Kforce Inc.
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to Kforce's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Blackman, Chief Corporate Development Officer. Sir, you may begin.

[Michael R. Blackman:]

Good. Thank you. Good afternoon and welcome to the Kforce Second Quarter Earnings Call. Before we get started, I would like to remind you that this call may contain certain statements that are forward-looking. These statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may differ materially from the factors listed in Kforce'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 this call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

[David L. Dunkel:]

Thank you, Michael. You can find additional information about Kforce in our 10-Q, 10-K and 8-K filings with the SEC. We also provide substantial disclosure in our release to assist in better understanding our performance and to improve the quality of this call. We are pleased with our revenue and earnings performance in the second quarter and in particular, our ability to deliver sequential revenue growth in all of our businesses. Total revenues of $283.7 million exceeded our expectations and earnings per share of $0.21 was at the top of our guidance. The human capital investments we made at the end of 2012 and early 2013 have begun to take hold, as is evidenced by the accelerated year-over-year growth from the first quarter. As these newer associates become more tenured, we expect revenue to continue ramping accordingly. Joe will provide additional perspective on this later in the call. Throughout the quarter, our many client meetings continue to affirm our belief about the secular shifts taking place in the employment marketplace. We are benefiting from our clients' increasing desire for a higher degree of variability in the composition of their workforce as they look to mitigate economic uncertainty and the increasing complexity and cost of employment. In addition to secular shifts, we are also finding that our Technology clients are showing an increased desire for flexible staffing to support their project efforts, as opposed to other alternatives that do not allow them to control cost, manage results or mitigate the uncertainties around immigration reform. We remain optimistic about our prospects and are committed to our belief that temporary staffing penetration, which has increased to a cyclical high of 1.97% in June of 2013 will continue to grow as companies redefine how they acquire and deploy human capital and will likely surpass its prior peak in the not-so-distant future. The environment for professional staffing, particularly in Technology, continues to be strong. Highly-skilled candidates remain in short supply and typically have multiple opportunities from which to choose. A recent Georgetown University study projects a 26% increase in STEM jobs by 2020, that's Science, Technology, Engineering and Math, with graduates coming out of our educational system nowhere near meeting that demand. Unemployment for college graduates is at 3.9%, which is about half of the headline VLS number. In this regard, we are spending significant effort to educate our clients on this war for talent with the intent of accelerating hiring decision on resources that have been identified. As revenues increase, we are intensifying our efforts to improve operating margins. We have also renewed our focus of becoming the employer of choice for our billable consultants, the great people that serve our clients every day. We remain confident in our strategic direction and believe there are significant opportunities with Kforce having only a 3% market share in a growing domestic professional staffing market. We're confident that we have the right operating model and talent to capitalize on this positive staffing environment and drive sustained revenue growth while significantly improving operating leverage. I will now turn the call over to Joe Liberatore , President, who will provide operating insights. Dave Kelly, Chief Financial Officer, will then provide additional insights on operating trends and expectations. Joe?

[Joseph J. Liberatore:]

Thank you, Dave, and thanks to all of you for your interest in Kforce. During the second quarter of this new era for Kforce, we remain externally focused on better meeting the needs of our customers. I personally had the opportunity to meet with Kforce clients and consultants with my team and have visited 24 markets since Q4. Collectively, these markets contribute over 2/3 of our revenue. These interactions have reinforced our belief in the opportunity to significantly grow revenue within our existing clients, as well as selectively add new clients. We remain focused on streamlining and leveraging our processes and tools to simplify how we do business with our clients and consultants. And we are leveraging real-time data to hold our associates accountable to higher levels of performance and superior customer service. These were significant drivers to our success in Q2. Tech Flex, our largest business unit, represents 62% of total perm revenues. Q2 revenues increased 5.9% sequentially on a billing-day basis and 5.5% year-over-year. Overall, our key performance indicators for Technology remain at high levels for job orders, external submittals and send out, with fill ratios at an all-time high. We continue to improve prioritizing the highest-quality job orders, so we believe additional opportunity remain for improvement. Candidate supply remains tight, particularly for skill sets in high demand such as [indiscernible], Java and .NET. business analyst and manage project managers. Intra-quarter trends for Tech Flex revenues showed moderate increases in both April and May, followed by a large increase in June. Our national footprint and diversified service offerings allow us to service client in industries with the greatest demand for technology professionals. The industries that performed best in Q2 were telecom, computer hardware and retail. We also continue to see growth in Technology services within healthcare and demand is expected to remain strong for the foreseeable future, as hospitals and healthcare organizations implement systems and transition their platforms to more of a shared services model. Tech Flex revenue trends have continued to strengthen in July and we expect Q3 2013 revenues to again increase. Revenues for our Finance and Accounting Flex business represent 19% of total revenues. Q2 revenues increased 4.4% sequentially on a billing day basis and declined 1.1% year-over-year. Fill ratios improved throughout the quarter as some of the project opportunities that have been delayed early in the year came online late in the quarter. Revenue showed moderate increases in April and May followed by a large increase in June. We expect Q3 FA Flex revenues to increase through the continued impact of project revenues. Revenue increases for the quarter for our Tech and FA business benefited from strong growth in some of our larger clients, which operate at lower margins and impacted our ability to improve bill pay spreads. We expect the mix of growth in Q3 to be more balanced across all client sizes. In the aggregate, the Firm provides consultants to approximately 3,000 clients at any time with no one client constituting more than 3% of total revenues. HIM Flex revenues grew 0.7% sequentially on a billing day basis and decreased 4.3% year-over-year. The demand in this business has been impacted by cost containment initiatives as healthcare organizations prioritized available spend towards Technology projects, such as ICD-10 and EMR implementations. However, we did see some improvement from Q1 as census improved and backlog of coating needs at some clients resulted in incremental gain. We believe demand remains intact for this business. We expect this business to continue to stabilize in Q3 and be slightly up. Revenues for our Kforce Government Solutions increased 2% sequentially despite the impact of sequestration and increased 8.1% year-over-year. Our government unit continues to have success in areas less impacted by government cut backs. We believe less than 10% of revenues are exposed to possible impacts from sequestration and we again, were able to outrun these impacts with new project wins and incremental additions to existing projects. There remains continued uncertainty around funding levels of various federal government programs and the environment for government services remains difficult. We anticipate Q3 revenues to increase largely due to expected government product sales, which will be hiring in Q3 due to typical seasonal buying patterns. Perm revenues from our direct placement and conversions which constitute 4.7% of total revenues increased 15.2% sequentially and 0.8% year-over-year. The pace of conversions has also remained elevated for the past 5 quarters. Perm revenues are difficult to predict but we expect them to be flat to slightly down in Q3 from Q2, which is typically the case due to slowdowns in activities over the summer months. As we continue to ramp our new associates during Q2, we held our investment in revenue responsible headcount essentially flat from Q1 2013. Year-over-year headcount increased 17.7%. Our newest associates that were largely hired in late 2012 and early 2013 continue to ramp during Q2 at rates that are consistent with our previous experience. It is our belief that the momentum gained so far into Q2 will continue into the back part of the year and these associates continue to become more productive. Our Q2 performance also benefited from increased contributions from our 1 and 2 year and 2 to 4 year population with both increasing approximately 20% year-over-year. Continuing improvement in contributions from these tenure group and ramping of newly-hired associates should positively impact revenue trends as we move into the back half of the year. We plan to continue to make investments in our sales associate headcount in geographies and industries that we believe represent the greatest opportunity. I'm pleased with our performance in second quarter and I'm confident we have built a strong foundation for future success. We will leverage our platform of tenured field teams, the National Recruiting Center and our Strategic Accounts model to adapt to the changing market dynamics and client and industry trends. We remain focused on driving profitable revenue growth by meeting our clients' and consultants' needs and gaining market share. We will do this by maintaining our focus, executing with simplicity and holding ourselves accountable for delivering great results. I will now turn the call over to Dave Kelly, Kforce's Chief Financial Officer, who will provide additional insight on operating trends and [indiscernible]. Dave?

[David M. Kelly:]

Thank you, Joe. Total revenues for the quarter were $283.7 million, which represented an increase of 6.8% sequentially and an increase of 3.5% year-over-year. Quarterly revenues for Flex were $270.4 million, which represented an increase of 6.4% sequentially and a 3.6% year-over-year increase. Search revenues of $13.3 million increased by 15.2% sequentially and 0.8% year-over-year. Early Q3 revenue trends have improved from June levels. For the first 3 weeks of July, Tech Flex is up 9.9% year-over-year, Finance and Accounting Flex is up 2.3% year-over-year and HIM is up 7.3% year-over-year. Search revenues are down 1.9% year-over-year for the first 4 weeks of Q3. It is difficult to assess potential full quarter results with this limited data, though recent activity is promising. Second quarter net income and earnings per share were $6.9 million and $0.21, respectively. Net income and EPS increased from $3.1 million or $0.09 per share in Q1 and declined from $8.9 million and $0.24 per share in Q2 2012 due primarily to investments in revenue responsible headcount. Our overall gross profit percentage of 32.7% increased 130 basis points sequentially and was flat year-over-year. Our Flex gross profit percentage of 29.4% in Q2 increased 110 basis point sequentially and increased 10 basis points year-over-year. The sequential impact of payroll taxes on margins in Q2 was 130 basis points and overall spreads were slightly up. Those gains were partially offset by one-time client-related adjustment negatively impacting Tech Flex margins by 30 basis points. Flex spreads in our Tech -- in F&A businesses have flattened over the past 3 quarters. Tech Flex spreads were flat sequentially and have improved 10 basis points year-over-year. At base spreads, we're down 20 basis points sequentially and are down 10 basis points year-over-year. Our Government spreads improved 300 basis points sequentially and 310 basis points year-over-year, driven by increased headcount needs on some of its most profitable projects. HIM spreads were down 60 basis points sequentially and have declined 490 basis points year-over-year due primarily to increased compensation costs for our consultants, which we expect to continue for the foreseeable future. Q2 SG&A levels of 227.7% decreased 80 basis points from Q1 but are 150 basis points higher in Q2 2012 due to our investments made to accelerate revenue growth. We have a mature infrastructure and continue to maintain a disciplined approach to expense management, which we expect to contribute to improving operating margins as revenue growth accelerates. As we look at our balance sheet, cash flows, our accounts receivable portfolio continues to perform well. Write-offs and the percentage of receivables aged over 60 days remain at very low levels. Capital expenditures for Q2 were $3 million. EBITDA for Q2 of $14.8 million increased $6.9 million sequentially but decreased $3.6 million year-over-year. EBITDA growth should continue to improve proportionally to net income growth. The Firm had $50.1 million in bank debt at quarter end compared to $39.5 million in debt at the end of Q1 2013 and $11 million in debt at the end of Q2 2012. This increase was primarily the result of the repurchase of approximately 1 million shares of stock for $14.8 million during Q2. Over the past 18 months, we have repurchased 4.8 million shares for $65.1 million. Currently, $69.1 million is available under board authorization for future stock repurchases. If cash flows improve, we will continue to evaluate the opportunity to return earnings to our shareholders through share repurchases and dividends. With respect to guidance, the third quarter of 2013 has 64 billing days compared to 64 billing days in the second quarter of 2013. We expect Q3 revenue may be in the $293 million to $297 million range. Earnings per share may be $0.26 to $0.28 in Q3. Our effective tax rate in Q3 is expected to be 40.6%. We anticipate weighted average diluted shares outstanding to be approximately $33.3 million for Q3. This guidance does not consider the effect, if any, of charges related to the impairment of intangible assets, costs related to the settlement of any pending legal matters, the impact on revenues of any disruption in Government funding or the Firm's response to regulatory, legal or tax law changes. The plan we established late last year to accelerate revenue growth is taking hold. Revenue and earnings expectations for the third quarter represents historical highs for our Firm and we believe that significant opportunity exists to further accelerate growth and improve operating margins well beyond these levels. We remain confident in our strategy and are pleased with our progress. Sayid, we'd now like to open up the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Mark Marcon from R W. Baird.

[Mark S. Marcon:]

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

[Joseph J. Liberatore:]

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

[Mark S. Marcon:]

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

[David M. Kelly:]

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

[Mark S. Marcon:]

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

[David L. Dunkel:]

Sure, sure, Mark. This is Dave. Actually, if you think about the third quarter and think about our guidance, one of the things that we're very pleased with is the expectation of improved operating margins, partially as a result of the fact that SG&A levels are expected to go down for a couple of reasons. One, as Joe mentioned, as the revenue responsible folks are beginning to ramp and as we talked about it in the past, as those folks ramp, we get operating margins from them as a result of their compensation and revenues they generate. And then as revenues grow, generally speaking, we talk a lot about our operating platform, we get leverage from that as well. So actually, operating margin improvement is expected in Q3, primarily as a result of that SG&A reduction.

[Mark S. Marcon:]

Okay. But do you mean that on an absolute basis or on a percentage basis? I'm assuming you mean on a percentage basis.

[David L. Dunkel:]

Yes. I mean, I think, again, if you take a look at our guidance, I can tell you that at the mid-point of guidance you're looking at operating margins in the low 5%. So we were at slightly over 4% this quarter...

[Joseph J. Liberatore:]

It's percent, Mark.

[David L. Dunkel:]

It's percent, Mark.

[Mark S. Marcon:]

Yes, I just wanted to make sure -- that's exactly what I'm assuming you're saying.

[David L. Dunkel:]

[indiscernible] our revenue stream.

[Mark S. Marcon:]

Got it. We're on the same page.

[Operator:]

Our next question comes from Kevin McVeigh from Macquarie.

[Kevin D. McVeigh:]

So if I have my math right, it looks like there's going to be an incremental kind of 30% margin Q2 into Q3. Is that better execution on the fill side as opposed to a C [ph] shift in demand? And it sounds like the demand's been there but even at some of the other verticals obviously, on the IT side, with some of the other verticals, it stepped up a little bit even more. Is that just a function of clarity on taxation or just the folks feeling better about the cycle? Just any commentary on that would be helpful.

[Joseph J. Liberatore:]

This is Joe. I would say a lot of it is really we've seen dramatic improvement in our fill rate. So for example, in Tech Flex, we had about a 7% sequential in our fill rate. So it's really a combination of, I would say, better execution from that standpoint. We've been after more refinement in the qualification of jobs that come in for the better part of about 2 years now and that's really starting to take hold and I think we're seeing some of the benefits there. So that's one piece of it and it's also volume standpoint. So for example, when I look at Tech Flex, our Tech Flex population is up 27.3% on a year-over-year basis, so it's really from both of those assets.

[Kevin D. McVeigh:]

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

[Joseph J. Liberatore:]

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

[Kevin D. McVeigh:]

Yes. Yes.

[Joseph J. Liberatore:]

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

[Kevin D. McVeigh:]

Got it. And then one more and I'll jump off the queue. Hey, Dave, you kind of alluded to immigration. As you think about that impacting the business versus Obamacare, the delay in that, I mean, I'd imagine immigration is probably a lot more impactful. Just any thoughts around that would be helpful.

[David L. Dunkel:]

Yes. It's hard to quantify and they can't even agree on what it's going to look and what the law is going to say but what it's done is create an element of uncertainty. So you have several factors really driving that. One is the wage arbitrage has been compressed. So the opportunity to offshore and see significant economic benefits has been reduced. The opportunity to bring people onshore. It reduced -- pay rates has also been reduced. So when you take those 2 things together, I think that those 2 things have created enough uncertainty that clients, especially for projects that are going to take more than 6 months to a year, are probably going to lean more towards onshore resources. So I think that has also benefited us and given us some wind in our sails again, as well.

[David M. Kelly:]

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

[Operator:]

Our next question comes from Tobey Sommer from SunTrust.

[Tobey Sommer:]

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

[Joseph J. Liberatore:]

Yes, Tobey, this is Joe. So where we are in Q2 is about 73% of the hiring, the ramp-up that we did was within our Tech Flex, about 27% of that was within FA. So this can kind of give you a sense because I had mentioned one number earlier. So we grew our Tech Flex headcount 27.3% year-over-year. The combination NRC and Strategic Accounts, we rooted about 17.7%, so we are adding more into our field operations than we are into the NRC or Strategic Account. Where we're really seeing the productivity gain, and I've mentioned this before, just to kind of break it down real quick, when we look at our 4 year plus population, they're about 50% more productive than our 2- to 4-year population. They're about 100% more productive than our 1- to 2-year population. Where we see our biggest productivity gain is when people move from less than 1 year into that 1- to 2-year population, we see about a 200% improvement. And so when you look at the makeup of our Flex population right now, only about 32.8% of our total Flex population has greater than 2 years of experience. We have 47.3% of our population actually has less than 1 year of experience. So we're very comfortable with where we are from a capacity standpoint.

[Tobey Sommer:]

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

[David L. Dunkel:]

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

[Tobey Sommer:]

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

[David L. Dunkel:]

Yes. It really depends on the client. It's time and materials for the most part, very, very few fixed-price. Certainly within the commercial space, the Government is different. But it's predominantly working with the client. They may provide senior project management resources, we'll staff an entire project and then we'll have delivery responsibility for that project. And it really comes down to -- it's very client specific and project specific. One thing that is happening for sure is the projects are more clearly defined with clearer expectations of timeframe and outcome, which really lends itself more to staffing as well. The big ERP projects that typically would have been an outsourced or managed services contract, those have been largely done. So these are more defined projects and typically related to things like big data, business intelligence, Java, .NET and applications like that.

[Tobey Sommer:]

Then just a question, a couple of numbers questions. What should be good expectation for tax rate for the balance of the year? And did you -- have you repurchased any shares quarter-to-date here in 3Q?

[David M. Kelly:]

So the effective tax rate that we're expecting for the year is a 40.6%. This is what we were expecting in Q3, Tobey. And then as it relates to your next question, your last question, I'm sorry, was?

[David L. Dunkel:]

Shares in the third quarter, no we have not.

[Operator:]

Our next question comes from Paul Ginocchio from Deutsche Bank.

[Ato Garrett:]

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

[Joseph J. Liberatore:]

Yes, actually, our hiring sequentially was really flat. I mentioned that in my comment though I would say that, that played a small part just because we have such a large percentage of population that are less than 1 year and actually, such a large percentage of population that are in that 0 to 3 months. So there is some carry there. As we look out to Q3, we would anticipate some net hiring, nothing near what we were looking at in Q4, Q1. We're just going to be selectively hiring in where we have markets that are hitting peak productivity or when we have, call it, certain client engagements, where we're really starting to hit peak productivity or within in certain industries. So that's really how we categorize on that aspect. Dave, I don't know if you want to add a little bit more color on the SG&A.

[David M. Kelly:]

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

[Joseph J. Liberatore:]

Yes. And also, David mentioned it in his opening comments, we did have the one-time true-up with a specific client that impacted Tech Flex margins in Q1. So that will show itself in an elevated SG&A as well.

[Ato Garrett:]

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

[David L. Dunkel:]

I would say there's no question, it's a restraint on growth not only from a standpoint of being able to recruit to fill the assignments but also turn over existing assignments. So I would encourage you to have your children become Technology or Computer Science majors.

[Joseph J. Liberatore:]

Just to put it in perspective, I mean, this quarter -- we're generating about 20% more candidates than we were 2 years ago, just to keep up with supply/demand and how quickly people are falling off. That's why we placed a lot of emphasis, really, over the better part of last month on refining our pipelines and really going after the candidate who is not active in the market and building those pipelines so that we have these virtual benches that we can access more effectively.

[Operator:]

Our next question comes from Morris Ajzenman from Griffin.

[Morris Ajzenman:]

Question, I'm going to hop on the SG&A again. In this past quarter, again, you clearly highlighted the last couple of quarters, the beef up, the step up the SG&A investment. But in this quarter, curiously, your top line rose 3.5% year-over-year and SG&A up 9.9%. And clearly, you would telegraph that you spoke about that investment. But are you playing games here? If I was -- if the revenues gained equated to SG&A gain, the SG&A was only up 3.5% year-over-year, you could have earned close to $0.30 this quarter. But clearly, that didn't happen but going forward, a handful of quarters down the road or thereabouts -- I presume you expect leverage where revenues would not rise -- would actually rise less than or equal to SG&A. So that leveraged potential is there as your sales staff ramp up, you get more mature in age, and the investment is behind us, there's no reason to believe that revenues shouldn't grow faster than SG&A. So along with the question here -- but SG&A as a percent of revenue were 26.5% a year or so ago, this quarter, 27.7%. How many quarters out do you think before we can see SG&A as a percent of sales back down to the 26.5% level, therefore much more leverage to earnings? Is that a couple of quarters out? Is that a year out? How does that play out?

[David M. Kelly:]

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

[David L. Dunkel:]

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

[Morris Ajzenman:]

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

[David M. Kelly:]

In terms -- on a percentage basis?

[Morris Ajzenman:]

No, on an absolute basis. First, let's talk on an absolutely basis. Has it peaked here or will it continue to rise the next few quarters?

[David M. Kelly:]

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

[Joseph J. Liberatore:]

Yes, Morris, this is Joe. I would look at our population in 2 big blocks. We have revenue responsible and we have nonrevenue responsible. The nonrevenue responsible, we're not going to be adding any expense there. We believe we have the platform. So there's not going to be expense added. So that we're going to get leverage on the nonrevenue as we continue to add revenue on top. The revenue responsible, as Dave mentioned, these people are commission- based. So as they become more productive, their compensation goes up but we gain leverage on them because it's one less computer, it's less real estate, we need less management and so on and forth, so while there is some cost there, it will -- that cost will not move at the same rate as the SG&A percentage will come down.

[Morris Ajzenman:]

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

[David M. Kelly:]

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

[Operator:]

[Operator Instructions] Our next question comes from John Healy from Northcoast Research.

[John M. Healy:]

I wanted to ask for a little bit more color on 2 things. On the Tech business, nice pickup you saw there, are you seeing or hearing from your customers any commentary on the length of assignment that they're expecting? There's candidates to be out on -- does the business seems stickier? Any qualitative comments you can provide there? And then with the hiring that you've done, is there any thought in terms of maybe not deploying those resources into existing relationships and maybe putting a segment of that -- of those recruiters or salespeople to focus on maybe a smaller business-type customers and maybe try to grow that segment of your business and overall, expand gross margins?

[Joseph J. Liberatore:]

Yes. So from the light of assignment standpoint, it's client specific. Number of clients that we engage with, they have term limits, so you can only keep somebody there for -- whether it's 12 months, 18 months or a year. So that pretty much fixed and you see that in a lot of larger organizations at this point in time. We're seeing length of assignment has remained very constant. So I'd say the business is healthy. For high demand skill sets, there's 10 plus jobs for certain skill sets. So the demand's out there. So length of assignment, not concerning whatsoever. In terms of the new hires that we brought on and deployment, it's actually quite the contrary. We see when we align these new hires on accounts where we have a degree of relationship so that we can further penetrate those accounts, our people ramp up faster versus if we throw them a phone book and send them chasing after a customer where there's no relationship. This business, at this point in time, at this point in the cycle, it is about relationship. The deeper your relationship is, the higher quality business that you're getting, the higher volumes of business that you're getting it. So we're actually doing quite the opposite, we're aligning our new hires more that we probably ever have with existing clients to penetrate those clients further and gain additional client share.

[John M. Healy:]

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

[David M. Kelly:]

Well, I mean, I think our EBITDA this quarter approached $50 million. Expectations are for it to grow proportionally as -- once revenues grow and earnings grow. So certainly, we feel good about the trajectory of the EBITDA.

[John M. Healy:]

Okay. So you guys feel good about -- do you still feel good about that $60 million number?

[David M. Kelly:]

Yes, I think we do.

[Operator:]

Our next question comes from Randy Reece from Avondale Partners.

[Randle G. Reece:]

I'm wondering if you could give me an idea of what your corporate expense considering on a year-over-year basis, versus the rest of your SG&A?

[David M. Kelly:]

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

[Randle G. Reece:]

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

[David M. Kelly:]

Yes. Well, essentially, Randy, margins from the last 2 or 3 have been flat. Spreads have been flat absent payroll impacts and we expect that to continue. So sequential, specifically, to your question.

[Randle G. Reece:]

You -- do you see a significant difference in behavior of the market according to, let's say, level of billing rate strata or perhaps projects versus staff aug?

[Joseph J. Liberatore:]

I'd say, obviously, income, we move into the statement of work business. We see a little bit better margin with a little bit higher expectation than the standard staff aug. And that's a space that we continue to go after and we continue to see more business shifting in to that arena. I would say in terms of the stratification of our client base, actually, when we look at our year-over-year, our largest clients, from a Tech standpoint, we actually experience about a 20-basis-point improvement in margins. So we're seeing bill rates start to move a little bit in the larger clients, which we haven't really seen. So part of what we've experienced is we've actually lost a little bit of margin in our stock market business and that because we're on boarding new customers and trying to penetrate and gain relationship there and work our way into that business.

[Operator:]

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

[David L. Dunkel:]

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

[Operator:]

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