Kforce Inc (KFRC) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Kforce second quarter 2009 earnings conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Michael Blackman. Please go ahead, sir.

Great. Good afternoon, and welcome to the Q2 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 public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements.

I will now turn this call over to David Dunkel, Chairman and Chief Executive Officer.

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

Once again we are very pleased with our team's performance against the challenging macroeconomic environment. We are often asked how we're able to perform at this level when compared to the decline we experienced in prior recessions. As I reflect on the question, I conclude it's not a singular event but the result of years of building a strong culture, refining our service offerings, and developing an operating platform that provides flexibility and leverage. Our team is gelling, and we are seeing the results.

Our focus is to provide high quality, high value services to our customers that will lead to a gain in both market and customer share. We are continuing to see vendor lists consolidate, and are pleased to see Kforce short-listed due to our performance, quality, scale and delivery capability, and financial stability.

There are indications the economic downturn may be moderating or ending as fear and uncertainty give way to cautious optimism. We believe the recovery, when it begins, may be marked by a greater utilization of flexible consultants than we have seen in recent cycles due to the severity and length of this recession.

With that said, we still believe the recession has masked the underlying secular drivers for highly skilled, knowledge workers, and those drivers remain intact.

As we discussed on our last call, we're now drawing our hand for the up -- for the coming up cycle in implementing plans that we believe will produce accelerating revenue and earnings growth. We have completed a review of key strategic initiatives and reprioritized to those that we believe will further enhance our financial performance in an improving economy.

We do not contemplate any change to our portfolio of services and believe that with our current service offerings, we are well positioned to serve our clients and to see enhanced operating leverage to fuel EPS growth earlier in the cycle.

We are pleased to have reduced bank debt in the past quarter, and we'll use cash flow for continued debt retirement, share repurchase, and acquisitions that meet a very high standard.

I will turn the call over to Bill Sanders, Kforce President. He'll provide his comments, and Joe Liberatore, Kforce CFO, will then provide additional insights on operating trends and expectations. Then, I will conclude. Bill?

Thank you, Dave, and thanks to all of you for your interest in Kforce. We are pleased with our results in the second quarter against the continued backdrop of a difficult operating environment. Our results are driven by the great people we have on our team and the strong partnership and culture we have built. We believe our operating platform and stable diversified portfolio of service offerings that is almost entirely domestic provides a strong foundation on which to outperform in any economic environment.

We continue to execute and take market share, utilizing competitive advantages such as our national recruiting center, which is particularly effective in delivering to our national accounts, and our state-of-the-art technology infrastructure.

These competitive differentiators are the result of purposeful strategic decisions that have been made by our seasoned executive team in preparation for the next economic up cycle.

During the second quarter, total revenues of 226 million declined 2.3% sequentially. Revenue declines were seen in our technology and health and life sciences flexible staffing businesses and our search business. These declines were partially offset by continued strong growth in our government business as well as sequential increase in F&A flex revenues.

Our technology flex business, which represents roughly half of total Firm revenues, declined 3.4% sequentially and is down 10.4% year-over-year. We have been pleased with our ability to substantially maintain our technology flex revenue stream throughout the current cycle. Tech flex revenues declined slightly over the first two months of the quarter, but were relatively stable in June.

Tech flex margins have also been relatively stable and are down 20 basis points year-over-year, from 27.5% to 27.3%. Recent trends for tech flex are slightly down from June levels, but the rate of decline continues to slow. The job order pipeline is improving, but clients are still slow to pull the trigger. We expect tech flex revenues to be slightly down in Q3.

Our HLS business segment, which comprises 18.5% of total revenues, is made up of two businesses -- clinical research and healthcare. During the second quarter, our clinical research business declined 6.9% sequentially and 7.2% year-over-year, and healthcare declined 9.4% sequentially and 24.3% year-over-year.

We continue to expect low revenue visibility for clinical research and flat to slightly down revenue for the third quarter as we continue to see consolidation and restructuring in the large bio-pharma space. In the longer term, we believe the quality of our relationships with the stronger companies in this space will provide opportunities for continued growth, as demonstrated by our recent award of an exclusive arrangement with one of the larger bio-pharmas.

Our healthcare business started this year at a slower pace than recent years, and the trends are showing a continued slower pace in 2009 versus 2008. This revenue decline is largely due to a reduction in hospital census, and nine out of ten hospitals reported cutting back to address economic concerns.

We continue to focus on strengthening business development to reach a greater population of clients. We expect revenues to be stable for the third quarter, as the latest trends are positive.

Our finance and accounting flex business, which now represents 16.4% of total revenues, increased 3.2% sequentially and is down 16.8% year-over-year. We are particularly pleased with the performance of our FA flex business, which has had stable-to-improving revenues throughout 2009. This growth is relatively broad-based, with the largest increase in the lower rate job classifications, such as mortgage-related services, which is supported by our low-cost centralized delivery function in the national recruiting center.

Through the summer -- though the summer months are typically slower for our FA flex business, we have continued to see stability in this revenue stream and expect Q3 revenues to be flat with Q2.

The strongest contributor to our top-line in the quarter was our government business, which had sequential growth of 6.1% and year-over-year growth of 56.9%. This prime federal contracting business now has annualized revenues approaching 120 million.

The integration of deNovis, which was acquired in December 2008, into KGS was substantially completed in Q1, and we are therefore unable to precisely segregate the revenue contributions between the previous standalone entities. We continue to be very pleased with the excellent job being done by Larry Grant and Glen Shaffer and their team as they grow our government business.

Federal activity looks to be promising in the areas such as healthcare, data integrity, finance and technology services, where our business is concentrated.

As we look forward into Q3, we continue to be optimistic about the growth prospects of this business and expect continued growth. We have seen some recent wins, but the federal government is slow in making awards, and roughly 50% of our revenue platform is being recompeted this year. Due to a probable loss of a significant contract, revenues will be flat to slightly improved in Q3.

Search revenues from direct placements and conversions, which were only 2.9% of total revenues in Q2, declined 15.3% sequentially and 66.8% year-over-year. While search activity has declined at an accelerating rate compared to the last downturn, we experienced a slower rate of decline in recent months. While search revenue trends are very difficult to predict at this point in the cycle, we expect search to continue to decline in Q3.

As we continue to navigate through the current economic environment, we look at internal KPIs as one of our primary near-term forecasting tools. These KPIs were down in Q1 from Q4 levels but were stable throughout Q2, consistent with recent revenue trends.

We continue to diligently manage the performance of our sales associates, with heightened focus on productivity and exiting under-performers quickly. Flex headcount was up 1.5%, and search down 16.8% sequentially.

Total sales headcount is 2.6% less than last quarter and 15.6% less than a year ago. We believe significant capacity exists on our sales force to take advantage of market opportunities as they evolve and economic conditions as they improve. Our focus includes retaining and inspiring our top performers for the economic upturn. In fact, our careful preparation for the current downturn has allowed us to deliver strong results and also focus on how we might position ourselves to take advantage of the next up cycle.

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 take advantage of opportunities when the economy rebounds.

Our government and KCR business, which constitutes 25% of our revenue stream, are focused on stable, long-term contracts. We have established a cost-effective delivery model in our national recruiting center that services our FA flex and technology flex businesses. We have evolved our revenue footprint to take advantage of our nationwide geographic presence and take customer share as large clients continue to consolidate vendor lists.

However, our largest 25 clients constitute only 39.2% of our revenue stream. Additionally, our decision coming out of the last downturn to manage search to be less than 10% of fellow revenues has allowed us to minimize its impact on our profitability and future prospects.

A recent industry publication ranked Kforce as the fifth largest staffing firm in the U.S. in terms of market share for both the technology and F&A product lines. Our strength in these product lines coupled with our HLS and government product lines we believe differentiates Kforce from our competitors.

We are well into our first year of our three-year strategic plan, which we are calling the race for the Triple Crown, and we are currently well positioned to win the first race. 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 retaining our great people and to improve client satisfaction while balancing revenue and expenses, as well as to continue to prepare the Firm for the next economic up cycle.

I'll now turn the call over to our Chief Financial Officer and Executive Vice President, Joe Liberatore. Joe?

Thank you, Bill. The Firm continued to perform well in a challenging environment in Q2, coming in at the high end of guidance for revenue and exceeding guidance for earnings per share. We believe the second quarter performance is a reflection of our strong culture and extreme focus on execution in all aspects of the business, including improving client relationships, balancing bill-pay rate spreads, expense management, and optimizing cash flow.

Revenues for the quarter of 226 million were down 11.4% from Q2 2008 and down 2.3% sequentially. Flex revenues of 219.3 million were down 6.7% year-over-year and 1.9% sequentially. Generally speaking, flex revenues declined sequentially in April and May and improved modestly in June.

Search revenues of 6.6 million continued to see the increasing impact of the economic slowdown. Search declined 15.3% sequentially and 66.8% year-over-year. Monthly search revenues were down each month of the quarter compared to prior year, so the rate of decline slowed as search improved sequentially from May to June.

Revenue trends for the beginning of the third quarter of 2009 has been mixed versus 2008 activity. Flex revenues for the first four weeks of July are down 5.4% year-over-year, with tech flex down 10.1% year-over-year and finance and accounting down 12.7% year-over-year.

The deterioration in search revenues, though still significant, has slowed slightly, as search is down 61.7% year-over-year for the first five weeks of Q3 2009. We caution it is difficult to draw conclusions for Q3 based upon this limited data.

Net income of 3.9 million and earnings per share of $0.10 in Q2 2009 increased sequentially 23.6% and 25%, respectively, compared to Q1 net income of 3.2 million and earnings per share was $0.08. These increases are largely the result of our successful managing bill rate pressure and operating expenses as we continue to take market share. Year-over-year, net income and earnings per share declined sequentially 55.1% and 54.5% from 8.7 million and $0.22, respectively.

We are very pleased with our ability to maintain gross margins, though our overall gross profit percentage of 31.7% has decreased 410 basis points year-over-year as a result of the changes in business mix attributable to the decline of our search business. Gross margins increased 50 basis points sequentially. Our flex gross profit percentage of 29.6% in Q2 2009 has declined 80 basis points year-over-year and increased 80 basis points sequentially from Q1.

When factoring in the effect of reduced payroll taxes between Q1 and Q2, flex margins were stable sequentially. The relative stability in our flex gross margin percentage is the result of the aggressive management of the spread between bill rate and pay rate. This is especially true in tech flex, our largest business, where gross margins have declined only 20 basis points year-over-year.

In general, we've been successful balancing pay rate reductions with reduced bill rates as we (inaudible) client bill rate reductions to our billable consultants. Staffing bill rates have declined 2.9% sequentially and 3.5% year-over-year, and pay rates have declined 3.7% sequentially and 1.4% year-over-year.

As we look forward to Q3 and beyond, we will maintain our focus on managing spreads, and believe additional bill rate-pay rate compression is possible due to the continued pricing pressure and the potential lag in our ability to reduce pay rates as quickly as declining bill rates.

However, this impact will be somewhat mitigated by the continued shift in our business mix to higher-margin business, as well as the increasing support in the recruiting process by our national recruiting center.

The Firm is aggressively managing operating expenses. We continue to highly scrutinize every expense to ensure a proper return on investment and alignment of the cost structure with the revenue stream, including variable costs such as travel and entertainment, lease costs, and FTEs.

Operating expenses remain low at 28.8% in Q2, an increase of 10 basis points from 28.7% in Q1 and a decrease of 110 basis points from 29.9% in Q2 2008 after excluding the impact of the acceleration of equity grants related to the sale of scientific and nursing, which occurred in Q2 last year.

The majority of our cost structure is variable, and compensation expense, which is highly correlated in gross profit, comprises over 75% of our operating expenses. We continue to see leverage in our non-compensation-based cost structure as the result of the significant infrastructure investments made over the past four years. These significant capital expenditures have prepared the Firm well to create efficiencies in this environment and in the future.

As we begin to look beyond the current environment in anticipation of a recovery, we expect operating efficiencies to continue to evolve, and corresponding leverage and earnings over the next few years as these efforts become fully depreciated.

Additionally, we continue to balance current profitability with selective investments, with a focus on further evolving our current infrastructure to support the growth of the business when the economy recovers. Examples of current ongoing investments include further development of our national recruiting center and our shared services platform to continue to increase quality and responsiveness to the customer at the right price.

Should revenues continue to decline, we will continue to manage expenses aggressively, but with a priority on keeping the great people in our Firm and maintaining positive cash flow. Though we expect operating expenses to 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 11.2 million, or $0.29 per share, in Q2, as compared to 20.5 million, or $0.49 per share, in Q2 2008. Our strong operating cash flow is a source of significant stability. Debt on our credit facility decreased to 25 million at the end of the Q2, from 44 million at the end of Q1. As of today, debt is currently 18.5 million.

There were no material stock repurchases during Q2, and the Firm has 74.4 million available for future stock repurchases under the current Board of Directors' authorizations. The Firm's always taken a conservative view when balancing the use of its cash flows 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 in this uncertain environment, with a focus on debt reduction. The Firm continues to have significant availability under its credit facility, which does not expire until November 2011, to meet its funding needs.

Our accounts receivable portfolio continues to perform very well. Receivables aged over 60 days decreased from 5 million at the end of Q1 to 4.9 million at the end of Q2, and net write-offs were virtually zero. However, we believe that significant risk remains for future default in this uncertain economic environment. Our allowance for doubtful accounts is currently 5.9 million and we believe sufficient to account for the current risk.

In terms of guidance for the second quarter, we expect revenues may be in the 221 million to 226 million range. Total Firm earnings per share may be between $0.07 and $0.10, which reflects an effective tax rate of 40.1% and approximately 39 million weighted average diluted shares outstanding. The bottom end of guidance reflects a continued deterioration from July results for flex revenue and results consistent with July trends for search revenue, as well as a decline in flex gross profit attributable to continued margin depression.

The third quarter of 2009 has 64 billing days, versus 64 billing days in the second quarter of 2009. Our guidance does not consider the potential non-cash charge related to the acceleration of vesting of long-term incentive equity grants made to Management. These grants contain a performance provision to accelerate vesting should the Firm's stock price appreciate from its issue price by 50% for 10 trading days.

From a financial perspective, we are pleased with the second quarter results. We continue to invest in our business, prepare for the upturn, but we have also moved aggressively to control costs during this recession.

As Dave and Bill referred to in their comments, we believe we are well positioned during these difficult times as a result of the actions taken over the past few years to increase flexibility and leverage. We have the quality revenue stream and balance sheet that will survive this recession, and we are well under way in our actions to improve our ability to further gain share and grow in this coming up cycle.

I'd like to now turn the call back over to our CEO, Dave Dunkel, for questions.

I'm going to make a quick comment. Thank you, Joe. As far as our quarterly performance is concerned, I just once again want to say, "Hats off," to our team for just delivering an exceptional, exceptional quarter. Thank you.

Dustin, we'll open it up to questions.

Thank you, sir. The question-and-answer session will be conducted electronically. (Operator instructions). And we'll go first to Kevin McVeigh with Credit Suisse.

Great. Thank you. Hey, nice job.

Thank you, Kevin.

Thanks, Kevin.

Oh, you're welcome. Well done. Hey, Dave, I wonder if you could give us a sense of where you think we are in the cycle today relative to the last cycle. So, it sounds like we're in the stabilization period now, and as we think about the next couple quarters, do we bounce along here? It's -- obviously, internally you've done a great job, and just are we better positioned to power out earlier as opposed to last cycle? Just any thoughts you could share with us on that.

I think there was a Who song once where the line was, "I wish I knew." As far as the cycle is concerned -- anybody's guess. I've seen everything from L to V to W to I don't even know what letter of the alphabet. I just hope they don't use Z.

You have that right.

The key is that what we've done is to position Kforce to manage the business through whatever happens in the cycle. And as we mentioned, as we moved into this year, we shifted from defense to offense and started to align the business to take advantage of what we think may be an improving environment as we move into the back end of this year and 2010.

If you look at the progress that we've made in operating expenses and productivity, if you look at the progress we've made in support infrastructure and shared services, our goal is to see enhanced revenue growth and enhanced operating leverage as we go forward.

I do believe that the environment that we're in and the severity and the length of the slowdown here, this recession, is likely going to bias the clients more towards using consultants and flexible workers than to going to direct hire. That's been our experience in past recessions, and the more severe it is, the less likely they are to trust it. So, we believe that that'll probably be what we'll see early on, but we are still, obviously, monitoring the market very closely, talking to our clients, and it's too early to tell.

Okay. And then, one other thought on the bill rate environment. It seems like on a relative basis, you folks aren't down as much as some of your peers. Is that kind of a function of the in-markets? Just any thoughts you have on that relative to the environment overall.

From a bill rate standpoint, in aggregate, bill rates decreased 2.4% sequentially, and it decreased 1.6% year-over-year. It's a little bit different when you look at it by the various service lines, but overall it's focused on the customer footprint that we've been chasing for many years and the strategies that we've evolved in and around that. And with most of our businesses being a little bit up on the higher end of the spectrum, even in the technology service line, what that really positions us is there's still a tremendous demand for the services of those highly skilled individuals, which I think has helped us to a certain extent.

Great. And then, let me just clarify, was that 1.6 year-on-year or 3.5 decline year-on-year?

From a bill rate standpoint, 1.6 year-over-year.

That's average bill rate.

Average bill rate across the Firm.

Great. Okay. Thank you very much.

You're welcome.

We'll go next to Mark Marcon with Robert W. Baird.

Good afternoon, and let me add my congratulations.

Thanks, Mark.

Thanks, Mark.

Can you talk a little bit about what you're seeing on the IT services side just in terms of -- it clearly seems like it's stabilizing. Where are you seeing the pockets of strength? I know you're gaining share relative to some players, but is it any particular types of clients or any particular verticals? And as -- and how far along are you in terms of fully exploiting the advantage of the national recruiting center and a reduced-cost delivery method?

There is one group in the tech flex side that is certainly outperforming all the others by a significant margin, and that's the federal sector, as the federal government continues to be a lucrative place for us to play, and that has been primarily out of our federal service center. And so, from that standpoint, tech flex is doing very well.

How it's working for -- what was the second part of your question?

Just I'm wondering how far along --.

Oh, the NRC, how the NRC was doing. Well, I would say the NRC is (inaudible) approximately six, seven years, and it's making its -- it is greatly developed. There is a trust and a communication and a means to facilitate hand-offs that have occurred, and it takes a long time to develop and is working very well.

However, with that said, our vision is still significant improvement. We are doing a very detailed Six Sigma study right now to improve the national recruiting center. It is a great advantage for our firm, there's no question about it. There is so much more that it can do for us, though. We are very excited about the NRC, and we look forward to it helping us as we go forward.

Great. Can you talk a little bit about what you're seeing on HLS, specifically on the clinical research? I mean, when do you think you're going to get good visibility there?

Well, as you know, a couple things there are happening there. The big pharma -- they're watching every penny very closely as they are reducing their research on projects that are further out. Therefore, the clinical trials in the early stages, they are not being looked at as closely, and so we look at that as slowing down the issue somewhat on the research side.

And at the same time, they have been going through a number of acquisitions, and those integrations have slowed down that activity as we go forward. So, as I mentioned in my prepared remarks, we just won a very nice exclusive arrangement with a large bio-pharma. We continue to win smaller engagements and larger engagements. I believe as the economy turns around and these companies go through their integration activities, I think that combined with our outstanding client list, that we will -- we'll be real winners in this space.

Okay. And lastly, can you talk a little bit about government? You mentioned a contract that my not get renewed. How big is that?

That contract is a very nice contract. We believe that there may be a number of protests as we go through this. It ranges, depending on exactly what happens, somewhere in the $7 million range. Larry, you want to elaborate? Larry Grant, the President of KGS, is here with us. You want to elaborate a little bit on that?

Sure, I'd be glad to. No, this particular contract right now -- and I won't speak a lot to it, because we have a window right now where it's going to go under protest potentially, and so it's just like a client-attorney privilege. I can't say too much about it. There's a contract where the government decided, a particularly agency, to roll six contracts up into one, one of which was the one that KGF is performing on, and award it to small business, lowest price.

The winning bidder at this moment offered a significantly lower price than we'd be able to offer and be able to recognize the brand and the margin, which we expect to need to continue to provide services the client would expect and would be pleased with. So, at this time, it's going to represent approximately $700,000 a month to the business.

Okay. And do you foresee many other contracts like that coming up for renewal that -- where you have the same sort of competitive set?

Well, there is potential for this to occur. Right now, there is -- in the life of the government contracting industry, we're going to have, every quarter, a number of recompetes that are going to occur and that we have to deal with. We're pleased, though, because we have a 9% win rate on our recompetes. But, we do see that there's going to be many times where we're going to be approached with this.

But, what's really good about it is we also take that into account, and we have built a pipeline right now of qualified opportunities representing $1.1 billion. Also in this pipeline, we have 25 proposals that we've submitted that are awaiting award, that total up to 256 million in new business. We also have eight proposals that we've submitted that are awaiting awards for IDIQs, which have large ceilings, some of them in the billion-dollar range. And then, we have 10 new proposals under way right now for new work.

So, while we have to take into account when we weighed our pipeline that there is potential for a loss, we also have many other opportunities to offset it with new business.

Mark, this is Joe. I'm going to kind of give you a little bit of staffing color here, as well, to kind of pull this together.

Uh-huh.

Now, unlike the staff (inaudible) business, where obviously the objective is to win an opportunity to play, and then once you win that opportunity to play, it's pretty much on a transaction-by-transaction basis. The government business is very different, because obviously the first step in the process is to win, but the next piece of the process is you have to be able to perform, and that performance is evaluated. So, it is not uncommon in the government business where an award may be to the lowest bidder and the lower bidder can't perform. That's one of the dynamics that we believe we've run into with this contract.

When we surely look at this applied demand of the cleared resources that are required to perform on a contract of this nature -- you can't drive down pay rate in a highly competitive environment, so some of these things do come back around.

And so, when we put everything together, it sounds like you assume that there's probably going to be a small setback in this quarter sequentially, but then a recontinuation of the nice growth trends that we've seen. Is that correct?

Actually, as Bill stated in his opening comments, even contemplating -- if through the protests we were to lose this full revenue in the quarter, we're still anticipating slight growth, even with that contemplated.

On a sequential basis?

On a sequential basis, correct. On a billing day basis.

Terrific. Thank you.

Hey, Mark, this is Dave. One thing that -- it's very difficult to apply staffing standards to the government business. And I know that sometimes for those that have followed us for years, to have this new animal come in with all kinds of new concepts and terms and so forth -- I would just point you to Bill's comment and to the guidance that we provide, because we've gone through an extensive amount of work to refine the message so that we are able to give you the kind of guidance that will help you as you're doing your models.

So, as Joe said, Bill's comments do reflect the full loss of this contract (inaudible) slight up. And of course, if things change, that would improve. And also, as Larry indicated, at any point in time, contracts are re-bid, and also there's a strong pipeline of wins and so forth. So, stay with us in each quarter rather than try to get ahead of us on it, because it's pretty dynamic.

Appreciate it. Thanks.

Thank you.

We'll go next to Tobey Sommer with Suntrust Robinson Humphrey.

Hi, good afternoon. This is Frank in for Tobey. I wanted to -- you mentioned bi-service lines bill pay spreads showed a little bit of differences. Could you maybe go through that a little bit and provide some color there?

Sure. When we look at it by service line, tech flex bill rates declined 1.2% sequentially and 3.6% year-over-year. FA bill rates declined 1.3% sequentially and 7% year-over-year. HLS bill rates declined 5.4% sequentially and 1% year-over-year. And government bill rates declined 1.4% sequentially and 5.5% year-over-year.

The government bill rate decline continues to be attributable to shift in the mix of business, from the high FA business into the more competitive technology business.

Okay, great. And going to the health and life sciences, could you talk a little bit about the healthcare portion and what you're seeing from clients in terms of budget issues and census there? Any change?

Well, we had the big American Hospital Association study that's out that says nine out of ten hospitals are having difficulty and budget constraints. How that basically is affecting us is our travel patient coding continues to be weak, but local inpatient coding continues to be our biggest demand. And so, what we've really done is we've changed some our sales approach and our sales coverage and making sure that we are hitting the hospitals in such a way that we can provide them the solutions that are necessary, because they cannot afford to have large backlogs of unbilled services that haven't been coded and sent off to the insurance companies. So, it's a problem. The hospitals are under severe pressure right now.

Okay, great. And a couple quarters ago, you talked about CFOs being very involved in the decision-making and kind of a shift in who was making those decisions. Can you speak to -- has there been any change in that environment?

I believe -- this is Joe. I believe I made that comment when I was really reflecting over my 20-plus year career in this space and how we've kind of gone full circle with much heavier CFO involvement in technology-oriented decisions versus the days of the dot-com bubble where the CIOs of the world were basically driving decisions down on the finance organizations. I mean, we continue to see rigor in all investment decisions with the majority of the organizations that we're making. I mean, if they can't tie an ROI to it or a strategic competitive advantage, they're not just doing things for the sake of doing them, so I don't think anything's really changed from that landscape. I don't necessarily say it's a CFO dynamic. I think it's a good business process that has really come full circle.

All right, great. Thanks very much.

Thank you.

Our next question comes from Michael Baker with Raymond James.

Thanks a lot. My first question has to do with the health side of the business. Bill, you mentioned towards the latter part of your commentary on the health business that the latest trends appeared to pick up a bit, and I was wondering if that's a function of some of the increases in utilization or if it's a function of hospitals now using coding as a way to enhance reimbursement.

Probably a little bit of both. Certainly, they cut back on the coding to save expenses and found out that's nothing but a death spiral, that you have to go out and you have to get the revenues to cover the cost, and so I think it's a little bit of both of them.

And how much of your business is kind of focused in on non-profit versus for-profit providers?

Oh, I don't really -- we don't segment our hospitals that way, so that would be a hard question for me to answer.

Okay. And then, just more broadly, how much of the slowdown do you think is attributable to some of the health reform dynamics, both on the clinical side and on the health side? What I mean on the clinical side is that there has been some talk about putting in place some patent protection, say, for 12 years on biotech drugs. I'm just wondering, as some of these things we get better clarity, would you anticipate a pickup once we get better clarity on some of the health reform issues that are out there?

Well, that's -- it is possible that that is part of some of the strategic activities that the large firms are working. We're not aware of that. That doesn't flow down to us, and so there may be a pick up and there may not be. That's not something we're really knowledgeable about.

Okay, thanks a lot.

Thank you.

Thank you, Michael.

(Operator instructions). And we'll go next to Jim Janesky with Stifel Nicolaus.

Yes, good afternoon. A question on the tech flex specifically, and F&A flex. When you talk to your customers in those two areas -- obviously, we saw dramatic declines in a very short period of time in the employment markets, especially late last year and early this year. Do your clients feel that they maybe cut too much, that when they do come back to you, it's going to be -- because they might have cut too much, they're going to need to hire back temps fairly aggressively? What do they plan to do with the people they did lay off? Are they going to turn to them first? Just what they're thinking as -- now that things seem to have stabilized.

Actually, that's a hard question to know what each client is thinking, but I will tell you this, that there's -- I do think that there's -- clients are telling us they did cut deep, very deeply. There is good talent available out there, except for probably certain niche skill sets. The candidates right now are somewhat reluctant -- those candidates are reluctant to move from client to client. But, I do believe -- from what we've seen and the speed for which it has happened in this particular cycle, there is certainly the possibility of a significant bounce-back. How long that will last and what that will be, Jim, your -- you know as well as I do what could possibly happen. But, yes, there has been a quick drop-off, there has been deferred maintenance, and there have been projects put on hold until the budgets have loosened up.

This is Joe. I would guess I would summarize it in two points that I hear consistently from our field leaders as they're interacting with customers across the nation. Entities are operating at lean staff levels to get done what they have to get done. There is pent up demand that's been built up through this recession of things that need to get done.

Okay. Dave and -- well, all of you folks have been through many cycles, have a lot of experience in this industry. I know the Company was a lot different in the last cycle that ended in the 2000-2001 timeframe. What does it feel like now? Was this worse but just for a short period of time, or was this worse this time around overall?

Joe, I just finished 29 years, and fortunately, having started at the age of 12, I'm still young. But, I've been through too many of them, and I'm, obviously, grateful to still be alive at the back end of this one, or so it appears. There's no question that the severity of this recession was amplified by a number of factors. The financial crisis I think manifested policy decisions that have been well publicized, and those -- the failure in the financial sector created a fear and panic that we didn't see the last time. And that fear and panic I think triggered a number of other actions as well, so my sense is that this was certainly different and more severe in its initial response.

How long it goes and how deep it is still remains to be seen, because there are many that still believe that the recovery, when it comes, will take on many different shapes, and there are those that believe we've just created another bubble, which is a government financing bubble, which is something else that could occur.

So, I would say at this point in the game, as a Firm, Kforce was much better prepared in going into this recession because we managed the entire up cycle with the expectation that the down cycle was coming, and that preparation allowed us to respond quickly, to have a much more flexible cost structure, to not be unduly dependent on (inaudible). So, as a Firm, I would say this one was probably less painful to us than the last one because of the significant changes we had to go through and an unwind of search and real estate and, of course, the tech bubble. So, to the Firm, probably less painful this time, but probably more severe in its abruptness.

Okay. Thanks. I appreciate it.

Thank you.

And at this time, there appear to be no further questions. I'd like to turn the conference back over to Management for any additional or closing comments.

Great. I'll just go ahead and close. And once again, we want to thank each of you for your interest in and support for Kforce. And once again, our sincere appreciation to our team just for performing very well in these challenging conditions. You did an exceptional job, and we're very thankful for each and every one of you, both in the field and in our corporate teams, and also to our consultants and clients for allowing us the privilege of serving them. So, thank you once again for your interest in Kforce, and we'll see you next quarter. Thank you.

And that does conclude today's conference call. Again, we thank you for your participation.