Kforce Inc (KFRC) 2008 Q2 法說會逐字稿

Welcome to the Kforce Q2 2008 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, sir.

Good morning and welcome to the Q2 Conference Call. Before we get started I would like to remind you that this call may contain statements that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially because of factors listed in Kforce's Form 10-K and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements.

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

Thank you, Michael. You can find additional information about Kforce in our 10-Q, 10-K and 8-K filings with the SEC and also we provide substantial disclosures in our Release and our hope is that this will improve the dissemination of information about our performance in the quality of this call.

The second quarter was particularly noteworthy, as Kforce performed very well in continuing operations against an economic backdrop of uncertainty and volatility. With the divestiture of our scientific and nursing businesses we have narrowed our focus to those services that are larger and offer opportunities for faster growth in scale. This completes our plans for divestiture and realignment of SG&A to reflect the reduced revenue and gross profit contributions of scientific and nursing.

As we consider our high quality revenue footprint going forward we are very excited about our growth prospects for both the near and long-term in each segment. The secular drivers for the higher skill niches we serve positions Kforce right in the sweet spot for professional services. College educated unemployment remains at a low 2.3%. Clients have not over hired in this cycle and the premium for top talent will likely increase for the foreseeable future.

Once again, during the quarter we made no acquisitions and have not made any acquisitions in nearly two years. With respect to future acquisitions we are maintaining a very high threshold and observe that private valuations remain high and have not yet come into alignment with the change in public valuations.

We were also very pleased with our strong cash flow and significant debt reduction of $20 million during the quarter while we continued to aggressively repurchase stock. We will continue to prioritize our three uses of cash, debt retirement, stock repurchase and acquisitions.

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

Thank you, Dave, and thanks to all of you for your interest in Kforce. As a general note, all numbers cited during our call today will be from continuing operations and therefore exclude any results from our recently divested nursing and scientific businesses unless specifically indicated. We are very pleased with our second quarter results. We were able to grow revenues from continuing operations for 21 of the last 22 quarters and for the tenth consecutive quarter to $251.1 million despite a more cautious business environment.

We were also able to divest two underperforming units in which revenue declined 15.1% and 19.4% over the last two years respectively. We believe these divestitures will allow us to direct all of our resources at our remaining portfolio of businesses, which we believe have the quality and diversification to provide the greatest return in the future. We are also pleased with bottom line results. We continue to accomplish one of the primary goals established in our roadmap to 2008, which was to deliver sustainable and consistent revenue growth and earnings performance.

Our two top performance segments again in the second quarter were HLS and Government Solutions, which grew 4.6% and 4.5% sequentially. For the second quarter 2008 over the second quarter 2007 HLS was up 24.9% and Government Solutions was up 24.2%. The growth in HLS was fueled by continued strong performance in both clinical research and health information management business units whose year-over-year growth was 25.5% and 23.8% respectively.

As we look forward to the third quarter, we expect HLS and Government Solutions to grow as a result of continued strong demand and the long-term nature of contracts with our clients. Revenues for our technology staffing segment improved 2.9% sequentially in Q2 and have increased 1.1% year-over-year. Our technology staffing segment continues to see consistent demand. This is particularly true from a flex perspective as we continue to offset some weakness in demand from financial institutions with new clients and other industries.

The ability to locate and place the right talent at the right time and for the right prices is still the primary driver in our ability to grow this revenue stream and we anticipate steady results in Q3 on a billing day basis. As anticipated, our finance and accounting business was down 2.6% sequentially and 5.3% year-over-year. This is typical of the seasonal decline seen in Q2 as year-end finance and accounting activities are completed. The year-over-year decline is primarily the result of a decline in our low-end mortgage related business, as we have stated previously. We believe demand in our core finance and accounting business continues. We also believe our finance and accounting business will be slightly down in Q3 on a billing day basis.

I should note that any point the Firm is providing flexible staffing consultants to approximately 4,000 different clients in many different industries. Our largest 10 clients represent 22% of our revenues. This diversification is an additional source of revenue stability. We will continue to align our sales focus to client and industry demand.

Search remains an important but relatively small part of our revenue and earnings stream. Our search revenues, which were 7.8% of the total revenues in Q2, improved sequentially. We are very pleased with the second quarter results and we see consistent demand as indicated by our KPIs. However, search activity remains difficult to forecast.

As with the rest of our business, we continue to monitor the market demand for search and moderate the size of our search teams and the related cost structure with a constant focus on improving productivity. Accordingly our search headcount was down 3.1% sequentially. However, headcount is 2.3% larger than a year ago and provides us additional capacity to grow this revenue stream. We expect search revenues to be down in the third quarter as a result of typically slower summer activity from an increased vacation time at our highest.

Another positive development in Q2 was the improvement of gross margins across all segments. Margins relative to Q1 were impacted by the reduction in payroll taxes from typically high Q1 levels. After considering the impact of these reductions gross margins in all segments still increased over Q1. They'll remain under pricing pressure. We expect margins to remain relatively stable though our focus remains on attracting the customers that will generate the greatest amount of gross profit dollars in both the near and long-term. Our revenue footprint continues to deliver some of the highest gross profit percentages in the staffing industry and is indicative of the demand of the specialty technical and professional staffing.

As we continue to navigate through the current economic environment we continually look at internal KPIs as one of our primary near-term forecasting tools. This data driven philosophy allows us to alter course quickly when indicators warrant. To date our KPIs and particularly job orders remain stable though clients are extending the hiring cycle. We continue to utilize these measures in determining appropriate headcount levels of sales associates. We've reduced a number of sales associates in Q2 by 4% as we continue to balance the uncertain economic environment with revenue growth opportunities though total sales headcount is 5% greater than a year ago. Productivity of our sales associates improved 3.6% from Q1 to Q2. We continue to provide outstanding training and we exit those new hires quickly who do not meet agreed upon benchmarks.

As our revenue stream continues to grow, we will however continue to make strategic adjustments to deploy our resources in the areas of greatest potential returns. We believe this focused investment posture will pay great dividends throughout the economic cycle for professional staffings and position the Firm to take advantage of the opportunities that will present themselves when the economic environment begins to improve. Although it has been 21 months since our most recent acquisitions, we will continue to consider strategic acquisitions but maintain a very high threshold for profitability and geographic and/or products fit.

Finally, we believe our back office continues to be one of the best performing in the industry. We have coupled great people and cost conscious culture with significant technology investment to provide exceptional service to our sales force and our clients. As we have stated previously, we have substantially completed our significant investment in new technology, which we believe provides an infrastructure on which to build for many years to come. We believe this provides our clients and associates with exceptional customer service and will allow us to reduce SG&A as a percentage of revenue through efficiency gains and adjust our cost structure as economic conditions warrant.

We've [allayed] our business is operating efficiently and remains very nimble. Despite our cautious view of the environment, our business remains stable and we do not see the signs of any significant slowdown in activity. Our seasoned management team has managed through multiple economic cycles. We are closely monitoring the development of this economic environment and we are reacting accordingly. Our revenue stream has multiple growth drivers with government, clinical research and HIM performing very well and they are a larger percentage of our revenue stream while search is a lesser percentage.

We have also divested of our slower growing units. As we encounter near-term cyclical headwinds we will focus on cost containment and position ourselves to take advantage of market opportunities.

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

Thank you, Bill. Revenues from continuing operations for the quarter of $255.1 million were up 4.8% for Q2 2007 and up 2% sequentially. These improvements were driven by broad-based revenue growth. Our technology flex segment increased 2.6% sequentially and had increased 0.9% year-over-year. HLS was up 4.6% sequentially and 24.9% year-over-year and our government segment increased 4.5% sequentially and 24.2% year-over-year. These three segments represent 74.9% of total revenues and are focused in areas of the greatest demand in today's economy.

In terms of revenue by time, Q2 flex revenues of $235.2 million were up 1.3% sequentially and 5% year-over-year. Total search revenue at nearly $20 million for Q2 improved sequentially. Revenue trends for the beginning of the third quarter of 2008 have been mixed versus 2007 activities and slower than Q2 activity. Flex revenues for the first three weeks of July are up 3.6% year-over-year and search is down 22.9% versus the first four weeks of Q3 2007.

Be cautious that it is difficult to draw conclusions for Q3 based upon this limited data but we remain cautiously optimistic about the near-term prospects. Net income for the second quarter of $8.7 million has decreased 17.7% year-over-year as compared to $10.6 million in Q2 2007 but improved 21.2% from $7.2 million in Q1 2008. Net income from continuing operations was $5.1 million and net income from discontinued operations was $3.6 million for Q2 2008.

In comparing operating results for the second quarter versus prior periods it is important to understand the key factors that affect the results. In this regard, as a result of the divestiture of our scientific and nursing businesses, Kforce accelerated divesting of certain equity grants which resulted in compensation expense of $6 million being recognized in the quarter. This expense has been reflected in selling, general and administrative expenses in our statement of operation.

This acceleration will also reduce expenses in Q3 and for the remainder of the initial vesting period by approximately $500,000 per quarter. In terms of income from discontinued operations, the Firm recognized a cumulative pretax gain of $5.9 million related to the sale of scientific and the per diem nursing business. Income from business operations exclusive of the gain was nominal.

Q2 2008 earnings per share of $0.22 increased $0.04 or 22.2% sequentially and decreased $0.03 or 12% year-over-year. We estimate that the impact of EPS on reduced payroll taxes versus Q1 2008 to be approximately $0.04. Q2 2008 earnings per share before the impact of equity based compensation expense and excluding discontinued operations was $0.24, which matched the $0.24 EPS Q2 2007.

Our gross profit percentage of 35.8% has decreased 60 basis points year-over-year and increased 140 basis points sequentially. The year-over-year decline is the result of change in business mix, both between search and flex as well as the composition of our customers as we continue to see growth in our larger volume, lower margin customer base.

The increase in gross profit versus Q1 is also impacted by decreasing level of payroll related taxes, which are typically highest in the first quarter. Our flex gross profit percentage of 30.4% in Q2 2008 declined 50 basis points year-over-year and improved 100 basis points sequentially from A1 2008. Though rates continue to increase and have improved 4.8% year-over-year, which we believe reflects continuing demand for our services, pay rates over the past 12 months have increased 4.6%.

The spread between bill rates improved from Q1 to Q2, which we believe reflects the stabilization in margins that we had expected to see. We expect our flex gross margins to continue to be relatively stable as the result of balancing volume and rate objectives. Operating expenses were 32.3% in Q2 versus 29.7% in Q1 2008 and 29.5% in Q2 2007.

Excluding the impact of the acceleration of equity grants related to the sale of scientific and nursing operating expenses were 29.9%, which reflects a sequential increase of 20 basis points and a year-over-year increase of 40 basis points. We continue to balance current profitability with selective investments with the focus on maintaining the necessary infrastructure to support the growth of the business.

The majority of our cost structure is variable. Compensation expense, which is highly correlated to gross profit, comprises 79.1% of operating expense compared to 76.4% in Q1 2008 and 78.7% in Q2 2007. This excludes the acceleration of the equity grants. Our non compensation based 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 as the business changes or with changes in the economic climates. We have already modified our cost structure to align with the reduction in revenues resulting from the recent divestitures.

EBITDA, an indication of the Firm's strong cash flow, was $20.5 million or $0.51 in Q2 2008 as compared to $21.1 million or $0.50 per share in Q2 2007. The strong operating cash flow allows us to continue to invest in our business, repurchase shares and also retired debt. The Firm has reduced debt by $20 million in Q2 and $73 million in the past 21 months to $33 million as compared to $53 million at the end of Q1 and $106 million in the fourth quarter of 2006 immediately following the acquisition of Bradson.

We also repurchased 898,915 shares of common stock during Q2 2008 at a total cost of $7.8 million. We have repurchased 2.4 million shares at a total cost of $20.8 million for the year 2008. The Firm has 43.9 million available for future stock repurchases under Board of Directors authorizations. In terms of other important financial metrics capital expenditures in Q2 were $3.7 million versus $2.8 million in Q1 2008 and are expected to remain flat now that we have substantially completed our enterprise optimization program initiative.

Write offs of account receivables and receivables aged over 60 days from the date of invoice decreased in the quarter. The quality and delinquency profile of our AR portfolio remains strong.

In terms of guidance for the third quarter, we expect revenues may be in the $247 million to $253 million range. Total Firm earnings per share may be between $0.17 and $0.20, which reflects approximately $40.3 million weighted average diluted shares outstanding and the bottom end to guidance reflects conservative guidance related to search.

The third quarter of 2008 has 64 billing days versus 64 billing days in the second quarter of 2008. From a financial perspective we are pleased with the second 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 strengthened specialty staffing.

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

Thank you, Joe. We are substantially into the planning process now for our next three-year plan and even as we conclude the third and final year of our current plan. We believe that we have an excellent revenue footprint. It represents outstanding growth prospects and financial performance as the secular drivers take hold. Once again, we wish to express our appreciation to our field teams and in particular our corporate teams who served exceptionally well this quarter completing these transactions and most importantly, our consultants and our clients for allowing us the privilege of serving them.

I would now like to turn the call open or open up the call to questions. Rachel?

(Operator Instructions) Our first question will come from Mark Marcon with Robert W. Baird.

Congratulations on the nice quarter relative to the choppy environment that we're all in. I was wondering-- and, Joe, congratulations to you on your promotion, well deserved. With regards to the monthly trends that you're seeing just on the IT side, can you talk a little bit more about what you're seeing on the flex side and obviously financially it seems like financial services would be choppy but you did mention that there's a number of different types of clients that you have and where are you seeing strength?

From I guess-- you know, we've provided intra quarter revenue trends and maybe that will be a good place to start. Revenue trends on a billing day basis during the quarter all units excluding the F&A and HLS were up in April and all units excluding HLS were down in May. However, when we moved into June tech and HLS were up in June with all the other units declining slightly and, as we started the quarter, I kind of gave you that high level flex of 3.6% up on a year-over-year basis. We still are seeing strong performance out of HLS and government, both of those in double-digit growth on a year-over-year basis. Tech is up slightly, a little bit less than 1% on a year-over-year basis and F&A is down on a roughly about 5% on a year-over-year basis.

So it sounds like F&A is stabilizing at this negative 5%. It's not getting worse, IT just a little bit, just a slightly softer and HLS and government continue to be strong. Did government go down in June?

Government did go down in June. It's important to note with the government business I mean it's heavily project oriented so it's not as smooth as a traditional staffing business so I wouldn't be alarmed by any one particular month trend in government. It's very pipeline oriented and our pipeline remains strong.

Okay and just going back to IT can you talk about the areas where you're seeing some strength and then where's it falling off and how should we think about the flex gross margins? They did come in a little bit on the IT side and my supposition is basically that there's just maybe not as many orders or that some clients are just sharpening their pencils a little bit more given the environment. Is that the right way to think about it?

Mark, this is Bill. Certainly margin it fluctuates because of the mix of the assignments that we have and the spread between the bill and pay rates, so as we look at those we are certainly after a strong balance between our volume accounts and our national accounts and our non-national accounts. Bill rate's down slightly year-over-year, about 3%, because of mix and the type of volume type accounts that we're after. I don't see any real movement about this. We're just trying to optimize our model and a possibility of the Firm from a gross dollar amount and not necessarily from a percentage amount. So I think things are fairly consistent. Could it be down slightly in the third quarter, tech? It could be but right now, as we see the trends, they're pretty flat.

Okay and is there the opportunity to go back to some of the contractors and just say the market has changed. Obviously there's-- you can see the headlines and manage the pay rates down just slightly in order to preserve the spread?

Actually when-- if you're talking tech specifically, while bill rates are down 2.4% pay rates are down 1.6%, so they are moving albeit that they don't move in complete concert as it's not a precise science but our people are focused on daily pricing of transactions so we're on top of that.

And then one thing we've heard from a few other companies is they're actually seeing recently more of a pull back from small and medium sized businesses relative to larger companies. Is that something that you're seeing?

I don't know that we could say, make that kind of a precise distinction between those two. Certainly people are moving from our leaving certain companies and taking new jobs. They are a little uncomfortable doing that and in uncertain economic times but right now I think, as I said, things are just-- best word I can use is steady.

And then can you talk-- nice job in terms of the SG&A. Can you talk just a little bit more about the natural variability with regards to your SG&A? Obviously the vast majority of that is compensation. Can you just talk about the part that flexes naturally with revenue?

Mark, well you hit the nail on the head. Compensation naturally flexes with really gross profit just because of commissions that are tied into there and then as long as you're balancing headcount and productivity. If productivity were to stay constant and margin or gross profit contribution were to stay constant you could pretty much expect that bottom line would remain very constant.

Unfortunately it's not a perfect science in terms of what the environment yields from a day-in and day-out basis and timing associated with that so that's why we're so focused on productivity and ramping up people and moving people through what we call ten-year gates because of how much more productive our people become as they become more seasoned in the environment and we've continued to see that shift taking place of more people moving into the two to four-year, ten-year gate because a lot of the hiring that took place over the course of the last three years and a much higher percentage of our population now in the one to two-year, ten-year category as compared to where we were three years ago, so that's part of the driver of head count increasing to the extent that it has over the last three years and productivity somewhat staying fairly constant and that's because we're moving those people through those pipes offsetting the higher percentage of makeup of our less tenured population.

Understood but just to go back to the original question, just if your gross profit, and I know it's going to vary materially depending on which sub sector we're talking about, but roughly speaking if gross profit were to flex down I say 10%, this for round numbers, not saying that that would happen, but if it were to flex down by 10% can you give us a rough approximation for on the flex side and then on the search side what the natural decline would be on the SG&A side?

It would-- well, it wouldn't be a one-for-one relationship because again, I've got to take you back here.

Sure.

Such a high percentage of our population is less tenured so those people in reality are much more burdensome from a cost standpoint because they're not covering their cost, so typically when we see a margin decline like that that's where we're experiencing it is a more challenging environment, which is more difficult on the newer associate to deliver, not necessarily the more experienced associate so-- I mean I haven't run the model to be able to give you a precise number on that. All I can really say is similar to what you saw this past quarter and prior quarters. We throttle that through natural attrition and things to that nature to manage SG&A.

Okay great and last question and then I'll hop off, you know money maker has obviously been a key contributor. Can you talk a little bit about the replacement there and what your expectations are for the government under new leadership?

This is Dave. As you know, Pat joined the Board several years ago. We brought Pat in specifically for his leadership in the government area and his expertise. Pat's contribution has been significant and the most significant part of his contribution has been the team that he built. His team has performed exceptionally well and his successor, Larry Grant, has been well tenured in the space and frankly we believe is going to be a major contributor and a strong leader for us in that area, so we believe the baton has been passed and I'd like to also point out that Pat will be remaining with Kforce sitting on the Board actively engaged in the government space so Pat's role and responsibilities and contribution have been significant and will be continuing as he transitions back onto the Board.

We said we will miss Pat. Larry though joined us two years ago as a senior leader in the government practice with General Dynamics and has been the President of this unit and reporting up to Pat for those two years so we do not anticipate any decline whatsoever. Larry, if you're listening, 20 plus percent is the minimum.

Tobey Sommer with SunTrust.

I wanted to see, Dave, if we could step back and maybe take a look at what you've accomplished with the three-year plan that is close to concluding and maybe if you have any glimpses that you could share with us about what the next three-year plan may entail?

Actually when we set out to do it certainly one of the thresholds was a $1 billion. We had high expectations for our Firm in terms of growth and earnings per share growth. We had also contemplated an economic that frankly is different than where we are today. We thought that 2008 would probably be more of an optimal year and, as we saw with the deterioration at the end of '07 and '08 we've had to make adjustments in that. With that said, most specifically the portfolio of services and the quality of the leadership team would be the most significant accomplishments during the last three years. With that said, we're not ready to comment on the next three years other than to say that our expectations will remain high and, in fact, we believe that with the portfolio that we have today that we can accomplish even more significant things in terms of growth and market capitalization and market value over the next three years.

I thought I'd try. In terms of the how you're managing the business with your KPIs looking at trends in the first couple of weeks in July. Do you manage strictly by the KPIs or do you also-- are you somewhat influenced by the headlines? I just want to get a sense for the extent to which you may be managing kind of the headcount in looking to maximize a little bit of productivity versus keeping kind of revenue generating capacity within the Firm and this market.

We look at KPIs. KPIs-- we are David's revenue, as Bill said. KPIs are very important. They're one data point. In addition to that we maintain a very strong communication pipeline with our clients, with our field leaders. We have regular weekly calls with our field leaders and we have a customer first program where we're engaged with our clients so it's a data point, a significant data point, certainly one of the primary data points but it's not the only data point and we do not react to headlines. We don't react to changes from week to week. We look at longer-term trends.

The most important thing to us is to ensure that we are delivering expectation service to our clients because we believe ultimately those are the things that are going to differentiate us in the market and earn us the right to serve them and the retention of our people. So one quarter to the next quarter is not going to cause us to unduly react and so therefore from our standpoint we have a much longer-term view and, as we've stated, should the economic climate turn significantly negative our primary focus is on retention and positive cash flow.

Okay and in terms of the uses of cash you had a very good call it cash flow not only quarter but last six months and you deployed that cash kind of between debt reduction and share repurchase. Is it any kind of change in the mix of how you would expect to deploy cash over the near/medium term?

No the three uses are again debt reduction and acquisitions. We are seeing a number of acquisitions. We've evaluated them. There's still a pipe lineup of acquisitions. As we've mentioned, there's a very high threshold for those acquisitions. There's still evaluation gaps. We will pay down debt and repurchase stock unless we see an acquisition that affords us the kinds of returns that we're looking for and certainly if a Bradson comes along we're going to make the moves to get it if we can, so all of those things are factors. We're very conscious of the balance sheet and want to make sure that we are being conservative. At the same time we don't want to miss an opportunity.

Thank you. That's very helpful. And then I'll ask one kind of question related to the businesses that you sold and what sort of impact does the sale of those have on the third quarter results, if any?

Given the-- because given the timing of the nursing transaction being really on the back end of the quarter, our team has worked really hard to restate Q1 and Q2 and I think if you dig into Q1 and Q2 you'll see that those two units combined we don't anticipate that from an accretion/dilution standpoint at the bottom line any material impact and so I would really model it from a revenue standpoint and I think Q2 is a good basis for that as well as the guidance that we provided for Q3.

And then one last detail question also regarding the model from an SG&A standpoint what's kind of the right trend to expect for the third quarter, given where you headcount was at the end of June?

I would recommend obviously that the $6 million expense on the acceleration, that will not take place again, so if you start to back that out of Q2 that kind of gives you a basis from an SG&A and operating margin standpoint of what to expect and then you have to make your own assumptions from a search contribution standpoint. As I mentioned, our guidance contemplates a conservative view of search as we look out to Q3.

And lastly, on a tax rate is a 40ish percent tax rate still a good rate for the year?

That's probably a little bit high. 39.4 is probably a little bit more of a precise rate based upon what we were seeing at this point in time and that would be on the continued operations.

Congratulations on a good quarter.

Jim Janesky with Stifel Nicolaus.

A question, Joe, could you go over the inter quarter trends again, April, May, June? I missed all of them.

The interim quarter?

Yes what you said what was up. Everything was up in April except and I missed that and then go over May and June again.

Yes on a billing day basis all units excluding F&A and HLS were up in April. All units excluding HLS were down in May and tech and HLS were up in June with all the other units declining slightly.

And is that-- when you say-- is that all flex number or can you let us know what the search trends were like? You did indicate what search trends were going into July.

Yes search trends from a unit standpoint, meaning Tech and F&A intra quarter, Tech was up in April, down in May, down in June. F&A was up in April, down in May and up in June.

And when you look at the very early results for July obviously that's much weaker seasonally but three weeks obviously is not a trend. Was Tech or F&A, did it stand out where there was a bigger decline or more strength or was it pretty equal.

Are you speaking from a search standpoint?

Yes search only, I'm sorry.

Yes search is not one particular.

Okay and were orders being cancelled or would you-- because you said that the KPIs in search were still pretty good so I would take away from it that maybe that this extension of sales cycle is why the quarter could have started off weak. Is that a good way to look at it?

That is a good way to look at it. The third quarter of the year always really hinges on September. We hold our breath until September is over, so it's real difficult for us to even begin to forecast what the third quarter search looks like, but it-- search was down in July across the board.

Shifting gears to the international front, it's an area where you folks have not really played in. Is that-- are you glad that you're all domestic? Do you plan on that changing either currently or as we move into the next economic unemployment cycle? What are your thoughts?

Actually we were for it before we were against it. I think probably addresses that. You know there are a lot of people that were touting Europe and how strong Europe was and now all of a sudden Europe is not so good. The old adage is when the United States catches a cold the rest of the world gets the flu. We are still very focused in the United States.

We have less than 2% market share here and while certainly there are opportunities abroad, we believe the opportunities here are more compelling and that's going to be our focus. This is over half the industry; the best margin profile is here and we have in fact through our Global Solutions business actually incorporated elements of international operations while still benefiting from the domestic platform in offering the services and off shoring to our clients without having to actually pick up operating units in Europe at scale, so that is going to continue. We don't have any plans to make any international investments at this time.

Michael Baker with Raymond James.

You spoke to client decision time frames on the search side. I was wondering if you could update us with recent trends on the flex side by a business segment?

Well in my prepared remarks I basically said on flex side tech is steady. It may be slightly down to flat. F&A we anticipate it to be down. This is-- F&A has to do with our mortgage business. We thought we saw the bottom of that a year ago when it was about 15% of our F&A business but obviously we were wrong with what has happened in the last six to nine months and now it's only 10%, so F&A is going to be fairly steady but will be down year-over-year. Let's see, HLS will be up, both as clinical research and HIM and government will be up.

So that's kind of the overall metric so to infer from that would be that client time, decision time frames-- I mean I was speaking more specifically to that metric rather than orders or anything else, just to try and get a sense for are the decision time frames lengthening in certain areas, shortening or staying the same?

Well they're lengthening in search but they are about I would call the norm in flex so certainly in real hot times we encourage our clients to make very quick decisions but we are in professional staffing. We are-- the skill sets of the people we have are in high demand, especially when you talk about cleared candidates, for example, clients need to make decisions very quickly, so I would say we are around the norm in flex.

Rick Dote with Columbia Management.

Just wanted to first I guess say good job on the free cash flow, debt pay down and stock buyback, terrific quarter on that, on those fronts. Just to dig into the sales productivity I think you said earlier in your prepared remarks up 3.6%. Can you tell us to what is the absolute level?

Yes it's up 3.6% sequentially, down 4.7% year-over-year, so it bounces around a little bit based upon where people are in those ten-year gates and how many people we have and what we consider the less tenured gates. So, from an overall standpoint, I would say things really haven't changed much over the course of the last several years as people move differently through those gates that when we reflect back to our peak in Q2 of 2005, which would be what we would consider a capacity peak where we'd start to really push the threshold if we could maintain that. There's 25% capacity in the system.

Okay I thought that was one area of disappoint last year on the productivity front and granted the prior year or at maybe even the beginning of last year you were in the-- more in the hiring mode so less tenured people but now that we have more tenured people and you've weaned out the weaker associates, wouldn't we expect greater gains there? And what are your goals I guess?

Well, Rick, this is Bill. As Joe said, we have more people than we had last year and that would normally suggest that you would have a lower productivity standard if you want to look at it that way. Our revenue per person on a quarterly basis is up from $105,000 to $116,000. Gross profit per person is up over 15%. The revenue per sales associate is up, so from the metrics that we look at productivity certainly quarter-over-quarter are substantially better and generally flat year-over-year. So it really depends upon the number of people coming through the beginning part of the funnel and, as we said, we are up and that creates the productivity number.

You talk about this capacity capability but what-- so do you have a goal? Are you looking to close that gap to 25%?

Rick, this is Joe. Yes we do-- I mean that's why we put that number out there. I mean that's the goal and there's a natural maturation of the sales force that takes place. It is different by service line. For example, we hired a lot into CRS and HIM on the back end of last year, which artificially pulls down the performance of those units and different service lines have different ramp periods so I mean it's very complex in terms of how we manage that at the enterprise level but at the end of the day it comes down to service line and, in fact, it even goes deeper than that. It comes down to a specific market and what the capacity is in that market and the ten-year makeup in that market, so I mean this is an area where we have quite a bit of analysis going on and we spent quite a bit of time in managing this aspect of the business.

So, again, I'll go back to add the amount of headcount that we've increased over the last three years and for productivity to virtually be flat is no minor undertaking in terms of that because one would expect that it would have deteriorated based upon that amount of hiring and how many people are in the less tenured groups because of how much productivity ramps. I mean once again, it doubles when somebody goes from one year to two years. When somebody goes from two to four years it doubles again, I mean, so it's pretty significant and we don't have that large makeup in the four plus year population, although our two to four-year population is much larger now than it was three years ago but also our less than two-year population is much larger than it was, so we're very comfortable with how we're moving people through those ten-year gates.

And at this time there are no further questions. I will turn the call back over to Mr. Dunkel for any additional or closing remarks.

Okay once again we appreciate the interest in Kforce and we'll look forward to speaking with you again at the end of our third quarter. Thank you very much.

And that will conclude today's call. We thank you for your participation.