Kforce Inc (KFRC) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to the Kforce Fourth Quarter 2007 Earnings Conference Call. Today's call is being recorded. [After] 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, Sir.

Good morning and welcome to the call. Before we get started I would like to remind you that this call may have contained 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 in our 10-Q, 10-K and 8-K filings with the SEC. We provide substantial disclosure in our release and our hope is that this will improve the dissemination of information about our performance and the quality of the call.

After 28 years of Kforce, I'm very pleased to report that 2007 was the best year in our firm's history. Passing $1 billion in revenue was an important milestone and the result of the great people of Kforce delivering exceptional service consistently to our customers. We hit all-time high records in revenues and earnings and the investments that we have made in our portfolio of businesses have positioned Kforce well for the future.

In 2007, we made no acquisitions and focused on deriving value and scale from our KGH business acquired in 2006. With respect to future acquisitions, we are maintaining a high threshold that observe that private valuations have not yet come into alignment with the change in public valuations. The macroeconomic picture has become quite [flattered] over the past several months and while we have not yet seen an impact on our business, we recognize there are potential challenges ahead.

We will maintain our vigilance shots and scrutiny of our key performance indicators and adjust as required. Our senior management team has extensive experience managing through different economic scenarios and is well-seasoned.

In the event the economy does slide into recession, we believe that there are a number of substantial differences when compared to 2001. Including no tech bubble; restrained employment growth thus far in the cycle; strong secular drivers in particular for professional and technical staffing.

In addition at Kforce we have a substantially different business model with a diversified revenue stream, far less permanent placement as a percentage of revenue and greater variability in the cost structure. Should we experience deterioration in business conditions, our priority will be to maintain positive cash flow and to retain and redeploy our people.

With that said, we believe the knowledge economy remains strong with both secular and cyclical drivers fueling excellent long-term growth prospects. College-educated unemployment remains at a low 2.1% and the premium for top talent will likely increase for the foreseeable future.

Overall, an outstanding year for Kforce is reflected in our operating results.

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

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

2007 was a year of significant accomplishments for Kforce indeed. We passed the $1 billion mark in revenues, saw sustained growth in most areas of the business, and also achieved record net income and earnings per share. As we enter 2008, we are pleased with the quality and diversification of our revenue stream, and are prepared to successfully manage the business as it continues to grow.

At the same time, our experienced management team is closely watching our key performance indicators and we are prepared should demand decline.

The fourth quarter marks the eighth consecutive quarter of record firm revenues, record flex revenues and income from operations. We are accomplishing the three-year goals we set out in our roadmap to 2008, which was to deliver sustainable and consistent revenue growth and earnings performance. Total revenues of $262.6 million in Q4 were a 3.5% increase sequentially on a billing day basis and an 8.1% increase year-over-year.

Strong performance continued in technology staffing in Q4 which grew 2.8% sequentially on a billing day basis and grew 91% year-over-year. Technology staffing represents one-half of our total revenues. This business unit is a major focus in the firm's investment strategy and continues in a positive trajectory.

Q1 technology revenues will be impacted by the traditional completed assignments at year-end. The recovery of the revenue stream in the first few weeks of 2008 is similar to the recovery we experienced in 2007.

As a result of the completed assignments at year-end, we expect technology to be down slightly in Q1 2008 on a billing day basis but up on a gross revenue basis. We remain optimistic about the firm's future prospects in tech.

Our two top performing segments again in Q4 were HLS and Government Solutions which grew 3.7% and 7.6% sequentially, respectively, on a billing date basis.

For the fourth quarter 2007 over the fourth quarter of 2006, HLS was up 18.8% and Government Solutions was up 23.3%. The growth in HLS was fueled by continued strong performance in our clinical research and Health Information Management business units, whose year-over-year growth was 25.8% and 47.1%, respectively.

As we look forward to 2008, we expect HLS and Government Solutions to continue to grow as a result of the long-term nature of our contracts with our clients.

Our Finance and Accounting business grew 3.9% sequentially on a billing day basis although this segment is down 6.1% year-over-year. As we have previously stated, the year-over-year decline was primarily driven by weakness in our low end mortgage-related business, which constitutes less than 1% of total firm revenues and the completion of certain high revenue projects. We believe the core F&A business demand continues, and we look for improvement in Q1.

I should note that, at any point in time, the firm is providing flexible staffing consultants to approximately 4,000 different clients in many industries. Our largest 10 clients represent 16% of our revenues. This diversification is an additional source of revenue stability. The firm generates approximately 15% of its revenues from a broad definition of financial services sector.

In total, we have not seen a significant impact on these clients from the recent financial market turbulence but continue to monitor this area closely.

Our Search business was down 10.7% sequentially in Q4, which is an historically slower quarter due to the holidays but grew 7.6% year-over-year and 10.2% for the full year 2007 over 2006. Search, which represented less than 7% of total revenues in Q4, is difficult to forecast. However our internal KPI suggests that the market for direct hires continues to be promising.

As with the rest of our business, we continue to monitor the market for surge and moderate the size of the team and the cost structure accordingly. We believe we have significant capacity with our current Search service team and continue to focus on maximizing productivity. Our Search team is 8.4% larger than a year ago and we look to grow this revenue stream.

Flex gross margins were up 30 basis price year-over-year with improvement in Finance and Accounting, HLS and Government Solutions. The sequential decline in technology flex margins is largely the result of client mix with a higher percent of high-volume, lower margin clients.

Tech margins in the fourth quarter were also affected by paid time off and the achievement of volume discounts with certain clients.

As we look forward we expect year-over-year margins to be relatively stable as we continue to see demand for our services reflected in the bill rate increase of $4.47 in 2007, and offsetting increasing pay rates of $2.60 across all segments.

A primary objective is to optimize gross profit dollars. Through both revenue growth and careful management of the spread or through revenue growth and careful management of the spread between bill rates and pay rates.

As we continue to navigate through the current economic environment, we continue to look at internal KPIs as a primary near-term forecasting tool. This data-driven philosophy allows us to alter course quickly when indicators warrant. To date, our KPIs are healthy and thus, we will continue to strategically make investments in headcount where the greatest return is most likely.

The number of sales associates has increased 3.1% sequentially and 5.2% year-over-year. We continue to provide outstanding training and we exit those new hires quickly who do not meet agreed-upon benchmarks. We believe this investment posture will pay great dividends throughout the economic cycle for professional staffing.

Although it has been over a year since our most recent acquisition, we will continue to consider strategic acquisitions to 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 our sales force and to our clients. We have substantially completed our significant investment in new technology which we believe provides an infrastructure on which to build for the next 10 years.

This infrastructure includes a new front end system, PeopleSoft modules for backroom processing, a state-of-the-art phone system, wireless connectivity in our offices and a long list of infrastructure applications which provides our clients and associates with exceptional customer service and also allows us to reduce SG&A as a percent of revenue through efficiency gains.

We believe our business is operating efficiently and remains very nimble. We are prepared for economic turbulence and we are well positioned to take advantage of market opportunities.

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

Thank you, Bill.

As Bill stated, 2007 was a year of many milestones for Kforce. Revenues for the year of $1.037 billion were up 10.5% from 2006. Net income of $40.4 million was up 24.1% year-over-year and earnings per share of $0.95 were up 23.4% year-over-year. All these figures are records for the firm.

These significant improvements were driven by strong revenue growth in our Technology segment which increased 13.7% year-over-year; HLS was up 11.8%; our Government segment, which increased 87.9% and 130 basis point improvement in total for our Flex margins.

Our diversified business is focused on many of the areas of greatest demand in today's economy and we believe positions the firm well as we move into 2008.

In terms of fourth quarter, revenues of $262.6 million represent an 8.1% increase year-over-year and a 3.5% sequential increase on a billing day basis and have now increased sequentially eight straight quarters. I should note that this revenue increase was broad-based with all segments up sequentially on a billing day basis.

Our revenue per billing day increased 3.5% to $4.3 million and set an all-time high for this metric for the 11th straight quarter. Q4 has 61 billing days versus 63 in Q3.

In terms of revenue by time, Q4 flex revenues of $244.4 million were up 8.1% year-over-year and 4.5% sequentially on a billing day basis. Total Search revenues of $18.2 million for Q4 was up 7.6% year-over-year and down 10.7% sequentially.

Revenues for the beginning of the first quarter of 2008 have been relatively consistent with Q4 activity. The Flex revenues for the first three weeks of January are up 7.9% year-over-year and Search is down 4% versus the first four weeks of Q1 2007. We caution that it is difficult to draw conclusions for Q1 based upon this limited data though we remain cautiously optimistic about near-term prospects.

Net income for fourth quarter was just under $10 million, and increased 7.7% year-over-year as compared to $9.3 million in a Q4 2006 and declined 9.6% from $11 million in Q3 2007. The decline in net income for Q3 is primarily attributable to the decline in Search which typically slows down in Q4 and the reduction in Technology Flex gross margin percentage. Our operating margins in Q4 2007 was 6.6% of revenue or $17.4 million versus 6.4% or $15.6 million in Q4 2006. Operating income has improved 83% in the last two years.

Q4 2007 earnings per share of $0.24 increased $0.02 or 9.1% year-over-year and decreased $0.02 or 7.7% sequentially. Q4 2007 earnings per share before the impact of equity base compensation expense is $0.25, an 8.7% year-over-year increase from $0.23 in Q4 of 2006.

Our gross profit percentage of 35.6% has improved 30 basis points year-over-year and decreased 110 basis points sequentially. Our Flex gross profit percentage of 30.8% in Q4 2007 improved 30 basis points year-over-year and declined 60 basis points sequentially from Q3 2007.

As we have previously stated, we expect our Flex gross margins to flatten out primarily as the result of balancing volume and rate objectives. Our Technology Flex revenue continues to benefit from increasing sales to larger volume, lower margin customers and has resulted in moderation of gross profit percentage growth. (inaudible) continued to increase and has improved 8.7% year-over-year which we believe reflects continuing demand of our services.

Partially offsetting the decline in gross margins is a reduction in operating expense from the third quarter. Operating expenses were 29% in Q4 versus 29.4% in Q3, and 28.5% in Q4 2006. We continue to balance current profitability with selective investments.

The majority of our cost structure is variable. Compensation expense which is directly correlated to gross profit comprises 74.6% of operating expense. Our non compensation 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 the firm to act quickly in changing economic climates.

EBITDA, an indication of the first strong cash flow increased 12.6%, to $22 million or $0.52 per share in Q4 2007 as compared to $19.5 million or $0.46 per share in Q4 2006. This strong operating cash flow which totaled $48.8 million over the past year allows us to continue to invest in our business and also retire bank debt.

The firm has reduced debt by 53% in the past year to $50.3 million as compared to the $106 million of debt on October 2nd, 2006, following the acquisition of Bradson. In terms of other important financial metrics, capital expenditures in Q4 were $3.5 million versus $3.2 million in Q3 2007 and are expected to decline in Q1 now that we have substantially completed our enterprise optimization program initiative.

We also continue to actively manage our accounts receivables portfolio, maintaining a very low DSO. On a specific point, we've assessed the exposure related to the recent bankruptcy of [Chimes] and believe potential write-offs to be less than $500,000 for which we believe we are adequately reserved.

Looking forward to the first quarter we expect revenues to be impacted by year-end assignment completions. The fourth quarter of 2007 had 61 billing days versus 63 billing days in the first quarter of 2008. Revenues may be in the $266 million to the $272 million range. Earnings per share in Q1 will be negatively impacted by approximately $0.05 relative to Q4 as a result of beginning of the year payroll taxes. We expect earnings per share of $0.18 to $0.21.

The extended range for EPS includes a possible moderate slowdown in Search revenues.

From a financial perspective, we are pleased with 2007 and fourth quarter results and believe we have a strong operating platform on which to grow our business. We are also well positioned to adapt to changes in the economic environment. Our profitability, cash flows and balance sheet remain strong and we remain cautiously optimistic 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. I will hold my remarks and open up the call to questions. Peter?

(OPERATOR INSTRUCTIONS) Jim Janesky. Stifel Nicolaus.

A couple questions. When you look at [perm] year-over-year, last year it was up 15% approximately for the first quarter. This year you said it was down 4% in the first three weeks. Obviously that is a very volatile number, but can you give us an idea? Is this a normal, seasonal pattern? And then, Joe, if you could just give us more detail on what type of moderate slowdown in Search you expect in the first quarter of '08? Is that sequentially or year-over-year?

Let's see, some background. I think we've observed that Search has been down in the fourth quarter, six of the last eight years, Search has been up 14 of last 17 quarters with the three down quarters being the fourth quarter. Search has been higher in Q1 in five of the last seven years. The exceptions being the recession years of 2000, 2001.

Search headcount is up 8.4% to year over -- full year over full year Search is up 10.2%. So basically when you look at all that, the trends would suggest if everything else would stay constant, that it would be up in the first quarter. Obviously with the economic turbulence we see out there and forecasting the first quarter we're being a little bit conservative and suggesting that it might decline from here. We have no reason to really believe that, especially in the first quarter. A lot of this depends on what happens in March.

So you know it's lumpy like we are, we are trying to be somewhat conservative on our estimation of where Search will be in the first quarter.

Thanks. That's helpful.

When you look at the strategy behind the [fo] -- or the reasons behind why there is a higher mix of business from the larger accounts as you mentioned, is that just where the growth is coming from or what are the reasons behind that? Is that just where you are seeing the growth in the market right now or give us maybe some a little bit more background as to why the revenue shift towards those types of accounts has occurred?

In particular, the very big picture, national accounts which are the large volume accounts for us are up 14% in the fourth quarter after being up 10% in the third quarter. So there's significant growth there for us. Total volume accounts if you will are 21.3% of our firm accounts.

I think as I -- or total firm revenues which is about 20 plus accounts and I think that you could say, yes, they're becoming part of what we do. A more, a bigger part of what we do. Now the effect on margins they've been -- if you look at -- for example Tech margins have been up 270 basis points over the last four years. And so you will see some compression there.

But we've also when you look at Tech flex margins they've declined six of the last eight years in the fourth quarter, primarily because of the results of time off. This quarter was quite unusual because of the achievement of some volume account benchmarks that we're quite pleased that we were able to achieve. But they also had a negative effect on gross margin percentages.

So we have said for the -- probably the last year that there's some moderation in GP percent. And I think that that's just part of the economic cycle that we're in as it's seasoning a little bit. Joe, you want to add to that?

Jim, what I would add to that when you look at Kforce and you look at our national footprint in the platform and the technology infrastructure we laid as well as what we are doing back here from a centralized recruitment and delivery standpoint, it really provides an opportunity -- I mean, we continue to see the larger customers paring back the amount of vendors that they are looking to work with. And this trend has been going on for the better part of the last 10 years and it continues to accelerate.

We see many, many of the companies that we're working with that used to work with 100 plus vendors. Now they've narrowed that down to less than 10. So that provides tremendous opportunities for us to leverage our scale on the overall infrastructure.

Mark Marcon. R. W. Baird.

Good morning and congratulations on hitting the $1 billion mark.

Thank you, Mark.

Just wondering. Just going back on the Tech Flex margins, are you seeing any sort of pullback in demand from some of smaller clients that would typically pay higher margins? And if not, why aren't you doing more business or trying to allocate your resources more over there?

I would say no. We -- our KPIs -- I will say it in a general fashion first. Our KPIs continue to be healthy. Now we don't necessarily believe that margin percent is what creates EPS. We believe that total margin dollars is what creates EPS. And, therefore, we are going after those type of opportunities to give us the highest reward for the least risk and helps our people be most productive.

And we find that a balance of those two things may sway a little bit as you go through economic cycles. But we believe we are pursuing the balance that creates the best bottom line for us and that's all -- I guess that's the way we apportion our resources.

What I would also add to that, realize the nature of our model is we work with the candidate population and identify those opportunities that are going to best match with their expectations. Given our footprint in many of the major markets, many of the larger customers in those markets are the desirable places to work. So we are really always trying to balance where those candidates desire to work, the makeup of the marketplace.

So that has a lot to do with it in terms of what we see taking place with the larger customers, in terms of what they have happening inside their environments that interest the candidates.

I mean I'm just looking at the hourly rate in terms of how it trended from Q3 to Q4, where it came down a little bit. And it's just not readily apparent to me why those -- certainly the gross profit dollars on the Flex GP side ended up declining sequentially and the growth rate slowed.

So I was just trying to get -- understand that to a greater extent and it would be fairly easy to understand if you just said, "well, some of the smaller clients are pulling back" but that doesn't sound like what you're saying.

I would say two or three things. One, $0.95 is the record EPS and that is what we are going for, is making sure that the EPS is the right bottom line. I'm not sure what hourly rates you're looking at, but as I look at our hourly rates for staffing in total, the quarter-over-quarter and year-over-year they are up.

I was just looking at Tech.

Tech went from $66.41 to $66.03. So basically flat and that's just a mix of people that go out. That's not -- I wouldn't say -- I don't necessarily draw a trend yet. I see what you're saying. I don't necessarily draw a trend from that. If you look year-over-year Q4 2006 for Tech was $64.48 and now it's $66.03. So it's up 2.4%.

So our indicators would suggest to us that we're still allocating resources and things are pretty moderate out there.

Okay. And just in -- if some of the people who are more concerned about the economy turned out to be right can you talk a little bit about if we go through a GDP decline that would be consistent with the last couple -- and I don't think that the staffing industry would go through this same level of decline as we did last time. I completely agree with you that there's a lot of differences now relative to the last down cycle. But can you talk a little bit about how you would see things being managed and where you think maybe the bottom would be in terms of margins?

I'll comment on the -- on my opening remarks. We agree with your assessment that in the event that there is a downturn and we are not saying that there is one that would affect the -- our segment of staffing, but should there be, A., we don't think it will look like 2001. B., our model is substantially different. Our Search concentration is lower. We have a much more variable cost structure. We've got a more diversified revenue stream.

And in the event that we do see downturn, we see GDP declines, then our priorities are clear. We are going to manage for positive cash flow and we are going to manage to hold on to our best people. We are going to seek to retain and we are going to seek to redeploy them. We have invested substantially in them. We have invested substantially in training them in that we will look across the divide and make the decisions for the long term not for the short term in terms of quarterly changes.

However, positive cash flow will in fact be paramount and that will be the ultimate metric that we are going to manage to as we seek to retain the people.

Margins are going to go where they go. Based on that, depends on mix. If Search deteriorates substantially then you would see the overall gross profit margin come down. If you see Flex margins come down which typically happened in a downturn as larger clients compress price, there tends to be a lag in pay rates at that point.

But in general we are going to manage those two as we have in the past. I think the experience that we've had in seasoned management team we know how to deal with that should that happen and at this point we have not concluded that that is going to happen.

Yes but I mean clearly the market -- you know to be fair I mean you're basically trading at 9.2 times trailing earnings. You know I think the next peak is going to be higher than -- if 2007 was the peak of this cycle then the next peak I think is going to be significantly higher than what you just accomplished. But, clearly, the market believes that things are going to slow down.

And so I think what a lot of people are wrestling with is how bad could it be and obviously nobody knows. But could you see yourself going into a loss situation at all? Or if we go into a downturn or do you think the worst margins would get to would be 2, 3, 4%?

As I said to you, we are going to manage to cash flow and we can run a lot of different scenarios out and you know there are non-cash charges that happen at those times. There are cash charges that happen at those times and we've been through this multiple times.

We are not at the point yet that we are going to go down that road and start telling you what we think is going to happen no more than we are going to be able to predict what's happening in the economy. Clearly, the market has determined that they believe that the economy is sliding into recession and have valued staffing stocks in Kforce specifically accordingly.

It remains to be seen whether they are right and as Bill made quite clear we are managing to our KPIs and those are the things that we're going to monitor.

Okay. And as you mentioned, if you managed to cash flow -- cash flow revenue starts slowing, cash flow goes up.

Theoretically.

Tobey Sommer, SunTrust Robinson Humphrey.

Thank you very much. I had a question for you about hiring. If I jotted down my numbers correctly in your prepared remarks, you said the number of associates up 3 percentish, percentage points sequentially, 5-ish year-over-year in the fourth quarter. I was wondering has your hiring and await you are thinking about bringing in new associates changed at all here during the first quarter?

The way we are bringing them in -- well we continue to look at our KPIs and we continue to look at those segments of our business that are growing and those [hot hands] are the people that are, in fact, hiring. Is the profile different? I would say the profile is not particularly different from how we were hiring in prior quarters or in the prior two or three years.

You may remember that we have done a tremendous amount of sophisticated studies of everybody we've hired over the last 10 years and we have developed profiles that we believe will be most successful for us and we continue to follow those profiles and be very careful though that people that we bring onboard that there's agreed-upon benchmarks that they meet at certain points of their career. And as they meet those benchmarks, they continue to proceed with the firm or they don't. So, no. Things things have not changed significantly.

Has the pace of hiring been different in this most recent January versus either in the fourth quarter or in the year ago January period?

I would say the pace is constant. It's very consistent. It's more what Bill referenced is where we are hiring the people into in terms of CRS, HIM, government, tax. There's obviously a higher percentage of hiring taking place in those areas because of what we are seeing from our results and opportunity standpoint.

And to touch upon your earlier question in terms of profile, what we typically see is based upon where we are in the cycle. When you are at the low point in the cycle there's typically opportunity to present themselves to higher [end] seasoned individuals because of the dynamics of the marketplace. But as the market continues to perform well and similar to a point where we are at right now, it's much more challenging to hire in true proven seasoned professionals because they have tremendous run rates on the Flex side and those types of things. So it's very difficult to dislodge them from where they are.

So we are more in the developmental type hiring profile.

Right. I was wondering if you could give us some color about what January trends were like by segments?

We historically have not broken out that level of detail on current quarter trends.

But, could you do it on the fourth quarter then?

Sure I can do it on the fourth quarter. When we look at -- when we look at year-over-year fourth quarter trends on the billing day basis, intra quarter, basically everything was up October, November and December, outside the Search been down in December and S&A Flex being down for the entire period.

Thank you. And then I guess I had another question about on the hiring side. With Search down a little bit in January, are you redeploying people out of Search or is it just kind of the initial trend in its January start of the year, so perhaps not enough to read into how you are managing the headcount there yet?

Yes. As I mentioned we have got a long history of the fourth quarter being a down quarter in Search and so that would certainly not suggest to us -- that trend would not suggest to us to start redeploying our people out of Search.

So, no, we continue to look favorably upon our Search service team. They have a lot of capacity to grow and so we continue to look at them favorably.

Thank you. And then shifting to cash flow. Quite strong in 2007 and you paid down a good portion of your debt. Is that -- looking at uses of cash over the next couple of quarters is that do you think where you'll focus your efforts? And I know you have a new share repurchase authorization. Wonder if you could comment on that as well?

This is Dave. You know we talked about three uses of capital being debt retirement acquisitions and share repurchase. Obviously with the 10-B-5 we made this statement that we believe at these levels that the return on investment and repurchasing our stock is there. You'll also note that the Board has increased our authorization an additional $50 million.

So again we are going to monitor very closely balancing cash flow and where the market is for our stock against acquisitions. But at 3.5 times EBITDA it's tough to find a more compelling investment.

And based on your prepared remarks it looks like private multiples need to come in a little bit before the likelihood of significant acquisitions materializes again?

Yes it -- again it comes down to as Bill said the strategic value. We are looking at a lot of these things and we have not yet seen private valuations come down yet. But as we demonstrated with Bradson, we are going to look at them and if they have growth characteristics and opportunities like that, that might compel us to move in that direction.

So we are going to assess all those things and do what we think is in the best interest of the firm for the long-term but, clearly, for the short-term the stock is compelling.

Josh Vogel, Sidoti & Co.

I'm sorry if I had missed it, but did you comment on the $14.8 million you had remaining on the authorized buybacks? Did you guys buy back any stock since then?

No, we did not comment on that just because we are intraquarter. So we really can't comment on how much of that authorization might have been used at this point in time.

Okay. I guess if you could prioritize for us, the use of your cash flows? If we were to take stock buybacks, debt repayment and acquisitions, what would be your top focus?

Josh, as I just said the -- we balance those three and at these levels at 3.5 times EBITDA clearly the stock is compelling which is the reason the 10-B-5 was filed.

Now at the midpoint of your guidance for Q1 it basically implies about 6% year-over-year upside to the topline but 7% downside to EPS. And I understand you are expecting moderation in bill rates and the Search business, but I guess I just want a better idea whether it's the bill rate moderation or the perm business that's having a bigger impact on the bottom-line outlook?

Yes as I mentioned in my opening comments we've contemplated a number of different Search scenarios.

What about the payroll taxes in Q1? Can you just remind us what the impact was in Q1 of '07?

The impact in Q1 '07 I believe was approximately $0.04.

Sequentially?

Correct.

And just last I know you guys don't usually comment, but is it possible to start disclosing the total conversions in the quarter and what they were the quarter before and the year before?

We don't break that out.

Is it possible that you guys could look to do that in the future?

Conversions are a small percentage of our overall Search contribution so it's an immaterial number to us.

And just lastly in the Finance and Accounting business, you've mentioned that one of the reasons for the lower revenues completion of the higher review projects and I was wondering if you expect to see any drivers that you see some larger projects come back to the table in -- some time in '08 or '09?

Well we believe that the large project that we are in the quarter before were very significant related to the Sarbanes-Oxley activity that went on. And as you know that has been integrated quite well. So major projects of that type I don't expect to see, but there are certainly always projects that are coming in and out. So it's really hard to know. Pipelines are certainly not that far looking to -- we could see something to predict that [into] 2009.

In general the demand for F&A is there. So as we burned off the large client, the mortgage business you've seen, we talked about in the third quarter last year that we thought F&A would turn up. On a billing day basis it did. In fact it turned up even on an absolute dollar basis. So we think that's a positive sign and an indication that we've cycled through it.

Mike Carney, Coker & Palmer.

Was wondering who you voted for? Just kidding.

All of them!

Really, what is your economic forecasts? No. Just kidding again on that one. Couple of questions. You had mentioned I think bill rate or price increases and pay rate increases, Bill, in your comments, but I had missed that. What was that? In 2008?

I had said in my comment that as bill rate increased $4.47 in 2007 and day rate increased $2.60.

But you've mentioned something about I think it was a qualitative assessment at 2008.

No, not about 2008. I don't know what bill rates and pay rates will be.

Is there -- in terms of the, getting the margins back in the or to flattening the margins in Tech staffing, is that just again a combination? Is that going to be a flattening in the mix or is that pushing through some pricing increases?

Well there's several things going on there. I think as I indicated Tech Flex has been down. The trend is traditionally down for GP percentage in the fourth quarter. In the first quarter, you have payroll taxes, so it's hard to get a trend out of that. However, over the last four years the trend has been up 260 basis points.

So the trend should continue depending on where you see us in the cycle as you go into a recession -- as you go into a recessionary cycle. there's more compression on margin. As you come out of it there's obviously an expansion of those margins. So it really depends on where you are.

Okay. In terms of the duration of staffing, especially on the Tech side, can you give us a sense if that is lengthening or if it's shortening?

Actually it's flat to lengthening. We are doing more major projects and as CRS and Government Solutions become a larger part of our revenue pie, those larger projects extended the overall length of assignment for the firm in total.

Okay. I guess what I'm getting at what typically most employment markets, big companies are leading indicator, small companies are lagging indicator and I don't know if you segment necessarily out by company size or just the size of your own accounts. But do you have any thoughts as to what's happening in terms of the -- in the -- in terms of the size of the companies? Whether one area is performing better than the next or -- ?

I think Bill actually went into a little bit of detail on that in some of his earlier comments in terms of the growth that we experienced sequentially in what we call our national accounts which are what you would consider substantial size entities. That's where we experienced considerable amount of our Tech Flex growth sequentially.

So I don't know what other detail you are looking for related to that.

Well I guess one quarter I certainly don't care about. I'm looking more at a trend. But basically it -- do you think that -- are you more focused on larger accounts? I mean, is there a trend to that or is that just a one quarter scenario? Are you more focused on the larger accounts or is it the fact that the or the larger entities -- are the larger entities simply performing better than the smaller midsize entities or -- ?

There's opportunities being created as vendor lists continue to consolidate, as larger customers look for suppliers that can service them across multiple geographies. This trend, I've been involved with Technology Staffing going on 20 years now. This trend has continued to evolve and, I would say over the course of the last 10 years, accelerate because there are many more players now that can service that. Although I will say that landscape is smaller today than what that landscape was seven years ago.

So that presents opportunities for us from the nature of the makeup of the firm. So that major accounts have always been a focus of the firm. I would say over the course of the last four to five years, and I think we've communicated that on calls, it has been an increased focus of the firm because of the opportunities.

And, again, going back to we are somewhat dependent upon finding that right match for the candidate populations and a larger -- a lot of these larger entities are doing a lot of interesting things for the candidate populations, especially on the technology side in terms of what they get to work on. And our objective is to be able to deploy candidates where candidates desire to work.

Got it. And did you mention or I think it was Bill that mentioned, it was 21% of total Kforce is the national accounts?

That's correct. 21.3%.

On the Search real quick, I'm not a big fan of just cutting some production and bringing it back on when it gets better, but on -- Search appears that productivity continues to decline. So I am assuming that just like you've talked about for many quarters now, Joe, that it's the -- it's the less tenured people that just aren't ramping up as quickly as would have been expected.

So do you -- I mean what's the strategy surrounding then and at what point are you going to start seeing productivity gains again? Or do you expect?

Yes. I would say we look at our human capital data it shows a direct correlation with selection and the rate of ramp on individuals. So when we start look at productivity, actually, it's the mix of the makeup of the population because and I would say this is even more heavily weighted in Search than it is in the Flex businesses. That while our greater than four-year population turnover has remained in single digits, when you lose a top performing Search person that's in the population that's not a one for one replacement from a headcount standpoint initially.

So when you say productivity has declined, when you look at it on an absolute basis with an 8.4% headcount increase, that would in fact be accurate. But when you look at how that is broken out, based upon the population, in terms of 10-year meaning greater than four-year people two- to four-year people and less than two-year people, in fact some of those populations' productivity performances is improved year-over-year because of that dynamic that I just tried to articulate.

So basically there's not really any reason to be, in general, cutting more people because they are just not ramping up as expected, relative to any other time?

Right.

Correct.

Got it. One last question. In terms of the fourth quarter I can simply tell that on the bad debt expense, I'm assuming you meant that in the fourth quarter you took a less than $500,000 charge for the chimes?

No. Basically what I had mentioned is we in our bad debt reserve it's a formula-based analysis based upon write-offs, delinquencies, trends, and overall changes in economic conditions, and concentration of accounts amounts by clients and by time outstanding by those clients. So we took all those things into consideration in terms of establishing our reserve.

Yes but so you said the that is accounted for. So --?

Recovered. There's no additional reserve required.

Right. Got it.

So on the fourth quarter that's between the -- looking at the fourth quarter of last year between bad debt expense and then stock comp expense that's like $0.02 of earnings and obviously if that would have come through it would look a lot different on the earnings side.

But I'm assuming that the stock comp expense, that's not going to get any better in 2008. But if you have what you've been running at 7, 8, 6% topline growth, is it reasonable to expect that you are going to have fairly good earnings growth? Because, obviously, the first quarter doesn't show that. However that's a strange seasonal quarter. So -- ?

Comp expenses certainly related to -- totally related to performance here and I might remind you how we started the call. Revenues were $1.037 billion, which is the best ever; operating income with 71.5 which is the best ever; net income 40.4, 24.1% increase which is the best ever. EPS of $0.95, which is a 23.4% increase, the best ever. Top expense will be related to that performance.

We have to go to the next question.

Rick [Dote], Columbia Management.

Just a couple of follow-ups on questions that have been asked. The buyback. You guys have already provided updated guidance for both Flex and Search in January. Why not provide in the public forum what you've done since you've reactivated your buyback?

The Flex and Search data that we provide is, I would say very generic whereas providing an SG&A line item impact is very specific. We've contemplated in our guidance any dilution impact. And we do not believe based upon current trading range our share price authorization will materially impact the quarter.

I mean it's more to give the, I think the market a sense that you are serious about the buyback and in fact, you've done -- made a material dent in what's out there and you know, words are one thing, I guess. Actions are another and you can tell us in this public forum what your actions are, but -- .

The piece that I guess I would echo there, Rick, is on -- I think Dave mentioned this in his comments and it was in our release, is the Board obviously authorizing an additional $50 million of share purchase.

Is there any restrictions, bank-related restrictions on you executing that $50 million?

No. We have no bank restrictions. The only restrictions we are really bound by are some of the amounts that we can acquire on the trading day.

Just, you've provided some information on the national accounts and if I got this right, national accounts grew 14% in Q4. I think Bill provided that data. Is that -- did I hear that right?

That's right, Rick. It grew 14% in Q4. It grew 10% in Q3. It's a total now of 21.3%.

Can you just -- I'm looking for the opposite of that, for the non national account business, what if anything did that grow and if you could provide -- and we know the national accounts are a drag on gross margins. Maybe if you can give us margin trends for the non national accounts?

I'm not sure how to answer that. You mean just the reciprocal number of the 21.3?

Right. The balance of the 14% so that the non national account business what was the growth rate for that in Q4? You said the national accounts grew 14%.

No, the amount of the revenue stream not the amount that they grew. The amount of the revenue stream, but part of the revenue stream that became.

Okay. So what -- ?

The growth rate would be actually a different number. Which I don't have that particular number in front of me by account. I don't know the answer to that.

No, I guess I am looking for revenue stream for the non national account business in Q4.

Well then it would simply be the reciprocal of those numbers. 21.3% is the national account. Therefore 88.7% would be the non national account.

And how about the margin trends in that business?

The margin trends in the, what we call the middle market or the small account has been fairly constant over the last several quarters.

So no deterioration. I mean some of the questions earlier I think were trying to get at whether you were seeing issues there and it sounds like things are fine there.

That's part of why Bill provided more color on the larger national accounts to provide that clarity that, in terms of when we look at the Tech business and we dig into what's happening from a margin standpoint, its mix-oriented.

Okay. Going to the Search side of the business, there was a comment made in your prepared remarks on moderating headcount. Now I'm not sure if you -- it sounds like that has not been executed. Clearly you grew sales associate headcount 3.1% in the fourth quarter, but --

So what did that mean? Is that something that you are saying you are willing to do it if you see business get tough or have you already started to execute on moderating headcount?

The primary investment in headcount in the fourth quarter was in Health and Life Sciences in the clinical and HIM areas to fuel continued growth. And I'm sure you'll agree the performance there has been exceptional. We are moderating the growth in the other areas; and we are going to continue to do that against productivity.

Is that moderating growth or is it actually reducing absolute reduction in any of the specific areas?

A [search] in the fourth quarter actually went down one person.

Just digging at that, I know you said we are not going to overreact to a decline sequentially from Q3 to Q4 on Search, but in fact this is the third time out of 17 quarters if my -- if I remember that right from your remarks. But it's also the only time that we've seen double-digit decline.

To me, that might be more than just a head fake like you've seen in the last two Q4s over Q3s and doesn't that merit something a little more serious on the expense side and, i.e., the headcount for Search?

Rick, we monitor the KPIs in terms of what's happening with job order flow, what's happening with sendouts, what's happening with the ratios associated with those, what's happening with from -- from when we take assignments to the acceptance of an offer.

We are focused on our KPI data and what those indicators are telling us. We look at these trends which is why again Bill shared some of those so that is an element of our overall consideration of what actions we're looking to take, but we -- so we bring all these pieces together and then we conclude on the approach we're taking at any given point in time, based upon those dynamics.

Would you expect your KPIs to give you a head up on perm? What kind of lead time do you think you're going to get on that from your KPI?

I personally have been involved in the business for 20 years, Dave's been doing this for 28 years. Most of our management has double -- is in the double digits in terms of experience and various different cycles. So the front end indicators, in terms of when we start seeing the ratio start to change, that starts to tell us something about a front end leading indicator.

Clint Fendley, Davenport.

Longer-term question here, Dave. On the government side obviously we've had some very nice results there in recent quarters. How might the election effect not just this year, but the longer-term opportunity to expand the number of agencies that you serve, I guess bearing in mind that a Democratic win might be better for some of the civil agencies. The Republican win may be for the IT-related defense. Could you remind us where most of your exposure is here?

Bill's going to give you some commentary on it. I think we've said historically that we are in areas within the government that are getting increased investments. Bill.

I would say to you that we will not be affected by the election. We expect probably somewhere around 10% sequential growth in government. We are primarily in DHS, DOD, customs and border protection and we are in those areas that should not be affected by the political outcome. There has been absolutely fantastic synergy between the staffing arm and the government arm of the firm; and staffing is just bringing in more people, faster and of higher quality than the government has ever seen before. So we are very pleased with that group and we expect significant growth as we go through the first quarter.

So for the DOD work that you are doing even if we were to sort of pull out of Iraq, maybe later or after the election, you don't have any work that is really geared specifically for that within your offering?

The DOD work is basically focused on improving internal controls and financial reporting. preparing audible financial statements, developing process, business process improvements. Those sorts of things. So Iraq is not a big issue in the work that we are providing to them.

Fortunately we are not in the business get of selling tanks, but that may happen.

We are going to conclude the call as we have run out of time. So as we mentioned earlier, we are going to move forward with the execution of our plan in the third and final year, but we are going to maintain our vigilance on watching our KPIs very strongly. The secular drivers are there for Kforce and we are still very optimistic that we have a bright future and strong prospects for 2008.

Again we wish to thank our field and corporate teams and our consultants and clients for allowing us the privilege to serve them. Thank you very much.

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