Kforce Inc (KFRC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Kforce's second quarter 2013 earnings conference call. (Operator Instructions)

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 Kforce second quarter earnings 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 upon current assumptions and expectations and 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 the call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you, Michael.

You can find additional information about Kforce in our 10Q, 10K and 8K filings with the SEC. We also provide substantial disclosure in our release to assist in better understanding our performance and to improve the quality of this call.

We are pleased with our revenue and earnings performance in the second quarter and in particular our ability to deliver sequential revenue growth in all of our businesses. Total revenues of $283.7 million exceeded our expectations and earnings per share of $0.21 was at the top of our guidance.

The human capital investments we made at the end of 2012 and early 2013 have begun to take hold as is evidenced by the accelerated year-over-year growth in the first quarter. As these newer associates become more tenured we expect revenue to continue ramping accordingly. Joe will provide additional perspective on this later in the call.

Throughout the quarter our many client meetings continued to affirm our belief about the secular shifts taking place in the employment marketplace. We are benefitting from our clients' increasing desire for a higher degree of variability in the composition of their workforce as they look to mitigate economic uncertainty and the increasing complexity and costs of employment. In addition to secular shifts we are also finding that our technology clients are showing an increased desire for flexible staffing to support their project efforts, as opposed to other alternatives that do not allow them to control cost, manage results, or mitigate the uncertainties around immigration reform.

We remain optimistic about our prospects and are committed to our belief that temporary staffing penetration, which has increased to a cyclical high of 1.97% in June of 2013, will continue to grow as companies redefine how they acquire and deploy human capital and will likely surpass its prior peak in the not so different future.

The environment for professional staffing, particularly in technology, continues to be strong. Highly skilled candidates remain in short supply and typically have multiple opportunities from which to choose. A recent Georgetown University study projects a 26% increase in stem jobs by 2020 as science, technology, engineering and math, with graduates coming out of our educational system nowhere near meeting that demand. Unemployment for college graduates is at 3.9%, which is about half of the headline VLS number. In this regard we are expending significant effort to educate our clients on this war for talent with the intent of accelerating hiring decisions on resources that have been identified.

As revenues increase we are intensifying our efforts to improve operating margins. We have also renewed our focus of becoming the employer of choice for our billable consultants, the great people that serve our clients every day. We remain confident in our strategic direction and believe there are significant opportunities with Kforce having only a 3% market share in a growing domestic professional staffing market. We are confident that we have the right operating model and talent to capitalize on this positive staffing environment and drive sustained revenue growth, while significantly improving operating leverage.

I will now turn the call over to Joe Liberatore, President, who will provide operating insights. Dave Kelly, Chief Financial Officer, will then provide additional insights on operating trends and expectations. Joe?

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

During the second quarter of this new era for Kforce we remained externally focused on better meeting the needs of our customers. I personally had the opportunity to meet with Kforce clients and consultants with my team and have visited 24 markets since Q4. Collectively these markets contributed over two-thirds of our revenue. These interactions have reinforced our belief in the opportunity to significantly grow revenue within our existing clients, as well as selectively add new clients.

We remain focused on streamlining and leveraging our processes and tools to simplify how we do business with our clients and consultants, and we are leveraging real-time data to hold our associates accountable to higher levels of performance and superior customer service. These were significant drivers to our success in Q2.

Tech Flex, our largest business unit, represents 62% of total Firm revenues. Q2 revenues increased 5.9% sequentially on a billing day basis and 5.5% year-over-year. Overall our key performance indicators for technology remain at high levels for job orders, external submittals, and send outs, with fill ratios at an all-time high. We continue to improve prioritizing the highest quality job orders, though we believe additional opportunity remains for improvement.

Candidate supply remains tight, particularly for skill sets in high demand, such as app dev, job and dot net, business analysts and project managers. Inter-quarter trends for Tech Flex revenues showed moderate increases in both April and May, followed by a large increase in June.

Our national footprint and diversified service offerings allow us to service clients in industries with the greatest demand for technology professionals. The industries that performed best in Q2 were telecom, computer hardware, and retail. We also continue to see growth in technology services within healthcare and demand is expected to remain strong for the foreseeable future as hospitals and healthcare organizations implement systems and transition their platforms to more of a shared services model.

Tech Flex revenue trends have continued to strengthen in July, and we expect Q3 2013 revenues to again increase. Revenues for our finance and accounting Flex business represent 19% of total revenues. Q2 revenues increased 4.4% sequentially on a billing day basis and declined 1.1% year-over-year. Bill ratios improved throughout the quarter as some of the project opportunities that had been delayed earlier in the year came online late in the quarter. Revenues showed moderate increases in April and May, followed by a large increase in June.

We expect Q3 FA Flex revenues to increase through the continued impact of project revenues. Revenue increases for the quarter for our Tech and FA business benefitted from strong growth in some of our larger clients, which operate at lower margins and impacted our ability to improve bill, pay spreads. We expect the mix of growth in Q3 to be more balanced across all client sizes. In the aggregate the Firm provides consultants to approximately 3,000 clients at any time with no one client constituting more than 3% of total revenues.

HI and Flex revenues grew 0.7% sequentially on a billing day basis and decreased 4.3% year-over-year. The demand in this business has been impacted by cost containment initiatives as healthcare organizations prioritize available spend for technology projects, such as ICD-10 and EMR implementations. However, we did see some improvement from Q1 as census improved and backlog of coding needs at some clients resulted in incremental gains. We believe demand remains intact for this business. We expect this business to continue to stabilize in Q3 and be slightly up.

Revenues for our Kforce Government Solutions increased 2% sequentially despite the impacts of sequestration and increased 8.1% year-over-year. Our Government unit continues to have success in areas less impacted by government cutbacks. We believe less than 10% of revenues are exposed to possible impacts from sequestration and we again were able to outrun these impacts with new project wins and incremental additions to existing projects. There remains continued uncertainty around funding levels of various Federal government programs and the environment for government services remains difficult. We anticipate Q3 revenues to increase largely due to expected government product sales, which will be higher in Q3 due to typical seasonal buying patterns.

Perm revenues from our direct placement and conversions, which constitute 4.7% of total revenues, increased 15.2% sequentially and 0.8% year-over-year. The pace of conversions has also remained elevated for the past five quarters. Perm revenues are difficult to predict, but we expect them to be flat to slightly down in Q3 from Q2, which is typically the case due to slowdowns in activities over the summer months.

As we continued to ramp our new associates during Q2 we held our investment and revenue responsible headcount essentially flat from Q1 2013. Year-over-year headcount increased 17.7%. Our newest associates that were largely hired in late 2012 and early 2013 continued to ramp during Q2 at rates that are consistent with our previous experience. It is our belief that the momentum gained so far into Q2 will continue into the back part of the year and these associates continue to become more productive. Our Q2 performance also benefitted from increased contributions from our one- and two-year and two- to four-year population, with both increasing approximately 20% year-over-year.

Continuing improvement in contributions from these tenured groups and ramping of newly hired associates should positively impact revenue trends as we move into the back half of the year. We plan to continue to make investments in our sales associate headcount in geographies and industries that we believe represent the greatest opportunity.

I am pleased with our performance in the second quarter, and I'm confident we have built a strong foundation for future success. We will leverage our platform of tenured field teams, the National Recruiting Center, and our strategic accounts model to adapt to the changing market dynamics and client and industry trends. We remain focused on driving profitable revenue growth by meeting our clients' and consultants' needs and gaining market share. We will do this by maintaining our focus, executing with simplicity, and holding ourselves accountable for delivering great results.

I will now turn the call over to Dave Kelly, Kforce's Chief Financial Officer, who will provide additional insights on operating trends. Dave?

Thank you, Joe.

Total revenues for the quarter were $283.7 million, which represented an increase of 6.8% sequentially and an increase of 3.5% year-over-year. Quarterly revenues for Flex were $270.4 million, which represented an increase of 6.4% sequentially and a 3.6% year-over-year increase. Search revenues of $13.3 million increased by 15.2% sequentially and 0.8% year-over-year.

Early Q3 revenue trends have improved from June levels. For the first three weeks of July Tech Flex is up 9.9% year-over-year, Finance and Accounting Flex is up 2.3% year-over-year, and HIM is up 7.3% year-over-year. Search revenues are down 1.9% year-over-year for the first four weeks of Q3. It is difficult to assess potential full quarter results with this limited data, though recent activity is promising.

Second quarter net income and earnings per share was $6.9 million and $0.21, respectively. Net income and EPS increased from $3.1 million or $0.09 per share in Q1 and declined from $8.9 million and $0.24 per share in Q2 2012 due primarily to investments and revenue responsible headcount.

Our overall gross profit percentage of 32.7% increased 130 basis points sequentially and was flat year-over-year. Our Flex gross profit percentage of 29.4% in Q2 increased 110 basis points sequentially and increased 10 basis points year-over-year. The sequential impact of payroll taxes on margins in Q2 was 130 basis points, and overall spreads were slightly up. Those gains were partially offset by a onetime client related adjustment negatively impacting Tech Flex margins by 30 basis points.

Flex spreads in our Tech and F&A businesses have flattened over the past three quarters. Tech Flex spreads were flat sequentially and have improved 10 basis points year-over-year. FA spreads were down 20 basis points sequentially and are down 10 basis points year-over-year.

Our government spreads improved 300 basis points sequentially and 310 basis points year-over-year driven by increased headcount needs on some of its most profitable projects. HIM spreads were down 60 basis points sequentially and have declined 490 basis points year-over-year due primarily to increased compensation costs for our consultants, which we expect to continue for the foreseeable future.

Q2 SG&A levels of 27.7% decreased 80 basis points from Q1, but are 160 basis points higher than Q2 2012 due to our investments made to accelerate revenue growth. We have a mature infrastructure and continue to maintain a disciplined approach to expense management, which we expect to contribute to improving operating margins as revenue growth accelerates.

As we look at our balance sheet and cash flows our accounts receivable portfolio continues to perform well. Write-offs and the percentage of receivables aged over 60 days remain at very low levels.

Capital expenditures for Q2 were $3 million.

EBITDA for Q2 of $14.8 million, increased $6.9 million sequentially, but decreased $3.6 million year-over-year. EBITDA growth should continue to improve proportionately to net income growth.

The Firm had $50.1 million in bank debt at quarter end compared to $39.5 million in debt at the end of Q1 2013 and $11 million in debt at the end of Q2 2012. This increase was primarily the result of the repurchase of approximately 1 million shares of stock for $14.8 million during Q2. Over the past 18 months we have repurchased 4.8 million shares for $65.1 million. Currently $69.1 million is available under Board authorization for future stock repurchases. As cash flows improve we will continue to evaluate the opportunity to return earnings to our shareholders through share repurchases and dividends.

With respect to guidance, the third quarter of 2013 has 64 billing days compared to 64 billing days in the second quarter of 2013. We expect Q3 revenue may be in the $293 million to $297 million range. Earnings per share may be $0.26 to $0.28 in Q3. Our effective tax rate in Q3 is expected to be 40.6%. We anticipate weighted average diluted shares outstanding to be approximately 33.3 million for Q3. This guidance does not consider the affect, if any, of charges related to the impairment of intangible assets, costs related to the settlement of any pending legal matters, the impact on revenues of any disruption in government funding or the Firm's response to regulatory, legal, or tax law changes.

The plan we established late last year to accelerate revenue growth is taking hold. Revenue and earnings expectations for the third quarter represents historical highs for our Firm and we believe that significant opportunity exists to further accelerate growth and improve operating margins well beyond these levels. We remain confident in our strategy and are pleased with our progress.

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

Thank you, sir. (Operator Instructions)

Our first question comes from Mark Marcon from R.W. Baird.

Good afternoon. Really nice to see the progress on the IT Flex side. Wondering if you can talk a little bit about the big jump that you ended up seeing in June and that continued into July, to what extent was that due to what you discussed in terms of some of the bigger clients signing up as opposed to being a little bit more broad based or your expectation is it'll be more broad based going forward?

Yes, Mark, I'd say it was definitely broad based, especially within Tech. I think from an FA standpoint we saw some of the pent-up project demand that we were talking about in our last call really started to open up on the back end of the quarter, but in general I'd say broad based.

Great. And then can you talk a little bit, also, on the government side? The gross margins were terrific, it sounds like it was due to a pickup with regards to some of the more valuable services. Can you be a little bit more specific? And how sustainable is that?

Sure, Mark, this is Dave Kelly. Yes, our government folks did a nice job in the quarter. One of the things that they've been very successful at is actually incremental adds on existing projects, and specifically speaking some of the more profitable projects that we've had for quite some time, some of those clients really, not necessarily impacted by sequestration have had significant add-ons, and those margins on those projects have done a good job, we've done a good job improving margins there. And we take the opportunity, you know, replenishing resources on those projects.

Great. And then can you talk a little bit about the SG&A? It sounds like we might have just a little bit of a modest uptick with regards to SG&A in the third quarter, but it sounds like you're starting to really leverage some of those hires that you made. Can you talk a little bit about the progression going forward and how we should think about that and where you are from a capacity perspective?

Sure, sure, Mark. This is Dave. Actually, if you think about the third quarter and think about our guidance, one of the things that we're very pleased with is the expectation of improved operating margins, partially as a result of the fact that SG&A levels are expected to go down for a couple of reasons.

One, as Joe mentioned, the revenue responsible folks are beginning to ramp, and as we've talked about in the past as those folks ramp we get operating margins from them as a result of their compensation and revenue that they generate. And then as revenues grow generally speaking we talk a lot about our operating platform, we get leverage from that, as well. So actually operating margin improvement is expected in Q3, primarily as a result of that SG&A reduction.

I fully expect that, but do you mean that on an absolute basis or on a percentage basis? I'm assuming you mean on a percentage basis?

Yes, I mean I think, again, if you take a look at our guidance I can tell you that at the midpoint of guidance you're looking at operating margins in the low 5's, so we were slightly over 4 this quarter, so it's percent, Mark.

Yes, I just wanted to make sure. That's exactly what I'm assuming you were saying.

Our revenue stream.

Got it, we're all on the same page.

Okay.

Thank you. Our next question comes from Kevin McVeigh from Macquarie.

Great, thanks, and nice job. Hey, so if I have my math right it looks like there's going to be an incremental kind of 30% margin Q2 into Q3, is that better execution on the sell side as opposed to sea shift in demand? And it sounds like the demand has been there, but even in some of the other verticals, obviously on the IT side, some of the other verticals had stepped up a little bit even more, is that just a function of clarity on taxation or just folks feeling better about the cycle? Just any commentary on that would be helpful?

Yes, this is Joe. I would say a lot of it is really we've seen vast improvement in our fill rate, so for example in Tech Flex we had about a 7% sequential improvement in our fill rate, so it's really a combination of I would say better execution from that standpoint. We've been after more refinement in the qualification of jobs that come in for the better part of two years now, and that's really started to take hold, and I think we're seeing some of the benefit there. So that's one piece of it, and it's also volume standpoint. So, for example, when I look at Tech Flex, our Tech Flex population is up 27.3% on a year-over-year basis. So it's really from both of those aspects.

And, Joe, is that -- as people get more confident they're more willing to switch assignments proactively as opposed to staying in some for a longer tenure or is that just execution? I mean and I'm just trying to get in the mind of some of the associates in terms of more of a willingness to move job to job as the economy firms up?

Yes, so you're really talking more the consultant population? Correct?

Yes.

Yes, I'd say that the consultants for the most part I mean they complete the assignment, so we haven't seen really any drastic change in assignment length, it's stayed pretty constant. I would just say the ability to redeploy those consultants obviously has improved as the overall supply, demand has taken hold. So you're also seeing less gap in terms of any downtime with those individuals. I mean many of these consultants, you know, they interview and there's an offer on the table immediately post-interview. So we've also seen really a compression of the hiring process finally starting to take place with a lot of our clients, we're seeing that both on the Flex side of the business, as well on the permanent placement side of the business.

Got it, and then one more and I'll jump off into queue. Hey, David, you kind of alluded to immigration, you know, as you think about that impacting the business versus Obama Care, the delay in that, I mean I'd imagine immigration is probably a lot more impactful, just any thoughts around that would be helpful?

Yes, it's hard to quantify, I mean they can't even agree on what it's going to look like and what the law is going to say, but what it's done is created an element of uncertainty. So you have several factors really driving that. One is the wage arbitrage has been compressed, so the opportunity to offshore and see significant economic benefit has been reduced. The opportunity to bring people onshore at reduced pay rates has also been reduced. So when you take those two things together I think that those two things have created enough uncertainty that clients, especially for projects that are going to take more than six months to a year are probably going to lean more towards onshore resources. So I think that has also benefitted us and given us some wind in our sails, again, as well.

Super. Thank you.

And, Kevin, just to follow-up on your question about Obama Care, and I think we've talked about this before, so given that we're predominantly Tech Flex the impact for us of Obama Care, even as it was expected to go in place was not expected to be significant for us in the near term, so the delay really doesn't impact the expectations and demand for our business as we move forward in the near term, so just to give you a little bit of color on that.

That's helpful. Thank you.

Thank you.

Thank you. And our next question comes from Tobey Sommer from Sun Trust.

I was wondering if you could give us a little bit of color about the different areas that you've got productivity to drive the revenue growth out of new hires, and maybe characterize the split between resources you added to the NRC versus field personnel? Thanks.

Well, Tobey, this is Joe. So where we are in Q2 is about 73% of the hiring, the ramp up that we did was within our Tech Flex. About 27% of that was within FA. So just to kind of give you a sense because I had mentioned the one number earlier. So we grew our Tech Flex headcount 27.3% year-over-year. The combination NRC and strategic accounts we grew at about 17.7%. So we are adding more into our field operations than we are into the NRC or strategic accounts.

We're already really seeing the productivity gains, and I've mentioned this before just to kind of break it down real quick, when we look at our four-year plus population they're about 50% more productive than our two to four-year population. They're about 100% more productive than our one to two-year population. Where we see our biggest productivity gain is when people move from less than one year into that one to two-year population, we see about a 200% improvement.

And so when you look at the makeup of our Flex population right now only about 32.8% of our total Flex population has greater than two years of experience. We have 47.3% of our population actually has less than one year of experience, so we're very comfortable with where we are from a capacity standpoint.

Perfect, thank you. And then, Dave, you just discussed offshoring and how kind of doing this work here domestically might make a little bit more sense these days. How do you think staff augmentation in IT staffing generally is comparing in kind of competitive versus in actual outsourced consulting relationships, hiring an Accenture or an IBM to do the project, any share shift that you see going on there?

Actually, we're seeing more managed service opportunities for us. We're actually participating in a lot of them, and that's by virtue of the relationship and the clients are asking us to do that. Obviously, there's a benefit to them because as you understand and they understand the premium for an Accenture and some of the larger managed services firms is quite significant over staffing. So given the fact that the resources are often the same resources, clients have figured out that in working with us and creating a hybrid model we can actually solve some of their problems and so that they don't have to incur the full cost of onshoring a lot of these managed services projects.

So in a managed services opportunity are you taking on sort of light deliverables and that kind of thing?

Yes, it really depends on the client, it's time and materials for the most part, very, very few fixed price, certainly within the commercial space, the government is different, but it's predominantly working with the client. They may provide project, senior project management resources and we'll staff the entire project, and then we'll have delivery responsibility for that project, and it really comes down to, it's very client specific and project specific.

One thing that is happening for sure is the projects are more clearly defined with clearer expectations, timeframe and outcome, which really lends itself more to staffing, as well. The big ERP projects that typically would have been an outsourced or managed services contract, those have been largely done, so these are more defined projects and typically related to things like Big Data, business intelligence, Java, dot net, and applications like that.

Thank you. Just a question, a couple of numbers questions -- what should be a good expectation for tax rate for the balance of the year, and did you -- have you repurchased any shares quarter to date here in 3Q? Thanks.

So the effective tax rate that we're expecting for the year is 40.6%, just as we were expecting in Q3, Tobey. And then as it relates to -- your next question was -- your last question, I'm sorry, was have we purchased shares in the third quarter -- no, we have not.

Okay, thank you very much.

Okay, thanks, Tobey.

Thank you. Our next question comes from Paul Ginocchio from Deutsche Bank.

Hi, actually, this is Ato Garrett on for Paul Ginocchio. I had a couple quick questions regarding the SG&A, both looking at 2Q and your expectations for 3Q. Looking at 2Q's SG&A expense it looked like it came in a little bit higher than we were forecasted, so I was wondering if maybe if you guys pulled forward any expenses there or if the human capital investments you made were done at the pace you anticipated? And, also, looking at your hiring plans for 3Q is that going to represent a similar pace of hiring or is that going to be an acceleration or deceleration?

Yes, well, actually our hiring sequentially was really flat. I had mentioned that in my comment, so I would say that that played a small part just because we have such a large percentage of the population that are less than one year and actually such a large percentage of the population that are in that zero to three month, so there is some carry there.

As we look out to Q3 we would anticipate some net hiring, nothing near what we were looking at in Q4 or Q1. We're just going to be selectively hiring in where we have markets that are hitting peak productivity or when we have certain client engagements where we're really starting to hit peak productivity or within certain industries. So that's really how I've categorized that aspect. Dave, I don't know if you want to add a little bit more color on the SG&A?

Yes, so I think your assumption was right. As we think about SG&A in Q2 a driver of SG&A is -- continues to be that revenue responsible population and the timing of when we hire in the prior quarter and the carry of those. And as we look into Q3 one of the expectations, as I mentioned earlier, that we have and the reason why we believe we're going to generate operating leverages we expect that they will ramp and, therefore, will generate leverage there. So the big driver in a lot of these things is these revenue responsible costs and the flip as to when they continue to become more productive and, therefore, drive revenue growth and more gross profit relative to what we're paying them from a compensation perspective.

Yes, and also David mentioned it in his opening comments, you know, we did have the onetime true up with a specific client that impacted Tech Flex margins in Q1, so that will show itself in an elevated SG&A, as well.

Okay, great. And then, also, looking at the IT -- sorry, looking at the IT market overall it seems that talent scarcity continues to be a challenge that many staffers are facing there. I was wondering if that's had any kind of a restraint on growth as of yet or if you've been able to recruit consultants?

I would say there's no question it's a restraint on growth, not only from the standpoint of being able to recruit to fill the assignments, but also turnover in existing assignments. So I would encourage you to have your children become technology or computer science majors.

To put it in perspective, I mean we're generating about 20% more candidates than we were two years ago just to keep up with supply, demand and how quickly people are falling off. That's why we've placed a lot of emphasis really over the better part of the last month on refining our pipelines and really going after the candidate who is not active in the market and building those pipelines so that we have these virtual benches that we can access more effectively.

Great. Thank you.

Thank you. Our next question comes from Morris Ajzenman from Griffin.

Hi, guys. A question, I'm going to hop on the SG&A again -- in this past quarter, and again you've clearly highlighted the past couple of quarters the beef up, the step-up in SG&A investment, but in this quarter curiously your top line rose 3.5% year-over-year and SG&A up 9.9% and clearly you have telegraphed, you spoke about that investment, but I just playing games here, if I was -- if the revenues gain equated to the SG&A gain, if the SG&A was only a 3.5% year-over-year you could earn close to $0.30 this quarter. Now clearly that didn't happen, but going forward a handful of quarters down the road or thereabouts I presume you expect leverage, where revenues would actually rise less than or equal to SG&A. So, you know, that leverage potential is there as your sales staff ramp up, you get more mature in age, and the investment is behind us, there's no reason to believe that revenues shouldn't grow faster than SG&A.

So a longwinded question here, but SG&A as a percent of revenues was 26.5% a year or so ago, this quarter 27.7%, how many quarters out do you think before we can see SG&A as a percent of sales back down to the 26%, 26.5% level and, therefore, a much more leverage to earnings? Is that a couple quarters out, is that a year out? How does that play out?

Yes, Morris, this is Dave Kelly. As we think about looking out next quarter and future quarters, one, certainly we expect SG&A to trend down. As we also look forward we talked about gross margins flattening. Our perspective on earnings growth is operating leverage in SG&A, we're not expecting significant gross margin growth. So when you think about percentages as we move into the third quarter it's going to be getting back down into those ranges, assuming that our guidance is met.

You answered your own question, Morris, I mean you know the business well. As the revenue grows and these revenue responsible heads start to contribute we'll see leverage in the operating line because we're not carrying them and they're actually becoming productive. So how quickly that happens, obviously, that's not something we can predict with any element of certainty, but the trend line and the direction is SG&A will continue to decline as a percent of revenue.

And early -- I wasn't sure if you said it absolute, you said it should decline in the third quarter, does that mean 78.5 peaked here in second quarter or it continues to rise modestly, but declines as a percent of sales?

On a percentage basis?

No, on an absolute basis. First, let's talk on an absolute basis, as the peak here, will it continue to rise the next few quarters?

Okay, so SG&A dollars, obviously are correlated predominantly because of the fact that the preponderance is compensation costs. As revenues grow and we generate commissions and bonus payments to our associates and our management teams SG&A dollars are going to increase, however, the expectation is proportionately they will not grow as quickly, as David mentioned, as we generate operating leverage from the hires that we've made and as revenues grow SG&A dollars are going to grow less quickly and, therefore, the percentage will go down.

Yes, Morris, this is Joe. I would look at our population in two big blocks. We have revenue responsible and we have nonrevenue responsible. The nonrevenue responsible, we're not going to be adding any expense there. We believe we have the platform, so there's not going to be expense added. So we're going to get leverage on the nonrevenue as we continue to add revenue on top.

The revenue responsible, as Dave mentioned, these people are commission based so as they become more productive their compensation goes up but we gain leverage on them because it's one less computer, it's less real estate, we need less management and so on and so forth. So while there is some cost there it will -- that cost will not move at the same rate as the SG&A percentage will come down.

Let me ask it a little differently then, based on your guidance, top line rises $10 million to $12 million sequentially second to the third quarter. Based on that will SG&A be flat, up or down?

Yes, I can tell you on a percentage basis it should be down. If you do the math, Morris, and we think about margins, gross margins not moving very significantly either way, SG&A dollars should be relatively flat.

Thank you.

Thank you. (Operator Instructions)

Our next question comes from John Healy from Northcoast Research.

I wanted to ask for a little bit more color on two things. On the Tech business, a nice pickup you saw there. Are you seeing or hearing from your customers any commentary on the length of assignment that they're expecting those candidates to be out on? Does the business seem stickier? Any qualitative comments you can provide there?

And then with the hiring that you've done, is there any thought in terms of maybe not deploying those resources into existing relationships and maybe putting a segment of those recruiters or salespeople to focus on maybe a smaller business type customers and maybe try to grow that segment of your business and overall expand gross margins?

Yes, so from a length of assignment standpoint it's client specific. The number of clients that we engage with, they have term limits, so you can only keep somebody there for whether it's 12 months, 18 months or a year, so that's pretty much fixed, and you see that in a lot of the larger organizations at this point in time. We're seeing length of assignment has remained very constant. So I'd say the business is healthy, for high demand skill sets, you know, there's 10 plus jobs for certain skill sets, so the demand is out there, so length of assignment not concerning, whatsoever.

In terms of the new hires that we brought on and deployment it's actually quite the contrary. We see when we align these new hires on accounts where we have a degree of relationships so that we can further penetrate those accounts, our people ramp up faster versus if we throw them a phonebook and send them chasing after a customer where there's no relationship.

This business at this point in time at this point in the cycle it is about relationship. The deeper your relationship is the higher quality business that you're getting, the higher volumes of business they're getting, so we're actually doing quite the opposite. We're aligning our new hires more than we probably ever had with existing clients to penetrate those clients further and gain additional client share.

Great, appreciate the color. You might have mentioned this, but I'm not sure if I missed it, I think last quarter you said that your projected EBITDA goal for the year was to exceed $60 million. Is that still in the cards given the developments in 2Q and what you see in terms of how the hiring is ramping?

Well, I mean I think our EBITDA this quarter approached $15 million. Expectations are for it to grow proportionately as revenues grow and earnings grow, so certainly we feel good about the trajectory of the EBITDA.

Okay, so you guys still feel good about that $60 million number?

Yes, I think we do.

Okay, thanks.

Thank you. Our next question comes from Randy Reece from Avondale Partners.

Afternoon. I was wondering if you could give me an idea of what's your corporate expenses comparing on a year-over-year basis versus the rest of your SG&A?

Yes, it's, Randy, relatively speaking corporate expense has been flat for the last couple quarters. We're not, as Joe had mentioned, one of the things that we've done over the years is made investments and we are in a stage right now where we're looking to generate operating leverage through leveraging those investments and are able to maintain corporate costs flat, essentially.

I gather from your comments that you expect -- implied in your guidance is a similar gross margin in the third quarter as you had in the second quarter or is it similar on a year-over-year basis?

Yes, well, essentially, Randy, margins for the last two or three quarters is flat, spreads have been flat absent payroll tax impacts, and we expect that to continue, so sequentially specifically to your question.

Do you see a significant difference in behavior of the market according to let's say level of billing rate strata or perhaps projects versus this staff [aug]?

I'd say, obviously, anytime we move into the statement of work business we see a little bit better margin with a little bit higher expectation than the standard staff aug, and that's the space that we continue to go after and we continue to see more business shifting into that arena.

I would say in terms of the stratification of our client base, actually when we look at our year-over-year our largest clients from a Tech standpoint, we actually experienced about a 20 basis point improvement in margin, so we're seeing bill rates start to move a little bit in the larger clients, which we hadn't really seen.

So part of what we've experienced is we've actually lost a little bit of margin in our spot market business, and that's as we're onboarding new customers and trying to penetrate and gain relationship there and work our way into that business.

Thank you very much.

Sure.

I'm showing no further questions in queue at this time.

Okay, great. We want to thank you all. We appreciate your interest and support for Kforce, and I would personally like to thank each and every member of our field and corporate teams for turning in just a fantastic quarter and for really performing at an exceptional level, and also to our consultants and our clients for allowing us the privilege of serving them. We thank you very much and look forward to talking with you on the next call.

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