Kforce Inc (KFRC) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Kforce, Inc., Q4 2014 earnings conference call. (Operator Instructions). As a reminder, today's call is being recorded. I would now like to introduce your host for today's conference, Mr. Michael Blackman, Chief Corporate Development Officer. Please go ahead.

Thank you. Good afternoon and welcome to the Kforce Q4 and year end 2014 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 vary materially from the factors listed in Kforce's public filings and other reports and filings with the securities and exchange commission. We cannot undertake any duty to update any forward-looking statements. I would now like to turn the call over to David Dunkel, Chairman and CEO. Dave?

Thank you, Michael. You can find additional information about Kforce in our 10Q, 10K, and 8K and 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 performance in the fourth quarter as Kforce achieved quarterly revenues of $318.7 million, and earnings per share from continuing operations of $0.31. Our growth is being driven across all business lines including Tech Flex, our largest business segment.

We continue to invest in our Tech and FA Flex and selectively in our search businesses given the excellent market opportunities that we see as demand remains very strong across all industries and geographies. Before we focus on Q4, I would like to take a moment to reflect on what has transpired over the past year both at Kforce and in professional staffing. The industry is very healthy, with specialty firms leading the way. The tech space continued it's strong growth trends in 2014 and is projected to grow at high levels for the next several years. The FA market also was robust which contributed to our strong growth performance.

The secular shift continues as the need for flexibility and specialized skills, the project nature of work and the regulatory environment drive customers to greater use of flexible resources. At Kforce 2014 revenues were $1.2 billion which is a 13.4% increase year-over-year. Growth in Tech Flex, which is 68% of our revenue, was $14.3% which is double staffing industry analyst estimates for the industry, and FA flex grew total year revenue be by 16.9% which is triple industry rates.

Our government segment which provides Tech and FA staffing and solutions to the federal government also performed well contributing 6.6% to our year-over-year revenue expansion in 2014. Adjusted earnings per share for 2014 on continuing operations were $0.97 which is a 45% improvement from adjusted earnings per share in 2013 of $0.67. During 2014, we returned $115 million of capital to our shareholders in the form of $102 million in share repurchases and $13 million of dividends.

We also increased our dividend 10% in Q4 two years after initiating our dividend program. I'm proud of our team's execution in what remains an uncertain non-traditional recovery but what appears to be an improving employment environment. US job growth has improved over the course of 2014 as temporary positions continue to contribute an historically disproportionate share of this expansion. The temp penetration rate is at near record levels and college educator unemployment at 2.8%, about half of the overall employment rate.

Expectations for Tech demand remain high as mobility, big data, data security, project and program management and post recession IT rebuild continue to fuel needs for talent in virtually all roles and commercialize the organizations. 2014 was a year where we saw the results of strategic decisions our executive team has made over the past two years. We simplified our business model to narrow our focus on our core offerings and accelerate investment in revenue generating resources to build a model that drives sustained organic double-digit revenue growth.

We streamlined our processes, simplified our organizational structure to a more client centric approach and aligned aligned resources to target the industries and skill sets where we have the greatest opportunity to capture client share and accelerate growth. We targeted stronger partnerships with our premier partner clients and we saw optimization and efficiencies in our revenue enabling support. This is translated to accelerated growth year-over-year and has laid the foundation for continued growth in a clear path. The 7.5% operating margins at $1.6 billion in annualized revenues.

In August of 2015, Kforce will be celebrating its 20th anniversary as a publicly traded firm. Over that time, according to SIA, US staffing revenue grew from $55 billion to an estimated $132 billion, and professional staffing grew as a percent of overall staffing from 31% to 63%. A secular trend in economic indicators continue to move favorably, we believe our footprint and recent strategic decisions position us well for near term and future success. I will now turn the call over to Joe Liberatore, President, who will provide further details on our Q4 operating results. Dave Kelly, Chief Financial Officer will then add further color on our Q4 operating trends and financial results as well as provide guidance on Q1. Joe?

Thank you, Dave, and thanks all of you for your interest in Kforce. I echo Dave's comments in my excitement over our team's execution in both Q4 and full year 2014. Our new era strategy is generating results that align with our expectations and we remain hyper focused on delivering revenue growth in excess of market trends and attainment of our operating margin objectives.

All lines of business showed sequential growth on a billing day bases in Q4. Tech Flex and FA Flex growth continues to grow significantly in excess of industry averages and our government business has now achieved four consecutive quarters of sequential growth. Search (inaudible), a slight sequential decline, which is typical in Q4, still performed better than historical patterns. Tech Flex staffing, our largest business unit, grew revenues 3.3% sequentially on a (inaudible), basis and 9.9% year-over-year. Overall, our key performance indicators for Technology remain at very high levels for job orders, external submittals and send outs.

The strength of our leading indicators, specifically the high job order volume and quality of orders, confirms demand remains strong and new start acceleration is expected in the coming weeks after a slightly uneven January. Demand is positive across many industries with our top five being financial services, communications, health services, insurance and computer manufacturing. We continue to outperform overall Tech Flex growth averages within these units.

Inter quarter trends for Tex flex revenues increased in October, dipped slightly in November and rebounded to quarterly peak levels in December. We anticipate Q1 revenue to be down slightly on a billing day basis due to typical fall-off and head count at the beginning of each year and an elevation in conversions in Q4. With reduce the base line of Flex head count going into the beginning of the year. The increase in conversions reflects positively on the overall Tech demand. We expect continued year-over-year growth in Q1 near Q4 levels.

As a result of success capturing some large long-term multi-year statement of work engagement and staffing project visibility is improving in our Tech Flex business. Revenue for our finance and accounting Flex business represents 21.3% of total firm revenues. Q4 revenue growth accelerated to 9.1% sequentially on a billing day basis and 22.2% year-over-year.

This business is also experiencing strong starts, job order flow and external submittals. Growth by industry is diverse but contributing drivers to year-over-year success are continued expansion and healthcare project revenue and increase in financial services revenue. Both of which in the national recruiting center positions us to maximize. Inter quarter revenues grew in each of the month of the fourth quarter.

We are benefiting from investments in management and operating model adjustments made in this business over the past two years to diversify our client base and capture market share. We expect Q1 flex revenues to be down slightly on a billing day basis due to end of year recovery and year-over-year growth remaining near 20%. Revenue increases for the fourth quarter for our Tech and FA flex businesses were driven from a diverse blend of clients.

Our top 25 clients contributed 37.6% of total revenues, an increase of 340 basis points year-over-year from 32.2% in Q4 2013. This, along with our above market growth rate, suggests that we have been successful in taking customer share within our largest clients as we continue to invest to further delight these customers. Our service capability is further enabled by our national recruiting center including our new Phoenix location which opened in mid 2014 and is better situated to serve our western US client needs.

Revenues for Kforce government solutions increased 10.6% sequentially on a billing day basis in Q4, up for the fourth consecutive quarter and are now 22.4% year-over-year. We are proud of this team's success in both the services and products basis as it works through the ongoing challenges within the federal government. As we noted last quarter, we expected stability in the services revenue and a significant product revenue increase in Q4 and this was executed as planned.

Q1 expectations include continued steady performance in services revenue and an additional quarter of product revenue consistent with Q4 levels followed by product revenue declines in Q2. As we look ahead into 2015, 36% of this unit's revenue is scheduled for recompete. We are still awaiting news on the award of our largest contract which we had mentioned last quarter.

Our historical success on recompetes and our strong relationships with the end user customers give us confidence in our ability to retain this business though the increasing trends for awards to be based on lowest cost technically acceptable provide somewhat greater uncertainty. Direct hire revenues from placements and conversions declined 4.7% sequentially but increased 2.9% year-over-year. Our objective is to meet the talent needs of our clients through whatever means they prefer and providing a meaningful capability to deliver resources through direct hire will remain important in meeting those needs.

In Q4 2014 direct hire was 3.7% of total revenues versus 4.1% in Q4 last year. We expect direct higher as a percentage of total revenues to continue to decline but be relatively stable from a dollar perspective as we move forward. Revenue generating head count increased 6.3% year-over-year in Q4. We continue to invest in additional revenue generating performer growth and anticipate year-over-year head count growth to remain at or above these levels respectively though below revenue growth rates.

We believe capacity exists and a significant opportunity to improve productivity remains as our newer associates become more experienced. Through an established approach to hiring we will drive both sustained revenue growth and operating leverage. Our execution in 2014 has set the stage for continued success in 2015 and beyond. We remain committed to expanding market share, evolving our relationships with our premier partners, becoming a top provider within all of our clients and achieving our operating margin objectives.

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

Thank you, Joe. Total revenues for the quarter of $318.7 million increased 4.9% sequentially on a billing day basis and 13% year-over-year. Our Flex staffing revenues collectively grew 12.7% year-over-year and our government business increased 22.4% year-over-year. Search revenues of $11.9 million increased 2.9% year-over-year in the quarter. Fourth quarter income in earnings per share from continuing operations were $9.1 million, and $0.31 respectively which represent 32% and 35% year-over-year improvements versus Q4 2013 normalized results.

Inclusive of discontinued operations, GAAP net income and earnings per share in Q4 were $8.9 million, and $0.30. Growth profit percentage in Q4 was 30.9% which is down 40 basis points sequentially, and down 80 basis points year-over-year. The year-over-year decline in margin is due to a combination of the decline in search revenues as a percentage of total revenues due to the relative strength of our Flex revenue growth and the decline in Flex margins. Flex growth profit percentage of 28.2% in Q4 decreased 30 basis points sequentially and declined 60 basis points year-over-year.

This sequential decrease is primarily attributable to business mix driving pricing compression in our KGF business and a Q4 true-up of $500,000 on a terminated contract. Also contributing to the decline in the slight compression is a slight compression in Tech bill pay spreads year-over-year due to a change in client mix as larger clients who have slightly lower margins have grown at a faster pace than the rest of the portfolio over the past year due to our investment emphasis to gain share in these clients.

Specifically, Tech Flex spread has declined 20 basis points year-over-year while FA Flex spread has been flat over the same period. Looking forward, assuming a consistent operating environment in economic landscape, we expect pay rates and bill rates to continue to increase in tandem leading to a stable flex margin environment. However, economic growth should accelerate, we may see an improvement in flex margins through an expansion similar to what we've seen historically.

Q4 2014 SG&A percentage of 25.5% was flat relative to normalized Q3 2014 results, and decreased 80 basis points from 26.3% in Q4 2013 excluding non-recurring charges that occurred last year related to organizational changes made to drive operating efficiencies. We expect continued reductions in SG&A percentage as revenues improve.

As we look at our balance sheet and cash flows, our accounts receivable portfolio continues to perform well and write-offs remain at low levels. Capital expenditures for Q4 were $1.5 million. Bank debt at the end of the quarter was $93.3 million as compared to $12.7 million at the end of Q3.

The increase in debt was driven by the repurchase of $1.9 million shares in Q4 for $42.4 million, and $38 million in federal income tax payments related to the August sale of our HIM business. During Q4, we completed the redeployment of all the HIM sale proceeds through stock repurchases. The repurchases, combined with operating efficiencies identified in late 2014, have allowed us to fully recapture the contribution of the HIM business to our earnings more quickly than we had originally anticipated and we remain on track to meet our longer term operating margin target of $7.5% at $1.6 billion in annualized revenues.

Also during the fourth quarter, we increased the size of our credit facility and extended its term for five years to provide additional flexibility and support of our growing business. With respect to guidance on continuing operations, the first quarter of 2014 has 63 billing days compared to 62 billing days in the fourth quarter of 2014. We expect Q1 revenue to be in the $312 million to $317 million range and for earnings per share from continuing operations to be between $0.17 and $0.19.

Given our concentration of business in the northeast corridor, we've lost approximately $2 million in revenue through last week. This does not contemplate any weather impact this week or the impact on lost hours, delayed starts or extended assignment closing processes. Gross margins on continuing operations are expected in Q1 to be between 29.9% and 30.1%. Margins will be negatively impacted by approximately 140 basis points due to increased payroll taxes in Q1.

SG&A as a percentage of revenue is expected to be between 26.3% and 26.6%. Operating margins are expected to be between 2.7% and 3%. We expect the increase in payroll taxes in both cost of sales and SG&A combined to negatively impact EPS by approximately $0.14 relative to the fourth quarter. Our effective tax rate in Q1 is expected to be 39.8%.

This guidance assumes weighted average diluted shares outstanding of approximately $28.5 million for Q1. This guidance does not consider the effect, if any, of charges related to the impairment of intangible assets and one time costs, 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.

We believe we made significant progress over the past two years building a foundation and executing our plan for achieving sustained revenue growth well above industry averages while also accelerating operating margin improvements.

We have continued to hit all of our internal financial targets and first quarter expectations are for continued improvement in operating leverage. We remain on track to achieve our targeted operating margin goals. We will focus on the continued execution of our plan in 2015, inclusive of consistent investment in head count growth for sustained revenue growth while maintaining progress toward our profitability goals.

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

Thank you. (Operator Instructions). Our first question comes from Mark Marcon with R.W. Baird. Your line is open.

Good afternoon and congratulations on a great year. I was wondering if you could talk about your pay and bill rate expectations with regards to Tech Flex. You gave some comments with regards to what you've seen and that you would expect them to go up in tandem but just wondering what rate of increase would you expect them to go up at?

Sure, Mark, this is Dave Kelly. We expect really the same trajectory that we've seen over the course of 2014. Bill rates and pay rates in 2014 went up year-over-year about 5%. And in a consistent bill and pay increases. And I think that trajectory we've seen in the last couple years, we expect to continue to go up because we talked a lot about we're still at a very supply constrained environment so having to pay more (inaudible) allowed us to maintain stable margins but certainly we are a not looking at Tech Flex for the change at this point.

Mark, this is Joe. What I would also add to that is we're seeing that consistent with our strategic (inaudible) portfolio clients as well as the spot they've pretty much moved in tandem through the entire year.

Great. What are your expectations with regards to the mix of clients?You clearly saw faster growth with some of the larger ones. Do you expect the smaller ones to catch up in terms of the growth rate?Or should we continue to see the same dynamic?

I anticipate we'll continue to see the same dynamic based upon how we're aligning our resources to capture greater client share in those clients where we're doing business. That's not to say we're not going to be on-boarding new accounts as well as servicing accounts that are earlier in their maturation stage. But we're very focused on those customers where there's significant bandwidth in them and where we've realigned our resources. You saw some of the movement in terms of the top 25 and even when we get into our Tech Flex service line, it's even a little bit more proportionally weighted towards the top 25 as a percentage of revenue.

Just under that circumstance, could you still end up seeing 5% increases in terms of the bill rates given the mix shift?

Well, that's part of why earlier when I tacked on to Dave's response. We've seen the same level of bill rate increase within our strategic account portfolio as we've seen in the spot market. In fact, I would even go a little bit further than that. What we've seen happen over time, probably the last four to six quarters, is we've really seen the delta between those two in terms of the level of bill rate has really compressed a little bit so they're much closer to each other than what they were if we were to look back 8 to 12 quarters ago.

Okay. But if I take a look at the last quarter, your bill rates on the Tech Flex side are roughly equivalent to a year ago?

If you're just doing a simple math, when we look at the transaction level rates (inaudible) they're up about 5%. We did see some additional cost in the system as a result of furlough that we saw in some clients. So if I can parse the answer between bill rates and pay rates strictly at a transaction and some other costs that might be impacting that calculation, that's really what's driving the math for you there.

Okay, great. And can you just add a little bit more color with regards to the commentary with regards to the KGS contract that's coming up for renewal? You mentioned something about the sensitivity on the lowest price. How should we think about that?

Mark, this is Dave again. As we think about the government contracting space in general, no different than what we've been talking about. Each procurement that we see, the contract to come up for renewal certainly lowest price technologically secular procurements are becoming more and more common and that's what we're referring to when we talk about the gross margin compression in KGS over the course of the last year. That's a big driver to that. I don't think that that will change. I mean I think we've over the course of the last couple years seen that, that's driven gross margins down. Certainly the procurement's going forward are a mix of renewals of what were previously lowest cost technically accessible replaced with new ones and there may be a few new contract procurements that are lowest cost technically accessible than previous or not. So, certainly, I think continued compression on margins is there but we've done a nice job, I think, managing that.

Mark, this is Dave. I wouldn't focus too much on that one client specifically because at the same time, there are other customers that we are proposing new work on. We have substantial opportunities that we're also pursuing at the same time. So if you were to look at that revenue and assuming an absolute worst case scenario, it's less than 3% of Kforce's revenue and we certainly don't expect that to happen, and that would discount any other business that we're seeking aggressively. We feel pretty comfortable with the relationship and with the stability of it. Obviously we felt it was important enough to point out that shift towards the lowest price technically acceptable contract vehicles.

And so, therefore, in terms of the trends that we're seeing in terms of year-over-year in terms of the gross margins, on that KGS side, you're not signaling a major departure from that trend?

No, we're not

Okay, great. Thanks.

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

Thank you. I think you said something about the bulk hire outlook for Tech getting better. Is that related to your direction of resources or is it also a market related external characterization?

Tobey, I would say it's a combination of both. Where we're seeing those opportunities is where we have the relationships so we're further entrenched in those organization which is bringing opportunity forth because of past performance. That's what I was saying on the one side of the equation. On the second side of the equation relative to the market, this is just part of the bigger dynamics within the market, consolidation of vendors, opportunities to look for cost efficiencies while directing a higher percentage of revenue to fewer vendors. So it's a combination of both.

I would add to that also that we've seen customers moving some of their statement of work business and project business to firms such as ours that have the capability to handle that and away from some of the larger higher priced consulting firms. So I think that we've cited that in the past and it's certainly does appear to be continuing.

Sort of that mix shift within IT services favoring staffing at the expense of some of the other categories?

Yes, it's obviously a much larger market than staffing as a whole. And customers have figured out that the resources that are often presented to them are coming through staffing firms and under the management and project management of the larger consulting firms. So depending on the size and the scale of the projects, it may be more advantageous to them to procure that directly with a team that's designated from the staffing firm with leadership of a project manager to take on these specific aspects of their project. Large scale stuff like an ERP implementation is still going to be done with the larger consulting firms.

Okay. I wanted to ask you about some of the incremental cost deficiencies that we talked on the call a couple of quarters ago, maybe over the summer, in kind of where you stand with those, whether those are in the P&L now or something perspective as we work our way through 2015 that will be additive to your margin?

Yeah, sure, Tobey, this is Dave Kelly. Just to refresh your memory from the last quarter, you're right. As we look at the fourth quarter, certainly, there's a continued progression and we're able to realize a portion of those efficiencies in Q4. As you look at Q1, we'll see some more of that which for us if you look at our guidance, it suggests we are getting some operating leverage and that's a result of some of those efficiencies and we're planning to be completely done with those in the second quarter. So I think we'll see improvement here in the first half of the year from those efficiencies and on top of that, obviously another big piece of that is our ability to scale and use the foundation that we have and the last biggest piece, as a reminder, is as we look at the tenure of our associate population, as they generate tenure a productivity in our systems, we get some operating margin improvements from that. So it's really those three things you need to think about when you think about the earnings power of the firm.

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

Great, thanks. If you said this, I apologize. Can you remind us what the EPS impact is from payroll tax free set as well as (inaudible) and if you're seeing any relief on the (inaudible) line as we're working our way through 2015 just to state budgets start to firm a little bit.

Sure, Kevin. So we had indicated our expectation in Q1 relative to Q4 was about a $0.14 impact for payroll taxes. In terms of relief, our expectation as we move into Q1, we're not seeing a lot of relief. Our business has a big impact, Q4 to Q1 predominantly because we are a tech business, this is our longer term assignments, higher pay so there's a significant impact in Q1. Relative to other quarters because of the length of those assignments, we're not really seeing any change right now. We're hopeful as the states get more solvent that we're going to see some benefit there but we are any big potential impact. FA, a much higher velocity business is more consistent throughout the course of the year, so most of the driver of that $0.14 in Q1 is tech.

Got it. And then on the journey to the 7.5% margin, any puts or takes in terms of potential upside to that as we think about the mix going forward or still on par to hit that 7.5%?

Yeah, Dave may have a couple things to say about this but I'll start by saying as far as puts and takes, 7.5% is the target that we put out there based upon a revenue expectation. It's certainly not where we're stopping. We're looking at all efficiencies that we can find and opportunities to improve that. I think the other thing I would comment on is a lot of the things that we've done, really, and the hiring that we continue to do, and the efficiencies that we've previously identified, we've already undertaken a lot of that hard work so executing on the business on a day-to-day basis as we grow this business should drive a lot of those operating efficiencies in the margins that we're looking for.

Kevin, this is David. The 7.5% is a milestone. It's not a stopping point. So we're going to continue to look at efficiencies and as Dave and Joe both indicated, a big part of what we expect in the future is going to be the productivity of these teams as they continue to mature. And based on our human capital model, we see that their productivity increases and that in turn gives us additional leverage in the future. The 7.5% is something we're holding ourselves accountable to. At that revenue stream, our model tells us that we can get there. We're focused on it but it isn't a stopping point.

Got it. One more if I could. In terms of FX and off-shore and coming back, has there been any change in terms of strategy around that, Dave?As companies look at their 2015 budgets from an off-shore versus near shoring versus bringing it back on to the states outright given the narrowing spread on wage rates and so on?

I haven't seen anything that would suggest that there's been any material change. I think the skills shortages are probably the still the primary driver of decisions whether it's on shore or off-shore, versus the dollar.

Super. Thank you.

Our next question comes from (inaudible) with Credit Suisse.

Earlier, you had talked about the bill rates that these larger clients continuing to converge the spot rates. I was wondering if you could give us a sense of how much that delta is now?I think you had said it was about a 5% difference last quarter. Just trying to get a sense of what's driving this convergence and how long it might take to close that gap.

Within Tech Flex, the bill rate delta between strategic accounts spots about 4.7. So you're correct. It continues to inch its way down closing that gap.

Okay. The growth from these top 25 clients has been really impressive but it's come at the expense of gross margins. I'm trying to understand if there's any risk to hitting your long-term margin targets if these accounts continue to grow at this pace? Or, asked another way, how much margin degradation are you weighing in from these top clients, or should we assume them to be stable from this juncture?

Yeah, I would say I would assume on stability, I think that in Dave Kelly's opening comments because that's all built into our models because actually when we look at what our mark-ups are within our spot market as well as our strategic accounts especially within Tech Flex which is roughly 70% of our business, those have really migrated and there's a nominal delta in terms of the mix there that shouldn't really drive any significant difference from a margin standpoint over time.

The other thing that I would add to those comments as we think about that client base, you need to think in terms of scale and the ability to deliver with large clients. So operating margins is what we're driving to, right?So, as gross margins might be slightly lower and larger clients of scale, you only have one bill. You only have one call to make, etc. So, you don't need the operating costs to drive the same operating margin even with a slightly lower gross margin. So we get the benefit of scale there. We're comfortable with the mix as large clients grow in those operating targets, operating margin targets.

Okay, that's helpful. And then also I just wanted to touch on revenue generating head count. It looks like 2014 average in the mid single-digit type of range. Just trying to get a sense of what might drive the additions towards that 10% number you've talked about versus the mid single-digit type of growth we saw in 2014?

We felt short of our targets in 2014. Q3 put us behind the curve and part of that was driven through some of the restructuring we had going on within the organization post the divestiture of HIM so we lost a little bit of traction there and it put us behind the curve. So we have everything in place at this point in time and we're marching back towards that 10% year-over-year growth target here in Q1.

Great. Thanks a lot.

Our next question, comes from Otto Garrett with Deutsche Bank. Your line is open.

Thanks for taking my question. Building on the question regarding head count additions, are you running into any supply constraints or any difficulty finding candidates as you work back towards the 10% target?

No, actually, we haven't really seen any constraints in terms of being able to go out and select top talent in the marketplace. We have an internal team that supports our field operations as well as that's obviously one of the priorities of all of our field leaders is getting the best talent in the marketplace. It's never easy. The talent is out there. We don't believe that that's going to be any constraint on our ability to hit our targets.

Okay, great. And also from early in the call I missed your expectations for Tech Flex in 1Q. I could run past those again?

Tech Flex in the first quarter we anticipate that the business will remain pretty constant to where we were in Q4 from a year-over-year standpoint.

Okay, great. Thank you.

Our next Question comes from Randy Reece with Avondale Partners.

The volume growth you had in finance and accounting was strongest I guess since the beginning of 2011. Could you give me a little more inside into how you got there? That was a huge number.

Yes, it's really the same story that we discussed in our last quarter. I mean it's broad based, it's across all marketplaces, it's coming out of project-based business as well as the transact ional accounting. And we are seeing that within, especially on a project side, within healthcare associated with rev cycle. We're also seeing in the financial services sector. And so on the bulk or high volume business, I think we're really benefiting from our NRC which is servicing close to 87% of that business at this point in time. So I think that also gives us leverage in our other base of businesses where it's operating at the local market and that more transaction traditional accounting space.

And on the tech side, I've heard reports of some serious competition for labor in the cyber security area. How does a company like yours adjust to what seems like rapid shift in the marketplace as far as labor supply/demand and the particular area?

It's one of the reasons why we really like the business that we're in because we're not a manufacturer that's dependent upon having the best features, advantage or benefits on what we're bringing to the customer. So, we adapt to what the market dynamics are and I'll go back to I think recruiting is one of our strongest core competencies. It's always been one of greatest competencies of the firm. Cyber security, partly when you look at cyber security is the demand is through the roof in terms of talent but it's not as broad based as what we're seeing in many other skill areas at this point in time. Not to the say this it won't become that. So we are really seeing a lot of the niche players that are capturing the project and entry point. Just because of where that is in its overall product evolution. I do think over time you'll see that move into the main sweet spot of professional staffing but right now I would say probably the solutions companies are really catching a little bit more of that which is the national growth curve of how these different products or services evolve in the marketplace.

Very good. Thank you very much.

Sure.

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

Thanks. Just a few extra. You mentioned the Tech Flex flat year-over-year in 1Q. What was your commentary about the other segments?

Well, FA we pretty much said will remain in roughly this 20% year-over-year growth range. Search we remained that it was pretty much from a dollar, what we produced in dollars, would remain pretty constant for the foreseeable future. And then KGS, really on a kind of flat from where we were from a revenue standpoint in Q4, realizing that we are going to have another big product quarter there, and we do see that potentially tailing off in Q2.

Understood. Is there a tailwind in terms of the share count declining a little bit further in the first quarter from the repurchases in the fourth?

No, there's not. I think we guided an expectation of 28.5 million shares. So that will give you a full look at what we are talking about here in terms of expectations for shares in Q1. That's obviously related to the fact that we repurchased throughout the fourth quarter.

Okay. And then my last question is just kind of a broad one. I'm not sure who to direct it to so I'll let you guys choose. We talked about staffing companies maybe being directed more statement of work business from customers who want to have more control and realize that's where the resources are coming from anyways so maybe save a little bit of price as well. Do you think there are IT services firms that, because the market is so tight, may actually want to have a recruiting engine?Do you see any of them kind of getting into the staffing space even on ancillary basis?Thanks.

I would say if we were to look at real world, so let's look at the governments base which is very mature from the type of providers that you're talking about, what we're seeing with our KGS unit right now is our ability to deliver and truly from a staffing standpoint as well as leverage the NRC is a key differentiator for that business within the marketplace. Where I was really going with that is you don't just create a staffing entity overnight. I mean it's taken us 50 years to evolve models and processes and systems and so on and so forth so I can't really tell you what's going on inside their strategic discussions in terms of looking to do that. Now whether they come in acquire and then bolt that in, then you go back to the same place where we've been before which is when you try and blend solutions and staffing together, there's a lot of channel conflict that comes into play there.

I think more than likely they're just going to use us as a supplier because we have an engine which by the way we found is also been a competitive advantage for us in our KGS unit. The NRC has become a primary supplier for KGS and the larger firms can't really compete with the staffing engine that can deliver at scale, and that's actually we believe is going to help us even more in KGS. So, the engine as Joe said, that's a competency to us. So I think the services firms and the consulting firms will come to us to procure talent rather than trying to buy us or something like that.

Thanks for the color. I appreciate it. Have a good afternoon.

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

Thanks, just a couple of quick follow-ups. First, I missed, what did you say the tax rate would be in the first quarter?

39.8%.

Great. And then, with regards to the head count additions, the 10% target, do you expect to get there all within the first half of the year, first quarter?You mentioned you got a little bit behind in the third quarter. So how should we think about that in terms of scaling it up over the course of the year?

Yeah, in an ideal state we would have looked to net up 10% year-over-year each quarter, and to be consistent with that. The practical reality of it is it's very difficult to be that precise. When you're dealing with turnover, when you're dealing with performance management and then you're dealing with hiring. So that's why when we put that 10% out there, that's our goal is to over time be consistent with 10% but not necessarily on a quarter-by-quarter basis. There's going to be some variable aspect associated with that.

And the predominant folks who are being brought on are newer or brand new to the industry and therefore the wage rates, your internal comp doesn't go up 10% as it relates to this group that's coming on?

I would say correct, the comp doesn't go up 10% based upon the group that's coming on. So no, we hire a diverse population within our organization but they all come in pretty much along the same price range in terms of how we orient them into the business. But no, we're not just hiring everybody right out of college and integrating them in. We hire people that have a lot of business experience. We also hire some people in the competitive landscape when those opportunities make sense and will integrate well into the teams.

Great. Thanks for the color.

Thank you. I'm showing no further questions. I would like to hand the call back to David Dunkel, Chairman and CEO, for any closing remarks.

All right. Thank you very much. We appreciate your interest and support for Kforce. I would like to again say thanks to each and every member of our field and corporate teams and also to our consultant and our clients for allowing us to the privilege of serving you. We look forward to speaking with you again with our first quarter results. Have a good evening.

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