Kforce Inc.
Q4 2008 Earnings Call Transcript

Published: 12 Feb 2009

[Operator:]

Good day everyone and welcome to today’s Kforce Inc fourth quarter 2008 earnings conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Michael Blackman, Senior Vice President, Investor Relations. Please go ahead, sir.

[Michael R. Blackman:]

Good afternoon and welcome to the Q4 Kforce conference call. Before we get started, I would like to remind you that this call may contain statements that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially because of factors listed in Kforce’s 10-K and 10-Q and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. I would now like to turn the call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

[David L. Dunkel:]

Thank you, Michael. You can find additional information about Kforce on our 10-Q, 10-K, and 8-K filings with the SEC. We provide substantial disclosure in our release and our hope is that this will improve the dissemination of information about our performance and the quality of this call. We are very pleased with our team’s performance even as the macroeconomic environment deteriorated significantly throughout the quarter. Against that backdrop, our teams did a great job persevering and delivering great results. Kforce began preparing for this downturn at the end of the last one. We have made a number of significant changes to our business model, service offerings, support organization and most importantly, our culture. 2008 marks the end of our last three-year plan which resulted in several significant accomplishments including entering the government space through KGS which now has over $100 million in annualized revenue, substantial growth and evolution of our HLS segment which is now running at close to $200 million in annualized revenue, evolution of our national accounts program, further development in refinement of our national recruiting center and support of our field teams and national accounts, modification of our search model, contribute to the up-cycle without the substantial online costs in the down-cycle, exiting the nursing and scientific businesses, and maintaining a domestic focus with an emphasis on market penetration. F-flex which comprises of approximately 50% of our revenue appears thus far to be behaving very differently this downturn and remains a very attractive component of our revenue mix. In addition, our technology infrastructure is complete and up-to-date with all major investments behind us. We achieved most of our goals in this plan even if last year, 2008, was a substantially different economic environment than originally anticipated. We now move into year one of our next three-year plan. This plan has been formulated over the last 12 months by our leadership team and incorporates specific elements and goals for each year to fuel revenue growth, improve operating performance, customer service and much more. As a part of that planning process, we recently announced several key leadership changes representing the next generation of Kforce. Most are very familiar to you and Bill will discuss them further in his remarks. We congratulate both of them to the executive team. On December 3, KGS completed the acquisition of dNovus and is substantially aligning the integration process. Thus far, it is going very well and we are excited about the prospects for the combined teams. As challenging as the environment is, we are aggressively pursuing market share and business opportunities that will lead to increasing our customer share. We believe that the future of professional staffing will not look like the past and that Kforce has developed a highly leveraged staffing platform that can deliver great results across our service spectrum. We are not simply waiting for a cyclical turn but instead are proactively putting in place the people and processes that will create our future successes and we believe firmly putting Kforce in a leadership role in the sector. Looking ahead, we will continue to use cash flow for debt retirement, share repurchase and acquisitions that meet a very high hurdle. I would also like to reiterate that our priority during this down-cycle is to maintain positive cash flow and to retain and redeploy our great people. I will now turn the call over to Bill Sanders, our Kforce President who will provide his comments and then Joe Liberatore, Kforce CFO will provide additional insights and operating trends and expectations and then I will conclude. William?

[William L. Sanders:]

Thank you, Dave and thanks to all of you for your interest in Kforce. We are very pleased with our fourth quarter results. We did a good job in a very difficult operating environment and we believe our continued success is a result of our great people and our diverse segment offerings. Revenues of $241 million declined 0.9% sequentially on a billing-day basis driven primarily by declines in clients’ accounting, our HLS professional staffing business and our search business. Flex revenues which represent 95% of our revenue stream decreased sequentially for the first time in three years to $228.2 million. Though they were flat on a billing-day basis, we are proud that this is the sixth consecutive year of increased revenues for continuing operations. Our technology business segment improved 1.3% sequentially on a billing-day basis, even though technology search declined 17% sequentially. Our technology flex business which represents roughly 51% of total firm revenues increased 2.1% sequentially and declined 2.6% year-over-year on a billing-day basis. Our technology flex business continued to be stable during the quarter, although we anticipated a sequential decline in Q1 as a result of typical assignment ends. Recent trends indicate that the demand environment today for the technology flex may be different from the previous recession. Specifically, our technology offering has not shown declines in activity consistent with other staffing disciplines including our finance and accounting products. We continue to watch our internal activity levels in this business closely as current visibility is limited. However, it appears that financial sectors have not overhired during the recent economic expansion and unlike the year 2000, we do not see the same exaggerated tech bubble that had developed previous to the last economic downturn. Our government business had very strong sequential growth at 15.3% on a billing-day basis. During the quarter, the firm acquired dNovus RDI, a $33 million government contractor in the technology space which is being integrated with KGS. Our government business unit now has annualized revenue in excess of $100 million. The expansion of this business beyond $100 million has much gone to pass performance potential. This, we believe is a significant milestone as this provides KGS with access to the most significant government contract which will assist us with the same growth. We are very pleased with the pace of the integration of the acquisition and the excellent job being done by Larry Grant and Glen Shaffer. Due to the acquisition and a solid pipeline, we expect solid growth for KGS in 2009. The two businesses in our HLS business segment are chemical research and healthcare business units that grew 7.1% and 0.6% respectively, year-over-year on a billing-day basis. These two businesses have been consistently the top-performing units in Kforce over the past six years with healthcare being the winner the last 2-3 years in sales contests and chemical research finishing second both times. I would like to congratulate both teams and their leaders, Sam Farrell and Kris Ellis. Both of these outstanding leaders have recently been moved to the firm’s executive committee. Chemical research has seen some slowdown in big pharma with low level of job orders and some cutbacks. The pipeline for the second half of this year appears promising. Healthcare fell at the beginning of January and is now picking up some momentum. Our finance and accounting business which now represents less than 20% of our total revenue declined 6.4% sequentially and 19% year-over-year on a billing-day basis. This decline was largely the result of the declines in the SMA permanent placement business with a decline of 15.6% sequentially. F&A has been the most significant impacted by the current recession and we expect this to continue to decline in Q1 as the economic activity continues to slow. Search revenues which were 5.3% of total revenue in Q4 declined 17.5% sequentially and 27.6% year-over-year. Search activity weakened as the quarter progressed and continued to be weak through January. I don’t think anyone could predict that search would be down quite significantly from the first quarter as plans from the clients declined more rapidly than in previous downturns. Gross margins across our businesses continued to be under pressure in 2008 and we expect to see some increasing pricing pressure as we move through the downturn. The consistency in our HLS and government businesses should mitigate some of the impact of this margin compression. As we continue to navigate through the current economic environment, we look at internal KPIs as one of our primary near-term forecasting tools. During Q4, our KPIs began to flatten and decline as clients continue to extend the hiring cycle. We have increased our diligence and intensity in which we manage our sales associates with heightened focus and productivity and exiting under-performers more quickly. Accordingly, the number of sales associates was down 7.1% Q3 to Q4. We will also continue to balance the revenue with our expenses. As a measure of our commitment to our line expenses to our declining revenue steams, we have frozen base salaries at 2008 levels for 50 leaders in the firm which is our executive team, top sales leadership and corporate officers. Our total revenues have decreased 2.4% year-over-year, total sales headcount is 11.9% less than a year ago. Our focus includes retaining and inspiring our top performers for the eventual economic upturn. As we consider the total Kforce business footprint, we believe we are very well-positioned to maximize market share in this current recession as well as be positioned to take advantage of opportunities when the economy rebounds. As I mentioned our government and HLS business constitutes over 27% of our business and is focused on stable and long-term contracts. Our technology flex business continues to have a relatively stable revenue base which represents 51% of revenue. Our decision coming out of our last downturn to make search to be less than 10% of total revenue has allowed us to minimize its impact on profitability in future prospects. We believe our stable diversified portfolio of service offerings is significantly differentiated in the marketplace and a key contributor to our long-term financial stability. We are also proud of the advances we made as a firm in 2008 as well as during the entire economic expansion. These advances include the building of a centralized master recruiting facility which provides fast, concentrated access to caring for our clients, the reduction of our dependence on highly cyclical search business, the investment of stable and profitable trends in the government contracting business, the divestiture of two under-performing business units, the completion of numerous projects to build a first-class pipeline, and most importantly, the invested ability to mange the best team in Kforce history. We began a new year of strategic planning in 2009 which we call the Race for the Triple Crown. The plan calls for aggressive action in several areas which has resulted in internal management promotions. In particular, the recent reorganization of our management team to include the appointments of Randy Marmon, Peter Alonso, Sam Farrell, to key goals and the expansion of the responsibilities for Kris Ellis, Mark Biscoe, Kye Mitchell and Larry Grant represents a key piece in positioning the firm for both near-term and long-term success. We believe that we are well-prepared to enter the weak labor markets and accelerate well to each new revenue piece in the next economic up-cycle. We understand that our clients believe our services are a cost-effective way to acquire talent. Our immediate plans are to continue to have a relentless focus on keeping our great people and to improve client satisfaction while balancing revenue and expenses. We intend of winning each race in the Triple Crown. I will now turn the call over to our Chief Financial Officer and Executive Vice President, Joe Liberatore. Joe?

[Joseph J. Liberatore:]

Thank you, Bill. The firm’s performance in the fourth quarter exceeded our guidance both in terms of revenue and earnings per share. We believe our ability to exceed expectations during the difficult business environment in the fourth quarter is a reflection of our strong management team and extreme focus on execution within our clients as well as along those items such as expense management that we can control. Revenues for the quarter of $241 million were down 2.4% from Q4 2007 and down 4% sequentially. Flex revenues of $228.2 million were very consistent throughout Q4 and flat on a billing-day basis. Search revenues of $12.8 million continue to see the increasing impact of the economic slowdown, with a search decline of 17.5% sequentially and 27.6% year-over-year. Our strongest businesses continue to perform well. Our technology flex segment which continued to be very stable increased 2.1% sequentially and decreased 2.6% year-over-year on a billing-day basis. HLS was down 7% sequentially but up 4.4% year-over-year on a billing-day basis. Our government solutions segment increased 15.3% sequentially and 23.8% year-over-year on a billing-day basis including a contribution of $3.3 million in revenue in Q4 from the acquisition of dNovus RPI on December 2. The HLS and government solutions segments now account for 27.3% of total revenues, up from 23.9% in Q4 of 2007. The continued growth of HLS and government solutions segments which were focused in the end of some of the areas of greatest demand bring increasing stability to our revenue stream as a result of the long-term nature of their contracts. Revenue trends for the beginning of the first quarter of 2009 have been mixed versus 2008 activity which is lower than Q4 activity. Flex revenues for the first four full weeks of January are down 1.8% year-over-year with tech flex down 2.1% year-over-year and finance and accounting down 21.9% year-over-year. Visibility in flex revenues in Q1 is difficult as a result of typical year-end job ends. In comparing the Q1 rebuild of these revenues with last year, after a slow first week in January, tech flex revenues are recovering more quickly than last year and estimated flex revenues are recovering at a slower pace than 2008. The deterioration in search revenues which has declined the past two quarters may be accelerating as search is down 56.5% year-over-year versus the first six weeks of Q1 2008. We caution that it is difficult to draw conclusions for Q1 based on this limited data. The firm recorded a net loss of $107.9 million and a loss per share of $2.81 in the fourth quarter which includes a pre-tax impairment charge on goodwill and other intangible assets of $129.4 million. Excluding this charge and the associated tax benefit, net income was $7.4 million and a decrease of 26.2% year-over-year as compared to $10 million in Q4 2007 and a decline of 6.8% from $7.9 million in Q3 2008. These declines were largely the result of reduction in search revenues and flex gross margins which were partially offset by declines in operating expenses. The impact to net income of the dNovus acquisition in the quarter was nominal after accounting for integration costs although we expect the acquisition to be accretive in 2009. To further elaborate on the $129.4 million impairment charge, this charge primarily relates to the write-down of the significant majority of goodwill in our technology and finance and accounting reporting units. Our HLS reporting unit has been built almost entirely organic and therefore has minimal goodwill. Substantial goodwill remains in our government solutions reporting units. It continues strong performance and long-term stability which suggests that no impairment exists at this time. Q4 2008 earnings per share of $0.19 after excluding the effect of impairment charge decreased $0.01 or 5% sequentially and decreased $0.05 or 20.8% year-over-year. Q4 2008 earnings per share before the impact of equity-based compensation expenses were $0.20 which is a decrease of $0.03 from $0.23 of EPS from Q4 2007. Q4 earnings per share include a one-time benefit of approximately $0.01 related to a true-up of tax benefit associated with the unrecognized foreign currency losses in our Manila outsourcing facility. We expect our effective tax rate to be approximately 39.5% on a go-forward basis. Our gross profit percentage of 33.5% has decreased 230 basis points year-over-year and decreased 100 basis points sequentially. This sequential and year-over-year decline is primarily the result of changes in business mix attributable to the declines in our search business. Additionally, our flex gross profit percentage of 29.8% in Q4 2008 declined 110 basis points year-over-year and 40 basis points sequentially from Q3 2008, though the sequential decline is largely the result of paid time-off in Q4. Flex gross margins were stable in our technology and finance and accounting units. Bill-rates have declined 1.1% sequentially but have increased 0.6% year-over-year largely due to the increase of the mix of business from our higher bill-rate government and HLS units. Pay rates increased 0.2% sequentially and 2.2% year-over-year. The spread between bill and pay rates deteriorated slightly from Q3 to Q4. As we look forward to Q1 and beyond, we expect to see an increase in pricing pressure in a recessionary environment that would typically result in declining margins as there is a lag in our ability to reduce pay rates as quickly as declining bill rates. The firm is aggressively managing operating expenses and continues to highly scrutinize every nickel to insure proper return on our investments and alignment of the cost structure with the revenue stream including better low costs such as travel and entertainment, lease costs and head count. Operating expenses were 28.6% in Q4, a reduction of 110 basis points from 29.7% in Q3 2008 and 80 basis points from 29.4% in Q4 2007. The majority of our cost structure is variable and compensation expense which is highly correlated to gross profit comprises over 85% of our operating expenses. We continue to see leverage in our non-compensation based cost structure as a result of the infrastructure investments made over the past three years and completed in late 2007. These significant capital expenditures have prepared the firm well for the future without requiring significant additional expenditures. We expect operating efficiencies to continue to evolve and corresponding leverage and earnings over the next few years and begin to become fully depreciated. Capital expenditures are expected to continue to moderate into this year. Should revenue continue to decline, we will continue to manage expenses drastically, both as a priority of keeping our great people in our organization and maintaining positive cash flow. Though operating expenses will decline as revenues decline, they will likely do so at a slower rate resulting in decreased profitability. EBITDA as an indication of the firm’s strong cash flow was $15.6 million or $0.40 per share in Q4 2008 as compared to $20.5 million or $0.39 in Q4 2007. Full-year EBITDA exceeded $70 million as strong operating cash flow was a source of significant stability. The firm increased debt to $38 million in Q4 from $12 million at the end of Q3 as a result of the $38 million acquisition of dNovus, although the debt has been reduced by $65.5 million from an amount exceeding $100 million over nine quarters since the BRADSON acquisition. We also repurchased 1.3 million shares of common stock during Q4 2008 at a total cost of $9.9 million. We repurchased 4.5 million shares at a total cost of $37.9 million for the year, 2008. The firm has 74.8 million available for future stock repurchases under our current Board of Directors authorization. The repurchases completed during the quarter will provide additional leverage for earnings per share when the economy rebounds and we believe in our prudent investments of the firm’s resources. The firm has always taken a conservative view when balancing the use of its cash flow between debt retirement, stock repurchases, and acquisitions as evident by our proven track record of significant debt retirement after an acquisition. We continue to balance the opportunities that present themselves in respect to stock repurchases and acquisitions. Our priority is to maintain actual flexibility in this uncertain environment to focus on debt reductions. Availability under our credit facility which does not expire until November 2011 is $61.4 million. Write-offs on accounts receivable were minimal in Q4. Receivables based over 60 days increased from $5.4 million at the end of Q3 to $8.6 million at the end of Q4. During Q3, we increased our allowance for doubtful accounts in anticipation of potential write-offs inherited in the AR portfolio. The allowance is currently $6.4 million and we believe sufficient to account for the increased risk of write-off. In terms of guidance for the first quarter, we expect revenue may be in the $226-$235 million range including a full quarter contribution of revenues from the dNovus acquisition. Total firm earnings per share may be between $0.05-$0.09 which reflects approximately 38.6 million weighted average diluted shares outstanding. The bottom end of guidance reflects an extrapolation of January to-date results for the full quarter. Inclusive of the significant deterioration in search consistent with January trends, the impact in EPS will be approximately $0.06 and an approximate $0.05 impact on increased payroll taxes in Q1 and a decline in flex gross profits attributable to continued margin compression. The first quarter of 2009 has 62 billing days. Our flex revenue, comprised of 95% of the revenue stream, has not yet been severely impacted in light of the deteriorating economic backdrop in which we currently operate. We are moving aggressively to control costs and prepare for a lengthy and deep recession. We believe we are well-positioned during these difficult times as a result of the actions taken over the past few years to increase flexibility and leverage. Some of those areas we are most proud of include our aggressive management of debt that has allowed us to have one of the strongest balance sheets in the staffing industry, our philosophy of only entering into short-term real estate leases that allows more rapid right-sizing of space aligned with revenues, the completion of a total redesign and rebuild of our technology infrastructure over the past several years and the centralization of most back-office processes to Tampa. The completion of all these activities greatly reduces distractions, creates leverage and allows us to focus exclusively on running the business during these challenging times. From a financial perspective, we are pleased with fourth quarter results as well as full-year results of almost $1 billion in revenues and earnings per share of $0.78 prior to the impacted impairment charge. However, we are also prepared for the challenges that may arise as a result of the current economic environment. We have a seasoned and strong management team that is able to adapt and position the firm to perform in this challenging climate. I would like to now turn the call back over to our CEO, Dave Dunkel for closing remarks. Dave?

[David L. Dunkel:]

I won’t close quite yet. We might take a question or two, Joe. Let’s open it up to questions, thanks.

[Operator:]

(Operator Instructions) We’ll go first to Mark Marcon with R.W. Baird. Mark Marcon – Robert W. Baird & Co., Inc. On the tech flex side, your performance is better than I would have expected given the macro backdrop. Can you talk about how it seems like you’re gaining share, can you talk a little bit about what you think may be driving that? Were there any large client signings? Are you seeing certain clients that are ramping up or are there any particular pockets in terms of skill sets where there seems to be a particular level of activity?

[William L. Sanders:]

Hi, Mark. This is Bill. I would say to that, no, there isn’t any particular thing that stands out. As we look at it and the same as what the other companies have reported, the only thing that we can say is that we have performed very well. We’re executing well. Our team has been in place for a number of years now and it is really gelling. I’m really proud of the work they’ve done. They’ve really kept after it. There’s no particular client skill set or other initiatives that would suggest something different for our tech practice. We just come in and try to serve our clients every day. Mark Marcon – Robert W. Baird & Co., Inc. So you don’t feel like you’re getting more orders or filling orders faster than others?

[David L. Dunkel:]

Mark, this is Dave. First, I think there are probably several elements. We built a culture which is based on, it’s accountability-driven, and it’s based on KPIs. One thing that we have done, that we talked about in the past is that we featured with the NRC, the speed in which we can move is significantly enhanced. We’re able to deploy at scale to markets and service lines that frankly are, we think, competitive advantages for us in the way that we are able to service clients. I am aware of a couple of examples where in a highly competitive situation, we substantially outperformed our competition. I think to some degree that is a result of the talent and the people and the culture, and I think it is to some degree, the result of the design of the model that we’ve put in place. We’re counting ourselves fortunate and it is really by God’s grace, I guess. Mark Marcon – Robert W. Baird & Co., Inc. Can you talk a little bit about what you’re seeing on the pricing side and what you’re seeing in terms of the flow of orders? I really appreciate the transparency in terms of what you would expect to happen. I was wondering if you could indicate is that across the board or specific verticals where you’re seeing that, and I am talking specifically about the tech flex bill rates that are likely to decline.

[William L. Sanders:]

Certainly, our clients are all watching prices very closely as you would expect and we’ve seen some more aggressive pricing situations with some clients than others. I think that Joe has indicated and he’ll tell you again that what we see in the bill rates and pay rates, they haven’t changed that much, but Joe why don’t you tell us a little bit about that.

[Joseph J. Liberatore:]

Mark, just to give you a little more color by service line by a bill rate-pay rate. On a year-over-year basis, F&A from a bill-rate standpoint was down about 3.6%. Tech is down about 2.9% and HLS is up 7%. From an average pay rate on a year-over-year, F&A is down 3.8% and tech is down 2.5%. HLS is up 16.8%. So from a total picture standpoint, basically, bill rates are up 0.5% while pay rates are up 2.2% and that’s really what’s driving the margin depression. I’d say it’s pretty consistent in terms of supply and demand and the market pressures that our people are experiencing. Mark Marcon – Robert W. Baird & Co., Inc. On the tech side, is there anything that prohibits you, do you have a lot of mark-up contracts where you wouldn’t be able to as opposed to bill-rate contracts where you may not be able to immediately reduce the pay rates or how should we think about that?

[Joseph J. Liberatore:]

Our contracts are a combination of all the above. It’s the typical lag in terms of when you can circle back with the consultant and when you can really adjust the pay rate whether it’s at the total contract prior to the renewal or if there is something more immediate like we’ve experienced with certain customers where they have had immediate needs to adjust bill rates, we’ve had an opportunity to direct re-paths on the long-term. So it’s market by market, skill set by skill set, decision process that you really have to go through.

[Operator:]

We’ll go next to Kevin McVeigh with Credit Suisse.

[Kevin McVeigh:]

Just a couple quick thoughts. Relative to the top R&D, the earnings came in; the incremental margins were a lot stronger. Was there anything particular that stood out, particularly given the run-off on the perm side?

[Joseph J. Liberatore:]

I would say, Kevin, there is probably three main drivers for some of the operating leverage that we experienced in the quarter. One of those, we started out very early and I think we even mentioned it on the last call, our personnel has been relentless on managing variable expenses and controlling what they can control. I think we saw a little bit more of that traction as the quarter unfolded. A couple other areas, one of the bigger areas is we did observe some productivity in improvements from Q3 to Q4 and even a greater expansion on a year-over-year basis. That’s really attributable to the exiting of low performers and people that just weren’t ramping up. We continue to see more of our population moving from the less than two years of experience into the greater than two years of experience. Those people are much more productive, that have been around for that period of time. Really, the third piece when you are looking at it sequentially is as I mentioned in my opening comments, we did take an approximately $3 million charge to our high debt reserve in Q3 and if you look at the face of what we sent out, we actually had a slight pick-up. I think it was $200,000 in Q4. So those are really the three big buckets.

[Kevin McVeigh:]

Just a thought on tech more recently, if you could kind of talk to, and Dave, your thoughts would be really helpful here, if you think about the project versus the maintenance, the mix of that today as opposed to the life cycle, what are your thoughts on that as you work your way through, and just if you could give any color on that and any incremental feedback you’ve gotten from companies as they prepare and work on their own projects, particularly on the tech side?

[David L. Dunkel:]

I will comment and then we will get some from Bill as well. I would say relative to the last downturn, a great deal of the investment in the last downturn was ramping up new data centers, new developments and significantly impacted by dot-com and by Y2K, so this particular time, there’s no question that we did not see the overhiring. It was much more measured. There is also a significant change in the nature of tech in that our data security is absolutely essential now. It’s not optional. You can’t make a decision to turn it off. The environment that we’re operating in has consequences in and of itself keeping the networks up and all of the infrastructure and servers up. I think that there is also a little bit of lag in making investments in the ERPs and CRM systems so we started to see that about the middle of the cycle so there were some one-offs associated with them. The Web has clearly impacted the business models and there is a real urgency to keep the face of the customer refreshed and to enable e-commerce so we see a lot more of that happening. I would say, in general, that it’s really a combination of all of those things. There isn’t an opportunity for any client today to say okay, we don’t want to do that anymore. They really have to support for a minimum of a substantial operation. Bill, do you want to add anything to it?

[Joseph J. Liberatore:]

The only other piece that I would add to that is an observation. Having been in and around the tech business for about 21 years at this point in time, in the zapping business, when I got into this business, the economic buyer was the CFO. Most technology functions reported up through the CFO. There were a lot of ROIs and decisions that were in and around that. Having lived through the late 90’s and early 2000’s, many of the economic decision makers at that point in time was the CIO. There weren’t as many true ROIs that were tied to that. In reality, at this point in time, it’s almost gone full swing. We see the CFOs, a lot of technology functions are now reporting up through that organization and they’re much more involved in the decision-making process. I think that is really what has provided more of a tempered type environment through this recovery versus that bubble that we experienced in the late ‘90s.

[David L. Dunkel:]

It sounds to me like Joe is making a play for Bill, here. Any other questions, Kevin?

[Operator:]

We’ll go next to Michael Baker with Raymond James.

[Michael Baker:]

I was wondering if you could update us in terms of the opportunities that you’re seeing for the government business in light of the government taking on an increased roll in the economy.

[William L. Sanders:]

Well, certainly we are seeing a more active administration than we have before, that and the talk and everything else that they are doing; I think that there will be more business there. We actually have 18 proposals awaiting awards. We have some slowdowns between the time that obviously we elected a new President and when they’re taking over. So we’re seeing some slowdown there but we expect revenue to increase. Of course, we’ve got organic growth and we’ve got the acquisition but I would suggest that next quarter we should see somewhere around 90% overall growth and for the year, we should see somewhere around 50% overall growth when you utilize the acquisition and organic growth. We’re pleased with that growth based on that and the acquisition working out very well. Hopefully by the end of this quarter, we will be substantially complete on that acquisition. So it is working out well for us.

[Michael Baker:]

I was wondering if you could comment and give some additional color on the CRO business. It appears as though in the opening remarks that there was some commentary around maybe a slowdown there but it seems as though the pipeline was still there but coming later in the year. I was just wondering if there are any cancelations or if it is just kind of an elongation of some of those opportunities.

[William L. Sanders:]

Well, we have our CRO business much more in alliance with our large pharma, as we look at this. I would say, yes, there has been some slowdown. At the end of the year, we have paid time off that becomes a big deal for us historically because most of these large file pharmas close down over the holidays. I would say to you that there are some, as I mentioned in my remarks, there is some slowdown that we see at the moment, and we expect that that should reverse itself as we begin the second half of the year, as we see some promising aspects of client activities. At the moment, there are pricing pressures and pressure on these large file pharmas but they of course need to have the stream of new drugs in the pipeline and that’s what they need to have the clinical trials.

[David L. Dunkel:]

I would like to add that our competitive position is very strong here. In the space that we occupy, not in CRO space, but really in the alliance partner space, I would say that we’re a clear leader. As a result of that, really a partner of choice in many of these clients.

[Operator:]

We’ll go next to Tobey Sommer with Suntrust Robinson Humphrey.

[Tobey Sommer:]

Maybe my question has been answered. Can you go through; I think I missed it in the prepared remarks, what the trends were like in the temp side, I think you did it by segments.

[William L. Sanders:]

In the fourth quarter?

[Tobey Sommer:]

In the early part of the first, I think you commented on what trends are like in the first several weeks.

[Joseph J. Liberatore:]

The first several weeks, I referenced from a tech flex standpoint, tech flex was down 2.1%, finance and accounting was down 21.9% and that’s for the first four weeks on a year-over-year basis. Search was down 56.5% based upon the first six weeks on a year-over-year basis.

[Tobey Sommer:]

The tech flex, 2.1%, is that a sequential change?

[Joseph J. Liberatore:]

No, that’s a year-over-year change based on comparing the first four weeks of 2008 to the first four weeks of 2009 in January.

[Tobey Sommer:]

A question for you. I know the way that you integrate acquisitions, organic numbers aren’t easy to quantify because of the swapping of accounts, etc. It seems like your revenue at performance in the quarter versus the industry was pretty significant. What sort of contribution at the top-line was there in the quarter from acquisitions?

[William L. Sanders:]

From a tech standpoint, the last tech acquisition that we did was in the early part of February 2006. So it has been quite some time ago. That business has long been integrated.

[Tobey Sommer:]

I wasn’t referring to tech specifically, even generally.

[David L. Dunkel:]

The only acquired revenue is in dNovus, that’s $3.3 million.

[Tobey Sommer:]

It looks like the domestic footprint focusing on professional staffing is headed pretty well in 2009. You’re buying up stock; you did a very aggressive job in that in 2008. The cash that the business is generating is quite significant. Have you seen yet seller expectations move down to a level that is adequate or is the severity of this downturn likely to just push out deals until sellers have some EBITDA to show?

[David L. Dunkel:]

I thought you were referring initially to stock repurchases. Those are always open on that front. We have not seen there is some of the traditional staffing; some are on the acquisition front that is adjusting prices. I think as the recognition and acceptance of the duration and severity of the downturn starts to sink in, there are those taking on a different posture and are thinking more about survival. I would say at this point, we’re not compelled to do anything. We can actually wait them out. From a pricing standpoint, we have a very high hurdle. We can be very selective, particularly in the staffing front, and can see where we can selectively add talent to some of our existing markets. So we don’t have to do anything, so we are going to be very opportunistic.

[Tobey Sommer:]

One last question. How much remaining do you have on your share repurchase authorization?

[David L. Dunkel:]

Nearly $75 million.

[Operator:]

We’ll go next to Clint Fendley with Davenport.

[Clint Fendley:]

Dave, you’ve seen a number of cycles in this industry and it seems we’ve never seen search decline as substantially and as rapidly as we’ve seen during this recession. How do you think this might affect some of your smaller, less well-capitalized competitors and your ability to gain share here?

[David L. Dunkel:]

Well, I want to address the inference that I’m old and actually affirm that. My birthday is in two days to some of a small intent; I will be turning double nickels. I just want to say you are not rid of me yet. Actually, we are seeing search fall out much more quickly which is not unexpected in the severity of this climate. During the last downturn, I believe it was seven quarters from peak to trough. We may see that happen much more quickly this time. The good news for us as Joe and Bill both mentioned, by design, we had a much different model going in. So while we will experience some GP and some SG&A impact, we don’t have anywhere near the real estate concentration and underlying costs that are substantially mitigated. We look at search as supplemental to our existing business. It’s an excellent service offering for our clients but at the same time, we never allowed it to become too significant a portion of our total revenue. So in this climate, and I think it’s been pretty much confirmed by other firms in our space, that we’re probably seeing a search decline this time that’s even greater than the last cycle.

[Clint Fendley:]

Probably a reach here, is there anything in the stimulus bill currently which could provide some type of near-term benefit to your results?

[David L. Dunkel:]

We’re thinking that there is going to be a lot of CEOs that are going to want to be contracted back for more than $500,000. When you think about it, a contract CEO business works very well in that climate. There are some opportunities if they actually do the bad asset bank. We are seeing some other smaller pieces but nothing on the scale of the RTC that we saw back in ’90-’91.

[Operator:]

We’ll go next to Josh Vogel with Sidoti & Company.

[Josh Vogel:]

Most of my questions have been asked already, but I was just wondering, did you say that headcount was down 7.1% year-over-year last quarter?

[Joseph J. Liberatore:]

No, sequentially it is down 7.1%, and 11.9% year-over-year.

[Josh Vogel:]

Was this voluntary by these sales associates or were they fired?

[William L. Sanders:]

It’s a combination of both. We are very aggressive on making sure that low-performers are exited on a timely basis.

[Josh Vogel:]

I know you said you’re seeing some aspects of client activity and you think there’s going to be a nice rebound in the back half of the year on the CRO business, but some of your other competitors have discussed that their former clients were looking to outsource this business overseas. I was wondering if you were seeing that from any of your clients.

[William L. Sanders:]

No, we have not heard of that. That is a major aspect of what many of our clients are doing. We have some pretty close relationships with many of our clients and that is not on the table at the moment.

[David L. Dunkel:]

Just a reminder, Josh, we are not a CRO.

[William L. Sanders:]

We do it differently than a CRO would outsource it overseas. You wouldn’t see us doing that.

[Josh Vogel:]

Just lastly, is there any seasonality in the dNovus business?

[William L. Sanders:]

In the government business, well, there was some this time because the government declared December 26 to be a holiday which they didn’t do last year. So there gets to be a little seasonality. There’s a lot more PPO time in the government business because it’s the end of the year, people are taking vacation. It becomes very slow. There is some seasonality from that standpoint, yes.

[Operator:]

We’ll take a follow-up from Mark Marcon with R.W. Baird. Mark Marcon – Robert W. Baird & Co., Inc. Can you go to the SG&A, you did have, even if we adjust for the swing in terms of bad debt expense, it’s still a nice decline sequentially. You mentioned that there was a 7.1% decline in headcount. What I’m trying to figure out is, how much of the decline on the SG&A side, would this be a natural byproduct of the reduction in terms of gross profit as opposed to the active headcount management that you’re undertaking, and how should we think about that for the first quarter?

[Joseph J. Liberatore:]

Mark, it’s the active management of moving non-productive individuals as well as I mentioned, our mix of populations in the different tiers that we look at continues to move in a favorable direction. At this point in time, 50% of our total associate population has been with Kforce greater than two years, where if I go back to even the beginning of 2007, that number was around 30%. That has a material impact in terms of productivity and operating results because realize that those non-productive people, if that person is $40,000 or $50,000 in a non-contributing job, virtually any gross profit will never move. All of that goes directly to the bottom line. Mark Marcon – Robert W. Baird & Co., Inc. In terms of the way the force is currently structured, do you feel like you took one big cut and we’re in a decent spot where you’re going to continue to monitor productivity and we’ll continue to adjust depending on what the man-trends would dictate?

[William L. Sanders:]

We were down 11.9% for the year, 7.1% for the quarter so sequentially, that was certainly more this quarter. We will continue to align revenues and expenses. The variable costs including headcount and all the other variable costs that Joe mentioned earlier like travel and lease expenses, all of those things we will continue to aggressively manage. As Joe indicated, hopefully there is not a deep recession but planning for that and hoping for something better.

[Joseph J. Liberatore:]

The turnover of less than 1-year people, that’s part of this business. What you’re really seeing reflected there is not really some radical change in business practice in terms of how we’ve been handling performance management. This is how we run the business in good times and this is how we run the business in tough times. Where you’re really seeing the lag effect or the effect from an operating margin improvement is the more selective, where are we replacing individuals because we’re replacing individuals on most teams that are very productive versus teams that are non-productive because when you bring people into non-productive teams in this type of climate, they don’t stand a shot at being successful. So I wouldn’t say that anything has drastically changed in terms of how we manage our population from a performance management standpoint. It’s really more about the volume of additional hires that are coming in and that lag that you’re seeing in impact to operating results. Mark Marcon – Robert W. Baird & Co., Inc. One short-term question and one longer-term question. The short-term question on the government side, Bill, it sounded like you were suggesting that things would pick up even on government in the second half. Is that because you would expect that the RFPs that you’ve been active in would become active by that point?

[William L. Sanders:]

Well, I think there are several things. One, the fourth quarter was unusually difficult because of stop-work orders and because of the extra holiday. Of course, we had an extra holiday for the inauguration in the first quarter as well. So Mark, while I don’t think the fourth quarter is an easy beat, I think as we indicated there are 18 proposals out there, 16 of those proposals are 100 days past due on awards. So yes, we believe some of those will come in and pick things up. As this administration gets a foothold and where they’re going, what they’re doing, we expect there to be both organic growth and growth from the acquisition. Mark Marcon – Robert W. Baird & Co., Inc. I was just wondering if Dave could expand a little bit on his opening comment in terms of redesigning to become the staffing company of the future and specifically how we should think about that or if there’s any additional color you can provide there?

[David L. Dunkel:]

What I was referring to was our three-year plan which really took place over a 12 month period of time. There are several initiatives in there all designed to accelerate revenue growth and enhance operating leverage while providing exceptional service to our clients. I won’t go into much greater detail but I will say that yes, we are very, very focused on the model as we go through this. As you’ve seen, as talent evolves and matures and productivity goes up, we believe that along with the great people that really are now demonstrating what we’ve always believed and that is that they are some of the top talent in the industry. As those people are equipped with greater tools, greater efficiency and speed to market, we believe that we are really going to be in a better position competitively. I would say at this point the focus has been culture and culture is working. Mark Marcon – Robert W. Baird & Co., Inc. I’m assuming you’re also talking about specifically in terms of greater tools, things like what you’re doing in terms of utilizing technologies to improve the recruiting process and the national recruiting center and things of that nature and that there’s still more to come?

[David L. Dunkel:]

As Bill said, we’ve, over the last several years, upgraded all of our technology. We completed IP telephony and integration into our Pro Phone system. We have CRN, ERP upgrades, wireless. There is a tremendous amount that has been done to enable our teams to be more flexible and to work more quickly. In addition to that, we have a business process group that has been refining business process to help us to be more efficient, after that, even further. It really is all aimed at that customer to deliver exceptional service and aimed at our people to make them more productive and to help them to deliver better service. We feel that some of the performance on the fourth quarter has been as a result of that. We also recognize that there are still a lot of challenges ahead so we’re not yet taking our blinders off; we’re not putting blinders on here. We’re going to stay at the post. We want to close the call now; we appreciate your interests in and for your support of Kforce. Really, once again, thanks to our team, for all of our folks for performing very well in these incredibly difficult conditions. Thanks to everyone of you, field and corporate, and to our consultants and clients for allowing us the privilege of serving them. Thank you very much.