Kforce Inc (KFRC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Kforce Q4 2010 earnings call. (Operator Instructions). As a reminder, this conference is being recorded. Now we'll turn the program over to Michael Blackman, Chief Corporate Development Officer. Sir, the floor is yours.

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 certain statements that are forward-looking.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may different materially because of factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. 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 hope that this will improve the dissemination of information about our performance and the quality of this call. Now I'd like to turn it over to Dave Dunkel, Chairman, CEO. Dave?

Thank you, Michael. We're very pleased with our Firm's performance in Q4 as well as for the 2010 year. And are optimistic about the Firm's prospects in what appears to be a secular shift towards a greater use of flexible staffing. Kforce reported revenue for the year ended December 31, 2010 of $991 million, an increase of 9%. Net income was approximately $21 million which represents a year-over-year increase of 60%, and EPS was $0.51, a 54.5% increase.

2010 was unprecedented in US economic history in that never before have we seen a recovery where such a disproportionate percentage of hiring was created through the temp sector. In 2010, the United States saw 36% of net job creation take place through the 1.7% of the US payroll spend in temp. This bodes very well for the sector going forward, as clients are looking at an uncertain economic recovery, combined with significant uncertainties surrounding regulatory tax and healthcare reform. Our clients are increasingly looking to flexible staffing which allows them to adjust in real time to this constantly shifting economic and regulatory environment.

The objectives we established for 2010 were to focus on market and client share gains and continue to expand our national recruiting center and Strategic Accounts teams while remaining focused on our four service offerings of Technology, Finance and Accounting, Health and Life Sciences and Government. Over the past year and a half we have successfully doubled the size of our NRC and Strategic Accounts teams and significantly increased the business development staff in KGS while continuing to outpace average industry growth.

Our objectives for 2011, the third year of our three-year plan are to further penetrate existing Strategic Accounts, take additional client share and selectively target new accounts for our service offerings and business model add value to our clients. Key to achieving these goals is the flexibility we have built in to our delivery platform. Human capital is our greatest asset and with the NRC and Strategic Accounts teams now at an increased scale, we have the flexibility to rapidly deploy these teams to quickly satisfy large volume requests from our clients.

Not only do the NRC and Strategic Accounts teams enhance our local on the ground capabilities, but the cost structure of NRC and Strategic Accounts group allow us to profitability serve certain clients and niches that would not be possible under a traditional staffing model. Our goal is to leverage fully the competitive advantage we have created in our NRC and Strategic Accounts teams working in a trust partnership with our field teams to accelerate growth and market share gains.

In summary, we believe temporary staffing penetration of the workforce will achieve historic highs in the US. The demand for our services is improving and the strong platform we have built will fuel accelerated revenue and earnings growth as economic expansion accelerates. We believe that we will surpass prior peak earnings earlier in the cycle with a higher quality, less perm dependant revenue stream.

To put things in perspective, we are already back to 98% of our prior peak revenue and 56% of prior peak [EBT]. Based upon these factors, we are very optimistic about our future and we have established revenue and EBIT targets for the next five years.

We have set targets of 15% average annual revenue growth and 25% average annual growth and EBIT. While our revenue growth target for 2011 is approximately 15%, our EBIT target exceeds 50% growth. We have the front and back of the house capabilities to make this happen. Our people, which are our greatest asset are positioned to win.

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

Thank you, Dave, and thanks to all of you for your interest in Kforce. Our ability to attain the near-term and longer term financial targets that Dave articulated began with laying a foundation through investments in people, processes and tools. Our philosophy in making these investments during more difficult economic periods has contributed significantly to our success in 2010. The significant investments are now essentially complete and we are beginning to realize the benefits.

Our fourth quarter results are consistent with our five-year financial targets. In comparing fourth quarter results with the prior year, the Firm was able to grow revenues by 15.1% to $258.5 million, and increase net income by 79% to $6.3 million.

These gains were driven primarily by the success in our core Technology and Finance and Accounting businesses which collectively constitute 75% of total revenues, and grew fourth quarter year-over-year 20% and 34% respectively. Both of these businesses benefit from the continuing maturation of our cost effective and highly flexible national recruiting center coupled with our strategic account strategy, as well as having the most tenured workforce in the Firm's history.

As a frame of reference, between 2007 and 2010, the percentage of Technology and F&A revenue being supported by the NRC has increased from 7% to 33%, and the percentage of revenue contributed by our 25 largest Tech and FA clients increased from 25% to 53% of total Tech and FA revenues. The continued evolution of these teams and their related success we believe provides significant additional revenue and earnings leverage.

With respect to fourth quarter results, we're very pleased with our performance and the continued strong environment for professional staffing as clients appear to be looking increasingly to our services to meet their hiring needs. Our Firm is well positioned to take advantage of our clients increasing desire for a more flexible workforce during uncertain times and regulatory changes that we believe may be contributing to a sustained secular shift towards flexible staffing.

We again achieved record revenues in the fourth quarter for total Tech revenue and Tech flex revenue and our operational performance metrics continue to be positive further suggesting that demand for our services continues to increase. Tech and FA Flex revenue trends improved year-over-year for each month of the quarter.

Our largest business unit, Technology Flex which represents 54% of total Firm revenues in Q4 2010, increased 5.8% sequentially on a billing day basis and 18.5% year-over-year, benefiting from particular strength in our larger customers.

January trends for Tech Flex are fairly consistent with December levels and performance indicators are improving. The declines we see in January due to annual assignment ends is at approximately the same level experienced last year which was historically low, further suggesting strength in this business. Billable headcount levels have already returned to 100% of normalized December levels by the end of January.

Because January trends are promising, we expect sequential revenues for Tech Flex to be stable to improving for the first quarter. Continued widespread weather disruptions may negatively impact our results. The prospects for this business throughout 2011 continue to be very strong and we currently anticipate annual growth rates consistent with 2010 as we realize the advantage of our national recruiting center and our Strategic Accounts platform.

Our Finance and Accounting Flex business which represents 18% of our total revenues in Q4 2010 performed extremely well in the quarter with revenues increasing 12.2% sequentially on a billing day basis and 34.1% year-over-year. This business continues to see strong growth, particularly in the lower bill rate, mortgage refinancing and foreclosure space which constitutes approximately 24% of our F&A business and grew greater than 30% sequentially.

This service offering benefits from a dedicated team in the national recruiting center to successfully service this business at a lower cost than our traditional FA staffing model and we are especially prepared to meet search opportunities presented by financial services firms with processing needs. We believe there is a significant pipeline for these type of opportunities and expect demand to continue for the foreseeable future, and expect to continue to take market share in this space.

FA Flex revenues showed an upward trend throughout the fourth quarter. Recent trends and performance indicators for FA Flex are stable with December levels and we therefore expect continued growth for this unit in Q1.

Our HLS business segment which represents 15% of total revenues in Q4 2010 is compromised of our clinical research and health information management businesses. During Q4, revenues in our clinical research business decreased 8.7% sequentially on a billing day basis and decreased 4.2% year-over-year.

The sequential declines in clinical research were expected due to significant traditional holiday shut downs at our largest clients during Q4 as well as a loss of a significant client in late Q3. We believe the prospects for this business remain strong and the quality of our relationships with the strongest companies in this sector will provide opportunities for growth in the longer term and we expect Q1 revenues to increase sequentially.

On a billing day basis, HIM revenues increased 12.5% sequentially and 17.6% year-over-year. Our HIM revenue trends continue to be promising and margins remain strong as hospitals spend continues to improve, particularly in the project services and remote coding areas.

This business has rebounded nicely over the past three quarters as it continues to evolve its business model to better embrace the evolving technological changes in this space. We believe in the long-term demand for this profitable business and expect revenues to be up again in the first quarter.

Revenues for Kforce Government Solutions, our prime government contracting business, decreased by 6.6% sequentially and 16% year-over-year on a billing day basis. This highly profitable business unit continues to see the negative impacts of the challenging federal procurement environment and by the continuing resolution authority, which is currently scheduled to expire in March has the government funded at 75% of the previous year's budget. We remain focused on our key competencies and consistent with our philosophy during difficult periods our talented KGS management team is taking this opportunity to make investments to improve our business development capabilities and our operating processes, so we're fully prepared to take advantage of opportunities in niches where we excel.

As we look forward to Q1, we anticipate revenues will be flat to slightly down with a stable profit picture in this unit. We continue to believe in the long-term prospect of KGS, although we expect 2011 to be challenging. Perm revenues from direct placements and conversions, which constitute 4.3% of total revenues, increased 4.7% sequentially and 49.4% year-over-year.

This is the fifth consecutive quarter perm revenues have increased. Over the last several years we have aligned our Perm business more closely with our Flex business, particularly in Tech to more efficiently meet customer needs as well as reduce the overall cost that must be invested in establishing and maintaining the Perm workforce. We continue to make measured investments in our field and NRC search teams though our financial targets are now predicated on returning to prior up cycle perm revenue levels.

Q1 has a historically slow beginning with a strong finish. The perm revenues are very difficult to predict. We expect perm revenues to continue to be relatively stable in Q1.

We are extremely happy with the performance of our field, NRC and Strategic Account teams. They are the lifeblood of our Firm. We continue to retain our tenured associates and now have the most tenured field team in our history.

Performance of our sales teams continues to improve as reflected in the 15.1% increase in revenue and 18% increase in gross profit year-over-year. Sales headcount inclusive of the NRC and Strategic Accounts has increased 7.6% year-over-year. We believe the continued development of our National Recruiting Center and Strategic Account teams provides the leverage to increase productivity well beyond historical highs and a cost of delivery well below historical levels.

We performed well during 2010 and we are on track to meet or exceed our financial targets. We believe our diversified service offerings, fortified by our tenured field sales team and our National Recruiting Center and Strategic Account executives will result in accelerating revenue growth and improved margins as we move further through this economic recovery. 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. I will now turn the call over to our Chief Financial Officer and Executive Vice President, Joe Liberatore. Joe?

Thank you, Bill. I also applaud our teams for their performance in the second year of our three year strategic plan.

From a financial standpoint, 2010 provided the opportunity for the Firm to take advantage of our flexibility and capacity to gain market share while protecting our strong balance sheet and delivering solid results of $991 million in revenues, $20.6 million of net income, and earnings per share of $0.51.

Cash flow and EBITDA also continued to be strong in 2010 which allowed us to purchase our headquarters facility and still end the year with low net debt of $10.8 million. We are well positioned to take advantage of available opportunities in 2011 and return strong results to our shareholders.

The Firm continued its strong performance in the fourth quarter, coming in at the high end of guidance for both revenue and earnings per share. Revenues for the quarter of $258.5 million increased 4.5% sequentially and increased 15.1% year-over-year on a billing day basis.

Quarterly revenues for Flex of $247.4 million increased 4.3% sequentially and 13.9% year-over-year on a billing day basis.

Search revenues of $11.1 million increased by 4.7% sequentially and 49.4% year-over-year.

Revenue trends for the beginning of the first quarter of 2011 are down slightly from pre holiday levels as we felt the impact of year end assignment ends. However, they are up on a year-over-year basis.

For the first four weeks of January, Tech Flex is up 15% year-over-year, Finance and Accounting Flex is up 30.5% year-over-year, and HLS is flat year-over-year.

Search revenues are up 15% year-over-year for the first five weeks of Q1 2011. We caution that it is difficult to draw conclusions for Q1 based upon this limited data.

Net income of $6.3 million and earnings per share of $0.16 in Q4 2010 was a result of sequential decrease of 1.6% in net income, while earnings per share remained flat compared to Q3 2010.

Year-over-year net income and earnings per share increased 79.4% and 77.8% from $3.5 million and $0.09 in Q4 2009.

Our overall gross profit percentage of 31.9%, decreased 30 basis points sequentially, primarily as a result of paid time off during Q4, and increased 80 basis points year-over-year. The year-over-year increase is a result of the strength of our core Tech and F&A staffing business and the increase in search revenue as a percentage of total revenue. In particular, the model we have built to service both the flex and perm needs of our tech clients, which includes leveraging our National Recruiting Center, has been a strong contributor to the Flex margin improvement as well as the 65.4% year-over-year growth in Technology Search.

Our Flex gross profit percentage of 28.8% in Q4 2010 decreased 50 basis points sequentially and increased 10 basis points year-over-year. The sequential decline is largely the result of increased paid time off in Q4 which impacts our Tech, Government, and KCR business most significantly.

Year-over-year our Tech Flex and F&A Flex margins have improved 100 basis points and 80 basis points respectively which suggests that we are beginning to see pricing power. This margin expansion in Tech and FA Flex has occurred at the same time that we've been able to increase the percentage of our largest accounts which typically generate lower margins by over 25% year-over-year.

Our government business has experienced a decline of 270 basis points year-over-year which is the result of aggressive pricing required to win recompete contracts over the past year. Recompete activity is relatively small for the next 12 months and we anticipate margins to be stable in this business on a go forward basis and we note our Government business continues to be quite profitable.

HLS Flex margins declined 110 basis points year-over-year, but are expected to improve in 2011 as the result of multiyear contract renewals in KCR and increasing demand in our HIM business.

In comparing the expansion of Tech and FA margins to the last recovery, margins in this cycle has expanded 100 basis points and 160 basis points from their low point in Tech and FA, respectively. This expansion is very similar to the last cycle where both expanded approximately 100 basis points on a comparable period. Ultimately, Tech and FA margins both expanded greater than 450 basis points from trough to peak.

Should we experience these same trends this cycle, we would expect to see continued margin expansion through 2011 and 2012 which will be critical in achieving the five-year EBIT target Dave mentioned. The Firm's EBIT will improve approximately $0.50 for each $1.00 of additional gross profit provided by improved bill pay spreads from current levels. As a reminder, however, Flex margins in the first quarter will be negatively impacted by payroll taxes which could reduce Flex margins as much as 100 basis points. Overall, we expect to see continued margin expansion in 2011.

Operating expenses were 27.8% of revenue in Q4 2010 which decreased 20 basis points from Q3 2010 and decreased 50 basis points from 28.3% in Q4 2009. The Firm continues to diligently manage operating expenses so that we may balance our profitability goals with continued investments in areas such as our National Recruitment Center and our Strategic Accounts team which we believe will be critical to sustain growth.

The majority of our cost structure is variable and compensation related expenses, which is highly correlated to gross profit, compromises over 75% of our operating expenses. A key benefit from investments in our National Recruiting Center [t g a gams group] 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. Additionally, the National Recruiting Center is a very cost effective means of meeting our clients' recruiting needs. The NRC currently services 33% of our Tech and FA revenue, yet comprises only 14% of compensation related to these businesses.

As the percentage of NRC usage increases across the Firm we anticipate additional operating expense leverage. Additionally, as revenues increase, we continue to see operating leverage from technology investments made over the past seven years.

Our accounts receivable portfolio continues to perform very well. Write-offs continued to be very small, and the percentage of receivables aged over 60 days remain at very low levels, increasing to 4.1% in Q4 as compared to 3% in Q3. Our accounts receivable reserves are currently $4 million and we believe sufficient to account for the current risks in the portfolio.

The Firm's cash flow continues to be strong. EBITDA was $15.2 million or $0.37 per share in Q4 as compared to $15.7 million or $0.39 per share in Q3.

Year-over-year EBITDA increased 57.9% from $9.6 million in Q4 2009. Bank debt at year end of $10.8 million is down from $20 million at the end of Q3 2010 due to a combination of strong cash flow and timing of certain payments, and was up from $3 million at the end of Q4 2009 due to the purchase of our headquarter facility in Q2 2010.

Borrowing availability under our credit facility which expires in November 2011 is currently $83 million. Capital expenditures in Q4 were $3.3 million and remain only a small portion of our cash flow. Excluding the Firm's corporate headquarters acquisition, capital expenditures were $11.4 million for the year and are anticipated to decline below $9 million in 2011 as we have now completed most planned major technology initiatives during this up cycle.

The Firm repurchased 227,118 shares of stock during 2010 at an average price of $15.77, and repurchased an additional 157,560 shares in January at an average price of $17.47, and we believe there continues to be value in our stock. There's currently $66.1 million available for future stock repurchases under our current Board of Directors authorization.

Respect to guidance, the first quarter of 2011 had 63 billing days versus 61 billing days in the fourth quarter of 2010. We expect revenues may be in the $259 million to $265 million range. Earnings per share may be $0.12 to $0.14.

Our effective tax rate in Q1 is expected to be approximately 39.5% with approximately $41 million weighted average diluted shares outstanding. Increased payroll taxes in Q1 are expected to negatively impact Flex margins by approximately 100 basis points and EPS by $0.05. The guidance also takes into consideration the impact from the sever weather experienced through January in the Northeast where we have a high concentration of offices, but does not take into consideration any additional weather related impacts throughout the quarter. This guidance also does not consider the effect, if any, for acceleration of equity incentives or the Firm's response to regulatory, legal, or tax law changes.

We are very pleased with our fourth quarter results. As we look ahead to 2011 and the next few years, we believe the platform we have built and the recent success we have had reflects strong first steps to our five-year financial targets of an average of 15% annual revenue growth and 25% annual EBIT growth. Our mix of service offerings, particularly in Tech and FA, position us for revenue growth and margin expansion as we move further into this recovery and the secular trend toward flexible staffing. We have a high quality revenue stream and balance sheet, as well as the strongest management team in the Firm's history, and a highly tenured associate population. We expect to capitalize on the capacity that exists in our associate base to increase leverage and accelerate earnings.

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

Yes, sir. (Operator Instructions). Our first questioner in cue is Mark Marcon with Robert W. Baird. Please go ahead.

Hi. Good afternoon and congratulations on the strong results.

Thank you, Mark.

You've obviously done a ton of work on the NRC, it continues to bear fruit for you. The area that has expanded more quickly than I think most people would have expected is on the F&A side. I was wondering if you could just give a little bit more color in terms of what you're seeing? How big is the opportunity there? How much longer can you continue to see the strong growth out of that side of the business?

Mark, this is Dave. A lot of that business, in fact most of it, is generated as a result of our Strategic Account initiatives, large account initiatives, so we actually have some reasonable visibility into what's happening in that space.

The vast majority of this business is coming as a result of the nuclear bomb that hit real estate. And we're really dealing with the post nuclear world now which is years of cleanup. You have the CDOs which they are unbundling, trying to figure out who owns what and if the guy who is living in it is actually the owner. You have financing considerations going on. So, unlike historical mortgage related activities which were predominantly refinancing, this is a massive cleanup related to the whole real estate debacle and candidly we have not seen any indication that there's an end in sight.

In fact, as Bill mentioned, it actually accelerated going from Q3 to Q4, so as we look forward we really believe that we're uniquely positioned to serve this business. It's done exclusively by our National Recruiting Center which interestingly enough is able to distribute that throughout the whole United States regardless of whether or not we have a field office, so we're able to cover the white space, and the key for us, of course, is to be able do it at scale and get leverage. So, as we've said in the past, we're going to go for client share and market share here, and we're going after it aggressively and thus far it would appear that we're winning it because of our competency in that space. So I guess to net it all out, as we look at 2011 we expect it to continue, and we've seen no indication that there's going to be any end to this in the foreseeable future.

With that said, because of the flexibility that we have in the NRC, all of those resources are redeployable. So one of the things that we've built into it is the competency and the capability to move those resources across function and across geography. So, for example, if for some reason we did see a slow down in demand in F&A and those particular skill sets, we can move those people into traditional F&A skill set areas, we can also move them into Technology. The benefit of doing it the way that we've done it is we have maximum flexibility and maximum leverage, so we are actually pleased to take that opportunity.

The other thing that I thought was noticeable was if you're gaining this share from some fairly large accounts who have some pretty big needs and yet the flex gross margins there continue to run at pretty high levels, how sustainable is that?

Actually, the pricing because of the supply and demand in the market, as Joe mentioned and Bill added some commentary as well, we actually believe the pricing environment is turning favorable. Certainly in large accounts with volume there are price considerations and concessions, but they also recognize that the market demand for those skills is quite strong. So as far as we're concerned, we believe that there is still some pricing leverage and margin leverage to be gained there, but we're really after the volume, we're really after the scale because that's what allows us competitively to take advantage of the model we've built through Strategic Accounts and the NRC.

Great. Can you talk -- despite -- you had some great overall results despite the fact that government has been sliding a little bit. Do you think the government is basically going to stabilize at these levels or maybe there's another leg down and then you've got visibility with regards to your contracts, or is there still a little bit of uncertainty in terms of how that's going to fall through?

Hi, Mark, this is Bill. While we have great visibility for Tech and F&A, we have almost zero visibility when you start talking about Government. We have these uncertain budgets. We have awards that are being all held back because of continuing resolution authority. Small business set asides. Protests. I mean, this thing is really having a very challenging period of time.

While I would like to say that it's a very profitable unit, I think it will be stable to declining probably for the first half of this year. I'm starting to get a little bit optimistic in talking to our team about the second half of the year, but this is a very, very unusual time as we deal with the government client. So we're starting to get -- morale is starting to pick up, we're getting a little bit optimistic, but some things have to be done before we can really give you a good trend line.

As a practice, Mark, one of things we do when we go through these challenging times is take that opportunity to refocus the business, examine what our competencies are, and we're way down range in that now. We have focused our teams significantly in what it is we do best. We're working very closely with our commercial field offices as well. We have actually had some wins because of the competency in that area, so we're taking full advantage of the fact that we're going through this time to really improve the efficiency and the effectiveness. As I mentioned in my opening comments, we've added substantially to the business development resources. God help us if we ever get to a place of normalcy in that space because, as you know, we believe very strongly that in the long-term that's an excellent business for us.

Great. One last question, then I'll jump back into the queue. In terms of the revenue and earnings guidance for the first quarter, does that incorporate the weird weather we've already witnessed thus far in the quarter, whether we live in the Northeast or the Midwest?

Mark, I had mentioned that in my opening comments. Through January that guidance does contemplate everything that's happened through the first month.

Great, thank you.

Thank you.

Thank you. Our next questioner in queue is Paul Ginocchio with Deutsche Bank. Please go ahead.

Thanks. Just a couple. First talk about Technology against revenue per billing hour. It looks like the growth rate decelerated a little bit. I just felt your revenue per billing hour would be going up a little faster. Is that just a mix shift and could you give us some color on that? And second, looks like the clinical gross margin was pretty low in the fourth quarter. What kind of snap back should we expect there?

Then finally on your five-year guidance, appreciate that. Maybe just give us a basic GDP scenario you're using to come up with that. Thanks.

Paul, I'm a little confused on the Tech. Actually, Tech on a billing day basis was up about 5.8% sequentially.

Revenue per billing hour I was looking at.

You mean bill rate?

Yes. I guess.

Bill rate for fourth quarter 2009 versus fourth quarter 2010 is up, as it is for Finance and Accounting and as it is for Government.

Okay. Maybe looking out to -- you talked a little bit about pricing power. Do you think that's going to accelerate from here or based on mix or shift of types of people you're placing. What do you think for that revenue per hour?

Well, this is one of the beginning of the turn around, Joe gave you some history here, but we believe rates will be improving as will gross margins as we go forward here. So we are optimistic on that as far as history tells us, and as far as our discussions with the clients are.

Yes, Paul, from a margin standpoint, especially in Tech, we're almost mirroring exactly what happened the last cycle, meaning the last cycle our Tech Flex margins declined 230 basis points from peak to trough and then they improved about 450 basis points off the trough, and we peaked out at about 29.4%.

This time around we declined about 240 basis points at the trough and to date we've recovered about 100 basis points which is almost identical to where we were at this same point in the last cycle. So if one were to extrapolate that to get back to peak levels there's 140 basis points just to get back to peak in terms of expansion, and then if you want to extrapolate that out further, if we were to get that same 450 basis points expansion, margins could even potentially go higher.

Great. The clinical gross margins?

Yes, clinical gross margins. We always see that from a -- [in Q4] (technical difficulty) because they have a very high percentage of their population, most of those are employees of Kforce. The big pharmas typically shut down over the holidays for as much as almost two weeks, so we're carrying a lot of costs and we're paying people for that time and that has a direct margin impact.

Right. It just looks like it was down 500 basis points, almost 500 basis points year-on-year, so just a little bit more than the trend line. Can you get back to where -- will we expect a bigger snap back?

Yes. I think we're down about 200 basis points on a year-over-year basis and we've articulated that in the some of the prior quarters. That's because we were in the second year of multiyear contracts where we're experiencing having to pay the consultants more, but we're locked in at a bill rate. And as I mentioned in my prepared remarks, we're optimistic from a KCR standpoint because we are actually -- this is the year where we renegotiate many of those multiyear contracts.

Great. And then just a final GDP?

Yes, Paul, this is Dave. Interestingly enough, if you correlate GDP to the staffing industry growth, we have no business growing in 2010. And as we mentioned, with 36% of the jobs being created through 1.7% of the payroll dollars, it's obviously and clearly different this time.

So our assumptions going into this relate somewhat to GDP, but as much to the regulatory environment, the healthcare environment, and the uncertainty and the unwillingness on the part of the clients to go long on human capital. Our thesis going into this recovery, literally a year and a half ago, was that early on that they would rebuild their permanent staffs, their core staffs based on the deep cuts that they made during the panic time of 2008 and 2009. Once that stabilizes that the preference would shift back towards the flexible side which would give them the on/off switch, allow them by the way to avoid the significant increase in the unemployment tax rates by most states.

Our hypothesis now really relates more to a hiring preference from our clients than a GDP environment. Assuming that the GDP environment remains relatively consistent with what it is now, we think it actually works to our advantage. We can't really contemplate a scenario where GDP accelerates substantially. We don't see that happening, nor do we at this point assume that it will slow down. If you think 2% to 3% would kind of be the sweet spot for our scenario, I would say that's probably what we would probably like to see happen.

Thank you.

Thank you.

Thank you, sir. (Operator Instructions). Next questioner in queue is Toby Sommer with SunTrust. Your line is now open.

Thank you. Few questions. One, I was wondering if you could comment about what your trends were like during the quarter in maybe January on a same day billing basis? Thanks.

Yes, actually trends during the quarter as we played out, I would say overall from a flex standpoint we were up in October, we were up in November, and as we would expect we were down in December because we lose a lot of billing days with the holidays. Then down in January, and that's typically driven by those end of year assignment ends as we rebuild. I think Bill had mentioned in his comments that for example Tech Flex is back to pre holiday billable consultants and FA is just about there, so we've made good progress through January on that front.

And in kind of a more typical seasonal pattern, would that pre holiday threshold be hit kind of more like early March instead of early February?

Yes. I would say last year was the first year that I recall in the 23 some years I've been in this business where the rebuild happened as quick as it did. I think we hit our 100% about mid February last year and we're actually tracking a little bit ahead of that this year.

Okay. I was wondering if you could comment on anymore color you could give us on the pricing power that is emerging? And any other details you can provide on that would be great.

As I mentioned before, finally we're seeing a year-over-year increase in our pricing power that, is as I suggested to you, bill rates are up on Tech, they're up on F&A, and they're up in Government. They're down in HLS, but that's the phenomena that we were talking about with Joe. Joe was talking about with the long-term contracts, although some of those long-term contracts have actually renewed on January 1st, so we're looking forward to pricing power as we go forward here, so we're pretty optimistic that pricing power is right around the corner.

And Bill, refresh my memory. If I'm correct, when the momentum shifts on these rates that tends to be a durable phenomenon that lasts for a while?

Yes, Tobey, that's kind of what I was referencing. When we go back and we do the historical look at last cycle. Where we saw that 450 basis point expansion in Tech over the course of, I think that cycle probably ran roughly about three years or so from the up point. We saw even a greater expansion in FA, actually FA from trough to peak expanded about 660 basis points. We were holding on pretty good this time around and this obviously was pretty severe on most fronts.

Both our Tech and F&A, they really mirrored the last cycle. In FA, we declined, like I said, about 590 basis points last time around. This time around we declined 510 basis points. As I mentioned in Tech, it was pretty much similar. So they seem to be tracking very comparable to last cycle.

Getting back to peak levels, I would say we're optimistic on getting back to peak levels. Our ability to get all of that extra juice in the orange. I mean, supply, demand and a lot of other dynamics are going to dictate whether that upside exists.

Thank you. I don't know if you gave this in your prepared remarks. If you did I apologize, I didn't catch it. Can you give us some metrics around the NRC or your field sales, in terms of either sequential or year-over-year growth?

Yes, I believe looking at February, March the total growth inclusive of the NRC and the Strategic Account team was a growth of 7.6%. Most of that growth was in the first half of the year.

Okay. And then I have two little detail questions. In terms of your approximate 15% growth this year, what do you think the mix would be between volume and rate? And then secondly, on the stock repurchase front, do you anticipate trying to offset equity grants or perhaps even reduce on an absolute basis the total shares outstanding? Thanks.

Yes, related to volume rate, we're always looking at volume rate. We have a pretty sophisticated finance team that's involved in all of our pricing. We have dedicated resources that are aligned with our Strategic Accounts organization, so pricing is near and dear to us. Those are always considerations we are looking at, the exchange of volume for rate. We're not going to take on high volume and no profitability, but if the true volume is going to be there we'll exchange rate for that volume because at the end of the day, percentages don't pay the bills. At the end of the day dollars pay the bills, so that's really where we're focused on and we have a real good team that focuses on all of these unique contracts that come in.

Share repurchase.

The question on share repurchase, one of the things that we've done historically is we've looked at market conditions and pricing relative to competing uses of capital is to say, okay, how do we view the value of our shares relative to the alternative uses? And as Joe mentioned, we made substantial acquisitions last year and also in Q1 of this year. The uses of capital, retiring debt, which we believe notwithstanding any share repurchase or acquisitions we would be out of debt this year.

So as we look at that and look at acquisition pricing, which by the way has remained relatively high, so our view now of acquisition alternatives would be that it is going to have to be very compelling, obviously culture comes first and we would look predominantly at tuck-in acquisitions in markets that we want to strengthen our team. That would really leave us back with share repurchases.

I think we demonstrated in Q1 that even at $17.50, roughly, that we think our shares are fairly valued and still represent a good investment. So the likelihood going forward is we'll be continuing to repurchase stock.

Thank you very much.

Thank you.

Thank you, sir. Our next questioner in queue is Giri Krishnan with Credit Suisse. Please go ahead.

Hi. Thank you. I have a couple of questions. First, the search revenue within Health and Life Sciences segment was up nicely and I think almost back to '07 levels. Can you speak to what drove that?

That was a unique situation that was part of the search revenues for HLS in the quarter. That won't necessarily repeat. We don't have a specific search practice in HLS, it's a matter of conversions and so it's based upon client demand.

Okay. And as we look at your long-term outlook and I know you shared with us your outlook for KGS for 2011, are you assuming things, maybe a modest improvement? Are you assuming a worst case scenario? I guess given the fact that you're adding to business development headcount, what is all of your expectation as we look longer term for the outlook for KGS?

This is Bill again. Our long-term outlook that it's certainly challenging, specifically for the first half of this year. I'm looking for it to stabilize in the second half of the year. As we go forward because we're in some of the most in demand sectors that the government is looking for, I am hopeful, I won't go any farther than to say that as we get into 2012 and 2013 and the government sorts out some of its issues that we will see growth in that group. At least at a minimum, I expect that group to stabilize and not to be the drag on the revenue stream so far. It's a very positive profitable unit at this point in time and we plan on keeping it that way.

And so other than adding to the business development headcount, are there any other changes that you're contemplating, such as changing services provider, enhancing them? Anything else that we should be aware of?

Just processes and tools in the way we do it become more effective and efficient, make sure that we have everything in place, so we can excel in the niches that we specialize in. Are we after it? Yes. Are they working hard? They are. Just because things are slow that is the opportune time to make sure processes, tools and activities, teams are all in place to take advantage of things when they turn around.

Yes, Gary, this is Joe also. I want to make sure it's clear when we talk about business development. If you were to look at Q4, for example, all of those costs are already in our number so we're not adding in addition to. We've made significant investments in terms of the business development resources in that unit because we believe in the long-term prospects and it's a very long sales cycle, so you got to get ahead of that curve. All of that is baked in there and it's still a very highly profitable unit for us.

Thanks a lot.

Thank you.

Thank you. And at this time, I'm showing no additional questioners in the queue. I'd like to turn the program back over -- back to David Dunkel for any closing remarks.

Thank you, Dewey. Once again, we want to express our appreciation for your interest in and support for Kforce and also to thank our team for performing so very well in these challenging conditions, and again, for winning on the field. So thanks to each and every member of our field and corporate teams, and to our consultants and clients for allowing us the privilege of serving you. We look forward to the opportunity again to speak with you in April. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.