Kforce (KFRC)

Q2 2011 Earnings Call

August 02, 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

William Sanders - President

Analysts

Paul Ginocchio - Deutsche Bank AG

Josh Vogel - Sidoti & Company, LLC

Tobey Sommer - SunTrust Robinson Humphrey, Inc.

Giridhar Krishnan - Crédit Suisse AG

Mark Marcon - Robert W. Baird & Co. Incorporated

Kevin McVeigh - Macquarie Research

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Second Quarter 2011 Kforce Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'll turn the program over to Michael Blackman, Chief Corporate Development Officer. Sir, the floor is yours.

Michael Blackman

Thank you, good afternoon and welcome to the Q2 Kforce conference call. Before we get started, I would like to remind you that this call may contain certain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially from the factors listed in Kforce public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements.

I would now like to turn the call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

David Dunkel

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.

Overall, we are pleased with our record second quarter revenues at $274 million and earnings per share of $0.17, which represent year-over-year growth of 11.3% and 30.8%, respectively.

We are pleased with the performance of our Tech Flex and HIM businesses and the continued strength in Search which performed well in both Technology and F&A. However, results for the quarter were mixed as we continue to experience headwinds, which negatively impacted a number of our businesses.

Our Government business continues to be impacted by the challenging government contracting environment and the mortgage-related component of our F&A business continues to be negatively impacted by the slowdown in mortgage refinancing and foreclosure activity.

Kforce Clinical Research also did not grow sequentially in the quarter as previously anticipated due to a slower than expected ramp at a major client project and some headcount reductions at 2 large customers.

Management is focused on being flexible and constantly adapting for the changing landscape across each of our businesses, particularly those as experiencing challenges, to mitigate any negative external impacts and position the firm to take advantage of future opportunities.

We have made progress, repositioning these business units and have confidence in our teams. Over time, we continue to believe that though all of our businesses rarely are performing at their peak at the same time, diversification in our revenue footprint provides the best platform for long-term success. We remain committed to our goal of surpassing prior peak earnings with a higher-quality revenue stream that is less dependent upon the Permanent Placement revenue. However, the challenge as mentioned, and the fact that margins particularly in our Tech Flex business are not expanding as quickly as in previous cycles suggests that peak earnings will not be achieved as quickly as originally anticipated. As a result of these unexpected challenges and the significant changes that have taken place in the economic outlook since February, 2011 revenue and earnings growth targets previously discussed will likely not be achieved and long-term revenue and earnings growth targets will need to be assessed in the context of this uncertain global fiscal landscape.

Since February 2011, the Q410, Q111 GDP have been revised downwards, 2011 GDP expectations have been significantly reduced, BLS employment data has been contacting and the macroeconomic environment remains uncertain due to the U.S. fiscal issues. However, despite the GDP backdrop, which historically correlates the declining temp staffing revenues, we have continued to see an environment where disproportionate amount of private sector hiring has been created through the temp sector. Our thinking remains that this uncertain environment, which has persisted for more than 2 years, continues to drive our clients' increasing desire for a more flexible workforce. This is particularly true in high scale niches. As college-educated unemployment was just 4.4% in June.

Talent shortages are particularly acute in tech, which is project driven by nature and constitutes over half of our revenues. In fact, we believe that the decline in GDP expectation for the U.S. economy reinforce our client's desire to utilize flexible staffing, which allows them to quickly adjust in this constantly shifting economic environment and the significant uncertainties surrounding regulatory tax and healthcare reform. Many client meetings have confirmed that they are reluctant to go long human capital in this macro backdrop. We remain confident in our believe that there is a sustained secular shift toward a flexible staffing model and that temporary staffing penetration of the workforce may achieve historic highs in the United States. We also remain confident in our highly leverageable operating model and anticipate continued revenue and earnings growth both in the near term and over the long term.

I will now turn the call over to Bill Sanders, Kforce's President, who we will come back, who will provide additional insight and operating trends and expectations and then Joe Liberatore, CFO, will provide remarks an overall financial performance. Bill?

William Sanders

Thank you, Dave. We thanks to all of you for your interest in Kforce. We at Kforce are committed to revenues and earnings growth. We will accomplish this by quickly adapting to the dynamic issues facing our clients. We will provide exceptional service to our clients, which will accelerate growth. We also expect to continue to improve profitability through the leverage that exist in a highly advanced operating platform and by further evolving the NRC, which allows us to profitably serve certain clients and niches that would not be possible under our traditional staffing model.

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