Kforce Inc (KFRC) 2007 Q3 法說會逐字稿

Good day, everyone. Welcome to the Kforce 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 Senior Vice President 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 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 the 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 statements I would 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 in our 10-Q, 10-K and 8K filings with the SEC. Kforce provides extensive disclosures in our release with the hope that this will improve the dissemination of the information about our performance and improve the quality of our call. Third quarter was another outstanding quarter for Kforce with revenues up to historical highs as we track toward $1 billion in annual revenue in 2007. EPS of $0.26 was at consensus increasing operating leverage. Once again, we established several new Firm records this quarter and we are approaching the end of year two, of our three year plan and can see the fruit of the hard work of our teams. Hats off especially go to our clinical research team, HIM, Tech and KGH teams on another great quarter. Our focus is driving organic revenue growth and enhancing operating leverage.

We hit a major milestone during the quarter with the implementation of our pay bill system in Q3, the culmination of years of effort and planning and we are grateful for the extraordinary effort of so many to accomplish this goal. We are excited about the enhanced capability our new technology platform will provide us in serving our customers. Uncertainty surrounding a cyclical slowdown remains, and we are were frequently asked to comment on future economic trends. There are people far more qualified than we were to do the economic prognosticating. Rest assured that we are operating with heightened sensitivity to any fluctuation at our front end indicators and we are fully prepared to act swiftly at the positive trends we are to observe were to shift. Indeed, our KPIs remain strong and we remain confident about the prospects for Kforce against a favorable secular and cyclical back drop for professional and technical staffing.

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

Thank you, Dave, and thanks to all of you for your interest in Kforce.

Third quarter marks the seventh consecutive quarter of record Firm revenues and many other important Firm milestones as well. We are extremely pleased with the progress we are making on all fronts as we continue to execute crisply during year two of our current three year strategic plan. The team we have assembled at Kforce is clearly focused on specific goals. 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 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 earnings performance. Total revenues of $262.1 million in Q3 represents a .8% increase sequentially on a gross basis and a 2.4% on a billing day basis and a 9.8% increase year-over-year. With Q3 results, we are well on our way to exceeding $1 billion in total revenues for 2007. Strong performance continues in technology staffing, which grew 1.6% sequentially and 12% year-over-year. Technology staffing represents one-half of our total revenues and has now grown seven straight quarters. This business unit is a major focus in firm's investment strategy and is expected to continue to grow on a billing day basis into Q4. We remain excited about the firm's future prospect in Tech.

Our top two performing segments were HLS and Government Solutions which both grew sequentially on a billing day basis. Year-over-year, HLS was up 15.5% and Government Solutions was up 148.2% which includes the acquisition of Bradson. The growth in HLS was fuel by continued strong performance in our clinical research and our health information management business managements. Boost sequential growth was 7.9% and 11.1% respectively. The growth in our government solutions segment though strong was tempered by delays in receiving the award of a number of new government contracts until late in Q3. We expect revenues to accelerate in the fourth quarter now that we have awards that have been made and activity is set to start in early Q4. Our Finance and Accounting business decline 5.3% sequentially. Driven primarily by a project end at a significant high bill rate, high volume client and also by client selection and the continued weak innocence our low end mortgage related business which constitutes less than 1% of total firm revenues. This segment should benefit from seasonality and revenues are expected to increase sequentially on a billing day basis in Q4.

Our search business was up slightly in Q3 driven by growth in technology search. Search revenues for Q3 2007 up $20.4 million represents .7% growth sequentially and a 4.6% increase year-over-year. Based upon recent key performance indicators and continued positive trends, we believe the market for direct hires will continue, but Q4 search revenues are always unpredictable. We believe we have significant capacity with our current search service teams and note that our search team is over 10% larger than a year ago. Because of our experience management team, strong recruiting classes, good job order flow and solid KPIs, we remain bullish on our search prospect. However, we maintain a careful eye on the leading indicators of demand and are vigilant to adjust course quickly if necessary. We were very pleased with our gross margin performance. Flex gross margins were up 130 basis points year-over-year with improvement in all four business units. Most impressive was the non-government flex staffing gross margin sequential improvement of 80 basis points. In accordance with our three year plan in 2008 we will strive to balance our revenue growth goals with strong margins while improving efficiency to optimize profitable growth. As indicated previously, in this the 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. We have been very thoughtful and deliberate in hiring and monetizing such investments. We added to staff during select periods in 2006 with few net additions in the first two quarters of 2007. Our KPIs continue to indicate areas of specific opportunity in the third quarter of 2007, such as technology flex and certain HLS business units. Accordingly, sales associate head count has increased 5.7% year-over-year and is up 5.5% sequentially. As our new associates mature in their roles and begin to ramp, we expect to see increases in productivity. We very carefully align our head count with observable KPIs and those productivity trends. Higher productivity from a new hire addition should help us continue our revenue growth as well as enhance our operating leverage. Additionally, though it has been one year since our most recent acquisition, 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 assessment.

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 have substantially completed the largest portion of the significant investment in our new technology for our firm, with a successful go live of People Soft, Pay Bill and time and labor in Q3. I am extremely proud of this and the Firm.

Our effort has been led by our Chief Sales Officer, Mike [Etor] and his team and they have done an excellent job. This implementation along with the insulation of a new front end system. a state of the art phone system, wireless connectivity and our offices, and a long list of infrastructure applications, provides a world class system which will provide our clients and associates with exceptional customer service and to allow us to reduce SG&A through efficiency gains.

The third quarter reflects continued progress and reaching our strategic and financial goals while still investing for future growth. We believe our business is operating efficiently and that our great team can improve further upon the world class platform we have built.

I will now turn it over to our Chief Financial Officer, Joe Liberatore. Joe?

Thank you, Bill.

Our revenue growth in the third quarter coupled with increasing earnings per share is a solid reflection in the continued demand for our specialty staffing services and our ability to translate that demand into a return for our shareholders. In particular, we believe the continued growth in technology staffing, HLS and our government practice which collectively represents 78.6% of total revenues and whose KPIs continue to be strong, provides diversity that allows the firm to be successful in this uncertain economic environment. Our great people in both our field and back office continue to perform during the third quarter. We remain on target for a successful conclusion of our three year strategic plan at the end of 2008.

Third quarter revenues of $262.1 million represent a 9.8% increase year-over-year, and a .8% increase over Q2, and have now increased seven straight quarters. Our revenue on a sequential billing day basis increase 2.4% to $4.2 million and set an all-time high for this metric for the ninth straight quarter. Q3 had 63 billing days versus 64 in Q2. In terms of revenue by time, Q3 flex revenues of $241.7 million were up 10.3% year-over-year and .8% sequentially. Total search revenues of $20.4 million for Q3 was up .6% year-over-year and .7% sequentially.

In terms of revenue for the beginning of the fourth quarter, flex revenues for the first three weeks of October are up 6.9% year-over-year. And search is up 11.4% versus the first four weeks of Q4, 2006. We caution that it's difficult to draw conclusions for Q4 based on this limited data, though we remain cautiously optimistic about the near term prospects. Our sustained revenue growth and focus on efficiencies and operating leverage have also translated to improving bottom line results, as net income has increased 24.7% year-over-year to $11 million in Q3 in 2007, as compared to $8.8 million in Q3, 2006. This earning leverage is apparent in the operating margin line as we were making measurable progress toward our stated goal of achieving 10% operating margins at the peak of the current cycle. Our operating margin in Q3, 2007 was 7.4% EF revenues, or $19.3 million versus 6.6% or $15.7 million in Q3, 2006. Operating income has improved 66% in the last two years. We are confident we can continue to manage the business to optimize earnings and adapt to any changes in the economic conditions while capitalizing on the strength of our diverse product offering. We expect 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 27.1% to $24 million or $0.56 per share Q3 2007, as compared to $18.9 million or $0.45 per share in Q3 2006. The strong operating cash flow which totaled $70.1 million over the past year allows us to continue to invest in growing our business and also comfortably retire bank debt. as reflected in the 11.2 million reduction in borrowing under our credit facility in the quarter. The Firm reduced debt by 49% in the past year to $54.3 million as compared to $106 million of debt on October 2, 2006 following the acquisition of Bradson. Q3 2007 earnings per share of $0.26 increased $0.05 or 23.8% year-over-year and increased $0.01 or 4% sequentially. Q3 2007 earnings per share before the impact of equity based compensation expense was $0.27, a 2.7% year-over-year increase from $0.22 in Q3, 2006.

Gross margin improvements continue as demand for highly skilled professional talent continues to be strong in the supply constrained market. Our gross profit percentage of 36.7% is improved 90 basis points year-over-year and increased 50 basis points sequentially. Our flex gross profit percentage of 31.4% in Q3 2007 improved 130 basis points year-over-year and 60 basis points sequentially from Q2, 2007, and has improved 330 basis points over the last two years. We believe the improvement and gross margin reflects the continues strong demand and professional staffing in the areas we service. We do however 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 continue 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. In Q3 operating expenses increased 50 basis points from the second quarter to 29.4% and have increased 20 basis points year-over-year. The amortization expense related to the go live of Pay Bill, and time and labor, that Bill mentioned, added approximately 267,000 expense in Q3 relative to Q2. The Firm expects to incur approximately 267,000 more quarterly amortization expense in Q3 beginning in Q4 as the result of this project moving into production in August of 2007. The most significant driver to operating expense increases is the additional compensation expense related to sales head count additions, productivity improvements over a more tenured staff and gross margin increases. Our noncompensation base cost structure continues to decline as a percentage of revenue and gross profit as a result of the leverage gained 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 Q3 were $3.2 million versus $4.5 million in Q2, 2007. And are expected to decline further in Q4. Now that we have substantially completed our People Soft Pay Bill initiative. We have continued to actively manage our accounts receivable, portfolio maintaining a very low DSO. Looking forward to the fourth quarter, we expect revenues to be impacted by the reduction of billing days, and anticipated holiday slowdowns which particularly affect our CRS and government businesses. The fourth quarter of 2007 has 61 billing days versus 63 billing days in the third quarter of 2007. Revenues may be in the $256 million to $262 million range, at mid range on the same day billing basis that would be 2.1% sequential increase. We expect earnings per share of $ 0.24 to $0.26, excluding any one time adjustments associated with the completion of our valuation of intangibles for the Bradson acquisition. This expectation assumes approximately $42.5 million weighted average diluted shares outstanding.

From a financial perspective, we are very pleased with the progress we are making and look forward to the continued improvement and believe Q3 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 and specialty staffing.

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

Thank you, Joe. As we close the second year of our three year plan, our focus remains on execution and optimizing operations as we previously stated, we have prioritized our near term investments in our technology, HIM, CRS and Government Solution units, and to a lesser degree F&A and search. We were pleased with our execution but are keenly focused on driving organic revenue growth. Our team has worked hard to position Kforce for superior performance and we are confident our field leadership and associates continue to distinguish themselves competitively in delivering exceptional service to our customers. Once again we wish to express our appreciation of our field and corporate teams and our consultants and our clients for allowing us the privilege of serving them. Now I would like to open up to questions. Steve?

Thank you. (OPERATOR INSTRUCTIONS) We will go to Mark Marcon with Robert W. Baird.

Good morning everybody. First I would like to say congratulations on getting so close to the billion dollar mark. David, I know it's been a long time coming, but you got there.

Thank you, Mark. As bill reminded me, it didn't take long after he got here.

Congratulations, Bill.

Thank you, Mark.

I wanted to ask with regards to the Pay Bill system, you mentioned that you will have a bit of an increase with regards to the expenses that in this coming quarter. What do you expect that will save you as we look out?

Mark, this is Joe. We have done an extensive analysis in terms of the ROI. We back office standpoint, we are seeing some of this reflected. Where we basically over the last year kept our back office head count somewhat flat with revenues being up over 10% year-over-year. And we anticipate that we will continue to be able to hold our head count somewhat constant if not be able to reduce our head count as revenues continue to expand. That's really where we will start to see it, because each individual becomes more efficient because of the technology that we are deploying. Not only from a Pay Bill standpoint but many of the other investments that we made.

Can you give us a feel along those lines of what percentage at this point of your SG&A is now related to kind of corporate back offices as opposed to field?

We haven't a historically broke out back office versus field. The one thing I that I will tell you is when we look at 2007 versus 2006, or if you compare 2006 versus 2005, we've continued to gain leverage from a back office standpoint. And that's partially reflected, when you look at what's happening with our sales head count additions and what's happening with our overall SG&A line, and then also operating margins, that's why you are seeing that expansion taking place from an operating margin standpoint while we are still able to add to head count.

And then did I hear you correctly, what was the sequential growth in terms of your internal head count for this quarter?

5.7%.

Will that pace --

I'm sorry, Mark. 5.7% is year-over-year and 5.5% is sequential.

That's what I thought I heard I wanted to make sure that was right. Are you going to moderate that pace of sequential additions to head count?

Certainly. I think in the fourth quarter there will be less of an increase. Now, certainly 5.5% is because we have been looking very closely at our key performance indicators. And as we look out at the strength of our business we believe that is warranted as we said before, it takes nine months to a year to ramp people up. We have our 2006 investments are starting to pay off so we believe we can keep our trend of earnings in line to support this type of investment. So we were doing this carefully and deliberately, but we believe that we can monetize these investments.

Mark, I would add to that. We are very pleased with the progress we were making on the productivity front. Productivity of our sales forces remain constant on a year-over-year basis, which is quite an accomplishment when you consider the normal turnover of more tenured associates, which have been replaced with less tenured associates, coupled with the 5.7% year-over-year head count growth Bill mentioned. We continue to believe we are at capacity within the existing population of approximately 25% if we were to reach the peak levels experienced in Q2, 2005.

Great. And then with regards to the trends, I'm sorry, I missed it, but what did you say you were seeing in October?

In October I gave you kind of the year-over-year. And we were seeing see the flex for the first three weeks was up 6.9%. And search is up 11.4% for the first four weeks on a year-over-year basis.

And I would imagine those trends are -- if we were to look at the various divisions you continue to see strong performances out of IT flex and out at Government and HIM and CRS and probably be the same sort of trends in the other divisions as well.

Yes. The 80% of the revenue that I had referenced in my opening comments, that would in fact be accurate. The one thing I would say is from an F&A flex standpoint, we do see them contributing from a positive sequential billing day basis as we go into the fourth quarter.

Okay. Great. I will hop off now and jump back on. Thank you.

Thanks, Mark.

We will go next to Josh Vogel with Sidoti and Company.

Good morning, everyone. With the search revenue up 11.4% year-over-year, you tell us which units you are seeing the strength in?

Well, on a year-over-year basis, when we look at search, tech is up 15.8%, F&A is up 6.1%, and HLS is up 11.1%. And weighted average of all that is -- wait a minute. I'm sorry. I was looking at the wrong numbers.

Bill -- you got it?

Yeah.

I just mean for the month of October so far.

Oh, okay.

Josh, this is Joe. We don't break out the search by segment in that short of window.

Okay. In the -- we saw nice spike in CRS bill rates last quarter. I was wondering if this was better pricing leverage on your side? Or a stronger mix of CRS business in general?

Well, CRS is long-term contracts with large biopharma deals. This is one to three year contracts, often fixed priced. I think over the last year that we have seen bill rate go up in $67 on average to up around $77 on average. Is this type of growth sustainable over time? I'm not sure that's the case. Is that bill rate sustainable as we go forward, I would say that is yes to that.

And it's apparent that F&A is a little weak in '07 versus '06. But do expect this moderation here as you look out into '08?

Yes. Let me tell you, the story. Basically we had a large client,that a run rate in 2006 of $14 million. And the third quarter of 2007, that client had $500,000 of revenue. So that's pretty significant loss. Second issue there, is that I mentioned, was the mortgage financing. Now we really went into that trying to rationalize our operating model and then prove our client selection over the last year or over the last two years. That group gross margin percentage has improved 620 basis points. Of course, the volume has come down. We believe we have stabilized those -- that activity. We are hiring in the third quarter and financing the accounting. And we expect in the fourth quarter to see a reacceleration of revenue growth in that group.

Just to confirm, you said your low end mortgage related to business was less than 1% of revenue. Did you mean less than 1% of accounting and finance revenue?

Total revenue.

And just lastly, obviously the shares have been under some pressure in recent months and as I was curious what level would a buy back be an attractive option for you?

Well, Josh, if I had any money in my own personal account I would be buying aggressively. Obviously being somewhat facetious, we have $14.8 million outstanding on a Board authorization in dollars. And clearly we were watching very carefully three uses of capital, acquisitions, debt retirement and share repurchase. The best that I can offer you at this point is that we are acutely aware of where the share price is today and we are watching carefully.

Great. Thank you.

We will go next to David Feinberg with Goldman Sachs.

Good morning.

Good morning.

One house keeping question. Just trying to reconcile your comments around the new bill system. Is there going to be an additional $267,000 of amortization in the fourth quarter? Or is that a continuation on a go-forward basis of what you booked in 3q.

That will be an additional 267 in the fourth quarter above the 267 we experienced in the third quarter based upon the timing of when we brought that system live.

Got that. That will be the new run rate. Correct.

If you put those two together that will be the new run rate.

And then trying to reconcile an earlier comment, I think I heard you say this system will allow you to reduce operating expense over time which is different from the first question you were talking about leverage. Is it the fact that you will be able to bring down operating expense or get better leverage with the system?

Yes. It will really be a combination of both.

And where do the opportunity for expense cut, head count?

No. It ripples everywhere. When we start to look at one individual being able to process more transactions, what that allows us to do is, we don't only save on adding additional head count to support future revenue growth. It also translates into benefit cost. It translates to computer related costs. So if that whole ripple into the P&L.

One question on guidance in the strategic question. The $0.24 to $0.26 EPS just to make me clear, you said that excludes amortization of the Bradson acquisition?

What I had said is we were in the process of finalizing the valuation of intangibles during the fourth quarter related to Bradson as we have done with all of our prior acquisitions. So we are in the thick of that right now. So I can't really provide any further insight because we were working through the details with our actuaries. Yes, correct.

And the strategic question, you referenced the three year plan and laid out some of the groundwork that you did in '06 in terms of the people and the capital investment. If you were to characterize you said we are at the end of year two and as we look into year three, 2008, what are the goals for this three year plan for 2008?

I was saying in general words it is -- this is Bill, is profitable growth. That is, we are looking to continue to ramp revenue. Not still be careful on client selection. So while I don't see our gross margin continuing to grow at the same pace, it will continue to grow but not at the same pace it had the last two years, I expect to see greater revenue growth and that is our goals to first build up our associate based during the 2006 and improve margins through 2006 and 2007 and 2008, and put that together to have that be our best year.

Have you had to make any changes to incentive plans in order to target that profitable growth in '08?

We have. That three year plan certainly has incentives tied to a three year plan that were put in place at the beginning of that, and that we have been amortizing our expectations over the three years so there will be no P&L head if that was your question, in the third year of that plan.

That is part of the question. The other part, just understanding in terms of the new hires you have brought on. Have you had to change their compensation plans to achieve the targets you laid out for '08?

No. We actually -- we revamped all of our comp structures as we headed into -- we revamped all of our comp structures as we headed into 2003 and we had not had a material change to our comp structure. That's for field management and associate population since that point in time. We are very confident with the human capital data analysis that go through that are comp plans are driving the desired behaviors both at the associate level and at the field management level.Our field managers are paid on balancing growth and profitability, and so we throttle those things and associates, the more that they produce the greater leverage that they get in their compensation structures.

Great. Thank you. I will hand it over.

We will go next to Mike Carney with Coker Palmer.

Good morning. I think Bill gave me his cold.

Uh-oh, I'm sorry.

This quarter I have a cold. Can I on the amortization, Joe, when you are talking about -- I'm sorry, for the Bradson amortization, in finalizing that, you are including in your guidance so far what you -- the amortization you have been including of $1.3 million.

Correct. We have been amortizing based upon our original estimate. Now all we are doing is finalizing the valuation of those intangibles. So that historically that led to some degree of a true-up in the quarter where we do that.

Okay. So if the intangibles were higher or the amortization period was lower, you would have to true it up in that period in the fourth quarter?

Yes. In that quarter and then it's prospective.

Okay.

Whether it be higher or lower, it will be prospective on a move forward.

The likelihood it is typically higher?

I really don't have insight on that at this point in time. That's where we are working with the actuaries on. And then, Bill, you had mentioned the finance in accounting several times now.

So the -- I guess the trough that we saw in the declines in the third quarter, if you had mentioned that we expect positive sequential growth in the fourth quarter, then basically you expecting there is already a trough in things are heading up on the top line now, is that correct?

It's going to be positive on the same day billing basis in the fourth quarter. As I mentioned, we had this one client that went from $14 million run rate for 2006 to $500,000 in the third quarter 2007. And we have based upon our KPIs we have begun to hire again in the third quarter. All of that put together and the early information we have would suggest on a same day billing basis in Q4 that finance and accounting will be up. And so hopefully that is the trough and hopefully we will see improvement as we go forward.

Okay. Thank you.

We will go next to Tobey Sommer with Suntrust.

Thank you. I was wondering if we could delve in a little more with the perm placement trends this year because a year or two ago you hired pretty aggressively in perm with those -- with that recruiter base expanding significantly. I guess I was expecting a little bit stronger revenue growth. You talked about perhaps that this not being an area that you would focus your investments on a go-forward basis. I was wondering if you could reconcile the past hiring and the recent growth trends and then maybe talk about how you are-- think being investments in this particular area going forward? Thanks.

Hey, Toby, this is Bill. We have been up 14 of the last 16 quarters in search. And so we were pretty pleased with how we were moderating our growth with our new hires. Would I like us to be up more? I certainly would. It's fourth quarter a difficult quarter for us to predict? Yes, it is. Over the last four years we have been up every quarter except those two quarters I mentioned and that's been the fourth quarter. And so we are positive on search. We are always careful about the fourth quarter.

We continue to hire people of the 5.5% increase in associate increase in head count. Approximately 27% of that was in search. So we are still hiring there. However, we are very careful on portfolio management. That is, we continue to make sure we make the appropriate investments and technology, HIM, CRS and certainly just other extent and search and finance and accounting. I think we moderate those. We look at that as a total portfolio. We look at our KPIs and trends and put that together and we come up with our thoughts. Certainly on a secular basis we believe search is a very strong area and is a legacy part of our firm and we continue to strive to get to the 10% to -- 10% to 15% combination of revenue when we hit the peak of this cycle.

So is it a function of the your management of the portfolio businesses and exposure to perm? Or is it -- I'm trying to get a sense that is the market there for you to grow more if you could and you are choosing not to? Or has the market moderated somewhat for perm growth?

I think if you are referencing back to when we were talking about investment, we made a lot of the investment in our search population and this really ties back to and I know I stated it on numerous calls so I don't mean to be repetitive. If you look at our productivity by tenure, less than two year period produce half the rate at two to four year people. And our four or plus, people produce at 100% of rate greater than the two to four year people. So if you were to go back and look at when we added the people into the cycle, you will see that that first tranch is starting to approach moving into that two to four year window and then over time many of those individuals will move into four plus year. That's where we start to get the leverage from the hiring. When we talk about investment, we look at the overall population and with a percentage of our population is less than two years which is greater than 50% of our overall search producer population, there is tremendous leverage in capacity in the existing population of our search population.

Thank you very much.

(OPERATOR INSTRUCTIONS) We will go next to Rick D'Auteuil with Columbia Management.

It's Rick D'Auteuil.

We know.

I know you know. Just a couple of questions. You know, through 2006 we heard a lot about 2007 and beyond. We will go into the optimization phase. Today we are talking about the productivity on the sales, on the recruiter side is flat. And when I look at the operating expenses sequentially, not that it's a big number, but growing faster than revenues, those don't seem like optimization kind of results. And I guess, are we looking at the peak year being further out? And that's why we are stepping up the hiring again? What is the thought process on-- now that 2007 clearly hopefully isn't the peak and 2008, is that what you are defining as the peak year?

We are not defining the peak year because we would have to be in the economist to be able to pinpoint the peak year. So we are managing the business on a day in and day out quarter and quarter in and quarter out basis with the back drop of three year strategic plan structure that we put in place. We continue to -- I mean, if you go back and look at the numbers, the numbers speak for themselves. We continued over the course of the last several years to make progress towards our stated goal of 10% operating margins. And operating margins are up 80 basis points year-over-year.

It's also important to note, we accomplished this with the backdrop of search declining as a percentage of revenue from 8.2% a year ago to 7.8% this quarter. We remain optimistic that the investments and the process improvements that we made during this cycle will continue to yield leverage and that we laid the platform to attain our goal irrespective of whatever search contribution we have as a search of revenue. So I think the numbers speak for themselves. If there was an expectation that 10% was to happen in a given quarter. I don't believe we have gone out there and said we have that crystal ball.

I guess I'm not being critical. I'm more trying to understand whether you kind of redefined now that we are -- it feels like this quarter we have gone into the investment phase again. Where as the first couple of quarters this year you were more moderate to on the head count front. What are you seeing, I guess, with a -- as you defined it, when you hire a new person, it's nine to 12 months for them to become productive. If clearly you can't be thinking 2008 is a peak year, otherwise why are we hiring people that will be not become productive until after the peak?

This is Dave. During this year we went through kind of a mid term analysis, if you will. Based on that, we determined that the four units I identified earlier, Tech, HRM, CRS and Government, afforded us the greatest opportunity to accelerate the organic revenue growth. If you look back over the past year starting with the fourth quarter last year and first couple of quarters this year, we were relatively flat in head count. As we look into '08, it was apparent to us that for us to continue revenue growth beyond '08 and into '09 and to contribute at the midpoint the back end of '08, we would need to inject additional resources primarily into those four units and secondary into search and F&A. That is why we made that decision. I would not suggest to you in anyway this is a deferral of what we had planned to optimize as we move into 2008. But it certainly a recognition that there is an opportunity there and we are giving more juice on the throttle, if you will.

I mean, it almost sound like this optimization is more than a length of period of time based on what you are seeing in the market. That's what it sounds like to me.

It doesn't mean we turn everything off and ring out the last buck, because there is life after 2008. The plan is to certainly make sure that we are running the machine as efficiently as possible as we move into '08. But we recognize we will have to make selective investments to continue to fuel the organic revenue growth which is what we are after.

I think very impressive results. I just encourage you in this kind of opportunity in the marketplace that with everybody else being naysayers, perhaps to use some of that fire power that you are developing that you are generating AOPB quarterly basis to repurchase some of your stock and put your money where -- put your money where your mouth is. Thanks.

Appreciate that. Thanks, Rick.

We have a follow-up question from Mark Marcon with Robert W. Baird. A bit of a follow-up to D'Auteuil's question, which is, how much-- you indicated you had some excess capacity, don't you, with regard to your personnel?

This is Bill. Yes, we continue to believe we have substantial capacity in our existing team.

I mean, how much is substantial, Bill? I know it's going to vary by practice area. But if we could generalize, how much more revenue could we get out of the existing team if we kind of hold back in terms of the hiring?

Mark, I stated if our total head count were to reach the levels obtained in Q2, 2005, there would be 25% capacity within our population. Now, the reality is there is always attrition taking place. And we were always hiring into the front end unless we decide that there is a point in time that we were going to totally monetize all investments and let the business go off the cliff. So I mean, if you look at it mathematically that's really what exists. I think the key point here is from looking at SG&A percentage versus operating margin.

SG&A percentage is not the best indicator of what is happening with the Firm from a profitability standpoint. So from a cost control standpoint, our primary focus is on expanding operating margin and we will continue to make investments to improve leverage and enhance operating results as we continue to grow the business. We will to focus on balancing our investments in areas such as head count, compensation, back office technologies and process improvements as long with training and sales support to deliver improved bottom line results. As reflected if you were to look at this quarter. Net income, expanded 24.7%. Top line expanded 9.8%.

And how do you -- I know your KPIs are positive. You guys are right there in Tampa. Which I guess according to the Kay Shuler report is the worst real estate market in the country right now.

I noticed.

There are some signs of potential economic slowing that could come along. And you both -- you have all been in the business long enough to know that employment is a lagging indicator. So how are you kind of looking at the outlook? You got one set of -- you got your dash board in terms of your KPIs. And then you got this other indicator being the headlines that are out there and what that would naturally imply longer term. How do you balance those out?

We are -- we are certainly acutely aware of what's being said about the economy. We watch all of the data just the same as you do. None of us here came out with an economics degree. And none of us are focused on studying the econo metrics' we study the same reports you do.

We watch them carefully and look for assignment with those reports with our KPIs and supplement that with what our customers are telling us. The bottom line is that our experience has shown us that when we see certain indicators that would be a signal to us, that we are starting to see a rollover or a slow down. We have not seen that. And that's the bottom line. Certainly our antennae are up, we have more scouts on the ridge. We are watching very carefully. And I think that our experience is no different than our peer group. If you talk to our peers and listen to what they are saying, they are saying the same thing.

There are segments of the economy that have been hit. Certainly real estate in Florida has been hit very hard and real estate in the rest of the part of the country has been hit very hard. Kforce in the professional and technical area doesn't have a high dependency in the real estate market. Our view is that the area we are in are longer term investments and capital expenditures. We think we have done a nice job in balancing our portfolio of services in areas that are going to sustain us going forward. Some of which are even counter cyclical within our HLS units. We like our portfolio, our product mix. We were watching very carefully to see what is going on in the economy. And experience is the best teacher here. We have been through this a number of times. And we are confident that if we see a signal we will move quickly as we have in the past.

That's fair. And how much exposure do you, how much exposure DTO financial services across the organization.

Our overall revenue base is highly diversified with no one client accounting for greater than 3.1% of our total accounts receivable. Given the sub prime market, we heightened our focus on all of the significant clients that we work with. To date we have not observed any material change in our accounts receivable patterns. Or in the needs for the general services we provide outside of the mortgage related finance roles which, Bill has already referenced make up more than 1% of our revenue.

The question was, what percentage of your revenue would be coming from financial services companies.

We historically have not broke out revenue by sector because it's far too subjective in terms of how do you measure that in one end of the university to the other end based on defining the financial services entity.

Mark, our discussions with our clients, this is where we get into our supplementary data. Our discussions have not yet indicated that there is anything that would suggest that there is a major cut back. And it might be our portfolio of clients. It may be the projects that we are working on with them within them. There is a lot of different factors that go into that. We are not in the investment banking area. We are not in the bond portfolio area. We are serving them in technology and finance and technology projects, particularly the scale that we are working on in those clients are typically much longer in duration and are not things you can turn off and on.

Thank you.

Appreciate it.

Having no further questions I would like to turn the conference over to David Dunkel for any additional or closing comments.

We appreciate your interest in Kforce and once again, we want to re-iterate our appreciation to our teams and look forward to speaking with you in January talking about Q4. Thank you very much.

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