress as we move into the second half of our three-year strategic plan. Our focus continues to be on driving organic revenue growth and operating leverage.

A year ago at this time, concerns were high about a mid-cycle slowdown and the potential effect on professional staffing. Our key performance indicators suggested that demand for our services remained strong, and the last year has resulted in a record performance for our firm.

We're in a similar position today, where many economists have expressed concerns about the state of the economy. Our KPIs remain strong, and we remain confident about the prospects for Kforce against a favorable secular and cyclical backdrop for professional and technical staffing.

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

Bill?

Thank you, Dave.

It was indeed an excellent quarter for Kforce. The second quarter marked the halfway point in our three-year strategic plan that we call the Roadmap To 2008. The team we have assembled at Kforce has pulled together, and it's clearly focused on specific goals, as exhibited by our sixth consecutive quarter of record revenues and many other second quarter records.

We are extremely pleased with both the quarterly results as well as the continued efforts to refine our sales focus and operating platform. We remain on track to meet the goals set forth in our strategic plan, and I remain confident that we have built a team that is capable of these accomplishments.

Our vision is to be the firm most respected by those we serve. This vision includes delivering sustainable and consistent revenue growth in our earnings performance. Total revenues of $259.9 million in Q2 represents a 3% increase sequentially and a 10.9% increase year-over-year. Quarterly revenues have now increased sequentially for six straight quarters. With the second quarter results, we are now more than halfway to reaching our $1 billion in total revenues for the year.

Strong performance continues in technology staffing, which grew 4.7% sequentially, and almost 15% year-over-year. Technology staffing represents half of total revenues, and has now grown six straight quarters. Our top performing segments were HLS and government solutions, which exceeded 6% sequential growth. The growth in HLS was fueled by continued growth performance in our clinical research and health information management business units, whose sequential growth was 7.5% and 10.8% respectively.

The growth in our government solutions segment was driven by continued exceptional results from the former Bradson business, whose quarterly revenues have now grown 23.4% over Q3 2006. We should note that, effective July 1, we have merged the Bradson operations with the rest of our government practice, which we believe will enhance our service offering in this fast-growing market.

Our finance and accounting business declined 3.8%, driven by anticipated seasonal declines in our S&A flex business and a project end at a significant high bill rate-high volume client.

Our service business posted gains in both finance and accounting and HLS during Q2, while technology search remained flat. Search revenues for Q2 2007 of $20.2 million represents 5.2% growth sequentially and a 14.5% increase year-over-year. Based upon recent key performance indicators, or KPIs, and continued positive trends, we believe the market for direct hires remains strong, and that the search activity in Q2 reflects strength in search demand that should continue in Q3.

Our surge of new hires in the second half of 2005 and in 2006 continue to gain traction. We believe we have significant capacity with our current search service teams, and note that our search team is over 14% larger than a year ago. We continue the focus on improving productivity and the success of our search associates. While we have moderated our hiring, we continue to build the teams and trends and KPIs suggest is prudent. Because of our excellent management team, strong recruiting classes, good job order flow and solid KPIs, we remain bullish on our search prospects.

In terms of gross profit performance and profitability, Q2 saw continued improvements in flex gross profit dollars and income from operations. We are very pleased with the improvements in both our gross margins and operating margins in Q2. Gross margins improved 170 basis points year-over-year, and operating margins increased by 80 basis points year-over-year. In 2007, we are striving to balance our revenue growth goals with strong margins while improving efficiency to optimize profitable growth.

As I indicated previously, in this second year of our strategic plan, we are placing 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 increase our hiring significantly in 2006 and to continue to build headcount in areas of specific opportunity in 2007, such as technology, flex and our search business.

Sales associate headcount has increased 4.4% year-over-year and is essentially flat sequentially. As our new associates mature in their roles and begin to ramp, we expect to see increases in productivity. During Q2, we saw productivity in our overall sales force continue to improve for the second straight quarter. Revenue per sales associate improved 3.6% from Q1. Higher productivity from our 2006 new hire additions should help us continue our revenue growth as well and significantly enhance our operating leverage.

Additionally, we will continue to consider strategic acquisitions during this phase of our strategic plan, but maintain a very high threshold of 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 ours sales force and our clients. We expect to substantially complete the significant investment in technology for our firm by this fall.

When completed, we will have installed 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 H.R. and Financial systems upgrades, PayBill, time and labor, and a data center upgrade. These world-class systems will provide our clients and our associates with the finest tools available and allow us to reduce SG&A through efficiency gains.

The second quarter reflects continued progress in reaching our strategic and financial goals while investing for future growth. We believe all of our businesses are operating efficiently, and that our great team can improve further upon this strong platform. We have a strong start for the third quarter and, thus, we expect revenue trends to continue on their positive course. We also will continue to make progress towards our target operating margins of 10% of revenue. We are on plan to meet our 2008 Roadmap.

I'll now turn the call over to our CFO, Joe Liberatore. Joe?

Thank you, Bill.

The continued growth in technology staffing, HLS and our government practice, and our ability to translate revenue growth into improving bottom-line results, are exciting. I believe these results are a reflection of the continued strength in the professional staffing market. Our great people in both our field and back office continued to perform during the second quarter. We delivered another strong quarter of financial results and, at the same time, continued our infrastructure and sales staff investments to further build out a foundation to support sustained growth. We have the highest quality team in firm history, and look with optimism to the rest of the year and the successful conclusion of our three-year strategic plan at the end of 2008.

As Bill stated, second quarter revenues of $259.9 million represent a 3% increase over Q1 and a 10.9% increase year-over-year, and have now increased six straight quarters. Our revenue on a billing day basis also increased to $4.06 million and set an all-time high for this metric for the eighth straight quarter.

In terms of revenue by time, Q2 flex revenues of $239.7 million were up 10.6% year-over-year and 2.8% sequentially. Total search revenues of $20.2 million for Q2 was up 14.5% year-over-year and 5.2% sequentially.

In terms of intra-quarter revenue trends, April revenue was up from prior year levels and approved again in May and June. In terms of revenue for the beginning of the third quarter, flex revenues for the last three weeks are up 10.5% year-over-year, and search is essentially flat with the strong performance in Q3 2006. We caution that it's difficult to draw conclusions for Q3 based upon this limited data, though we remain optimistic about the near-term prospects.

Our sustained revenue growth and focus on efficiencies and operating leverage have also translated into improving bottom line results, as net income has increased 26.4% year-over-year to $10.6 million in Q2 2007 as compared to $8.4 million in Q2 2006. This earnings leverage is also apparent in the operating margin line, as we are making measurable progress towards our stated goal of achieving 10% operating margins at peak of the current cycle.

Our operating margins in Q2 2007 was 7.2% of revenues, or $18.8 million versus 6.4%, or $15 million in Q2 2006. Operating income has almost doubled in the last two years. We are confident that we can continue to manage the business to optimize earnings while capitalizing on the strength of our diverse product offering, and should continue to see additional operating leverage as we focus on profitable growth and productivity for the remainder of our three-year strategic plan.

EBITDA, an indication of the firm's strong cash flow, increased 28.7% to $23.1 million, or $0.54 per share in Q2 2007 as compared to $17.9 million, or $0.42 per share in Q2 2006. This strong operating cash flow, which totaled $69.6 million over the past year, allows us to continue to invest in our growing business and also comfortably retire the bank debt incurred as the result of our recent acquisitions.

During 2006 we borrowed in excess of $130 million under our credit facility to finance the purchase of PCCI and Bradson. As of yesterday, our bank debt outstanding was $60 million. Q2 2007 EPS of $0.25 increased $0.05, or 25% year-over-year, and increased $0.04, or 19% sequentially. Q2 2007 EPS before the impact of equity-based compensation expense was $0.27, a 28.6% year-over-year increase from $0.21 in Q2 2006.

We believe the measure of EPS before equity-based compensation is relevant for quarterly comparisons, as non-cash equity based compensation can fluctuate quarterly as the result of certain vesting acceleration provisions on our long-term incentive programs tied to stock price performance.

Gross margins improvement continued as demand for highly skilled professional talent continues to be strong in this supply-constrained market. Our gross profit percentage of 36.2% has improved 170 basis points year-over-year and increased 110 basis points sequentially. Our flex gross profit percentage of 30.8% in Q2 2007 improved 160 basis points year-over-year and 110 basis points sequentially from Q1 2007, and has improved 360 basis points over the last two years.

We believe the continued improvements in our gross margins reflects the strengthening demand in professional staffing, though we expect the 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 selective investments as we execute the optimization phase of our strategic plan. This is reflected in our ability to manage the increases in operating expenses. Operating expense increases are typically correlated with the increasing compensation expense as productivity and gross margins increase.

In Q2, operating expense increased 20 basis points from the first quarter to 28.9% and have increased 80 basis points year-over-year. Our non-compensation based cost structure continues to decline as a percentage of revenue and gross profit as a result of the leverage gain from the infrastructure investments made over the past three years. The resulting cost structure allows continued increases to bottom-line profitability.

In terms of other important financial metrics, capital expenditures in Q2 were $4.5 million and are expected to peak in Q3 and then decline in Q4 as we substantially complete our PeopleSoft PayBill initiative. We also continue to actively manage our accounts receivable portfolio, maintaining a very low DSO of 41.5 days, which is flat sequentially with Q1 2007.

Looking forward to the third quarter, we expect revenues may be in the $260 million to $267 million range, and EPS of $0.25 to $0.27. This expectation assumes approximately 42.5 million weighted average diluted shares outstanding. The third quarter of 2007 has 63 billing days versus 64 billing days in the second quarter of 2007.

From a financial perspective, we are very pleased with the progress we are making, and look forward to the continued improvement, and believe Q2 reflects the ability of the firm to manage the business to maximize profitability while still allowing flexibility to make key investments to build the business in those areas of specific strength. 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 in specialty staffing.

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

Thank you, Joe.

As we move into the second half of our three-year plan, our focus on execution is intensifying. We have prioritized our investments, as we have stated, technology, HIM, CRS, government solutions and, to a lesser degree, F&A and search. We are pleased with our execution, but we're not satisfied. Our team has worked hard to position Kforce for superior performance.

We are confident that our field leadership team and talented associates will continue to distinguish themselves competitively in delivering exceptional service to our customers. We have built an excellent firm of great people, and we are looking forward to a strong second half of 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 serving them.

Here, we'd now like to open up the call to questions.

(OPERATOR INSTRUCTIONS.)

Mark Marcon, R.W. Baird.

Congratulations on the great results.

Was wondering, with regards to the government side, obviously you're seeing extremely strong growth there. And I'm wondering, how long can you continue to grow that part of the business at this rate, do you think?

Hi, Mark. This is Bill. That is certainly a real gem in our portfolio that we have here, and we're very excited about its growth prospects.

I see no reason that it cannot grow at this pace for the foreseeable future. We have married up our staffing engine with our government practice, and we are supplying the people. As you know, the government, particularly in the finance and accounting arena where [we're just centered], has a great push on determining what are good internal controls, what are auditable financial statements, what are good performance measurements.

And so, they are early in the cycle, if you will, of something very similar to Sarbanes-Oxley. So, when you compare that with the needs that they have in the data processing side, we are excited about the prospects, and we think they are long-term.

When you're saying you can continue to grow at this rate for quite some time, are you referring to the sequential growth that you experienced, or how would you describe the year-over-year growth?

Well, this is certainly a project-based business. We re-compete on certain jobs, and it's a very long sales cycle. So, to say it, it is a sequentially based linear trend, that would be -- that is not reasonable to expect. But, certainly year-over-year trends, we indicated a while ago that they would be 20% or better, and we continue to believe that would be the case for the foreseeable future.

OK, great. And then, can you keep up these margins? I mean, the gross margins are obviously the highest in your business, other than perm.

Well, we're very excited about those margins. There's no doubt about that. And certainly, we continue to balance the need for volume and margins. Will the gross profit margin stay there? I believe so. We are adding to our business development staff in the government business and, therefore, our overall operating margins may decline some. But, they will still be certainly on the side of excellent that we are looking for.

OK. Now, let me flip from your smallest business to your largest. In terms of tech flex, that was very good year-over-year growth, 14.5%, and nice sequential growth. When we look at that, and then we also look at the gross margins continuing to improve, can you talk about the areas of strength that you're seeing there that it's enabling you to grow at a very fast rate while continuing to improve the margins? Where are you seeing the strongest demand?

Well, certainly enterprise architecture and development, and the installation and maintenance of PeopleSoft. Those are the sort of things that we mention we're doing. That is what's happening around the United States. And that's certainly where the growth is. These are a little bit longer-term projects than you would normally see. And so, we believe over the next six quarters tech is going to continue to grow quickly, and that is our sweet spot. It's over 50% of our revenue.

We have focused on tech, and we continue to focus on tech as a big part of our growth engine.

OK. And can you describe the monthly trends in tech that you ended up seeing?

Mark, this is Joe. From a tech flex standpoint on a billing day basis, was up in April, up in May, up in June, up the first three weeks of -- I mean the last three weeks of July.

All at the same rates, or greater rates? And is that on a year-over-year basis, or are you just looking at it sequentially?

It's pretty linear in terms of the growth that we're seeing over those periods.

And it's year-over-year.

Yes. Those were the year-over-years I was giving you.

OK, great. And then, finally, you mentioned that you've made all these investments, or you're in the process of making all these investments, and that you should be done in the fall in terms of your back office and your front end systems, as well. Can you tell us how much incrementally you're investing now that, if you weren't putting in place these initiatives, we wouldn't see in the SG&A?

And then, secondly, once you're completed and once everything is normalized, what sort of savings can we get out of those systems being put in place?

Yes, Mark. I guess the best way that I can answer that is, as we've stated, our objective is 10% operating margin. We continue to be pleased with the progress that we've made to date. We continue to remain confident that the firm can attain the 10% operating margin at peak of the current cycle regardless of what search and flex mix exists. And we'll continue to balance SG&A with revenue mix and margins as demonstrated.

I guess in our most recent sequential results because, if you notice, search increased 20 basis points, from 7.6% of revenue to 7.8% of revenue, while income from operations improved 80 basis points, from 6.4% of revenue to 7.2% of revenue. So, we're constantly evaluating where we're making headcount investment additions. And if you're talking specifically about CapEx, the CapEx we do foresee that coming down in Q4 and continuing to come down as we head into 2008.

Now, we still will have obviously facility upgrades that we'll be dealing with as new leases come online and things of that nature. But, in terms of major technology type investments, most of those will be behind us, outside of the implementation of our new phone system, state-of-the-art phone system, which will really run through the majority of 2008.

OK. Would you say putting in place those investments did materially impact your SG&A this quarter relative to what it would have been had you not been doing all these things?

No. I wouldn't say it significantly impacted the SG&A if we had not been doing those things.

OK. All right, great. Thank you.

Tobey Sommer, SunTrust Robinson Humphrey.

Thanks.

I was wondering if -- couple questions about the perm market and what you're seeing there relative to volume in pricing, and particularly given the fact that you've kind of done significant additions to your recruiter base over the last couple years, how you see that playing out, and maybe you could describe the trends in the quarter on a monthly basis if you have them by segment. If not, an overall view would be fine. Thanks.

Yes, Tobey. From a -- trends in the quarter on the perm side of the house, we saw -- and these are year-over-year on a billing day basis -- we saw tech up in April, up in May, up in June and up the last three weeks of July. We saw F&A perm was up in April. It was down in May, up in June, and slightly down the first -- the last three weeks of July.

And so, what we're seeing in terms of volume versus rate is our greatest challenge continues to be on the candidate identification side. Our front-end KPIs continue to remain strong, which is very consistent with what we're hearing from our field personnel regarding the tone of our clients. As we all know, search is a challenging revenue stream to draw any conclusions upon based upon short periods of time.

However, directionally, we remain very optimistic as job order flow has continued to remain strong. And as I mentioned, the greatest challenge continues to remain around candidate identification just because there's a talent shortage especially in the high skill areas we're playing, in the finance and accounting and technology front.

Toby, this is Dave. Real quickly, just as a reminder also, third quarter tends to be a slower quarter in search for Kforce. We have a very heavy concentration in Northeast, and that's a period of summer vacations. So, generally, July and August tend to be a little bit slower, then September ramps up for a strong finish to the year.

So, with the concentration that we have, it's not unusual for us to see Q3 be a little bit slower, even though last year we did have a great Q3 and certainly exceeded our expectations.

Question for you about your recruiter base. I was wondering if -- and I think I may have missed this in the prepared remarks. What are you doing in terms of your own hiring? And then, I was curious in terms of compensation growth internally for recruiters, a tight labor market. They're seeing some of the salaries that they're placing people at. Are you experiencing any wage pressure internally?

Tobey, our compensation structures are very performance-based, so this really goes back to the selection process. The individuals that we're selecting into the firm are individuals that have very high aspirations of earning potential. So, they're not coming into the firm to -- for a security blanket or things of that nature. I mean, they're looking to maximize their earnings potential.

So, given that, we haven't really seen any increase in terms of eth amount that we're having to pay people during their ramp-up period. We haven't really seen that materially change over the course of the last 24 to 36 months. And relative to total earnings, that was one of the points that I was referencing.

When it gets a little tricky, when you start to look at our SG&A increasing, but yet our operating margin expanding, that's because compensation's going up. However, we get a lot of leverage out of that compensation because, if we have a four-plus year person performing at two times the level of somebody that's two to four years, you can just do the math on that. And when you start to look at all the fixed costs associated with an individual, such as benefit costs, setting that person up from a facility, computer, technology, so on and so forth, we get quite a bit of leverage, so that really flows through.

So, from a compensation standpoint, it's really pay as you perform once people get through that ramp-up period.

Thanks. That's helpful.

And then, I was curious what turnover is like internally in the recruiters, and if from a -- as a separate issue, from a geographic standpoint, if you're seeing any particular pockets of strength or perhaps a little bit of softness from a geographic perspective. Thanks.

Relative to turnover, our turnovers remain fairly consistent here over the last four to five quarters, which means our more seasoned people, four-plus year people, our turnover still continues to remain in single digits. People on the front end coming in, our turnover has remained consistent, realizing there's the ramp-up of those one-year people.

And again, we're very performance-based, so our bar is very high. The competition is strong. So, there's going to continue to be turnover on the front end, but we evaluate people quickly to help them make the right decision and make the right decision for the firm. So, that's a healthy turnover, and one that I don't think anybody in any sales profession has figured out the magic formula in around that. So, we stay very close to these people and monitor KPIs and activities very closely because, on the front end, that's really what -- a front-end indicator of what somebody's success is going to be.

Relative to geographic strength, we continue to see the coasts are very strong. I would say pretty much it's broad-based in terms of the strength of our market. The only market where we've really seen any impact is obviously when you get up into the Detroit market, based upon what's happened in the auto industry. However, here in the last quarter, we've started to see some strength coming back in that marketplace.

Thank you very much.

Josh Vogel, Sidoti & Company.

Hey, good morning.

You guys mentioned that a lot of your investing was going to be on the tech and perm side. And I was wondering what kind of investments you were going to make in the HLS and government segments maybe relative to the tech and search businesses.

Well, they're -- this is Bill. There are four areas that, as we balance and rebalance our portfolio of products and investments of our capital that we look at, and certainly technology, search, HLS, CRS and government are at the top of that list and our highest priority. So, we see all those as significant investment and growth opportunities.

OK.

Switching over now, your average search fees were up nicely sequentially and year-over-year, and I was curious what was driving that.

Yes. It's supply-demand. As the market continues to drive increased need, as we're seeing -- typically, when you start to see the expansion that's happening on the flex side of the house in technology, that translates right over to the search side. So, average fee is going up. That's on a percentage basis, meaning the fee percentage that's being charge that hasn't been accelerating, as well as you have some salary escalation. So, when you put those two things together, that's driving the increase.

OK. And when you look at the search business, it looks like the acceleration and just the year-over-year growth is slowing in '07 versus '06. And Joe, you mentioned that you're making progress towards achieving your goal of 10% operating margins at the peak of the current cycle. But can you discuss, outside of the search business, what other levers you're going to pull to get there?

Yes. I mean, every line item in the P&L is really a lever. And again, I can't continue to state it enough. We've run all of our various models, and mix is really not a dependency based upon our ability to obtain 10% operating margins at peak of cycle. So, we will continue to adjust accordingly, whether it be headcount, whether it be investments, whether it be discretionary spending.

OK.

And just lastly, with the bank debt, do you think you're going to pay it down all this year, or early next year?

I think the guidance that we have been consistent in providing related to bank debt when we took on the bank debt, is our -- all of our models and our objectives were to have bank debt paid down by the end of 2008 barring any additional investments.

OK, great. Thank you.

(OPERATOR INSTRUCTIONS.)

Mike Carney, Coker Palmer.

Good morning.

Bill, I think you had mentioned flex sales associates and the growth year-over-year. was that -- did you say 4.4%?

Yes, I did, Mike.

And that's flex, right?

That was flex associates, yes.

If we -- and we're talking about the strength in IT, is that where most of the flex associates are being added, or is it -- are you getting higher productivity gains in IT, or ...

Once -- I'm just looking at a couple numbers here, just to make sure that -- yes, that's tech.

Technology certainly is our sweet spot, 50% of our revenues, and it is the -- that is where we think the market's going for -- over the next six quarters, Mike. And yes, that is where we have been adding people. That's where the underlying conditions, such as KPIs, job orders and strength in our different marketplaces. So, yes. That is the area we will probably add -- not probably -- the area we will add the most people as we go forward.

And did you also mention that productivity was up 3.6% in flex?

I did.

OK, and that's across all the segments?

Yes, that is firm-wide.

So, I'm assuming that it's probably up higher then in IT, given the revenue growth versus ...

Well, it depends on how we are adding people, that is to say, once you slow down the rate of core headcount additions, then productivity grows just because of the math of the number of people divided into the amount of revenue.

And so, you can't say that as quickly as it might first appear.

Right.

And on the finance and accounting, it's been weak for a number of quarters, really mostly market -- across the market. But, do you think that -- and I know you mentioned a project end, and then there's Wheaton and some of the smaller mortgage segment. But, do you think that that is an area that's going to start to see growth, or is it an area that you would expect to continue to be soft?

Well, first, mortgage is a non-issue for us. we really -- that's not an issue. We look at all of our products that we offer, and we -- on a continuous basis we analyze those products and we determine what the -- where the growth potential is, where the market leadership, the market teams we have in place, and then we balance that portfolio, just like anybody would. And at the moment, we have indicated that our priorities are on tech, which we think is going to grow substantially over the next six quarters, as well as HIM, CRS and government solutions.

OK. So, in finance and accounting, I mean, there's -- gross margins have grown substantially for many years, and they've slowed, obviously. Is that an area where you will -- you think gross margin will go down in order to pick up Mike Carney, Coker Palmer growth? Or you'll just continue to see some flat to down revenue and keep those gross margins pretty high?

I think we'll balance volume and gross margins, and I think that this business is going to stabilize right here. And I think that it is that type of business, and it's just certainly -- reached close to its [apex], so it's now up to people to take market share and execute strongly. And I think that we can do that. But, certainly, greater potential to grow in the tech side of the business, and that's where we're strongest.

This is Dave. The F&A business is a heritage business for us. We know it well. And we are committed to that business. We'll continue to manage the business and prioritize our investment in that business. And as we've stated in the past, we went through a fairly extensive evaluation of that business. We talked about performer on (inaudible) and the mortgage burn-off, and that is no longer a factor to us.

And also, just to reiterate, we had a major client and a major project that rolled off for the second quarter, so there were seasonal factors, as well. So, we have invested heavily in that business in '03 and '04 and, as we look forward, we expect that F&A will be a contributor for Kforce going forward, in that, ultimately as we move into the back of the year, that that will start to level off, as Bill said.

But, the priority of investment, F&A is not at the top of the list because we believe that the greatest return for organic revenue growth are going to come from the four areas that we stated, which is tech, government, CRS and HIM.

Got it.

One other on the -- moving to the perm side. It appears that it's IT search, and I know of course you can't take one or even maybe a couple quarters into account as a good trend in search. But, given that you've made considerable investments there, it appears that there's -- that the weakness there is coming from the new investments, I mean, because your fees are certainly up pretty strong, but there's just not the placements. I know there's a candidate shortage, but there's just significantly higher number of people doing that than there were a few years ago.

So, what -- I guess obviously if that was running with the same productivity as you had a few years ago, you'd have a lot more earnings right now. And I guess I'm just wondering what there is to solve that issue.

Yes, it is. To solve that issue, it's time. The market's there, meaning job order demand is there, so we're seeing the demand from the customer. It's the maturation of the sales force. We all know ultimately what happened on the technology front. Technology search basically evaporated during the last cycle because of the combination of Y2K, the dotcom bust, and then 9-11 on the back end of that. I mean, for example, you know, when we look at our low watermark on the technology front was probably below $3 million a quarter.

So, we had much further to go in terms of rebuilding our population on that front. More than 60% of our population has been with us less than two years. So, as those individuals continue to develop and mature, we will see that productivity gap start to expand. So, that is -- technology is where we made some of our significant hiring investments during '05 and '06 to ramp up the population of people, so we have some pretty good mass there, and it's now time to mature those individuals.

And if something were to change in the marketplace, I'm assuming that, if you cut a number of unproductive searchers there, that you would have considerably less operating expense. Is that right, Joe?

Yes. We're always evaluating what's -- supply-demand and what the market opportunities are, similar to what both Bill and Dave were referencing on the F&A flex front. Back in '03 and '04, that market was very hot, and especially '05 as Sarbanes came online. And we're seeing that kind of across the board, that -- you know, there's a plateauing. So, as Dave referenced, it now is a capture market share game.

And similar now to what we're seeing in the marketplace, we're seeing that expansion happening really broad-based from a technology standpoint. And that's one of the nice things about not being a single-service provider, where we swing with the overall demands in the marketplace. We have a very diverse portfolio, and no different than when you're managing your stock portfolio. We're constantly evaluating our businesses and where the greatest market opportunities exist, and weighing our investments in those areas more heavily.

OK. Just one more, since you said that. In the government solutions business, is there need -- obviously there's always different opportunities out there. But, is there a need to make any further acquisitions in that, or can you continue to grow at a very high pace there by just organically and in keeping one or a couple offices?

Yes. The government -- in evaluating the government space, and I think we put some good data in the release, that we pushed out a pretty extensive PowerPoint at the time we made the Bradson acquisition, that had some data in there. I mean, the government market is significant.

If you were to look at the collective finance and accounting and technology government market, it's virtually as large as the staffing market. Now, there's a lot included in that. So, relative to the size of our government practice at this point in time, the percentage of market share that we have is nominal. So, there's opportunity to grow it organically. Obviously we continue to evaluate strategic acquisitions and, if an acquisition met our threshold, we feel that we have the leadership in place to be able to absorb an acquisition on that front.

Hey, Mike, this is Dave. One other point of note is, when we discuss the Bradson acquisition, one of the key elements that we saw was the synergies related to the staffing engine being connected to the government solutions piece.

And over the last several quarters, we have diverted the efforts of our search teams in one of our largest markets, in D.C., to actually support and service Bradson. So, those synergies have, in fact, been realized, to the detriment of our search numbers reported externally, but to the benefit of our government solutions business, as you can clearly see, that those synergies have yielded excellent results and sequential growth and year-over-year growth.

So, we will continue to do that. We believe that's in the best interest of the firm. So, one of the synergies that we had identified has in fact played out very well for us.

OK, good point. And just the temp to perm numbers, those are included in search, right, across the segments?

Correct.

OK, thanks.

Mark Marcon.

Just wanted to ask a little bit about HLS. You saw huge growth in HI, and I was wondering, was there a big project that jumped in? Or how sustainable is the growth rate in Health Info management?

Yes, Mark. HIM has been a stellar performer for us over the last several quarters. There's not any unique dynamic taking place in that marketplace. It's pure execution. We have a great leader over top of that unit who's really built a great leadership team, and they're ramping up associates very quickly. And they're just -- they're grabbing market share. I mean, they are executing. I don't want to say flawlessly, but I've been in this business 19 years, and that business is, from an operational execution standpoint, as good as I've seen.

Interesting. And then, CRS obviously also bouncing back nicely. Have you basically replaced all those contracts that went away a few quarters ago, and now you're back in the build mode?

This is Bill. It is much different than HIM, which is short-term activity. CRS is very long-term projects, long sales cycles. And so, you normally will see this type of volatility. They have recently signed some new contracts and re-competed on others, and they have won those. They are really an employer of choice, one of the top three in the entire marketplace, and we think that they'll continue to grow.

But, it will, much like government solutions, it will not be linear, and it will not be straight up. But, over time, year-over-year, we will see excellent performance from them, we believe.

Terrific. Thank you.

And there are no further questions. Mr. Dunkel, I would like to turn the call back over to you for any additional or closing remarks.

OK, thank you very much. We appreciate it. Once again, our appreciation goes out to our field and corporate teams and our consultants and clients. We're very pleased with the quarter, and we are continuing to execute with an intense focus as we continue to pursue our three-year plan.

So, thank you very much for your interest in Kforce.

This does conclude today's conference. Thank you for your participation.