Kforce Inc (KFRC) 2008 Q3 法說會逐字稿

Good day everyone and welcome to the Kforce Third Quarter 2008 Earnings Conference Call. (Operator Instructions) 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 afternoon and welcome to the Q3 Kforce 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 and our 10-Q, 10-K and 8-K filings with the SEC. And 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 this call.

Well that was an interesting quarter. Unparalleled and unprecedented are the two words that have way overused to describe the world economic picture. With that said, we are very, very pleased with the firm, solid performance in the third quarter.

We began preparing for this inevitable downturn at the end of the last cycle and believe that we are ready to take advantage of the opportunities available in the market. We believe that Kforce has a seasoned management team, experienced in leading during times like this. With a strong balance sheet we have flexibility, both operationally and financially.

During this phase of the economic cycle, our priorities are to maintain positive cash flow and retain our highly talented people. We will use free cash flow for debt retirement, share repurchases and acquisitions that meet very high thresholds.

Our domestic focus allows us even greater flexibility to pursue client share. The attitudes of our team are confident and positive and prepared to meet the market opportunities ahead. I will now turn the call over to Bill Sanders, Kforce President, who will provide his comments and then Joe Liberatore, Kforce CFO, will provide additional insights on operating trends and expectations. And I will 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, excludes any results from our recently divested nursing and scientific businesses unless specifically indicated.

We are pleased with our third quarter results. Revenues of $250.9 million declined 1.7% sequentially, driven primarily by declines in our financing, accounting, flexible staffing and our permanent placement business. Flex revenues, which represent approximately 94% of our revenue stream, increased sequentially for the 11th straight quarter to $235.4 million.

Our Technology business segment declined 0.4% sequentially as a result of a 21.7% decline in our Technology Perm business. However, our Technology Flex business, which represents roughly 50% of our revenues, grew 0.9% sequentially and has grown 0.5% year-over-year. Our Technology Flex business continues to be stable, although we anticipate a sequential decline in Q4 as a result of the decrease of billing days from 64 in Q3 to 62 in Q4.

We believe that the demand environment for our Technology Flex business is very different from the previous recessions. Specifically, it appears that clients have generally not overhired during the recent economic expansion and unlike the year 2000, we do not see the same exaggerated tech bubble that had developed previously.

Our top performing segment, again, in the third quarter was Health and Life Sciences, which had a very strong sequential growth of 3.4%. This segment is now 18.3% larger than a year ago. Specifically, the Clinical Research and Health Information business units have grown 19% and 17.1% respectively year-over-year. We anticipated continued growth from these businesses, though it is the case every year, Q4 will be negatively impacted by a reduction in billing days. This is especially true for our Clinical Research business, whose clients typically experience facilities shutdowns the last two weeks of the year.

Government Solutions, our prime government contracting business in the technology and finance and accounting areas, declined 2% sequentially and grew 17.1% year-over-year. This sequential decline is primarily the result of delays in anticipated awards during the quarter. We expect Government Solutions to return to positive sequential growth in Q4, despite the reduction in billing days attributable to the holidays.

We believe the clients we serve in the federal government will continue to be funded regardless of the administration changes resulting from the upcoming elections, though we may see continued delays in the timing of project awards and task orders.

Both our Clinical Research and Government Solutions business benefit from the continued strong demand and long-term nature of their contracts.

Our Financial and Accounting business was down 8.7% sequentially and 8.6% year-over-year. This decline was largely the result of declines in the F&A Permanent Placement business, which declined 29.4% sequentially. We believe demand in our core finance and accounting business continues. However, we expect this business to decline in Q4 due to fewer billing days.

Search revenues, which were 6.2% of total revenues in Q3 declined 22.4% sequentially and 21.9% year-over-year. Search activity weakened as the quarter progressed and has continued to be weakened into October. We expect that Search will be down for the second consecutive quarter in Q4, which is consistent with historical experience when entering a recession.

I should note that at any point in time, the firm is providing flexible staffing consultants to approximately 3,000 different clients in many different industries. Our largest ten clients represent approximately 23% of our branches. This diversification is an additional source of revenue stability. We will continue to align our sales focus to client and industry demand.

Gross margins across our businesses have continued to be relatively stable, though we expect to see increasing pricing pressures as we move through the downturn. The continued growth in our HLS and government businesses should mitigate some of the impact of this margin compression.

History suggests that a slower economic environment would allow the stronger companies to gain market share and accordingly positively impact their loss of revenue from existing clients. We have a solid, disciplined approach that allows us to meet our clients' needs in terms of both volume and rates and due to our financial strength, at 45 years of staying power, we will aggressively pursue market share during this down cycle.

As we continue to navigate through the current economic environment, we look at internal KPIs as one of our primary near term forecasting tools. This data driven philosophy allows us to adjust quickly when indicators warrant. During Q3, our KPIs began to flatten and clients also continued to extend the hiring cycle. We continue to utilize these measures in determining appropriate headcount levels of sales associates and accordingly, the number of sales associates were down slightly from Q2 to Q3.

In early 2008, we began a systematic reduction of expenses and rationalization of headcount in our firm. This has allowed us to come into these uncertain economic times quite lean. While we will continue to balance revenue and expenses, our focus will be to keep our highly talented staff for the eventual economic upturn.

Our total revenues have increased 1.8% year-over-year, total sales count is 1.9% less than a year ago and down 5% for 2008 year-to-date. Although it has been 24 months since our last -- most recent acquisition, we will continue to consider strategic acquisitions, but maintain a very high threshold of profitability and geographic and/or product fit.

We are proud of the advances we've made as a firm during the most recent economic expansion. These advances include the building of our centralized national recruiting center, which provides fast, cost efficient access to candidates for our field offices, the reduction of our dependence upon the highly cyclical search business, the investment in the stable and profitable prime government contracting business, the divestiture of two underperforming business units, the completion of numerous projects to build a first class back room and most importantly the investment in building the best management team in the firm's history.

We believe that we are well prepared to weather the current economic storm and to accelerate growth for -- to reach new revenue peaks in the economic up cycle. Our immediate plans are to continue to have a relentless focus on keeping our great people and to improve client satisfaction, while balancing revenue and expenses.

I'll 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 $250.9 million were up 1.8% from Q3 2007 and down 1.7% sequentially. Our revenue stream was very consistent throughout Q3, though search in particular saw the increasing impact of the economic slow down. Our strongest businesses performed well.

Our Technology Flex segment increased 0.9% sequentially and has increased 5% year-over-year. HLS was up 3.4% sequentially and 18.3% year-over-year. And our Government segment, though it decreased 2% sequentially, has increased 17.1% year-over-year. These three segments represent 77.1% of total revenues and though it's difficult to determine the impact of the slowing economy on their performance, they are focused in areas of some of the greatest demand.

In terms of our revenue by time, Q3 Flex revenues of $235.4 million were up 0.1% sequentially and 3.9% year-over-year. Total search revenue of nearly $15.5 million for Q3 declined 22.4% sequentially and 21.9% year-over-year. Revenue trends for the beginning of the fourth quarter of 2008 have been mixed versus 2007 activity and slower than Q3 activity. Flex revenues for the first three weeks of October are down 1.2% year-over-year and search is down 17% versus the first four weeks of Q4 2007. We caution that it is difficult to draw conclusions for Q4 based upon this limited data.

Net income for the third quarter was $7.9 million and it decreased 28.4% year-over-year as compared to $11 million in Q3 2007 and declined 9.3% from $8.7 million in Q2 2008. These declines are largely the result of the reduction in search revenue and the increase in our allowance for doubtful accounts. Net income from continuing operations was $7 million, net income from discontinued operations was $0.9 million for Q3 2008, as a result of receiving a contingent payment related to the post-transaction performance of our former scientific business.

In Q3 2008, earnings per share of $0.20 decreased $0.02, or 9.1%, sequentially and decreased $0.06, or 23.1%, year-over-year. Q3 2008 earnings per share before the impact of equity-based compensation expense was $0.20, which is a decrease of $0.05 from the $0.25 EPS from Q3 2007.

Our gross profit percentage of 34.5% has decreased 260 basis points year-over-year and decreased 130 basis points sequentially. The sequential and year-over-year declines are primarily the result of a change in business mix attributable to the decline in our search business.

Additionally, our flex gross profit percentage of 30.2% in Q3 2008 declined 140 basis points year-over-year and 20 basis points sequentially for Q2 2008, as we continue to see growth in our large volume, lower margin customer base.

Bill rates continue to increase and have improved 0.6% sequentially and 2.3% year-over-year. Pay rates increased 0.7% sequentially and 3.4% year-over-year. The spread between bill and pay rates deteriorated slightly in Q2 to Q3.

As we look forward to Q4 and beyond, we expect to see an increase in pricing pressure in a recessionary environment that would typically result in declining margins as there is a lag in our ability to reduce pay rates as quickly as declining bill rates.

The firm continues to aggressively manage operating expenses. Operating expenses were 29.7% in Q3 versus 29.9% in Q2 2008, excluding the Q2 impact of the acceleration of equity grants and 29.8% in Q3 2007. Operating expenses decreased 23 basis points sequentially and 10 basis points year-over-year. the majority of our cost structure is variable and compensation expense, which is highly correlated to gross profit, comprises over 75% of our operating expenses.

We continue to see leverage in our non-compensation based cost structure as a result of the infrastructure investments made over the past three years and completed in late 2007. The resulting cost structure allows the firm to act quickly if the business changes or with changes to the economic climate. We continue to closely monitor business activity and make adjustments to our cost structure as necessary.

Should revenues decline, we will continue to manage expenses appropriately, with the priority on keeping the great people in our firm and maintaining positive cash flow. Though operating expenses will decline as revenues decline, they will likely do so at a slower rate, resulting in decreased profitability.

EBITDA, an indication of the firm's strong cash flow, was $16.4 million or $0.41 per share in Q3 2008 as compared to 22.7 million or $0.53 per share in Q3 2007, our strong operating cash flow is a source of significant stability and allows us to selectively invest in our business, repurchase shares and also retire bank debt. The firm has reduced debt by $21 million in Q3 and $91.5 million in the past 24 months to $12 million as compared to $33 million at the end of Q2 and $70.5 million in the fourth quarter of 2006, immediately following the acquisition of Bradson. As of today, our bank debt is $570,000.

We also repurchased 797,829 shares of common stock during Q3 '08 at a total cost of $7.2 million. We have repurchased 3.2 million shares or 7.7% of the outstanding shares at a total cost of $28 million for the year 2008. The firm has $36.8 million available for future stock repurchases under current Board of Directors authorization. The firm has repurchased 24 million shares since 1999. We believe repurchases completed during the quarter will provide additional leverage to earnings per share when the economy rebounds and we believe are prudent investments of the firm's resources.

Capital expenditures in Q3 were $2.4 million versus $3.7 million in Q2 2008 and are expected to remain low now that we have substantially completed our enterprise optimization program initiative. Write-offs of accounts receivable and receivables aged over 60 days remain low in the quarter, however, we have increased our allowance for doubtful accounts at the end of Q3 to $6.7 million, or 4.5% of the receivable balance to reflect the increased risk in the A/R portfolio as of September 30th, related to the credit crisis and uncertain economic environment. Our exposure to the financial services industry represents approximately 16% of the A/R portfolio.

In terms of guidance for the third quarter (Sic-see press release), we expect revenues may be in the $230 million to $238 million range, total firm earnings per share may be between $0.10 and $0.14, which reflects approximately 40 million weighted average diluted shares outstanding.

The bottom end of guidance reflects continued deterioration in search and negative leverage in operating expenses. The fourth quarter of 2008 has 62 billing days versus 64 billing days in the third quarter of 2008. We believe we are well positioned during these uncertain times as a result of the actions taken over the past few years to increase flexibility and leverage. Some of those areas, which are -- which we are most proud of include our aggressive management debt that allows us to be virtually debt free as of today. Our philosophy on only entering into short-term real estate leases, that allows more rapid right-sizing of space to align with revenues. The completion of and total redesign and rebuild of our technology infrastructure, which we completed in 2007. And the centralization to Tampa of all back office processes.

The completion of all of these activities greatly reduces distractions, creates leverage and allows us to focus exclusively on running the business during this challenging time. From a financial perspective, we are pleased with the third quarter results, but are also ready for the challenges that arise as a result of the current economic environment.

We have a seasoned and strong management team that is able to adapt and position the firm to perform in this challenging climate. Our cash flows and balance sheets remain strong.

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

Thank you, Joe. While we appreciate the desire for greater clarity about the economic future, there are many far more qualified than we are to prognosticate. We will continue to closely monitor all business indicators and are prepared to adjust quickly to changing circumstances.

Our sincere appreciation goes out to our clients and consultants for allowing us to serve them and our field and corporate teams for their extraordinary performance. Nicole, I now would like to open up the call to questions.

Thank you. (Operator Instructions) And we will take our first question from Michael Baker at Raymond James.

Thanks a lot. I know in the past, you've had some success with government programs kind of stabilize financial system with VRTC. I was just kind of wondering if you've had this time to get a sense for any opportunities there and any potential timing of the new outlays?

Hi, Michael, this is Dave Dunkel. What we've done -- actually we've done quite a bit of work with the RTC. And we have drawn on that experience and prepared a strategy to allow us to participate in this program as well, both as a product contractor, via our KGS units, and also through our field offices as well.

So we've developed a comprehensive strategy and expect to be able to participate in it. Although there's quite a bit of difference than what happened before, with the RTC, we still think there can be substantial opportunities.

Any sense of timing on -- has the government identified areas in which they're looking for assistance from folks like you?

We don't really have a sense of timing yet. We have had communication with certain government agencies directly as well as with other primes and we do expect that there will be activity.

There's an urgency to move on this, both from our standpoint and from the government's standpoint, but as I'm sure you can expect, there's still a lot that has to be done before anything really starts to hit.

Thanks. And I just had a question for Joe. Obviously you gave us a range of $0.10 to $0.14 and some general sense of what kind of drives to the low end. Can you give us a sense of the key one or two factors that would drive you towards the higher end of that?

Yes. What would drive us to the higher end of that would be search not deteriorating, proportional to what we experienced here sequentially. And margins holding up a little bit better from a flex standpoint if margins were to remain constant and weak weren't to experience any price compression due to a larger customer looking at consolidating vendors and really exchanging more volume for rate.

Thanks a lot.

Sure.

Thank you.

And we will go next to Tobey Sommer at SunTrust Robinson Humphrey.

Thank you. I had a question, maybe if we think about your expense structure in terms of variable versus fixed, could you describe changes in that in this downturn relative to maybe how the business was structured, 7 or 8 years ago? Thanks.

Yes, Tobey, this is Joe. Again, there were a couple of big drivers. One is revenue per field associate. It decreased 1% sequentially and improved 2.7% year-over-year. But it's also important to note the leverage that's been created.

So to give you a little bit of waft on, I guess, back in history, currently, our gross profit per sales associate is running at about 25.8% if we were to consider Q2 2008, a peak in comparison to Q3 2000 as a peak. While revenue per sales associate has improved 65.8% during the same period, another key area is our support headcount. We've improved this area roughly about 7.4% in our sales headcount has decreased, and that's while supporting 35.6% more revenue. We've also, as I've mentioned in my comments, in shifting support activities to Tampa, back in 2000, about 65% of our support headcount was steel based and 35% was corporate based. As of now, we have 63% of that support is here in Tampa with 37% of that being out in the field. And I think what really is reflective of this is when we compare like A/R over 60 days, for example, we were running about 8% of A/R over 60 days back at that point in time and we're running at about 3.6 in Q2 2008.

We've also aligned a lot of other activities, improving our manager-to-associate ratios, we're about 36% more efficient, we're 39% more efficient now versus where we were at point in time. And I'd also, in my opening comments, mentioned real estate and shorter leases. Important to note that where on a per person basis we've decreased our real estate costs on a per person basis by about 7.3% and that's on an absolute dollar basis, it's effective for any inflation over that period of time. And I guess the reason I give you this backdrop is because you have to question, I think these and the other actions taken during this current cycle give us confidence in our ability to manage through the climate in as effective a manner as possible.

Thank you. That's very helpful. And I had question, maybe directed towards Dave. Cash flow has been very, very good and I think you're just about debt free from a practical standpoint as of today. Of the two remaining choices, if the debt's gone, at what kind of pace can you buy back the stock? Is that your preference? And -- because I think you're involved in an organized repurchase program. Are there any limits to how rapidly you could deploy that?

We have a 10b5 program that actually expires at the end of this week and we will be able to reenter the market on Friday.

There are a number of factors that go into that and there are limitations to trading, which all of you guys are familiar with. That is one of the areas that we communicated last time, we reaffirmed this time. It is a primary use of the free cash flow.

Yet at the same time, we're also still evaluating acquisition prospects and we believe that we can be opportunistic. And we're seeking those that would meet a very high threshold, but can also be added to our portfolio of businesses today. So we've seen a substantial deal flow, if you will. And there seems to be an urgency on the parts of many to try and consummate transactions before the end of the year. So we've had an opportunity to see many, but as you can see, we haven't done anything at this point. So those would be the two uses of free cash flow at this point.

Thanks. I have a follow-up, one other question, get back in the queue. Is that push towards the year-end have to do with the change, the potential change, in CapEx, in cap gains rates? And then I was wondering if you could expand upon your volume strategy that you allude to in the press release? Thanks.

Yes, there are -- it's probably related to the redistribution of wealth plan that has been cited by one of the candidates. That has been a prime motivator, no question. That, of course, doesn't affect our strategy. Our strategy, we have a discipline and we're going to stay with our discipline and, as I mentioned, we've got a very high hurdle rate.

As far as the volume strategy is concerned, we're -- we look at a client specifically to determine what the -- not only the short term, but also the long term potential is. We've categorized clients based on segment, which is the size and relative opportunity for the firm and how they align with us geographically, by industry and also by service offering.

So we've got a very comprehensive analysis that we do in customer profitability. And as both Bill and Joe mentioned, one of the things we did strategically during this last up cycle was to develop a very robust national recruiting center, which gives us quite a bit of leverage on our ability to staff throughout the United States and to do so at scale and driving much greater operating efficiencies, which we're able to share with our clients and that has attracted a lot of interest and I think gives us a competitive advantage.

Thank you very much.

Thank you.

Yes, and Tobey, I'll just give you a lot more of a real-time piece of data as well, given in my opening comments. I mentioned where debt was as of today, it's $570,000. Through the 27th of this month, we continued our share repurchase under a 10b51, we've purchased another additional 622,000 shares for a little bit over $5 million. And through September, just to give you cash flow, roughly about $65 million.

Thank you very much.

And we will go next to Mark Marcon with Robert W. Baird.

Good afternoon.

I was wondering, the bill pay spreads, they're -- there's some obvious pressures out there, but can you talk a little bit about what the competitive environment is like and do you think you may be able to adjust pay rates to reflect the bill rates?

Yes, Mark, the competitive environment, we're hearing from more and more customers, as they're assessing the overall backdrop that they're being required to operate within, looking at consolidating vendors, distributing their consultant population across fewer vendors. And we think we're uniquely positioned to take advantage of those opportunities in terms of that is going to drive down margins and our responsibility is to find a way to support that business and at a cost effective manner by reducing our operating expense to support that revenue.

So we've been working through that with several customers at this point in time. If this climate plays out as the last several cycles have played out, that will continue to be a theme that these large buyers that have a lot of leverage with their spend continue to bring to the table and look for organizations that are looking to partner with them and bring solutions to the table on helping them more cost effectively manage their resource needs as well.

Would there be an offset in terms of you'd be able to get more leverage out of those clients and therefore get the SG&A down?

Well it comes down to a gross profit dollar gain, then, versus a percentage gain. But that's the objective.

All right. And can you remind us how much, typically, during these cycles we could see kind of peak to trough in terms of the -- just on the flex side? How much the margins could potentially come in?

Yes, from a peak to trough standpoint, if you look at overall margins, last time overall margins came down about 290 basis points from peak to trough.

On the flex side?

Flex side.

Flex. I'm talking about flex only because search is just mix, a mix number.

Sure.

And so I -- and that's pretty consistent across most of our units, meaning that if tech came down 270 basis points last time, F&A came down 280 basis points, our HLS segment, and when I talk HLS, I'm only talking continuing operations, which would be KCR and HIM, they only compressed about 180 basis points.

And anything that's different this cycle relative to the last? Or do you think it's just basically going to be the same sort of dynamic?

Jeez, Mark, we were kind of hoping that you could tell us.

No. I mean, on the one hand, technology is -- shouldn't be as much of a bubble, and yet the recession certainly seems worse.

Yes, I would say this to you, that the tones from the clients, we have not seen the wholesale panic and releasing consultants, terminating assignments, terminating open orders, those kinds of things. We have not seen that. And so there does not seem to be panic. It seems to be much more rational, which would support the theory that they did not over hire during the last cycle and in fact that that does seem to be confirmed in conversations that we've had with larger clients.

They recognized that it was difficult to find the people during this cycle. And they too are trying to make sure that they can hold onto the people that they have that are both core and flex. So and recognize another factor in that is the dependency on technology is even greater today than it was back in 2000. You've got issues that we didn't even face back then in terms of data security and so forth.

So many of these things are no longer optional both from a security standpoint and from a regulatory standpoint.

And with regards to the pet debt expenses, it looks like there's no specific issue, but are you just being more conservative or was there anything that occurred out there in terms of the increase in the bad debt expense for the quarter?

Yes, there -- well, I'd say the overall economic backdrop is what occurred during the quarter. And the uncertainty associated with it. I mean, we -- I think we all experienced this. You wake up one morning and significant entities will all of the sudden going bankrupt or were being sold or consolidated.

So as you know, our management of our allowance for doubtful accounts is based upon our inherent losses in the portfolio. So we felt it prudent to expand our methodology in assessing the overall methodology that we use to assess bad debt.

Then on the government side, that seems like it shouldn't be too cyclically influenced, particularly at the federal level. You mentioned it was delayed. Has it started back up again or what are your expectations in terms of some of those projects that were put off?

We have great -- this is Bill, Mark. We have great expectations and just to give you a little bit of background, we're very pleased to have Larry Grant, President of Kforce Government Solutions, here with us. And Larry, maybe you can answer that question. That would be great.

Sure. I'd be glad to. Now the delays that have been experienced are largely delays in the requests for proposals from the government being released for the vendors out there to compete for and then other delays that were experienced had to with RFPs or proposals that were put in and the awarding of them have been delayed.

We have 18 proposals that we submitted in Q1 and Q2 that were due for Q2 or Q3 award and we're still waiting. We just received one this month that we won just last week that was seven months past its award date. Now the main reason for that right now is the government's experiencing a real lack of experienced acquisition and contracting officials. And so they're having to go out right now and try and hire temporaries to come in, have a disability, or attract those retirees back through incentive programs to be able to get these contracts out and awarded. The government has to have them. They need to have them. The budget's there for them. So the requirement is not going to stop. And so that's what's been the primary delays.

And then also, for us, in Q3, we have a fund at work, that was a contract that belongs to a prime, which we're subcontracted to do. And they just had a delay in their start with the government and that's about $400,000, $500,000 a quarter to us. So it's funded. We're waiting, just waiting for the prime to start from the government.

Do you think this is an unusual development? Or is this occurring across the government from what you can tell?

No, it's occurring the government. Largely, as I said before, because the acquisition or contracting official core has been depleted with all the retirees. Right now, the baby boomer generation's going out the door very fast. That's a huge issue in the government, so the government's losing a lot of intellectual capital.

The good news is, they're going to have to have us come in the door and do it for them. But they also need the people to be able to put the proposals out and then be able to survey the proposals for the winner and then to announce the winners and put it in place.

Like another business opportunity.

Absolutely.

You noticed?

Yes. Thank you.

Thank you.

(Operator Instructions) We will go to Josh Vogel with Sidoti and Company.

Hey. Good afternoon. Thank you.

I was just trying to -- your guidance for Q4, at the midpoint of your range, and if I'm doing my calculation right, it looks like ex-the discontinued ops, down about 6% year-over-year. And I was wondering if you were just choosing to be a lot more conservative here or are these based on the revenue trends that you've seen through October so far?

Well you have to really start with $7.9 million comes right off the top because we lose two billing days, which impacts the flex business.

Yes.

And then with the volatility that we experience with the search business in Q3, we thought it would be prudent to be conservative in terms of our expectations of that business.

Okay. That's fair.

Now with the discontinued ops, is there going to be any income that's baked into your Q4 guidance? There's two about two pennies in Q3, is there going to be anything in Q4?

Yes, well Q3 is a part of our science -- our scientific transaction. There were a couple of specific offices that the buyer had certain concerns about in terms of how that revenue would perform after the time of sale. So we had a contingency in place there and in essence in our earn out, based upon how those would perform over that period of time and we've crossed that measurement period and received that earn-out in full. And the only other earn out per se that exists with the discontinued ops is 500,000 associated with nursing. But that's pushed all the way out to 2011.

Josh Vogel Okay. So based on your 10% to 14% guidance, there's nothing there from the discontinued ops?

Yes. That's really continuing operations.

Okay. And just to give a good apples-to-apples comparison, do you have an idea of what those two divisions contributed to Q4 of last year, the bottom line?

Well I think I stated it on the last call. For the most part, Scientific and Nursing, when you look at them collectively, they were really neutral to the bottom line.

Okay. And I think you mentioned that sales count was down almost 2% sequentially and 5% year-over-year. Do you have a long way to go there on paring down the headcount?

No. This is Bill, Josh. As I mentioned in the -- our -- my prepared remarks, we have been to -- after this for quite some time. In fact, cash conscious culture's very important to us and we are making sure that we have balanced our headcount with our revenues. We have done an especially aggressive job, beginning in the '80s, the beginning of this year. And we continue to do that. But we, more than anything else, we have a posture of wanting to keep our great people and we are working to keep the people that we have.

So will there be substantial headcount reductions? Well it depends on where revenues go, but generally speaking, I would not expect a substantial reduction.

Yes, Josh, I'd add on to that, given I'm the data guy, our mix of our population of more ten-year population has just continued to evolve over the past seven quarters. I think really positioning us very effectively as possible to hold onto our more seasoned and proven performers.

Just to kind of give you a little bit of flavor, our flex population has experienced improvements in average gross profit contribution in Q3, which obviously is a more challenging climate as compared to if I use Q1 2007. In all our categories, and when I'm talking categories, I'm talking ten-year categories, less than one year, 2 to 4 years, the 1 to 2-year population and the greater than four-year population, it's improved in all of those categories -- in every one of those groupings, it's improved outside of the less-than-one-year population.

And the best news, really, from a picture standpoint, is what's happening. We're having people, and we have been saying this for probably the better part of the last several years, we're having people move through those ten-year gates. I think a prime example of that is we've seen our less-than-one-year population decrease from 15.8% of the total flex population in Q1 2007 to, in Q3, it was 9.6%. And we would expect those less-than-one-year people to have a little bit more challenging time to ramp up in this period. And then in looking at our search team, that ten-year population we've really shifted. We have many more 2 to 4-year people. It's actually doubled in size over that same period. So I mean, we're very comfortable with the mix into the more tenured population.

Okay. That's helpful. Thank you.

And just lastly, I missed it. How much do you have left to go in the share repurchase program?

A little less than 37 million.

Okay. Great. Thank you.

You're welcome.

And we will take a final question from Tobey Sommer with SunTrust Robinson Humphrey.

Thank you. Again, two questions.

One, I was wondering if you might have bill rates on a sequential basis, what the change might have been? And then I was wondering if you could describe one of the highlights you had, I think it was for the Government business, was the long term nature of the contracts, wondered if you could just kind of give us a little bit more color on the length of the visibility you have there and maybe compare and contrast that with a couple of the other segments that maybe don't have as long a horizon? Thanks.

This is Bill. As you look at the bill rates, bill rates have increased year-over-year by 2.3% and sequentially Q1 and Q2, they're up about 0.6%. When you look at the total firm from a pay rate, they have increased year-over-year approximately 3.4% and sequentially about 0.7%.

The -- I'd like to turn it back over to Larry Grant to answer your government question. He's our expert in that area.

Hi, Tobey, this is Larry. Just to help you compare and contrast a little bit, government contracts are typically let for anywhere from 3 to 10 years. That would be the typical, with the average being about five years. And generally when that's done, on average, most of the distribution of revenue is fairly even or solid across all five of those years, maybe a little bit less in the first year and a little bit more in the fifth year as you tend to ramp down in the process.

We like to look at it as an annuity over those five years or over the life of the contract. The difference is though, that in order to obtain contracts like this, there's a longer lead cycle in selling to the government and there's a lot more complexity involved in selling to them due just to the federal acquisition regulation. But having said all of that, once you win an award, your profits are pretty much set, depending on what your operating expenses are and your revenues for that particular contract.

Right. And then can you compare and contrast that to the sort of visibility that you have in the other segments? Maybe which segments you have longer visibility versus others?

Well, the government practice, we probably have the longest visibility, although in our clinical research practice, we had excellent long-term visibility as well. HIM, we -- it's pretty good visibility. The rest of finance and accounting and short term projects. A little bit longer term in technology. But -- and they are more projects than the technology business, but to say that we have long-term, meaning more than six months in those two business lines, which are the major part of our revenues, we don't have a great visibility, no.

Thank you very much. Very helpful.

Thank you, Tobey. Okay. We're going to wrap up the call and we'll look forward to talking with you in January, God willing. Thank you very much.

And that does conclude today's conference. We appreciate your participation and you may now disconnect.