Kforce Inc. (KFRC) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Kforce Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to hand the conference over to Mr. Michael Blackman, Chief Corporate Development Officer. Sir, you may begin.

Great. Thank you. Good afternoon. Welcome to the Kforce Fourth Quarter Earnings Call. Before we get started, I would like to remind you that this call may contain certain statements that are forward-looking. These statements are based upon current assumptions, 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 this call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you, Michael. You can find additional information about Kforce on our 10-Q, 10-K and 8-K filings with the SEC. We also provide substantial disclosure in our release to assist in better understanding our performance and to improve the quality of this call. The firm continued to perform well in the fourth quarter, reporting revenues of $269.8 million, and earnings per share of $0.24 after adjusting for the non-cash goodwill impairment charge. We have continued to see consisted demand for our services and have been able to capitalize on this demand through both increases in revenue and improvements in operating margins. During the fourth quarter, we also shifted our strategy to focus on accelerating future revenue growth by adding a significant number of new sales associates as we now believe we will remain in a positive environment for professional staffing for the foreseeable future. This continued high demand environment for skilled talent in the preponderance of areas we serve, which persisted throughout 2012, allowed us to grow full year technology and F&A revenues 8% over 2011 levels, and our HIM business over 12%. Additionally, we now have gained greater clarity around the future operating environment due to the recent election and the resolution of various tax and regulatory issues, many of which we believe will be favorable to the growth of our industry. The positive operating environment and greater clarity have led us to recently change the mindset under which we have been previously operating. Over the past few years, we have conservatively focused on refining our operating platform and growing revenue through productivity improvements and measured incremental investments. We now believe that the confluence of competitive, regulatory, political and economic factors afford Kforce the opportunity to more aggressively pursue growth initiatives and leverage our operating platform. We therefore took significant actions to realign our focus in Q4 to accelerate profitable revenue growth through a greater outbound focus in a larger associate population. Indicative of this renewed outbound focus, we have visited 7 markets and met with over 25 clients and with our operating teams since October. The client meetings very much reaffirmed our assumptions on the many structural shifts taken place across the employment landscape, particularly their desire to increase the component of their contingent workforce. We believe that temporary staffing penetration, which has improved from 1.34% at the beginning of this economic cycle and is currently about 1.9% of the workforce, may achieve historic highs in the U.S. during this economic expansion. I would note that in many European economies, which have long faced many of the concerns now part of the domestic landscape, the percentage of temp penetration is significantly higher. In addition, the percentage of jobs added through temp in this economic recovery cycle have been disproportionately high, reflecting clients' increasing desire to migrate towards a flexible workforce. We believe strongly in the long-term growth prospects in our tech, FA and health information management businesses where there continues to be an imbalance between strong demand and short supply. As we transition into this new era for Kforce, we would once again like to thank Bill Sanders for his contribution to the firm as he led Kforce to $1 billion in revenues while building a world-class infrastructure that will serve as a platform to achieve the next $1 billion and beyond. Under the leadership of Joe Liberatore, our firm will continue to focus on delivering profitable revenue growth as we emphasize a sales-driven culture. Joe's legacy is in sales, as he started his career at Kforce in the sales organization where he rapidly progressed in a leadership role and left a legacy of growing significant markets and leadership teams. Joe has also had the opportunity to serve as the firm's Chief Talent Officer and Chief Financial Officer, among other roles, which will provide him valuable perspective on the business and will serve him well in this new role. Joe has begun driving the philosophy of focus, simplicity and accountability in everything we do. But he is most relentless in applying those principles to generating profitable revenue growth. All of this is against the backdrop of Kforce having only a 3% market share in a growing domestic staffing market. There are clearly significant opportunities for the firm. As I reflect on 2012, I am pleased with what we have accomplished and believe that the firm is well-positioned for future success. In addition to improving full year earnings per share exclusive of impairment charges to $0.85, a 21.4% year-over-year increase, we also paid a special cash dividend on Kforce common stock in December of $1 per share. The total value of that dividend was approximately $35 million. Looking forward, I am excited as we move into a new era for Kforce, and I am confident that the results will speak for themselves. I will now turn the call over to Joe Liberatore, President, who will provide commentary. Dave Kelly, chief financial officer, will then provide additional insights on operating trends and expectations. Joe, Mr. President, the call is yours.

Thank you, Dave, and thanks to all of you for your interest in Kforce. As Dave indicated in his opening comments, this is a new era for Kforce, focused on accelerating profitable revenue growth and further enhancing our sales-focused, client-centric culture. I am confident Kforce is poised to win as we strive to take market share in 2013 and beyond. I'm excited to be in a position to allocate a higher percentage of my time focused on direct client interactions and working more closely with our revenue generation teams. In the fourth quarter, I personally had the opportunity to meet with over 25 clients as I visited 7 markets, which contribute 1/3 of our overall revenue. These conversations reinforce our belief opportunity exists for us to significantly grow revenue within our existing clients. The platform has been set with a world-class and scalable infrastructure that will allow us to compete effectively and take market and customer share. As a firm, we will be looking for ways to focus more time and energy externally to better meet the needs of our customers as we are streamlining and leveraging our processes and tools to simplify how we do business with our clients, and we will leverage realtime data to hold our associates accountable to higher levels of performance and superior customer service. Our flexible staffing businesses, which is comprised of almost 70% technology staffing, inclusive of those technology portions of our government and HIM businesses continue to grow in the fourth quarter sequentially and year-over-year on a billing day basis. Permanent placement revenues decreased sequentially but increased year-over-year. Tech flex is our largest business unit and represents 61% of total perm revenues. On a billing day basis, Q4 revenue is increased 0.3% sequentially, and 2.7% year-over-year. Overall, our key performance indicators for technology remain at a healthy level. Job orders, external submittals and send outs remain at high levels and candidate supply remains tight, particularly for skill sets in high demand areas such as EPIC, JAVA, .NET, project management, data warehouse, business intelligence and mobile computing. We continue to improve in prioritizing the highest quality job orders and our fill ratios for these orders are at all-time high levels, but we believe additional opportunities will remain for improvement. Inter-quarter trends for Tech Flex revenue showed declines in October and November, and an increase in December. January trends for Tech Flex are better than last year. The declines in January due to annual assignment ends were similar to last year but we are already at 97.3% of normalized December headcount, which is more promising than last year. The better recovery and strong KPI volumes suggest continued solid demand in this business. We expect Q1 2013 revenues to be flat on a billing day basis for Tech Flex from Q4 2012 levels but with an accelerated rebound relative to Q1 2012 that bodes well for the remainder of the year. Revenues for our finance and accounting flex business represent 19% of total revenues. On a billing day basis, Q4 revenues increased 2.1% sequentially and 0.2% year-over-year. Revenues increased in October, decreased in November and increased in December. Current trends for FA Flex revenues suggests a slight decline on a billing day basis as this is recovering more slowly than last year due to more significant Q4 project ends than last year. Revenue growth for the quarter for our Tech and FA businesses was driven by our small and medium-sized client base and some select strategic accounts. Our strategic accounts portfolio declined slightly as a percentage of the total revenue in the quarter. In aggregate, the firm provides consultants to approximately 3,000 clients at anytime with no one client constituting more than 3% of total revenues. We believe the key to our ability to accelerate revenue growth will be to more deeply penetrate our existing customer base, many of which provide substantial opportunities to increase share. Our flexible model allows us to source consultants at scale in key areas of customer needs. We are refining our processes in the NRC to more sharply focus on key skill sets that are in greatest need by our customers. Our national footprint and diversified service offerings also allows us to service clients in the industries with the greatest demand for technology and F&A professionals such as health care. All of our top 25 clients are financial services and comprise approximately 7.3% of total revenues in Q4 2012, which has declined from 9.8% in Q4 2011. Financial services represent 16% of tech revenue which is flat to Q3 2012. On a billing day basis, revenues for our HIM business increased 8.7% sequentially and 2.6% year-over-year. We believe there is a strong demand for this profitable business unit and it's synergies with our Tech Flex business as we continue to capitalize on the growing spend and health care around ICD-10 and electronic medical records. This business experienced significant end at 2 clients in Q4 and we expect revenues in Q1 to be relatively flat as a result. On a billing day basis, revenues for our Kforce Government Solutions increased 8.3% sequentially and 2.1% year-over-year. Revenues for this unit have stabilized but the overall market visibility for government contractors remains extremely limited. There remains continued uncertainty around funding levels for various federal government programs and agencies as they await the outcome and potential impact of sequestration. KGS continues to strategically focus on opportunities within federal agencies that are less impacted by these fiscal concerns such as the health care space and expects less than 10% of its business to be impacted by sequestration. We anticipate a decline in revenues in Q1 due primarily to product sales that positively impacted Q4 to not recur in Q1. Perm revenues for direct placement and conversions which constitute 4.1% of total revenues decreased 10.3% sequentially but increased 9.2% year-over-year. The war for talent continues to create an environment of strong demand for highly skilled candidates and the pace of conversion has remained elevated for the past 4 quarters. Q1 has historically improved as the quarter progress. Perm revenues are difficult to predict but we expect perm revenues to be relatively stable in Q1. As I alluded to earlier, we'll continue to increase investments in revenue responsible headcount from Q3 to Q4. Sales headcount inclusive of the NRC and Strategic Accounts increased 10% sequentially and 20.9% year-over-year. The demand for our services remains strong. Associate performance metrics remain near peak levels at certain tenure levels. Our most experienced performers are close to capacity and we have seen contributions from our 2 to 4-year tenured performers increased nearly 45% year-over-year, and a 1 to 2-year population responsible for an additional 23% over the same period. Continuing improvements in performance from these tenure groups and ramping of newly hired associates should positively impact revenue trends as we move further into the year. However, it typically takes 6 to 9 months for new associates to ramp and as a result, we expect increased compensation costs relative to gross profit generated from this population over the next 2 quarters. We plan to continue to make additional investments in our sales associate headcount in geographies and industries we believe represent the greatest opportunity though not at the accelerated pace of Q4. We had solid performance in the fourth quarter and have a very strong foundation for the future success. We will remain heavily focused on our client needs and will leverage our platform of tenured field teams, the National Recruiting Center and our Strategic Accounts model to adapt to changing market dynamics and client industry trends. We believe that the current environment remains very attractive for professional staffing and that our time is now. We will remain focused on driving profitable revenue growth by meeting our client needs and gaining market share. We will do this by maintaining our focus, executing with simplicity and holding ourselves accountable for delivering great results. I will now turn the call over to Dave Kelly, Kforce's Chief Financial Officer, who will provide additional insights on operating trends and expectations. Dave?

Thank you, Joe. The firm delivered solid results in the fourth quarter. Total revenues for the quarter were $269.8 million, which represented a billing day increase of 1.5% sequentially and an increase of 2.4% year-over-year. Quarterly revenues for Flex were $258.7 million, which represented a billing day increase of 2% sequentially and a 2.2% year-over-year increase. Search revenues of $11.1 million decreased by 10.3% sequentially and decreased 9.2% year-over-year. Super Storm Sandy had a direct billing impact of roughly $1 million in Q4, which was not as significant as we had anticipated. Q4 monthly revenue trends were relatively flat in October and November, and showed improvement in December. Flex revenue trends for the beginning of 2013 have declined from December levels as is typical due to December assignment ends. For the first 4 weeks of January, Tech Flex is up 3.6% year-over-year, Finance and Accounting Flex is down 4.6% year-over-year, and HIM is up 2.6% year-over-year. Search revenues are up 3.8% year-over-year for the first 5 weeks of Q1. It is difficult to assess potential full quarter results with this limited data. This is particularly true in Q1 due to the uncertainty of any holiday-related impact. Additionally, Q1 2013 has one less billing day than last year since 2012 was a leap year. Adjusted for the $2.5 million after-tax noncash goodwill impairment charge, fourth quarter net income and earnings per share from continuing operations were $8.4 million and $0.24, respectively. Net income decreased 9.7% sequentially and EPS decreased 7.7% sequentially. Year-over-year, net income from continuing operations excluding the impairment charge increased 64.6% from $5.1 million in Q4 2011 and earnings per share increased 71.4% from $0.14 in Q4 2011. Improvements in revenues and gross profit helped offset the cost of the increase in revenue responsible headcount to drive strong bottom line results. The $2.5 million impairment charge was recorded in Q4 to true up the estimated impairment for our government reporting unit in Q2 after finalization of our procedures. No additional impairment was identified in Q4. Our overall gross profit percentage of 32.8% decreased 10 basis points sequentially and increased 110 basis points year-over-year. Our Flex gross profit percentage of 29.9% in Q4 2012 increased 30 basis point sequentially and 100 basis points year-over-year. Overall, bill pay spreads increased 20 basis points sequentially and increased 100 basis points year-over-year. Gross margins improved throughout 2012 reflecting consistent demand for our services. Tech Flex margins are now only 100 basis points from their previous peak despite a significant increase in statutory loss from the last cycle. The following is a breakdown of year-over-year and sequential bill pay spread improvement by business unit. From a year-over-year perspective, Tech Flex improved 90 basis points and FA Flex spread improved 70 basis points, while HIM spreads were down 120 basis points. From a sequential perspective, Tech and F&A spreads were stronger than anticipated in the quarter, despite the impact of Q4 consultant paid time off. Tech Flex spreads were flat and FA Flex spreads declined nearly 10 basis points due to improvements in pricing and shift in the mix of clients. HIM spreads declined 110 basis points. As we look to Q1, Flex margins in the first quarter will be negatively impacted by payroll taxes, which will be slightly greater than last year and could reduce Flex margins as much as 130 basis points. However, we expect to continue to see modest expansion in bill pay spread as we move through 2013 which should fully mitigate these increases as the year progresses and should result in improved Flex margins overall. We believe we have a world-class back-office infrastructure that will allow us to deliver operating leverage as we continue to expand revenue and take market share. Q4 SG&A levels of 26.9% have declined 40 basis points year-over-year despite the 21% increase in revenue responsible headcount. The overall result of improving revenue and gross margins along with declining SG&A is seen in our operating margin improvements. Operating margins have improved from 3.2% in Q4 2011 to 5.1% in Q4 2012, and we anticipate continued improvements as we grow the top line. We are in the process of assessing the impact of health care reform. The rules are still being refined so there remains much uncertainty. However, the provisions that go into effect in 2014 will certainly increase the cost of employment for most companies. We believe this will have a positive impact in all revenues due to the potential increased demand for temporary staffing. Relatively speaking, the cost of the law should have less impact on Kforce than many other companies because of the level of benefits we already offer, particularly through our Tech Flex consultants. We have always viewed our consultant benefit plans as a competitive advantage and it may serve an even more meaningful attraction tool under the new law. We currently offer benefit plans that will likely exceed the minimum requirements to approximately 2/3 of our employees, of which slightly over half enroll in our plans. Under the new law, the requirement for offering benefits to a larger population will likely increase so there will be an impact. We believe we will be able to pass these incremental costs, which will be most significant in our FA business through to our clients over time. A positive implication of this law is the potential for increased demand from companies looking to better manage their employee health care costs which is particularly relevant in project-related disciplines such as technology. We believe Kforce is in a strong position to provide solutions to our clients to minimize the effects of the new rules. As we look to our balance sheet and cash flows, our accounts receivable portfolio continues to perform well. Write-offs were down sequentially and the percentage of receivables aged over 60 days remained at very low levels. Our cash flow continues to be strong, EBITDA for Q4 2012 was $16.1 million, decreased 12.7% sequentially but increased 10.2% year-over-year. We are now generating annual EBITDA over $60 million. The firm had $20 million in bank debt and $1.4 million in cash at quarter end compared to 0 bank debt at the end of Q3 2012, and $49.5 million in debt at the end of Q4 2011. The firm repurchased approximately 1.4 million shares of stock at an average price of $13.08 in Q4. Additionally, last week our Board of Directors approved an increase of $50 million in authorization for stock repurchases. Currently, $89.9 million is available for future stock repurchases. We will continue to evaluate additional repurchases as cash flow and market conditions warrant. With respect to guidance, the first quarter of 2013 has 63 billing days compared to 62 billing days in the fourth quarter of 2012. We expect Q1 revenue may be in the $268 million to $274 million range. Earnings per share in the first quarter relative to the fourth quarter will be significantly impacted by both the increase in payroll taxes and the incremental costs of our recent investments in revenue responsible headcount and additional anticipated investments in Q1. We expect the increase in payroll taxes in cost of sales and SG&A to negatively impact EPS by $0.09 to $0.10 relative to the fourth quarter. Additionally, the impact of recent revenue-generating headcount investments and those anticipated in Q1 are expected to impact EPS by $0.03 to $0.04, as it typically takes 6 to 9 months for our new associates to ramp. Earnings per share may be $0.09 to $0.12 in Q1. Our effective tax rate in Q1 is expected to be 40%. We anticipate weighted average diluted shares outstanding to be approximately $35 million for Q1. 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. We are pleased with our fourth quarter results and in particular, the continued expansion in bill pay spreads that help to offset some of our planned hiring cost. We expect to continue making human capital investments to drive topline performance with a goal of accelerating revenue growth in the second half of 2013. We remain confident in our near-term and long-term prospects and expect to capitalize on the operating platform we have built to grow revenue and generate operating leverage. Saeed, we would now like to turn the call over for questions.

[Operator Instructions] Our first question comes from Paul Ginocchio from Deutsche Bank.

Dave, maybe just help us think about the sort of the new idea about it seems like it's a new idea, you're going to hire more to accelerate growth relative to your previous strategy. Can you talk about what that does to margins or how we should think about incremental margins going forward?

Sure, Paul. In terms of margins, operating margins, obviously, we had talked about the fact that we've hired significantly in Q4. In Q1, as I have said, the expectation is we're going to have a full quarter of those costs from the hires we had in Q4, as well as the fact that we anticipate hiring additional headcount in Q1. So part of the guidance that we provided in Q1 was to give you some sense as to what the impact on margins would be for that hiring and we anticipate Q1 specifically to have an impact of about $0.03 to $0.04 in EPS, and those costs predominantly are in the SG&A line.

And should we think about whatever your incremental margins were previously under this newer strategy, incremental margins going forward are going to be a little bit less in the hopes of getting more revenue growth, is that the right way to think about it?

Yes, I think -- Paul, I think the way to think about it and Joe touched on it in his comments, as we hire these folks, it will take them, as we mentioned, as he and I both mentioned, 6 to 9 months to ramp. And so as we work through that 6 to 9 months, certainly there's going to be incremental costs until they turn the corner and start paying for themselves, if you will, and then we anticipate revenue growth obviously to accelerate as a result of that hiring which is going to allow us to leverage the operating platform that we have to generate some incremental operating margin improvements as we get to the back half of the year.

Paul, this is Joe, I'll give you a little bit more color in and around the ramp because, obviously, there is acceleration in Q4. We don't anticipate that we'll be adding at the same levels at Q4. But back in 2010, we really started to refine our new hire ramp with a bunch of programs in place on how we measure people at 30, 60, 90-day increments. And over the course of time, what we've seen is we've seen actually our performance of our less than 1 year, people improve 65% from where we were on the back end of 2009, prior to putting in a lot of the programs. Likewise, we've also seen the performance increase by 55% on our people as they move from 1 year to 2 years, so we're getting nice performance out of those individuals. And to kind of frame that, when we look at our greater than 4-year population, they're about 63% more productive than our 2 to 4-year population, and they're about 114% more productive than the 2 to 4-year population. Where we get our greatest leverage is when we move people from less than one year into our 1 to 2-year population, those people are typically 200% more productive. I mean, that's off of these hire levels that we've established which gives us comfort that we're really building future revenue leverage opportunity that won't really manifest itself from really expanding SG&A by too much as this group of people start to move through the pipeline.

Okay. Maybe if I could just ask maybe one more just to get a better understanding. Was there something that happened in the fourth quarter or an event or something you're looking at that sort of changed your mind or why weren't you just adding throughout 2012, and why was there such a big sort of bubble of hires in the fourth quarter?

Actually, we started back in Q3. We started to accelerate our hiring in Q3 and that was mainly because as we started to look at some of what was happening with productivity of our more seasoned people, we noticed that they have started to plateau which led us to believe that we have started to reach the peak productivity levels, which really drove the need to start hiring in additional then. And in combination with that, Dave and I visited, as I mentioned, 7 markets and spent a lot of time with customers and these are some of our largest customers that were giving us a lot of forward insight in terms of what they had coming heading into 2013 and forward, and we saw a lot of projects that were being teed up, so there are a number of drivers there.

Paul, this is Dave. I want to add a couple of other points. If you look back over the last several years coming out of 2008 and 2009, with the financial crisis that we had, the new President, there was a tremendous amount of uncertainty about what was going to happen with health care regulation and so forth. And as we went into Q4 and the election was settled, the regulatory environment was settled, and even with the recent, at least, temporarily resolution of the fiscal cliff, when we combine all those things together and we take our feedback back from our clients, it became very clear to us that the opportunities for Kforce were significant. We've seen a significant change in the competitive climate, many of our larger competitors have been acquired, so there's been a lot of factors that have really, really, I think, changed the landscape and given us a pretty unique opportunity. So we considered all of those factors. This made a lot of sense for us to do.

Great. And I promise this is the last one. So obviously, one of the factors is sort of health care reform?

I wouldn't say health care reform as a catalyst. I'd say the resolution fixed one of the variables that we're waiting for. I think the election was certainly another one because one of the things that we've seen clearly is that in this highly regulated environment, many of our clients have made the decision to shift employment risk and with the reelection of the current President, that kind of confirms that for the next 4 years, at least, we can expect that our clients are going to continue to shift more of that employment risk to us. So that was confirmed and together with the market opportunities, we believe that actually were probably one of the best positions with we've been in the history of our firm.

Our next question comes from Mark Marcon from Robert W. Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: I was wondering, did you mention how many full-time employees you have within the organization at Q4 end?

No, we didn't talk about numbers, Mark. All that information will be in our K, when we release our K. That's typically for the number of employees, it's just so we have a specific point in time. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. I was just wondering if you wouldn't mind disclosing it now since it will be in the K shortly.

Yes, hold on a second. Let me make sure we give you the right number.

And Mark, this is Dave. In the aggregate, there's about 2,500 total employees in the firm, that's core employees, that's obviously exclusive of the 10,000 billable consultants that we have. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Sure. And was that number up relative to a year ago or is it flattish?

Well, when we think about, as Joe had mentioned, revenue responsible headcount is up 21% year-over-year. In the aggregate, the headcount is up less than 15%. So it gives you some perspective of the operating leverage and the shift in focus to more revenue and sales focus and trying to capitalize on the operating leverage that has been built. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And the SG&A, when we think about that and we think about our typical ratios, how much of the SG&A at this point is fixed and scalable because you did say, just in answering Paul's question, that there were few folks who were client-facing or who are recruiters who are plateauing, which if they are in fact plateauing, then it makes you wonder where does this scale come from in terms of being able to drive higher productivity across the firm? So I'm assuming that there's a percentage, a meaningful percentage of SG&A that's fixed and that could continue to be scaled?

Depending upon how you define fixed. So we've talked about in the past that compensation from the firm is about 70% of SG&A, so the fixed cost is about that other 30% and compensation, obviously, you've got salary, management salary, which you could be in the fixed as well so... Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And then there's always going to be all those back office folks?

That's right. When I'm talking about total SG&A, I'm talking about that 30% that's not compensation that is fixed. And then, as I said, you've got management salaries that's a better part of that 70% that is also obviously fixed. So you're talking about a percentage certainly relatively sizable in excess of 30%, 30% to 50% that is fixed if you want to define it that way.

Mark, just to give you also a little additional color when we talk about that more seasoned population where they're producing at very high levels. We've improved performance of that 4 year plus population 45% from where we were when we really came out of the downturn last cycle. So I mean, we've gotten tremendous leverage there and so those people are just -- you can only do so much and we've implemented a lot of tools and that's allowed us to get this continued productivity, that's not to say that we don't believe we might still be able to get some additional productivity there but it would have been a high risk to bank on that to continue to happen. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Got it. And of the 2,500 employees, what percentage are recruiters or sales as opposed to kind of back office?

So as we think about in terms of ratio, and it is probably somewhere in the neighborhood of 65% -- 60% to 70% -- 65% to 70% focused on revenue generation. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Right. And what are you seeing in terms of your retention rates among those folks?

Well, retentions really broken out by the 10-year grouping. So our more seasoned people 4-plus years, we've historically run low single-digits and we continue to stand in those areas so we typically hold onto those individuals. And as you move down to new hires, we have our -- our greatest churn is in the people in the 0 to 6-month category. But we've gotten very disciplined about having 30-day and 60-day and 90-day checkpoints, we really evaluate how people are ramping and also how things are going for them. With a sales environment, there is no perfect formula, sometimes people coming in the door better at selling themselves than really what we need them to do in terms of servicing our customers and likewise, sometimes, they make a wrong decision, or we haven't evaluated them appropriately so it's our responsibility to do what's right for them and right for the firm. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then with regards to the government side, good performance during this quarter. And you did say it's going to be down a little bit sequentially in the first quarter. I'm wondering if you could just put a little more color around that in terms of how you're expecting it to go and what would your game plan be if in fact there is sequestration?

We've gone through to the best of our ability and looked at the agencies where we're doing work and mapping that against what is out in the marketplace in terms of the agencies that will be impacted the most. And what our team has come back with is really anticipating less than a 10% exposure if thanks were to stay with what's known at this point in time to the whole revenue stream. They're realizing a little bit over 35% of our business is wrapped up in health care areas which are not supposed to be impacted by sequestration and we're in a number of other agencies that are supposed to be somewhat insulated. When we look at that business in terms of the guidance that we provided Q1 relative to Q4 is we have a product within our KGS unit by the name of Matt, which is really they're utilized for the military in terms of different services but we have a nice product mix there. And as we look into Q1, that business kind of moves in different cycle so our pipeline has grown from about $7 million to $10 million over the course of the last year, but we're not expecting as many orders to be processed in Q1. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Got it. And I missed the tax rate that you're expecting for the first quarter and for the year?

Yes. So Mark, we're expecting approximately 40% tax rate for 2013 including the first quarter.

Our next question comes from Kelly Flynn from Crédit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: First of all, in talking about your reinvestments in growth so to speak, in the press release [ph] you referenced changing views on the competitive environment and I think you said your competitors, many of them have been acquired which is obviously true. So I was hoping you could more fully explain what you've observed competitively. Are you saying it's getting less competitive or what's going on there?

Kelly, this is Dave. Actually, what we've seen is at the client front firsthand, that the clients are seeing issues related to pricing, turnover, margins and so forth, particularly at some of the larger clerical firms have acquired the professional firms and as they tried to rationalize compensation and the conflicting channels that they've had with those clients, there have been a lot of disruption. So one thing that's become clear to us is that staying as a pure play independent professional and technical firm actually has given us opportunities that are very significant. We've been invited into many of those relationships as a result of the fact that the clients are not happy with the way that they're being serviced. In addition to that, we've also received a number of people who come to us from those firms who experienced compensation cuts, experienced pricing changes and channel conflicts and so forth. So we've benefited on both the client front and also on the associate product and obviously, we're going to make measured investments because not all of them fit the Kforce culture. But in general, I would say that particularly in the larger clerical firms where the acquisitions have taken place for the last couple of years, we've actually benefited both on the client front and on the associate front.

Kelly, and I would add that while we did a lot of our heavy lifting and I'm very thankful for everything that Bill did while he was here at Kforce, as we reengineered ourselves and our infrastructure, we worked very hard on building our culture. We haven't done a staffing acquisition in 7 years now, so our culture is very solidified and it just really provides us a unique opportunity, especially as many of these individuals with some of these competitive firms, they were really attached to those types of cultures and the type of focus that we have here at Kforce and we think it provides us a unique opportunity. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, great. And then a couple of clarification questions on the guidance. When you're talking about the gross margin, I think you said that you expect it to expand year-on-year, I think, for the year, but you also threw in some comments about the payroll taxes, so what do you expect to be year-over-year the gross margin in the first quarter and then how will it play out as the year progresses?

So Kelly, a couple clarifications to these comments. So the comment that I made was that we anticipate sequentially that the payroll tax impact from Q4 to Q1 could be as much as 130 basis points. What we were referencing in terms of expansion in margins has to do with the fact that we've seen pretty persistent gradual improvements in our bill pay spreads really over the course of the last 8 quarters and had in fourth quarter continued success on that front and anticipate that at a modest level to continue such that year-over-year, when we look at total margins, obviously, those payroll tax costs normalize full year to full year, that Flex margins will improve over 2012 levels. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. But that 130 bps is that to be taken straight out of the gross margin sequentially or are you saying that...

That's correct. That's correct. Every year in the first quarter, we see an impact because obviously, the clock resets on payroll taxes on January 1 for all employees. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, great. And then on the KGS revenue decline, are you saying you expect that year-over-year or just sequentially?

The commentary that we we're making refers to a sequential decline. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. And then lastly, when you were talking about the benefits, you said you have 2/3 of the employees that are offered benefits but then you said slightly over half will do something else -- I couldn't really understand what you were saying. So can you just clarify that 2/3 versus 1/2, what you're intending to say there?

Sure. So the health care reform law requires you to offer benefits to employees at some minimum level. The comments that I made suggested that we believe our benefits exceed those minimum levels, about 2/3 of our employees are offered those benefits, 2/3 of our billable consultants, those are concentrated, particularly in Tech Flex, and that they have an election and about half of those who are offered benefits accept those benefits, the other half have other benefits maybe from their spouse or some other arrangement that they have.

Our next question comes from John Healey from Northcoast Research.

I wanted to ask you guys a little bit more about the investments into the headcount. Could you maybe give us a little bit of color in terms of where you're allocating these resources and in terms of where you want them to go in the market? Is it a view to keep investing and growing to Tech business because you believe in the kind of a secular opportunity there or do you look to have a more balanced split between the 3 verticals or the 4 verticals you're in today? And in terms of the customer size you want to focus these individuals on, is there a thought process that you'd like to highlight there?

In terms of where we're directing the hires, the hire concentration is within Tech Flex. We're also hiring into FA Flex and we've done some hiring into our NRC, mainly within our NRC, we piloted and we've been piloting for a little while, we were calling the Performance Academy. We've had a lot of success with people ramping up in the NRC and then going out into our field operations. In fact, my son just left the NRC and went to work in one of our operations. So it's happening broad-based and what we've done is we've really organized around that more effectively. So we believe that over time, that's going to allow us to ramp our field associates even more effectively. In terms of how we're focusing the individuals, as I mentioned, we believe there's tremendous opportunity within our existing customer base, so we've actually started to align more new hires in and around existing customer so that we can penetrate those existing customers more effectively versus what I would say has more traditionally happened is they've been assigned to hard to break accounts so we believe that, that will also provide us an opportunity.

Great. And then kind of along those lines, you may have mentioned earlier and I missed it but any color on how much of your customer base right now is being serviced by the NRC?

Yes. Actually, the NRC, it's improved about 450 basis points on a year-over-year basis in terms of that percentage of revenue that they're servicing. Currently, they're servicing about 33.1% of revenue.

Okay, great. And then the other thing you mentioned on the HLS business kind of some ramp down with 2 projects there, the ICD-10. Any thoughts in terms of whether any more add in terms of the opportunity there and maybe how you would see that opportunity kind of trending as maybe we go out through 2013?

I would say just in general, I'd say health care providers aren't ready for health care reform. That's inclusive of HIPAA, HITECH, EMR and ICD-10. So we believe there's still opportunity. We saw a slowdown last year in terms of ICD-10 assessments. We've noticed and been awarded a number of contracts here in Q1 so we've seen a pickup there, but we believe we're going to see more of the volume associated with remediation in and around ICD-10, as we move to the back half of this year and then as we move into '14 as people prepare for that October 2014 date.

Our next question comes from Tobey Sommer from SunTrust.

Just a follow-up on the distribution of your headcount additions. Could you comment on the proportion between the NRC in the field because just curious, in this climate, how the productivity advancing -- is advancing in the NRC on a go-forward basis, so what you think about where the upper bounds of that may be?

Much higher. The majority of the headcount was deal-based hiring and recruitment-oriented or in account-oriented roles. And relative to the NRC and performance, we have a much higher percentage of population within the NRC that are moving across that 2 year on level. So we believe we'll continue to see performance there. I'd say the big thing with the NRC is, and I think we've mentioned this before, we were the victims of our own success with the NRC. We were very fragmented in terms of how we were leveraging the NRC. We really started on the back half of last year refining the focus and narrowing our focus and concentration. We believe that will pay dividends over time as well. In fact, we've already seen some performance aspects in the areas where we had them focus such as the high demand skill areas, specific demand areas and certain industry verticals where we know there's a gross misbalance. In fact, in some of these areas, if you were to go out and do an assessment, you'd find that there's 10 jobs for 1 candidate. So we're really after the identifying and the building of the pipelines on those ends. One of the other areas is our business development area which actually we saw an increase by about 70% in terms of the client visits that they're setting for our more experienced people providing leverage for field operations on that front.

What was the contribution in terms of revenue in EPS from product sales in the fourth quarter?

In terms of the total, certainly, we don't have the data on EPS. It was a small couple of million dollars in revenue for the firm as a whole on that product sales in KGS.

Okay. Is that what causes the sequential decline in revenue in the first quarter?

That's correct, that's correct. The service business we expect to be stable to slightly up in KGS from Q4 to Q1.

In the fourth quarter itself, gross profit in KGS, gross profit margin was up almost 500 basis points, is the preponderance of that related to product sales?

Yes, there's really 3 pieces to that. Actually, that is a small piece of it but only about 50 basis points is being driven by the product sales. The -- actually, the biggest driver is increased rate on some new and existing business and our service business as we've managed to improve profitability there. That actually was about -- I'm talking sequentially, about 170 basis points. The rest was really one-time true ups. So if you think about margins for that business, the service business contribution of 170 basis points was the key there.

What kind of bill rate growth are you seeing in the Tech Flex business?

As far as bill rates are concerned, as we think about bill rates year-over-year, they're modest, they modestly continue to increase over -- pretty consistently. Pay rates obviously have kept -- stepped not quite as quickly as we've been able to manage both the bill rate and pay rate side. So we think that's reflective of continued good demand in the space.

Okay. Two last questions for me. One, just kind of a housekeeping one. Could you give us the number of billing days by quarter if you happen to have them for 2013? And then I was interested if you could comment on are you lapping anything in Tech Flex relative to some big industry projects that ended in kind of the May, April timeframe last year that may facilitate growth kind of optically looking faster as we enter the second half?

First of all, I'll answer your billing day question. Q1, 63 days; Q2, 64 days; Q3, 64 days; and Q4 62 days.

And relative to Tech Flex, I guess the best way that I can answer that question, are we aware of any big projects that we have coming to an end, the answer is no to that question. But when we look at our firm-sponsored accounts, Strategic Accounts portfolio makes up roughly about 30% of our revenue stream. However, our firm-sponsored accounts, as I have mentioned, have decreased from 9.8% to 7.3% in some of the financial services areas, so we did experience some trail off through the course of 2012. But in fact, in Q4 is the first time in 4 quarters where we actually saw growth within our firm-sponsored accounts, they were up about 4.7% sequentially. And here, even heading into Q1, we've seen job flow demand coming out of those clients that has been at a healthier pace.

Joe, I was actually referring to big projects ending last year that might have hampered comparisons though.

That's what I'm saying. I wouldn't call them large projects ending but some of the firm-sponsored accounts where we were doing business had various aspects of their business that they were decelerating in terms of their use of billable consultants, so it wasn't like a big project of 100 people ended or 300 people ended, it was more of a constant bleed that they were bringing down their contingent workforce.

Our next question comes from Randle Reece from Avondale Partners.

I was wondering about what corporate expense looked like in 2012, and how you think it will compare in 2013?

If you're talking about corporate expense in terms of infrastructure to support the revenue responsible population in 2012, I think we did an excellent job in managing those costs and they were stable throughout the course of the year which obviously you can see is driving a lot of that operating margin improvement. And a focus, as Joe has talked a lot about, and Dave, in driving revenue growth is going to be important for us and are committed to scrutinizing all those costs and don't expect expansion of those costs as we move into 2013 either.

And in terms of management compensation, what kind of leverage are you going to get in 2013 since you've made some changes to management comp?

You're obviously alluding to some of the disclosures that we have modifications that were being considered by the comp committee, those were actually determined at the end of 2012 on top of some of the change that was already instituted in 2012. Certainly, the result of those changes is going to be a reduction in overall executive pay as we think about that. Again, we think that only enhances our ability to invest in accelerating revenue growth. So it is an opportunity for us.

Do you have the numbers for operating cash flow, for either fiscal '12 or the fourth quarter?

Yes, sure. Fourth quarter cash from operations is going to be about $28 million. And for the year, about $56 million, Randy.

Our next question comes from Morris Ajzenman from Griffin Securities.

Let's take another stab at this headcount increase, the staffing up looking at the next few quarters. Clearly, you guys are optimistic looking out over the next year, or so, and all and on the flip side, when you make an announcement like this, Wall Street's reaction initially as the first quarter going out is what's going to be the impact to earnings. So you gave us some anecdotal evidence earlier, talking about post elections and things improving but can you put a little meat on the bone, just give us some sort of stories. I presume you're optimistic because you're going to see a different corporate customers and 1 by 1 you kind of listened and strategized with them. What can you help us understand your optimism of how you're going forward, now increasing the staff by what you've been told or been hearing from your customer base?

I think we've kind of said it. It's a confluence of several factors coming together. I mean, if you look at the environment that we've been operating in, there's been an enormous amount of uncertainty throughout the entire last term of the current President. The question was whether or not health care reform was actually going to be passed and then whether it was going to sustain the Supreme Court, that was resolved. The issue of who was going to be the next president obviously was a significant issue because of the clear regulatory environment and tax policy and so forth. That was another issue that's now been resolved. And as you know, uncertainty have always, in our industry, is clearly a real issue and our clients have now come to the point where they've said, okay, now we know what we're going to operate in. So it's beyond a year. We're looking past the year in saying that we now believe that over the next several years, what we have experienced over the last several years is what we will experience over the next several years, and our clients have confirmed it, and that's the point. We've been talking to our clients not just during the fourth quarter but throughout, but we placed a major emphasis on it. And it's clear to us that the opportunities for us as a firm now with the resolution of some of the political factors, as well as some of the competitive issues that we've already talked about, we're actually in probably the best position as a firm having maintained our independence, having a solid corporate culture and the ability to leverage a fixed infrastructure, we believe that this is our time, as Joe said, "Our time is now." We want to take full advantage of it and therefore, we made the decision to make the investments in additional headcount. The impact on SG&A is marginal for the incremental headcount and the risk-reward, we believe, is significantly weighted towards reward, particularly towards the back end of this year and accelerating revenue growth even into 2014. So all very well thought out, all very well-calculated, all very well-executed and we're confident that as we get into the back end of the year, that we're going to see more of that, and we're going to continue to invest as we go forward to accelerate the revenue growth. We've got a great platform. As Joe said, Bill has done a phenomenal job in honing the culture, building out a great infrastructure. And actually, all of these factors coming together put us in a great place right now, and we're actually excited about our future. And we think that based on these conversations, I'll give you an interesting status, we went through our plans of attack for our field offices, we could actually triple the size of the firm and not add another client. So just to give you an idea of the level of the scope and the success that we've had with these clients, so the new people that are coming in, as Joe said, are largely going to be targeted at existing clients to further penetrate them and to gain more share from them as we move up in the share of those customers and take additional market share. So I know you're looking for something more than that, probably something more specific but it's a management call and management's made the call and we believe that you'll see, as we get to the back end of the year, that there's going to be an acceleration of revenue growth.

I just wanted to make sure then, basically, what I'm hearing, the majority of this call is distrust going forward is not something that hopefully happens but what you're hearing from your clients, your customer base, is that correct?

Morris, I've met with the majority of our largest customers in the last quarter. There's -- one thing's crystal clear, everybody is looking at overall human capital staffing strategies and what balance of their mixture of their population it's going to be in contingent and the use of contingent on an ongoing basis. I'd say part of that is really based upon what David had mentioned, what we've seen manifest itself here in the last several years because of all the uncertainty. And with health care reform and the uncertainties there, there's no question, people are not looking to go long on human capital and now they're building in contingent workforce as a staple of their overall not just for projects but even ongoing maintenance. I'll tell you, there's another big point that Dave didn't mention, it's the quality of our leadership. We have a very stable leadership team. We built a team over time. They've been in their seats. They're ready to go. They have good infrastructure. They're training aspects, they ramp up aspects, they're some of the things that I mentioned earlier in terms of proof in the pudding, of some of the results and how we've been ramping up new people, so we're very confident in our leadership's ability to integrate these teams and make things happen and in our ability to capture market share at the client front.

This concludes our question-and-answer session. I would like to hand the conference back over to Mr. David Dunkel for any closing remarks.

All right. Well, thank you. We appreciate your interest and support for Kforce. And once again, I would like to say thanks to each and every member of our field and corporate teams and also to our consultants and our clients for allowing us to prudently serving you. Thank you very much.

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