Kforce Inc. (KFRC) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Kforce First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Mr. Michael Blackman, Chief Corporate Development Officer. Sir, you may begin.

Thank you, good afternoon and welcome to the Q1 Kforce conference call. Before we get started, I would like to remind you that this call may contain certain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially from the factors listed in Kforce 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?

Okay, thank you, Michael. You can find additional information about Kforce in 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. Joe and I will be providing remarks and answering questions on today's call. Bill Sanders will not be participating today as he is working from home after having a voluntary planned procedure performed. We pray for and anticipate his speedy recovery. We are pleased with our first quarter results as we move into the second year of this tenuous economic recovery. We are on track to meet our 2011 financial targets of 15% revenue growth and 50% EBIT growth. We are particularly pleased with the performance of our Tech Flex, F&A Flex and HIM businesses, in the leverage we are seeing from our investments in the National Recruiting Center, in back-office platform, which are contributing to the improving trend in operating expenses. Entering 2011, we anticipated increased statutory payroll costs, and thus, have been extremely focused on margins and pricing. Our actual statutory cost increase was significantly higher than expected and we were unable to completely pass these costs through during the quarter. The sequential impact of the increased costs was approximately $0.08, including billable and core employees versus the $0.05 originally anticipated. We are continuing to focus on margins and pricing and expect improvement throughout the rest of the year. We believe Kforce is well-positioned to service our clients' increasing desire for a more flexible workforce during this unique, temporary employment leg recovery, which we believe may contribute to a sustained, secular shift towards a flexible staffing model. We believe temporary staffing penetration of the workforce may achieve historic highs in the U.S. in this cycle. We continue to see recovery where a disproportionate amount of private sector hiring is being created through the temp sector. Additionally, many economists recently tempered their GDP expectations for the U.S. economy, which may result in clients turning increasingly to flexible staffing, which allows them to quickly adjust to this constantly-shifting economic environment and the significant uncertainties surrounding regulatory, PAC and Healthcare reform. We also benefit from the strength of our diversified revenue footprint, which is concentrated in some of the highest demand areas in today's knowledge-based economy. While the overall BLS unemployment numbers remains relatively high, college-educated unemployment was just 4.4% in March. Talent shortages are particularly severe in Tech, which is project driven by nature and constitutes over half our revenues. The operating model we have built is working well and positions us to capture revenue and drive additional EBIT across all customer segments. Our customer mix is evenly distributed among large, medium and small customers. Each of which, we are able to service as a result of this flexible model. Our gross margin profile is already one of the most attractive in the industry, but the capability to the cost effectively meet customer needs for speed and quality, allows us to drive EBIT both through increased margins and through operating efficiencies and flexible compensation structures. Our operational objectives for 2011 are to further penetrate and accelerate growth at existing Strategic Accounts, compete for additional customer share and selectively target new accounts where our service offerings and business model add value to our clients. We also expect to continue to improve profitability through the leverage that exists in our highly advanced operating platform and by further revolving the NRC, which allows us to profitably serve certain clients and niches that would not be possible under a traditional staffing model. As we consider our success in meeting our financial and operational objectives, I note that in the first quarter, the firm was able to grow total revenue year-over-year by 15.8% to $262.4 million and increased net income by 78.7% to $4.8 million. These gains were driven primarily by the success in our core technology and financing accounting business, which collectively constitute 75% of total revenues and grew first quarter year-over-year 19.6% and 34.1% respectively. Both of these businesses benefit from the continuing maturation of our cost effective and highly flexible national recruiting center, coupled with our Strategic Accounts strategy, as well as our highly tenured workforce. Currently, 25% of Technology and F&A Flex revenue is being supportive by the NRC. We expect this percentage to grow as our Strategic Accounts strategy gain further momentum, an increasing tenure in the NRC leads to additional productivity improvements. We believe the continued evolution of these teams and their related successes provides significant additional revenue and earnings leverage. Our largest business unit, Technology Flex, which represents 53% of total firm revenues in Q1 2011 saw first quarter revenue increased 0.7% sequentially and 19.7% year-over-year. Revenue trends improved year-over-year for each month of the quarter, with performance accelerating significantly in March. April trends for Tech Flex continue to improve from March levels and key performance indicators continue to be quite strong. We expect sequential revenues for Tech Flex to increase in the second quarter. Our Finance and Accounting Flex business, which represents 18% of our total revenues in Q1 2011 performed well in the quarter, with revenues increasing 0.7% sequentially and 34% year-over-year. FA Flex revenue trends improved year-over-year for each month of the quarter. This business includes a significant amount of activity in lower bill rate positions, inclusive of the mortgage refinancing and foreclosure space, which constitute approximately 22% of our F&A business. This portion of our F&A business declined 9% sequentially, but has increased 74% year-over-year. This service offering benefits from a dedicated team in the National Recruiting Center to successfully service this business at a lower cost than our traditional F&A staffing model, and we are especially prepared to meet surge opportunities presented by financial services firms with processing needs. We anticipate the lower bill rate portion of our F&A business to decline again in Q2, however, our traditional F&A business is performing well and is expected to grow sequentially and more than offset the declines in our lower bill rate business. April revenues and performance indicators for FA Flex in total are stable for March levels, and we therefore expect continued growth for this unit in Q2. Our HLS business segment, which represents 16% of total revenues in Q1 2011, is comprised of our Clinical Research and Health Information Management businesses. During Q1, revenues in our Clinical Research business increased 13.2% sequentially, but decreased 3.8% year-over-year. Sequential revenue trends in Q1 for our Clinical Research business typically benefit from a reduction in paid time off versus Q4. However, this strong sequential growth reflects continued improvement in this business. Additionally, we expect a significant project win in late Q1 at a major client to positively impact Q2 revenues and therefore anticipate strong growth in Q2. We believe the prospects for this business remains strong and the quality of our relationships with the strongest companies in this sector will provide opportunities for growth in the longer-term. HIM revenues increased 0.7% sequentially and increased 20.7% year-over-year. Our HIM revenue trends continue to be promising and hospital spend continues to improve. Particularly in the project services and remote coding areas. This business has performed nicely over the last four quarters and it continues to evolve its business model to better embrace the evolving technological changes in this space. We believe in the long-term demand for this profitable business and expect revenues to be up again in the second quarter. Revenues for Kforce Government Solutions, our prime government contracting business, increased 0.2% sequentially and declined 12% year-over-year. This profitable business unit continues to see the negative impacts of the challenging federal procurement environment, resulting in the delays of the timing of project awards, primarily stemming from the continuing resolutions, as well as the trend by the federal government to insource certain functions. We remain focused on our key competencies and consistent with our philosophy during difficult periods, our talents at KGS management team is taking this opportunity to challenge all aspects of the business and its processes so we are fully prepared to take advantage of opportunities in niches where we excel. As we look ahead to Q2, we anticipate revenues will be flat to slightly down with a stable profit picture in this unit. We continue to believe in the long-term prospects of KGS, although we expect 2011 to remain challenging for this business unit. Perm revenues from direct placements and conversions, which constitute 3.8% of total revenues decreased 8.7% sequentially, but increased 27.9% year-over-year. Over the last several years, we have aligned our Perm business more closely with our Flex business, particularly in Tech to more efficiently meet customer needs, as well as reduce the overall cost in establishing and maintaining the Perm workforce. We continue to make measured investments in our field and in our search teams to support our high-quality revenue stream, although our financial targets are not predicated on returning to prior peak Perm revenue levels. Perm revenues are very difficult to predict, however, we expect Perm revenues to increase in Q2 as a result of the promising early-quarter trend and a growing pipeline. We are extremely happy with the performance of our field NRC and Strategic Accounts teams. They are the lifeblood of our firm. Performance of our highly tenured sales teams continue to improve, as reflected in the 15.8% increase in revenue and 15.2% increase in gross profit year-over-year. As a result of strengthening demand, we continue to make selective investments in our sales headcount by adding additional scale in the NRC. Sales headcount inclusive of the NRC and Strategic Accounts has increased 5.9% year-over-year. We believe the continued development of our National Recruiting Center and Strategic Accounts teams provide the leverage to increase productivity, well beyond historical highs and at a cost of delivery well below historical levels. As we have stated previously, this is the first up cycle we have experienced with these units at scale and we continue to refine our focus and direction to optimize performance. We performed well during the first quarter of 2011 and we are on track to meet or exceed our financial targets. We believe our diversified service offerings, fortified by our tenured field teams and our National Recruiting Center and Strategic Account executives will result in accelerating revenue growth and improved operating margins as we move further through this economic recovery. We believe that we will surpass prior peak earnings earlier in the cycle with a healthier, less Perm dependent revenue stream. To put things in perspective, we are in the second year of the economic expansion and we are already back to 99% of our prior peak revenue and 46% of prior peak earnings. Our priorities are a continuing relentless focus in retaining our great people and improving client satisfaction, while driving continued profitable revenue growth. I will now turn the call over to Joe Liberatore, Kforce's CFO and Executive Vice President, who will provide additional insights on operating trends and expectations. Joe?

Thanks, Dave. We're pleased with our results for the first quarter, which reflect strong execution. Revenues for the quarter of $250.4 million increased 1.5% sequentially, and increased 15.8% year-over-year. Quarterly revenues for Flex of $252.3 million increased 2% sequentially and increased 15.3% year-over-year. Search revenues of $10.1 million, decreased by 8.7% sequentially, but increased 27.9% year-over-year. Overall revenue trends rebounded well in January after the holidays, were relatively flat in February and accelerated across all business lines in March. Revenue trends for the beginning of the second quarter of 2011 are up from March. For the first 3 weeks of April, Tech Flex is up 16.5% year-over-year, Finance and Accounting Flex is up 29.3% year-over-year and HLS is up 2.8% year-over-year. Search revenues are up 35% year-over-year for the first four weeks in Q2 2011. We believe the consistent demand in Q1 and the strong start to the second quarter, despite weakening economic growth trends, support the possibility of the secular shift towards greater utilization of temporary staffing for knowledge workers. Net income of $4.8 million and earnings per share of $0.12 in Q1 2011, decreased sequentially, 23.6% and 25% respectively compared to Q4 of 2010. Year-over-year net income and earnings per share increased 78.7% and 71.4% from $2.7 million and $0.07 in Q1 2010. Our strong bottom line results in the face of significantly increased payroll taxes is a result of the disciplined approach to improving bill/pay spread, and the improving cost efficiencies from our operating platform, as well as the increased use of our cost efficient National Recruiting Center. Our overall gross profit percentage of 29.9% decreased 200 basis points sequentially and decreased 20 basis points year-over-year. The year-over-year decrease is primarily a result of the increase in payroll taxes by amounts larger than we had anticipated. Substantially offset by improving bill/pay spread. Our Flex gross profit percentage of 27.1% in Q1 2011 decreased 170 basis points sequentially, due to a 210 basis point increase in payroll taxes in Q1. Inclusive of the increased pseudo-cost [ph] and the expiration of the new higher tax credit in Q4, partially offset by an 80 basis point improvement in bill/pay spread. Year-over-year Flex gross profit percentages decreased 40 basis points and we are pleased with our progress in improving bill/pay spread. All staffing business lines, except HIM, have experienced improvement in year-over-year bill/pay spreads, with year-over-year Tech Flex spreads improving 100 basis points, FA Flex spread improving 60 basis points, Clinical Resource spreads improving 190 basis points and HIM declining 220 basis points. Impacting the improvement in bill/pay spreads, particularly in our Tech Flex business, is the continued growth of our Strategic Accounts, which typically have lower margins and where spreads are more difficult to expand. The Strategic Accounts portfolio, however supported primarily by our National Recruiting Center, which significantly lowers the cost of delivery and results in highly profitable business, despite lower gross margins. Overall, we anticipate continued improvement in bill/pay spreads across all our staffing businesses in Q2, as well as the reduction in payroll tax costs. Our government business unit has experienced a decline of 60 basis points in Flex margins year-over-year, which is the result of aggressive pricing required to win re-compete contracts over the past year. Margins in our Government business will be relatively stable in Q2, but will be negatively impacted by the resolution of a major protested contract that we had disclosed over a year ago, which we were able to retain at a lower margin than previously recognized. We will continue our relentless focus on pricing and margin expansion as we continue through Q2. As we compare our progress in expanding margins during what we believe to be the early stages of this up cycle versus last, we continue to see expansion of bill/pay spreads fairly consistent with the prior recovery. The architecture of our income stream is well distributed among large, medium and small customers. We believe this provides the best opportunity to leverage our operating platform and maximize operating margin. As the percentage of business with large customers grow, this increased profitability will come from a combination of gross margin improvement and operating expense leverage. The shift in overall business mix, with higher payroll taxes is negatively impacting our progress in overall margin expansion. However, current trends suggest continued margin expansion in 2011 and a continuation of this expansion throughout 2012. If Search were to remain at approximately 4% of revenues, and if we were to expand Flex margin to 30% levels, well below the peak of last cycle, we would need to reduce operating expenses to 25.7% of revenue to exceed peak operating margins of 7.4% in the last cycle. We are very pleased with the declining trends in operating expenses over the past 2 years. Operating expenses were 26.9% of revenue in Q1 2011, which decreased 90 basis points from Q4 2010 and decreased 130 basis points from 28.2% in Q1 2010. The continued reductions are a reflection of our diligent management of operating expenses and the expansion of our National Recruiting Center. The NRC currently services 25.2% of our Tech and FA revenue, yet comprises only 12.6% of compensation, related to these businesses as compared to servicing only 6.1% of Tech and FA client 3 years ago. Another key benefit from investments in our National Recruiting Center and Strategic Accounts group, is to improve the performance of our field associates, thereby improving retention and reducing the cost of expensive turnover. Field associate turnover continues to be low. As the percentage of NRC usage increases across the firm, we anticipate additional operating expense leverage. Additionally, as revenues increase, we continue to see operating leverage from the technology investments made over the past seven years. Our accounts receivable portfolio continues to perform very well, write-offs continue to be very small and the percentage of receivables aged over 60 days remain at very low levels, decreasing to 3.5% in Q1 as compared to 4.1% in Q4. The quality of our accounts receivable portfolio also benefits from the growing concentration of high credit quality strategic clients, helping to maintain low write-off levels. The firm's cash flow continues to be strong, EBITDA was $14.1 million or $0.34 per share in Q1, as compared to $15.2 million or $0.37 per share in Q4. Year-over-year EBITDA increased 64.3% from $8.6 million in Q1 2010. Bank debt at quarter end of $25.3 million is up from $10.8 million at the end of Q4 2010, due primarily to a timing of certain annual payments and the repurchase of approximately 530,000 shares of the firm stock for a total of $9.3 million, and was up from $19.2 million at the end of Q1 2010. Borrowing availability under our credit facility, which expires in November 2011 is currently $73 million. There is currently $59.6 million available for future stock repurchases under our current Board of Directors authorization. Capital expenditures in Q1 were $1.7 million will remain only a small portion of our cash flow. With respect to guidance for the second quarter of 2011, at 64 billing days versus 63 billing days in the first quarter. The firm generated approximately $4.2 million in revenue each billing day in Q1. We expect revenues may be in the $276 million to $283 million range, the bottom end of the revenue range reflects a continuation of April revenue levels, while the top end reflects continued improvement at the rates seen from March to April. Earnings per share may be $0.17 to $0.20, this guidance considers a full quarter impact of the NRC resources and offshore back-office resources brought on board in Q1, along with continuing near-term uncertainty related to the pace of margin expansion and sequential reduction in the impact in payroll taxes that provides $0.04 a benefit from Q1 levels. Additionally, last year, we experienced 150 basis points Flex margin improvement in Q1 to Q2, and this guidance contemplates similar improvement. Our effective tax rate in Q2 is expected to be approximately 37.6%, with approximately $41 million weighted average diluted shares outstanding. This guidance does not consider the effect, if any, for acceleration of equity incentives or the firm's response to regulatory, legal or tax law changes. We're very pleased with first quarter results. As we look ahead to the remainder of 2011, we believe the platform we have built and the recent success we have, reflect a strong first step in achieving our target of 15% revenue growth and 50% EBIT growth. Our mix of service offering, particularly in Tech and FA, position us for revenue growth and margin expansion as we move further into this recovery and the secular shift towards flexible staffing. We have a high-quality revenue stream and balance sheet, as well as the strongest management team in the firm's history, and a highly tenured associate population. We expect to capitalize on the capacity that exists in our associate base to increase leverage and accelerate earnings. Operator, we'd like to now open up the call for questions.

[Operator Instructions] Our first question comes from Kevin McVeigh from Macquarie.

Joe, I wonder, can you just help us understand a little bit. It seems like you're modeling for about $0.05 impact from the pseudo came in at about $0.08, just what the delta there was in income -- just what drove that change relative to where we were thinking initially in the quarter?

Sure, Kevin. There's really, there's a couple of things. In our statutory, we have pseudo, we have benefits, what also can impact us in there is the mix of W2 population versus IT population. We also -- new higher tax credit that was there last year that expired going into this year. And then we also have some shift that can happen from the shift in billable expense. So I guess, if I were to reflect where we were when on the call February 7, from really what in terms of our initial modeling, we've only received a few state rates at that point in time. Because they kind of bleed in through the entire first quarter. So based upon those initial ones that we received, our experience looked like it was going to be very similar to last year. However, what ultimately happened is we got hit much harder in the high cost base, where we have very high concentrations of our business. And in fact, in most of those states -- we're now at the maximum, we're at the maximum rate level within those states. We also experienced a little benefit excalation [ph] during the quarter based upon experience that took place during the quarter that you really can't forecast. And then we also did have some mix in terms of higher mix of W2 employees versus IT employees, which we view as a good thing, because they're a much more stable resource for us, because that does also impact some of our statutory cost modeling.

But Joe, does that impact -- as you think about recapturing that through the year, is it pretty consistent in terms of ability to recapture or does it push it out maybe a little bit more to the back half of the year?

It pushes it out a little bit, but one dynamic that we'll be dealing with this year is, as we get into the back part of the year, that's where our margins were more favorably impacted from the new higher tax credit benefit that we are receiving last year. So while the pay/bill spread, we're focused on that and continuing to expand that because that's really the one thing we can control. When you start to look at year-over-year comps, they'll be a little bit tighter but the margin expansion will be happening in there.

Our next question comes from Mark Marcon from R. W. Baird. [Robert W. Baird] Mark Marcon - Robert W. Baird & Co. Incorporated: Can you talk a little bit about the revenue trends on the IT side? Where are you seeing the major strength? Were there any major big accounts that came along? How should we think about the IT trends that you're seeing?

Mark, this is Dave. The consistency of the Tech demand I think is kind of reassuring, if you will. We've seen it across the customer spectrum as I mentioned in my prepared remarks. We've seen it in Strategic Accounts which are accounts that we've identified and categorized for the firm based on a number of specific criteria that we've established. But frankly, based on the experience that we had during the quarter, and as you know, each quarter, we go out and visit with clients, as well as with investors. What we saw was frankly, a little startling. It was a dramatic shift in demand and it was a little bit overwhelming coming into the February and March timeframe. We saw, not only in the larger clients but also the smaller clients, a significant increase in demand. So what happens in that kind of a situation is you literally have to go through a prioritization process and focus. And when you see that kind of a spike as we saw, the balancing, if you will, between field-base delivery and our fee-based delivery in the prioritization of each of the classifications of the accounts, require that we call timeout and we evaluate where we're allocating resources based on those clients. So the thing that I would say and emphasize about Tech is that the demand is strong across all geographies, across all customer segments and across all technology. Mark Marcon - Robert W. Baird & Co. Incorporated: Did the mix change at all? And part of the reason I'm asking, Dave, is we're hearing constantly about how strong the demand is, but the bill rate on a year-over-year basis and a sequential basis in fact came down. It's just a little bit counterintuitive to increasing demand. So I'm just wondering if you could help with that.

Yes, Mark. You hit the nail in the head. Meaning, within each skill set we are seeing the bill rate expand, within each given skill set. So it is mix dynamic. One of the things that we've experienced, especially through our heavy focus on Strategic Accounts, is a lot of the entrée into these larger accounts happens to come through more infrastructure work initially. So you kind of earn your stripes on the infrastructure side of the house and then you start to move over to the normal app dev [ph] and those types of areas just because of the mass volume that they're looking at from an infrastructure and our ability to leverage the NRC to deploy people quickly in a cost-effective manner. So that's part of what you see going on there, it's definitely the mix. Mark Marcon - Robert W. Baird & Co. Incorporated: Yes, because I mean we see the gross margins on the Flex site increasing there despite the pseudo, so that was reassuring. And then it sounds like your cost of delivery is obviously less and that's illustrated by the decline in SG&A as a percentage of revenue, correct?

Yes, we've been emphasizing that for quite sometime with the operating model that we've been looking to evolve here over the better course of -- probably in reality, the last 10 years that it's been accelerating here over the course of the last 3 years in terms of having a very nimble model that allows us to drive, speed, quality in high volume manner. So you hit the nail on the head, I mean, we're all about, it's really that balancing of the SG&A or operating expense where in the margin makeup of our business, in conjunction with being able to grapple loss of revenue.

Mark, this is Dave. One of the things that we do when we go through this in evaluating clients in the business that we take on is to evaluate the contribution margin from the client. So because we are able to identify where the delivery resources are coming from, we're able to determine at a higher level the customer profitability and contribution margin to the firm and how to select which clients are the ones that are going to have the best profile for us going forward. Mark Marcon - Robert W. Baird & Co. Incorporated: Then I just didn't -- I'm going to ask one question then I'll jump back in the queue. I didn't understand the comment with regards to the government guidance for the second quarter. You mentioned a specific contract, and I wasn't quite sure exactly what the implication was as we think about the government business.

Yes, we had a very large re-compete that we were working on last year, which we were actually awarded and we won. And so one of the dynamics of that re-compete and we're seeing this in a lot of the government stays on re-compete. This one is probably exaggerated more than what I would say the normal re-compete. So we did win that business back to maintain that business, but it's at a lower rate. So on an apples-to-apples basis, the revenue contribution of that piece of business comes down on a sequential basis.

By the way, that business was won, protested, re-competed, won, protested and finally, awarded. So that's the nature of what's going on in the government space with the procurement. Mark Marcon - Robert W. Baird & Co. Incorporated: So basically, what you're telling us is that the gross margin are going to come down sequentially because of that re-compete coming back in? Does that also mean that the revenue is going up because of that? Or is the revenue going to be somewhat flat on that part of the business?

Because that business was already ours, we were recognizing that revenue at higher bill rates. The awarded contract actually has lower bill rates now. So therefore... Mark Marcon - Robert W. Baird & Co. Incorporated: So product revenue and gross margins will be down.

Right, but as part of what's happened with KGS over this quarter and as we talked about it, because we actually have seen some stabilization in the revenue, Q1 to Q2 sequential will be impacted as a result of that contract win.

Our next question comes from Paul Ginocchio from Deutsche Bank.

It looks like Search started in April from what you just reported in the first quarter, can you talk about where you think some of the acceleration is coming from, which division? And then you stepped up your share repurchase a little bit in the first quarter. Can you just talk about maybe what you're thinking about for the rest of the year? Should we look at similar number to the first quarter or was that just an abnormally high number -- high quarter?

On Search, we're really seeing it broad-based. We're seeing demand both from Tech and FA. And obviously, we do some business within HLS from a permanent placement standpoint to both of our permanent placement businesses within Tech FA. So I would say we're really seeing it's more broad-based.

It's across all geographies. Relative to your share repurchase question, the balancing act that we go through all the time is the use of free cash flow. And it's got retirement, acquisitions and repurchasing of shares. We operate in a couple of different ways. We have, during the periods if it's at quarter end, we typically work with 10b5s based on what we see in the market. And we're seeing opportunities to purchase and support the stock. Obviously, we still have a fairly substantial authorization from the board outstanding. So as we look at the balance of the year and depending on how we see things unfold, the likelihood is you will see us continue to be active in that area.

Our next question comes from Tobey Sommer from SunTrust.

This is Frank in for Tobey. I wanted to ask another quick question on Perm. Have you seen any change in terms of pricing or the competitive market in that Perm?

The competitive market definitely has accelerated in terms of our average, average fee hasn't really materially changed. Sequentially, it's pretty much flat from when I look at across the board. So it seems very stable in terms of average fee but absolutely a much more competitive environment. We're seeing Kansas get multiple offers and those unfortunately aren't always all of our jobs, so we're competing with the same candidate with other parties out there.

And on the HLS side in terms of your Clinical, what are you seeing in terms of demand environment there and pricing? And I guess, just kind of outlook going forward.

The Clinical business as we've indicated, we had a very good sequential coming from Q4 into Q1. We saw spreads improve 190 basis points. So in the larger clients, there's a realization or a recognition that pricing and pay are starting to move so we've had some success with our larger clients and reestablishing bill rates. We also indicated that we have significant win at the end of the first quarter. We won't realize that from a revenue standpoint until really, probably into the last month of this quarter, because there's a training and ramp up time and so forth. But we're pleased with the way our Clinical business is going. And that's been a long tenured business in our firm. The last couple of years, as a result of the consolidation in big pharma and biotech, we've gone through a fairly challenging time. But as we've stated previously, the lifeblood of these firms is research and new drug development. So we believe that's been stabilize that the opportunity there will remain.

And quickly if I can get one more. In terms of the government segment, has there been any change at all in terms of visibility now that CRs kind of winding down a little bit?

The situation is pretty much the same and it's still very difficult to determine when procurement is going to ramp up. The only thing that we're hearing now is that the agencies are really feeling the pressure from the need to be able to get these projects done and be able to get these contracts awarded and to get the task orders awarded. But at the same time, we have not seen anything that would suggest that there's going to be a significant change. So our operative assumption for the year that it's going to be challenging, and as we move into the next fiscal year, the hope is that we'll have a budget that we can manage to and that will allow us to be more effective, and actually seeing some of these contract wins that we've worked hard for, actually be awarded and the task orders awarded.

[Operator Instructions] Our next question comes from Josh Vogel from Sidoti & Company. Josh Vogel - Sidoti & Company, LLC: Just a couple of quick ones here. On the last call, you had some commentary about long-term revenue growth, and I was curious if you still envision achieving 15% annual growth? And do you see this primarily coming from gains in Tech and F&A?

Josh, it's Dave. Yes, as I opened with my remarks, as we look at the business, we believe we're still on track to meet our 2011 target of 15% for this year, 50% over the course of the five-year period. We've indicated that we believe we can average 15% to 25% of the target, not as guidance, but as we look at the portfolio of services that we have and the growth characteristics of them, with the infrastructure that we've built and as we've stated, we have invested substantially in both the sales pipeline, as well as the delivery pipeline. So one benefit of Strategic Accounts is you have the opportunity to see what's coming down the pipe, more so than you see in the traditional field demand area. So we've been greatly encouraged by our success in Strategic Accounts with contract awards. And so that's one of the things that's encouraged us to continue to build out our NRC infrastructure. It takes about six months to get NRC resources ramped to levels of productivity that they're able to effective in servicing these accounts. So as we look forward and we see the pipeline of activities there, there's no question that we feel that the demand is there and we've set up our supply chain to accommodate it. Josh Vogel - Sidoti & Company, LLC: Now looking at the F&A segment, you had some commentary that the mortgage refinance foreclosure work was down sequentially. I was just curious as you look out over the next several quarters, are there any drivers, revenue growth drivers you see in that market outside of refinance and foreclosure work?

That business has several elements to it. It has mortgage refinance, it has workout business and real estate. So there's a lot involved in there. We also have activities that we work on in insurance is there as well. So what we have experienced over the last quarter is that the refinance part of it has slowed, as rates have come up. The workout business has remained relatively consistent. What we've also seen that, to some degree, that's event driven as opposed to demand driven. That business is served entirely by the NRC and is predominantly Strategic Accounts. So the discussions that we're having with those accounts suggest that the need for the resources is still there. But the slowing down of foreclosures and those kinds of activities have caused some of the projects to be delayed by these larger clients. So as we stated, that business by the way is 22% of our F&A business, 4% of our overall business. So the core F&A demand has actually -- and growth has actually surpassed any loss that we've had as a result of the drop off in the refinance demand. So as we look to Q2, based on what we've seen thus far, we expect the refinancing demand to continue to decline. However, we expect that our traditional F&A business and the workout business will continue to improve. So we expect F&A to be up in the quarter. Josh Vogel - Sidoti & Company, LLC: That's helpful. And lastly, I may have missed it, but did you talk about how much additional capacity you see in the NRC before you would have to really be aggressive in hiring new sales associates?

From an NRC standpoint, we substantially expanded that last year. And as we're looking forward, the ability to deliver is ultimately going to become paramount as the cycle continues to play out and supply demand continues to take hold, in terms of access to the candidate. So similar to what we did here in the first quarter is we're looking at what's happening with activities, and as activities start to peak out, we'll continue to bleed individuals into the NRC. But I don't really see substantial tranches of people needing to go in there, because it's still from a tenure standpoint, very low on the tenure scale. So we have a lot of capacity opportunity as those individuals gain more experience to become more tenured. So we're comfortable with where our capacity is, but we'll more than likely continue to be adding to the NRC when supply demand warrants it.

One of the things we've experienced with the demand is that with the huge spike, our field offices experienced such an incredible and dramatic shift in demand again as we did last year in March, that they all have as a part of their business model to be able to request assistance from the NRC. So the big issue then becomes, "Okay, how do we prioritize the delivery resources based on the accounts and the markets?" Because the demand is frankly far exceeds our ability to deliver, so we've got to be highly selective in the clients that we pick and the markets that we've structured this delivery for. So -- but with that said, we can also say we're confident that the people that we brought on board, as they ramp to productivity, will allow us to meet the demand of these clients without substantial increase of resources.

That's really not just an NRC dynamic, that's the nature of this business. At this point in the cycle and as the cycle continues to mature more, that's where it really turns to -- it turns to prioritization, it turns to client control, it turns to candidate control, because you never have enough resources to service all the demand as the market continues to heat up. So ability to hone in on those right clients and go after the controllable clients and focus delivery resources in those areas becomes paramount, and we have quite a few initiatives going on in that front. Not just specific to the NRC but the field as a whole.

Our next question comes from Mark Marcon from R. W. Baird. Mark Marcon - Robert W. Baird & Co. Incorporated: Just have one more follow-up on the F&A and HLS. On the F&A, I mean just the sequential growth, typically you end up seeing pretty good sequential growth. And you did say it's going to be up year-over-year, but I'm assuming we're not going to see the same level of year-over-year growth that we saw in the first quarter, just because the comps are getting a little bit tougher, is that correct?

I mean the comps are getting a little bit tougher but I think in my opening comments, when I referenced where F&A was for the first three weeks, still almost pushing 30% year-over-year. So that's really not that far off of where we were sequentially, and that's in spite of Q2 usually being a little bit more seasonally weak than Q1. So we kind of like where we stand at this point. Mark Marcon - Robert W. Baird & Co. Incorporated: And what are you seeing from the competition? I mean, you've become known for your NRC. Are you seeing anybody that's trying to duplicate what you have? I think culturally, it's difficult to do but are you seeing in terms of the competitive ROPs [ph] that are out there, any sort of activity that would suggest that?

Yes, I would say that we've seen everybody announce an NRC or some derivative or permutation thereof, which is great. One of the things that I've appreciate about our industry is that we really do need to evolve and we need to innovate and find more effective ways to serve the client. So to the extent that our competitors and other firms adopt that model, as far as I'm concerned, I think that's great. It's incumbent upon us to continue to press the advantage that we have as a result of having been active now for 10 plus years, and really refining the process is in the culture. So the challenge for us is to say, "Okay, now what?" And as you know, and coming to visit us here, we haven't stopped at all. In fact, we've continued to push the advantage. We've identified additional ways to leverage the NRC. We found new and innovative ways to speed up the process, improve the level of customer satisfaction, the customer experience. So those are the things that we're testing in various areas. But I look at it and say, imitation is the sincerest form of flattery. I think it's a great thing. I do believe that ultimately it's not technology or process that makes that work, I think it's culture. And the culture that -- and the primary value that drives that in a culture is the trust that exists with the field resources and our talented teams out there working with our corporate NRC team. So that is really where I think we've been able to make the most gains and the most traction. So when it comes down to the leadership, and it's time engraved. So we're actually confident about it and we're flattered that other people are doing it. Mark Marcon - Robert W. Baird & Co. Incorporated: Great, and can you give us a little bit of color in terms of what your assumptions are in terms of the year-over-year hit that we should assume in terms of the HIRE Act not being in place for Q2 through Q4?

In Q2, there's not a lot of HIRE Act impact. Most of that was really back end of the year, Mark. So the HIRE Act, it kind of -- it hits you one -- there's two dynamics associated with the HIRE Act: It was the benefit received last year for those that executed under that, which in our case would show up in gross margin. And then for example, this year, and that's part of why when you look at our effective tax rate, it is where it is. Because now, we actually get a tax benefit this year, associated with that HIRE Act for individuals that ended up staying with us for a year. So we kind of recapture 25% of what we gained last year in effective tax rate. So when we moved to the back end of the year, I guess, the best way that I could articulate the impact, there's more of an impact in Q3. The greatest impact we experienced, or benefit, I should say, was in Q4. So that's why we're focused on increasing our pay spread, pay/bill spread, and we have a lot of margin optimization focuses going on, because our objective is to improve those to the same extent, so that we neutralize any of that benefit that we received last year. Mark Marcon - Robert W. Baird & Co. Incorporated: Okay, and that Q3 and Q4 benefit, was that roughly 40, 50 bps?

Yes, for the year, it's probably about 40 bps. Mark Marcon - Robert W. Baird & Co. Incorporated: 40 bps and concentrated in the last half?

Correct. Mark Marcon - Robert W. Baird & Co. Incorporated: Great. And then, you would to expect to recapture 25% of that, roughly? In terms of more favorable to...

From an income standpoint, we recapture that after-tax because of the tax benefit that we pick up. Mark Marcon - Robert W. Baird & Co. Incorporated: Okay great. And then are you seeing any supply constraints anywhere in the chain? Particularly in IT since it's been hot for just about everybody?

Absolutely. In our West Coast trip that we took in March, we went to -- what was it, 20-something clients. And every single client, I mean, every single client expressed to us concern about delivery, about pricing, pay skills. See what happens is, eventually, it comes to roost in their own employee base. So they'll see their core people identifying other opportunities. And so supply and demand in the market really is the driver for margin expansion and pricing. So everywhere we've gone, all the reports we've gotten from our field folks, we just had our incentive trip, where we get an opportunity to sit down one-on-one with our teams and hear from them. There isn't a market, there isn't a skill set within Tech that we're not hearing has got significant demand, and everyone is frankly crying for additional delivery resources and, as Joe said very well, at this point in the cycle, that you really have to be more selective and narrow your focus, and go after client and candidate control. F&A, as we've certainly seen an increase in demand, although I would say that it's not at the level of Tech is, in terms of any imbalance. But we expect that this way, that it will become more challenging for resources and likely, we'll see pricing come up there as well.

And Mark, what I would add to that one of our key initiatives, and it has been for quite some time at this point in time is delivery optimization. We have our best resources focused on that. The whole firm is behind it, field, back of the house, because ultimately that bleeds into one of our other top priorities, which is margin optimization because first, you've got to be able to identify the quality candidates and then you have to get the value for those candidates that's associated. So those two things really tie very closely together and we're full-steam forward on both of those initiatives. Mark Marcon - Robert W. Baird & Co. Incorporated: Nothing to the point where you are unable to fill orders to the level that you can continue to maintain the growth rate?

No, we're going to have demand. And if I could fill every order, I'd be on the call for one more quarter because frankly, the demand is staggering. So in all of my years in the business, working and managing through cycles as you move into this part of the cycle, it comes back to client selection, it comes back to focus, it comes back to client control. Things such as defining the process, speeding up decision-making, all of those kinds of things, because the worst thing is the cost of rework. When a client says, "Yes, I'm really interested in Mark. He's great. I'll get back to you next week." Well by next week, Mark is already assigned somewhere else, and we have to go through the whole process again. So that's what happens at an inflection point where the clients start to figure it out and they think this isn't fun for us either. So they start to adapt their hiring processes, compress their cycles down. So this is normal and we expect it to continue, there's nothing that we're seeing now that we haven't seen in the past. And it's always a -- for us, it's a matter of selection and focus to make sure that we are serving the clients that we want to serve, because we think about them strategically in a relationship. Not just for today but also for the next five years because there's going to be another page in the cycle. As we discovered before, and one of the things that we benefited from, was our client selection and the servicing that we offered to them so we didn't experience the negative on the other side of it. So it's important that we pick the right clients, and do an effective job of servicing them because it affects us on the other side of the cycle as well.

With all the technology that's come into the space, the VMSs, VMOs in various other areas. Speed has become paramount, and I don't see that changing anytime soon. It's only increasing in velocity on one's ability to really quickly get things done in a high-quality manner, which again, I'll go back to this is everywhere we've been making our investments for the last 10 years from every piece of back-office infrastructure to the NRC to many of the other alignments from a Strategic Accounts standpoint.

Our final question today comes from Giri Krishnan from Crédit Suisse. Giridhar Krishnan - Crédit Suisse AG: I believe you mentioned a large contract win on the HLS side, was that in Clinical Research or was that in HIM?

That was in Clinical.

And I guess it was good to see bill rate spreads increase across the board. I was curious to know, I don't know if you addressed this before, what drove increases on the HLS side, and how sustainable do you think they are?

The KCR bill rates came from repricing. That is concentrated in larger clients with large pharmaceutical, biotech and they're all the long-term relationships. So the benefits that we saw there came as a result of those relationships in repricing. We wish to once again, say thank you to all of you for your interest in Kforce. And once again also, our thanks to our teams, to our field teams, to our corporate teams and for all of those that are delivering just great service to our clients, and of course, this is what we're here for, is delivering exceptional service. So we thank you for your interest and look forward to talking with you again next quarter with Bill. Thank you.

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