Kforce Inc (KFRC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kforce Q4 2011 earnings conference call. (Operator Instructions). I would now like to introduce your host for today's conference, Michael Blackman, Chief Corporate Development Officer. Sir, you may begin.

Thank you. Good afternoon, and welcome to the Kforce fourth quarter and year end 2011 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 subject to risks and uncertainties. Actual results may differ materially from factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements.

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

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

We are pleased that both Q4 and full year 2011 results. Fourth quarter revenues of $285.6 million and earnings per share of $0.20 were both at the top end of our guidance. In the quarter, the firm also achieved several milestones, establishing record quarterly revenue per billing day marks for total revenue, flex revenue, total Tech revenue and Tech Flex revenue.

Kforce reported revenue for year ended December 31, 2011, of $1.1 billion, an increase of 12.1%. Net income was $27.2 million, which represents a year-over-year increase of 31.6%, and EPS was $0.70, a 37.3% increase. Total Technology revenue of $624 million and Tech Flex revenue of $606.2 million represent historical high water marks for that business unit.

We are optimistic about the firm's prospects and what we believe continues to be a secular shift towards a greater use of flexible staffing in an environment of high demand for skilled professionals. Looking back on 2011, we believe that the staffing industry performance has been significantly different than in previous economic cycles, further supporting the secular shift in super cycle theory. The unemployment rate among college degreed workers is 4.2%, abouthalf that of the overall US rate of unemployment, and is substantially lower in several of the specialized skill sets Kforce specializes in, particularly in technology.

Our revenue footprint and domestic platform are focused in the areas of greatest demand in today's economy. We continue to benefit from our client's desire for a flexible workforce during this slow economic recovery combined with significant uncertainty in regulatory, tax and health care reform. All of this bodes well for the future of our firm.

The objectives that we established for 2011 were to further penetrate existing strategic accounts, capture additional client share, and selectively target new accounts were our service offerings and business value add value to our clients. Our strategic accounts program, supported by the national recruiting center, has continued its steady growth. At the same time, the growing needs for flexible staffing at small and medium size the customers, particularly in the second half of the year, has allowed us to sequentially improve the bill pay spreads in our Technology flex business, more typical of what we have seen in past more traditional economic recoveries.

Looking back on 2011, we also believe that the staffing industry performance has been significantly different -- whoops, I'm sorry. I had two pages stuck together.

We believe that the uncertain economic outlook in 2011 negatively impacted the valuation of Kforce and other staffing stocks disproportionately. The firm was aggressive in response and able to repurchase 5.7 million shares of stock during the year, which represented 13.8% of outstanding shares for a total of 59.6 million.

Looking forward to 2012 we remain committed in our belief that temporary staffing penetration, which has improved from 1.34% at the beginning of this economic cycle and is currently 1.82% of the workforce, will achieve historic highs in the US during this economic expansion. We believe strengthening demand for our services as a result of this trend will only be enhanced if economic growth accelerates.

Our strategy remains intact, as we believe there remains significant opportunity for continued strong growth in our Tech and FA businesses, as well as our health information management business, which is well positioned for continued success through the implementation of ICD-10 and electronic medical records. We expect our Clinical Research business to perform reasonably well as we navigate the rapidly changing environment in the pharmaceutical and biotech industries as blockbuster drugs come off patent. Our government business is expected to continue to face a challenging environment, although our team is competing effectively.

Overall the demand for our services continues to improve, and we expect continued strong revenue growth. We also expect gross margin and operating margin improvement in 2012, though overall improvements will be negatively impacted by increasing payroll tax related costs, as states continue to raise unemployment insurance rates and wage bases in an effort to replenish their depleted unemployment funds. We expect 2012 to be a strong year overall for the firm, and we remain excited about our prospects.

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

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

We are please with the successful completion of the final year of our three year strategic plan, called the Triple Crown, in 2011 and are excited to embark about the Expedition, our 2012 to 2014 plan. Our foundation of great people, processes and tools, combined with the flexible NRC and strategic accounts model and tenured leadership and sales teams drove record high revenues in excess of $1.1 billion in 2011, as well as revenue records in Tech and HIM flex.

We are very pleased with the results for are the fourth quarter, where wehad sequential revenue increases in all flex business lines on a billing day basis, except for Kforce clinical research, which is highly impacted by paid time off around the holidays. We were able to continue to take advantage of our advanced sales and delivery platform that leverages the combination of our field associations, strategic account executives, and National Recruiting Center to profitably grow revenue of both large and small clients.

We also now have more than a full year of data and visibility into our key performance indicators through the firm's new reporting vehicle we call [AMP]. This tool provides a real time dashboard into our associates' activity levels, which assists us in managing and incentivizing our team to achieve success.

Tech Flex continued to have strong demand in the quarter. Tech Flex is our largest business unit and represents 55% of total firm revenues. Q4 revenues increased 2.5% sequentially on a billing day basis, and increased 15.1% year-over-year, and increased 16.1% for the year 2011 over 2010.

Our key performance indicators for Technology remained at high levels, and sale ratios are improving, suggesting strong demand. The candidate pool for technology consultants in particular is very tight.

This is especially true for skill sets and demand such as F8, Java and .NET. Maintaining a pipeline and finding candidates through passive recruiting and social media is a necessity. January trends for Tech Flex are typically down from the prior quarter. The declines in January 2012, due to assignment [ends], were slightly deeper than last year, but recovering faster, with stronger TCI volumes, further suggesting strength in this business. We expect sequential revenues for Tech Flex to increase in the first quarter.

Revenue for our Finance and Accounting flex business, which represents 18% of our total revenues, increased 11.2% sequentially on a billing day basis, and increased 7.2% year-over-year and 17.2% for the year 2011 over 2010. For the year-over-year growth is impacted by a decline in activity and lower bill rate position, inclusive of the mortgage related assignment, which constitutes approximately 17% of our F&A business and was very strong last year. This portion of our F&A business improved quarter over quarter, though we expect to continue to experience volatility in this area based upon changes in the housing and mortgage market. F&A flex revenue showed an upper trend throughout the fourth quarter. Recent trends in performance indicators for F&A flex are strong, and we expect continued growth for this unit in Q1.

Both of our Tech Flex and F&A flex businesses benefit from our cost effective and highly elastic National Recruiting Center, coupled with strategic account strategy and highly tenured workforce serving all of our clients. Currently approximately 30% of Technology and F&A revenue is being supported by the NRC, whichis consistent with Q3 levels as the broad based demand in our small to medium sized clients is not keeping pace with the growth of our strategic accounts.

In the aggregate, the firm provides consultants to approximately 3,000 clients at any time. We have an extremely diversified revenue stream, with no one client constituting more than 5% of total revenues. Our flexible model allows us to redeploy consultants in the industry with the greatest demand for our services such as health care. Four of our top 25 clients are in financial services and comprise approximately 8.9% of total revenues, which has declined from 10.2% a year ago. Financial services represent 20.7% of Tech Flex revenue, which remains unchanged from Q4 of 2010.

The NRC and strategic account teams were successful in 2011, and we expect to continue our focus on the evolution of these teams in 2012. During 2011, due to the significant demand for its resources because of large increases in job order flow, a key focus of the NRC was on enhancing and refining its assignment prioritization processes and tools. We have already seen positive results on this front. Our field teams are highly leverage in NCR, and the related processes and tools are deriving real benefit and experiencing higher fill rates. We expect continued process improvements in 2012 and should also see benefits of increasing tenure with NRC in the form of improvements, as 65% of the team has now been with the firm for greater than one year. Though the firm is already realizing significant benefits from the NRC, we expect continued improvement in 2012 and future years.

Revenues for our Health Information Management business increased 12.5% sequentially on a billing day basis, and 17% year-over-year, and 19% for the year 2011 over 2010. HIM flex revenues at record levels, and revenue trends continue to be promising with hospital spend continues to improve, particularly in the project services and remote [coding] areas. This business has grown more quickly than all of our other businesses over the past year and has now grown seven straight quarters. We believe in the long-term demand for this profitable business and in particular opportunities that are evolving for both HIM and Tech Flex with clients ambitions for electronic medical records and with the October 2013 deadline for the adoption of ICD-10. We expect HIM revenues to be up again in the first quarter.

During the fourth quarter revenues in the Clinical Research business declined 1.6% sequentially on a billing day basis and increased 14% year-over-year. The sequential decline in Clinical Research was expected due you to significant traditional holiday shutdowns in our largest clients during Q4. We have been very successful in transitioning our valuable billable resources to other clients as major projects end. In some cases, this has led to improved profitability, as we avail ourselves of higher margin opportunity at new or smaller clients. We are pleased to achieve the milestone of 50 active revenue generating clients in the fourth quarter.

We intend to leverage our strong platform for additional growth opportunities and remain highly focused on continuing to diversify our client portfolio in 2012. For example, we expect to expand our project monitoring solutions practice, which carries much higher margins. We are expecting revenues to grow in Q1.

Revenues for Kforce's Government Solutions increased 2.4% sequentially on a billing day basis, but decreased 0.2% year-over-year. The sequential growth was driven by a combination of new you project wins and incremental head count additions on existing projects. Believe we have made significant progress in repositioning that profitable unit for success.

Government contractors continue to see the negative impact of the challenging federal procurement environment and funding cuts. As a result, revenue visibility remains limited, but we believe with our diverse and quality sales pipeline we may take market share in this project based business. As we look forward to Q1, we anticipate revenues will be flat to slightly up. However, negative revenue trends in the business could result in a noncash impairment charge on this unit's intangible assets.

[Firm] revenues from direct placements and conversions constitute 3.6% of total revenues, decreased 12.4% sequentially and 6% year-over-year and were up 13.1% for 2011 over 2010. We continue to make measured investments in our field NRC search teams to support this revenue stream. Q1 historically has improved as the quarter progresses, and thus revenues are very difficult to predict. He expect [firm] revenues to be relatively stable in Q1.

In terms of core head count trends, we maintained a stable headcount during Q4. Sales headcount inclusive of NRC and strategic accounts decreased 1% sequentially but increased 10.8% year-over-year. We expect to continue to make selective investments in our sales associates head count as we achieve certain performance metrics. Revenues per employee is 2.7% higher than a year ago.

We performed well in 2011 and are poised for success as we embark on a three-year strategic plan. We believe our diversified service offerings, fortified by our tenured sales teams and our National Recruiting Center and strategic account executives, will result in continued revenue growth as we move further through this economic recovery. As we embark on our expedition to attack the summit during the next three years, 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's CFO and Executive Vice President, who will provide additional insight on operating trends and expectations. Joe?

Thank you, Bill.

I also applaud our team for their performance in the final year of the three year strategic plan. From a financial standpoint, 2011 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 record high revenues of $1.1 billion, $27.2 million of net income and earnings per share of $0.70. Cash flow and EBITDA also continued to be strong in 2011. We are well positioned to take advantage of available opportunities in 2012 and return the strong results to our shareholders.

The firm continued its strong performance in the fourth quarter. Total revenues for the quarter of $285.6 million increased 3.7% sequentially on a billing day basis and increased 10.5% year-over-year, driven by broad-based growth in our flexible staffing businesses. Quarterly revenues for flex of $275.2 million increased 4.2% sequentially on a billing day basis and increased 11.2% year-over-year. Search revenues of $10.4 million decreased by 12.4% sequentially and decreased 6% year-over-year.

Overall revenue per billing day were at record highs, and trends in Q4 showed improvements in October and November, followed by a decrease in December. Sequential monthly revenue trends for Tech Flex were flat from prior month in October, improved in November, and declined in December. Sequential revenues trends for F&A flex increased steadily each month through the quarter. HIM revenue increased in October, was flat in November, and decreased in December. Clinical research decreased in each of the three months in Q4. Search decreased in October, strengthened in November, but decreased again in December.

Flex revenue trends for beginning of the first quarter of 2012 are down from December, primarily as a result of year end assignment ends. For the first three weeks of January, Tech Flex is 14.3% year-over-year,Finance and Accounting flex up is 11.3% year-over-year, KCR up 21.9% year-over-year, and HIM up 13.9% year-over-year. Search revenues are up 9.4% year-over-year for the first four weeks of Q1 2012. We caution that early quarter trends don't necessarily accurately reflect potential full quarter results.

Net income of $7.1 million and earnings per share of $0.20 in Q4 2011 decreased sequentially 16.1% and 9.1% respectively compared to Q3 2011. Year-over-year net income and earnings per share increased 11.8% and 25% from $6.3 million and $0.16 in Q4 2010.

Our overall gross profit percentage of 31.2% decreased 50 basis points sequentially and decreased 70 basis points year-over-year. Our flex gross profit percentage of 28.6% in Q4 2011 decreased 30 basis points sequentially and decreased 20 basis points year-over-year.

The sequential decrease was driven primarily by paid time off impacts and escalating statutory costs. Year-over-year improvement in spread of 100 basis points was largely offset by the impact of the new higher tax credit that was recognized in Q4 2010. The higher tax credit added 90 basis points to flex margins in Q4, 2010. This program expired at the end of 2010 and thus did not impact margins in 2011.

Bill rate in Tech Flex increased 1.6% sequentially. The increase in flex gross profit percentage due to the expansion of spreads between bill and pay rate in Tech Flex was 40 basis points sequentially and 130 basis points year-over-year. Bill rates in F&A decreased 1.7% sequentially and were impacted by business mix. The sequential decrease in flex versus profit percentage due to the contraction of spreads between bill and pay rates and F&A flex was 20 basis points. Year-over-year there was a positive impact of 130 basis points due to the expansion of bill pay spreads.

Margins in this cycle have been significantly impacted by increasing statutory costs and have not improved as rapidly as in prior cycles. However, based upon our experience in 2011, it appears that bill pay spreads may now be expanding at a rate more typical to traditional recovery. We continue to be highly focused on margin expansion and expect to recapture a significant portion of the impact of increasing statutory costs through higher bill rates on both new and existing assignments.

We believe that the current supply demand environment suggests that pricing power will continue to improve over time, though it may not be at the same rate seen historically. As we look to Q1, flex margins in the first quarter will be negatively impacted by payroll taxes, which could reduce flex margins as much as 120 basis points, though we expect bill pay spreads to be stable to improving. Overall we expect to see continued modest margin expansion in 2012.

We've continued to diligently manage operating expenses in Q4 and throughout 2011. Operating expenses were27.2% of revenues in Q4, 2011, which increased 10 basis points from Q3 2011 but decreased 60 basis points from 27.8% in Q4 2010. Over time we expect to see additional operating leverage as revenues increase.

Our accounts receivable portfolio continues to it perform very well. Write-offs continue to be small, and the percentage of receivables aged over 60 days remain at low levels. The firm's cash flow continues to be strong. EBITDA was $17.9 million or $0.50 per share in Q4, as compared to $20.1 million or $0.52 per share in Q3. Year-over-year EBITDA increased 17.5% from $15.2 million in Q4, 2010.

Bank debt at quarter end of $49.5 million is down $9.9 million from $59.4 million at the end of Q3. Borrowing availability under our credit facility as of the end of Q4 is $35.9 million.

The firm repurchased approximately 172,000 shares of stock at an average price of $9.84 in Q4. For the year we repurchased 5.7 million shares at an average price of $10.38 per share. There is currently $84.2 million available for stock repurchases under the current Board of Directors' authorization. We will continue to be opportunistic in future repurchases as cash flow and market conditions warrant.

With respect to guidance the first quarter of 2012 has 64 billing days, compared to 61 billing days in the fourth quarter. We expect revenues in the $293 million to $300 million range. Earnings per share may be $0.14 to $0.16. Our effective tax rate in Q1 is expected to be approximately 39%, with approximately 35.7 million weighted average diluted shares outstanding. We expect the increase in payroll taxes in both cost of sales and SG&A to reduce EPS by approximately $0.07 relative to our fourth quarter.

This guidance does not consider the effect if any of charges related to the impairment of intangible assets; acceleration of equity incentives; costs related to the settlement of any pending legal matters; the impactof revenues of any disruption in the government funding of the firm's -- or the firm's response to regulatory, legal, or tax law changes.

We are pleased with our fourth quarter results, and we continue to be confident in our long-term success as we strive to capitalize on the changes in the external environment and impact on our business. Our mix of service offerings, particularly in Tech, FA, and HIM, position us well as we see continued secular shift toward flexible staffing. 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 derive EBIT, both through increased gross margin and through operating efficiencies as flexible compensation structures.

We launch our next three year strategic plan with a high quality revenue stream and balance sheet, a highly tenured associate population, and a very strong management team. We expect to capitalize on the capacity that exists in our associate base to grow revenues and improve earnings.

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

Thank you. (Operator Instructions). Our first question from Kevin McVeigh of Macquarie. Your line is open.

Great, thanks. Hey, Joe, thanks for your color. Very helpful. One question, I know there is $0.07 impact from payroll tax in Q1. Where has that been relative to history in terms of EPS impact over the last couple of years?

If I reflect on last year, last year we had about a $0.06 impact. So what we really built into our guidance is a comparable scenario to what we experienced last year, roughly 120 basis points of statutory. Now, last year we did experience 210 basis points of total payroll tax impact, but 90 basis points of that was related to the new you higher tax credit. So very similar. If you think of it, last year was about $0.05 impact for the flex population, about $0.01 impact for the core population, and this year it is about $0.06 and $0.01. Part of the dynamic there too, Kevin, is with our lower share count we also get some impact on that EPS.

Got it. Got it. And then, Joe, it sounds like the pricing is definitely starting to firm as we think about 2012. The supply/demand has been pretty tight in IT through the last couple of years. What is starting to change where you are really starting to see kind of some of the clients it sounds like they are willing to pay up a little bit for the candidate at this point?

I think a big part of it is, we have been after the pricing education in terms of what is happening with not just the statutory cost increases but as well as supply/demand shifts that taking place. AndI think the clients are also -- have had more experiences in losing candidates that they wanted or not getting the quality candidates that they desired, which is assisting us on some of the bill rate expansion. And our team has done a very effective job on managing the pay side of it. And I would attribute part of that to we offer a pretty row best robust benefits program and various other things to the consultant population, which provides us a little leverage on the pay front.

Got it. And then just switching gears, and this will be my last question. The ICD-10, I just want to make sure I understand. Where is that captured amongst the segments?Is it all in one or across a couple? And as a percentage of revenues today how, does that kind of impact the business?

Yes, today very small percentage of revenue. I think we will see probably most of that opportunity materialize in the next 18 months. So it is captured predominantly in our HIM unit today. We will see some of the tech follow-on business will be captured in our Tech service line as we handle -- get involved with any remediation type work.

Great. Thank you very much. Great job.

Thanks, Kevin.

Thank you organization. Our next question from Mark Marcon of Robert W. Baird. Your line is open.

Good afternoon, and terrific year.

Thank you, Mark.

Wondering if you could talk a little bit, first of all, just on the guidance with regards to the [SUDA] that impact, just to make 100% sure. The 120 basis points is sequentially, right?

Correct.

And what percentage of that do you think you will be able to get back through price increases, passing it along to the client, et cetera?

Hey, Mark, this is Bill. We have a -- last year as you know we did not pass along as much of that, and this year we are going to -- we have been working with our clients, and by mid-February we expect to have passed on -- to approximately 65% to 70% of our clients to have passed on this rate. So we are working that hard, and so it will have an effect on half this quarter and then we expect to get the rest of that in the second and third quarters of this year as turnover improves.

Okay. And so by the time we get to the back half, I mean just given the way SUDA works, we shouldn't see much of an impact. And at that point you should see a flow-through with regards to the pay bill spread that has been improving.

I would say yes, but as you may be aware, the states are getting clever, and they have assessments -- extra assessments and a variety of things that happen. But that is certainly our plan and hope.

Okay, great. Then can you talk a little bit about -- you ended up increasing head count by 10% over the course of the year, but it was down a little bit sequentially. How should we think about both head count additions, internal comp expectations and then also CapEx and where you would make investments over the course of this year? And what would -- in a normal economic environment, how much operating margin improvement should we hope for?

Well, that is several questions, Mark. Okay. I will take on the head count addition. Certainly as our metrics improve to be met, we will add in a very measured way to our head, count additions. As we have suggested, we have been more measured in adding to our search team and more aggressive in adding to our flex team.

But it is all about KPIs. As we indicated in our prepared remarks, [KPIs] are very strong, and so that would suggest to us if our historical trends work out to what we have seen against job orders, and if submittals turn into fills, then we would expect to see head count increasing as we meet those metrics.

Yes, Mark, from a CapEx standpoint, we anticipate 2012 to be very similar to 2011. 2011 CapEx was about $7.7 million. We were forecasting approximately $8 million of CapEx spend in 2012.

Great. And then I know you are not giving full year guidance or anything, but just as we look out towards the overall year, if we were to experience growth rates that were similar to what you ended up experiencing in the fourth quarter, when we think about the incremental GP, how much of that should end up dropping down to the operating line? You had a good performance this year, roughly 30% of your in incremental GP ended up falling down to the EBIT line.

Probably we would tail off from that to a certain extent, because we have certain other costs that are coming back into the business and reinvestment.

Okay. And then last question, and I'll jump back in the queue. Obviously there is lots of news flow out there on the pharma industry, and I know you can't name specific clients, but you have done a terrific job so far in the second half in terms of maintaining the Clinical Research revenue. I'm wondering is it realistic to assume that you can continue to successfully transition folks, o would it be smart to assume that there will probably be a little bit of a tail off as the year unfolds?

Well, I would say two or three things to you, Mark. This is Bill. One, we've almost -- in the last year to 18 months we have doubled the number of clients we have, and now we are up to 50 clients. In your largest account for example we continue to grow head count. We are not sure what to expect, and that will unfold as it unfolds. But our consultants have been with us many of them ten years or so. Redeploying them in this labor shortage is something that we can do rather quickly as they are in very high demand. And so at the moment we are not predicting any significant consequences.

Great. Thank you.

Thanks, Mark.

Thank you. Our next question comes from Tobey Sommer of SunTrust. Your line is open.

Thank you. I just wanted to ask you about the pricing in your KPIs for Tech Flex. Could you describe what you are monitoring and what is giving you confidence that momentum there is durable? Thanks.

Well, I'm not sure -- This is Bill. I'm not sure that it is the pricing that is durable as much as the KPIs and job orders and the activity that we see. Obviously -- well, not obviously. The large clients are still quite aggressive on pricing and are starting to see a loss -- a lack of retention of consultants and hard to find new consultants that have the appropriate capabilities that they are looking for. The spot market is moving faster than that in the pricing realm, and so we are happier there, and certainly as time goes along, we are in the skill shortage, and it is in tech -- mostly in tech, but it also certainly in HIM and KCR. So we look forward to pricing pressure as we go forward.

Yes, Toby, this is Joe. Also I would reference some of our Tech Flex rebuild. While Tech Flex fell a little bit further in the beginning of this year than what we experienced last year, which was really off of a historic best in terms of the amount of deterioration, we are seeing the rebuild take place faster. Likewise, when I look at the margin story, especially on the Tech Flex front in Q4 where we actually had margin improve in spite of more paid time off -- I mean I have been around Tex Flex business for going on 23 years now, and I honestly don't know if I can recall another time where we improved Tech Flex margins from Q3 to Q4 with that phenomenon.

Thanks very much for the color. Joe, do you have an expected tax rate in the first quarter in 2012?

39%.

39%. And could you give me an update on the share repurchase authorization, and were there any shares repurchased year-to-date?

Yes -- oh, year-to-date?No, I didn't mention anything in my opening comments. I just mentioned what we repurchased in Q4, which is a little over 172,000 shares, and we have a little over $84 million remaining on our Board of Directors' authorization.

And -- so the share count would be a little lower headed into the first quarter based on that fourth quarter activity?

I mean, when you average it -- I provided -- I mean, I provided the number in guidance that we are using, but (inaudible -- multiple speakers) --

I apologize, I didn't catch that.

The 35.7 million is what I would be using.

Okay. Thank you very much.

Thank you. Our next question comes from Giri Krishnan of Credit Suisse. Your line is opened.

Thank you. I had a couple of questions. First, regarding KGS, where it sounded like there may be an impairment coming. I wanted to go back to some comments you made I think the last couple of quarters where it sound like you were trying to use more employees to drive more commercial work. Could you update us on where -- or how much progress you made there, or what are the plans given what you know about visibility in this segment?

Yes, this is Joe. I address the front end of the question, and then Bill can address the second part of your question.

In terms of impairment we go through our exhaustive end of year impairment testing, so as of close of December 31, the business is not impaired. We do have a cushion in that business. So that is where we stand at this point in time. You are probably referencing maybe Bill's comments, as well as I referenced some comments there. If we were to see revenue deteriorations, it is possible we have $103 million of goodwill that we carry in that business of potential impairment on that front. But the revenue would have to be deteriorating, or probability would have to be deteriorating.

Okay.

So repeat the second part of your question so we make sure we answer it correctly.

I think you were contemplating using some of the employees in that segment, given the capacity you have available to drive more commercial work and have them staff more commercial projects. And I don't know if you were still doing that today.

Sure, we are doing that. There is some -- not some -- that group, they're permanent employee, and they are highly talented in the solutions business, and government is just another client, and it is applicable to the commercial side as well, and we are doing activities in commercial clients as we speak. So, yes,we continue to utilize those talented people to grow that practice.

Okay. And then just a broader question. Given the trends you have seen in the last couple of quarters, and it seems like you have better visibility, the bill pay spreads seem to be moving in the right direction. Could you revisit the long-term targets you provided some time last year, three to five year targets. What would be neat to see -- give us on scrap date on what you think about realistic three to five year revenue and earnings growth targets?

This is Dave. I think we learned our lesson last year when we tried to look a little bit further ahead, and perhaps the headlights were going on the road, and as we saw you things changed pretty significantly. So, we withdrew our longer term targets and have not re-established those, and at this time I do in the think it prudent to, particularly given the level of uncertainty in the external climate and the lack of visibility.

However, with that said, we can clearly see that there has been a consistent high level of activity across all of our business units, and in addition our front -- the front end system in measuring activity, AMP, does suggest that activity is not only stable, it is actually accelerating. And we are seeing indications from other clients that -- particularly in tech -- that demand is also increasing. So what we can see today through our front end systems, KPIs, and in discussions with clients, would suggest that the business is strong and continuing to get stronger.

However, with the external climate, given what is going on in Europe -- I don't even know if they settled the Greek crisis today; they keep saying the next day. And, of course, the geopolitical risk and so forth, oil prices, I don't think it prudent to go long in any guidance. I will just say from what we can see today we are very optimistic and very confident.

That's fair. Thanks for the color.

Thanks,.

Our next question foreign comes from Paul Ginocchio of Deutsche Bank. Your line is open.

Hi, thank you. Just a question about IT scarcity. Is there any metrics that you look at, or is there anything you can kind of help us understand better? Maybe how much scarcer talent is getting versus maybe six or nine months ago when it comes to unfilled orders or whatever you look at that helps us understand that metric better? Thanks.

Yes, Paul, this is Dave. Bill will probably comment as well. That is one of the benefits of the AMP system is we can look at activity levels, we can look at submittals, we can look at fill rate percentages, and we grade them based on the quality of the assignment. That was one of the things we had to improve off of last year as we were victims of our own success and really creating an avalanche of demand that was impossible for our NRC team to be able to support.

So with that being said, the key metrics that we look at really are the number of assignments, submittals and fill rates, and that is particularly for what key call the high quality assignments or the A orders. And those are the things that would tell us that we are getting stronger. Part of that, as I think Joe mentioned earlier, is an education process for the client, because we want the clients to understand -- which they are also experiencing -- that there is a tremendous amount of demand for this talent and they don't last long. So as a part of our sales process we are educating them on a speed to a decision, and in many cases we have actually significantly compressed that decision-making cycle, which has improved the fill rates. Bill, do you want to add any comments to that?

I would just say that demand exceeds supply.

Right. I certainly notice the Q on Q decrease in SG&A and the pickup in the gross margin. So it does look like you are able to get an offset from the higher search costs. Is that a good way to think about it, or how do you think about it?

Yes -- I mean, I think the way that we look at the business is we have a responsibility to continue to optimize to become more efficient internally, and then if we were to have traditional margin expansion take place, that should be additive to us. So weare doing everything win our power to optimize our delivery capabilities as well as managing every SG&A line item in the P&L.

Just the final one. Again it sounds like [search] costs are not going up as fast as maybe the bill pay rate spread?

The search revenues?

No, I'm sorry the cost of finding Tech Flex talent.

That is embedded in our SG&A, Paul. And that is one of the measures that we look at in terms of our productivity and efficiency, so no, it is not going up.

Great. Congratulations on the quarter, guys.

Okay. Thanks, Paul.

Thank you. Our next question comes from John Healy of Northcoast Research. Your line is open.

Thank you. I wanted to ask a question about the mix of your customer base today, and I was hoping you could give some color on the percentage of the business that you define as kind of the small and medium sized customer. Because it sounded like you were starting to see life there, and I was just trying to put that in context versus historical standards, and maybe how we think about the gross margin on that business versus a relatively larger business.

As you look at our business, 27% of F&A and Tech is in large clients, and 23% of total revenues are in large client, and that's in -- when you look at those segments, you also see the different segments that we have suggested to you, so there is large clients in Clinical Research. There is large clients in Government as well. But I would say if you want an overall big picture, a third, a third, a third. It as well balanced portfolio. 3,000 clients. No more -- no client 5% of revenues.

And this is Joe. And then relative to the margin profiles, the way that I would kind of talk about that in a simplistic fashion is in Tech Flex we see some margin difference between our larger customers, whether they be strategic account or firm sponsored, in the spot market. In the spot market typically we are able to obtain margins somewhere 15% to 20% greater. Likewise in FA. In FA the gap is even larger between the strategic customers and the spot market, mainly because what we see in our larger customers -- strategic profile of customers for FA is more that high volume, lower margin business, so it is a little more exaggerated in that business. Fill rate as well.

Very helpful. When I think about how you utilize the NRC, has there been much change in strategy over -- in 2011, or maybe how we should think about it in terms of 2012, in terms of redeploying resources. I'm trying to understand, isthere anything funny going on with the growth rates between F&A and Tech result of you maybe moving members of the NRC into the Tech vertical and away from the F&A vertical, and maybe you're kind of chasing the longer term opportunity in Tech. And I'm trying to understand it in terms of howthe NRC being utilized? Has is it changed meaningfully when you look at it in 2011 versus 2010, and does it change anyway going forward in 2012?

Well, John, this is Dave. The evolution of the NRCcontinues. As we learn and learn how to apply it at scale in different points in the cycle, that by definition is going to cause us to change our strategy. For example, 2011 -- in 2008 and 2009 and early 2010 we were playing offense in a relatively difficult environment and were enormously successful in retaining clients and actually growing it.

In 2010 and going into early you 2011, as we saw you a significant shift in demand and a spike in demand, we were victims of our own success. Our field sales and strategic accounts folks were selling tremendous amounts of business, which frankly we couldn't handle. Love to be able to fill all of it; couldn't do it. So as we look at that situation, we went back in and remodeled the way that we prioritize and the way that we allocate resources. And that led to some significant improvements in our processes and systems, which allowed us to narrow focus and improve fill rates, and we are still, I would say, probably in the early part of experiencing the benefits of that and the continued evolution.

And so when you think about the NRC, the best way to say it is that it is still early in the evolution as we apply it. I would also point out, as Joe said and Bill said, that 55% of our people are now just crossing one year. So they are now hitting a maturation point where they have the experience and understanding to perform at a higher level, because tenure equals improved performance.

So with that being said, the key leverage point for the NRC is our ability to be able to allocate resources to the surges in demand. Unlike what most can do in a field based delivery model, where it is difficult to match supply and demand in any one particular market, we with do that here. That for our NRC also applies across functional areas, so we can move people from Finance to Tech and Tech to Finance. With that being said there are some specifically assigned and stay with those accounts because of the intimate knowledge required of their hiring processes and the technology, and then there are others that are able to move in a SWAT team kind of basis as there were spikes in demand.

So I wouldn't get hung up on thinking about the NRC as being functionally specific or inflexible. In fact, it is just the opposite. The process of assignment and focus is being improved and will continue to be, but the real advantage, the strategic advantage for the NRC is its flexibility.

Okay. Thank you, guys.

Thank you. Our next question comes from Morris Ajzenman of Griffin Securities. Your line is open.

Hi, guys. Two follow-up questions. One, earlier in the presentation you spoke about expecting to pass through about two-thirds of the state unemployment taxes to our customers as 2012 unfolds?Well, let's talk about the other one third. What is it that takes more time, and how much patience do you have with the other one third of the customer base of not being able to pass through those high state unemployment taxes as quickly as you would like?

I think that was one of timing. So I think you are referencing a comment that Bill had shared earlier in terms of some of the pricing initiatives that we have going on here in Q1. So that is related to timing. So through the course of the year we anticipate we will be passing along 100% through the course of the year, but it's timing. As the assignments end, those consultants will be re-priced in the market. So I think that is where that got lost in the translation.

Thank you. And one other tidbit, because most of the other questions have been pretty well picked over. When you look at theyear-to-year, just a data point, revenues up a healthy 12.1% percent. Trades receivable were up 17.8% year-over-year. Any comment on that?

Well, part of it is the make up of our client portfolio. Much higher mixture of larger strategic accounts, and as those come on board, they typically have a little bit longer cycle for receivables. But it is important to note that our write-offs continue to remain at historic low levels. I mean, write-offs for 2011 in total less than $500,000. SoI believe our team has done a tremendous job in terms of the credit-worthiness of the profile. So that is just one more of a timing of corrections, because of certain contractual obligations, but in terms of the quality of the receivables base, I would say it is at its highest level ever.

Thank you.

Thanks, Morris. [How's your] game?

We're getting the ball in the air.

The Knicks might need you tonight. You better suit up.

I'm ready.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back to David Dunkel for any further remarks.

Okay, that's great. Once again we want to thank you for your interest and support for Kforce. And once again, thanks to our team for performing very well in these some what confusing and challenging market conditions and for really getting it done out on the field every day. Thanks to each and every member of our field and corporate teams, to our consultants and clients for allowing us the privilege of serving you, and we look forward to speaking with you again in our Q1 call. Have a good evening.

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