Kforce Inc (KFRC) 2009 Q3 法說會逐字稿

Good day, and welcome to the Kforce Incorporated third quarter 2009 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Michael Blackman, Senior Vice President of Investor Relations. 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 public filings 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 this call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you Michael. You can find additional information about Kforce in our 10Q, 10K, and 8K 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.

Finally for the first time in five quarters we are able to report a sequentially up quarter on both an actual and billing day basis. Once again we are very pleased with our team's performance in what continues to be a challenging macro economic environment. The green shoots of Q2 are now starting to take root, although we are far from declaring victory.

We continue to perform well on a relative basis, as our service offerings and enhancements to our sales and delivery platforms provide flexibility and competitive advantage. We are seeing clear indications of improving conditions for our technology service offerings consistently across all geographies. This appears to be true for our national account clients, large clients, and certain small to mid-size clients. Bill will provide in depth comments on each service offering in a few minutes.

We've built capacity in our team as we focus on performance management and providing enabling technology, process enhancements, and infrastructure support. Therefore we believe we have built strong operating leverage, suggesting prior peak earnings may be surpassed earlier in the cycle. Our team is maturing 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.

If the recovery is marked by slower growth, we believe we may see greater utilization of flexible consultants than we have seen in previous cycles due to the severity and length of this recession. With that said, we still believe the underlying secular drivers for highly skilled knowledge workers remains intact.

We are pleased to have further reduced bank debt in the past quarter, and anticipate using cash flow for continued debt retirement, share repurchase, and acquisitions that meet a very high hurdle. I'll turn the call over to Bill Sanders, Kforce's President, who will provide his comments, and Joe Liberatore, Kforce's CFO will then provide additional insights on operating trends and expectations, then I will conclude. William?

Thanks you Dave, and thanks to all of you for your interest in Kforce. We are pleased with our third quarter results, and in particular, our ability to grow revenue sequentially for the first time since the beginning of the recent economic downturn. We believe this may be the start of the up cycle as the economy improves. 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 diversified portfolio of service offerings provide a strong foundation on which to outperform in any economic environment.

We continue to execute with competitive advantages such as our national recruiting center, which is particularly effective in delivering to our large national accounts, where speed, quality and cost competitiveness are very important. Our NRC and our state of the art technology infrastructures supporting our tenured field staff are competitive differentiators. We are prepared for the economic up cycle and we believe the firm is positioned to beat prior peak revenues and earnings benchmarked earlier in the cycle than in past economic rebounds.

Revenues increased in the third quarter for the first time since Q2 2008. Total revenues of $228.3 million increased sequentially by 1%. Revenues increased in our technology and FA flexible staffing businesses. This increase was partially offset by an anticipated decline in our HLS business, as well as a slight decline in our government businesses.

Our largest business, Technology Flex, which represents roughly half of total firm revenues, increased 3.4% sequentially, and is down 8.2% year-over-year. We have been pleased with our ability to substantially maintain our Technology Flex revenue stream throughout the current down cycle. Tech Flex revenues increased steadily each month of the quarter, from their low point in July, and have continued those same trends into October. Tech Flex margins have been stable and are flat year-over-year at 27.4%. The job order pipeline continues to improve, but clients remain cautious in their hiring. Though October trends are promising, we expect Tech Flex revenues to remain stable on a billing day basis for the fourth quarter.

Our finance and accounting flex business, which now represents 16.5% of our total revenues, increased 1.3% sequentially and is down 11.7% year-over-year. We are pleased with the recent performance of our F&A flex business, which has increased sequentially for the second straight quarter. This growth is relatively broad based, with the largest increase in the lower rate, lower margin job classifications, such as mortgage related services, which has been enabled by our national account strategy, and is supported by our low cost centralized delivery function in the national recruiting center. The mix change associated with the growth in this lower margin business is driving the reduction in year-over-year flex margins. We have continued to see stability in this revenue stream, and expect Q4 revenues to be stable on a billing day basis.

Our HLS business segment, which comprises 17.7% of total revenues, is made up of two business units; clinical research and healthcare. During Q3 our clinical research business declined 3.5% sequentially, and 12.4% year-over-year; and healthcare declined 1.9% sequentially and 29.3% year-over-year. We continue to expect low revenue visibility for clinical research in the short-term, as a result of the consolidation and restructuring in the large biopharma space. Though this consolidation will likely impact our business unit at least until mid 2010, we believe the quality of our relationships with the strongest companies in this space will help mitigate short-term revenue declines and provide opportunities for growth in the longer-term, as demonstrated by a recent award of an exclusive arrangement with one of our large biopharmas. This business typically experiences significant holiday shut downs at our largest clients, and therefore we expect revenues to decline in Q4.

Revenue declines in our healthcare business slowed during Q3. This business remains challenged by continued low hospital census, due to cutbacks to address economic concerns, and a trend toward lower utilization of traveling medical coders. We continue to focus on strengthening development to reach a greater population of clients. We believe in the longer term demand for this profitable business, though much like several other businesses, expect revenues to be down in the fourth quarter due to the reduction in billing days.

Our government business had a sequential decline of 1.7% and a year-over-year growth of 57.4%. This prime federal contracting business with revenues approaching $120 million is concentrated in some of the most promising areas of federal services, such as healthcare, data integrity, finance and technology solutions. We have seen some recent wins though the federal government remains slow in awarding new work, and has recently begun to in-source some of the activity previously reserved for contractors. We have been successful in winning renewals on the majority of the roughly 60% of our revenue platform, which is being re-competed this year. As we look forward into Q4 we expect revenues to decline slightly as the result of a recent loss in a significant re-competed contract, and fewer billing days. These declines will be offset somewhat by recent wins. We continue to be optimistic about the growth prospects for this business and the stability it adds to our revenue footprint, due to the long-term nature of its contracts.

Search revenues from direct placements and conversions, which were only 2.9% of total revenues in Q3, declined 1.1% sequentially, and 57.7% year-over-year. This marks the second conservative quarter of deceleration in search declines, though total revenues are at very low levels. Q4 has had a relatively strong start though revenues are difficult to predict. We expect Search to continue to be relatively stable in Q4.

As we continue to navigate through the current economic environment, we look at internal KPIs, which we call key performance indicators, as one of our primary near-term forecasting tools. KPIs began to improve in Q3 and continue to trend positively in October. Overall we are seeing a slight improvement in some of our leading indicators, such as job orders, in most geographies and most products, though it is likely too early to suggest that a sustained recovery may be forthcoming.

We continue to diligently manage the performance of our sales associates with heightened focus on productivity and exiting under performers quickly. Flex headcount was down 3.9% and Search 6.9% sequentially. Total sales headcount is 4% less than last quarter, and 19.6% less than a year ago. Those who have remained with the firm during the downturn are our must successful associates. The current population contains the largest mix of highly tenured associates in the firm's history. We believe significant capacity exists in our sales force to take advantage of market opportunities as they evolve, and economic conditions as they improve, and we therefore believe it is not currently necessary to add significant headcount in anticipation of the up cycle. Our focus remains on retaining and inspiring our top performers for the economic upturn.

While we have less worse results during this downturn, we have also been very focused on positioning 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 maximize both market and client share when the economy rebounds. Our government and KCR businesses, which constitute 24.5% 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 enhances delivery of our FA Flex and Technology Flex businesses. Our large national account strategy has enabled us to evolve our revenue footprint to take advantage of our nationwide geographic presence, and take customer share as large clients continue to consolidate vendor lists. Our largest 20 staffing clients constitute 34.2% of our revenue stream, and have been a significant contributor to maintaining our revenues during the downturn. Revenues in this customer group have grown 15.7% over the past year. Additionally, we expect Search to continue to compliment our revenue footprint, although it is not necessary for it to return to previous levels to maximize profitability.

We are coming out of the stretch in the 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 are also positioning ourselves to win the second 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 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 the challenging environment in Q3, exceeding guidance for revenue and earnings per share, adjusted for the non-cash charge related to the acceleration of vesting in long-term incentive equity grants. We believe the third quarter 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 rates spreads, expense management, and optimizing cash flow.

Revenues for the quarter of $228.3 million increased 1% sequentially and decreased 9% from Q3, 2008.

Flex revenues of $221.7 million were up 1.1% sequentially and were down 5.8% year-over-year. Search revenues of $6.6 million were relatively flat sequentially and declined 57.7% year-over-year. [Though] down year-over-year, monthly Flex and Search revenues both improved sequentially in August and September.

When considering quarterly revenue trends, we note that revenue increased for the first time in five quarters on both a gross and billing date basis. This compares favorably to the last down cycle, when revenues did not improve for 10 quarters after the previous peak. We believe this is a reflection of our improved ability to take market share and that we are well prepared to grow revenues beyond levels achieved in previous peaks.

Revenue trends for the beginning of the fourth quarter of 2009 are down from 2008 levels, though October activity continues to improve from September levels in Tech, Flex and Search. For the first four weeks of October, Tech Flex is down 8% year-over-year; Finance and Accounting Flex is down 13.3% year-over-year and HLS is down 17.5% year-over-year.

The deterioration in Search revenues, though still significant has slowed as Search is down 44.4% year-over-year for the first five weeks of Q4, 2009. We caution that it's difficult to draw conclusions for Q4 based upon this limited data.

Net income was $2.3 million and earnings per share were $0.06 for the quarter. Net income and EPS were impacted by a non-cash pretax compensation charge of $3.6 million, or $0.05 per share, resulting from the acceleration of vesting of certain equity awards and recognition of all remaining unamortized compensation expense related to the grant.

The acceleration was triggered when Kforce's closing stock price exceeded the stock price at the grant date by 50% for a period of 10 trading days, as a result of a standard provision in our compensation plans.

Excluding the non-cash charge, net income was $4.4 million, and earnings per share were $0.11, which reflects sequential increases of 12.7% and 10% respectively compared to Q2 net income of $3.9 million and earnings per share of $0.10. These increases are largely the result of the success managing bill rate pressures and operating expense as we continue to take market share.

Year-over-year, net income and earnings per share, excluding the non-cash charge, declined 44.2% and 45% from $7.9 million and $0.20 respectively. We are very pleased with our continued ability to maintain gross margins. Our overall gross profit percentage of 31.7% remained flat in Q2 and decreased 280 basis points, year-over-year, as the result of changes in business mix attributable to the decline in our Search business.

Our Flex gross profit percentage of 29.7% in Q3 2009, increased 10 basis points sequentially and declined 50 basis points, year-over-year. The relative stability in our Flex gross profit percentage is the result of aggressive management of the spread between bill rates and pay rates. This is especially true with Tech Flex, our largest business, where gross margins of 27.4% increased 10 basis points sequentially and remained flat, year-over-year.

In general, we've been very successful in passing along a substantial amount of client bill rate reductions to our billable consultants. Staffing bill rates have declined .5% sequentially and 4.7% year-over-year and pay rates have declined .2% sequentially and 2.6% year-over-year.

As we look forward to Q4 and beyond, we believe we can continue to effectively manage bill and pay rate spreads. However, we anticipate margins to decline slightly in Q4, due to increased paid time off around the holidays.

The firm continues to aggressively manage operating expenses. We continue to highly scrutinize every expense to insure a proper return on investment, and alignment of cost structure with the revenue stream. Operating expenses were 29.8% of revenue in Q3. Excluding the non-cash charge, operating expenses were 28.2% of revenue, a decrease of 60 basis points from 28.8% in Q2 and a decrease of 150 basis points from 29.7% in Q3, 2008.

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 base 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 forward, we expect operating efficiencies to continue to evolve and corresponding leverage in 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 infrastructures 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 search services platform, to continue to increase quality and responsiveness to the customers at the right price.

We will continue to manage expenses aggressively but with a priority on keeping our great people in the firm and maintaining strong cash flow.

We believe we have the strongest management team and the most tenured and talented associate population in our history and expect to capitalize on the capacity that exists in our current employee based increased leverage and accelerate earnings as the economy rebounds, positioning the firm to obtain prior peak earnings earlier in the cycle.

EBITDA, an indication of the firm's strong cash flow, was $11.5 million, or $0.29 per share in Q3, as compared to $11.2 million or $0.29 per share in Q2. Year-over-year EBITDA decreased 29.7% form $16.4 million in Q3 2008.

Debt outstanding under our credit facility, which expires in November 2011, decreased to $13 million at the end of Q3, from $25 million at the end of Q2. And borrowing availability was $59.2 million at the end of Q3. We continue to have sufficient operating cash flow and borrowing availability to run our business and do not anticipate a significant impact from the recent bankruptcy filing of CIT, which has continued to meet any funding requirements and has a $15 million lending obligation in our $140 million credit facility. We are currently working with our bank group to insure maximum borrowing capacity.

The firm made no significant repurchases of stock during the quarter and has $72.5 million available for future stock repurchases under the current Board of Directors authorization. The firm's always taken a conservative view when balancing the use of its cash flow between debt retirement, stock repurchases and acquisitions and will continue to balance the opportunities that present themselves.

Our accounts receivable portfolio continues to perform well. The percentage of receivables aged over 60 days increased slightly to 4.7% in Q3, though it remains at a low level. And net write offs were virtually zero.

We believe the significant risk remains for future defaults in this uncertain economic environment. Our allowance for doubtful accounts is currently $6.3 million and we believe sufficient to account for the current risks.

In terms of guidance for the fourth quarter, we expect revenues may be in the $216 million to $221 million range. Earnings per share may be between $0.06 and $0.08, which reflects an effective tax rate of 41.2% and approximately 39 million weighted average diluted shares outstanding.

The fourth quarter of 2009 is impacted by paid time off and client shutdowns around the holidays, particularly in our Clinic Research and Government segments, which together represent 24.5% of revenue. As a result, the fourth quarter has 61 billing days, versus 64 billing day in the third quarter of 2009.

From a financial perspective, we are pleased with third quarter results. We continue to invest in our business to prepare for the upturn with a continued eye on expense management. We believe we are well positioned to outperform as the economy recovers.

We have a quality revenue stream and balance sheet and are well underway in our actions to improve our ability to further gain share and grow. I would like to now turn the call back over to our CEO, Dave Dunkel for questions. Dave?

Thank you, Joe. Misty, go ahead and open up the call.

(OPERATOR INSTRUCTIONS)

We'll take our first question. It comes from Kevin McVeigh with Credit Suisse.

Great; hey, great job on the quarter in obviously a very, very difficult environment. I wonder, given the sequential up tick in Tech Flex, do you think any of that had to do with kind of some budget flush? Or, just, a real, real nice job with the sequential up tick relative to some of your peers? I just want to understand a little bit more, if you could.

Kevin, this is Dave. Thank you for your compliment. I would say that the improvement in Tech Flex is execution. If you look at our KPIs and the performance of our field teams, it's consistent, across our geographies and it's consistent across our customer base.

So, large account, national account and even medium and smaller accounts, we are seeing improvement. So, I would take hats off to our team. I think they've done an excellent job.

Great and Dave, as you start hearing kind of discussions about 2010, have clients started to give an indication on kind of budgets starting to free up a little bit? And specifically, around discretionaries as opposed to what I consider more non-discretionary type work?

What we're hearing is the backlog of work and the pressure has been building so that some of the projects that are in the queue can no longer be delayed and that there's a greater urgency now to move these into the pipeline. So, it's difficult to categorize the nature of each one of them but there's no question that there's real pressure on the technology departments of our clients to move these things off the back burner.

Some of these things, as you know, are deferred maintenance and can no longer be deferred. There are upgrades that need to be done and investments that need to be done to comply with regulatory changes and so forth.

So, I would say, from an anecdotal standpoint, the tonality for Tech and what we're hearing from clients for 2010 right now is positive.

Great and one more, if I could. Obviously, you've done a tremendous job with the NRC through this down cycle. Is there any way to quantify how much margin that's helped preserve, as a result of kind of business flowing through that, versus, you know, when you didn't have it in the past?

I know that's probably pretty tough to track but is there any way to think about that?

We would have to be in some high level of activity-based accounting to get into it but I can say that there's no question that it's helped us to preserve margin. How much would be difficult to say; it would require a lot of assumptions, at a high level if you just look at how we performed in the last downturn, how we performed in this downturn, if you consider that we're reaching a point of inflexion.

Now, from an earnings standpoint, I would say that it's had a substantial impact and leverage for us.

Kevin, this is Joe. What I would add to that is I would look at it more that it's allowed us to attract and/or hold onto more margin dollars because it provides us an ability to service business that, in the past, we may have been required to walk away from just because of how our compensation structures work. And this provides us leverage to go after that business as well to hold onto that business as we gain some pressure.

Great so it's probably fair to say, Joe, the incremental margins will be that much higher as you kind of are able to be a little more selective on certain engagements going forward, I'd imagine, as the economy picks up. Is that fair?

If you were to expect a comparable recovery to what we experienced last time around, that would probably be a fair assumption.

Great, thank you.

Thanks Kevin.

We'll take our next question from Mark Marcon with R.W. Baird.

I'd like to add my congratulations. I was wondering, can you talk a little bit more about the incremental margins on gross profit? If we go back to the last downturn it looked like you were running incremental margins on gross profit that were in the, depending on the year, anywhere from 46% to 30%. As you have more efficiencies now should we think of those incremental margins as being higher at this point, or how should we think that through?

Mark I'll give you a little bit of history and try and tie it back to some of our more recent experience, and then we can kind of take it from there. But during the last downturn our continuing operations experienced about a 280 basis point flex margin compression, as compared to a 70 basis point decline from the peak revenue levels we experienced in Q2 2008, to Q3 2009. So I think it's important to note that our continuing operation mix of business by service line is very different current state as compared to last cycle. By service line our make up heading into the last downturn was about a little over 60% Tech, 32% F&A and roughly about 7% HLS as compared to where we are here in Q3, with 51.4% Tech, 18.1% F&A, 17.7% HLS and 12.8% government. By service line I think what's really most interesting is the declines from peak to trough we lost about 270 basis points last time around in Tech and 280 basis points in F&A, and this time around from a Tech standpoint, if we look at where we were at the peak, we're just slightly down from where we were. F&A is very similar to last time around. So I'd say from a Tech standpoint we're starting from a higher basis than where we were last time, which is our largest business segment.

Great. And so from, taking that into account, it sounds like the incremental margin should actually be -- would you expect your gross margins to improve from this point forward?

It's really going to depend on what happens with supply and demand. If one were to believe that the demand on the candidate side is going to move back to prior experiences, that should provide some opportunity to accelerate the bill rate. But you know there's always a lead lag that we experience there.

And then on the Tech Flex side, when you take a look at your current resources, how much excess capacity do you think you have?

When we look at our sales associate population?

And recruiters.

At this point in time when we look at our two plus year population, which is really now makes up over 50% of our overall sales force, we've pretty much lost if we were to use Q1 2008 as really kind of the peak levels here more recently. We're down roughly about 28% in GP production in that population on the flex side, and about 44% on the Search side of the house. So we believe we have an inherent capacity that's built into the system as those people start to capture opportunities.

And how will we -- how are you thinking about investing? As things improve in terms of adding personnel, adding capacity, how much are you going to be inclined to let it flow through to the bottom line? You mentioned that a lot of your clients are probably going to be a little bit more cautious about adding permanent headcount just because of the uncertainties associated with this downturn. Are you going to mirror them in terms of your approach? And would that further aid the improvement in margins?

Mark, let me take a crack at it. We're going to continue to invest in the areas where we have demand and need to add capacity. We have developed a model to accomplish that. For example, if we see within our federal staffing unit increased demand then certainly as that accelerates we're going to invest additional resources there. One of the key questions we're asked most often is, "What are you going to have to do with Search in order to get Search to the level necessary to achieve the operating margins?" And the answer is, we don't. As we have looked at our population the vast majority of the tenured population that was with us at the beginning of the cycle is with us at the back end of the cycle. It's predominantly the new associates that are not here. So the good news is that we believe we have a lot of capacity still in Search. It's not going to be necessary for us to make substantial investments in there.

Of course the caveat is where's the demand going to go. So if for some reason we were to see a major shift toward permanent hiring then we would obviously adapt the model and make those investments. The good news is that we're not going to have to go through a major headcount ramping in order for us to meet client demand. We believe we have capacity, and as we watch the capacity being absorbed we will follow our investment model and in inject the resources and the dollars necessary to continue to fuel that growth.

Great. I've got one more question and then I'll jump back in the queue. Can you talk a little bit about the government side and what you're seeing there, and can you give us a little bit more color in terms of the accounts that you won and the ones -- and you made a comment with regard to increased in-sourcing. Can you put a little bit more color around that?

Mark, this is Bill. We had an usually high number of re-competes, over 60% of our revenue base being re-competed this year. Now if you were to compare that to a normal cycle, 2010 approximately 13% of our revenue base would be re-competed. So you can see this year was a very big year for us. Through Q3 we have had 25 re-competes, we've won 18 of them, we have four awaiting award and we have two re-competes in the fourth quarter. KGS still anticipates a 7% or so growth year-over-year as we look at this, so I think we're doing fairly well. We have significant new work we've been after, we've won some in the Air Force and Marine Corps, Veteran's Administration, and we have a strong pipeline in KGS of $1 billion that we are looking at. So while things are somewhat difficult, because you have a new administration with a new philosophy that's making it difficult, obviously, to get the awards out, to look at the conflicts of interest and all the new changes around procurement, the procurement cycle has lengthened and has become more difficult. So structurally nothing has really changed in our group, we believe that everything is strong, doing well, we have confidence in the future. We have to get through this new administration so that we can get these awards out there, so we can get some more work.

In-sourcing, this administration has, at least in the beginning here, begun a process of actually hiring some of our contractors that are on different contracts working within the government. That's different than the past administration. And so we're seeing some of that, unfortunately there's no conversion fees or anything that rewards us when they actually in-source some of our contractors. So more of that is happening. It has not been a real big issue for us or for the industry, but it is becoming part of a problem.

Okay so Bill, how should we think about the government services from a longer term perspective?

I will tell you we are extremely bullish on our group. We have leaders in place, and we have a business development group in place that we think is outstanding and really building a quality team. I think that they have to get over this re-compete cycle. You may or may not remember, the price that we paid for our most recent acquisition considered this type of activity, and therefore we think we are well placed in that acquisition. But we are very strong, very bullish on where this is going to go for us.

One additional element of color is, the result of the acquisition of dNOVUS in the fourth quarter of last year, we had an unusually high number this year, at 60% on the re-compete. Moving in to 2010 we expect that number will be in the mid teens, about 13%, just to give you a sense for what will be rolling through the pipeline. In addition to that its obviously a highly complex analysis, but the backlog of proposals and a number of other activities that are going on remain very strong. So our belief is that this business unit will be a major contributor for the firm going forward. But as we mentioned at the beginning of this year, this is going to be an unusual year because of the high level of re-competes.

Right. But it sounds like once we get into 2010 that should stabilize, and given that, I'm just trying to understand the in-sourcing dynamic and the slower procurement relative to your good positioning, and how we should think about kind of a longer term growth rate. Does it still seem reasonable that it should at least grow in the teens for next year?

On a Q4 basis, if we look at Q4 year-over-year, we'll be roughly around the mid teens. And what's really going to happen as we look out into next year, realize that the timing on proposals versus decisions and all the delays that we spoke about, those are all elements that we're having to deal with. The other dynamic that we dealt with this year is with the amount of re-compete that really chews up a lot of our business development resources, because it's the same amount of energy we have to put into the re-compete as trying to on board new business. When you look at the percentage of market that we have, there is a lot of opportunity for us, providing we execute in this business as we've executed in our other service lines.

But I'll give you a specific answer Mark, this is Bill. Best in class as we read what you analysts suggest is 15% growth, and we seek to be among those best in class, that's the best answer I could give you.

I appreciate that, thank you.

Our next question comes from Tobey Sommer with SunTrust.

Thank you. I wanted to continue asking a couple of questions about the government services space. I was wondering if you could tell us what percentage of your work are you prime on, and then kind of what are you seeing in terms of protests. With a lot of re-competes and wins did you find competitive bidding teams protesting and kind of where may those stand? Thanks.

We are 83% prime contractor, 17% subcontractor. Protests, well that is becoming a common feature of almost all of these awards that are coming out, so you see more and more of that. In certain cases when we believe that it's appropriate for us to protest, we do, and certainly you're seeing more and more of that. So Tobey I'm not sure where you want me to go with that, but the volume of that has certainly increased substantially.

I guess I was commenting specifically about the re-compete loss you cited. Is that something you're protesting, and if so, would you get a couple more months of revenue from that just based on the protest?

Well we have protested it, there is no way of knowing how long before that protest is ultimately resolved. At the moment it has not been resolved.

There's actually one on the other side that we won, and they're protesting, so that's delayed that too as well. So there's an awful lot of protestors, penalty flags all over the field.

Right. And then I wanted just to ask you a question, so based on the significant amount of re-competes this year, really you're not just talking about 2010 being a low re-compete year as a percentage, but really probably 2011 and 2012 as well. Is that right?

You're correct, because many of these contracts are three to five years in length, and so you would think that that would in fact be the case.

And then is it fair to say that because bid and proposal spending will probably be down in 2010 that margins could expand?

Actually we're going to keep that proposal effort and new business effort at that level. Our goal is to grow faster so as Bill said earlier, the amount of effort, or Joe said rather, the amount of effort required in the re-competes is the same as on new business. So this should substantially free up resources and move us past the best in class.

Just strategically are you finding that there's maybe a need to start bidding on even larger work? Is that something that you're trying to develop an expertise at, and throwing your hat in the ring in more substantial contracts that could potentially move the needle even further?

Actually yes, what we've seen is, because of our scale now you get north of 100 million it qualifies you for a whole different class of contracts. So yes, we're going after bigger ones, and also because of the scale having the firm behind KGS, that gives us recruiting resources, financial resources and so forth, that will allow us to compete favorably on those contracts. So yes, we're going after bigger ones.

And then, I guess I'm asking a lot of government services questions, in terms of your strategic direction with the firm deploying capital, the relatively stability and visibility of this segment combined with pretty handsome margins, does this sit atop the pecking order in terms of when you look at investing M&A dollars from the balance sheet?

If we look at this business, clearly the rate of return is excellent. Of course when you're looking M&A dollars it's also more expensive. So we've got to balance those two things, but government is certainly up at the top of our list, probably standing next to Tech Flex at this moment. And as we target specific markets that we want to strengthen to accelerate that flex growth going into the sub term.

Okay, last question. I was wondering if you could comment, do you have any [SEDA] work that you would be in a position, in terms of evaluating on whether you wanted to keep it, or perhaps jettison that piece of work? Thanks.

Non that we are aware of at this point in time.

Thank you very much.

Thank you Tobey.

(Operator Instructions)

Our next question comes from Clint Fendley with Davenport, please go ahead sir.

Thank you. Good afternoon gentlemen. I wondered, recognizing in the clinical research segment, recognizing that the placements obviously are down considerably, at the same time the average fees for the quarter were up significantly. Any color on that and outlook that we might expect, going forward here?

No, when you think of direct placement in KCR, that's a small number. It's very lumpy. I don't think that, from a Search standpoint, that that's indicative of anything specific.

It's more so the opportunity that presents itself, based upon the nature of the skill set, where the client need is. I mean, you know, our permanent placement makeup of our KCR business is so nominal that it's going to bounce all over the place, unlike a more traditional tech business or an F&A business.

Okay fair enough. And, both for the clinical and the healthcare, what type of impact might we expect, as a result of the healthcare reform?

Once we have a clear definition of exactly what healthcare reform is going to be, we probably could answer that question more accurately. We do, however, believe, I mean, with what has been put out there, in terms of moving everything from an electronic records standpoint, that that provides us some tremendous opportunities in our healthcare business because that directly impacts the coding aspect.

And so there's a lot of change that's taking place and we anticipate a lot of change that will take place in that landscape. And we've been strategically developing our plans on how to capitalize with the opportunities that are going to continue to present themselves there.

Okay fair enough and final question, I wondered if you could comment on any opportunity to gain share in light of the recent MPS acquisition?

That'll be interesting to see. Of course, whenever an acquisition of that scale takes place, there's an initial disruption. And of course, undoubtedly they're smart guys. They're going to do what we would do; they're going to do everything possible to hold onto their talented people.

However, we will wait out here with welcoming arms to any of their folks that would like to remain with the specialty staffing firm. We will miss Tim and Bob and seeing them in some of the investor conferences and we wish them well. They've done a fine job over the last several years and I think this is a great move for them.

Great; thank you guys.

Thank you.

And we do have a follow up question. It comes from Mark Marcon with RW Baird.

I wanted to ask a little bit more about what you're seeing on the IT side, just in terms of the verticals that you may have seen some improvement in. How broad based is it? And also, can you talk a little bit about the expectations for bill rates? Because that's actually been holding in there pretty well.

Well, from a vertical standpoint, we're actually seeing some movement in any number of different areas, particularly in healthcare. It's coming back well and financial services is starting to come back.

More importantly than vertical is the size of client. We're seeing our largest clients, they are beginning to be more active in the market place, much more so than the medium sized and small clients who are less active at this point in time, rather than a vertical piece.

What was the second piece of --?

From a bill rate standpoint, that is correct. I mean, I think if we go back and we look at kind of where we peaked out, which was Q4, 2007, I think bill rates have come down about 6.6%. So, really not anything material from that standpoint.

So, we view that there's continued opportunity there. Again, you know, bill rates are driven by supply and demand.

Mark, this is Dave. From an industry standpoint, I'll give you a few. We're a major player in financial services. We've seen a real strong recovery, or rebound in financial services. Healthcare vertical and technology seem to be bounding well. And also, within the government space, not just our prime business but also our, what we call, Kforce Federal Staffing has also had a strong response as well.

The tech area, as a technology industry, also appears to be showing signs of life. So, I would say, in general, that several industry groups are leading or lending the support here to our strong performance on a relative basis in tech as we look across our peer group. We were trying to dig into that and understand what is it that's doing that. We think it's our customer portfolio in some of the industry verticals we're playing in.

Great and I was -- I suspected that you had some of the larger financial services companies that were coming back. And that was part of the reason behind the bill rate question is, typically, with larger clients, your bill rates typically tend to be, you know, lower just because of the volume price agreements that they would have. And yet, we're seeing the bill rates are holding up.

So, I'm just wondering, is that something -- should we anticipate that the bill rates will continue to hold up? If they've held up this far, in the down cycle, is there any reason why they should be coming down in the future?

Well, our clients have been, early in the cycle, quite aggressive on pricing. And we are seeing that aggressive pricing reductions have subsided. And so, bill rates themselves should not be under the pressure that they have been before because they've been knocked down to the point that it's starting to affect the quality of candidates that they are seeing.

Now of course, on the other side, we are seeing some pressure in negotiating with our consultants. And so, there are two sides to that coin.

The good news there, Mark, is that the larger clients, because of the fact that they're dealing with a much larger population of consultants, are going to get greater visibility into market shifts in supply and demand. We are seeing, for the first time in quite a while, consultants getting multiple offers and getting turn downs. And, because of the larger clients' exposure in that space, they're able to see that and recognize the need to improve their pay rates somewhat to remain competitive, particularly to get the talent that they're looking for.

So, it's an early indicator, we think, that there's stability, pricing stability. And, of course, as Joe said earlier, there's a lead and lag effect there.

Do you see any changes, with regards to assignment lengths? Just the amount of time that the clients are willing to commit to in this--?

Not really. Assignment lengths have been so project specific that, you know, I don't think in the last several years we've really seen any movement on the tech side of the house, in terms of the average length of assignment.

Great. And can you talk a little bit about F&A? I mean, that's been holding up here sequentially. How do you think that's going to evolve?

Well, you're right. We've seen some decent momentum in F&A. Of course, one of the things that have been good for us is the improvement in the mortgage related activity, in which we've had a clear pick up in activity compared to last year. And that's because of our national account focus and NRC being able to deliver quality candidates at a very good price.

So, one issue we have in F&A is the actual candidates are slow to leave jobs. Accountants are a little more conservative, so they're hanging onto their positions and that's in difficult economic times.

But F&A is improving, based upon the general F&A population and due to the mortgage related type of activity.

Does that mean if mortgage activity falls off, that we would expect to see a little bit of a down drift? Or how do you--?

The answer to that is yes but I would tell you right now, from every indication that we see, that there is no fall off in the visibility of a short-term period that we can see. We have looked at that.

In fact, I looked at that this morning and there is no fall off that we can anticipate in the near future.

One other consideration, Mark, is that when you think about the pay rates and so forth there, when you're replacing a mortgage level skill set with a higher skill set, it becomes a one-to-two or one-to-three kind of ratio. So, hopefully, a slow down in mortgage activity would indicate that the general economy has turned and we'd start to see an improvement in demand for some of the higher skill sets as we see investment transactions and so forth start to pick up.

So, that's typically what we've seen in the past. But as Bill said, we have not seen anything yet with the mortgage related activity.

Great; thank you.

Thank you.

And with no further questions in queue, I'd like to turn it over to David Dunkel for any additional comments and closing remarks.

Okay well, thank you very much for your interest in Kforce. And once again, we want to say thanks to our team for performing very well in these challenging conditions and for really going out and winning on the field.

Thanks to each and every one of you and every member of our field and corporate teams and our consultants and clients for allowing us the privilege of serving you.

We'll look forward to speaking with you again in February on our fourth quarter performance. Thank you.

This does conclude our call today. Thank you for your participation.