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Kforce Inc. (NASDAQ:KFRC)

Q3 2008 Earnings Call

October 28, 2008 5:00 pm ET

Executives

Michael Blackman - Senior Vice President, Investor Relations

David Dunkel - Chairman of the Board, Chief Executive Officer

William Sanders - President

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

Analysts

Michael Baker - Raymond James & Associates

Tobey Sommer - Suntrust Robinson Humphrey

Mark Marcon - Robert W. Baird & Co., Inc.

Josh Vogel - Sidoti & Company LLC.

Operator

Good day everyone and welcome to the Kforce’s third quarter 2008 earnings conference call. Today's call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Mr. Michael Blackman. Please go ahead, sir.

Michael Blackman

Good afternoon and welcome to the Q3 Kforce conference call. Before we get started I would like to remind you that this call may contain statements that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially because of factors listed in Kforce's Form 10-K, and other reports and filings with the Securities 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, and 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 in an interesting quarter, unparalleled and unprecedented, two words that have been way overused to describe the world economic picture.

With that said we are very, very pleased with the firm solid performance in the third quarter. We have begun preparing for this inevitable downturn at the end of last cycle and believe that we are ready to take advantage of the opportunities available in the market. We believe the Kforce is a seasoned management team experienced in leading during times like this.

For the strong balance sheet, we have flexibility both operationally and financially. During this space of the economic cycle, our priorities are to maintain positive cash flow and retain our highly talented people. We will use free cash flow for debt retirement, share repurchases and acquisitions that made very high thresholds.

Our domestic focus allows us to see a greater flexibility to pursue client share. The attitudes of our team are confident and positive and prepared to meet the market opportunities ahead.

I will now turn the call over to Bill Sanders, Kforce's President, who will provide his comments and then Joe Liberatore, Kforce Chief Financial Officer, will provide additional insights on operating trends and expectations. Then I will conclude. Bill?

William Sanders

Thank you Dave, and thanks to all of you for your interest in Kforce. As a general note, all numbers cited during our call today will be from continuing operations and therefore, excludes any results from our recently divested nursing and scientific businesses, unless specifically indicated.

We are pleased with the third quarter results. Revenues of $250.9 million declined 1.7% sequentially driven primarily by declines in our finance and accounting, flexible staffing and our permanent place of business. Flex revenues which represent approximately 94% of our revenue stream increased sequentially for the eleven straight quarters to $235.4 million.

Our technology business segment declined 0.4% sequentially as a result of a 21.7% decline in our technology firm business. However, our technology flex business which represents roughly 50% of our revenues grew 0.9% sequentially and has grown 0.5% year-over-year. Our technology flex business continues to be stable although we anticipate the sequential decline in Q4, as the result of the decrease in billing days from 64 in Q3 to 62 in Q4.

We believe the demand environment for our technology flex business is very different from the previous recession. Specifically, it appears that clients have generally not over hired during the recent economic expansion and unlike year 2000, we do not see the same exaggerated tech bubble that had developed previously.

Our two top performing segments again in the third quarter Health and Life Sciences, which had a very strong sequential growth of 3.4%. This segment is now 18.3% larger than a year ago. Specifically, the clinical research and health information business units have grown 19% and 17.1% respectively year-over-year. We anticipate continued growth from these businesses, now; this is the case every year Q4 will be negatively impacted by a reduction in billing days. This is especially true for our clinical research business whose clients typically experience facility shut down the last two weeks of the year.

Government Solutions, our prime government contracting business in the technology and financing accounting area declined 2% sequentially and grew 17.1% year-over-year. The sequential decline is primarily the result of delays and anticipated awards during the quarter. We expect Government Solutions to return to positive sequential growth in Q4 despite the reduction in billing days attributable to the holidays.

We believe the clients we serve in the Federal Government will continue to be funded regardless of an administration changes resulting from the upcoming elections. So we may see continued delays in the timing of project awards and task orders. Both our clinical research and Government Solutions business benefit from the continued strong demand and long-term nature of their contracts.

Our finance and accounting business was down 8.7% sequentially and 8.6% year-over-year. This decline was largely the result of declines in the SMA permanent placement business which declined 24.9% sequentially. We believe demand in our core finance and accounting business continues. However, we expect this business to decline in Q4 due to fewer billing days.

Search revenues which were 6.2% of total revenues in Q3 declined 22.4% sequentially and 21.9% year-over-year. Search activity weakened as the quarter progressed then has continued to be weakened into October. We expect that search will be down for the second consecutive quarter in Q4, which is consistent with historical experience when entering a recession.

I should note that at any point in time, the firm is providing flexible staffing consultants to approximately 3000 different clients in many different industries. Our largest 10 clients represent approximately 23% of our revenues. This diversification is an additional source of revenues to [billing dates]. We will continue to align our sales focus to client and industry demand.

Gross margins across our businesses have continued to be relatively stable though we expect to see increasing pricing pressures as we move to the downturn. The continued growth in our HLS and Government businesses should mitigate some of the impact of this margin compression. History suggests that slower economic environment will allow the stronger companies to gain market share and accordingly positively impact their loss of revenue from existing clients. We have a solid disciplined approach that allows us to meet our clients need in terms about volume and rates and due to our financial strength and 45 years of staying power, we will aggressively pursue market share during this down cycle.

As we continue to navigate to the current economic environment, we look at the internal KPI, as one of our primarily near term forecasting tools. This tested driven philosophy allows us to adjust quickly when indicators warn.

During Q3, our KPI is again to flatten and our clients also continued to extend the hiring cycle. We will continue to utilize these measures in determining appropriate headcount levels of sales associates and accordingly the number or sales associates were down slightly from Q2 to Q3.

In early 2008, we began a systematic reduction of expenses and rationalization of headcount in our firm. This has allowed us to come into this uncertain economic times quite lean, while we will continue to balance revenue and expenses, our focus will be to keep our highly talented staff for the eventual economic upturn.

Well, total revenues have increased 1.8% year-over-year. Total sales count is 1.9% less than a year ago and down 5% for 2008 year-to-date. Although there has been 24 months since the most recent acquisition, we will continue to consider strategic acquisitions to maintain a very high threshold for profitability and geographic end of product fit.

We are proud of the advance as we have made as a firm during the most recent economic expansion. These advances includes the building of our centralized national recruiting center, which provides fast access to candidates for our field offices, the reduction of our dependents upon the highly securable search business, the investment in a stable and profitable prime government contracting business, the divestiture of 2 under performing business units, the completion of numerous projects to build a first class back room, and most importantly the investment in building the best management team in the firm’s history.

We believe that we are well prepared to weather that current economic storm and to accelerate growth to reach new revenue peaks in the economic up cycle. Our media clients continue to have a relentless focus in keeping our great people and to improve client satisfaction while balancing revenue and expenses.

I will now turn it over to our Chief Financial Officer and Executive Vice President, Joe Liberatore. Joe?

Joseph Liberatore

Thank you, Bill. Revenues from continuing operations for the quarter of $250.9 million were up 1.8% from Q3 2007 and down 1.7% sequentially. Our revenue stream was very consistent throughout Q3, though search in particular solved the increasing impact of the economic slowdown. Our strongest businesses performed well. Our technology flex segment increased 0.9% sequentially and has increased 0.5% year-over-year. HLS was up 3.4% sequentially and 18.3% year-over-year, and our Government segment though decreased 2% sequentially has increased 17.1% year-over-year. These three segments represent 77.1% of total revenues and though, it is difficult to determine the impact of a slowing economy on their performance, their focus scenarios, as some of the greatest demand.

In terms of revenue by time, Q3 flex revenues of $235.4 million were up 0.1% sequentially and 3.9% year-over-year. Total search revenue of nearly $15.5 million for Q3, declined 22.4% sequentially and 21.9% year-over-year. Revenue trends for the beginning of the fourth quarter of 2008 have been next [15.25] of 2007 activity and slower than Q3 activity. Flex revenues for the first three weeks of October are down 1.2% year-over-year and search was down 17% versus the first four weeks of Q4 2007. We caution that it is difficult to draw conclusions for Q4 based on this limited data.

Net income for the third quarter was $7.9 million and it decreased 28.4% year-over-year as compared to $11 million in Q3 2007, and declined 9.3% from $8.7 million in Q2 2008. These declines are largely the result of the reduction in search revenue and the increased in our allowance for doubtful accounts. Net income from continuing operations was $7 million. Net income from discontinued operations was $0.9 million for Q3 2008, as the result of receiving a contingent payment related to the post transaction performance of our former scientific business.

In Q3 2008 earnings per share of $0.20 decreased $0.02 or 9.1% sequentially and decreased $0.06 or 23.1% year-over-year. Q3 2008 earnings per share before the impact of equity based compensation expense were $0.20, which is a decrease of $0.05 from the $0.25 EPS from Q3 2007.

Our gross profit percentage of 34.5% has decreased 260 basis points year-over-year and decreased 130 basis points sequentially. These sequential year-over-year declines are primarily the result of the change in business mix attributable to the decline in our Search business. Additionally our Flex gross profit percentage of 30.2% in Q3 2008 declined 140 basis points year-over-year and 20 basis points sequentially from Q2 2008. As we continue to see growth in our large volume, lower margin customer based.

Bill rates continue to increase and have improved 0.6% sequentially and 2.3% year-over-year. Pay rates increased 0.716% sequentially and 3.4% year-over-year. Spread between bill and pay rates deteriorated slightly in Q2 to Q3. As we look forward to Q4 and beyond, we will expect to see an increase and pricing pressure in a recessionary environment that would typically result in declining margins, as there is a lag in our ability to reduce pay rates as quickly as declining bill rates.

The firm continues to aggressively manage operating expenses. Operating expenses were 29.7% in Q3 versus 29.9% in Q2 2008, excluding the Q2 impact of the acceleration of acuity grants, and 29.8% in Q3 2007. Operating expenses decreased 20 basis points sequentially and 10 basis points year-over-year. The majority of our co structures variable and compensation expense, which is highly correlated to gross profit comprises over 75% of our operating expenses.

We continue to see leverage in our non-compensation based cost structure as a result of infrastructure investments made over the past three years and completing in late 2007. The resulting cost structure allows the firm to act quickly as the business changes or it changes to the economic climate.

We continue to closely monitor business activity and make adjustments to our co structures necessary. Should revenues decline; we will continue to manage expenses appropriately for the priority in keeping the great people in our firm and maintaining positive cash flow. Though operating expenses will decline as revenues decline, they will likely do so the slower rate resulting in decreased profitability.

EBITDA, an indication of the firm's strong cash flow was $16.4 million or $0.41 per share in Q3 2008 as compared to $22.7 million or $0.53 per share in Q3 2007. Our strong operating cash flow is a source of significant stability, and allows us selectively invest in our business, repurchase shares and also retire bank debt. The firm has reduced debt by $21 million in Q3 and $91.5 million in the past 24 months to $12 million as compared to the $33 million at the end of Q2 and $70.5 million in the fourth quarter of 2006 immediately following the acquisition of Bradson. As of today, our bank debt is $570,000.

We also repurchased 797, 829 shares of common stock during Q3 2008 at total cost of $7.2 million. We have repurchased 3.2 million shares or 7.7% of the outstanding shares at the total cost to 28 million for the year 2008. The firm has $36.8 million available for future stock repurchases under current Board of Director's authorizations. The firm has repurchased 24 million shares in 1999. We believe repurchases completed during the quarter will provide additional leverage to earnings per share when the economy rebounds and we believe our prudent investments of the firm’s resources.

Capital expenditures in Q3 were $2.4 million versus $3.7 million in Q2 2008 and are expected remain low now that we have substantially completed our enterprise optimization program initiative.

Write-offs of accounts receivable and receivables aged over 60 days remained low in the quarter. However, we have increased our allowance for doubtful accounts at the end of Q3 to $6.7 million or 4.5% at the receivable balance. To reflect the increased risks in the AR portfolio as of September 30th related to the credit crisis and uncertain economic environment. Our exposure to the financial services industry represents approximately 16% of the AR portfolio.

In terms of guidance for the third quarter, we expect revenues maybe in the $230 million to $238 million range total firm earnings per share may be between $0.10 to $0.14, which reflects approximately $40 million weighted average diluted shares outstanding. The bottom end of the guidance reflects continued deterioration in search and negative leverage in operating expenses.

The fourth quarter of 2008 has 62 billing days versus 64 billing days in the third quarter of 2008. We believe we are well positioned during these uncertain times as a result to the actions taken over the past few years to increase flexibility and leverage. Some of those areas which we are most proud of include our aggressive management of debt as it allows us to be virtually debt free as of today.

Our philosophy not only entering in to short term real estate leases that allows more rapid right sizing of space to align with revenues. The completion and total redesign and rebuild of our technology infrastructure, which we completed in 2007. And the centralization to tap all back office processes. The completion of all these activities greatly reduces distractions, creates leverage and allows us to focus exclusively on running the business during this challenging time.

From a financial perspective, we are pleased with the third quarter results but we are also ready for the challenges that arise as the result of the current economic environment. We have a seasoned and strong management team that is able to adapt and position the firms to perform in this challenging climate. Our cash flows and balance sheets remain strong.

I would like to now turn the call back over to our Chief Executive Officer, Dave Dunkel, for closing remarks. Dave?

David Dunkel

Thank you, Joe. Well, we appreciate the desire for greater clarity about the economic future, there are many far more qualified than we are prognosticate. We will continue to closely monitor our business indicators and are prepared to adjust quickly to changing circumstances.

Our sincere appreciation to all our clients and consultants for allowing us to serve them and our field and corporate teams for their extraordinary performance.

Now I would like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Michael Baker – Raymond James.

Michael Baker – Raymond James & Associates

Thanks for that. I know in the past you have had some success with government programs, kind of stabilize financial system with the [RTC]. I am just wondering if you had at this time, to get sense for any opportunities there, in any potential timing of the new outlays.

David Dunkel

We have done, actually we did quite a bit of work with the [RTC] and we have drawn on that experience and prepared a strategy to allow us to participate in this program as well, both us the prime contractor [KGS] units and also through our field offices as well. So, we developed a comprehensive strategy and expect to be able to participate in it, although there is quite a bit of difference to what happened before with the [RTC]. We still think of these substantial opportunities.

Michael Baker – Raymond James & Associates

Any sense of timing on government identified areas in which they are looking for assistance from folks, like you.

David Dunkel

We do not really have a sense of timing yet, we have had communication with certain government agencies directly, as well as with other primes and we do expect that there will be activity. There is an urgency to move on this, our standpoint and from the government standpoint but it is not sure if you can expect that there is still a lot less to be done before anything really starts to hit.

Michael Baker – Raymond James & Associates

Thanks, and I had just a question for Joe, obviously you gave us a range at $0.10 to $0.14 and some general sense of, what drives to the low end. Can you give us the sense of the key one or two factors that would drive you into that towards the high end into that?

Joseph Liberatore

Yes. We will drive as to the higher end to that would be search not deteriorating portion of what we experience here sequentially. Margins holding up a little bit better from a flex standpoint those margins were to remain constant once we experience any price compression due to larger customers looking at consolidating vendors and really exchanging more volume for rate.

Michael Baker – Raymond James & Associates

Thanks a lot.

Operator

Your next question comes from Tobey Sommer – Suntrust Robinson Humphrey.

Tobey Sommer – Suntrust Robinson Humphrey

Thank you. My question, maybe if you think about your expense structure in terms of variable versus facts. Could you describe changes in that, in this downturn relative to maybe how the business was structured seven years ago?

Joseph Liberatore

This is Joe. I guess there is couple of big drivers, one is revenue per field dissociate, it decreased 1% sequentially and improved 2.7% year-over-year. But it is also important to note the leverage that has been created, so I will give you a little bit walk on, I guess, back in history. Currently our gross profit per sales associate is running at about 25.8% if we were to consider Q2 2008 a peak in comparison Q3 2000 as a peak. While revenue per sales associate has improved 65.8% during the same period. Another key area is support headcount. We have been improved this area roughly about 7.4%. Our sales headcount has decreased and that is while supporting 35.6% more revenue. We have also, as I have mentioned in my comments in shifting our support activities to Tampa. Back in 2000, about 65% of our support headcount was field based and 35% was corporate based. As of now, we have 63% of that support as here in Tampa with 37% about being out in the field. And I think what really, is reflective of this is when we compare like AR over 60 days, for example, we are running about 8% of AR over 60 days back at that point in time when we are running about 3.6 in Q2 2008. We have also aligned a lot of other activities, improving or manager to associate ratios for about 36% more efficient or 39% more efficient now versus where we were at that point in time. And I also, in my opening comments mentioned real estate and shorter leases. Important to note that where on a per person basis, we have decreased our real estate cost on a per person basis by about 7.3% net on an absolute dollar basis that is not affected for any inflation over that period of time, and I guess the reason I gave you this backdrop is you asked the question. I think these and the other actions taken during this current cycle give us confidence in our ability to manage through the climate eminent at effective manner as possible.

Tobey Sommer - Suntrust Robinson Humphrey

Another question, maybe directed towards Dave, cash flow has been very, very good and I think you are just about debt free from practical standpoint as of today. Out of two remaining choices as the debt is gone, what kind of piece, can you buyback stock, if that is your preference? And I think you are involved in an organized repurchase program. Are there any limits to how rapidly you could deploy that?

Executive

We have a [30:36] for going that, actually, expires in the end of this week. And we will be able to reenter the market on Friday. There are numbers of factors that go into that and there are limitations to trading, which you guys are familiar with. That is one of the areas that we communicated last time. We reaffirm this time. It is primary use of the free cash flow. Yet at the same time, we are also still evaluating acquisition prospects and we believe that we can be opportunistic and we are seeking those that would meet a very high threshold, but can also be added to our portfolio of businesses today.

We have seen a substantial deal flow, if you will and there seems to be urgency on the parts of many to try and consummate transactions before the end of the year. So, we found an opportunity to see, not even as you have seen, we have not done anything at this point. So, those would be the two uses of free cash flow at this point.

Tobey Sommer - Suntrust Robinson Humphrey

To follow up one other question, get back from the queue. Is that push towards the year end, have to do with the change of potential change in CapEx in a Cap gains rate? And then, I was wondering if you could expand upon your volume strategy that you allude to in press release?

Executive

It is probably related to the redistribution of wealth plan that has been sighted by one of the candidates. That has been a prime motivator, no question. That of course does not affect our strategy. We have a discipline and we are going to stay with our discipline, and as we mentioned, we have got a very high hurdle rate.

As far as the volume strategy is concerned, we look at the clients specifically to determine what will, not only the short term but also the long term potentials. We categorize clients based on segment which is the size and the relative opportunity to the firm and how they align with us geographically by industry, and also, by service offering.

So, we have got a very comprehensive analysis that we do in customer profitability, and as both Bill and Joe mentioned, one of the things we did strategically during this last up cycle was to develop a very robust national recruiting center which gives us quite of a leverage in our ability to staff throughout the United States, and also, add scale in deriving much greater operating efficiencies which we are able to share with our clients and that has attracted a lot of interest, and I think, gives us competitive advantage.

Executive

And Tobey, I will just give you more of the real time piece of data, as well as given. In my opening comment, I mentioned where debt was as of today, almost 570,000. Through the 27th of this month, we have continued our share repurchase under 10B51. We have purchased another additional 622,000 shares for a little bit over $5 million. And through September, just to give you cash flow, roughly about $65 million.

Operator

Your next question comes from Mark Marcon – Robert W. Baird & Co., Inc.

Mark Marcon – Robert W. Baird & Co., Inc.

I was wondering the bill case spreads; there are some obvious pressures out there. But, can you talk a little bit about what their competitive environment is like? Do you think you may be able adjust pay rates to reflect the new bill rate?

William L. Sanders

Yes Mark, the competitive environment we are hearing from more and more customers as they are assessing the overall backdrop that they are being required to operate within on looking and consolidating vendors in distributing their concern on population across fewer vendors. We think that we are uniquely position to take advantage of those opportunities in terms of. That is going to drive down margins. Our responsibility is to find a way to support that business and at the cost effective manner, by reducing our operating expense to support that revenue.

So, we have been working through that with the several customers at this point in time. If this climate plays out, as the last several cycles have played out. That will continue to be a thing that this large buyers, they have a lot of leverage with their spend, continue to bring to the table and look for organizations that are looking to partner with them and bring solutions to the table on helping them more cost effectively manage their resource needs as well.

Mark Marcon – Robert W. Baird & Co., Inc.

There be an off site in terms of you would be able to get more leverage out of those clients and therefore get the SG&A down?

William L. Sanders

Well it comes down to a gross profit dollar gain than versus a percentage gain. But, that is the objective.

Mark Marcon – Robert W. Baird & Co., Inc.

Can you remind us how much typically during these cycles, we could see, kind of peek of trough in terms of the, based on flex side? How much of margins could potentially come in?

William L. Sanders

Yes. From peak to trough standpoint, if you look at overall margin, last time overall margin came down about 290 basis points from peak to trough.

Executive

On the flex side –

William L. Sanders

Flex. I am talking flex only because [36:20] is just a mixed number. And so, in that, that is pretty consistent across in most of our units meeting. I could, flex came down 270 basis points last time. F&A came down 280 basis points. Our HLS segments, and when I talk HLS, I am only talking to continuing operations, which would be KCR and HIM. They only comprise about 180 basis points.

Mark Marcon – Robert W. Baird & Co., Inc.

And any thing that is different, this cycle of relative to the last or you think it is just basically the same sort of dynamic?

William L. Sanders

Mark. We were kind of hoping that you could tell us.

Mark Marcon – Robert W. Baird & Co., Inc.

On the one hand, technology is should not be as much of a bubble, and yet, the recession certainly seems worse.

William L. Sanders

Yes. I would say this to you, that the tones from clients we have not seen the wholesale panic on the leasing consultants, terminating assignments, terminating open orders, those kinds of things. We have not seen that. So, it does not seem to be panicked. It seems to be much more rational, which would support the theory that they did not over hire during the last cycle, in fact, that that seems to be confirmed on conversations that we have had with larger clients. They recognize that it was difficult to find a people during this cycle. They too are trying to make sure that they can hold on to the people that they have that are both core and flex. In recognizing other factor and that is to depend in GM technology is even greater today than it was back in 2000. We have got issues that we did not even faced back then in terms of data security and so forth. So, many of things are no longer optional both from security standpoint and from a regulatory standpoint.

Mark Marcon – Robert W. Baird & Co., Inc.

With regard to the back draft expenses, it looks like there is no specific issue, but, are you just being more conservative or was there any thing that occurred our there in terms of the increase of back debt expense for the quarter?

William L. Sanders

Yes, there was, I would say, the overall economic backdrop, would have occurred during the quarter, and the uncertainty associated with that. I think, we all experienced that, you wake up one morning and the significant entities were all of the sudden going bankrupt or being sold or consolidated.

As you know, our management of allowance for doubtful account is based upon the inherent losses in the portfolio. So, we felt it prudent to expand more methodology in assessing the overall methodologies that we do use to assess that debt.

Mark Marcon – Robert W. Baird & Co., Inc.

Then on the government side, that seems like it should not be too secretly influenced particularly at the federal level. You mentioned that it was delayed, has that started back up again or what are you expectations in terms of some of those projects that were put off?

William Sanders

We have greater expectations and, just to give you a little bit of background. We are very pleased to have Larry Grant, President of Kforce Government Solutions here with us and maybe, Larry if you could answer that question that would be great.

Larry Grant

Sure, I would be glad to. The delays that have experienced, the largely delays in the request for proposal by the government being released for the vendors out there to compete for, and then other delays we have experienced have to do with RPs or proposals that were put in and the awarding have been delayed. We have 18 proposals that we have submitted in Q1 and Q2 that were due for Q3 award, and we are still waiting. We have just received one this month that won just last week that with seven passed its award date. The main reason for that right now is that the government is experiencing a real lack of experience, acquisition, and contracting officials. So, they are having a “Go out” right now and try and hire temporaries to come in, have visibility, or attract, which was already back through incentive programs to be able to get these our contracts out and awarded. The government has to have them. They need to have them on budgets. Therefore, then so, the requirement is not going to stop. So, that was been the primary delays, and then also for us in Q3. We have funded work that was a contract that belongs to a prime which was subcontracted to, and I just have the delay in their start with the government that was about $400,000 to $500,000 accorded to us. So, that is funded and we were waiting. We were just waiting to the prime being started in the government.

Mark Marcon – Robert W. Baird & Co., Inc.

Do you think this is an unusual development or is it just a occurring across the government from what you can tell?

Larry Grant

No, it is occurring across the government largely as I said before because the acquisition or contracting official core has been depleted with all the retirees, right now, the baby boom generations going out the door very fast. That is a huge issue in the government. So, their governments are loosing a lot of electoral capital. The good news is that they do not have to have those come at the door and do it for them. But, they also need the people to be able put the proposals out and then be able to survey the proposals for the winter and then to announce the winners and put it in place.

Mark Marcon – Robert W. Baird & Co., Inc.

Like another business opportunity.

Larry Grant

Absolutely.

Operator

(Operator Instruction) Your next question comes from Josh Vogel – Sidoti & Company LLC.

Josh Vogel – Sidoti & Company LLC.

I was just trying to, your guidance for Q4 at the midpoint of your range and if I am doing my calculation right, it looks like, the discontinued Opts down about 6% year over year. I was wondering if you were just choosing to be a lot more conservative here or this pace on the revenue transaction that you have seem through October so far.

William L. Sanders

Yes, we really start with $7.9 million comes right off of the top because we loose two of our billing days which impacts the Flex business. Then, with the volatility that we experienced with the search business in Q3 we thought that it would be prudent to be conservative in terms of our expectations to that business.

Josh Vogel – Sidoti & Company LLC.

Now, with the discontinued ups, is there going to be any income that speaks into your Q4 guidance? Except two pennies in Q3 is going to be in Q4.

William L. Sanders

Well, the Q3 is part of our scientific transaction. There are a couple specific ops opposite that the buyer had certain concerns and in about in terms of how that revenue would perform after the time of sales. So, we had contingency emplaced there in essence and are now based upon how those would perform over that period time and we have crossed that measurement period and received that earn out in full. And the only other earn out, per se that exists with the discontinued ups is 500,000 associated with nursing, but that pushed all the way out to 2011.

Josh Vogel – Sidoti & Company LLC.

So, based on your $0.10 to $0.14 guidance, there is nothing there from the discontinued ops.

William L. Sanders

Yes, that is our really continuing operations.

Josh Vogel – Sidoti & Company LLC.

And just to get good apples to apples comparison, do you have an idea of what those two divisions contributed to Q4 of last year on the bottom line?

William L. Sanders

Well, I think I stated that on the last call for the most part scientific and nursing, when you look at them collectively, they were really neutral to the bottom line.

Josh Vogel – Sidoti & Company LLC.

I think you mentioned that sales kind was down almost 2% sequentially in 5% year over year. Do you have a long way to go there on that pair and down the head count?

William Sanders

As I mentioned in my prepared remarks, we have been after this, for quite some time. In fact, that cost kinds of [44:53] culture is really important to us and we are making sure that we have balanced our headcount with our revenues.

We have done an especially aggressive job in the beginning of this year and we continue to do that. But, we, more than anything else, we have a posture of line to keep our great people and we are working to keep the people that we have. So, whether it would be substantial headcount reduction, or depends on where revenues go, but generally speaking, I would not expect a substantial reduction.

Executive

Josh, I might add on to that given on the date of guide. Our mix of our population of more 10-year-per-population has continued to evolve over the past seven quarters. I think it is really positioning us very effectively as possible to hold on to our more seasoned improving performers. Just the kind of I will give you a little bit of flavor. Our Flex population has experienced improvements in average gross profit contribution in Q3 which obviously is a more challenging climate, as compared of, like if I use Q1 on 2007.

In all of our categories, and when I am talking categories, I am talking 10 year categories, less than one year, two to four years, the one to two year population and the greater than four year population. It has improved in all of those categories and every one of those groupings that was improved the outside of the less than one year population. On the best news, really from a picture standpoint is what is happening, we are having people and we have been saying this for probably the better part of the last several years.

We are having people move through those 10-year gapes. I think a prime example of that is we have seen our less than one year population decrease from 15.8% of the total Flex population in Q1 2007, and Q3 it was 9.6%. We would expect those less than one year people to have a little bit more challenging time to ramp up in this period.

And then, looking at our search team, that 10 year population, we have really shifted, we have many more two to four year people on of actually doubled in size over that same period. So, we are very comfortable with the mix into the more 10 year population.

Josh Vogel – Sidoti & Company LLC.

It was helpful, thank you. Just last to end this, how much do you have left to go in the share repurchase program?

William L. Sanders

A little less than, $37 million.

Operator

Your next question comes from Tobey Sommer - Suntrust Robinson Humphrey

Tobey Sommer - Suntrust Robinson Humphrey

I have two questions. One, I was wondering if you might have a bill rates on a sequential basis? What the change might have been? I wondering if you could describe one of the highlights you had, I think it was for the government business was the long term nature of the contracts? What if you could just kindly give us a little bit more color on the length the visibility you have there and maybe comparing contrast that with a couple of the other segments that maybe do not have this long horizon?

William L. Sanders

As you looked at the bill rates, bill rates have increased year over year by 2.3% and sequentially Q1 and Q2 they are up about 0.6%. When you look at the total firm from a pay rate, they have increased the year over year approximately 3.4% and sequentially about 0.7%.

I would like to turn back over to Larry Grant to answer government question. He is our expert on that area.

Larry Grant

Just to help you compare in contrast a little bit. The government contracts are typically less for anywhere from three to 10 years. That would be the typical where the average thing about five years. And generally, when that is done on average, most of the distribution of revenue is fairly even or solid across all five of those years. So, maybe a little bit less on the first year, a little bit more in the fifth year, as you begun to wrap down on the process.

We like to look at it as an annuity over those five years over the life of the contract. The differences though, in order to obtain contracts like is a longer lead cycle in selling to the government. And there is a lot more complexity involved, and so in term, due to the federal acquisition regulation. But, having said all of that, once you win an award, your profits are pretty much set depending on what the operating expenses are and your revenues for that particular contract.

Tobey Sommer - Suntrust Robinson Humphrey

Can you compare and contrast that to the kind of visibility that you have in the other segments, maybe which segments you have a longer visibility versus others?

David Dunkel

Well, on the government practice, we may have the long visibility; although in our clinical research flex is we have the instruments long term visibility as well.

HIM. It is pretty good visibility. The rest of the finance and accounting and its short term project a little bit longer term in technology but, and there are more projects in this technology business but we say that we have long term at any more than six months. In those the businesses decline which are the major part of our revenues. We do not have great visibility into that.

Tobey Sommer – Suntrust Robinson Humphrey

Thank you very much for your help.

David Dunkel

Thank you, Tobey. Okay. We are going to wrap up the call and we look for to talking with you in January, God willing. Thank you very much.

Operator

This concludes this conference. We appreciate your participation and you may now disconnect.

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