Kforce Inc (KFRC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Kforce First Quarter 2011 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to hand the conference over to Mr. Michael Blackman, Chief Corporate Development Officer. Sir, you may begin.

Great, thank you. Good afternoon and welcome to the Q1 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 differ materially from the factors listed in Kforce public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements.

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

Okay, 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. Joe and I will be providing remarks and answering questions on today's call. Bill Sanders will not be participating today, as he is working from home after having a voluntary planned procedure performed. We pray for and anticipate his speedy recovery.

We are pleased with our first quarter results as we move into the second year of this tenuous economic recovery. We are on track to meet our 2011 financial targets of 15% revenue growth and 50% EBIT growth.

We are particularly pleased with the performance of our Tech Flex, F&A Flex and HIM businesses in the leverage we are seeing from our investments in the National Recruiting Center in back office platform, which are contributing to the improving trend in operating expenses.

Entering 2011, we anticipated increased statutory payroll costs and thus have been extremely focused on margins and pricing. Our actual statutory cost increase was significantly higher than expected and we were unable to completely pass these costs through during the quarter. The sequential impact of the increased costs was approximately $0.08 including billable and core employees versus the $0.05 originally anticipated.

We are continuing to focus on margins and pricing and expect improvement throughout the rest of the year. We believe Kforce is well positioned to service our client's increasing desire for a more flexible work force during this unique temporary employment led recovery, which we believe may contribute to a sustained secular shift towards a flexible staffing model.

We believe temporary staffing penetration of the work force may achieve historic highs in the U.S. in this cycle. We continue to see recovery where a disproportionate amount of private sector hiring is being created through the temp sector. Additionally, many economists recently tempered their GDP expectation for the U.S. economy, which may result in clients turning increasingly to flexible staffing, which allows them to quickly adjust to this constantly shifting economic environment and the significant uncertainty surrounding regulatory, tax and health care reform.

We also benefit from the strength of our diversified revenue footprint, which is concentrated in some of the highest demand areas in today's knowledge-based economy. While the overall BLS unemployment numbers remains relatively high, college educated unemployment was just 4.4% in March. Talent shortages are particularly severe in tech, which is project driven by nature and constitutes over half of our revenues.

The operating model we have built is working well and positions us to capture revenue and drive additional EBIT across all customer segments. Our customer mix is evenly distributed among large, medium and small customers, each of which we are able to service as a result of this flexible model. Our gross margin profile is already one of the most attractive in the industry but the capability to cost effectively meet customer needs for speed and quality allows us to drive EBIT both through increased margins and through operating efficiencies and flexible compensation structures.

Our operational objectives for 2011 are to further penetrate and accelerate growth at existing strategic accounts, compete for additional customer share and selectively target new accounts where our service offerings and business model add value to our clients. We also expect to continue to improve profitability through the leverage that exists in our highly advanced operating platform and by further evolving the NRC, which allows us to profitably serve certain clients in niches that would not be possible under a traditional staffing model.

As we consider our success in meeting our financial and operational objectives, I note that in the first quarter the firm was able to grow total revenues year-over-year by 15.8% to $262.4 million and increase net income by 78.7% to $4.8 million. These gains were driven primarily by the success in our core technology and Finance and Accounting business, which collectively constitute 75% of total revenues and grew first quarter year-over-year 19.6% and 34.1% 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 our highly tenured workforce.

Currently 25% of technology and F&A flex revenue is being supported by the NRC. We expect this percentage to grow as our strategic account strategy gains further momentum and increasing tenure in the NRC leads to additional productivity improvements. We believe the continued evolution of these teams and their related successes provide significant additional revenue and earnings leverage.

Our largest business unit, Technology Flex, which represents 53% of total firm revenues in Q1, 2011 saw first quarter revenue increase 0.7% sequentially and 19.7% year-over-year.

Revenue trends improved year-over-year for each month of the quarter with performance accelerating significantly in March. April trends for Tech Flex continue to improve from March levels and key performance indicators continue to be quite strong. We expect sequential revenues for Tech Flex to increase in the second quarter.

Our Finance and Accounting Flex business, which represents 18% of our total revenues in Q1, 2011, performed well in the quarter with revenues increasing 0.7% sequentially and 34% year-over-year. FA Flex revenue trends improved year-over-year for each month of the quarter. This business includes a significant amount of activity and lower bill rate positions inclusive of the mortgage refinancing and foreclosure space, which constitute approximately 22% of our F&A business.

This portion of our F&A business declined 9% sequentially but has increased 74% year-over-year. 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 F&A staffing model and we are especially prepared to meet surge opportunities presented by financial services firms with processing needs.

We anticipate the lower bill-rate portion of our F&A business to decline again in Q2. However, our traditional F&A business is performing well and is expected to grow sequentially and more than offset the declines in our lower-bill rate business. April revenues and performance indicators for FA Flex in total are stable for March levels and we therefore expect continued growth for this unit in Q2.

Our HLS business segment, which represents 16% of total revenues in Q1, 2011, is comprised of our Clinical Research and Health Information Management businesses. During Q1 revenues in our Clinical Research business increased 13.2% sequentially but decreased 3.8% year-over-year.

Sequential revenue trends in Q1 for our Clinical Research business typically benefit from a reduction in paid time off versus Q4. However, this strong sequential growth reflects continued improvement in this business. Additionally, we expect a significant project win in late Q1 at a major client to positively impact Q2 revenues and therefore anticipate strong growth in Q2. 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.

HIM revenues increased 0.7% sequentially and increased 20.7% year-over-year. Our HIM revenue trends continue to be promising and hospital spend continues to improve, particularly in the project services and remote coding areas. This business has performed nicely over the last four quarters and 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 second quarter.

Revenues for Kforce Government Solutions, our prime government contracting business, increased 0.2% sequentially and declined 12% year-over-year. This profitable business unit continues to see the negative impacts of the challenging federal procurement environment resulting in the delays of the timing of project awards, primarily stemming from the continuing resolutions as well as the trend by the Federal Government to in source certain functions.

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 challenge all aspects of the business and its processes so we are fully prepared to take advantage of opportunities and niches where we excel.

As we look ahead to Q2, 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 prospects of KGS although we expect 2011 to remain challenging for this business unit.

Firm revenues from direct placements and conversions, which constitute 3.8% of total revenues, decreased 8.7% sequentially but increased 27.9% year-over-year. 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 in establishing and maintaining the Perm work force.

We continue to make measured investments in our field and in our NRC Search teams to support our high quality revenue stream although our financial targets are not predicated on returning to prior peak Perm revenue levels. Perm revenues are very difficult to predict. However, we expect perm revenues to increase in Q2 as a result of the promising early quarter trends and a growing pipeline.

We are extremely happy with the performance of our field NRC and strategic account teams. They are the life blood of our firm. Performance of our highly tenured sales teams continue to improve as reflected in the 15.8% increase in revenue and 15.2% increase in gross profit year-over-year. As a result of strengthening demand, we continue to make selective investments in our sales headcount by adding additional scale in the NRC. Sales headcount inclusive of the NRC and strategic accounts has increased 5.9% year-over-year. We believe the continued development of our National Recruiting Center and strategic accounts teams provide the leverage to increase productivity well beyond historical highs and at a cost of delivery well below historical levels.

As we have stated previously, this is the first up cycle we have experienced with these units at scale and we continue to refine our focus and direction to optimize performance. We performed well during the first quarter 2011 and we are on track to meet or exceed our financial targets. We believe our diversified service offerings fortified by our tenured field teams and our National Recruiting Center and strategic account executives will result in accelerating revenue growth and improved operating margins as we move further through this economic recovery.

We believe that we will surpass prior peak earnings earlier in the cycle with a healthier, less perm dependent revenue stream. To put things in perspective, we are in the second year of the economic expansion and we are already back to 99% of our prior peak revenue and 46% of prior peak earnings.

Our priorities are a continuing relentless focus on retaining our great people and improving client satisfaction while driving continued profitable revenue growth. I will now turn the call over to Joe Liberatore, Kforce CFO and Executive Vice President, who will provide additional insights on operating trends and expectations. Joe?

Thanks, Dave. We're pleased with our results for the first quarter, which reflect continued strong execution. Revenues for the quarter of $252.4 million increased 1.5% sequentially and increased 50.8% year-over-year. Quarterly revenues reflect the $252.3 million increased 2% sequentially and increased 15.3% year-over-year. Search revenues of $10.1 million decreased by 8.7% sequentially but increased 27.9% year-over-year.

Overall revenue trends rebounded well in January after the holidays, were relatively flat in February and accelerated across all business lines in March. Revenue trends for the beginning of the second quarter of 2011 are up from March. For the first three weeks of April, Tech Flex is up 16.5% year-over-year. Finance and Accounting Flex is up 29.3% year-over-year and HLS is up 2.8% year-over-year. Search revenues are up 35% year-over-year for the first four weeks of Q2, 2011.

We believe the consistent demand in Q1 and the strong start to the second quarter, despite weakening economic growth trends, support the possibility of a secular shift towards greater utilization in temporary staffing for knowledge workers.

Net income of $4.8 million and earnings per share of $0.12 in Q1, 2011 decreased sequentially 23.6% and 25% respectively compared to Q4, 2010. Year-over-year net income and earnings per share increased 78.7% and 71.4% from $2.7 million and $0.07 in Q1, 2010. Our strong bottom line results in the face of significantly increased payroll taxes is a result of the disciplined approach to improving bill pay spreads and the improving cost efficiencies from our operating platform, as well as the increased use of our cost efficient National Recruiting Center.

Our overall gross profit percentage of 29.9% decreased 200 basis points sequentially and decreased 20 basis points year-over-year. The year-over-year decrease is primarily a result of the increase in payroll taxes by amounts larger than we had anticipated, substantially offset by improving bill pay spreads.

Our Flex gross profit percentage of 27.1% in Q1, 2011 decreased 170 basis points sequentially due to a 210 basis point increase in payroll taxes in Q1. Inclusive of the increased pseudo cost and the expiration of the new higher tax credit in Q4 partially offset by an 80 basis point improvement in bill pay spread.

Year-over-year Flex gross profit percentages decreased 40 basis points and we are pleased with our progress in improving bill pay spreads. All staffing business lines except HIM have experienced improvements in year-over-year bill pay spreads with year-over-year Tech Flex spreads improving 100 basis points, FA Flex spreads improving 60 basis points, Clinical Research spreads improving 190 basis points and HIM declining 220 basis points.

Impacting the improvement in bill pay spread, particularly in our Tech Flex business, is the continued growth of our strategic accounts, which typically have lower margins and where spreads are more difficult to expand. The strategic account portfolio however supported primarily by our National Recruiting Center, which significantly lowers the cost of delivery and results in highly profitable business despite lower gross margins. Overall we anticipate continued improvement in bill pay spreads across all our staffing businesses in Q2, as well as the reduction in payroll tax costs.

Our Government Business Unit has experienced a decline of 60 basis points in Flex margins year-over-year, which is the result of aggressive pricing required to win regency contracts over the past year. Margins in our government business will be relatively stable in Q2, though they will be negatively impacted by the resolution of a major protested contract that we had disclosed over year ago, which we were able to retain at a lower margin than previously recognized.

We will continue our relentless focus on pricing and margin expansion as we continue through Q2. As we compare our progress in expanding margins during what we believe to be the early stages of this up cycle versus last, we continue to see expansion of bill pay spreads fairly consistent with the prior recovery.

The architecture of our income stream is well distributed among large, medium and small customers. We believe this provides the best opportunity to leverage our operating platform and maximized operating margins. As the percentage of business with large customers grows, this increased profitability will come from a combination of gross margin improvements and operating expense leverage.

The shift in overall business mix with higher payroll taxes is negatively impacting our progress in overall margin expansion. However, current trends suggest continued margin expansion in 2011 and a continuation of this expansion throughout 2012. If Search were to remain at approximately 4% of revenues and if we were to expand Flex margins to 30% levels, well below the peak of last cycle, we would need to reduce operating expenses to 25.7% of revenue to exceed peak operating margins of 7.4% in the last cycle.

We are very pleased with the declining trend in operating expenses over the past two years. Operating expenses were 26.9% of revenue in Q1, 2011, which decreased 90 basis points from Q4, 2010 and decreased 130 basis points from 28.2% in Q1, 2010. The continued reductions are a reflection of our diligent management of operating expenses and the expansion of our National Recruiting Center.

The NRC currently services 25.2% of our Tech and FA revenue yet comprises only 12.6% of compensation related to these businesses as compared to servicing only 6.1% of Tech and FA clients three years ago.

Another key benefit from investments in our National Recruiting Center and Strategic Accounts Group is to improve the performance of our field associates, thereby improving retention and reducing the cost of expensive turnover. Field associate turnover continues to be low. 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 the technology investments made over the past seven years.

Our accounts receivable portfolio continues to perform very well. Write-offs continue to be very small and the percentage of receivables aged over 60 days remain at very low levels decreasing to 3.5% in Q1 as compared to 4.1% in Q4. The quality of our accounts receivable portfolio also benefits from the growing concentration of high credit quality strategic clients helping to maintain low write-off levels.

The firm's cash flow continues to be strong. EBITDA was $14.1 million or $0.34 per share in Q1 as compared to $15.2 million or $0.37 per share in Q4. Year-over-year EBITDA increased 64.3% from $8.6 million in Q1, 2010.

Bank debt at quarter end of $25.3 million is up from $10.8 million at the end of Q4, 2010 due primarily to the timing of certain annual payments and the repurchase of approximately 530,000 shares of the firm's stock for a total of $9.3 million and was up from $19.2 million at the end of Q1, 2010. Borrowing availability under our credit facility, which expires in November of 2011, is currently $73 million. There is currently $59.6 million available for future stock repurchases under our current Board of Directors authorization.

Capital expenditures in Q1 were $1.7 million and will remain only a small portion of our cash flow.

With respect to guidance for the second quarter of 2011 at 64 billing days versus 63 billings days in the first quarter, the firm generated approximately $4.2 million in revenue each billing day in Q1. We expect revenues may be in the $276 million to $283 million range. The bottom end of the revenue range reflects a continuation of April revenue levels while the top end reflects continued improvement at the rate seen from March to April.

Earnings per share may be $0.17 to $0.20. This guidance considers a full quarter impact of the NRC resources and off-shore back office resources brought on board in Q1 along with continuing near-term uncertainty related to the pace of margin expansion and sequential reduction in the impact in payroll taxes that provides $0.04 of benefit from Q1 levels. Additionally, last year we experienced 150 basis point Flex margin improvements from Q1 to Q2 and this guidance contemplates a similar improvement.

Our effective tax rate in Q2 is expected to be approximately 37.6% with approximately 41 million weighted average diluted shares outstanding. This guidance 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 first quarter results.

As we look ahead to the remainder of 2011, we believe the platform we have built and the recent success we have reflect a strong first step in achieving our targets of 15% revenue growth and 50% EBIT growth. Our mix of service offering, particularly in Tech and FA, position us for revenue growth and margin expansion as we move further into this recovery and the secular shift towards 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.

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

(Operator Instructions). Our first question comes from Kevin McVeigh from Macquarie.

Hey, Joe, I wonder can you just help us understand a little bit? It seems like you were modeling for about $0.05 impact from the suit and it came in at about $0.08, just what the delta there was and then kind of the what drove that change relative to where we were thinking initially in the quarter.

Sure, Kevin, and there's really there are a couple of things. In our statutory we have pseudo, we have benefit. What also can impact us in there is the mix of a W-2 population versus IT population. We also, a new hire tax credit that was there last year that expired going into this year and then we also have some shift that can happen from the shift in billable expense.

So I guess if I were to reflect where we were when we were on the call February 7th and really what changed in terms of our initial modeling, we had only received a few state rates at that point in time because they kind of bleed in through the entire first quarter. And so, based upon those initial ones that we received, our experience looked like it was going to be very similar to last year. However, what ultimately happened is we got hit much harder in the high cost states where we have very high concentrations of our business and, in fact, in most of those states we're now at the maximum rate level within those states.

We also experienced a little benefit escalation during the quarter based upon experience that took place during the quarter that you really can't forecast and then we also did have some mix in terms of higher mix of W-2 employees versus IT employees, which we view as a good thing because they're a much more stable resource for us but that does also impact some of our [pseudo], some of our statutory cost modeling.

Got it. Now, Joe, does that impact as you think recapturing that through the year? Is it pretty consistent in terms of the ability to recapture or does it push it out maybe a little bit more into the back half of the year?

Yes it pushes it out a little bit. The one dynamic that we'll be dealing with this year is, as we get into the back part of the year, that's where there are -- our margins were more favorably impacted from the new hire tax credit benefit that we were receiving last year so, while bill -- while the paid bill spreads we're focused on that and continuing to expand that because that's really the one thing we can control. When you start to look at year-over-year comps they'll be a little bit tighter but the margin expansion will be happening in there.

Super. Okay thank you.

Mark Marcon, R.W. Baird.

Can you talk a little bit about just the revenue trends on the IT side? Where are you seeing the major strength with this? Were there any major big accounts that came along? How should we think about the IT trends that you're seeing?

Hey, Mark, this is Dave. The consistency of the tech demand I think is kind of reassuring, if you will. We've seen it across the customer spectrum, as I mentioned in my prepared remarks. We've seen it in strategic accounts, which are accounts that we've identified and categorized for the firm based on a number of specific criteria that we've established but frankly, based on the experience that we had during the quarter and, as you know, each quarter we go out and visit with clients as well as with investors. What we saw was frankly a little startling. It was a dramatic shift in demands and it was a little bit overwhelming coming into the February and March time frame.

We saw not only in the larger clients but also the smaller clients a significant increase in demand so what happens in that kind of a situation is you literally have to go through a prioritization process and focus and when you see that kind of a spike, as we saw, the balancing, if you will, between field based delivery and our C based delivery the prioritization of each of the classifications of the accounts required that we call time out and reevaluate where we were allocating resources based on those clients so the thing that I would say and emphasize about tech is that the demand is strong across all geographies, across all customer segments and across all technologies.

Did the mix change at all? And part of the reason why I am asking, Dave, is just we're hearing constantly about how strong the demand is but the bill rate on a year-over-year basis and a sequential basis in tech came down. It's just a little bit counter intuitive to increasing demand so I was just wondering if you could help with that.

Yes, Mark, you hit the nail on the head meaning within each skill set we are seeing the bill rate expand within each given skill set so it is a mix dynamic. One of the things that we've experienced, especially through our heavy focus on strategic accounts, is a lot of the entrée into these larger accounts happens to come through more infrastructure work initially so you kind of earn your stripes on the infrastructure side of the house and then you start to move over to the normal app dev and those types of areas, just because of the mass volume that they're looking at from an infrastructure and our ability to leverage the NRC to deploy quickly in a cost effective manner. So that's part of what you see going on there. It's definitely the mix.

Okay yes because I mean we see the gross margins on the flex side increasing there despite pseudo. So that was reassuring and then it sounds like your cost to delivery is obviously less and that's illustrated by the decline in SG&A as a percentage of revenue, correct?

Yes we've been emphasizing that for quite some time with the operating model that we've been looking to evolve here over the better course of the -- probably in reality the last 10 years that have been accelerating here over the course of the last three years in terms of having a very nimble model that allows us to drive speed, quality in high volume manner so you hit the nail on the head. I mean, we're all about it's really that balancing of the SG&A or operating expense, where in the margin makeup of our business in conjunction with being able to grab blocks of revenue.

Yes, Mark, this is Dave. One of the things that we do when we go through this in evaluating clients and the business that we take on is to evaluate the contribution margin from the client, so because we were able to identify where the delivery resources are coming from we're able to determine at a higher level the customer profitability and contribution margin to the firm that helps us select which clients are the ones that are going to have the best profile for us going forward.

Great. And then I just didn't -- I am going to ask one question and then I'll jump back in the queue. I didn't understand the comment with regards to the government guidance for the second quarter. You mentioned a specific contract and I wasn't quite sure exactly what the implication was as we think about the government business.

Yes we had a very large recomplete that we were working on last year, which we were actually awarded and we won, and so one of the dynamics of that recomplete and we're seeing this in a lot of the government states on recomplete, this one was probably was exaggerated more than what I would say the normal recomplete so we did win that business back to maintain that business but it's at a lower rate so on an apples to apples basis the revenue contribution of that piece of business comes down on a sequential basis.

And, by the way, that business was won, protested, re-competed, won, protested and finally awarded, so that's the nature of what's going on in the government space with the procurement.

So basically what you're telling us is that the gross margins are going to come down sequentially because of that recomplete coming back in. Does that also mean that the revenue is going up because of that or is the revenue going to be somewhat flat on that part of the business?

Because that business was already ours, we were recognizing that revenue at higher bill rates. The awarded contract actually has lower bill rates now so therefore--

So both revenue and gross margins will be down?

Right and that's part of what's happened with KGS over this quarter and, as we talked about, because we actually have seen some stabilization in the revenue. Q1 to Q2 sequential will be impacted as a result of that contract win.

Okay thanks for the clarification.

Paul Ginocchio, Deutsche bank.

It looks like search accelerated in April from what you just reported in the first quarter. Can you just talk about where you think some of the acceleration is coming from, which division? And then you stepped up your share repurchase a little bit in the first quarter. Can you just talk about maybe what you're thinking about for the rest of the year? Shall we look at a similar number the first quarter or was that just an abnormally high quarter? Thanks.

Paul, on Search we're really seeing a broad based and we're seeing demand both from a tech and FA. Obviously we do some business within HLS from a permanent place and standpoint. The bulk of our permanent placement business is within tech FA so I would say we're really seeing it's more broad based.

It's across all geographies. Relative to your share repurchase question, the balancing act that we go through all the time is the use of free cash flow and it's debt retirement, acquisitions and repurchasing of shares. We operate in a couple of different ways. We have during the periods, at quarter end we will typically work with 10b-5s based on what we see in the market and we're seeing opportunities to purchase and support the stock. Obviously we still have a fairly substantial authorization from the Board outstanding so, as we look at the balance of the year and depending on how we see things unfold, the likelihood is you will see us continue to be active in that area.

Tobey Sommer, SunTrust.

This is Frank in for Tobey. I wanted to ask another quick question on perm. Have you seen any change in terms of pricing or the competitive market in the perm?

Yes. I mean, the competitive market definitely has accelerated in terms of our average fee hasn't really materially changed. Sequentially it's pretty much flat from when I look at across the board so it seems very stable in terms of average fee but absolutely a much more competitive environment. We're seeing candidates get multiple offers, so we're -- and those are unfortunately -- aren't always all of our jobs so we're competing with the same candidate with other parties out there.

Okay great and on the HLS side in terms of the clinical, what are you seeing in terms of the demand environment there and pricing and I guess just kind the outlook going forward?

The clinical business, as we indicated, we had a very good sequential coming from Q4 into Q1. We saw spreads improve 190 basis points so in the larger clients there's a realization and a recognition that pricing and pay are starting to move so we've had some success with our larger clients in reestablishing bill rates. We also indicated that we had a significant win at the end of the first quarter. We won't realize the full benefit from that from a revenue standpoint until really probably into the last month of this quarter because of the training and ramp up time and so forth but we're pleased with the way our clinical business is going and that's been a long tenured business in our firm.

The last couple of years as a result of the consolidation in big pharma and biotech, we've gone through a fairly challenging time but, as we've stated previously, the life blood of these firms is research and new drug development so we believe, as things stabilize, that the opportunities there will remain.

And quickly if I could get one more, in terms of the government segment, has there been any change at all in terms of visibility now that CR is kind of winding down a little bit?

The situation is pretty much the same and it's still very difficult to determine when procurement is going ramp up. The only thing that we're hearing now is that the agencies are really feeling the pressure from the need to be able to get these projects on a dime and be able to get these contracts awarded and to get the task orders awarded but at the same time we have not seen anything that would suggest that there's going to be a significant change, so our operative assumption for the year is that it's going to be challenging. And, as we move into the next fiscal year, the hope is that we'll have a budget that we can manage to and that will allow us to be more effective in actually seeing some of these contract wins that we've worked hard for actually be awarded and the task orders awarded.

Great. Thanks very much.

(Operator Instructions). Josh Vogel, Sidoti & Co.

Just a couple of quick ones here, on the last call you had some commentary about long-term revenue growth and I was curious if you still envision achieving 15% annual growth and do you see this primarily coming from gains in tech and F&A?

Hey, Josh, this is Dave. Yes, as I opened with my remarks, as we looked at the business we believe that we're still on track to meet our 2011 targets of 15% and for this year 50% over the course of the 5-year period we've indicated that we believe we can average 15% to 25% as a target, not as guidance. But as we look at the portfolio of services that we have and the growth characteristics of them with the infrastructure that we've built and, as we've stated, we have invested substantially in both the sales pipeline as well as the delivering pipeline so one benefit if strategic accounts is you have the opportunity to see what's coming down the pipe, more so than you see in the traditional field demand area.

So we've been greatly encouraged by our success in strategic accounts with contract awards and so that's one of the things that's encouraged us to continue to build out our NRC infrastructure. It takes about six months to get our NRC resources ramped to levels of productivity that they're able to be effective in servicing these accounts so, as we look forward and we see the pipeline of activities there, there's no question that we feel that the demand is there and we've set up our supply chain to accommodate it.

Okay great. Now, looking at the F&A segment, and you had some commentary that the mortgage refi and foreclosure work was down sequentially and I was just curious as you look out over the next several quarters are there any drivers, revenue growth drivers, you see in that market outside of refi and foreclosure work?

That business has several elements to it. It has mortgage refinance and it has workout business and real estate. So there's a lot involved in there. We also have activities that we work on in insurance in there as well so what we have experienced over the last quarter is that the refinance part of it has slowed as rates have come up. The workout business has remained relatively consistent but we've also seen that to some degree that's event driven as opposed to demand driven. That business is served entirely by the NRC and is predominantly strategic accounts so the discussions that we're having with those accounts suggest that the need for the resources is still there but the slowing down of foreclosures and those kinds of activities have caused some of the projects to be delayed by these larger clients.

So, as we stated, that business, by the way, is 22% of our F&A business, 4% of our overall business so the core F&A demand has actually -- in growth -- has actually surpassed any loss that we've had as a results of the drop off in the refinance demand. So, as we look to Q2 based on what we've seen thus far, we expect the refinancing demand to continue to decline. However, we expect that our traditional F&A business and the workout business will continue to improve so we expect F&A to be up for the quarter.

Okay that's helpful and lastly, I may have missed it but did you talk about how much additional capacity you see in the NRC before you would have really be aggressive in hiring new sales associates?

From an NRC standpoint we substantially expanded that last year and, as we're looking forward, the ability to deliver is ultimately going to become paramount as the cycle continues to play out and supply/demand continues to take hold in terms of access to the candidates. So, similar to what we did here in the first quarter or as we're looking at what's happening with activities and as activities start to peak out, we'll continue to bleed individuals into the NRC but I don't really see substantial tranches of people needing to go in there because it's still from a tenure standpoint very low on the tenure scale. So we have a lot of capacity opportunity as those individuals gain more experience and become more tenured, so we're comfortable with where our capacity is but we'll more than likely continue to be adding to the NRC when supply/demand warrants it.

And one of the things we've experienced with the demand is that with the huge spike our field offices experienced such an incredible and dramatic shift in demand again, as we did last year in March, that they all have as a part of their business model to be able to request assistance from the NRC, so the big issue then becomes okay how do we prioritize the delivering resources based on the accounts and the markets because the demand is frankly far exceeds our ability to deliver so we've got to be highly selective in the clients that we pick and the markets that we've structured this delivery for. So but, with that said, we can also say with confidence that the people that we've brought on board as they ramp to productivity will allow us to meet the demand of these resources, meet the demand of these clients without substantial increase in resources.

And I would -- that's really not just an NRC dynamic. That's the nature of this business at this point in the cycle and as the cycle continues to mature more. That's where the -- that's where it really turns to. It turns to prioritization. It turns to client control. It turns to candidate control because you never have enough resources to service all the demand, as the market continues to heat up so ability to hone in on those right clients and to go after the controllable clients and focus delivery resources in those areas becomes paramount and we have quite a few initiatives going on on that front, not just specific to the NRC but the field as a whole.

Okay that's helpful. Thanks for taking my questions.

Mark Marcon, R.W. Baird.

I just had one more follow-up on the F&A and HLS. On the F&A I mean just the sequential growth typically you end up seeing pretty good sequential growth and you did say it's going to be up year-over-year but I am assuming we're not going to see the same level of year-over-year growth that we saw in the first quarter just because the comps are getting a little bit tougher. Is that correct?

The comps are getting a little bit tougher but I think if -- you know, in my opening comments when I referenced where F&A was for the first three weeks still almost pushing 30% year-over-year so that's really not that far off of where we were sequentially and that's in spite of Q2 usually being a little bit more seasonally weak than Q1. So we're -- we kind of like where we stand at this point.

Great and what are you seeing from the competition? I mean you've become a little -- you've become known for your NRC. Are you seeing anybody that's trying to duplicate what you have? I think culturally it's difficult to do but are you seeing in terms of the competitive RFPs that are out there any sort of activity that would suggest that?

Yes I would say that it's we've seen everybody announce an NRC or some derivative or permutation thereof, which is great. One of the things that I appreciate about our industry is that we really do need to evolve and we need to innovate and find more effective ways to serve the clients and so to the extent that our competitors and other firms adopt that model, as far as I am concerned, I think that's great and incumbent upon us to continue to press the advantage that we have as a result of having been at this now for 10 plus years and really refining the processes and the culture and so the challenge for us is to say okay now what and, as you know in coming to visit here, we haven't stopped at all.

In fact, we've continued to push the advantage. We've identified additional ways to leverage the NRC. We found a new and innovative ways to speed up the process, improve the level of customer satisfaction, the customer experience so those are things that we're testing in various areas. But I look at it and say imitation is the sincerest form of flattery. I think it's a great thing. I do believe that ultimately it's not technology or process that makes that work. I think it's culture and the culture that -- and the primary value that drives that in the culture is the trust that exists with the field resources and our talented teams out there working with our corporate and our C teams so that is really where I think we've been able to make the most gains and the most traction. So and it comes down to the leadership and it's time and grade so we're actually confident about it and we're glad other people are doing it.

Great and can you give us a little bit of color in terms of what your assumptions are in terms of the year-over-year hit that we should assume in terms of the HIRE Act not being in place for Q2 through Q4?

In Q2 there's not a lot of HIRE Act impact. Most of that was really back end of the year, Mark. So the HIRE Act, it kind of -- it hits you in one -- there's two dynamics associated with the HIRE Act. It was the benefit received last year for those that executed under that, which in our case would show up in gross margin, and then for example this year and that's part of why when you look at our effective tax rate it is where it is because now we actually get a tax benefit this year associated with that HIRE Act for individuals that ended up staying with us for a year.

So we kind of recapture 25% of what we gained last year in effective tax rate so when we move to the back end of the year, what I guess the best way that I could articulate the impact, there's more of an impact in Q3 than the greatest impact we experienced or benefit I should say, was in Q4 so that's why we're focused on increasing our pay spread, pay bill spread, and we have a lot of margin optimization focuses going on because our objective is to improve those to the same extent so that we neutralize any of that benefit that we received last year.

Okay and that Q3 and Q4 benefit was that roughly 40, 50 bps?

Yes about for the year it was probably about 40 bps.

40 bps and concentrated in the last half.

Correct.

Great and then you would expect to recapture 25% of that roughly in terms of a more favorable tax rate?

Well, but that's from an income standpoint we recapture that after tax because of the tax benefit that we pick up.

Okay great and then are you seeing any supply constraints anywhere in the chain, particularly in IT since it's been hot for just about everybody?

Absolutely. In our West Coast trip that we took in March we went to -- that was 20 something clients and every single client -- and I mean every single client -- expressed to us concern about delivery, about pricing, pay scale. What happens is eventually it comes to roost in their own employee base so they'll see the core people identifying other opportunities and so supply and demand in the market really is the driver for margin expansion and pricing.

So everywhere we've gone all the reports we've gotten from our field folks, we just had our incentive trip where we get an opportunity to sit down one-on-one with our teams and hear from them, there isn't a market, there isn't a skill set within tech that we're not hearing has got significant demand and everyone is frankly crying for additional delivery resources and, as Joe said very well, it's at this point in the cycle that you really have to be more selective and narrow your focus and go after client and candidate control.

F&A is we've certainly seen an increase in demand, although I would say that it's not at the level that tech is in terms of any imbalance. But we expect if demand continues this way that it will become more challenging for resources and likely we'll see pricing come up there as well.

Yes, Mark, and what I would add to that is one of our key initiatives, and it has been for quite some time at this point in time, is delivery optimization. We have our best resources focused on that. The whole firm is behind it, field, back of the house because ultimately that bleeds into one of our other top priorities, which is margin optimization because first you've got to be able to identify the quality candidates and then you have to get the value for those candidates that's associated so those two things really tie very closely together and we'll keep full steam forward on both of those initiatives.

But nothing to the point where you are unable to fill orders to the level that you can continue to maintain the growth rate.

No we'll -- we're going to have demand and if I could fill every order I'd be on the call for one more quarter because the -- frankly, there's the demand is staggering so in all of my years in the business the working and managing through cycles as you move into this part of the cycle it comes back to client selection. It comes back to focus. It comes back to client control, things such as defining the process, speeding up decision making, all of those kinds of things because the worst thing is the cost of re-work.

When a client says yes I am really interested in Mark; he's great. I'll get back to you next week. Well, by next week Mark is already assigned somewhere else and we have to go through the whole process again. So and that's what happens at an inflection point where the clients start to figure it out and they go you know, this isn't any fun for us either so they start to adapt their hiring processes, compress the cycles down.

So this is normal and we expect it to continue. There's nothing that we're seeing now that we haven't seen the past and it's always a -- for us it's a matter of selection and focus to make sure that we are serving the client that we want to serve because we think about them strategically in a relationship, not just for today but also for the next five years because there's going to be another page in the cycle and, as we discovered before and one of the things that we benefited from was our client selection and the servicing that we offered to them so we didn't experience the negative on the other side of it. So it's important that we pick the right clients and do an effective job of servicing them because it affects us on the other side of the cycle as well.

With all the technology that's come into the space through VMSs, VMOs and various other areas, speed has become paramount and I don't see that changing anytime soon. It's only increasing in velocity on one's ability to really quickly get things done in a high quality manner, which again I'll go back to this is everywhere we've been making our investments for the last 10 years from every piece of back office infrastructure to the NRC to many of the other alignments from a strategic account standpoint.

Great thanks and I also want to pass along my best wishes for speedy recovery to Bill.

If William is listening on the call right now and he'll be very pleased to hear that from you. Thank you, Mark.

Our final question for today comes from [Giridhar Krishnan] from Credit Suisse.

I just had a couple of quick questions. I believe you mentioned a large contract win on the HLS side. Was that in clinical research or was that in HIM?

That was in clinical.

Okay and I guess it was good to see bill rate spreads increase across the board. I was curious to know -- I don't know if you addressed this before -- what drove increases on the HLS side this time and how sustainable do you think they are?

The KCR bill rates came from repricing. That is concentrated in larger clients with large pharmaceutical and biotech and it's they're over long-term relationships so the benefits that we saw there came as a result of those relationships and repricing.

Okay that was all. Thank you.

Well, we wish to once again say thank you to all of you for your interest in Kforce and once again also our thanks to our teams, our field teams, our corporate teams and for all of those that are delivering just great service to our clients and, of course, this is what we're here for is delivering exceptional service so we thank you for your interest and look forward to talking with you again next quarter with Bill. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.