Kforce (KFRC)

Q1 2011 Earnings Call

May 03, 2011 5:00 pm ET

Executives

Joseph Liberatore - Chief Financial Officer, Executive Vice President and Secretary

David Dunkel - Chairman, Chief Executive Officer and Chairman of Executive Committee

Michael Blackman - Chief Corporate Development Officer

Analysts

Frank Atkins - BMO Capital Market

Paul Ginocchio - Deutsche Bank AG

Giridhar Krishnan - Crédit Suisse AG

Josh Vogel - Sidoti & Company, LLC

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Unknown Analyst -

Mark Marcon - Robert W. Baird & Co. Incorporated

Kevin McVeigh - Macquarie Research

Presentation

Operator

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

Michael Blackman

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

David Dunkel

Okay, thank you, Michael. You can find additional information about Kforce in our 10-Q, 10-K and 8-K filings with the SEC. We provide substantial disclosure in our release and our hope is, that this will improve the dissemination of information about our performance and the quality of this call.

Joe and I will be providing remarks and answering questions on today's call. Bill Sanders will not be participating today as he is working from home after having a voluntary planned procedure performed. We pray for and anticipate his speedy recovery.

We are pleased with our first quarter results as we move into the second year of this tenuous economic recovery. We are on track to meet our 2011 financial targets of 15% revenue growth and 50% EBIT growth. We are particularly pleased with the performance of Our Tech Flex, F&A Flex and HIM businesses in the leverage we are seeing from our investments in the National Recruiting Center in back-office platform, which are contributing to the improving trend in operating expenses.

Entering 2011, we anticipate an increase statutory payroll costs, and thus, have been extremely focused on margins and pricing. Our actual statutory cost increases was significantly higher than expected and we were unable to completely pass these costs through during the quarter. The sequential impact of the increased costs was approximately $0.08, including billable and core employees versus the $0.05 originally anticipated.

We are continuing to focus on margins and pricing and expect improvement throughout the rest of the year. We believe Kforce is well-positioned to service our clients increasing desire for a more flexible workforce during this unique, temporary employment leg recovery, which we believe may contribute to a sustained, secular shift towards a flexible staffing model. We believe temporary staffing penetration of the workforce may achieve historic highs in the U.S. in this cycle. We continue to see recovery or a disproportionate amount of private sector hiring is being created through the temp sector.

Additionally, many economists recently tempered their GDP expectation for the U.S. economy, which may result in client turning increasingly to flexible staffing, which allows them to quickly adjust to this constantly-shifting economic environment and the significant uncertainties surrounding regulatory, PAC and Healthcare reform.

We also benefit from the strength of our diversified revenue footprint, which is concentrated in some of the highest demand areas in today's knowledge-based economy. While the overall BLS unemployment numbers remains relatively high, college-educated unemployment was just 4.4% in March. Talent shortages are particularly severe in Tech, which is project driven by nature and constitutes over half our revenues.

The operating model we have built is working well and positions us to capture revenue and drive additional EBIT across all customer segments. Our customer mix is evenly distributed among large, medium and small customers. Each of which, we are able to service as a result of this flexible model. Our gross margin profile is already one of the most attractive in the industry, but the capability of the cost effectively meet customer needs for speed and quality, allows us to drive EBIT both through increased margins and through operating efficiencies and flexible compensation structures.

Our operational objectives for 2011 are to further penetrate and accelerate growth at existing Strategic Accounts, compete for additional customer share and selectively target new accounts where our service offerings and business model add value to our clients.

We also expect to continue to improve profitability through the leverage that exists on our highly advanced operating platform and by further revolving the NRC, which allows us to profitably serve certain clients and niches that would not be possible under a traditional staffing model.

As we consider our success in meeting our financial and operational objectives, I note that in the first quarter, the firm was able to grow total revenue year-over-year by 15.8% to $262.4 million and increased net income by 78.7% to $4.8 million.

These gains were driven primarily by the success in our core technology and financing accounting business, which collectively constitute 75% of total revenues and grew first quarter year-over-year 19.6% and 34.1% respectively. Both of these businesses benefit from the continuing maturation of our cost effective and highly flexible national recruiting center, coupled with our Strategic Accounts strategy, as well as our highly tenured workforce.

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