Kforce Inc (KFRC) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 Kforce Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Michael Blackman, Chief Corporate Dev Officer. Sir, you may begin.

Great. Good afternoon, and welcome to the Kforce Q3 call. The prepared remarks of this call are available on the Investor Relations page of the Kforce Inc. website in the Events and Presentations section.

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 turn this call over to David Dunkel, Chairman and Chief Executive Officer.

Thank you, Michael. You can find additional information about Kforce in our 10-K, 10-Q and 8-K filings with the SEC. We also provide substantial disclosure in our earnings release to assist in better understanding our performance and to improve the quality of this call. We have provided an additional table in our press release to reconcile our GAAP results with adjusted results, which is provided to give you greater clarity into operating trends. Adjusted results reflect $342.1 million in revenue and earnings per share of $0.45. The adjustments reflect the exclusion of hurricane impacts, the sale of our international operations in the Philippines to the management team and costs related to organizational alignment to serve our largest strategic clients.

The remainder of our prepared remarks will reference adjusted results unless otherwise noted. We're pleased with the progress that we are making towards our long-term goals and results for the third quarter. Notably, we were able to meaningfully accelerate year-over-year revenue growth rates and improve both growth margins -- gross margins and operating margins. Our success in accelerating revenue growth was driven primarily by Tech Flex and the services portion of Kforce Government Solutions business, which grew year-over-year by 3.6% and 12.7%, respectively, on a billing day basis. Our Q4 guidance contemplates Tech Flex accelerating to 5%, which Joe will address later in this call.

The revenue impact from the storms was only about $1 million. However, the combined impact on EPS of the lost revenue and the actions we took in response was approximately $0.05. This disproportionate cost was driven by our decision to prioritize the care and safety of our core associates and consultants by continuing to compensate them while our clients were closed and providing additional support to those with more critical needs. We also felt compelled to more broadly support the communities we live in through a $1 million charitable donation to the Red Cross and other charities. I'm extremely grateful for the unwavering efforts of our employees who persevered and ensured that our consultants and clients were well cared for.

They rallied to help team members who lost their homes to flood waters, bring critical supplies to those without power for weeks and ship and airlift supplies to Puerto Rico to assist those who are still suffering.

We are encouraged by the recent trends in our Tech Flex business. The strength in the demand environment has not changed. We believe the secular drivers remain intact as companies increasingly look to technology to provide internal operating efficiencies, enhance competitive position and enable sustained market relevance in today's rapidly evolving marketplace.

Technology initiatives transcend all industries, companies of all sizes, and are increasingly focused on customer-facing applications. Competitive pressures and the need to innovate continues to intensify, and technology investments in areas such as big data, artificial intelligence and machine learning received increasing prioritization. The areas of the highest demand include mobility, cloud computing, cybersecurity, e-commerce, machine learning and digital marketing. The shorter-term project nature of technology requires specific skill sets, which are increasingly driving companies to a greater use of flexible resources.

Our KGS business had a very successful quarter as they secured 2 strategic prime contract wins under the T4 Next Gen contract vehicle of the U.S. Department of Veteran Affairs with a total award value of nearly $100 million, which we expect will be realized over 5 years. These prime contract wins serve to increasingly build a solid, more profitable revenue base moving forward. This business now has long-term services contracts in place capable of generating approximately $30 million per quarter on average.

From an operating perspective, we're also pleased with both the improvements we saw during the quarter in flex margins, driven by improved pricing discipline as well as the improving productivity within our revenue-generating population. Continued emphasis in these areas will be critical in meeting our longer-term goals.

Over the last 2 years, we have been executing a strategic plan to refine our operating structure, improve our sales efforts and enable our associates with new technology, and we're making progress and are committed to our plan.

The third quarter brought little additional clarity on key political policy initiatives, including immigration reform, health care reform and financial deregulation. Corporate tax reform, however, took a step forward with the passing of the budget. If enacted as proposed, it would have a significant positive impact on Kforce financial results. While there is still great uncertainty as to the details and the impact of any potential reform, we believe the balance of any changes and the increasing trend on GDP, now at 3% for the third quarter, should be a net positive for Kforce and our industry.

I will now turn the call over to Joe Liberatore, President, who will provide further details on our Q3 operating results. Dave Kelly, Chief Financial Officer, will then add further color on our Q3 operating trends and financial results as well as provide guidance on Q4. Joe?

Thank you, Dave, and thanks to all of you for your interest in Kforce. As we begin to see the benefits from the structural changes and investments we've made over the past 2 years, revenue growth rates are beginning to improve. Total firm revenues, adjusted for lost revenue from the 2 hurricanes, grew 3.3% on a year-over-year billing day basis. We are pleased that our Tech Flex unit, which accounts for roughly 2/3 of total revenues, grew 3.6% year-over-year on a billing day basis. We continued to benefit in the third quarter from a positive trend in longer assignment lengths and new assignment starts volume remained solid. Consultants on assignment increased each month of the quarter and into October, which should also benefit growth prospects in the fourth quarter.

Fortune 500 companies continue to be the largest consumer of flex technology talent and represent a significant majority of our revenues. We believe continued focus within growing industry verticals should allow us to expand the breadth of our service offerings to deepen our relationships with these larger, sophisticated buyers. Larger customers continue to concentrate spend with partners such as Kforce that can meet their needs nationally as well as ensure compliance with internal and external policies and regulations. We've been working to diversify our portfolio beyond our largest clients and more deeply into other Fortune 500 customers where we have established relationships. Much of the revenue growth in the quarter was a result of these efforts, as large client opportunities outside of our 25 largest clients account for the greatest share of growth in the quarter.

This strategy is well supported by our mature centralized delivery platform, which allows us to deliver consultants at scale across the United States.

This capability, combined with improved execution in our field offices, has also allowed us to increase productivity levels again this quarter. While these gains are welcome, we believe significant additional improvement is possible.

During the quarter, we experienced year-over-year growth in 6 out of our top 10 industries. Communications, manufacturing and energy performed particularly well, as well as certain professional services and solutions companies supporting the Federal Government.

For the fourth quarter, we expect Tech Flex revenues to improve sequentially and for year-over-year growth rates to accelerate from Q3 levels to approximately 5% on a billing day basis. As Dave noted, we recently sold our international operations in the Philippines, which took place in late September. Excluding this business from our baseline, our core domestic tech staffing revenue growth rate is projected to be closer to 6% in the fourth quarter.

Our FA Flex business, which represents 23% of total revenues, declined slightly on a sequential basis, but increased 4.6% year-over-year on a billing day basis. From an industry perspective, 6 out of our top 10 industries experienced year-over-year growth, including financial services, business services, retail and energy. We experienced a slower-than-expected seasonal ramp in new assignments as the third quarter progressed, but saw an acceleration in activity in September and October. We expect to resume sequential growth in Q4, but may see a slight decline year-over-year due to the lower baseline from the end of the third quarter.

Revenues for Kforce Government Solutions increased 13.9% sequentially and 0.6% year-over-year on a billing day basis. As Dave mentioned, KGS was successful in winning 2 strategic prime awards in the third quarter that are expected to provide a growth catalyst and a solid base to continue to build upon as we head into the fourth quarter of 2017 and beyond. This team has worked hard to improve its ability to win prime business, and we are beginning to see the payoff. As KGS ramps up headcount in this new business during Q4, we expect double-digit sequential growth. This predictable revenue stream also should allow for significant growth in 2018 for this business, provided it can win the only significant recompete, which constitutes 20% of its revenue base scheduled for next year in Q1. We have a high degree of confidence in success with this recompete as 2017 recompetes were 100% successful.

Direct Hire revenues, which represent roughly 3.5% of total revenue, declined 10.9% sequentially and 4.9% year-over-year. Our Direct Hire capabilities are an important element of our strategy and our objective is to meet the talent needs of our clients through whatever means they prefer. The fourth quarter is usually a seasonal low point, and we expect both sequential and year-over-year declines in the fourth quarter.

We are focused on making investments that provide our revenue generating talent with the necessary training, methodologies and digitally-enabled tools to engage in more strategic conversation and allow us to elevate the value we are bringing to our clients and consultants. These new tools should also contribute to productivity improvements. We completed the rollout of our new customer relationship management system during the third quarter, and we'll continue to enhance that solution going forward.

Excluding any impacts from our international operations in the Philippines, we have reduced our revenue-generating talent 8.5% versus levels a year ago. The process refinements we've been making, coupled with improved business intelligence tools that allow us greater selectivity in acquiring the right talent, have allowed us to accelerate revenue growth despite this decline. We also believe significant capacity exists to continue growing revenue and expect associate headcount levels to be stable for the remainder in conjunction with third quarter levels. Looking forward, we will intensify focus on tools that we can further enhance the capability and output of the team, make our people more successful and reduce turnover, so that we can limit adding additional resources. Our success is tied to our ability to consistently improve associate productivity by ensuring they are engaging with the right customers and arming them with the best tools and leadership.

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

Thank you, Joe. Total GAAP revenue and earnings per share for the quarter were $341.1 million and $0.40, respectively. As has been mentioned, hurricanes Harvey and Irma significantly impacted results. Additionally, earnings were positively impacted by a gain from the sale of our international operation in Manila, which was basically offset by costs incurred to better align our operations to service our largest strategic clients. Adjusted revenues of $342.1 million improved by 3.3% year-over-year on a billing day basis. Year-over-year growth rates in each of our businesses accelerated in the third quarter as compared to the second quarter with the exception of Direct Hire, which comprises less than 4% of total revenues. Adjusted earnings per share of $0.45 in the third quarter also continue to trend positively.

Our adjusted gross profit percentage in the quarter of 30.7% reflects a 20 basis point increase sequentially as a result of an improvement in Flex gross profit margins that was partially offset by a lower mix of Direct Hire revenue. The 60-basis point year-over-year decline, which compares favorably to a 120-basis point decline last quarter, is the result of both a decline in flex gross profit margins and a lower Direct Hire mix.

Our adjusted Flex gross profit percentage of 28.2% improved 60 basis points sequentially. On a sequential basis, for the second quarter in a row, we saw improving trends -- spreads between bill and pay rates on new assignments in both our Tech Flex and FA Flex businesses. We believe these improvements are the result of reinforcing to our associates the need for more disciplined discussions with our clients around pricing, given the value that we provide. In addition, the prime contracts that KGS won during the third quarter have contributed positively to KGS' Flex gross profit margin, which improved 450 basis points sequentially and should continue to support higher margins in this business prospectively.

Year-over-year, bill/pay spreads in our Tech Flex and FA Flex businesses remain down, though the gap is closing due to positive pricing trends the last 2 quarters. The pricing environment is still very competitive and labor supply remains tight. As a result, we will likely face wage inflation and will work to pass through these increases in the form of bill rate increases. However, if the current economic landscape continues, where many of our customers still lack pricing power, spreads may continue to be under pressure. As we look to Q4, early quarter data suggests that Tech Flex and FA Flex spreads may be stable to slightly down sequentially compared to Q3 levels. Flex margins are expected to be down seasonally due to paid time off for some of our consultants, particularly in KGS.

We continue to make progress in improving our operating leverage. On an adjusted basis, SG&A expenses as a percentage of revenue were 24.3% and have continued to decline due primarily to recent improvement in the productivity of our revenue-generating talent and solid expense control. We expect to make ongoing investments in enabling technologies, which will allow us to serve our customers more efficiently and result in continued declines in SG&A expense.

On an adjusted basis, third quarter operating margins improved 10 basis points sequentially to 5.8%. We expect to continue making progress towards our operating margin objectives as revenues accelerate further and productivity continues to improve.

Our adjusted effective tax rate in the quarter was 38%. Because our business is entirely domestic and not capital intensive, there is an extremely high correlation between statutory federal and state rates and our book and cash tax rates. Our effective federal tax rate is approximately 35%. Any reduction in federal rates would have a corresponding reduction in our tax rates and cash obligations.

With respect to our balance sheet and cash flows, accounts receivable increased $18.4 million sequentially. This increase was a result of a combination of growth in our business, the timing in receipt of certain payments, as well as certain clients extending payment terms. Long-term debt at the end of the quarter was $128.9 million, which is an increase of $1.5 million from Q2 2017. We've already seen an acceleration in cash collections in Q4 and long-term debt is currently $119 million.

Capital expenditures for Q3 were approximately $1.1 million, and we repurchased roughly 74,000 shares for $1.4 million during the quarter. Since the beginning of 2015, we spent approximately $82 million on repurchases and returned $34.1 million through dividend payments over the same period. In total, cash returned to shareholders has exceeded operating cash flows over that period. We will continue to appropriately balance the utilization of available capital between investing in the long-term growth of our business through technology investments, potential tuck-in acquisitions, investments in strategic partnerships, reducing debt levels and returning capital to our shareholders.

The fourth quarter of 2017 has 61 billing days, which is 2 days less than Q3 and equal to Q4 2016. As a reference point, we generate approximately $5.5 million in revenue for each billing day. We offer the following guidance, which represents a significant increase relative to expectations: We expect Q4 revenues to be in the range of $338 million to $342 million, which reflects an acceleration to approximately 4.3% year-over-year growth at the midpoint of guidance, and for earnings per share to be between $0.42 and $0.44.

Gross margins are expected to be between 30.1% and 30.3%, while Flex margins are expected to be between 27.9% and 28.1%. SG&A as a percent of revenue is expected to be between 23.9% and 24.1%.

Operating margins are expected to be between 5.4% and 5.8%. This guidance assumes an effective tax rate of 38%. Weighted average diluted shares outstanding are expected to be approximately $25.4 million for Q4.

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

Our guidance suggests continued acceleration in total firm year-over-year growth rates, driven primarily by Tech Flex and KGS. In addition to the benefits we will see in the fourth quarter from the recent prime contract awards at KGS, this longer-term annuity business significantly improves our growth prospects in 2018. We are optimistic about our prospects after a quarter of improving revenue, gross margin and operating margin trends, and we believe we can continue to accelerate revenue growth. We remain on track to achieve operating margins of 6.3% at $1.4 billion in annualized revenue and 7.5% at $1.6 billion in annualized revenue and remain confident in our long-term success. Jimmy, we'll now turn the call over for questions.

(Operator Instructions) Our first question comes from Tim McHugh from William Blair and Company.

First, just -- I guess, I know you gave a lot of details, which is helpful, on the call. But more broadly, is the environment any different from what you would have described either for FA or Tech versus 3 months ago? Or do you put more of the improvement as we look at the fourth quarter on just the internal initiatives kind of starting to work? Kind of if you had to pick one of those 2, I'd be curious to hear your views.

Sure, Tim. This is Joe Liberatore. I'd say what we're hearing from key customers and what we're hearing from our people out in the field is a very consistent operating environment. And we're seeing that reflected also in our key performance indicators. So we haven't seen anything really change with the market. It's remained intact and very stable. I would say what you are beginning to see here is the front end of the execution, which we've started down this path a while ago and we're starting to realize some of the results of that execution.

Okay. That's helpful. And then on the government side you mentioned the renewal in Q1. Can you remind us what that large contract is that's up for renewal? What the nature of it is? I guess, how long you've been performing that contract?

Yes, yes, Tim. This is David Kelly. So this, again, is with the VA. This is actually a contract that we participated on and we participated on as a subcontractor and we participated on it for, boy, multiple years. I don't know if it's 10 years. It could be more than that. We've got a great partner and that is coming up, as Dave said, in the first quarter. We feel very good about it. I'll remind you our recompete success last year was 100%, because of our long-standing relationship with the VA, but that's what that contract is about.

And our next question comes from Kevin McVeigh from Deutsche Bank.

Dave or -- I guess, Dave. Any thoughts on kind of what the impact of the corporate tax reform would be if you go to 20%? And then ultimately, what we do with the proceeds?

Yes. So I'll give you the math and then I'll let Dave talk a little bit about the proceeds. It's pretty simple. The math is pretty simple, right? So I tried to spell it out in my remarks. So our effective federal rate is 35%. There's really a very -- we're a very simple company. If it goes down to 20% depending, of course, on what other changes there are, but there's not a whole lot that can impact our tax rate. If 35% goes down to 20%, our effective tax rate goes down to about 20%.

Right, but (inaudible)

Federal rate. Right.

What would be the cash savings and then, ultimately, what would you do with the cash?

Yes. If you think about that based upon our taxable income, again, depending upon, if there's any other changes, you could see $8 million to $10 million at these current profitability levels of additional cash generated.

Yes. Kevin, this is Dave Dunkel. A couple of observations. I would say first of all, from what we've seen, the likelihood of a cut of some kind is increasingly more likely. Whether it will be to 20% hard to say, but clearly, the momentum is building behind it. And that's why I mentioned in my prepared remarks, with the budget passing, it's now a simple majority. So at this point, I would say the likelihood has increased. And obviously, with the shenanigans going on in Washington, everything is up in the air. But there seems to be momentum on both sides to try to get some tax reform passed. With that said, with the free cash flow, we've got lots of alternatives. Their retirement is clearly one of them. Repurchasing stock has been a very high use in the past. We could certainly evaluate increasing our dividend and dividend yield. And then, Dave has also talked about pursuing tuck-in acquisitions and also strategic investments as we've looked at different alternatives. Within the recruiting industry as a whole, there are some interesting options that we've seen. So we'll have some options for sure. And at this point, we haven't concluded. We don't want to start spending something until we finally realize whether they get this thing through. So we'll keep praying that it gets done.

Yes, for sure. That's super helpful. And then just -- it's interesting because it seems like everybody has inflected in terms of kind of September into October. And you see that in the organic going [10 to 3 to 5.5.] Is that the economy? Is that optimism? Is that just because we've kind of been in this holding pattern for upwards of 2 years now, what are you hearing from your clients that just gives them the confidence, because it's really across the industry, right, even in the [ASA] data like, you clearly see this acceleration.

Well, I think it was interesting back in 2011 and '12, we were talking about what we call the secular drivers behind technology and the staffing industry per se has always been highly correlated to cycles. We are seeing a very clear change in that the technology that was in the past part of the back-office support enterprise projects has now been moved to the front of the organization, customer-facing, product delivery, mobility. I mean, there's so many drivers now of technology, it's actually become part of the engineering of their product itself. So when you think competitively about what's happening in the market, when an Amazon introduces a new vertical that they're going after, their competitors are going to aggressively pursue and address those alternatives. Amazon being a disruptor, a technology disruptor -- the traditional competitors are now going to be making investments in technology to effectively address that. And that's just one simple industry and one simple example. So innovation and engineering applied to customer-facing applications is a very, very big part of what's happening. All of that, of course, is aimed at remaining competitive, at taking cost out of the system, looking for efficiencies. But I would say that technology has become embedded in all of the products of virtually every industry of every customer that we're dealing with today. So the very nature of what we do and the secular drivers behind it have changed dramatically during the cycle.

Got it. And then, real quick if I could, the decision to exit the Philippines?

That was a decision for lots of reasons. Number one, we did not see it as a long-term service offering for our clients. It had been part of an acquisition that we had done a number of years ago. And we didn't see it as a place that we would continue to invest. And so what we decided to do, and it was actually a very positive outcome, was to work with our management team and the management in the Philippines has actually acquired the business and we have entered into a strategic alliance with them to serve our clients here, and it also gives them a growth vehicle actually in the Philippines. The political environment there is also a little bit shaky. And as a result, we wanted to derisk our geographical portfolio, if you will. So that was certainly another consideration.

Kevin, what I would add to that is just, without the scale and the service offerings that we provide within Manila, with the customer base that we interface with, we need to be able to provide a broader array of services. So this provides us a greater opportunity to enter into additional partnerships so we can provide a broader spectrum of opportunities to the clients where we have the deep-seated relationships.

Got it. And then one more if I could just. The comments on kind of the perm were interesting. I would have thought you would have seen more momentum there. Just any thoughts on that? Was that just people not wanting to commit to the perm in terms of candidates as opposed to clients or just any thoughts on the perm trend?

Now I wouldn't say there's anything material that's been taking place from what we're seeing from a perm standpoint. As you're well aware, that's -- it's an offering that we view of value to our clients. As I've said this countless times, when you look at the technology side of the equation, we predominantly do that through a blended type delivery model. So we don't have, per se, dedicated technology, permanent placement individuals. And so it's going to bounce around on us a little bit from time-to-time just based upon what's happening within the client. I would say probably the better indicator of what's happening at the customer front is, we still are seeing conversions at an elevated rate, in fact, I think year-over-year where you're up about 12%. So we're outrunning those conversions and I view that as a healthy thing, because that means the customers really are using the flexible engagement type model as a means to identify the right talent and the talent they need to hold on to and then they're retaining that talent on a full-time basis. And again, I think anyone of our associates or leaders would tell you, I don't think there is a greater compliment we get than when we place somebody on a flexible assignment and they convert into a permanent employee there because we found somebody a great environment for them and we found an end client a great employee for the future.

Super. And congrats on the hurricane response as well.

Thank you. It's an interesting comment you make because our people rallied in a way that was just living out our stewardship value, Kevin. It was really neat to see. And when you're talking to some of your consultants and they have just been evacuated from their home and their home has been totally flooded and wiped out, it makes it real and personal and we just made a decision that we wanted to do the right thing. Thanks for noticing.

Yes, because I would say, it even goes beyond what we've done as a firm. I mean, it's our peoples' time and also many of our people have made significant contributions individually in support of hurricane victims as well.

This was just the corporate side. There are individual contributions. It was really interesting to watch and see our values lived out. They're reaching out to the folks in Puerto Rico now, and we don't even have any operations down there and we've sent container ships down. We've sent airlifts down. And you don't see it in the news now, but it's still very, very severe down there. So we're sending water purification units down next week. So our people are living out our values, and we're proud of them.

And our next question comes from Tobey Sommer from SunTrust.

This is Kwan Kim on for Tobey. First off, could you talk about your plans for internal sales generating headcount growth heading into 2018?

Yes, as I said earlier in my opening comments, based upon some of the things that we're experiencing from some technologies that we brought on as well as some talent analytics, we're seeing some improvement in terms of the selection and the ramp-up of people. So through the end of the year, we anticipate headcount will remain fairly constant with where were in Q3. As we move into 2018, we'll make those assessments. But at this point, based upon what we see from a productivity improvement opportunity, capacity standpoint, we believe we have ample capacity that we're not going to have to be adding a significant amount of resources.

Got it. And on Tech Flex, what is the demand like among large financial services firms given a more relaxed regulatory regimen and rising expectations over rate hike in the next 12 months?

Yes. We haven't really seen anything materially change in the financial services sector. I mean, obviously, you have certain players in that space that are dealing with different dynamics. But overall, I'd say the sector is very strong. And similar to what Dave was talking from a secular versus cyclical standpoint, there are so many initiatives that they have going on which are customer facing. It was really where we're seeing a lot of the ongoing demand.

(Operator Instructions) Next question comes from Greg Mendez from Baird.

This is Greg on for Mark. I know it's still early, but could you just talk about what you're seeing in the early days here with -- we have the CRM roll-off complete, how's that going? And kind of what your expectations are that if people continue to ramp on using it?

Yes, I'd say we are very early on. Probably the most significant thing that I could say at this point in time is we haven't really noticed any disruption as our people have become acclimated to the system. And I mean, we hear about these types of implementations all the time. And there, a lot of time, is a decrease in productivity or a distraction or a rationalization of loss of revenue opportunity as people become accustomed to the new system. I mean, obviously, we haven't seen any of that. And I would attribute that to, I think, our technology team did a fabulous job of picking the right technology, implementing the technology. And I would also credit our overall field for all the efforts that they put forth in really learning ahead of the curve before the system went in of how to operate the system and -- I mean, just our overall training department. So I couldn't be more proud of the team, I guess, what I'm saying is across the board. So we really have high aspirations in terms of where this is going to lead us and it's going to allow us much better pipeline management, how we organize around the customer, how we bring additional services to the customer and understand where the customer needs are, not to mention all the prospecting aspects realizing we picked Dynamics, though, we have some pretty interesting linkage into LinkedIn and tools and technologies in and around that. So we're already now moving down the path of evaluating our TRM, which is really the ATS and it will be a completely integrated system. And so I think as that comes online, we'll have the full solution for our people with the best tool on the market.

That's great. On the commentary on just potential for more spread pressure going forward. Is there any industry that jumps out where, hey, spreads are pressured here more than others? Or is it pretty much the same across the board?

Yes, it does, I think, vary -- and we've said this in the past. It does vary a little bit in a couple industries in particular, right? So the financial services sector, we've said in the past, certainly, is a very large sophisticated buyer. So I think financial services is probably one that you see pressured. The other side, interestingly, as you think about an inverse, because there is a significant demand, and of course, we see it and I'd alluded to it in the spread improvements we've seen in our government business. We've seen some increases in margins, and that partially is because we won some prime awards. But I think that they are receptive and they are spending money in the new administration. So it's a mixed bag, I would say. There are some pluses and then there are some that are more under pressure.

Okay. And last question, just any thoughts on the uses of cash. You mentioned potential strategic investments or acquisitions. I mean, can you provide just maybe any additional commentary on maybe what type of things you might look at? I mean, not specific, but just would be, hey, it would be for the build out in Tech Flex or anything along those lines?

Sure. This is Dave Dunkel. I would say that we would be looking at geographical tuck-ins in traditional staff (inaudible). We'd be looking at tuck-ins in statement of work and managed engagements with the specialize practices. So there's some -- there's some real opportunities in certain specific geographies for us to enhance our existing presence, also even potentially to enter customers. So I wouldn't look for a large-scale acquisition or a transformational acquisition. I'd look for something more that would be of a tuck-in nature.

And our next question comes from Michael Cho from JPMorgan.

I was actually hoping I could just follow up one more time briefly around your comments on recent October trends. I know you talked about maybe some secular-driven demand that possibly could come into fruition, but is there other any other supply and demand dynamics in October that you could possibly provide any more incremental color on?

I mean, I'd say we did notice improvements as we went into October. We noticed some ratio improvements, nothing radical in terms of front-end key performance indicators. I would just say overall, I mean, the environment has remained strong and remained intact and nothing materially has changed.

And our final question comes from Jonathan Mueller from Invesco.

Quick question. Just looking at your longer-term targets, you reiterated that the 7.5% margin on $1.6 billion and then the 6.3% on $1.4 billion. If we sort of look at your annualized guidance for this year and it really only requires 3% or 4% growth next year to get to that $1.4 billion annualized revenue run rate. So I just want to make sure I'm thinking about that correctly. So you're basically saying that if we can achieve that number, the margin, that we should be able to deliver at least a 6.3% margin on that run rate?

Yes, that's right. So I guess, another way to think about it, as we look at a $350 million quarter, right, we get 6.3%. And so it's some of the points that we're making. There are some things that have happened as we have seen the fourth quarter that are going to help us. I would caution Jonathan, there are -- I would say that would be a clean quarter we'd looking at. So Q1, there are significant amounts of payroll taxes. So to have an expectation of 6.3% margin on $350 million in revenues in Q1 is not realistic. So as we think about it, there are some things, obviously, that helped us. We've been talking a lot about a stable margin environment the last couple of quarters, and we've made the changes in the improving profitability trends that, we think, can get on a path to that and we still feel strongly about the that. We will benefit incrementally from things like the prime win that we had at KGS, which is going to have higher margins. Again, I've alluded to the fact that it is an annuity business over the last -- over the next 5 years. That business now is trending on a quarterly revenue run rate of about $30 million a quarter. So plus. So there were some things that we hadn't contemplated, I think, that are positive that gives us renewed -- I guess, increased confidence, I would say, that we're well on the path. And not only that, but as we continue to grow upon that to that 7.5% level.

Yes. Jonathan, this is Dave. I would add to that, that that's not a destination, it's just a place on the road. We're going to keep on going. Historically, we have performed at higher levels of EBIT. We have completely -- our operating income. We've completely transformed this model since 2012. We had a clinical business, we had health information management and we have gone through a very significant change in where the contribution of revenues come from. So as we have retooled the mix, doubled down in Tech, and have not acquired in the permanent space, because we believe that the way that we deliver the tech solution through the blend that Joe mentioned, is really the better way to go. Our team has done a great job with that, by the way. Our search team, and they have embraced that model. They've done a great job in the way that they've served the customers. So I would say, in general, as you look at the model transformation as we've changed from 2012 to 2017, we've stabilized it. We've made the technology investments. As revenue growth accelerates -- and I'm not going to declare victory because I don't think we're ready to that yet. I'm sure there'll still be still some choppiness. But in general, the trajectory is heading in the right direction. It's accelerating and the 6.3% and 7.5% are just milestones along the road. We're going to keep going.

Right. And that's helpful. And less concerned about on the quarterly cadence and realized like Q1, you could have property -- I mean, payroll tax and different things. But per se, just so I'm clear, if we hit $1.4 billion next year, 2018, we would expect on a sort of consolidated full year to be able to deliver that 6.3-plus percent EBITDA margin?

No. So Jonathan I'll restate. So obviously, the Q1 impact is significant. So if you took a look at the whole year, and if it were $1.4 billion, the total year operating margin would not likely be 6.3%. It'd be close, but because of that Q1 impact, we're trying to convey in a clean quarter what type of profitability milestones that we have.

Okay. Right, but even just back of the envelope math, if you're pretty close to that, I mean, that's looking like $2 in earnings power for this company and you're trading at $20 a share today. So I'm just trying to think about -- if I'm thinking about that even directionally correct?

I would agree with you vehemently that we are undervalued relative to the peer group.

With that, ends our answer Q&A session. I'd like to turn it back over to David Dunkel for any closing remarks.

All right. Great, thank you. Thank you all for interest and support for Kforce. And I'd also, again, like to just say thank you to our team, all of our team for the way that they've embraced the change, the way that they responded to the hurricane victims and helped out each other, just it was inspiring. I also want to thank our field and corporate teams, our consultants and our clients for allowing the privilege of serving you. And that we look forward to speaking with you again for our Q4 call. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude your program for today. And you may all disconnect. Everyone have a great day.