Kforce Inc. (KFRC) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Kforce Q1 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Michael Blackman, Chief Corporate Development Officer. Please go ahead.

Thank you. Good afternoon, and welcome to the Kforce First Quarter 2012 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 -- 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 the call over to David Dunkel, Chairman, Chief Executive Officer. Dave?

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. As previously announced on March 31, we completed the sale of our Clinical Research business. Information pertaining to this transaction was disclosed in the 8-K that was filed on April 3, 2012, and additional required disclosures will be included in our 10-Q filing later this week. As a general note, all numbers cited during our call today will be from continuing operations, and therefore, exclude any results from this transaction and the Clinical Research business unless specifically indicated. We are pleased with our Q1 results and the outlook for the remainder of 2012. Kforce reported revenue for the quarter ended March 31, 2012, of $268.4 million, a year-over-year increase of 13.5% and a sequential increase of 3.5%. We remain optimistic about the firm's prospects in what we believe continues to be a secular shift towards a greater use of flexible staffing in an environment of high demand for skilled professionals. The unemployment rate among college degree workers is currently 4.2%, roughly half that of the overall U.S. rate of unemployment and it's substantially lower in several of the specialized skill sets Kforce specializes in, particularly technology. During the quarter, many of our clients pursued direct hire strategies and elected to convert tenured consultants which resulted in lost billings and no realized conversion fees to Kforce. In addition, our Strategic Accounts experienced a sequential decline in Tech Flex revenues, primarily driven by our largest financial services clients. Our revenue footprint and domestic platform remain focused in the areas of greatest demand in today's economy. We continue to benefit from our clients' desire for a flexible workforce during this slow economic recovery combined with significant uncertainty in regulatory tax and health care reform. Despite some recent mix data on the near-term economic backdrop, we continue to believe that the analyst consensus estimates of approximately $1.1 billion in revenues from continuing operations is conservative and EPS of $0.88 are reasonable expectations for full year 2012 results. Our strategy remains intact, and we believe the divestiture of our Clinical Research business will result in a less complex and ultimately more leveragable operating model. We are continuing to refine our delivery model and narrow our focus to accelerate growth. We believe there is significant opportunity for continued strong growth in our Tech and F&A businesses, as well as our Health Information Management business, which is well positioned for continued success due to the implementation of ICD-10 electronic medical records. Additionally, our government business had a very successful Q1, so we are now beginning the staffing process on the new contract awards, which should lead to sequential revenue growth in this business in each of the next 3 quarters. Looking ahead, we are pleased with the firm's positioning and our opportunity to capture market share. We remain excited about our prospects and are committed to our belief that temporary staffing penetration, which has improved from 1.34% at the beginning of this economic cycle and is currently 1.87% of the workforce, will achieve historic highs in the U.S. during this economic expansion. Before I turn the call over to Bill, I want to thank all of our associates for their contributions to Kforce as we celebrate our 50th anniversary on May 12. I'll turn the call over to Bill Sanders, Kforce President, who will provide his comments. Joe Liberatore, Kforce CFO, will then provide additional insights on operating trends and expectations. William?

Thank you, Dave, and thanks to all of you for your interest in Kforce. We are pleased with the first quarter of our new 3-year strategic plan, The Expedition. We had built a foundation of great people, processes and tools that allow us to compete effectively in what we foresee is a solid market for our staffing and solutions business unit. Our highly tenured field sales and delivery operations are supported by a highly flexible National Recruiting Center and Strategic Accounts model that combined allow us to effectively service a broad spectrum of clients across geographies, industry and size. All of our flexible staffing business units grew sequentially and year-over-year growth accelerated from Q4. Our Permanent Placement revenues, driven by a strengthening Tech Perm environment, increased sequentially and year-over-year. As Dave noted, our government business unit is beginning to realize the benefit of its rebuilt business development team, as exhibited by the multiple contract wins in the first quarter. Tech Flex is our largest business unit and represents 60% of total firm revenues. Tech Flex continued to perform well in the quarter and, again, achieved record revenues. Q1 revenues increased 2.5% sequentially and 15% year-over-year. Overall, our key performance indicators for technology remain at high level, though the tightening market for Canada may be slightly tempering growth. The year-end assignment ends were more significant than last year and the rebuild hasn't happened as quickly as last year, though revenue grew sequentially in each month of the quarter. The candidate pool for technology consultants is particularly tight for skill sets in high demand, such as FA, Java and .NET. We are focused on continuing to evolve our National Recruiting Center to source candidates and expect second quarter revenues to increase for Tech Flex. Revenues for our Finance & Accounting Flex business, which represents 20% of our total revenues, increased 7.3% sequentially and increased 14.2% year-over-year. Revenues were down in January from December level. The growth for this year accelerated in each month of the quarter and was broad based. These results are inclusive of mortgage-related services, which grew at a rate consistent with the rest of FA and constitutes approximately 17% of F&A revenues. Seasonal trends and current performance indicators suggest FA Flex revenues will stabilize in Q2. Both of our Tech Flex and FA Flex businesses benefit from our cost effective and highly elastic National Recruiting Center, coupled with our Strategic Accounts strategy and highly tenured workforce serving all of our clients. Currently, approximately 27% of revenue is being supported by the NRC, which is consistent with Q4 levels. Revenue growth for the quarter was driven by our small- to medium-sized client base and some select Strategic Accounts. However, our Strategic Accounts portfolio declined slightly in the quarter due to consolidation and capital requirements in 3 large financial services clients. In the aggregate, the firm provides consultants to approximately 3,000 clients at any time. We have an extremely diversified revenue stream with no one client constituting more than 3% of total revenues. Our flexible model allows us to redeploy consultants in the industries with the greatest demand for our services such as health care. Four of our top 25 clients are in financial services and comprise approximately 8.4% of total revenues, which has declined from 10% a year ago. Financial services represent 18% of Tech Flex revenue, which has declined from Q4 2011. Revenues for our HIM business increased 4.8% sequentially and 21.3% year-over-year. Our HIM Flex revenues were at record levels and revenue trends continue to be promising, as revenue growth accelerated in March and hospital spending continues to improve, particularly in the project services and remote coding areas. This business continues to grow more quickly than all of our other Flex businesses and has now grown 8 straight quarters, and we expect it to eclipse an annualized run rate of over $80 million in Q2. We believe in the long-term demand for this profitable business, and in particular, opportunities that are evolving for both HIM and Tech Flex where client transitions to electronic medical records and with the recently extended deadline to October 2014 for the adoption of ICD-10. Revenues for Kforce Government Solutions decreased 1.2% sequentially and 1.6% year-over-year. Though the overall market visibility for government contractors remains limited, Q1 business development activity was up sharply from 2011 results. During Q1, KGS was awarded 7 new contracts that should result in strong growth of revenues once the projects are fully staffed. The contract wins are predominantly for cleared personnel. We have begun the process to identify consultants to assess the open positions and gain clearance, and we expect Bellux [ph] to begin in late May to early June. Revenues should increase for KGS in Q2 with an acceleration of revenue increases expected in Q3 and Q4 as the task orders become fully staffed. Perm revenues from direct place of conversions, which constitute 4.1% of total revenues, increased 8.4% sequentially and 12.3% year-over-year. This growth was concentrated in technology, which we believe reflects continued strength in this area as desired skill sets are hard to find. We expect Perm revenues to continue to be relatively solid in Q2. In terms of core headcount trends, we continue to make measured investments in additional headcount from Q4 to Q1. Sales headcount inclusive of the NRC and Strategic Accounts increased 1.2% sequentially and 9.4% year-over-year. We expect to continue to make selective investments in our sales associate headcount, as we achieve certain performance metrics. We performed well in the first quarter and we are poised for success as we embark on our new 3-year strategic plan. We believe our diversified service offerings, fortified by tenured field sales teams and our National Recruiting Center and Strategic Accounts executives will result in continued revenue growth as we move further through this economic recovery. As we continue on our expedition to attack the summit during the next 3 years, our priorities are continuing. We'll have this focus on retaining our great people and improving client satisfaction, while driving continued profitable revenue growth. Over to you Joe.

Thank you, Bill. The firm continued to perform well in the first quarter. Total revenues for continuing operations for the quarter of $268.4 million increased 3.5% sequentially and increased 13.5% year-over-year, driven by broad-based growth in our flexible staffing businesses. Quarterly revenues for Flex of $257.3 million increased 3.3% sequentially and increased 13.6% year-over-year. Search revenues of $11 million increased by 8.4% sequentially and increased 12.3% year-over-year. Overall, sequential Flex revenue trends in Q1 showed a decline in January, as it's typically seen at the beginning of the year. We're flat in February and improved in March. Search decreased in January, then strengthened in February and March. Flex revenue trends for the beginning of the second quarter 2012 are flat from March. For the first 3 weeks of April, Tech Flex is up 12.2% year-over-year, Finance & Accounting Flex is up 11.7% year-over-year and HIM is up 19.9% year-over-year. Search revenues are down 6.8% year-over-year for the first 4 weeks of Q2 2012. We caution that early quarter trends don't necessarily accurately reflect potential full quarter results. Total net income, inclusive of discontinued operations of $4.1 million and earnings per share of $0.12 in Q1 2012, decreased sequentially 42.5% and 40%, respectively, compared to Q4 2011. Year-over-year net income decreased 15.8% from $4.8 million in Q1 2011. Earnings per share were flat year-over-year at $0.12. Our overall gross profit percentage of 30.1% decreased 160 basis points sequentially and decreased 10 basis points year-over-year. Our Flex gross profit percentage of 27.1% in Q1 2012 decreased 180 basis points sequentially and decreased 10 basis points year-over-year. Overall, bill/pay spreads were flat sequentially. The sequential decrease was driven by 130 basis point increase in payroll tax-related cost in Q1, which was slightly higher than we had anticipated, as well as a 50 basis point impact related to a $1.8 million tax audit accrual. Year-over-year improvement in spread of 40 basis points was offset by the impact of the 50 basis point increase in cost as a result of the tax audit accrual. To provide further insight into margin changes in our Tech Flex and FA Flex business units, we provide the following breakdown in the year-over-year and sequential drivers. For Tech Flex, year-over-year margins declined 90 basis points. This change is comprised of a 50 basis point improvement in bill/pay spread offset by a 30 basis point increase in payroll tax cost, an 80 basis point impact from the previously mentioned tax audit accrual and a 30 basis point increase in other costs, such as benefits and billable expenses. Tech Flex sequential margins decreased 250 basis points. Payroll taxes increased 130 basis points and the tax audit accrual had an 80 basis point impact. Bill/pay spread declined 30 basis points. Tech Flex spreads were negatively impacted by 50 basis points as a result of investments made in new projects with 2 large customers. Exclusive of this impact, bill/pay spreads would have increased 20 basis points sequentially, as originally anticipated, and 100 basis points year-over-year. FA Flex margins improved 180 basis points year-over-year. Bill/pay spreads have improved 150 basis points and payroll tax and benefit costs collectively are 30 basis points less than a year ago. Sequential FA Flex margins declined 90 basis points. Bill/pay spreads improved 70 basis points, but were offset by 160 basis point increase in payroll tax cost. Improving bill/pay spreads in Q1 in Tech and F&A essentially enabled us to fully pass through increased payroll tax-related costs in the quarter. We believe that the current supply-demand environment suggests that pricing power will continue to improve over time. We expect Flex margins in the second quarter to be at or near Q4 2011 levels due to the positive impact of the significant reduction in payroll taxes from Q1, continued modest bill/pay spread expansion and the elimination of the negative impact associated with the tax audit. In considering operating results for the firm, we believe it is most instructive to consider the revenue and earnings guidance we have provided for the second quarter, as well as the outlook we had provided for full year. The divestiture of our Clinical Research business and the associated actions and costs related to the transaction make it particularly difficult to reconcile the first quarter. However, we note that first quarter SG&A was impacted by a number of items, notably the firm incurred incremental expense of approximately $31.3 million from the acceleration of all outstanding long-term incentives that allowed the firm to defer the tax obligation related to the $36.6 million gain associated with the divestiture. As we look ahead to Q2 and the rest of 2012, the acceleration in the LTI will reduce quarterly SG&A by approximately $4.9 million. Additionally, the firm has accrued approximately $800,000 related to the potential settlement of a lawsuit, which it expects to resolve in the second quarter. We continue to maintain a disciplined approach to improving cost efficiencies in our operating platform. Our accounts receivable portfolio continues to perform very well, as the percentage of receivables aged over 60 days remain at low levels. Our cash flow from operations continue to be strong. EBITDA in Q1 typically declines from Q4 as the result of increased payroll tax cost. Additionally, EBITDA was impacted by the expense incurred from the acceleration of certain cash-based long-term incentive awards. We expect quarterly EBITDA to return to more normalized levels in Q2. Bank debt at quarter end was essentially 0, down from $49.5 million at the end of Q4 2011. However, as a result of early Q2 settlement for Q1 stock repurchases, we will likely have outstanding borrowing at the end of Q2 of approximately $20 million. Borrowing availability under our credit facility as of the end of Q1 is $85.5 million. The firm repurchased approximately 1 million shares of stock at an average price of $14.83 in Q1. There is currently 68.7 million available for future stock repurchases under the current Board of Directors authorization. We will continue to evaluate future repurchases as cash flow and market conditions warrant. With respect to guidance, the second quarter of 2012 has 64 billing days compared to 64 billing days in the first quarter. We expect revenues maybe in the $274 million to $281 million range. Earnings per share maybe $0.21 to $0.23. Our effective tax rate in Q2 and remainder of 2012 has increased to approximately 42%, due primarily to permanent tax differences. We anticipate weighted average diluted shares outstanding to be approximately 36.8 million in Q2. 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. As Dave mentioned, we believe the consensus analyst estimates for 2012 revenues of approximately $1.1 billion, excluding Clinical Research, is conservative and $0.88 of EPS remains reasonable, absent a change from current economic expectations. This would suggest that quarterly revenues will have returned to Q4 2011 levels by the end of the year and EPS for Q3 and Q4 combined would be approximately $0.35 [ph]. We believe the combination of a stronger gross profit margin profile and less complex business model without Clinical Research will allow us to gain cost efficiencies that will offset the impact of divesting of this profitable business by the end of the year. This is exclusive of any benefit that we might derive from the redeployment of capital for stock repurchases or acquisition or any acceleration in gross margin expansion. We are pleased with our first quarter results and we continue to be confident in our long-term success, as we strive to capitalize on the changes in the external environment and the impact on our businesses. Our mix of service offerings position us well, as we see a continued secular shift towards flexible staffing. We have successfully launched our new 3-year strategic plan with a high quality revenue stream and balance sheet, a highly tenured associate population and a very strong management team. We expect to capitalize on the capacity that exists in our associate base to grow revenues and improve earnings. Operator, we'd like to now open up the call for questions.

. [Operator Instructions] Our first question is from Mark Marcon with RW Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I was wondering on the IT side, it sounds -- could you just give a little more color with regards to the tax accrual? And then secondly, the item with regards to the 2 clients. Because it sounds like the Flex gross margin should go back to historical levels on that side, if I'm understanding correctly.

Mark, you are understanding correctly. In fact, if you look at -- as we look from Q1 to Q2, we would anticipate that we'll recapture about 100 basis points to 110 basis points from a payroll tax standpoint. And then on the tax audit item, we will recapture the full 50 basis points there. So if you just put those 2 numbers together, that starts to get you there. The impact in Q1 associated with the tax audit specific to tax was a -- to Tech Flex was about 80 basis points. And related to the 2 larger clients that we're onboarding the investments on those fronts, that's just a timing, so we don't really necessarily believe we're going to see any material pickup from those 2 clients in Q2. But as the course of the year unfolds, we'll start to recapture margin there and then as future years look out, there's even more opportunity. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And can you give a little bit more clarity with regards to what the tax audit was about?

It's just a standard tax audit. I mean, nowadays, we're probably averaging state -- so this was state-oriented. We all understand the condition that states are in. So we're experiencing 10 to 15 different state audits on an annualized basis at this point in time. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Got it. And then can you give a little more clarity with regards to SG&A as a percentage of revenue as it should trend given the current expense structure? Because it sounds like we have 2 factors that are likely to occur, one would basically be -- because just from a GAAP accounting perspective, the stock-based compensation is going to be reduced by the amount that you talked about on the call. And then in addition to that, we should end up with some overhead or shared services that could become more efficient over time that are probably still being used to support KCR. Is that correct?

That's correct. Some of the cost infrastructure that's associated with supporting KCR through our transition services agreement, that actually shows up in disc ops. But there is other infrastructure that's associated with the support of that business. So when we look at SG&A, based upon the forward-looking guidance that we provided for Q3 to Q4, and I'm sure you'll see this when you start to go into any of your modeling, you'll start to see that SG&A percentages start to drive down into the low 25% as you move towards the back end of the year. And then as we start to look out into 2013, which when we did our initial release, we kind of confirmed analyst expectations associated with that, you can see that SG&A percentage will continue to trail down from there.

Our next question is from Kevin McVeigh of Macquarie.

Any sense of the revenue opportunity from the onboarding of those new clients? And would it materially change kind of the mixes kind of larger versus small to medium?

Well, they're both larger clients. One, we have a strong partnership with and the other one has been a client that just increased our partnership. So over time, revenue will increase. Certainly, as it increases, we would expect margins to come back because -- that's why we made the investment, to encourage further business with them at certainly at a normal margin.

Is this primarily in Tech Flex or across all service lines?

No, it's just Tech Flex.

Just Tech Flex. And then just thinking about the kind of the proceeds from the acquisition, are you pretty comfortable with the client mix now? Or as you think about kind of potential acquisitions, would they be across any particular areas, F&A or Technology?

Kevin, this is Dave. We actually are looking at a couple of different opportunities now. As you can imagine, pricing is a consideration and we've talked in the past, the primary focus would be in Tech. And we'd look at tuck-ins to existing markets to strengthen existing markets or to bring in specific clients. But at this point, we still have substantial growth opportunities that are available to us just even within the existing clients. So we don't have to do anything. It would really be opportunistic. We also, by the way, are considering opportunities in the HIM area as a result of the opportunities with ICD-10 and electronic medical records. So those would be the 2 areas that we're seeing activity. But again, we're being very disciplined about it because pricing is certainly up in those areas.

Understood. And Dave, as you think about kind of where we are in the cycle and obviously that supply demand is relatively tight, conversations around price with some of the larger clients, are they becoming easier to have as you kind of work your way through the course of the year?

Yes. It depends on the client. As we mentioned, financial services clients, we have 3 of our larger ones. We saw a significant shift in their strategy towards actually going to direct hires, a number of our consultants for converted. So not only did we lose the billing but we also didn't get the conversion because these were long-tenured consultants. So there's still a question as to whether that will even recover as the year goes on and then whether pricing would return. And financial services is one of the big consumers of Tech Flex staffing and also is about 18% of our business. That's the bad news. The good news is that our penetration into those clients is actually improving and the conversations that we're having with them have shifted more towards quality and away from price because there's a recognition that they can't control the market through pricing and the quality does have a significant impact on the outcome of their project. So the conversation has changed. We do believe that pricing is starting to shift. But I think as Joe said earlier, it's not moving as quickly as we would have thought, Although we're seeing other firms that are prospering in the mid- to lower-level clients. And I would say that we're experiencing the same thing with our portfolio of clients that the midsized and smaller clients we're seeing greater pricing power.

Got it. And then if I could, Dave, one more. Obviously, there's been a sizable transaction in the sector. Does that change the competitive landscape at all? And had you seen those folks in the market in the past and kind of any thoughts from a competitive perspective around that?

It's an interesting deal. We do hats off for those guys. We think it's a great deal for both of them. Kind of pushing the chips to the middle of the table. But if they can pull that off, I think they've done a fantastic job with it. And yes, we compete predominantly with the target in many of our markets. They're a very good competitor and we have a lot of respect for them. So I don't think that -- I don't think it will be a negative. I think it will actually be a positive. Our view of the competition actually is it makes us better because when you get good competition, it makes you examine your strategy, it makes you examine your -- the way that you've approached the business model. We have some razors on our team and our team wants to win too. So we're watching to see what these other guys are doing and we're looking for any openings to take some of their talent and have them join our team and take some of their clients and start building them from our account. So it's actually a good thing, I think, ultimately for the industry because it's raising the bar competitively and also raising the standard of quality for the clients as they now expect more from their national providers. So it's a good thing for all of us, I think.

Our next question is from Paul Ginocchio of Deutsche Bank Securities.

You talked a little about labor market scarcity. Can you just talk about recruiter productivity and maybe what you think it'd cost to find somebody today in Tech Flex versus a year ago and how you're sort of managing that? And then I've got a couple of housekeeping questions.

This is Bill, Paul. Performance for us, as you can see, our revenues continue to grow and we are not -- we've been very judicious in the hiring patterns that we have. So our performance pathway has turned out to be very good. And so revenue per employee in the firm is near all-time high. In fact, it's a dollar up [ph]. So we're pleased with performance, especially if you were to look at something like our NRC. Our NRC is up 40% on revenue with a flat headcount year-over-year. So performance is strong and we continue to be laying the uncertainties of the economy and being very deliberate in our higher employee onboarding.

So you're not as -- focused on the cost to recruit a new Tech Flex consultant? So what does that look like on a year-on-year basis, the cost to find and place, just the search cost for finding a new Tech Flex consultant?

Paul, this is Dave. The machine is running all the time in the recruitment. The cost of the supply is going up. That would be the pay rate. So vis-à-vis the pay rate, that affects the margin and the bill rate. So the good news about staffing is that as the contracts end and they refresh every 90 to 180 days, you can reprice the market. You get to reprice both pay rate and bill rate. So certainly, pay rates are coming up. You've seen that, and therefore, bill rates accordingly are also coming up. And the realization especially in the last several quarters has hit the clients. The clients understand it because they're watching their own people exit and they're watching consultants that they have on assignment, long-term assignment, as a key part of their intellectual capital is actually walking off assignments at the end of their assignments and getting significant increases. So the good news is the market is pure, it's just a matter of time before they actually start to experience it. But no question, we're paying more particularly for the high demand skills, but we are in turn also billing more for those same skills.

The pieces that I would add to that is, the activities required by the recruiter to yield the output are higher at this point in time because of supply-demand dynamics. This happens every cycle as supply demand starts to tighten. So they're having to do more activities, they get the same output. We're not necessarily having to add more individuals, which is increasing the cost. So I'd say that the energy required is going up. Now the benefit there is you get a residual byproduct benefit of that over time because the effort that's put in today that doesn't yield a result, there's a relationship that is established that then can yield the result down the road.

Okay. And then just a couple housekeeping. SG&A cost is a clean number for the first quarter, clean continuing about $72.7 million. And then, Joe, on those 7 contracts in KGS, what's the annualized revenues? Can you size it at all for us?

Yes. On the SG&A, Q1 is a really, really challenging number to reconcile continuing operations. I would say, the best way to get to the clean number is if you take the guidance that we provided to Q2 and plug that into your model, that would probably get you much closer to the SG&A number than trying to reconcile Q1. And I'm sorry, could you mention again what the second part of your question?

So I think you mentioned or Bill had mentioned 7 new contracts in KGS. What's the annualized revenues roughly or can you size it at all?

So we believe in Q3 and Q4, that we will be up approximately $10 million. If you were to analyze it over time, that could be obviously as much as $20 million to $30 million.

Our next question is from Tobey Sommer of SunTrust.

On the KGS, what customers did you win contracts with? And are those standard kind of multiyear, 4-year contracts with a 1-year option?

One, we haven't asked clients for permission to use their name. But I would tell you they are more civilians than DoD type of contracts. And yes, they are, as you expressed, they have 1-year options after the initial.

Are they different? Are any of them new customers or is it additional work with your legacy portfolio customers?

It's additional work with our legacy portfolio customers. But when you talk in terms of the government, that's not -- if you were to pick one agency or one civilian group, that has many, many, many different components to it. And so it's well diversified within a particular client with different groups, and therefore, we're pleased with that. But it's not just a single customer. But we are actually not even doing certain work with existing customers as we refine our business development strategy. As you know, the government is changing a lot. We are very nimble. We have built up a new business development team that can acquire business under the new constraints. Obviously, since 2010, things have changed dramatically, and so we're really pleased with how this new business development team has been able to work around the issues of the day.

How much revenue and profit are you currently servicing? What proportion through the NRC?

Approximately 27%.

And from a goal perspective, do you have a target for how high you think you can get there?

Tobey, this is Dave. We're not going to target it. We're going to allow it to go to where the channels are best going to utilize it. The issue is, as we leverage that model, is the efficiency of the delivery and the ability to deliver at scale and at speed. So what we don't want to do is to bias the field to utilize them if it's more efficient for them to do it in the field-based delivery team dealing with local market clients, which are typically small to midsize. We have seen the NRC to be most effective in surge demand and also in large-scale clients. So from that perspective, we've been able to capture a greater share of the available business in the larger clients. We've also seen them be very successful in highly specialized skills like EPIC and some of the emerging health care technology skills that we need to build a practice in. So in the ways that we've specialized them, we found them to be more productive and generated greater volume. So we don't have a desire to outcome other than maximizing productivity. As Bill said, we're very close on a revenue basis to where we've been at peak from a productivity standpoint, which tells us that we're starting to realize the benefit of the model. And what it also says is that as we are looking at the business and the model and how much more productivity is there and what other tweaks do we want to make to, to optimize, to drive further revenue growth and where do we want to make selective investments. So as we've said all along, the NRC really came to a level of maturity during the downturn. This is the first time we've had to manage through an upturn when it's -- we're really learning now to how to tweak and adjust and where to best utilize it. But in the end, right, the demand is so great in every field market, in every industry that it's impossible for us to fill all these positions. So we've got to be very selective and targeted in the way that we're deploying them. And that's something, frankly, we're still learning to do.

And just to add on to that. Because with the NRC, this is organic and it's ever evolving. One of the things as a prime example with some of the wins from KGS in Q1 and because of the demand that's coming from that, so we deployed an NRC team focused specifically on that business to assist with building the pipeline so that we can get ahead of the demand curve on that. So I mean, that's why we're constantly looking on how we evolve the NRC. And the number that Bill gave you, that was the concentration that's attacking that bay business. Now all of a sudden when KGS rolls in, it's constantly moving. It's all about focus on the performance and maximizing capacity is really where the focus is.

That's helpful. It sounds like pricing in the conversations with customers are proceeding as you would expect in a cycle. But is there any pruning that needs to be done of low-margin clients which aren't keeping up with the marketplace?

This is Bill. Yes, that's always the case. As clients feel the pressures of the uncertainty and different supply and demand characteristics that they have. So is that something we do? Yes, client selection is a very important part of our business.

But anything on the horizon that comes to mind?

That's normal course of business. We're looking at the portfolio of clients on a regular basis and if we have clients that are too far behind the curve in terms of where their expectations are relative to the market, we're constantly moving away from clients that find themselves in those states. And I could cite specific examples where those clients have come back around and come back onboard as clients as they woken up to the reality of the marketplace. So I mean, that's just normal operations course of business. To answer your question, is there any significant revenue stream that's on the horizon that would potentially be a risk? I don't see anything of that nature.

Last question for me. How much did you increase recruiter headcount, either year-over-year or sequentially, in the quarter?

Approximately 9.4% in the field.

Our next question is from Giridhar Krishnan of Credit Suisse. Giridhar Krishnan - Crédit Suisse AG, Research Division: I have a clarification on a different question. I guess the clarification on KGS, did you, Joe, say that you expect revenue to increase sequentially as you proceed from Q2 through Q4?

This is Bill. Yes, it will increase in Q2 somewhat because it takes 4 to 6 weeks to clear someone after we have identified them. And so we have this process -- we go through this process with our client. We're trying to work with our clients to speed that up some, so that they can start sooner. But assuming that is the case, you're talking late May to early June before any start and then since it's a large number of people that they are requiring it will take some time. So we are suggesting that there will be some improvement in revenue from these wins in Q2. They really will start taking effect in Q3 and in full bloom in Q4.

So we will start to see the sequential increase as well as year-over-year increase in KGS in Q2. Giridhar Krishnan - Crédit Suisse AG, Research Division: Okay. And with respect to the recruiter headcount, as we think about the different service lines, where -- as we go down the different service lines, where is the bulk of that focused on, essentially if you think about demand in the quarters going ahead?

It's by far and away this last year, it has been in Tech Flex. As we look forward, 50% of our business is in Tech Flex. So I would assume that, that would continue to be the case. Second quarter for F&A Flex has a kind of historical seasonal stabilization. So as we look forward, certainly in the near future, it would be in Tech Flex.

[Operator Instructions] I'm showing no additional questions at this time. I would now like to turn the conference back over to Mr. Dunkel for any further remarks.

That's great. Thank you very much. We appreciate your interest and your support for Kforce. And once again, thanks to each and every member of our field -- I'm sorry, we do have Mark Marcon come up. Mark? Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Wondering if you could talk just a little more about the balance sheet and how we should think about that? Joe, you had mentioned we're debt free now, but then we've got something that's coming up, so we'll basically end up being net debt around $20 million by the time we get to the end of Q2. Is that right?

Well, yes. In Q2, just because of the timing of some stock repurchases, we'll incur the about close to $60 million stock repurchase expense. That's all I was really putting out there. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. Great. And then you did indicate that you would trend towards the 25-ish range in terms of SG&A by the time we get to Q4. Is that -- did I hear that correctly?

You heard that correctly. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And that would encompass some savings, but not full savings in terms of the things -- the items that you mentioned coming out, correct?

That would be correct. And you'll see that, Mark, as you start to model out the second half of the year, when you start to drive your margin assumptions, you will see that it will start driving you right to those SG&A levels.

Okay. Now we can say good night. We got some people here that are hungry in the East Coast. So thanks to each and every member of our field and corporate team and also to our consultants and clients, again, for allowing us the privilege of serving you. And once again, Happy 50th Anniversary, Kforce. Thank you very much and good night.

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect and have a wonderful day.