Kforce Inc (KFRC) 2009 Q4 法說會逐字稿

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

At this time I would like to turn the conference over to Michael Blackman, Chief Corporate Development Officer. Please go ahead, sir.

Great. Thank you. 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 public filings and other reports and filings with the Securities and Exchange Commission. We can not undertake any duty to update any forward-looking statements.

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

Thank you, Michael. You can find additional information about Kforce in our 10-Q, 10-K and 8-K filings with the SEC. 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.

We're very pleased with our firm's performance in 2009. And it's against a challenging and still somewhat uncertain economic environment. The objectives we had established at the beginning of the year that focused on markets and customer share gains, retaining our great people, and maintaining positive cash flow were all achieved. Our longer-term strategies are also bearing significant fruit, including our National Recruiting Center, strategic accounts and a narrow focus on our core service offerings in Technology, Finance & Accounting, Health & Life Sciences, and Government.

Over the past year we've doubled the size of the NRC and strategic account teams and significantly increased the business development staff in KGS. Additionally, our infrastructure and technology investments provide a flexible and world-class platform aimed at driving productivity, streamlining our processes to gain efficiencies and increase operating leverage. These include business intelligence, PeopleSoft ERP, enhancements to our front-end system, IP, telephony, wireless offices and more. We're leveraging our offshore capability in Manila for our back office functions and NRC, as well as for our clients, allowing us to gain efficiencies and benefit from the time zone differences.

Our objectives for 2010, the second year of our three-year plan, are to further penetrate existing strategic accounts, take additional customer share and selectively target new accounts where our service offerings and business model add value to prospective clients. We believe the demand for our services is improving and, together with the platform we have built, may fuel accelerated revenue and earnings growth as the recovery takes hold.

We are pleased to have further reduced bank debt in the past quarter to a negligible $3 million and anticipate using cash flow for continued debt retirement, share repurchase and acquisitions that meet a very high hurdle. There have been several recent transactions within the staffing industry and we are continuing to see opportunities presented to us, but are maintaining our discipline and standards.

I'll turn the call over to Bill Sanders, Kforce President, who will provide his comments and then Joe Liberatore, Kforce CFO, will provide additional insights on operating trends and expectations. And then we'll open up the call to questions. Thank you, Bill.

Thank you, Dave, and thank you to all of you for your interest in Kforce.

Before we begin a detailed discussion of fourth-quarter results, I wanted to take a moment to reflect on some of the key accomplishments of the past year. In the face of a very difficult operating environment, the great people of our firm continue to deliver exceptional results that have prepared us well to take advantage of the upcycle slingshot. We are pleased that we were able to retain our field and corporate leaders and note that the lifeblood of our firm, the percentage of sales associates with greater than four years of experience, is at an all-time high. As a result, we were able to take market share, minimize the deterioration of our revenue stream, and deliver consistently strong results to our shareholders.

Tech Flex in particular outperformed throughout the year. Additionally, 2009 was a year of preparation, where we continued to build key differentiators such as our centralized National Recruiting Center, strategic accounts program, and shared services platform, with significant investment in infrastructure and headcount. We believe the additional leverage we have developed, coupled with significant capacity in our existing sales force, prepares us well to take advantage of this economic upturn.

Specifically, with respect to fourth-quarter results, we are pleased with our revenue and earnings performance, and in particular our ability to grow revenue on a billing day basis. Our results are driven by the great people we have on our team and the strong relationship and culture we have built. We believe our operating platform and stable diversified portfolio of service offerings provides a strong foundation on which to perform in any economic environment. We are prepared for the economic upcycle and we believe the firm is positioned to attain higher peak revenues and higher earnings levels.

Total revenues of $224.6 million increased 3.2% sequentially on a billing day basis. Billing day revenues increased in our Technology and FA staffing businesses, as well as our perm business. This increase was partially offset by the anticipated decline in our HLS business, which was significantly impacted by holiday shutdowns at several clients. Our Government business was essentially flat on a billing day basis.

Our largest business unit, Technology Flex, which represents greater than half of total Firm revenues, increased 1.8% sequentially, despite three less billing days, and grew 6.8% on a billing day basis. Year over year Tech Flex was down 5.5%. We have been very pleased with the performance of this business, as revenues have now grown for two consecutive quarters. Tech Flex revenues increased each month throughout the quarter, with a low point in October and their job order pipeline continues to improve. While we typically see a decline in revenue in January due to annual assignment ends, those declines were not as significant as we've seen in previous years and weekly revenues at the end of January have returned to 98% of normalized December levels. Because January trends are promising, we expect sequential revenues for Tech Flex to be stable to improving for the first quarter as a result of the normal rebuild.

We are also pleased that Tech Flex margins have declined over 40 -- only 40 basis points both sequentially and year over year to 27% and a total of only 50 basis points from the peak of this cycle, which compares favorably with the last downcycle when margins declined 190 basis points from the peak to the trough.

Our Finance & Accounting Flex revenues, which now represent 16% of total revenues, decreased 5.8% sequentially and decreased 1.2% on a billing day basis. Year over year FA Flex is down 9.6%. We continue to see a shift in FA Flex business to the lower-rate, lower-margin job classifications such as mortgage-related services which have been enabled by our strategic account strategy and then 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 continue to expect relatively stability in this revenue stream, as our mix of business is less impacted by seasonal factors and expect Q1 revenues to be stable to improving over Q4 levels.

Our HLS business segment, which comprises 17% of total revenues, is made up of two businesses -- clinical research and healthcare. During Q4 our clinical research business declined 5.7% sequentially on a billing day basis, and 12.2% year over year. And healthcare grew 2.6% sequentially on a billing day basis and declined 23.8% year over year. The sequential declines in clinical research were expected, due to significant holiday shutdowns at our largest clients during Q4. We continue to expect low revenue visibility for clinical research in the short term as a result of the continued economic headwinds and consolidation in the large biopharma space, which will likely impact our business until at least mid-2010. However, Q1 revenues should increase sequentially as we see a ramp up of activity at a significant new client. We expect the prospects for this business to remain strong and the quality of our relationships with the strongest companies in this space will provide opportunities for growth in the longer term.

Revenues rebounded slightly in our healthcare business during Q4. This business, however, remains challenged by continued low hospital (inaudible) cutbacks to address economic concerns and a trend towards lower utilization of traveling medical coders. We continue to focus on strengthening business development to reach a greater population of clients. We believe in the longer term demand for this profitable business and expect revenues to be slightly up in the first quarter.

Revenues for Kforce Government Solutions, our prime government contracting business, were flat sequentially on a billing day basis, and grew year over year by 34.1%. This business is concentrated in some of the most promising areas of federal services, such as healthcare, data integrity, finance and technology solutions.

As disclosed in a press release dated December 17th, KGS was temporarily suspended by the Department of Interior from renewing or pursuing new federal business. This matter was resolved quickly and the suspension was lifted on February 29th. This event resulted in the loss of one contract with annual revenues of less than $1 million and did not materially impact Q4 financial results for the Firm. We are vigorously implementing the terms of the administrative agreement, which focuses on training and controls aimed at avoiding future incidents of this nature. In the end, we believe this is going to make KGS a better federal service provider.

With respect to near-term prospects for this unit, procurement delays are pushing award decisions, vacated positions are not being replaced, and there continues to be a shift toward in-sourcing some of the activity previously reserved for contractors. On the positive side, we are quite successful in winning renewals from the roughly 63% of our revenue platform which was recompeted in 2009. However, two larger contract losses are still under protest. We expect continued success as we recompete only 16% of our revenue platform in 2010, which will allow our business development efforts to be more outwardly focused in 2010. We have an excellent management team at KGS and we continue to be optimistic about the growth prospects of this business, which we believe will accelerate in the second half of 2010. However, we are anticipating a decline in revenue for the first quarter.

Firm revenues from direct placements and conversions, which were 3.3% of total revenues in Q4, increased 13% sequentially. Year over year perm declined 42.1%. This marks the first quarter perm revenue has increased since Q2 '08, though total revenues remain at low levels. Q1 has started relatively strong, though revenues are still difficult to predict. We expect perm to continue to be relatively stable in Q1.

As we continue to navigate the current economic environment, we look at internal KPIs as one of our primary near-term forecasting tools. KPIs began to improve in Q3 and accelerated those positive trends through Q4. Since the first of the year we have continued to see improvement in some of our leading indicators, such as job orders in most geographies and most products.

We continue to diligently manage the performance of our sales associates, with heightened focus on productivity and exiting underperformers quickly. Flex core headcount was down 1.5% and perm 7.4% sequentially. Telesales headcount is 2.6% less than last quarter and 14.6% less than a year ago. Those that have remained with the Firm during the downturn are our most successful associates. The current population contains the largest mix of highly tenured associates in the Firm's history. We believe that these highly skilled associates will be able to capitalize on the capabilities of our National Recruiting Center, whose headcount has doubled in the last year, and our strong strategic account sales teams. These two teams add additional leverage to the capacity that exists in our field sales force.

We have taken the opportunity during the past economic downcycle to be very focused on positioning ourselves to take advantage of the next upcycle. As we consider the quality of our revenue stream, defined by a diversified business footprint and almost 3,000 clients to whom we provide service at any point in time, we believe we are very well positioned to maximize both market and client share as the economy rebounds. 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 strategic 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 strategic accounts revenue grew 23% year over year, and has been a significant contributor to maintaining our revenue stream during the downturn. Additionally, we expect perm to continue to complement our revenue footprint.

We decisively won the first race during the first year of our three-year strategic plan, which we are calling The Race for the Triple Crown. We are well positioned to win the second race in 2010. We understand that our clients believe 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 driving continued profitable revenue growth that will lead us back over the $1 billion mark in revenues and beyond.

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

Thank you, Bill. I also applaud our team in winning the first race of our three-year strategic plan. From a financial standpoint, 2009 provided opportunity to position the Firm from a cost structure and cash flow perspective to prepare for the economic upcycle, while still delivering solid results of $910 million in revenue, $42.1 million in EBITDA, and $12.9 million in net income.

During 2009 we took the opportunity to rededicate our focus on providing the right people at the right price. As a result, we had relatively good success maintaining Flex margins, which were down 110 basis points, Q4 to Q4. More impressively, our Tech Flex gross margins declined only 40 basis points over the same period. Bottom-line performance benefited from this focus as well as our disciplined approach to discretionary expenditures. Cash flow also continued to be strong in 2009, as we ended the year with essentially no net debt. We are well positioned to take advantage of the available opportunities in 2010 and return strong results to our shareholders.

The Firm continued to perform well during the fourth quarter of 2009, exceeding consensus expectations for revenue and earnings per share. Revenues for the quarter of $224.6 million decreased 1.6% sequentially, but increased 3.2% on a billing day basis. Year-over-year revenues decreased 6.8% from Q4 2008. On a billing day basis, Flex revenues of $217.2 million increased 2.8% compared to Q3 2009. Flex revenues were down 4.8% year over year. When considering quarterly revenue trends, we note that this was the second consecutive quarter of sequential revenue growth per billing day. Search revenues of $7.4 million increased 13% sequentially and declined 42.1% year over year.

Revenue trends for the beginning of the first quarter of 2010 are down slightly from pre-holiday levels as we felt the impact of year-end assignment ends. In comparing the Q1 rebuild of these revenues with last year, however, January Tech and F&A Flex revenues are recovering much more quickly than last year, which suggests improving demand for our services and the possibility that companies have very limited capacity in their existing workforces.

For the first four weeks of January, Tech Flex is down 2% year over year, Finance & Accounting Flex is down 1.1% year over year, and HLS is down 12.9% year over year. Search revenues are flat year over year for the first five weeks of Q1 2010. We caution that it's difficult to draw conclusions for Q1 based on this limited data.

Net income of $3.5 million and earnings per share of $0.09 in Q4 2009 decreased sequentially 19.8% and 18.2%, respectively, compared with Q3 2009, which excludes the Q3 $2.1 million after-tax noncash compensation charge resulting from the acceleration of the vesting of certain equity awards. These strong bottom-line results are due to our success in managing bill rate/pay rate pressure and operating expenses as we continue to take market share.

Year-over-year net income and earnings per share declined 52% and 52.6% from $7.4 million and $0.19 in Q4 2008, respectively, excluding the impact of the goodwill and intangible asset impairment charges in Q4 2008. Our overall gross profit percentage of 31.1% decreased 60 basis points sequentially and decreased 240 basis points year over year, primarily as a result of changes in business mix attributable to the decline in search business.

Our Flex gross profit percentage of 28.7% in Q4 2009 decreased 100 basis points sequentially due to higher paid time off in Q4 and declined 110 basis points year over year, primarily due to the shift to lower-margin business in our F&A unit, the mix shift to greater percentage of Tech business in KGS, and continued pressure on bill rate and pay rate spreads in HLS as M&A activity within our large pharma clients continued to evolve.

During Q4 we continued our focused effort to aggressively manage the spread between bill rates and pay rates. In general, we've been very successful in passing along significant portions of client bill rate reductions to our billable consultants, although there is typically a lag in bill rate increases, as demand strengthens and supply tightens, leading to some margin compression. Staffing bill rates have declined 1% sequentially and 4.6% year over year. And pay rates have increased 0.3% sequentially and decreased 2.5% year over year.

As we look forward to Q1, we'll continue to focus our efforts on managing bill rate/pay rate spread, though we expect margins to continue to be under pressure as revenues increase. Historically we have seen margins begin to expand three to four quarters after revenues begin to increase. This would suggest margin expansion potentially in the second half of 2010. An additional factor negatively impacting margins throughout 2010 is the significant increase in state unemployment tax rates. We are aggressively attacking this issue and estimate a possible 30 or 40 basis point impact on operating income for 2010.

The Firm continues to aggressively manage operating expenses. We highly scrutinize every expense to insure a proper return on investment and alignment of the cost structure with the revenue stream. Operating expenses were 28.3% of revenue in Q4 2009, an increase of 10 basis points from Q3 2009, excluding the noncash charge, and a decrease of 30 basis points from 28.6% in Q4 2008, excluding the goodwill and intangible asset impairment charges. 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.

A key benefit to the investment in our National Recruiting Center is to improve the performance of our field sales associates, thereby reducing the cost of expensive turnover and the need for significant hiring as demand increases. As this performance improves we anticipate more productive delivery of our services that should improve operating leverage. We continue to see improvements in our non-compensation-based cost structure as a result of the significant infrastructure investments made over the past four years. As we look forward, we expect these investments to allow operating efficiencies to evolve and produce corresponding leverage in earnings over the next few years as revenues grow. Additionally, we continue to balance current profitability with selected investments with a focus on further evolving our current infrastructure to support the growth of the business when the economy recovers.

We believe we have the strongest management team and most tenured and talented associate population in our history. And we expect to capitalize on the capacity that exists in our current employee base to increase leverage and accelerate earnings as the economy rebounds, positioning the Firm to attain prior peak earnings earlier in the cycle. We believe revenues can grow as much as 25% without having to add significant sales headcount.

EBITDA, an indication of the Firm's strong cash flow, was $9.6 million, or $0.24 per share, in Q4 as compared to $11.5 million, or $0.29 per share in Q3. Year-over-year EBITDA decreased 38.4% from $15.6 million in Q4 2008.

This strong cash flow allowed us to reduce net bank debt to roughly $0 at the end of Q4. This is down from $13 million at the end of Q3 and $38 million at the end of Q4 2008. Borrowing availability under a credit facility which expires in November 2011 was $65.2 million at the end of Q4 2009. 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.

Our accounts receivable portfolio continues to perform well. The percentage of receivables aged over 60 days increased slightly to 5% in Q4, though remain at low levels. And net write-offs were approximately $250,000 in the quarter. We believe that risk remains for future defaults in this uncertain economic environment. Our allowance for doubtful accounts is currently $6.6 million and we believe sufficient to account for the risk.

In terms of guidance for the first quarter, we expect revenues may be in the $224 million to $232 million range. Earnings per share may be between $0.04 and $0.07. Our effective tax rate is expected to be approximately 40%, with approximately 40 million weighted-average diluted shares outstanding. This guidance includes approximately a $0.05 impact from the increased payroll taxes in Q1. The low end of guidance contemplates a flattening of billable consultants on assignment from current levels and a sequential decline in search. Guidance does not take into consideration weather-related impacts throughout the quarter. The first quarter of 2010 has 62 billing days versus 61 billing days in the fourth quarter of 2009.

From a financial perspective, we are pleased with fourth-quarter results, as well as full-year results. We continue to invest in our business to take advantage of the economic 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.

Gwen, we'd like to now open up the call to questions.

Thank you. (Operator instructions.) Tobey Sommer; Suntrust.

Thank you. I had a question about how to think about 2010, given the trajectory of rates of growth among your various segments. Wondering if, without giving us guidance and specific numbers, you could stratify them as to which ones you would expect to grow fastest and perhaps less fast? Thank you.

Tobey, this is Bill. KCR obviously will grow the fastest, because it had PTO in the fourth quarter that was quite significant. But when you look beyond that, certainly expect Tech Flex to grow, FA Flex to grow. And healthcare and KCR will both grow, we hope. I think the one that's working through the very tough 2009 they went through is KGS. So we're looking forward to a pretty good year.

Thank you. And I wanted to get a sense -- you talked about sales force productivity and the ability to add a lot of revenue without significantly increasing the sales force. How should we think about that? Is it productivity of gross profit dollars per sales person? Could you give us some color on what metrics we should keep an eye out over time?

Yes, we look at it from a couple of perspectives. Gross profit per associate is really the key metric. But obviously that dovetails into how many billable consultants each associate can support. So in an expanding margin environment that benefits you. In a contracting margin environment it hurts you a little bit in terms of absolute performance that you can get out of the sales associates.

And then, are there any specific kind of broad goals for that GP per associate over time?

Yes, I would tell you more from a -- if we go over time, the broad goals are, is to have those people as productive as possible. And I don't believe in history we've ever really tapped what the true potential is. And with the investments that we've made over the course of the last ten years with our infrastructure and a lot of other things we've done from a sales support standpoint and the tools that we're enabling those individuals with, not to mention the strategic account penetration that's been taking place, I'm here to tell you that if I look ten years down the road, the objective is to have those people extremely productive. And in essence, there are no options for them in terms of where to go, because there wouldn't be another environment where they could be at that level of performance. So that really drives the retention and kind of fuels the whole engine.

Thank you. One last question and I'll get back in the queue. The NRC has been a significant competitive advantage over several quarters now. That's been evident. I was wondering if you could give us some color on the initiatives you're taking to stay out there on the edge and try to keep that market-share-gaining momentum, maybe your offshore activities. Any color you could give us there would be great.

(Inaudible.)

Yes, we could talk for a couple days about that. Certainly we are increasing our presence offshore so that we can be at this 24 hours a day, seven days a week, and making sure that everybody is fully productive. And when one group comes in in the morning, the next group has prepared the team to carry on. When you look at the other kind of things we've done with the NRC, we've gone through Six Sigma. We've gone through other types of processes and procedures, improvements, to make sure that this is a world-class team as we continue to build it. And I think, as we indicated in our prepared remarks, we have doubled the size of this group. So it's a very significant group that is first class, located in one place with the highest level of training and supervision and encouragement to accomplish a lot of different objectives.

In addition, what I would add there is what we've been also doing is segmenting the sales process, looking to really offload certain aspects of the sales cycle, (inaudible) have to take place in that cycle, so that we can get those activities sitting with dedicated individuals, which ultimately drives a higher degree of quality and a higher degree of excellence, as well as increases efficiency when you have somebody focusing on less pieces of the process.

Thank you.

Kelly Flynn; Credit Suisse.

Thanks. You mentioned a couple times your potential to get back to prior peak earnings. I wonder if we could talk about that in a little more detail. So we've lost a lot more jobs in this country in this downturn than in recent other ones. And the expectation seems to be across the board for a relatively slow recovery, which one might infer would be that it could take a lot longer to get back to prior peak earnings than what we saw in prior cycles. Can you just address that thought, perhaps as it relates to the staffing industry in general and then your company specifically? Any nuances that you think are relevant would be helpful. Thanks.

Kelly, this is Dave Dunkel. One of the things that I would suggest to you is -- as I've visited with many of our clients -- the macro job loss picture, while certainly challenging, doesn't speak to what's actually happening in some of the more technical areas where we specialize. And tech areas obviously have shown substantial growth. And by our fourth-quarter performance I think you can see clearly that we're making real progress there.

In addition to that, a lot of those opportunities are now coming back and being recompeted as there's any kind of growth at all. And being one of the few remaining specialty firms, we believe that the opportunity for us to take additional share, both customer and market share, is substantially greater now. As the ball goes in the air again, a number of competitors that are distracted with acquisition and integration, and the opportunity now, based on what we've been able to do with our strategic accounts and National Recruiting Center, we think there's more market share for us to take. If you look at the last BLS report you can see the temp penetration numbers are going up substantially as well. So the new job creation does appear to be moving into the temp area as those that are hiring are not trusting the recovery and seeking greater flexibility.

Yes. Kelly, I'd also add, for Kforce specifically when we compare revenue impact this down cycle to revenue impacts the last cycle, our revenues kind of off the peak are down about 11.4%, whereas last time we were down 45.5%. When we start to look at that by our business mix, last time around flex revenues deteriorated about 35.7% versus roughly about 7.7% this time. Flex revenues -- I mean, excuse me -- search revenues deteriorated 86.2% last time around versus when we hit the bot- -- if we did hit the bottom prior to this recent up, deteriorated to 67.2%. So from a Kforce perspective we're also starting from a higher basis than where we were last time.

Okay. That's all really helpful. Thanks. And could you just address -- you alluded to it in the answer you just gave, but how do you see the M&A that's gone on in the space recently, with tech staffing? How do you see that impacting your business going forward? Seems like you think it's a positive, but does it potentially have any negative impact on pricing?

Actually, we actually see it as a positive for us. Having gone through a number of acquisition integrations, we realize how distracting they can be, even at the best of execution. We think that the many clients, from our conversations with them, prefer specialty firms due to the specialization required and some of the highly specialized skills. And I think the other factor that is significant, of course, is that many of the compensation plans change and some of the top performers look to go to the firms that are specialized and are known for the areas that they have their expertise in. So looking at Kforce in many respects is last man standing. In the large specialty firms we think that we're actually going to benefit.

Okay, great. Thanks a lot. Appreciate it.

Mark Marcon; R.W. Baird.

Good afternoon and nice quarter, nice year, considering the headwinds. Was wondering if you could talk a little bit about on the tech side. Obviously you've been doing well there; the whole market is doing well in tech. As we look out strategically you talked about potentially looking at strategic acquisitions. Should we surmise from your comments that you would focus primarily on the Tech side or are you still looking at HLS or Government as being other potential areas to further increase your footprint?

Actually, Howard Sutter, who's a Vice Chair, runs that program for us. And we have a pretty wide net cast. And as you know, the last acquisition we did was dNovus a year ago. We have seen a number of transaction opportunities that have come across our desk. For one reason or another we did not execute on them. The principal driver is still culture and many don't even get to the next step for that reason. But as far as acquisition opportunities are concerned, we have seen F&A opportunities. We've seen Government opportunities and we've seen Tech opportunities, all very recently. So the good news is that we don't have to do one. We can be opportunistic and we will be opportunistic. It would be our desire to find one that would fit well with us where the culture would be a great fit and the economics would work. However, we're not going to put ourselves in a position to damage what we've worked so hard to build here and the culture that we've built.

Right. And can you talk a little bit more about what you're seeing on the tech side just in terms of types of positions, verticals, where you're seeing the growth come from? And then, what you're seeing in terms of kind of the bill/pay rates? As demand is growing, are you seeing any sort of pressure on the pay side or is that still pretty manageable?

Skill sets haven't changed all that much, Mark. This is Bill. Security engineers, software developers, PMs, SAP and Oracle expertise, Java, DotNet -- I mean it's been pretty steady over the last year or two. I believe there are some unique activities such as PEGA or some of those areas in Tech Flex that are interesting and starting to come aboard. But for the most part, it's stayed pretty steady. I'll let Joe address the bill rate/pay rate.

Yes. From a Tech Flex standpoint, our bill rates had declined 0.6% sequentially and 4.3% year over year, while pay rates increased 0.4% sequentially and declined 3.3% year over year. So, as one would expect, you're starting to see that, what I had mentioned in my comments, supply/demand coming into place and some of the lead/lag where historically we see pay rates accelerating at typically a little faster pace before we see bill rate expansion start to take place. And we're seeing that kind of unfold.

Great. Can you talk a little bit about the SUTA in terms of what the impact is on the gross margins in terms of the general expectation for the quarter and the year? You mentioned $0.05 for the first quarter in terms of the impact and then the 30, 40 bps in terms of the year. But can you break that out between SG&A versus GP?

Yes. When we look at GP, if I look at the first quarter, we'd anticipate that it could be up to 150 basis point impact in Q1, just because of how we get impacted by payroll taxes because of the makeup of our population. And when we look out through the course of the full year, we could be impacted up to 100 basis points.

Okay. And that 150 basis points, to be clear, is on a year-over-year basis?

No, that would be from a Q4 to a Q1, so on a sequential.

And do you think that that would be fairly steady state across all of the various sub-segments, or would you expect any to be (inaudible - multiple speakers.)

Oh, absolutely not, because when we get into our HLS businesses and we get into the KGS business, those are long-term employees. So we have much less of an impact in those populations versus our more transactional businesses. So it's very different by segment.

Okay. So biggest impacts will be on the Tech Flex and on the F&A side?

F&A that'd be fairly accurate. Tech Flex, we have pretty reasonable length of assignments on the Tech Flex front as well. But typically those people aren't with us for a career, like what we experience in a KGS or an HLS, where people are with us in many instances for 5 or 10 years.

Okay, great. And then, can you talk a little bit more about what you're expecting in the short term on HLS and Government? It sounded like on the HLS side there were some moving parts, so some puts and some takes. But it sounded like, generally speaking, if we put it all together we're kind of looking at relatively stable revenue? Was that a correct interpretation of what your comments were?

This is Dave, Mark. I would say, speaking of KGS, as Bill mentioned, first quarter we expect would be down from Q4. And as the year unfolds, we would expect to see growth return in KGS as we get to the back end of the year. As you know, in that particular business we have much greater visibility into that by virtue of contracts and so forth. So while there's still some estimation and some uncertainty, we feel pretty comfortable that as we go through this first quarter period that the back end of the year for KGS will be good.

Bill mentioned KCR will be up in the first quarter and HLS would probably be up -- I'm sorry -- healthcare would be up slightly in the first quarter. And I think the trend for the rest of the year is still somewhat uncertain by virtue of the M&A activity, but those units appear to be stable to improving.

Great. Thank you.

Josh Vogel; Sidoti & Company.

Hi. Thank you. I just wanted to build off one of the earlier questions, talking about the Tech business. I was wondering if you can just go into more detail, maybe parse out the areas or exact specialties of the tech or IT professionals that you're seeing the most demand for? And how does this differ, if at all, to the last recession? Because it seems like you guys are taking share and I was just wondering if there's any distinct competitive advantage that's emerging during this cycle?

Well, as I indicated before -- this is Bill. As I indicated before this -- the skill sets that have been required in this particular area are -- continue to be relatively the same over the last couple of years. I would say in taking share that comes much more from the tenure of our population, supported by the NRC, which just makes our sales and delivery just I think as good or better than anyone. And so it's really just out-hustling and outperforming and providing quality candidates that the clients are looking for. But there's not -- I don't think there's any secret here. It's execution. You go out and you get the job done with a world-class infrastructure and you've got something.

Okay. And it seems like some of your larger competitors have, obviously, an increased appetite for IT exposure. And I was just wondering if the strategic direction of your firm involved maybe you looking to sell your part of the IT business or the whole firm? Or would you be an acquirer instead?

The thought of selling our -- the IT part of the business is -- kind of took us by surprise. As you look at what we've been doing, we have been an acquirer. We expect to continue to be an acquirer. At the same time, obviously we're fiduciaries to our shareholders. We think we benefit from being the last man standing. Part of my responsibility as a founder has been to present the Board with a succession plan that would allow Kforce to continue as an independent company into the future. We've done a fine job of that and we have a great team. We continue to perform at these levels. There's no reason that Kforce can't continue to be an independent company and pursue acquisitions. So that's our current thinking.

Okay. And just shifting to KGS, I'm not really sure of the seasonality in the bidding cycle for government programs. But did the short suspension cause you to miss out on any significant opportunities or was that really just a nonevent?

As far as new opportunities, no, there was one opportunity that I believe we missed out on, but that's all. It was pretty much -- well, it wasn't a nonevent. I'll tell you it certainly was an event that we were not accustomed to and we took very seriously and aggressively. Completed the situation and very happy that the government worked with us to get that done. But, no, it has not had a material impact on our business.

Okay. And are you looking to take any steps now going forward to make sure something like that doesn't arise again? And what kind of steps are you taking?

Well, we're under an administrative agreement that's a three-year agreement with the Department of Interior. And it has some -- certain training and controls we have to put in -- additional training and controls we have to put in place. We are very aggressively going after that, putting those controls in place, working with that entire unit. It is a very strong, solid unit with a great management team. So we believe that we'll work through this very easily and quickly. And the checks and balances initiated will certainly satisfy the government. We have just had a GSA regional auditor in and he left with a very positive impression. So we're quite pleased with where that is as we go today.

Okay, good. And just lastly, housekeeping question. I was wondering if you had an idea of what CapEx will look like in 2010, if maybe we're going to start to get back towards historical levels, maybe near the $10 million range? Or are we still going to expect to be where we were in '09?

Yes. Based upon some of the initiatives that we have going on this year, because we [boiled] out a couple of key strategic initiatives that provide our future platform to further enable the Firm, and we're evaluating the timing of some of those at this point in time based upon how the recovery unfolds. If everything were to play out in that, yes, we'd probably move back to approximately those historical levels. If we bleed some of that out and carry a little bit over into 2011, we'll be at lower levels.

Okay, great. Thank you very much.

Jim Janesky; Stifel Nicolaus.

Good afternoon. I had a question around how we should look at search over the next cycle. You're at a run rate now of less than half of what you did in 2008 in terms of fees. How much would be you be able to -- how do you look at it over the next cycle in terms of how it's going to grow? How much revenues can you do without adding new headcount? And at what point would you consider reducing headcount if -- would it have to contract or what are your thoughts?

Jim, this is Dave. We have substantial capacity in place. The folks that are with us today are long-tenured professional associates. And we believe there's substantial capacity there. As we mentioned earlier, we are using the NRC as a tool to improve the productivity, so we would hope and expect, as the cycle unfolds, that we'd actually be able to exceed past performance by utilizing some of these new tools and techniques and helping our top performers. It's not our intention to reduce headcount at all. In fact, obviously, in this environment we would hope that we would continue to grow. We have modified our model and that model includes leveraging our existing sales force.

So I would say to you that it is not our intention to do massive amounts of hiring in search, that we will do selective hiring to meet client demand and take full advantage of the team that we already have and the national account program that we have and concentration of search associates that we have. So as you look forward in search, I would expect that in modeling it out, that you would be somewhere between where we are today and where we were previously as a percentage of total revenue, based on where the market goes.

Our own view of what's happening now is that many of the clients that had cut so deeply are hiring back to get to kind of normal operating levels. We're not viewing this as the beginning of this great new search cycle. We think they'll get to a point where they'll start to plateau, then add selectively, and that flex will still be the predominant service offering of choice by our clients.

And the additional color that I'd provide on that front is that if we look at our dedicated search population today versus coming out of the last downturn, we basically carried about 60% more of a population through this time. So we have more search people today than we did have coming out of the last cycle, as well as they're much more tenured than what they were. Virtually the majority of our existing search population has been here greater than two-plus years, and most of them greater than four-plus years.

Okay, great. That's very helpful. And shifting gears a little bit towards your comments in the release about this does not -- that your guidance doesn't assume any weather-related -- you know, we're -- we've been -- DC has been slammed very hard. The government's been closed. They're going to get another potentially foot to another two feet of snow. So, we have had weather disruptions. I mean, have you taken that into account in your Government Solutions practice or other practices for the entire East Coast? And at what p- -- is that something you've already taken into consideration with your guidance or is that something that would be incremental to your guidance?

No. That's why I specifically broke it out relative to guidance. We wanted to provide a base line of where the business is and where we anticipate the business is going Q1, instead of partitioning this and telling you what's happened as of 5:00 today when we know there's another storm that's right around the corner that some say it's just going to hit DC. Some say it's going to go up to New York. Some say it may now expand to Boston. So to try and provide that broad a range. So I guess the color that I could provide you is, I mean, DC is one of our largest markets. We have our Government business there as well as we have our commercial business as well as we have our KFS business that is heavily based there. So by that office closing, we anticipate our impact to be as great as $800,000 on a daily basis. And so that would be coming down off the guidance that we provided. If things do expand up further into the Northeast, our impacts could go a little bit north of $1 million of full impact on a daily basis.

Okay. Yes, that's very helpful. I would imagine outside of the Government business since this last storm was over the weekend it didn't have as much of an impact, I mean, things were somewhat back to normal by Monday? Or am I wrong?

Actually, the government was closed on Monday.

No, outside of the government I meant, because --

Actually, most businesses were closed on Monday. I believe DC shut schools down for the entire week. Now, we are looking at things to mitigate the impact as much as possible. We have a pretty mobile workforce, so we're looking at work-from-home opportunities. In KGS, one of the other important points to note is anything that's fixed-price contracts, which is a significant amount of our business, those aren't adversely impacted, as well as many of these projects are going to now get extended a little bit further, so it's going to be a delay in recognizing that revenue more on the commercial side.

But the storm is more expanded than that, Joe. It also -- the Ohio Valley, we had several offices closed in the Ohio Valley up in the Midwest into the North. So this is a difficult thing for us to estimate at this point, Jim. But it is going to be, it's going to be significant.

Sure. I appreciate the level of detail. It is significant. Just ask my back from shoveling, so. Thank you.

We have time for one final question. Tobey Sommer; Suntrust.

Thanks. Just wanted to sneak one or two more on Government Services. In terms of your initial look at the budget that the Obama administration's put out, how did your largest customers fare as far as the outlook for fiscal 2011 budget allocations?

Well, we're about 50/50 civilian and defense. Our largest clients are in the healthcare area, so the VA and those type of areas which are faring very well on the civilian side. On the education and other areas we are also faring very well. So from this administration view, we seem to be fairly well positioned and so I'm pretty happy the way it's turning out at the moment.

Are there other agencies in which you would like to gain additional exposure? And then lastly I was wondering if you could comment on the size of your pipeline within the Government area and/or the -- or a kind of value of the bids that you have awaiting award? Thanks.

Well, the government is, as you know, the largest employer in the United States and so we'd like to have more business. $120 million is just kind of a drop in the bucket to the many, many billions that the government spends. Are there other areas, or even within any one agency, would we like to expand? Certainly. DOD I think has 28 different groups within it in just that one agency. So would we like to do -- would we like to improve? Yes.

Do we have a pipeline? Our pipeline, as I indicated earlier, is 63% of our activity -- or 63% of our revenue base in 2009 was recompete. So we were very, very internally focused on those recompetes. And so our pipeline for 2010 is not as big as we would like it to be, but it is significant. At the same time we only have 16% of our revenue base being recompeted, so we are going to be very outward focused. We have added to our process of identifying, proposing, and capturing awards from the federal government and so we think we are well positioned. As we indicated earlier -- I believe Dave said it well -- when we expect that we will be down for the first quarter, but then sequentially up for the remaining quarters and should see some pretty good acceleration in revenue in the second half of 2010.

Thank you very much.

Okay. We want to go ahead and close. Once again, thank you for your interest in Kforce and support. And also, again, thanks to our team for just performing very well, for winning on the field. So for each member of our field and corporate teams and to our consultants and clients, we want to thank you for allowing us the privilege of serving you and we look forward to talking with you during the next call. Thank you very much.

Thank you.

Thank you, everyone. That does conclude today's conference. We thank you for your participation.