Kforce Inc. (KFRC) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Kforce Inc. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today, Mr. Michael Blackman, Chief Corporate Development Officer. Sir, please go ahead.

Thank you. Good afternoon, and welcome to the Kforce Second 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, expectations 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. We are pleased with our Q2 results as Kforce reported revenue for the quarter of $274.1 million, a year-over-year increase of 10.5%. Earnings per share of $0.24 after adjusting for the noncash goodwill impairment charge came in a bit stronger than expected. The strong bottom line results were driven by improving bill/pay spreads across all of our staffing businesses, strong performance in search and continued SG&A discipline. The environment for professional staffing and, in particular, technology staffing, continues to be strong. Certain industry segments such as health care remain very strong, but these gains are being partially offset by declines in some of our financial services clients, which comprise about 16% of our business. The war for talent across our staffing businesses continues to be heated. The unemployment rate among college-degreed workers is currently 4.1%, roughly half that of the overall U.S. rate of unemployment and is substantially lower in several of the skill sets Kforce specializes in, particularly technology. Bill rates continue to increase, and supply for candidates is still tight. We are aggressively managing our client portfolio to optimize both volume and rate, which was exhibited in the margin expansion we experienced in Q2. Our revenue footprint, which now is comprised of approximately 70% technology staffing, inclusive of those technology portions of our government and HIM businesses, remain in the areas of greatest demand in today's economy. We continue to benefit from our clients' desire for a flexible workforce during this uncertain economy, combined with significant uncertainty in regulatory tax and health care reform. We remain optimistic about our prospects and are committed in our belief that temporary staffing penetration, which has improved from 1.34% at the beginning of this economic cycle and is currently 1.9% of the workforce, will achieve historic highs in the U.S. during this economic expansion. In addition, approximately 17% of net job creation in this recovery has been through the temp sector, which bodes very well for us as it indicates a secular shift in how companies acquire and deploy human capital. As we look ahead, we believe there is significant opportunity for continued growth in our Tech and F&A businesses, as well as the long-term growth for our Health Information Management business, which is well positioned for continued success due to the mandated implementation of ICD-10 and electronic medical records. Overall, despite continued mixed data on the near-term economic backdrop and our decline in expectations for our government unit, we anticipate continued billing day growth, though not at a rate previously anticipated. 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. Looking ahead, we are pleased with the firm's positioning and our continued opportunity to capture market share. I will 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. Bill?

Thank you, Dave, and thanks to all of you for your interest in Kforce. We have built a foundation of great people, processes and tools that allow us to complete -- compete effectively in this market for our staffing and solutions business units. Our highly tenured field sales and delivery operations are supported by a highly flexible management recruiting center and a strategic accounts model that, combined, allow us to effectively service a broad spectrum of clients across geographies, industry and size. Our Tech and HIM flexible business both grew sequentially, while FA declined slightly. Permanent placement revenues, driven by strength in both Tech and FA, increased sequentially and year-over-year. Our government practice had a sequential decline in revenues due to unanticipated delayed headcount ramp at several large clients and was flat year-over-year. Tech Flex is our largest business unit and represents 61% of total firm revenues. Tech Flex continued to perform well in the quarter and again achieved record revenues. Q2 revenues increased 3.5% sequentially and 10.7% year-over-year. Overall, our key performance indicators for technology remain at strong levels though are down slightly from Q1. Along with an already tight market for candidates in this space, growth is being impacted by increasing decision times as well as high level of conversions. Tech Flex revenue grew sequentially in each month of the quarter, though the growth was moderate. The candidate pool for technology consultants is particularly tight for skill sets of high demand such as EPIC, Java and .NET. We expect third quarter revenues to increase for Tech Flex though at a slower pace than Q2. Revenues for Finance and Accounting Flex business, which represents 20% of our total revenues, decreased 2.0% sequentially and increased 12.7% year-over-year. Revenues declined slightly in each month of the quarter. These results were driven by declines in our mortgage-related services, particularly at our largest financial services clients. Mortgage-related services now constitute only 12% of F&A revenues, down from 17% last year, and are 2.3% of total revenues. Current performance indicators suggest FA Flex revenues will increase slightly in Q3. Both of our Tech Flex and FA Flex business units benefit from our cost effective and highly elastic National Recruiting Center and highly tenured workforce. The NRC has the flexibility to be quickly directed to opportunities at clients and in geographies and business lines where the demand remains the strongest. Currently, approximately 30% of revenue is being supported by the NRC, which has increased from 27% in Q1. Revenue growth for the quarter was driven by our small- and medium-sized client base and some selected strategic accounts. However, our strategic account portfolio declined slightly as a percentage of the total revenue in the quarter due to declines at our financial services clients. Margins improved during the quarter, reflecting continued strong demand and talent shortages. 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. 4 of our top 25 clients are in financial services and comprise approximately 7.5% of total revenues, which has declined from 10.6% a year ago. Financial services represents 17% of Tech revenues, which is a small decline from Q1 2012. Revenues for our HIM business increased 2.7% sequentially and 19.1% year-over-year. This business has now grown 9 straight quarters and margins are strong. However, third quarter revenues may decline due to expected large project completions. We continue to believe in the long-term demand for this profitable business and its synergies with our Tech Flex business as we continue to capitalize on the growing spend in health care around ICD-10 and electronic medical records. Revenues for Kforce Government Solutions decreased 6.3% sequentially and 1.8% year-over-year as the overall market visibility for government contractors remains very limited. As mentioned, the expected ramp in revenues related to contract wins in Q1 did not materialize as expected in Q2. Revenues in pipelines for this business unit were adversely impacted by increasing significant delays in the startup of one and funded past quarters. These delays are due to acute shortages of acquisition and contracting personnel within certain federal government agencies. The lack of contracted personnel, along with increasing uncertainty at funding levels of various federal government programs and agencies and the uncertain macroeconomic and political environment, has caused us to reduce our revenue growth projection and our pipeline for this unit. KGS has implemented a business strategy over the past 12 to 18 months to focus on opportunities with federal agencies less impacted by the fiscal concerns, which we believe will result in our long-term success [ph]. We expect revenue growth in Q3 assuming the funded projects begin to add consultants. Perm revenues from direct placements and conversions, which constitute 4.8% of total revenues, increased 19.9% sequentially and 10.4% year-over-year. This growth was concentrated in Finance and Accounting. As the war for talent continues to create an environment of strong demand for candidates, the pace of conversions has accelerated in the past 2 quarters. Perm revenues are difficult to predict, but we expect perm revenues to be flat to slightly down in Q3. In terms of core headcount trends, we continued to make investments in additional headcount from Q1 to Q2. Sales headcount, inclusive of the NRC and strategic accounts, increased 3.2% sequentially and 11.5% year-over-year. We continue -- we expect to continue to make selective investments in our sales associates headcount as we achieve certain performance metrics. We performed well in the second quarter and have laid the groundwork for success. We believe our diversified service offerings, fortified by our tenured field teams and our National Recruiting Center and strategic account 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 a continuing, relentless focus on 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 CFO and Executive Vice President, who will provide additional insights on operating trends and expectations. Joe?

Thank you, Bill. The firm delivered solid results in the second quarter. Total revenues for the quarter of $274.1 million increased 2.2% sequentially and increased 10.5% year-over-year, driven by broad-based growth in our flexible staffing businesses. Quarterly revenues for Flex of $260.9 million increased 1.4% sequentially and increased 10.5% year-over-year. Search revenues of $13.2 million increased by 19.9% sequentially and increased 10.4% year-over-year. Overall, sequential Flex revenue trends in Q2 showed slight improvements in April and May, with a decline in June. Search revenues improved in May and June followed by a decline in March to April. Flex revenue trends for the beginning of the third quarter of 2012 are down from June, so it's difficult to draw any conclusions due to the timing of the July 4 holiday and its potential impact on the first 3 weeks of the quarter. For the first 3 weeks of July, Tech Flex is up 4.9% year-over-year, Finance and Accounting Flex is up 9.4% year-over-year and HIM is up 5.6% year-over-year. Search revenues are up 13.1% year-over-year for the first 4 weeks of Q3 2012. The firm recorded a net loss of $33.2 million and a loss per share of $0.90 in the second quarter, which includes a noncash estimated goodwill impairment charge in our Government Solution reporting unit of $65.3 million on a pretax basis and $42 million on an after-tax basis. Excluding this charge and the associated tax benefit, we recorded total net income of $8.9 million and earnings per share of $0.24 in Q2 2012. Excluding the charge, year-over-year net income increased 30.7% from $6.8 million in Q2 2011 and earnings per share increased 41.2% from $0.17 in Q2 2011. The procedure to finalize the impairment charge will be completed later this year and any adjustment will be reflected at that time. The remaining goodwill reflected on our balance sheet for our Government Solutions reporting unit as of June 30 is $37.3 million. Our overall gross profit percentage of 32.7% increased 260 basis points sequentially and 60 basis points year-over-year. Our Flex gross profit percentage of 29.3% in Q2 2012 increased 220 basis points sequentially and 70 basis points year-over-year. Overall, bill/pay spreads increased 70 basis points sequentially and 110 basis points year-over-year. The sequential increase was also impacted by a 130 basis point decrease in payroll tax-related costs in Q2, as well as a 50 basis point impact related to the $1.8 million tax audit accrual that was recorded in Q1. To provide further insight into margin changes in our staffing business units, we provide the following breakdown in the year-over-year and sequential drivers. For a year-over-year perspective, Tech Flex margins improved 80 basis points Q2 2012, over Q2 2011, driven by a 160 basis point improvement in bill/pay spreads. This was partially offset by the increases in other costs including taxes, benefits and billable expenses. FA Flex margins improved 150 basis points, driven by a 130 basis point improvement in bill/pay spreads. HIM margins increased 30 basis points, driven primarily by a decrease in other costs, including billable and non-billable expenses. From a sequential perspective, Tech Flex margins improved 260 basis points Q2 2012 over Q1 2012 with an 80 basis point improvement in bill/pay spreads. FA Flex margins improved 190 basis points with a 20 basis point improvement in bill/pay spread. HIM Flex margins improved 360 basis points with a 140 basis point improvement in bill/pay spreads. This broad-based improvement in bill/pay spreads were solid, particularly in Tech Flex. Spread improvements that began in March of this year have continued to improve primarily as a result of our focus on optimizing our activities as we on-board new business and new and existing clients. We expect spreads in the Flex and Flex margins in the third quarter to continue to improve, though not at the same level seen in Q2. Q2 SG&A levels of 26.1% remain low, and we expect these levels to remain consistent for the remainder of the year as we continue to maintain a disciplined approach to improving cost efficiencies of our operating model. Our accounts receivable portfolio continues to perform well as the percentage of receivables aged over 60 days remain at low levels. Our cash flow from operations continued to be strong. EBITDA returned to a more normalized level this quarter at $18.3 million. Bank debt of $11 million at the end of the quarter was slightly lower than was anticipated due to strong cash flows and earnings. Borrowing availability under our credit facility as of the end of Q2 was $75 million. The firm repurchased approximately 55,000 shares of stock at an average price of $14.47 in Q2. There is currently $67.9 million available for future stock repurchases under our current Board of Directors' authorizations. We will continue to evaluate future repurchases as cash flow and market conditions warrant. With respect to guidance, the third quarter of 2012 has 63 billing days compared to 64 billing days in the second quarter. We expect revenues may be in the $271 million to $277 million range. Earnings per share may be $0.23 to $0.25. Our effective tax rate in Q3 is expected to be 42.9%. We anticipate weighted average diluted shares outstanding to be approximately 36.8 million for Q3. This guidance does not consider the effect, if any, of charges related to the impairment of intangible assets, costs related to the settlement of any pending legal matters, the impact on revenue of any disruption in the government funding or the firm's response to regulatory, legal or tax law changes. We are pleased with our second quarter results, and we continue to be confident in the long-term success as we strive to capitalize on the changes in the external environment and the impact on our businesses. We believe the combination of a strong gross profit margin profile and more focused business model in areas of significant demand position us well as we see a continued secular shift towards flexible staffing. We have 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 revenue and improve earnings. Operator, we'd like to now open up the call for questions.

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

Just wonder if you could give us a little commentary on the mortgage. I was surprised that slowed a little bit just given how strong the refinance market has been. Can you just help us understand what the components of that are today? Is it -- I know it's pretty diversified in terms of refinance and then some -- I thought some foreclosures, things like that. But if you could just help explain that a little bit.

You're right, Kevin. This is Bill. It is well diversified and comes at us in waves at different points in time. We had a significant number of ins at a major client, and that client has now started back up again. So it's more client-specific than anything generally that I could say to you.

Got it. And Dave, just -- I know I ask you about this a lot, but I think it's important in terms of -- it seems like the growth you're putting up relative to the macro is still very, very strong. And just any thoughts on what you're seeing from a client perspective on increased use of temporary help and as we think about that through this next cycle.

Yes, Kevin. I would say to you that what we hear from the clients is pretty consistent with what we've heard really throughout the cycle. Remembering that, traditionally, staffing was correlated to GDP at 3% plus in order to grow, and we've been running at 1.5% to 2% GDP at best and we've actually been growing and performing well. I think the 17% job creation in this cycle really points to the fact that the clients are saying they don't want to take on the risk, and so I think we've seen a fundamental change in the way that they procure resources. Now with that being said, we've also seen the -- with the increased demand, particularly in tech, clients that have experienced turnover have elected to convert contract resources that have critical skills that they need in order to keep their systems going. And for our portfolio, we've got a pretty diverse portfolio with different clients. So based on the tenure of the consultant on the assignment, that could convert for anywhere from a small amount to a large amount or for nothing. So what we've seen in many of our clients that -- particularly those that have experienced turnovers, that they're actually holding on to consulting resources. And so that, too, has been a little bit of a shift for us. In general, I would say Technology is still strong. F&A is still strong. The health care area, I believe over the long term, in particular now with ICD-10 getting a little bit of an extension, will start to re-ramp again as we get to the back end of the year. So we remain very confident about what's happening in the space. The big unknown really is Europe and the impact that the European Union decline is having. The news out of there obviously is not good. We haven't yet seen any indication on U.S.-based companies, but that's something that we're certainly wary of.

[Operator Instructions] Our next question comes from the line of Paul Ginocchio from Deutsche Bank.

Joe, first on the one less day in the third quarter. I didn't have that in my model. I think it's about $4 million and $0.02 to EPS. Does that sound about right to you?

That'd be correct, Paul.

And do you get that day back in the fourth quarter, do you have 62 in the fourth?

Yes. 62 is what we're forecasting for the fourth.

Great. And just 2 more quick ones. When you gave -- when Bill gave the color by the divisions on growth into the third quarter, that was a year-on-year number?

Yes.

Great. Then just finally, I didn't know if I recall this correctly, but the NRC's up to 30% of the revenues for it versus 27% last quarter. But financial services as a percent of your business in Tech is down. I would've thought that's often supported by the NRC. So what have -- what other end markets have really ramped up their use of the NRC sort of Q-on-Q to make up for the drop in financial services?

This is Bill. Certain -- the NRC supports a large spectrum of our clients, including all of our firm-sponsored and strategic accounts. And so it's all over the board. I mean there's no specific industry that is -- that I would say the NRC, other than financial institutions, are supporting. So it could be all the way from insurance companies to health care, HIM, all the different activities.

Yes, Paul, I look at the NRC, I mean, this is -- that's just a clear reflection of what we've been talking about for quite some time, the flexibility that the NRC brings. So the NRC, we point that wherever the demand is. What Bill is really referencing is it's not necessarily an industry. It could be a market that we have a hot hand in because we just secured a number of orders in that marketplace. So the real key there is the flexibility of the NRC to be able to redirect those resources to where the demand is.

Okay. Great. And then just to make sure I heard you correctly, your strategic accounts were down year-on-year, but your overall growth came largely from the smaller accounts?

That's correct. Paul, I wanted -- I missed the second part of your question when you had mentioned $0.02 on comp. It would really -- it's probably closer to $0.01 on comp, $4 million on revenue.

And $0.01 on the EPS line.

Yes.

And our next question comes from the line of Jim Janesky from Avondale Partners.

When you look at headcount growth in the second quarter and as we move into the third quarter, do you expect that to slow a bit? Or do you think it could be as strong as it was in Q2?

This is Bill. Our productivity is very high. And so as long as productivity metrics continue to be strong, we will continue to add people. And so it is really based upon the environment that we see and the productivity that we have. And at the moment, we feel we're well positioned for the future.

Yes, and Jim, this is Joe. I can give you a little bit more color on that. Actually, our productivity, once again this quarter it improved about 2.6% sequentially. We're now within about 5% of our all-time high levels that we experienced back in 2005. And it's important to note that hitting those high levels of productivity, that's on the heels of adding 11% -- 11.5% to our headcount. So we're going to continue to throttle that and measure that against the P&L. But as opportunities present themselves and if we continue to see the strong headwind in terms of revenue growth opportunities, we have to continue to build that headcount to support those future revenue generation opportunities.

Okay. And how important is the National Recruitment Center to the small- and mid-sized client to use? If that continues to grow, will the NRC become a smaller portion? Or how should we look at that?

The NRC is playing in all-size clients. So it's playing in our strategic accounts. It's playing across industries. It's focused on specific skill sets, for example, EPIC, which is a very hot skill set. We have dedicated teams that are focused on that. But in fact, here in Q2, we've also started to realign some of our opportunities to recruit in the government space in support of that unit. So I wouldn't say small market penetration versus large -- or excuse me, small account versus large account is really going to be the driver for how the NRC grows. It's going to be more so driven by the demand in the overall marketplace.

Okay. And then what is -- you didn't have any stock comp expense this quarter. What's in your guidance for the third quarter? And just in general, how should we look at it going forward?

Yes, it's very small actually for Q3 as well. Typically, we do our grant in the beginning of the year, so you would project that for the remaining part of the year.

And our next question comes from the line of Morris Ajzenman from Griffin Securities.

Gross margins, you talked about the bill/pay spread increasing but it was slower paced into the third quarter. Can you give us any sort of feel for gross margins? Will that -- in what was actually flattish sequential revenue second and third quarter, can we expect to see any gross margin change, any improvement in that sort of environment? And then one quick follow-up.

I think as I mentioned in my comments, in our models in terms of providing guidance, we're anticipating continued expansion of gross margins into the third quarter, albeit not at the same levels that we experienced from Q1 to Q2.

And last, I'm not sure, when you were talking about headcount, did you give us a headcount actually at NRC?

No, I don't believe -- we didn't break out the NRC from the overall headcount.

Can you, or you prefer not to?

We prefer not to.

And our next question comes from the line of Giri Krishnan from Crédit Suisse. Giridhar Krishnan - Crédit Suisse AG, Research Division: Could you just repeat what you had said about your expectation for HIM and KGS revenue for Q3? I thought I -- I just want to clarify what I heard.

This is Bill. We expect KGS revenue to be flat, and we expect, because of some large project completions, that HIM may be down slightly in the quarter. Giridhar Krishnan - Crédit Suisse AG, Research Division: Okay. And with respect to your gross margin expectation, I think previously you had suggested, I think it was last quarter, that the Q3 and Q4 ranges -- I think you had given a range. Given your comment about what your expectations for Flex gross margin in Q3, should we expect any significant change in Q4?

Well typically, Q4 we -- historically, just because there's more holiday, so margins are a little bit muted because of PTO in the fourth quarter. And I don't believe we've provided the forward guidance in terms to that level of margin profile into the fourth quarter. Giridhar Krishnan - Crédit Suisse AG, Research Division: Right. But it's safe to assume it's normal seasonality and there's no other items that we should take into account?

Yes, that would be correct. And then one could also assume if we were to continue to see the same type of pricing environment that we experienced in Q2 that we anticipate will continue into Q3, some of that expansion that we would just get on new starts might offset a little bit of the PTO.

And our next question comes from the line of Tobey Sommer from SunTrust.

I wanted to get a little bit more color on F&A search. I guess, what was driving that in the quarter? And what do you see, is their visibility there going forward? Because you had a nice performance there.

Well visibility, we had a very nice quarter, and we are not expecting that quarter growth -- that amount of growth to continue. There's nothing particular that was driving that. That's across all the different skill sets that are out there. So nothing in particular other than just a very nice quarter in that group.

Okay. And then on the Government Services side, you mentioned the delays as a result of the shortage of contracting personnel, uncertainty in funding. What impact may the election season have on that? And are you seeing any anticipation for change for that from clients? Or any read-through of certain agencies?

Hey, Tobey. Well, when you consider that we're into the third year, heading into the fourth year without a budget and operating under continuing resolution, it's hard to imagine an environment that could have greater uncertainty for the government agencies than the one we're in currently. Our communication with them continues to demonstrate a high level of caution. As you know, the mandatory cuts come in as a result of the deficit spending cap. So at this point, it's almost impossible for us to make any kind of assumptions or prediction. The likelihood is that, that will be resolved some time in and around the election. Shortly thereafter, depending on the winner, there will likely be a stopgap measure of some kind to allow, hopefully, the new administration to come in and start to provide some more strategic direction and a clearer picture on the budget and where the spending will be. But there's no question that, in our experience, the word unprecedented comes to mind. Our team has done a great job of navigating waters which nobody has ever experienced, frankly, in our time in this space or, frankly, that any others can remember from their prior experience at other firms. So that's really what we're seeing, and all I can say at this point is that we're hopeful for a positive resolution in November and clearer direction there.

Okay. Great. And then you mentioned a couple large projects coming to completion in health care. Can you talk a little bit about the pipeline? Are you seeing any visibility in terms of projects coming on? And how does that pipeline look in general?

The pipeline continues to be strong. This is a candidate-shortage market. Finding the right people at the right time or the right skill set is very difficult. But our NRC has been performing extremely well, as well as the recruiters in HIM. So this is a very healthy business, and we believe it will continue for some time.

[Operator Instructions] Our next question is a follow-up from the line of Paul Ginocchio from Deutsche Bank.

Question for Bill on maybe the ROI of hiring a recruiter. I'm not sure if you can even break out what sort of the scarcity of talent limitations are putting on your IT business. But have you sort of run some scenarios of the ROI of hiring more recruiters and if that would accelerate your growth rate?

It certainly will accelerate our growth rate over time. It's not immediate. That's why it's important to have a tenured sales force. It takes anywhere from, depending on what unit they go into and their skill sets, anywhere from 6 months to 9 months to see some real payback from some of them.

Yes, Paul, and this is Joe. What I would really add to that, where we're really focusing our efforts because we believe that at this point, we're adequately staffed on the recruitment side, this is about job qualification and improving our fill ratios. We've put a tremendous amount of energy on this front, and we're continuing to exert a tremendous amount of energy because that's where we view one of our largest upsides is further qualifying, really fleshing out the quality of the orders and swarming those quality orders because we have clearly demonstrated through the NRC our ability to do that in a very time-effective with high-quality candidates. So that's where our nearer-term upside is.

And our next question comes from the line of Mark Marcon from Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: So wondering, on the issue with regards to the conversions that you're seeing on the IT side, how -- what percentage of the consultants are being converted, and how would you anticipate that unfolding going forward?

Yes, It's a small percentage as it relates to the overall population. But in comparison to what we've experienced in the past, these last 2 quarters have been at a heightened level. But it's still, on a percentage of population, a very small number. It's hard to say whether we'll continue to see this. I think Dave really gave a little -- a lot of good color in and around what we're hearing from the customer front. And I would say if we continue to operate in a comparable environment, we may operate at a little escalated level here for a period of time. However, we're also doing things internally in terms of looking at our conversion policies and the nature of how we do business with various customers and make sure that we're pricing effectively. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And when you're saying a small percentage, do you mean like 2% to 3%, David?

Yes. Probably even a little bit less than that.

The issue as you know, Mark, is the -- when a fee converted versus a billable dollar unholes [ph] about $4 to $5 of billable dollars to feed out. Now if you assume that many of these people have been on assignment for a term and are converting at less than full fee, you're actually losing a greater ratio than 4 or 5 to 1, you might be 7, 8 or even 10 to 1. So it really depends on whatever the policy is with that particular client, the duration of the assignment, the relationship because there are times, if they have 30 or 40 consultants and they want to convert one and they ask us for a break, we're probably going to let them have it. So there's a lot of subjective decision-making that goes in. But in general, with the demand as high as it is in Tech, there's no question, both short term and long term, the resource scarcity is going to compel us to change pricing for conversions. We have to do that, and in fact, modify conversion policies in some cases where there may be no conversions at all. So that's basically what we're having to do in response to what is a significant change. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Do you think some of your competitors are going to do the same?

We actually, in the pure consulting space where we compete and in some of the quasi staffing consulting firms, in the higher levels, they don't offer conversion at all. They view their resources as their own employees, their own proprietary resources and actually have a no-conversion policy. In the staffing firms that have -- that offer both direct hire and consulting, the practice of creating the contract to hire has actually been introduced as a benefit to the client to allow them to try the resource and determine cultural fit before converting. So that space kind of emerged over time. So I would say that there are some firms that practice that, predominantly those that have the direct hire business, but there are many that don't have it at all.

And this is Joe. And similar to the permanent business, which both Dave and I grew up in, conversions, while there's a short-term impact, there's a significant long-term benefit. Because if they're converting somebody, it's somebody they think highly of. And many of those people eventually move into leadership roles or maybe even are in a project management role. So it provides us future revenue generation opportunities, which is why we typically don't get in the way of it because if that's the right match for that individual to be working at that customer and the customer wants that individual, I mean, that's what we're in the business of doing. So we're looking at the long-term picture as well, not just near term. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then on the F&A side, just want to make sure I got this right. On a sequential basis, would you expect it to -- I thought you initially said it was going to increase. Is that right or...

Yes. This is Bill. It should increase slightly, I said. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. I just wanted to make sure I got that right. And then with regards to the government business, I know that there's an unprecedented lack of clarity from the government at this point. But is it your general understanding that all of those RFPs that you ended up winning are still theoretically possible, it's just that we're waiting for the funding for them? Or are you concerned that some of those might just evaporate?

We have won those task orders, and they are funded. It's simply awaiting enough contracting officials to authorize the on-boarding of those billets. And so we are cautiously optimistic, but we're not going to record it until it's booked. And so that's...

The only way to describe it, Mark, is we've been down this road. And just when we think everything is going to break loose and it appears that we've finally gotten the staffing resources, procurement resources, the thing suddenly, mysteriously runs into more road blocks again. So Bill said it well. When it's in the bank, we'll count it because at this point, we have a very low level of confidence in the government's ability to execute on these. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Understood. And then so how are you planning for your own internal headcount in that division going forward? Are you just going to kind of keep it flattish here until there's a little bit more clarity?

Certainly, it's going to be flat. By the way, we believe that we will add no overhead to these large awards that we have won and that are funded. And so it should be a profitable unit if this can ever happen.

So we make decisions in KGS based on a coin toss on whether or not we think that they're actually going to be able to execute. The amazing thing is our team has actually done a fantastic job. I mean, these guys have, against -- really against all odds in dealing with the level of uncertainty. And by the way, the government resources feel the same way. They're enormously frustrated because they can't even make decisions on whether or not they can commit to something after September 30. So it's frustrating for everybody. The work needs to be done, yet they don't have the resources. So there's really almost a complete dysfunction in some cases. So there's just a complete lack of leadership at the government level on what needs to be done with these areas. Our team has done a fantastic job in -- really, in inconceivable circumstances. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Understood and appreciated. Finally, with regards to the IT side, it sounds like even beyond this quarter, you'd expect that the pricing still to go up just because of the resource constraints, unless demand really freezes.

Yes, unless something were to change in the macro environment. We just see the supply/ demand is significantly out of balance.

And our next question is a follow-up from the line of Morris Ajzenman from Griffin Securities.

Mine is a conceptual question of how the industry continues to evolve, and I'm sure you've had this in many forms, this question. But we recently used LinkedIn to get some professionals in. It's a very low-cost way of getting some highly qualified individuals. NRC, I guess, is part of the answer to that. But as the industry evolves and there's a lot of professionals that list their services on different, let's call it, sites or placement centers, et cetera, and some of them would be much more cost-effective, how does the industry and you compete over time as this potentially gets a larger and larger share of revenues?

Yes, this space has continued to evolve from when Monster came into the picture back in the '90s, the mid-'90s. So what ultimately has happened, having been somebody who grew up on the permanent placement desk and then also running the flex businesses and being on the account management side, it's mainly where we've seen the cannibalization or the deterioration has been on the permanent side of the business. When I was once a great recruiter back in the late '80s, you could have 15 of a given skill set in place, 13 of those people that were in your drawer that you had interviewed over time and they were easy to fill because you had an inventory of those individuals. What the -- what first the job orders have done and now the social media is doing is they're taking away the easy-to-fill requirements that are out there. And so we've been fighting this headwind on the permanent placement side of the business for the better part of 17 years now that's been evolving. And so those easy-to-fill requirements have disappeared, and we're getting the tough-to-fill requirements. And that will only continue to mature over time because the #1 way people find jobs still remains through referrals. And ultimately, when you look at these social media, they're just providing a platform to accelerate and make more efficient the referral process.

Morris, it's important to understand that we provide an employment relationship. Somebody's got to pay him, somebody's got to benefit him, somebody's got to handle all of that on the Flex side. So when it comes to the employment relationship, we are not going to be disintermediated. On the cert side, the issue is basically related to referrals, and we actually are participants in that as well. But remember, I mean, the ability to match is still unique to human interaction because there's a lot of people that raise their hand but there's only 1 or 2 that are qualified. So that's the reason that search firms still exist. It's the reason contingency search still exists.

That concludes our question and answer session. I'd like to turn the conference back to Dave Dunkel for any concluding remarks.

All right. Well, thank you very much. We appreciate your interest in and support for Kforce. Once again, thanks to each and every member of our field and corporate teams and to our consultants and our clients for allowing us the privilege of serving you. Good evening.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.