Kforce Inc (KFRC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Kforce fourth quarter 2013 earnings call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would like to turn the call over to your host, Michael Blackman, Chief Corporate Development Officer. Please go ahead.

Thank you. Good afternoon, and welcome to the Kforce full-year 2013 and Q4 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 on current assumptions and expectations and are subject to risks and uncertainties. Actual results may materially from the factors listed Kforce's public filings and other reports and filings with the SEC. We cannot undertake any duty to update any forward-looking statements.

I would now like turn this 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 also provide substantial disclosure in our release to assist in better understanding our performance and to improve the quality of this call.

We are very pleased with our performance in the fourth quarter, as Kforce achieved record high quarterly revenues of $302.9 million and adjusted earnings per share of $0.28. In particular, our growth was driven by Tech Flex, our largest business segment, in which growth accelerated to 18.3% year-over-year. We continue to invest in our growing Tech Flex business, given the excellent market opportunities that we see as demand continues to significantly exceed supply of candidates. Our Tech, FA, and HIM businesses grew sequentially for third consecutive quarter, driving year-over-year total Firm revenue growth of 12.3%.

Joe Liberatore, Kforce President, will provide further details on our Q4 operating results later on this call, while Dave Kelly, Chief Financial Officer, will add further color on our Q4 operating trends and financial results, as well as provide guidance on Q1.

I'd like take a moment to reflect on many of the changes that have taken place, both in the industry and at Kforce, over the past year. 2013 has been a year unlike any I have ever seen in 32 years in the professional staffing industry. Moderate GDP growth rates have resulted in a disproportionate share of job growth coming in the temporary staffing sector. The temp penetration rate reached 2.06% in December, surpassing the all time high of 2.02% reached at the height of the dot-com boom.

For the year, fully 10% of total job growth came from temp staffing. These facts alone are significant for our industry and indicate that the flex super cycle is real. Tech Flex is performing particularly well, and we believe the temp penetration rate in tech is greater than 2.06%, driven by secular shifts as well as the ubiquitous nature of technology across our clients' business platforms. Staffing industry growth has moved from cyclical to secular as the benefits we bring to the labor markets manifest themselves.

This past year has also been a year of significant change at Kforce. We began 2013 with a new executive team under the direction of Joe Liberatore, which had a mission to accelerate revenue growth with a greater emphasis on a sales driven culture. Our executive team visited virtually every market and met with over 150 top clients throughout the United States. We made investments in our revenue generating population, a key component of our strategy in 2013 in order to accelerate revenue growth.

This investment and the ramping productivity of our associates drove year-over-year revenue growth of 12.3%, which now exceeds our year-over-year associate growth of 10%. We expect to continue to invest further at a steady pace as the business environment dictates and for revenue growth rates to exceed hiring rates, which will drive improving operating margins.

The Firm took significant steps to realign our leadership and support structure in the second half of 2013, with a goal of allocating a higher percentage of roles closer to the customer and accelerating the speed of turning decisions into action. We narrowed our focus, simplified our processes, and aligned resources to target the industries and skill sets where we could have the greatest chance of success. This realignment has allowed us to further -- invest further in a revenue generating activities and create a road map to exceed prior peak operating margins of 7.4% as we approach $1.6 billion revenues.

Part of this realignment in Q4 included a strategic review of our Government segment, with a renewed focus on the prime solutions aspects of this business and less emphasis on other aspects of the portfolio. The refinement of our KGS business will impact the near-term forecast, but we believe will benefit this unit's long-term prospects. Also as part of the realignment, we welcomed Pat Moneymaker back to Kforce as Chairman and CEO of Kforce Government Solutions. Pat will lead this group into the new era.

The Firm reached record revenues of $1.15 billion in 2013 and an adjusted EPS of $0.84. We believe our strategic actions in 2013 have set the platform for even greater success in 2014 as we continue toward our objective of increasing market and client share, particularly in our fast-growing Tech Flex business line. I will now turn the call over to Joe Liberatore, President.

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

It was only three quarters ago that we reported 1.5% year-over-year growth for our Tech Flex business. I couldn't be more excited and proud of our team, as another quarter of strong sequential growth of 5.6% has accelerated year-over-year growth to 18.3%. This growth acceleration was largely the result of actions taken by the Firm over the past five quarters, through our outbound efforts to listen to the voice of our field leaders and clients, with a relentless drive for focus, simplicity and accountability in everything we do.

I'm pleased to see our actions in this new era for Kforce continue to drive the results we expected, as we remain focused on better meeting the needs of our clients, consultants and core employees, leveraging our new alignment and agile infrastructure. Tech Flex, our largest business unit, representing 63.8% of total Firm revenues.

Overall our key performance indicators for technology remain at high levels for job orders, external committals and send outs, with fill ratios at an all-time high. Candidate supply remains tight, particularly for high demand skill sets such as Java .NET developers, project managers, and business analysts. The industries that performed the best in Q4 were health care, financial services, telecom, insurance, retail, and computer hardware. Technology services within health care remain very healthy, as hospitals and health care organizations implement systems and transition their platforms to more of a shared services model.

Inter-quarter trends for Tech Flex revenue showed steady growth in both October and November, followed by further acceleration in December. Tech Flex revenues and head count are well above levels from last year, and we have already rebounded to 98.9% of Q4 average head count. Strong KPI volumes suggest recovery levels could accelerate relative recent years, as we would expect Q1 Tech Flex revenues to be down slightly on a billing-day basis due to the typical fall off in head count at the beginning of each year.

Revenues for our Finance & Accounting Flex business represent 18.3% of total revenues. On a billing-day basis, Q4 revenues increased 4.7% sequentially and 7% year-over-year. Revenues showed steady growth throughout Q4 and declined in January due to assignment ends at end-of-year. Current key performance indicators and stronger than historical starts volumes in January have already returned us to December average head count levels. We expect Q1 FA Flex revenues to be flat to slightly down on a billing-day basis but show continued acceleration in revenue growth on a year-over-year basis.

Revenue increases for the fourth quarter for our Tech and FA businesses were broad based from a client side perspective, although larger client growth rates were slightly stronger in the aggregate. We expect a mix of growth to be balanced across all client sizes in Q1.

As part of our recent changes that took place in Q4, we have fully integrated our strategic accounts group into our field leadership team, enhancing our alignment to serve and delight our premiere clients. This change streamlines decision making, driving greater consistency and focus around sales activity, while more effectively positioning us to partner with these customers to quickly adjust to the pace of change taking place within these large consumers of the services we provide.

We experienced significant success during the course of 2013, deepening these relationships as reflected by the increase in revenues contributed by our 25 largest customers year-over-year from 30.8% to 32.1% of revenues. As we move through 2014, we will further refine our value propositions and evolve our approach around customer intimacy.

From a delivery standpoint we've narrowed the focus of our National Recruiting Center to target skill sets in industries in which this national delivery model can be applied most efficiently. The NRC also continues to serve as a training ground for developing new talent that need to be deployed to our field office assignments. During 2013 approximately 32% of additions to associate staff in field offices came from the NRC.

We believe further development of this strategy could positively impact turnover rates, as the training received during their tenure in the NRC improves their ability to ramp. We're also working on a plan to create greater efficiency in serving our West Coast clients by reallocating a portion of the NRC resources to a facility on the West Coast.

On a billing-day basis, HIM Flex revenues grew 8.8% sequentially and increased 7% year-over-year. This space continues to be impacted by the prioritization of available spend towards projects such as ICD-10 and EMR implementation. Revenue trends improved throughout the fourth quarter. We expect HIM revenues to be slightly down sequentially in Q1 on a billing-day basis, but experience continued acceleration in year-over-year growth rates, as we've already rebounded to December average head count.

On a billing-day basis, revenues for our Kforce Government Solutions decreased 7.2% sequentially and decreased 10.3% year-over-year. This was driven partially by the continued impact of sequestration on our services revenue and a sequential decline of $1.6 million in product sales. There remains continued uncertainty around funding levels of various federal government programs, and the environment for government services remains difficult. We anticipate Q1 revenues to be slightly down in first quarter.

Perm revenues from direct placements and conversions, which constitute 3.9% of total revenues, decreased 4% sequentially and increased 5.9% year-over-year. Perm revenues are difficult to predict, but we've seen a slow start early in the first quarter and expect perm to be down sequentially from Q4.

Hiring was modest in Q4 as we strategically reduced hiring targets to minimize low productivity around the holidays. The mix of hiring continues to be more heavily weighted towards Tech Flex delivery in particular.

Revenue generating head count in Q4 remained flat sequentially and increased 10.3% year-over-year. As Dave mentioned, the quarter is notable in that Q4 2013 revenue growth surpassed head count growth on a year-over-year basis. We continue to see contributions from all tenure population and experience better than historic retention levels for the Firm.

A key driver in further accelerating growth is to continue to refine our territory management and allocation of resources to efficiently meet customer needs with the right mix of volume of associates. We have a large portfolio of excellent clients, and deeper penetration into existing opportunities will be key to our success.

Associate mix remains highly weighted in tenure range of learn 15 months, so overall productivity levels have significant room for improvement. We plan to make continued investment in our sales associate head count to sustain and possibly accelerate revenue growth.

I'm pleased with our strong performance in the fourth quarter and feel confident that we have built a solid foundation that we can capitalize on to further success in 2014 and beyond. We will continue to evolve our premiere partnership with our clients, strive to be the employer of choice for our consultants and core employees, and support revenue enablement with an agile customer-centric infrastructure.

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

Thank you, Joe. Total revenues for the quarter of $302.9 million increased 4.4% sequentially on a billing-day basis and 12.3% year-over-year. Quarterly revenues for flex were $291.2 million, which represented an increase of 4.6% sequentially on a billing day basis and a 12.5% year-over-year increase.

Search revenues of $11.8 million decreased by 4% sequentially and increased 5.9% year-over-year. For the first five weeks of Q1, Tech Flex is up 17.6% year-over-year, Finance & Accounting Flex is up 9.7% year-over-year, and HIM is up 10.2% year-over-year. Search revenues are down 6.6% year-over-year for the first six weeks of Q1.

It is difficult to assess potential full-quarter results with this limited data, though current recovery levels relative to December head count are slightly better than last year. In the fourth quarter, the Firm incurred a net loss of $8.2 million and a GAAP loss per share of $0.25. These results were significantly impacted by two items.

The first is $11.9 million in pretax charges related to the realignment activities announced in Q4. The total of these charges is greater than originally anticipated as a result of slightly higher than expected severance charges and a discretionary bonus directed by the Board and distributed widely to senior management in recognition of the realignment activities and transformation of the Firm during 2013.

The second item impacting EPS is a $14.5 million goodwill impairment charge incurred in our Government Solutions business due to our decision to focus more directly on prime solution and to exit the product sales business and any staff augmentation business within KGS. This decision impacted expectations on future cash flows.

The remaining goodwill in this reporting unit is $19 million, and we believe the current value is reasonable barring a significant deterioration in its business prospects. The realignment and goodwill items collectively impacted EPS negatively by $0.53.

Adjusted for these two items, Q4 2013 net income and earnings per share were $9.1 million and $0.28 respectively, compared to $9 million and $0.27 per share in Q3 2013 and $8.6 million and $0.24 per share in Q4 2012. Our overall gross profit percentage of 31.7% decreased 80 basis points sequentially and 110 basis points year-over-year. This is partially due to revenue acceleration in our flex business, which has led to our search business declining as a percentage of total revenues. While search will remain an important part of our business, we are planning for it to remain at or near current revenue levels for the foreseeable future.

Our flex gross profit percentage of 29% in Q4 decreased 60 basis points sequentially and 90 basis points year-over-year. Flex spreads in our Tech business were down 30 basis points sequentially and 100 basis points year-over-year. FA Flex spreads were flat sequentially, but down 50 basis points year-over-year.

Rising bill rates are providing additional gross profit dollars per transaction in Tech and FA Flex, though pay rates are rising at a slightly faster percentage, which is contributing to the compression in flex margin percentage. Also contributing to the decrease in flex margin percentage is the strong growth in our largest clients, which is typically have slightly lower margins than our small and medium sized clients.

Our government spreads declined 180 basis points sequentially and 200 basis points year-over-year. This decline is primarily the result of a combination of increased paid time off in the fourth quarter and a reduction in higher margin product sales.

HIM spreads still remain high relative to our other businesses, but were down 40 basis points sequentially and have declined 500 basis points year-over-year due to a combination of increased compensation costs for our consultants to enhance retention and cost pressures on health care providers.

Bill pay spreads in January, across our businesses were stable with December levels and are not expected to change significantly in the first quarter. As we look into 2014, we expect flex margins to be stable to slightly down, assuming a continuation of slow economic growth. However, historical data suggests that flex margins could improve if GDP growth accelerates.

Q4 SG&A levels of 25.9%, excluding impairment and realignment charges, decreased 60 basis points from 26.5% in Q3 2013 and have declined 100 basis points from 26.9% in Q4 2012 as we have begun to see the benefits of both productivity improvements from more recent hires and a partial benefit from the realignment activities taken in the fourth quarter. As we move into the first quarter and into 2014, we expect to see continued improvement in these areas, but we are still finalizing some actions related to the realignment.

We would expect operating margins to be between 5% and 5.5% of revenue by Q2, assuming revenues between $315 million and $330 million in the quarter once the full impact of our realignment activities is realized, and to continue to improve as revenue grows.

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 low levels. Capital expenditures for Q4 were $2.1 million. Adjusted EBITDA for Q4, excluding the realignment charges, was $19.2 million, which has increased $3.1 million year-over-year. The firm had $62.6 million in bank debt at quarter end, compared to $53.4 million in debt at the end of Q3 2013 and $21 million in debt at the end of Q4 2012.

During 2013 the Firm repurchased 1.8 million shares for $27.3 million, and over the past eight quarters the Firm has repurchased 5.2 million shares for $71.7 million. Currently $62.5 million is available under Board authorization for future stock repurchases.

During the quarter we also initiated a $0.10 per share quarterly dividend. Our strong cash flow profile allows ample opportunity to also evaluate further return of earnings to shareholders for additional stock repurchases.

With respect to guidance, the first quarter of 2014 has 63 billing days compared to 62 billing days in the fourth quarter of 2013. As has been widely discussed, the significant number of widespread winter storms to date in the quarter has had a greater than normal seasonal impact on our revenue. We estimate the impact of the storms to date at approximately $2 million to $3 million in revenue. Thus, we have elected to give a slightly broader range in our guidance.

We expect Q1 revenue maybe in the $298 million to $304 million range and for earnings per share to be between $0.15 and $0.18. Gross margins are expected to decline from Q4 to Q1, due to an expected decline in search. Additionally, cost of sales will be negatively impacted by approximately 130 basis points due to increased payroll taxes in Q1. We expect gross margins to be between 29.9% and 30.2% for the quarter.

SG&A as a percent of revenue is expected to be between 26.1% and 26.4%. We expect the increase in payroll taxes from cost of sales and SG&A combined to negatively impact EPS by approximately $0.11 relative to the fourth quarter. Our effective tax rate in Q1 is expected to be 40%. We anticipate weighted average diluted shares outstanding to be approximately $33.2 million in Q1.

This guidance does not consider the effect, 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 firms response to regulatory, legal or tax law changes.

We're very pleased with our progress in 2013 to accelerate revenue growth and improve bottom-line results. We believe we are better positioned than at any time in the Firm's history. Our business is concentrated in tech, one of the fastest growing segments in staffing, and is further supported by positive secular drivers. We believe we will sustain our revenue growth rate and expect operating margins to improve in 2014, and we remain on track to exceed prior peak operating margins of 7.4% as we approach $1.6 billion in annualized revenue.

Patrick, we'd now like to turn the call over for questions.

(Operator Instructions). Our first question comes from Tobey Sommer with SunTrust. Your line is open.

Thank you very much. I'm interested in your perspective of how staffing, in particular Tech Flex staffing, is competing with alternative uses that your customers -- and methods that your customers may be able to employ to accomplish projects, such as offshoring or consulting or outsourcing. Any perspective you could have on maybe how staffing is being looked at differently than in the past relative to those alternatives would be helpful.

Yes, Tobey, it's a great question. In fact, it's one that I've had a number of discussions with the CIOs while I've been out in the market the past year. The biggest change that I've seen in 26 years that I've been involved with Tech Flex at this point in time is that the CIOs are really looking at the global workforce.

So instead of -- offshoring used to be a cost play. Many of the more progressive CIOs aren't looking at it from a cost play stand point. They're looking for where is it most efficient and where are the best talent pools to get various aspects of the overall lifecycle of development done.

So I think that plays very well for us, especially when you look at our footprint on the high-end developers, project management, business analysts, systems analysts -- that world. Because that stuff has to happen on ground. That's not stuff that you can offshore and do remotely.

So many of them -- this is part of why I think you see some of the offshore work coming back on shore, because they're making decisions that certain aspects of that work are more effective when you have the human communication. We also see the same dynamic happening with large organizations out there talking about bringing their workforces back in, because you can't remove the human communication aspect in driving efficiencies in certain types of work patterns that have to take place.

Thank you. I also wanted to ask you about the first quarter bounce-back. It seems like it's happening faster in terms of flex volume than would normally occur, and I'm curious, when would a kind of normal first quarter volume approach earlier or mid-December levels?

Yes, historically we more so see getting back to those same levels on the back end of February or into the early part of March, and as I mentioned in my opening comments, we're already actually higher. From an FA standpoint and from an HIM standpoint we've exceeded all our December levels. And then from a Tech standpoint we're just about approaching our December levels.

Okay, thank you. And I just have one more question, and I'll get back in the queue. Related to your health care exposure, do you see hospitals working towards meaningful use in the transition of ICD later this year as being catalysts for demand?

Yes, actually I think health providers in general are not ready for health care reform initiatives. That's inclusive of HIPAA/HITECH, EMR, ICD-10 and meaningful use. They're behind the curve in all of those areas, which I think just provides greater opportunities for us, not just from an HIM standpoint, but also within our Tech business. And then also we're seeing opportunities in our Finance & Accounting on-staff business when we look at some of the front-end and back-end aspects of rev cycle.

Thank you very much.

Our next question comes from Hamzah Mazari with Credit Suisse. Your line is open.

Good afternoon. Thank you. A question on the cost realignment. Could you give us sense -- I know you have outlined 100 basis points of margin expansion through that initiative. Could you give us a sense of how these savings roll through the P&L for the balance of the year or going forward?

Sure. Sure. This is Dave Kelly. So we took a number of actions in the fourth quarter, and so we realized some benefit in the fourth quarter, probably about $0.02. I think we had indicated that we expected benefit of between $0.03 and $0.05 once fully realized. When we get to Q2 is when we would expect to fully realize those actions, because there's still some carryover activities in the first quarter. And then once we get into Q2 and beyond, we'll see that full realization of that $0.03 to $0.05 on a quarterly basis.

Okay, great. Just a follow-up question. On head count growth, I realize that's below revenue growth right now. Could you give us a sense of -- do you feel you've built up enough capacity that we may begin to see some operating leverage in the model come through, or do you continue to ramp up the head count? What's your thought process there?

I'd say we're going to continue that to head count in high-demand areas where have we have productivity levels that warrant it, although as I think we stated before, we don't see adding head count at the same levels that we experienced on the back end of 2012 and into the early parts of 2013. We've been adding head count proportionately toward the revenue growth.

About 90% of our head count has been directed towards our Tech Flex operating model, and as I had mentioned, a high percentage of that on deliveries, realizing supply/demand, it's harder to get after the candidates. So that's where we've been ramping up our hiring. So we will continue to moderate hiring activities. Dave, I don't know if you have any other?

I would add as we think about future state operating margin, this is a key expectation in the model as we laid out the path to exceed peak margins. Our expectation is we're going to get some additional operating margin -- in our estimates 1.2% was what we indicated -- as a result of this sustained pattern of growth rates exceeding hiring rates.

Great. Just last question. I'll turn it over. Do you have a sense of what the underlying market growth rate is in Tech Flex? Is it high single digits and you guys are surpassing the market by 1,200 basis points? Or how do you think about the underlying market versus your numbers? Thank you.

Yes, so Staffing Industry Associates in 2013 and 2014 both, which is probably the most widely used information in the marketplace, projects growth in tech flex to be approximately 7% in 2014 after a 7% year in 2013. So obviously our growth rate as we have gotten to the back half of the year have significantly exceeded that.

Okay. And you believe those numbers are right?

It's the best gauge that we have. And certainly, yes, we don't have any reason to dispute those numbers.

Okay. Great. Thank you.

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

Thanks. Joe, just a question around the acceleration in Tech Flex. Any way to distinguish between what's the internal initiatives versus is the market accelerating? And then second, just because Tech Flex is growing so fast, and because we hear about talent scarcity all the time in IT, just wondering why yourself and others aren't showing more gross margin expansion in tech if it's such talent scarcity? Thank you.

Yes, no, it's two very good questions. Relative to internal and external, I have to go back to where Dave just mentioned. I think if we look at SIA's numbers over the course of the last three or four years, they've been pretty constant and pretty much in that range through this entire recovery. So I would attribute our acceleration and performance to -- it's internal. No different than when we weren't performing at the market. It was internal. Now that we're outperforming the market, it's internal.

Our teams have put forth tremendous effort, not just in hiring people and ramping those people, but it's everything across the board. It's the narrowing of our focus. It's the upgrading of leadership. It's the account assignments that we're putting people on. It's narrowing our skills recruiting efforts, so that people are going after the highest-demand people, so that when they find somebody, we have multiple places to deploy that person.

So I mean this is wholesale. We've been after this for the better part of five, going on six quarters now and the team has responded. And it's showing up in the results.

Relative to gross margins, it's interesting because it's one that we're still working through trying to really figure out what's taking place in the marketplace. Because having been in this business the amount of time that I've been in the business, the cycle that looks most like this cycle would be the dot-com era in terms of supply/demand imbalance. And if we go back and we look at our flex margins during that cycle, we were in the low 27%.

There's one big difference though in that cycle versus this cycle. We haven't seen GDP expansion in this cycle, which is unlike any other cycle that I have ever operated in in terms of looking at what's been happening to top-line revenue and the market expansion that's taking place. So when we look at these low GDP levels, and we look at our clients' inability to pass along pricing to their end users, we don't know how much of that now is coming back to us.

Likewise, on top of that when we look at margins, I sit here and say, it's probably been about 14, going on 15 years now that the DMS and the VMOs have been integrating into the business. So clients have access to a lot more information, which is really driving a lot of their vendor consolidation, because the large consumers of the services we provide, they fully understand the volume rate gain.

And so there if there's volume there that gives you more security from your revenue, you gain operating leverage and efficiencies there. And there is some exchange from a rate standpoint now. I will say in our largest customers we are seeing dollar GP expansion, albeit we're not seeing margin expansion. So we are seeing bill rates go up, but much of that bill rate is going back to the candidate to attract and retain the candidate.

And then the last piece I would probably add to margin is the competitive landscape that we see today is unlike anything that I personally have experienced in 26 years in this industry. We've had quite a few professional providers that are in our space that have been absorbed by the clerical type firms, which is driving a dynamic. We still have a very aggressive second-tier marketplace of the local operators and regional operators.

And then you have couple others that are really growing some revenue share that are driving margins down. But at the end of the day I think the customers are paying market. What happens when GDP expansion comes about is really what the question will be.

That's great. And if I could just ask one more, and I appreciate the completeness of that answer. The year-to-date growth rates you quoted, that would include the $2 million to $3 million of revenue?

Yes.

The year-to-date growth, that's exactly right. So one of the dynamics in Tech Flex, Joe had mentioned that we're almost back to the head count levels in January that we experienced in December. That is after a little bit slower start in the first couple of weeks due to the weather impact on that. So, yes, that's inclusive of that number, Paul, yes.

And, Paul, outside of the billable hours that we lose because of these weather impacts, you also have an impact in terms you have interviews that are canceled, you interviews that are postponed, you have delayed starts. So even in spite of all of those head winds, I'm very pleased with where our rebound is. I mean, I wish I was sitting here and weather hasn't been what it's been, because I would be really excited at this point in time about what Q1 prospects are.

And is that $2 million to $3 million of weather hit proportionate to your revenue exposure by discipline?

Well, yes, it is. It certainly is, Paul. Obviously we've got a strong concentration in the Northeast and the Southeast. But it's pretty well distributed between Tech Flex proportional to the size of the revenue streams.

Yes, you get a little bit more revenue impact when we have weather conditions such as this. You'll feel it a little bit more in the finance and accounting product lines, just because those people don't have the ability to work as remotely as now much of our Tech Flex population. A lot of those people can get activities done remotely. Then when we look at our HIM business, because of the transition that's taking place there into remote coding, that business is actually almost insulated from weather dynamics at this point in time, unless they ripple into census in the hospital.

Great. Thanks very much.

Our next question comes from Mark Marcon with Robert W. Baird. Your line is open.

Good afternoon. On the F&A side you seem to be doing better than others. I'm wondering if you can just talk a little bit more about what you're doing there, where the pockets of strength are. And it looks like through January things continue to progress nicely, so just -- do you think that's sustainable?

Mark, I'd say it's really -- there's two pieces to that question. One is we were under performing the market for a period of time. And our teams have worked really hard on our operating model and getting much more outbound, which is a theme that's not just in FA, it's across the enterprise, which I think is making a difference. And how we're balancing our resources from an outbound standpoint versus a delivery standpoint within our F&A models. Our FA people have done a nice job working on the model in of itself. So that's playing a piece in it.

The other piece that has been playing is we've experienced double digit growth in what I would consider more bulk-type FA opportunities. And that's not just the on-staff opportunities. It's also within FA where customers are looking to hire multiple individuals in a very short time. And that's really where I would say our NRC integrated delivery strategy with being able to service those higher volume opportunities has really played very much in our favor.

That's great color. It seems like the margins have held up pretty darn well, given that there's more bulk. Is there a reason for that?

Part of that is because you're looking at just an average margin there. Part of that is the transitioning of our business, because in our core FA business we've been moving upstream a little bit more there and out of the lower end FA business. So that's part of where you see some of that margin improvement taking place when you look at the margin profile as a whole, because actually in the large customer footprint we've actually had some margin compression, so it's even offsetting that as well.

That's great. And then can you just expand a little bit with regards to the increased focus on the government services side? What are the specific areas that may be deemphasized and the areas that are specifically being emphasized and how we should think about that?

Yes, Mark, this is Dave Kelly. So our objective in the changes that we announced were to basically focus on what we believe to be a higher quality revenue stream in that business. And that's the solution based, longer term project-based business, focused on prime and tried to deemphasize some of those areas that weren't part of that core business. So specifically we had mentioned in prior quarters we had a small product business that we still have that we are looking to deemphasize, as well as some of the shorter duration things that might be better -- that basically are pure staff augmentation business that don't lend themselves specifically to a solutions provider.

Okay. That small product that you're referring to, that's the defense related product?

That's the trauma training unit that we have. And so as we kind of think about this business going forward, we look into Q1, as Joe mentioned, our expectations of quarterly revenues are basically flat, inclusive of these changes.

Yes, Mark, this is consistent with the strategy that we've been executing across the entire enterprise, which is to simplify things, to narrow our focus and hone in. And so that's why we're challenging every aspect of our business, so that we do those things that we know we can win and compete and that are core to our business.

Great. What's the -- what are the margin profiles on the prime relative to the areas that you're deemphasizing?

Well, prime business gives you a greater degree of control as well, but typically our prime business is a more profitable piece of business. Moderating that in the government space, obviously, is some of the initiatives that the administration has out there to be more cost conscious and bid things on a lowest cost technically acceptable bid decision base. So there's pressures even when you are a solutions provider on margins there. So our expectation of margins in that space as well are [going] to be flat.

Great. Thank you.

Our next question comes from Jordan Maka with Macquarie. Your line is open.

Actually this is Kevin. Hey, congrats on just a great job, and the guidance looks really strong. As we think about the cost actions that you guys announced last year, kind of $0.03 to $0.05, how did that impact Q1? And then as we think about that through 2014, how should we think about kind of -- is it a pretty straight line $0.03 to $0.05, or does that step up it through the year? And then organizationally, how did folks receive it? Obviously the stock really reacted well to it, but how is it from an organizational perspective?

I'll let Joe talk about the organization, but as it relates to the costs, Kevin, as I mentioned, so we saw partial benefit of that. We said it was going to be $0.03 to $0.05. As we look a little bit more closely at it now, we have about $0.02 in the fourth quarter. We still have got some carryover work that is going probably -- will benefit from another $0.01 or $0.02 in the first quarter and then fully realize the benefit. So we're looking at -- we said $0.03 to $0.05, probably $0.04 to $0.05 on a quarterly basis -- on an ongoing basis from Q2 forward.

Yes, and I'd say on how the internal people have received things, this is the message from day one as we started to go through our succession planning is, we're playing to win, and we're playing to be the gold standard. We're not playing to be average, and our performance was average. So I'd say the people that are here, they understand that. They've all parted with friends and co-workers who have been here for a while, but they understand that this is the move forward and it's for the health of the Firm. So I'd say it was very well received.

I don't want to necessarily say it was a non-event, but I think now people are really starting to see the by-product of the activities that we've taken in terms of removing a lot of the matrix for the activities that were within the Firm. Streamlining decision making, our ability to operate in agile type environment, to move more rapidly and adjust to the demands that are coming upon us. We're seeing that directly on customer decisions and customer fronts, whether it's opportunity or problem resolution.

We're also seeing from our revenue enablement standpoint that are supporting those revenue producers and revenue generators in the field to drive decisions so that we can streamline things and respond more quickly to the demands that our clients are placing upon us. So I would say right now the tonality within the Firm is extremely positive. People are excited about where we are and the prospects that lie ahead, and they're ready to play ball and take more market share.

Super. And then, Joe, it seems like -- this is the first quarter in a while I can remember -- or Dave, whoever wants to comment on it -- that the revenue actually looks really strong relative to where consensus is. And we're guilty a lot of mismodeling it. Is that a function of just a better macro environment, some of the more kind of revenue producing investments you made the last couple of years kind of maturing, or really what's driving that? [Because] it's just a really, really impressive guide, particularly given kind of obviously the -- I know the weather has impacted a little bit, so that's admittedly a bit of a head wind, but the revenue looks really, really good relative to where consensus had been?

I think a yes to all of those, Kevin.

Okay.

If we look at Q4, we built throughout the quarter. So the December levels coming out of Q4 were really at the highest levels of Q4. So when we came down, we kind of came down to an average level, based on what would be the normal fall off, and our team was really focused on the rebuild. Somewhat mitigated by the weather. We came right out of the end of the year, and bang, we got the East Coast snowstorms. And we've had this polar vortex stuff, and we're just laughing about it because it really is real. I mean, there's stuff happening all over. Tomorrow Atlanta gets hit.

So I think the weather has impacted our ability to do even better, because our team did come out of the year with an expectation of hitting that prior peak in December earlier. So the weather slowed us down a little bit, but we've performed well coming out of the end of the year.

Got it. Thanks. And again great job.

Thank you.

Thanks, Kevin.

Our next question comes from Randy Reece with Avondale Partners. Your line is open.

Afternoon. I was wondering what the changes -- strategic changes in Government Solutions will look like in terms of the margin structure of that business? Gross margin and cost margins?

Yes, the impact of these changes on the government business, as I think we mentioned, our expectations are we're looking at a relatively flat trajectory for that business, both on the top line and from a margin perspective. We've been talking over the course of 2013 that they've done a nice job in winning some new business. A lot of those wins are solution-based business that we look to build on with some very important customers. Places like the VA, which is very much a sheltered from a lot of the sequestration impacts.

So we've got a very solid foundation for that business. It's going to give us an opportunity as we are into 2014 to really transition out of some of this other business without severe changes to the trajectory of the business.

And in the technology staffing business, if you look on a year-over-year perspective, you've mentioned that large customers might have outperformed. Are there any differences in other ways you can dissect the business, such as more project staffing versus augmentation, and any other verticals the way you look at it?

Randy, I would say from a project standpoint, staff augmentation, I mean, we are seeing an increase in mix of what I would consider statement [of work] type business as compared to peer staff aug. But at this point in time I don't think that's significantly moving the needle. And part of that's by-product of the relationship building that we've been after with our clients, so we're getting opportunities to take a swing at business that is a little bit more upstream.

So we are seeing a little bit more on that front, and [we're] organizing a little bit more around the business in those areas and where we see the high-demand areas. When we look at mobility and we look at business intelligence, we see that broad base across our entire customer base. So we are doing some more statement of work, project oriented-type activities in those areas.

From an industry vertical standpoint, as I mentioned in my opening comments, our top six industries have all performed very well year-over-year. So that's pretty much the backdrop that I would give you there.

I have heard from other players in the business that the year was very inconsistent across geographic markets. That there were big differences in performance between Boston, New York, Chicago, Austin and so on. But they're anticipating maybe more consistent comps this year. Do you have a feel for that?

The only -- my only comment related to that, having been in this business 26 years, is give me a market that is average and give me an above-average leader in that marketplace, and they will [perform]. When we look at opportunity by geography, we only go to one place when we're not capturing market share, growing the business, and it's we haven't done our job in terms of getting the best leader we can get in that marketplace.

Because the markets -- when we're sitting here with 3% market share, how can I use a market geography as an excuse for not performing. It's internal. Every one of our markets, broad based, across geographies, has demand, has job flow and has needs.

Very good. Thank you very much.

Thank you, Randy.

Our next question comes from Morris Ajzenman with Griffin Securities. Your line is open.

Hi, guys. A number of quarters ago you articulated specifically really dramatically stepping up hiring of professional staffing, and it appears to be really playing out [puffing] currently. My question is back -- going back to the quarters back, you gave us different [buckets] as a percentage of total staffing: under one-year experience, between one and two years of experience, two to three and above. And you gave us a percent of your total staff and their productivity, and [clearly] picked up as they aged. Can you kind of refresh us to where you were or are exiting in the fourth quarter based on those different buckets and their level of productivity. And then based on your plans you have currently, what would that look like as we exit 2014?

Yes, so I'd say the good news is even with the hiring increase going back to Q4 2012, we've remained very consistent with performance in each one of those categories. So while hiring more people and having more people transition into the different buckets, our average performance for the most part has stayed very constant, so I view that as a big positive.

What I had shared back then is typically our four-year-plus population is about 50% more productive than our two- to four-year population. Our two- to four-year population is 100% more productive than our one- to two-year population. And then we're about 200% increase when we have somebody go from one year into the one- to two-year category. Where we are right now is about 33% of our total population has greater than two years. So that's what I referenced in my opening comments, that in that less than 15-month category we believe we have a lot of capacity that's building.

And can you kind of project where that would be 12 months out based on internal hiring and how that further ramps up as a percent of total staffing, above two years or whatever?

Yes, the only reason -- I can't tell you where we'll be on a percent standpoint, because a lot of that is driven by what activities happen on the front end, which moves that. I also don't want to mislead you when I stated that our two-plus year population is 33%. We have a lot more people in that two-plus year population today than we did a year ago. So we are moving people into those populations, and we are holding onto them at higher rates than we have done historically. So all of those -- all of the populations are growing in numbers -- in aggregate numbers.

I would -- this is Dave Kelly. I would add to that. So as we look at decisions for hiring on a go-forward basis, we look at the productivity metrics and the distribution of people that Joe mentioned. But our objective here as we can -- we have to look out because of the ramp -- is to continue to hire, continue to add people on a consistent basis to sustain this revenue growth.

And we've got probably 20 years of information that we've modeled that help us determine the appropriate level of hiring that we should have in any particular quarter. But certainly our bias is to continue to add people and sustain the growth rates that we've had, and we believe that we can add, as Joe mentioned, at levels that are less than the revenue growth rate that we currently have and can sustain that.

Right, but again, you made comments earlier. Your rate of additions is going to be clearly at a lesser rate than it was a year ago. So based on the formula and how that matures, you're going to have a sales force that's going to be more productive, because you're not hiring at the same aggressive extent you were a year ago. Is that a fair inference?

I think that that's right. And then piece of it is that's right, we can generate additional productivity with additional tenure that's going to -- you're right, it's going to allow us to hire at lower levels than revenue growth.

That's part of what Dave shared -- I believe it was JPMC conference. Michael and Dave, when they presented, relative to our future state operating margin. I mean, that's a big part of where operating margin leverage is going to be coming from.

Okay. Last question. [Trade receivables, you spoke about] day sales outstanding, being I think under 60 days, thereabouts. I know from the third quarter that trade receivables were actually down $3 million, but year-over-year they went from $151 million to $179 million. Clearly, I guess, we should look at that as a reflection of strong demand out there driving revenue growth over next quarter or two? Is that a fair way to look at it, or is there some [unturned] other sort of ramification out of that?

I would say there's two things. Certainly the first piece, as you mentioned, the revenue growth year-over-year at 12.3% is a big driver to the increase in the amount of receivables. The other thing that I would say in terms of day sales outstanding, Joe had mentioned the success we've had with larger clients and growing their revenues stream, very high credit quality clients. But what we see when we get to a larger client, are payment terms that are somewhat longer in duration than you see at some smaller clients. So that will also tend, as we have strong growth of larger clients, to increase accounts receivable day sales outstanding. So it's really those two things in tandem that are driving that.

Yes, and just on that as well, also with some of those larger consumers, they're very sophisticated, and many of them build into their contracts actually rebates for early payments. So you also have that side that you get the positive aspect of from the large client.

Thank you.

Thank you, Morris.

Thank you, Morris.

Our next question comes from Tobey Sommer with SunTrust. Your line is open.

Thank you very much for letting me fit in another question from soon-to-be wintry Atlanta.

Polar vortex.

Yes. I'm glad you did the call tonight instead of tomorrow, because the office will be closed. I wanted to get a sense -- maybe, Dave -- we talked about the temp job growth being surprisingly strong, given the tepid economic environment. What kind of growth and maybe pricing and gross margins might the business be able to achieve if for some strange reason we do get an extra point or 1.5 points of GDP growth.

Yes, as Joe said, well, I think in the end it comes down what does the end customer -- what are they able to pass along. And we've seen relatively low inflation to deflation for the majority of the products that are out there. So when you think about it, if they are able to pass along price increases, then we're going to see those margins start to expand.

In the meantime, I think we've done exceptionally well in pricing in this kind of an environment. This is new for staffing, because historically we would not be growing at these levels at this level of GDP. So it's actually I think a combination of factors. It's all of the regulatory changes, all of the uncertainty.

And I believe finally we've seen the secular shift away from seeing staffing as just a -- something to be used during a cycle, to being a strategic part of a plan for an organization, where they've seen the benefit of it, certainly project cycles and so forth and their changes. So I think we were entering a new era for staffing as a whole, which has benefited us and benefited others in our industry. And our industry as a whole is actually in a time of prosperity, and we see that continuing for the foreseeable future.

Last question for me is within the financial services area in your Tech Flex, has growth from that customer set been above average? Thanks.

Well, actually growth on a year-over-year standpoint has been pretty consistent with what we're seeing across the board. And I will say that's in combination with -- that's one of our two largest industries. So it's consistent on a percentage basis on a much larger number.

Thank you very much.

Thank you.

This ends our Q&A session. I'll turn it back to David Dunkel, Chairman and CEO, for closing remarks.

All right. Well, we appreciate your interest in and support for Kforce. And once again I would like to say thanks to each and every member of our field and corporate teams, and to our consultants and our clients for allowing us the privilege of serving them. And we look forward to talking with you again for our first quarter call. Thank you very much.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.