Kforce Inc (KFRC) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Kforce Fourth Quarter 2008 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Michael Blackman, Senior Vice President Investor Relations. Please go ahead, sir.

Good afternoon and welcome to the Q4 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 10-Equipment 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. I would now like to turn the call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you, Michael. You can find additional information about Kforce on 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 in the quality of this call.

We are very pleased with our team's performance even as the macroeconomic environment deteriorated significantly throughout the quarter. Against that backdrop, our team has done a great job persevering and delivering great results.

Kforce began preparing for this downturn at the end of the last one. We have made a number of significant changes to our business model, service offerings, support organization and, most importantly, our culture.

2008 marks the end of our last three-year plan, which resulted in several significant accomplishments including entering the government space through KGS, which now has over $100 million in annualized revenue, substantial growth in evolution of our HLS segment, which is now running at close to $200 million in annualized revenue.

Evolution of our national accounts program -- further development and refinement of our National Recruiting Center in support of our field teams and national accounts, modification of our search model to contribute during the up cycle without the substantial underlying costs in the down cycle. Exiting the Nursing and Scientific businesses and maintaining a domestic focus with an emphasis on market penetration.

Tech Flex, which comprises approximately 50% of our revenue appears, thus far, to be behaving very differently this downturn and remains a very attractive component of our revenue mix.

In addition, our technology infrastructure is complete and up to date with all major investments behind us. We achieved most of our goals in this plan even at the last year, 2008, was a substantially different economic environment than originally anticipated.

We now move into year one of our next three-year plan. This plan has been formulated over the last 12 months by our leadership team and incorporates specific elements and goals for each year to fuel revenue growth, improve operating performance, customer service, and much more. As a part of that planning process, we recently announced several key leadership changes representing the next generation of Kforce. Most are very familiar to you, and Bill will discuss them further in his remarks. We congratulate and welcome them to the executive team.

On December 3rd, KGS completed the acquisition of dNovus and is substantially along in the integration process. Thus far it is going very well, and we are excited about the prospects for the combined teams.

As challenging as the environment is, we are aggressively pursuing market share and business opportunities that will lead to increasing our customer share. We believe that the future professional staffing will not look like the past, and that Kforce has developed a highly leveragable staffing platform that can deliver great results across our service spectrum. We are not simply waiting for a cyclical turn but instead are proactively putting in place the people and processes that will create our future successes, and we believe firmly earn Kforce a leadership role in the sector.

Looking ahead, we will continue to use cash flow for debt retirement, share repurchase and acquisitions that meet a very high hurdle. I would also like to reiterate that our priority during this down cycle is to maintain positive cash flow and to retain and redeploy our great people.

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 and operating trends and expectations, and I'll conclude. William?

Thank you, Dave, and thanks to all of you for your interest in Kforce. We are very pleased with our fourth quarter results against the backdrop of a very difficult operating environment, and we believe our continued success is a result of our great people and diverse service offerings.

Revenues of $241 million declined 0.9% sequentially on a billing day basis driven primarily by declines in finance and accounting and HLS, Flexible Staffing business, and our Search business.

Flex revenues, which represent 95% of our revenue stream decreased sequentially for the first time in three years to $228.2 million though they were flat on the billing day basis. We are proud that this is the sixth consecutive year of increased revenues from continued operations.

Our Technology business segment improved 1.3% sequentially on a billing day basis, even though Technology search declined 17% sequentially. Our Technology Flex business, which represents roughly 51% of our total firm revenues increased 2.1% sequentially and declined 2.6% year-over-year on a billing day basis.

Our Technology Flex business continued to be stable during the quarter although we anticipate its sequential decline in Q1 as a result of typical assignment ends. Recent trends indicate that the demand environment today for Technology Flex may be different from the previous recession. Specifically, our technology offering has not shown declines in activity consistent with other staffing disciplines including our finance and accounting products.

We continue to watch our internal activity levels in this business closely, as current visibility is limited. However, it appears that clients have generally not over-hired during the recent economic expansion and unlike the year 2000, we do not see the same exaggerated tech bubble that had developed previous to the last economic downturn.

Our government business had a very strong sequential growth of 15.3% on a billing day basis. During the quarter, the firm acquired dNovus RDI, a $33 million government contractor in the technology space, which is being integrated with KGS. Our government business unit now has annualized revenues in excess of $100 million. The expansion of this business beyond $100 million with much stronger past performance credentials is, we believe, a significant milestone, as it provides KGS access to more significant government contracts, which should assist in its sustained growth.

We are very pleased with the pace of the integration of the acquisition and the excellent job being done by Larry Green and Larry Grant and [Glenn Schaeffer]. Due to the acquisition in a seller pipeline, we expect strong growth for KGS in 2009.

The two businesses in our HLS business segment, our clinical research and health care business units have grown 7.1% and 0.6%, respectively, year-over-year on a billing day basis. These two businesses have consistently been the top-performing units in Kforce over the past six years, with health care being the winner of the last two three-year sales contests and clinical research finishing second both times. I want to congratulate both teams and their leaders, Sam Farrell and Kris Ellis. Both of these outstanding leaders have recently been named to the firm's Executive Committee.

Clinical research is seeing some slowdown in Big Pharma with low levels of job orders and some cutbacks. The pipeline for the second half of this year appears promising.

Health care had a slow beginning for January but is now picking up some momentum.

Our finance and accounting business, which now represents less than 20% of our total revenues was down 6.4% sequentially and 19% year-over-year on a billing day basis. This decline was largely the result of declines in the F&A permanent placement business, which declined 15.6% sequentially. F&A has been the most -- the unit most significantly impacted by the current recession, and we expect this business to decline in Q1 as economic activity continues to slow.

Nurse revenues, which were 5.3% of total revenues in Q4 declined 17.5% sequentially and 27.6% year-over-year. Search activity weakened as the quarter progressed and continued to be weak through January. Early January trends suggest that search could be down significantly for the first quarter, as placement started declining more rapidly than in previous downturns.

Gross margins across our businesses have continued to be under pressure during 2008, and we expect to see some increasing pricing pressure as we move through the downturn. The consistency in our HLS and government businesses should mitigate some of the impact of this margin compression.

As we continue to navigate through the current economic environment, we look at internal KPIs as one of our primary near-term forecasting tools. During Q4, our KPIs began to flatten and decline as clients continued to extend the hiring cycle. We have increased the diligence and intensity with which we manage our sales associates with heightened focus on productivity and exiting under-performers more quickly.

Accordingly, the number of sales associates was down 7.1%, Q3 to Q4. We will also continue to balance the revenue with our expenses. As a measure of our commitment to our line expenses with declining revenue streams, we have frozen base salaries at 2008 levels for 50 leaders in the firm, which is our executive team, top CO leadership, and corporate officers.

While total revenues have decreased 2.4% year-over-year, total sales headcount is 11.9% less than a year ago. Our focus includes retaining and inspiring our top performers for the eventual economic upturn.

As we consider the total Kforce business footprint, we believe we are very well positioned to both maximize market share in this current recession as well as be positioned to take advantage of opportunities when the economy rebounds.

As I mentioned, our government and the HLS business, which constitute over 27% of our business is focused on stable, long-term contracts. Our Technology Flex business, which continues to have relatively stable revenue base, represents 51% of revenues. Our decision coming out of our last downturn to manage search to be less than 10% of total revenues has allowed us to minimize its impact of profitability in future prospects. We believe our stable, diversified portfolio of service offerings is a significant differentiator in the marketplace and a key contributor to our long-term financial stability.

We are also proud of the advances we have made at the firm in 2008 as well as during the entire recent economic expansion. These advances include the building of a centralized National Recruiting Center, which provides fast, cost-efficient access to candidates for our clients, 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 under-performing business units, the completion of numerous projects to build a first-class back room, and, most importantly, the investment ability of the best management team in the firm's history.

We began our new three-year strategic plan in 2009, which we call "The Race for the Triple Crown." The plans call for aggressive action in several areas which have resulted in internal management promotion, in particular, the recent reorganization of our management team to include the appointments of Randy Marmon, Pete Alonso, and Sam Farrell to key roles and the expansion of responsibilities for Kris Ellis, Mark Biscoe, Kye Mitchell, and Larry Grant represents a key piece in positioning the firm for both near-term and long-term success.

We believe that we are well prepared to weather the weak labor market and to accelerate growth to each new revenue peak in the next economic upcycle. We understand that our clients believe our services are a cost-effective way to acquire talent. 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.

We intend on winning each race of the Triple Crown. I will now turn the call over to our Chief Financial Officer and Executive Vice President, Joe Liberatore. Joe?

Thank you, Bill. The firm's performance in the fourth quarter exceeded our guidance both in terms of revenue and earnings per share. We believe our ability to exceed expectations during the difficult business environment in the fourth quarter is a reflection of our strong management team and extreme focus on execution within our clients as well as on those items, such as expense management, that we can control.

Revenue for the quarter of $241 million were down 2.4% from Q4 2007 and down 4% sequentially. Flex revenues of $228.2 million were very consistent throughout Q4 and flat on a billing day basis. Search revenues of $12.8 million continued to see the increasing impact of the economic slowdown. Search declined 17.5% sequentially and 27.6% year-over-year.

Our strongest businesses continue to perform well. Our Technology Flex segment, which continued to be very stable, increased 2.1% sequentially and decreased 2.6% year-over-year on a billing day basis.

HLS was down 7% sequentially but up 4.4 % year-over-year on a billing day basis. Our Government Solutions segment increased 15.3% sequentially and 23.8% year-over-year on a billing day basis including a contribution of $3.3 million in revenue in Q4 from the acquisition of dNovus RDI on December 2nd. The HLS and Government Solutions segments now account for 27.3% of total revenue, up from 23.9% in Q4 2007.

The continued growth of HLS and Government Solutions segments, which are focused in some of the areas of greatest demand bring increasing stability to our revenue stream as a result of the long-term nature of their contracts.

Revenue trends for the beginning of the first quarter of 2009 have been mixed versus 2008 activity and slower than Q4 activity.

Flex revenues for the first four full weeks of January are down 1.8% year-over-year with Tech Flex down 2.1% year-over-year and Finance & Accounting down 21.9% year-over-year. Visibility in Flex revenues in Q1 is difficult as a result of typical year-end job ends. In comparing the Q1 rebuild of these revenues with last year, after a slow first week in January, Tech Flex revenues are recovering more quickly than last year, and F&A Flex revenues are recovering at a slower pace than 2008.

The deterioration in search revenues, which has declined the past two quarters may be accelerating as Search is down 56.5% year-over-year versus the first six weeks of Q1 2008. We caution that it's difficult to draw conclusions for Q1 based upon this limited data.

The firm recorded a net loss of $107.9 million and a loss-per-share of $2.81 in the fourth quarter, which includes a pretax impairment charge on goodwill and other intangible assets of $129.4 million. Excluding this charge and the associated tax benefit, net income was $7.4 million, and it decreased 26.2% year-over-year as compared to $10 million in Q4 2007 and declined 6.8% from $7.9 million in Q3 2008. These declines are largely the result of the reduction in search revenues and Flex gross margins, which were partially offset by declines in operating expenses.

The impact of net income of the dNovus acquisition in the quarter was nominal after accounting for integration costs. So we expect the acquisition to be accretive in 2009.

Further, elaborate on the $129.4 million impairment charge -- this charge primarily relates to the writedowns of the significant majority of goodwill in our Technology and Finance & Accounting reporting units. Our HLS reporting unit has been billed almost entirely organic, and therefore has minimal goodwill. Though substantial goodwill remains in our Government Solutions reporting unit, its continued strong performance and long-term stability suggests that no impairment exists at this time.

Q4 2008 earnings per share of $0.19 after excluding the effect of the impairment charge decreased $0.01 or 5% sequentially and decreased $0.05 or 20.8% year-over-year. Q4 2008 earnings per share before the impact of equity-based compensation expense was $0.20, which is a decrease of $$0.03 from $0.23 of EPS from Q4 2007.

Q4 earnings per share include a one-time benefit of approximately $0.01 related to a true-up of a tax benefit associated with the unrecognized foreign currency loss in our Manila outsourcing facility. We expect our effective tax rate to be approximately 39.5% on a go-forward basis.

Our gross profit percentage of 33.5% has decreased 230 basis points year-over-year and decreased 100 basis points sequentially. This sequential and year-over-year declines are primarily the result of changes in business mix attributable to the declines in our search business.

Additionally, our Flex gross profit percentage of 29.8% in Q4 2008 declined 110 basis points year-over-year and 40 basis points sequentially from Q3 2008, though the sequential decline is largely the result of paid time off in Q4. Flex gross margins were stable in our Finance & Accounting units. Bill rates have declined 1.1% sequentially but have increased 0.6% year-over-year largely due to the increased mix of business from our higher bill rate Government and HLS units.

Pay rates increased 0.2% sequentially and 2.2% year-over-year. The spread between bill and pay rates deteriorated slightly from Q3 to Q4.

As we look forward to Q1 and beyond, we would expect to see an increase in pricing pressure in a recessionary environment that would typically result in declining margins, as there was a lag in our ability to reduce pay rates as quickly as declining bill rates.

The firm is aggressively managing operating expenses and continues to highly scrutinize every nickel to ensure proper return on our investment and alignment of the cost structure with the revenue stream including variable cost such as travel and entertainment, lease costs, and headcount.

Operating expenses were 28.6% in Q4, a reduction of 110 basis points from 29.7% in Q3 2008 and 80 basis points from 29.4% in Q4 2007.

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. These significant capital expenditures have prepared the firm well for the future without requiring significant additional expenditures.

We expect operating efficiencies to continue to evolve and corresponding leverage and earnings over the next few years as these efforts become fully depreciated. Capital expenditures are expected to continue to moderate into this year.

Should revenues continue to decline, we will continue to manage expenses aggressively, both a priority on keeping our great people in our organization 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 $15.6 million, or $0.40 per share in Q4 2008 as compared to $20.5 million, or $0.49 per share in Q4 2007. Full-year EBITDA exceeded $70 million. Our strong operating cash flow is a source of significant stability. The firm increased debt to $38 million in Q4 from $12 million at the end of Q3 as the result of the $38 million acquisition of dNovus. However, debt has been reduced by $65.5 million from an amount exceeding $100 million over nine quarters since the Bradson acquisition.

We also repurchased 1.3 million shares of common stock during Q4 2008 at a total cost of $9.9 million. We've repurchased 4.5 million shares at a total cost of $37.9 million for the year 2008. The firm has $74.8 million available for future stock repurchases under our current Board of Directors' authorization. The repurchases completed during the quarter will provide additional leverage to earnings per share when the economy rebounds, and we believe our prudent investment of the firm's resources.

The firm has always taken a conservative view when balancing the use of its cash flow between debt retirement, stock repurchases, and acquisitions as evidenced by our proven track record of significant debt retirement after an acquisition. We will continue to balance the opportunities that present themselves with respect to stock repurchases and acquisitions. Our priority is to maintain maximum flexibility of this uncertain environment to focus on debt reduction.

Availability under our credit facility, which does not expire until November 2011, is $61.4 million. Write-offs on accounts receivable were minimal in Q4. Receivable days over 60 days increased from $5.4 million at the end of Q3 to $8.6 million at the end of Q4. During Q3 we increased our allowance for doubtful accounts in anticipation of an increase in potential writeoffs inherent in the AR portfolio. This allows us currently $6.4 million, and we believe sufficient to account for the increased risk of writeoffs.

In terms of guidance for the first quarter, we expect revenue may be in the $226 million to $235 million range including a full quarter contribution of revenues from the dNovus acquisition. Total firm earnings per share may be between $0.05 and $0.09, which reflects approximately 38.6 million weighted average diluted shares outstanding.

The bottom end of guidance reflects an extrapolation of January-to-date results for the full quarter. Inclusive of the significant deterioration in search consistent with January trends impacting EPS by approximately $0.06, an approximate $0.05 impact from increased payroll taxes in Q1, and a decline in Flex gross profit attributable to continued margin compression.

The first quarter of 2009 had 62 billing days.

So our Flex revenue, which comprised 95% of the revenue stream had not yet been severely impacted in light of the deteriorating economic backdrop in which we currently operate, we are moving aggressively to control costs and prepare for a lengthy and deep recession. We believe we are well positioned during these difficult times as a result of the action taken over the past few years to increase flexibility and leverage.

Some of those areas we are most proud of include our aggressive management of debt that has allowed us to have one of the strongest balance sheets in the staffing industry. Our philosophy of only entering into short-term real estate leases that allows more rapid right-sizing of space to align with revenues, the completion of a total redesign and rebuild of our technology infrastructure of the past several years, and the centralization of most back-office processes to Tampa.

The completion of all these activities greatly reduces distractions, creates leverage, and allows us to focus exclusively on running the business during these challenging times. From a financial perspective, we are pleased with fourth quarter results as well as full-year reserves of almost $1 billion in revenue and earnings per share of $0.78 prior to the impact of the impairment charge. However, we are also prepared for the challenges that may 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 conform in this challenging climate.

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

I won't close quite yet. We might take a question or two. Okay, Gwen, we're going to open it up to questions, thanks.

(Operator Instructions) Mark Marcon, R.W. Baird.

Good afternoon and congratulations on the solid results given the increasingly challenging backdrop. On the Tech Flex side, your performance is better than what I would have expected given the macro backdrop. Can you talk about how -- it seems like you're gaining share. Can you talk a little bit about what you think may be driving that? Were there any large client signings? Are you seeing certain clients that are ramping up or any particular pockets in terms of skill sets where there seems to be a particular level of activity?

Hi, Mark, this is Bill. I would say to that, no, there isn't any particular thing that stands out, and as we look at it and see what the other companies have reported, the only thing that we can say is that we have performed very well. We're executing well. Our team has been in place for a number of years now and is really gelling. I'm really proud of the work they have done. They've really cut back. There are no particular clients, skill sets, or other initiatives that would suggest something different for our Tech practice. We just come in and try to serve our clients every day.

Okay, so you don't feel like you're getting more orders or filling orders faster than others or --?

Mark, this is Dave. I think there are probably a couple of elements. One, you know, we've built a culture that's based on -- it's accountability driven, it's based on KPIs. One thing that we have done that we've talked about in the past that we've featured is with the NRC, the speed with which we can move is significantly enhanced, and we are able to deploy at scale to markets and service lines that, frankly, are, we think, competitive advantages for us in the way that we are able to service clients. I am aware of a couple of examples where, in a highly competitive situation, we substantially outperformed our competition, and I think, to some degree, that's a result of the talent of the people, the culture, and I think, to some degree, it's a result of the design of the model that we've put in place. So we're counting ourselves fortunate, and it's really by God's grace, I guess.

Great, and can you talk a little bit about the -- about what you're seeing on the pricing side and what you're seeing in terms of the flow of orders. I really appreciate the transparency in terms of what you would expect to happen, but I was wondering if you could, you know, indicate is that across the board or is it just specific verticals where you're seeing -- and I'm talking specifically about the Tech Flex bill rates that are likely to decline.

Well, certainly, our clients are all watching prices very closely, as you would expect, and you see some more aggressive pricing situations with some clients than others. I think, as Joe indicated, and he'll tell you again now that what we see in the bill rate and pay rates that they haven't changed that much. But, Joe, why don't you tell us a little bit about that?

Mark, I mean, just to give you a little bit more color by service line from a bill rate/pay rate on a year-over-year basis, F&A from a bill rate standpoint, down about 3.6%, Tech is down about 2.9%, and HLS is up 7%. And from an average pay rate on a year-over-year, F&A is down 3.8%, and Tech is down 2.5%, and HLS up 16.8%.

So from a total picture standpoint, basically, bill rates are up 0.5% while pay rates are up 2.2%, and that's really what's driving the margin compression, and I'd say it's -- you know, it's pretty consistent in terms of supply/demand and the market pressures that our people are experiencing.

On the Tech side, is there anything that prohibits you -- do you have any -- do you have a lot of markup contracts where you wouldn't be able to -- as opposed to bill rate contracts where you may not be able to immediately reduce the pay rates or how should we think about that?

Our contracts are a combination of all the above. It's just it's typical -- it's the typical lag in terms of when you can circle back with a consultant and really adjust the pay rate whether it's at the term of a contract prior to the renewal or if there is something more immediate like we've experienced with certain customers where they have had immediate needs to adjust bill rates. We've had an opportunity to directly pass that along, so it's really a -- it's a market-by-market, skill-set-by-skill-set decision process that you really have to go through.

Kevin McVey, Credit Suisse.

Great, thank you, nice job on the quarter.

Thank you, Kevin.

Sure. A couple of just quick thoughts -- relative to the top line (inaudible) the earnings came in -- you know, the incremental margins were a lot stronger. Was there anything in particular, that stood out particularly, given the runoff on the perm side?

Yeah, I would say, Kevin, I mean, there's probably three main drivers for some of the operating leverage that we experienced in the quarter. One of those, we started out very early, and I think we even mentioned it on the last call. I mean, our personnel has been relentless on managing variable expenses and controlling what they can control, and I think we saw a little bit more of that traction as the quarter unfolded.

A couple of other areas -- one of the bigger areas, is we did observe some productivity improvements from Q3 to Q4 and even a greater expansion on a year-over-year basis. And that's really attributable to the exiting of low performers and people that just weren't ramping up. And we continue to see more of our population moving from the less than two years of experience into the greater than two years of experience. And those people are much more productive that have been around for that period of time.

And then, really, the third piece, if you're looking at it sequentially is, as I mentioned in my opening comments, we did take a $3 million -- approximately a $3 million charge to our bad debt reserve in Q3, and if you look at the face of what we sent out, we actually had a slight pickup. I think it was $200,000 on the Q4. So those would really be the three big buckets.

That's helpful. And then just the thoughts on Tech more recently -- if you could kind of talk -- and, Dave, probably your thoughts would be real helpful here -- you think about the project versus the maintenance, the mix of that today as opposed to the last cycle. What are your thoughts on that as you work your way through '09, and just if you could give any color around any incremental feedback you've got from companies as they prepare and work through their own '09 projects, particularly on the tax side?

Yes, I'll add some comment, and then we'll get some from Bill as well. I would say relative to the last downturn, a great deal of the investment in the last downturn was ramping up new data centers, new development and, of course, significantly impacted by dot-com and the Y2K.

So this particular time -- there is no question that we did not see the over-hiring. It was much more measured. There is also, I think, a significant change in the nature of Tech in that data security is absolutely essential now, it's not optional, you can't make a decision to turn it off in the environment that we're operating in, which has consequences in and of itself in keeping the networks up and all of the infrastructure and servers up.

I think that there is also a little bit of a lag in making the investments in the ERPs and CRM systems. We started to see that about the middle of the cycle, and those have some runoff associated with them. The Web has clearly impacted business models, and there is a real urgency to keep the face to the customer refreshed and to enable eCommerce, so you see a lot more of that happening.

But I would say, in general, that it's really a combination of all of those things, and there isn't an opportunity for any clients today to say, "Okay, we don't want to do that anymore." They really have to support, at a minimum, a substantial operation. Bill, do you want to add anything to it?

No. Well answered. Joe?

The only other piece that I would add to that is just an observation on having been in and around the tech business for about 21 years at this point in time in the staffing business. When I got into this business, the economic buyer was the CFO. Most technology functions reported up through the CFO, so there were a lot of ROIs and decisions that were in and around that. And then having lived through the late '90s and early 2000s, many of the decision-makers, the economic decision-maker at that point in time was the CIO. So there weren't as many true ROIs that were tied to that. And, in reality, at this point in time, it's almost gone full swing where you see the CFOs, a lot of technology functions are now reporting up through that organization, and they are much more involved in the decision-making process. So I think that's really what has provided more of a tempered type environment through this recovery versus that bubble that we experienced in the late '90s.

It sounds to me like Joe is making a play for some more real estate here. Any other questions, Kevin?

No, thank you very much.

Thank you.

Michael Baker, Raymond James.

Thanks a lot. I was wondering if you could update us in terms of the opportunities you're seeing for the government business in light of the government taking on an increased role in the economy?

Well, certainly, we're seeing a more activist administration than we have before, and that and the TARPs and the [TOUTs] and everything else that they're doing, I think that there will be more business there.

We actually have 18 proposals that awaiting awards. There has been some slowdown between the time that, obviously, we've elected a new president and they're taking over. So we're seeing some slowdown there, but we expect revenue to increase. Of course, we've got organic growth, and we've got the acquisition, but I would suggest that next quarter we should see somewhere around 30% overall growth and, for the year, we should see somewhere around 50% overall growth when you utilize the acquisition and the organic growth.

So -- we're pleased with that group -- it's a very strong group. The acquisition is working out very well. Hopefully, by the end of this quarter we'll be substantially complete with that acquisition. And so it's working out well for us.

And then I was wondering if you could comment and give some and color on the CRO business. It appeared as though in the opening remarks that there was some commentary around maybe a slowdown there, but it seemed as though the pipeline was still there but coming later in the year. So I was just wondering if there are any cancellations, or if it's just a kind of an elongation of some of those opportunities?

Well, we don't have a CRO business. We're much more in the alliance with our -- the large pharmas as we look at this. I would say, yes, there has been some slowdown at the end of the year, but we have -- paid time off becomes a big deal for us historically because the number of these large biopharmas close down over the holidays. But I will say to you that there are some -- as I mentioned in my remarks, that there is some slowdown that we see at the moment, and we expect, though, that that should reverse itself as we get into the second half of the year. We see some promising aspects of client activities.

But, at the moment, there are pricing pressures, and there are pressures on these large biopharmas that they, of course, need to have the stream of new drugs in the pipeline, and therefore they need to help to do the clinical trials.

And I would add that our competitive position is very strong here. In the space that we occupy, non-CRO space but really in the alliance partner space, I would say that we're a clear leader, and as a result of that, really a partner of choice in many of these clients.

Tobey Summer, Suntrust Robinson Humphrey.

Could you go through -- I think I missed it in the prepared remarks -- what the trends were like on the Temp side? I think you did it by segment.

In the fourth quarter or --?

No, in the early part of the first, I think you commented on what trends were like in the first several weeks.

Yes, the first several weeks I had referenced from a Tech Flex standpoint, Tech Flex was down 2.1%, Finance & Accounting was down 21.9%, and that's for the first four weeks on a year-over-year basis. And then Search was down 56.5% based upon the first six weeks on a year-over-year basis.

And is that Tech Flex 2.1 -- is that a sequential change?

No, that's a year-over-year change based upon comparing the first four weeks of 2008 to the first four weeks of 2009 in January.

Thank you very much. And I have a question for you -- I think -- I know the way you integrate acquisitions, organic numbers aren't easy to quantify because of the swapping of accounts, et cetera. Is there -- it seems like your revenue out-performance in the quarter versus the industry was pretty significant. What sort of contribution at the top line was there in the quarter from acquisitions?

Well, from a -- Tobey, from a Tech standpoint, I mean, the last Tech acquisition that we did was in the early part of February 2006. So it's been quite some time ago. That business has long been integrated.

Yes, I wasn't referring to Tech specifically -- even generally.

The only acquired revenue is dNovus, and that was $3.3 million.

Okay, perfect. It looks like a domestic footprint on focusing on professional staffing is going to serve you well in 2009. You're buying back stock, you did a very aggressive job of that in 2008, and the cash that the business is generating is quite significant. Have you seen yet seller expectations move down to a level that is adequate or is the severity of this downturn likely to just push out deals until sellers have some EBITDA to show?

We haven't -- as it relates to the stock -- I thought you were referring initially to stock repurchase, and the window is always open on that front. We have not seen -- there are some of the traditional staffing sellers on the acquisition front that are adjusting prices. I think as the recognition and acceptance of the duration and severity of the downturn starts to sink in, there are those that are taking on a different posture and are thinking more about survival. And so I would say, at this point, we're not compelled to do anything, and we can actually wait them out from a pricing standpoint. We have a very high hurdle. We're going to be very selective, particularly in the staffing front, and see where we can selectively add talent to some of our existing markets. So -- we don't have to do anything, so we're going to be very opportunistic.

One last question -- how much remaining do you have on your share repurchase authorization?

Nearly $75 million.

Clint Fendley, Davenport.

Dave, you've seen a number of cycles in this industry, and it seems we've never seen Perm decline as substantially and as rapidly as we've seen during this recession. How do you think this might affect some of your smaller less well-capitalized competitors and your ability to continue to gain share here?

Well, I want to address the inference that I'm old. And actually affirm that -- my birthday is in two days, so something small and not too expensive. I'll be turning double nickels, just so that you know, you're not rid of me yet.

Actually, we are seeing Search fall of much more quickly, which is not unexpected in the severity of this climate. So during the last downturn, I believe it was seven quarters from peak to trough. We may see that happen much more quickly this time. The good news for us, as Joe and Bill both mentioned, by design, we had a much different model going in. So we will experience some GP and some SG&A impact. We don't have anywhere near the real estate concentration, and ongoing costs are substantially mitigated.

We look at Search as supplemental to our existing business. It's an excellent service offering for our clients but, at the same time, we never allowed it to become too significant a portion of our total revenue. So in this climate, and I think it's been pretty much confirmed by other firms in our space, that we're probably seeing a Search decline this time that's even greater than the last cycle.

Thank you, that's helpful. And probably a reach here, but is there anything in the stimulus bill currently, which could provide some type of near-term benefit to your results?

We're thinking that there is going to be a lot of CEOs that are going to want to be contracted back for more than $500,000.

(laughter)

When you think about it, a contract CEO business works very well in the climate. There are some opportunities that they actually do -- the bad asset bank, and we are seeing some other smaller pieces but nothing on the scale of the RTC that we saw back in '90 and '91.

Josh Vogel, Sidoti & Company.

I was just wondering, did you say that headcount was down 7.1% year-over-year last quarter?

No, sequentially, it's down 7.1%, and it's down 11.9% year-over-year.

Okay. Was this voluntary by these sales associates or were they fired?

It's a combination of both, but we are very aggressive on making sure that low performers are exited on a timely basis.

Okay. And I know you said you're seeing some aspects of client activity, and you think there is going to be a nice rebound in the back half of the year in the CRO business, but some of your other competitors have discussed that their former clients were looking to outsource this business overseas, and I was wondering if you were seeing that from any of your clients?

No, we have not heard that as a major aspect of what any of our clients are doing. We have some pretty close relationships with our clients, and that is not on the table at the moment.

And just a reminder, Josh, we are not a CRO.

We do a different -- we do it differently. CROs certainly could outsource this overseas, but you wouldn't see us doing that.

Okay, great. And, just lastly, is there any seasonality in the dNovus business?

In the governmental business? Well, there were some this time because the government declared December 26th to be a holiday, which they didn't do last year. So it gets to be a little bit of seasonality. There's a lot more PPO time in the government business because at the end of the year people take vacations so it becomes very, very slow. So there is some seasonality from that standpoint, yes.

Mark Marcon, R.W. Baird.

Go to the SG&A -- I mean, you did have -- even if we adjust for the swing in terms of bad debt expense, it's still a nice decline sequentially. You mentioned that there was a 7.1% decline in headcount. What I'm trying to figure out is how much of the decline on the SG&A side -- would this be a natural byproduct of the reduction in terms of gross profit as opposed to the active headcount management that you are undertaking, and how should we think about that for the first quarter?

Mark, it's the active management of removing non-productive individuals as well as I mentioned, our mix of population in the different tiers that we look at continues to move in a favorable direction. I mean, at this point in time, 50% of our total associate population has been with Kforce greater than two years. Whereas, if I go back to even the beginning of 2007, that number was around 30%.

So that has a material impact in terms of productivity and operating results because realize that those non-productive people, if that person is $40,000 or $50,000 and are not contributing virtually any gross profit, when they are removed, I mean, all of that flows directly to the bottom line.

Understood. And -- in terms of the way that the force is currently structured, do you feel like you took one big cut and were in a decent spot? Or are you going to continue to monitor productivity and will continue to adjust, I mean, on what demand trends would dictate?

Well, we were down 11.9% for the year and 7.1% for the quarter. So sequentially that certainly was more this quarter.

We would continue to align revenues and expenses. So the variable costs including headcount and all the other variable costs that Joe mentioned earlier like travel and our lease expense -- all of those things we would continue to aggressively manage. As Joe indicated, hoping that it's not a deep recession but planning for that and hoping for something better.

Now, Mark, and, you know, the turnover of less than one-year people -- I mean, that's part of this business. So what you're really seeing reflected there is not really some radical change in business practice in terms of how we've been handling performance management. This is how we run the business in good times, and this is how we run the business in tough times where you're really seeing the lag effect or the effect from an operating margin improvement is the more selective where we are replacing individuals because we're replacing individuals on those teams that are very productive, you know, versus teams that are non-productive because if you bring people into non-productive teams in this type of climate, they don't stand a shot at being successful.

So I wouldn't say anything has drastically changed in terms of how we manage our population from a performance management standpoint. It's really more the volume of additional hires that are coming in and that lag that you're seeing the impact in operating results.

Understood. And then one short-term question and one longer-term question -- the short-term question on the government side -- Bill, it sounded like you were suggesting that things would pick up, even on government in the second half. Is that because you would expect that the RFPs that you've been active in would become active by that point?

I think there are several things there. One is that the fourth quarter was unusually difficult because of some stop work orders and because of the extra holiday. Of course, we had an extra holiday for the inauguration in the first quarter as well.

So, one, I think, the fourth quarter is an easy beat. I think, as they indicated, there are 18 proposals out there. Sixteen of those proposals are 100 days past due on awards, so, yes, we believe some of those will come in and pick things up.

So as this administration gets a foothold and where they're going and what they're doing, we expect there to be both organic growth and growth from the acquisition.

Great, and then I was just wondering if Dave could expand a little bit on his opening comment in terms of redesigning to become the staffing company of the future, and specifically what -- how we should think about that or if there is any additional color that you could provide there?

Yes, what I was referring to is our -- in our three-year plan, which really took place over a 12-month period of time, there are several initiatives in there, all designed to accelerate revenue growth and enhance operating leverage while providing exceptional service to our clients.

So I won't go into much greater detail, but I will say that, yes, we are very, very focused on the model as we go through this, and as you've seen that as the talent evolves and matures, and productivity goes up, we believe that with the great people that really are now demonstrating what we've always believed, and that is that they're some of the top talent in the industry. As those people are equipped with greater tools and greater efficiency and speed to market, we believe that we're really going to be in a better position competitively. So I would say at this point the focus has been culture, and culture is working.

Terrific, and I'm assuming you are also talking about specifically in terms of greater tools. Things like what you're doing in terms of utilizing technology to improve the recruiting process and the National Recruiting Center and things of that nature, and that there is still more to come.

Yes, there is -- as Bill said, we've, over the last several years, upgraded all of our technology, and we've completed IP telephony and integration into our full phone system. We have CRM, Europe upgrades, wireless, I mean, there's a tremendous amount that's been done to enable our teams to be more flexible and to work more quickly. And in addition to that, we have a business process group that has been refining business process to help us to be more efficient. We're after that even further. So it really is all aimed at the customer to deliver exceptional service and aimed at our people to make them more productive and to help them to deliver better service.

So -- yes, we feel that some of the performance in the fourth quarter has been as a result of that. But we also recognize that there are still a lot of challenges ahead. So we're not taking our blinders off -- putting blinders on here. We're going to stay at the post.

Great, thank you.

All right, thank you very much. I want to close the call now and say we appreciate your interest in and support for Kforce, and, really, once again, thanks to our team for all of our folks for performing very well in incredibly difficult conditions, and thanks to each and every one of you, field and corporate, and to our consultants and clients for allowing us the privilege of serving them. Thank you very much.

Thank you, everyone. That does conclude today's conference. You may now disconnect.