Kforce's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.12.14 | About: Kforce, Inc. (KFRC)

Kforce, Inc. (NASDAQ:KFRC)

Q4 2013 Earnings Conference Call

February 11, 2014 05:00 PM ET

Executives

Michael Blackman – Chief Corporate Development Officer

David Dunkel – Chairman & CEO

Joseph Liberatore – President

David Kelly – CFO & SVP

Analysts

Paul Ginocchio – Deutsche Bank

Mark Marcon – Robert W. Baird

Hamzah Mazari - Credit Suisse

Randle Reece – Avondale Partners

Morris Ajzenman – Griffin Securities

Tobey Sommer – SunTrust Robinson Humphrey

Kevin McVeigh – Macquarie Research

Operator

Good day, ladies and gentlemen, and welcome to the Kforce Fourth Quarter 2013 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would like to turn the call over to your host, Michael Blackman, Chief Corporate Development Officer. Please go ahead.

Michael Blackman

Thank you. Good afternoon. Welcome to the Kforce full year 2013 and Q4 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 and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings and other reports and filings with the SEC. 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

Thank you, Michael. You can find additional information about Kforce in 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.

We are very pleased with our performance in the fourth quarter as Kforce achieved record high quarterly revenues of $302.9 million and adjusted earnings per share of $0.28. In particular, our growth was driven by Tech Flex, our largest business segment in which growth accelerated to 18.3% year over year. We continue to invest in our growing Tech Flex business given the excellent market opportunities that we see as demands continues to significantly exceed supply of candidates. Our Tech FA and HIM businesses grew sequentially for the third consecutive quarter driving year over year total firm revenue growth of 12.3%.

Joe Liberatore, Kforce President will provide further details on our Q4 operating results later on this call while Dave Kelly, Chief Financial Officer will add further color on our Q4 operating trends and financial results as well as provide guidance on Q1.

I would like to take a moment to reflect on many of the changes that have taken place both in the industry and at Kforce over the past year.

2013 has been a year unlike any I have ever seen in 32 years in the professional staffing industry. Moderate GDP growth rates have resulted in a disproportionate share of job growth coming in the temporary staffing sector. The temp penetration rate reached 2.06% in December surpassing the all time high of 2.02% reached at the height of the dotcom boom. For the year, only 10% of total job growth came from temp staffing. These facts alone are significant for our industry and indicate that the Flex super cycle is real.

Tech Flex is performing particularly well, and we believe the temp penetration rate in Tech is significantly greater than 2.06% driven by secular shifts as well as the ubiquitous nature of technology across our clients’ business platforms. Staffing industry growth has moved from cyclical to secular as the benefits we bring to the labor markets manifest themselves.

This past year has also been a year of significant change to Kforce. We began 2013 with a new executive team under the direction of Joe Liberatore, which got a mission to accelerate revenue growth with a greater emphasis on a sales driven culture. Our executive team visited virtually every market and met with over 150 top clients throughout the United States. We made investments in our revenue generating population, a key component of our strategy in 2013 in order to accelerate revenue growth. This investment and the ramping productivity of our associates drove year- over-year revenue growth of 12.3%, which now exceeds our year-over-year associate growth of 10%. We expect to continue to invest further at a steady pace as the business environment dictates and for revenue growth rates to exceed hiring rates which will drive improving operating margins.

The firm took significant steps to realign our leadership and support structure in the second half of 2013, with a goal of allocating a higher percentage of roles closer to the customer and accelerating speed of turning decisions into action. We narrowed our focus, simplified our processes, and aligned resources to target the industries and skill sets where we can have the greatest chance of success. This realignment has allowed us to invest further in revenue-generating activities and create a roadmap to exceed prior peak operating margins of 7.4% as we approach $1.6 billion in revenues.

Part of this realignment in Q4 included a strategic review of our government segment with the renewed focus on the prime solutions aspects of this business, and less emphasis on other aspects of the portfolio. The refinement of our KGS business will impact the near-term forecast, but we believe will benefit this unit’s long-term prospects. Also as part of the realignment, we welcomed Pat Moneymaker back to Kforce as Chairman and CEO of Kforce Government Solutions. Pat will lead this group into the new era.

The firm reached record revenues of $1.15 billion in 2013 and an adjusted EPS of $0.84. We believe our strategic actions in 2013 have set the platform for even greater success in 2014 as we continue toward our objective of increasing market and client share particularly in our fast-growing Tech Flex business line. I will now turn the call over to Joe Liberatore, President.

Joseph Liberatore

Thank you, Dave and thanks to all of you for your interest in Kforce. It was only three quarters ago that we reported 1.5% year-over-year growth for our Tech Flex business. I couldn’t be more excited and proud of our team as another quarter of strong sequential growth of 5.6% has accelerated year-over-year growth to 18.3%. This growth acceleration was largely a result of actions taken by the firm over the past five quarters to our outbound effort, to listen to the voice of our field leaders and clients, with a relentless drive for focus, simplicity, and accountability in everything we do.

I am pleased to see our actions in this new era for Kforce continue to drive the results we expected. As we remain focused on better meeting the needs of our clients, consultants, and core employees leveraging our new alignment and agile infrastructure. Tech Flex, our largest business unit representing 63.8% of total firm revenues. Overall, our key performance indicators for technology remained at high levels for job orders, external committals, and send-outs with fill ratios at an all-time high.

Candidate supply remains tight particularly for high demand skill sets such as JAVA, .NET web developers, project managers, and business analysts. The industries that performed best in Q4 were healthcare, financial services, telecom, insurance, retail, and computer hardware. Technology services within healthcare remained very healthy as hospitals and healthcare organizations implement systems and transition their platform to more of a shared services model.

Intra-quarter trends for Tech Flex, revenue showed steady growth in both October and November followed by further acceleration in December. Tech Flex revenues and headcounts are well above levels from last year, and we have already rebounded to 98.9% of Q4 average headcount. Strong KPI volumes suggest recovery levels could accelerate relative to recent years as we expect Q1 Tech Flex revenues to be down slightly on a billing-day basis due to the typical falloff in headcount at the beginning of each year.

Revenues to our finance and accounting Flex business represented 18.3% of total revenues. On a billing day basis, Q4 revenues increased 4.7% sequentially and 7% year over year. Revenues showed steady growth throughout Q4 and declined in January due to assignment ends at end of year.

Current key performance indicators and stronger than historical starts volume in January have already returned us to December average headcount levels. We expect Q1 FA Flex revenues to be flat to slightly down on a billing-day basis, but show continued acceleration in revenue growth on a year-over-year basis.

Revenue increases for the fourth quarter for our Tech and FA businesses were broad-based from a client size perspective, although larger client growth rate was slightly stronger in the aggregate. We expect the mix of growth to be balanced across all client sizes in Q1.

As part of our recent changes that took place in Q4, we have fully integrated our strategic accounts group into our field leadership team, enhancing our alignment to serve and delight our premier clients. This change streamlines decision making, driving greater consistency and focus around sales activity while more effectively positioning us to partner with each customer to quickly adjust to the pace of change taking place within these large consumers of the services we provide. We experienced significant success during the course of 2013, deepening these relationships as reflected by the increase in revenues contributed by our 25 largest customers year over year from 30.8% to 32.1% of revenues.

As we move through 2014, we will further refine our value proposition and evolve our approach around customer intimacy. From a delivery standpoint, we’ve narrowed the focus of our National Recruiting Center to target skillsets in the industry in which the national delivery model can be acquired most efficiently. The NRC also continues to serve as a training ground for developing new talent that needs to be deployed to our field office assignment.

During 2013, approximately 32% of additions through associate staff and field offices came from the NRC. We believe further development of this strategy could positively impact turnover rate as the training received during their tenure in the NRC improves their ability to ramp. We are also working on a plan to create greater efficiency in serving our West Coast clients by reallocating a portion of the NRC resources to a facility on the West Coast.

On a billing day basis, HIM Flex revenues grew 8.8% sequentially and increased 7% year-over-year. This space continues to be impacted by the prioritization of available spend towards projects such as ICD-10 and EMR implementation. Revenue trends improved throughout the fourth quarter. We expect HIM revenue to be slightly down sequentially in Q1 on a billing day basis but experience continued acceleration and year-over-year growth rate as we've already rebounded to December average check-out [ph].

On a billing day basis, revenues for our Kforce Government Solutions decreased 7.2% sequentially and decreased 10.3% year-over-year. This was driven partially by the continued impact of sequestration on our services revenue and a sequential decline of $1.6 million in product sales. There remains continued uncertainty around funding levels of various federal government programs and the environment for government services remains difficult. We anticipate Q1 revenue to be slightly down in the first quarter.

Perm revenues from direct placements and conversions, which constitute 3.9% of total revenues, decreased 4% sequentially and increased 5.9% year-over-year. Perm revenues are difficult to predict but we’ve seen a slow start early in the first quarter and expect perm to be down sequentially in Q4. Hiring was modest in Q4 as we strategically reduced hiring targets to minimize low productivity around the holidays.

The mix of hiring continues to be more heavily weighted towards Tech Flex delivery in particular. Revenue-generating headcount in Q4 remained flat sequentially and increased 10.3% year-over-year. As Dave mentioned, the quarter is notable in that Q4 2013 revenue growth surpassed headcount growth on a year-over-year basis. We continue to see contributions from all tenured population and experience better than historic retention levels to the par [ph].

A key driver in further accelerating growth is to continue to refine our territory management and allocation of resources, to efficiently meet customer needs with the right mix of volume of associates. We have a large portfolio of excellent clients and deeper penetration into existing opportunities will be key to our success.

Associate mix remains highly weighted in tenure range of less than 15 months. So overall productivity levels have significant room for improvement. We plan to make continued investment in our sales associate headcount to sustain and possibly accelerate revenue growth. I am pleased with our strong performance in the fourth quarter and feel confident that we’ve built a solid foundation that we can capitalize on for further success in 2014 and beyond. We will continue to evolve our premier partnership with our clients, strive to be the employer of choice for our consultants and core employees and support revenue enablement with an agile customer centric infrastructure.

I will now turn the call over to Dave Kelly, Kforce’s Chief Financial Officer who will provide additional insights on the operating trends and expectations. Dave?

David Kelly

Thank you, Joe. Total revenue for the quarter of $302.9 million increased 4.4% sequentially on a billing day basis and 12.3% year-over-year. Quarterly revenues for Flex were $291.2 million which represented an increase of 4.6% sequentially on a billing day basis and a 12.5% year-over-year increase.

Search revenues of $11.8 million decreased by 4% sequentially and increased 5.9% year-over-year. For the first five weeks of Q1, Tech Flex is up 17.6% year-over-year, Finance & Accounting Flex is up 9.7% year-over-year and HIM is up 10.2% year-over-year.

Search revenues are down 6.6% year-over-year for the first six weeks of Q1. It is difficult to assess potential full quarter results with this limited data though current recovery levels relative to December headcount are slightly better than last year.

In the fourth quarter, the firm incurred a net loss of $8.2 million and a GAAP loss per share of $0.25. These results were significantly impacted by two items. The first is a $11.9 million in pre-tax charges related to the realignment activities announced in Q4. The total of these charges is greater than originally anticipated as a result of slightly higher than expected severance charges and the discretionary bonus directed by the board and distributed widely to senior management, a recognition of the realignment activities in transformation of the firm during 2013.

The second item impacting EPS is a $14.5 million goodwill impairment charge incurred in our government solutions business due to our decision to focus more directly on prime solution and to exit the product sales business and any staff augmentation business within KTS. This decision impacted expectations on future cash flow. Remaining goodwill of this reporting unit is $19 million and we believe the current value is reasonable barring a significant deterioration in this business prospect. The realignment and goodwill item collectively impacted EPS negatively by $0.53.

Adjusted for these items, Q4 2013 net income and earnings per share were $9.1 million and $0.28 respectively compared to $9 million and $0.27 per share in Q3 2013 and $8.6 million and $0.24 per share in Q4 2012. Our overall gross profit percentage of 31.7% decreased 80 basis points sequentially and 110 basis points year-over-year. This is partially due to revenue acceleration in our Flex business which has led to our search business declining as a percentage of total revenues.

While search will remain an important part of our business, we are planning for it to remain at or near current revenue levels for the foreseeable future. Our Flex gross profit percentage of 29% in Q4 decreased 60 basis points sequentially and 90 basis points year over year.

Flex spreads in our Tech business were down 30 basis points sequentially and 100 basis points year-over-year. FA Flex spreads were flat sequentially but down 50 basis points year-over-year. Rising billing rates are providing additional gross profit dollars for transaction in Tech and FA Flex, though pay rates are rising in a slightly faster percentage which is contributing to the compression in Flex margin percentage.

Also contributing to the decrease in Flex margin percentage is the strong growth in our largest client, which typically has slightly lower margin in our small and medium sized clients. Our government Flex [ph] spreads declined 180 basis points sequentially to 200 basis points year-over-year. This decline is primarily the result of the combination of increased paid time off in the fourth quarter and a reduction in higher-margin product gains.

HIM spreads still remain high relative to our other businesses, but were down 40 basis points sequentially and have declined 500 basis points year-over-year due to a combination of increased compensation costs for our consultants to enhance retention and cost pressures on health care providers.

Bill pay spreads in January across our businesses were stable with December level and are not expected to change significantly in the first quarter. As we look into 2014, we expect Flex margin to be stable to slightly down due to the continuation of slow economic growth. However historical data suggest that Flex margin could improve as GDP growth accelerates.

Q4 SG&A level of 25.9%, excluding impairment and realignment charges, decreased 60 basis points from 26.5% in Q3 2013 and declined 100 basis points from 26.9% in Q4 2012 as we’ve begun to see the benefit of both productivity improvements from our recent hires and a partial benefit of the realignment activities taken in the fourth quarter.

As we move into the first quarter and into 2014, we expect to see continued improvement in these areas. But we are still finalizing some actions related to realignment. We would expect operating margin to be between 5% and 5.5% of revenue by Q2 assuming revenue between $315 million and $330 million in the quarter once the full impact of our realignment activities is realized and to continue to improve as we revenue grows.

As we look at our balance sheet and cash flows, our accounts receivable portfolio continues to perform well. Write-offs and the percentage of receivables aged over 60 days remain at low level. Capital expenditures for Q4 were $2.1 million. Adjusted EBITDA for Q4 excluding the realignment charges was $19.2 million which has increased $3.1 million year over year.

The firm had $62.6 million in bank debt at quarter end compared to $53.4 million in debt at the end of Q3 2013 and $21 million in debt at the end of Q4 2012. During 2013, the firm repurchased 1.8 million shares for $27.3 million and over the past eight quarters the firm has repurchased 5.2 million shares for $71.7 million. The $5 million is available under board authorization for future stock repurchases.

During the quarter, we also initiated a $0.10 per share quarterly dividend. Our strong cash flow profile allows ample opportunity to also evaluate further return of earnings for shareholders through additional stock repurchases.

With respect to guidance. The first quarter of 2014 has 63 billing days compared to 62 billing days in the fourth quarter of 2013. As has been widely discussed, the significant number of widespread winter storms to date in the quarter has had a greater than normal seasonal impact in our revenues. We estimate the impact of the storm to date at approximately $2 million to $3 million in revenue. Thus we have elected to give a slightly broader range in our guidance.

We expect Q1 revenue may be in the $298 million to $304 million and for earnings-per-share to be between $0.15 and $0.18. Gross margins are expected to decline from Q4 to Q1 due to an unexpected decline in search. Additionally, cost of sales will be negatively impacted by approximately 130 basis points due to increased payroll taxes in Q1. We expect gross margin to be between 29.9% and 30.2% for the quarter.

SG&A as a percent of revenue is expected to be between 26.1% and 26.4%. We expect the increase in payroll taxes from cost of sales and SG&A combined to negatively impact the EPS approximately $0.11 relative to the fourth quarter.

Our effective tax rate in Q1 is expected to be 40%. We anticipate weighted average diluted shares outstanding to be approximately 33.2 million in Q1. This guidance does not conservatively attract, if any, of charges related to the impairment of intangible assets, costs related to settlement of any legal matters, the impact on revenues of any disruption in government funding or the firm’s response to regulatory legal or tax law change.

We are very pleased with our progress in 2013 to accelerate revenue growth and improve bottom-line result. We believe we are better positioned than at any time in the firm’s history. Our business is concentrated in Tech, one of the fastest growing segments in staffing and it’s further supported by positive secular drivers. We believe we will sustain our revenue growth rates and expect operating margins to improve in 2014 and we remain on track to exceed prior peak’s operating margins of 7.4% as we approach $1.6 billion in annualized revenue.

Patrick, we’d now like to turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tobey Sommer with SunTrust.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you very much. I am interested in your perspective of how staffing, in particular Tech Flex staffing, is competing with alternative uses that your customers -- and methods that your customers may be able to employ to accomplish projects such as offshoring or consulting or outsourcing. Any perspective you could have on maybe how staffing is being looked at differently than in the past relative to those alternatives would be helpful?

David Dunkel

Tobey, it’s a great question, in fact, it’s one that I have had a number of discussions with CIOs while I have been out in the market the past year. The biggest change that I’ve seen in 26 years that I’ve been involved with Tech Flex at this point in time is that the CIOs are really looking at the global workforce. So they – instead of it offshoring used to be a cost play . Many of the more progressive CIOs aren’t looking at it from a cost play standpoint. They are looking for, where is it most efficient and where are the best talent pools to get various aspects of the overall lifecycle of development done.

So, I think that plays very well for us, especially when you look at our footprint on the high-end developers, project management, business analysts, systems analysts, that world, because that stuff has to happen on ground. That’s not stuff that you can offshore and do remotely, so many of them – this is part of why I think you see some of the offshore work coming back to onshore because they are making decisions that certain aspects of that work are more effective when you have the human communication. They also see the same dynamic happening with large organizations out there talking about bringing their workforces back in, because you can’t remove the human communication aspect in driving efficiencies and certain type of work patterns that have to take place.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you. I also wanted to ask you about the first quarter bounce back. It seems like it’s happening faster in terms of Flex volume than would normally occur. I am curious when would kind of a normal first quarter volume approach earlier mid-December levels?

David Dunkel

Historically, we more or so see getting back to those same levels on the back end of February or into the early part of March. And as I mentioned in my opening comments, we’re already actually higher from a net based standpoint and from an HIM standpoint. We’ve exceeded already our December levels. And then from a Tech standpoint, we’re just about approaching our December levels.

Tobey Sommer – SunTrust Robinson Humphrey

Okay, thank you. And just one more question, I will get in the queue. Related to your healthcare exposure, do you see hospitals working towards meaningful use in the transition of ICD later this year as being catalysts for demand?

David Dunkel

I think health providers in general are not ready for healthcare reform initiatives that’s inclusive of HIPAA, HITEC, EMR, ICD10 meaningful use. They are behind the curve in all those areas, which I think just provides greater opportunity for us not just from an HIM standpoint but also within our Tech business. And then also, we are seeing opportunities in our finance and accounting on staff business when we look at some of the front end and backend aspects of the [web] (ph) cycle.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you very much.

Operator

Our next question comes from Hamzah Mazari with Credit Suisse. Your line is open.

Hamzah Mazari - Credit Suisse

Good afternoon. Thank you. A question on the cost realignment, could you give us a sense – I know you’ve outlined a 100 basis points of margin expansion through that initiative. Could you give us a sense of how these savings roll through the P&L for the balance of the year or going forward?

David Kelly

So we took a number of actions in the fourth quarter, and so we realized some benefits in the fourth quarter of probably about $0.02. I think we had indicated that we expected benefit of between $0.03 and $0.05 once fully realized. When we get to Q2 is when we would expect to fully realize those actions, because they is still some carryover activities in the first quarter and then once we get into Q2 and beyond we will see that full realization of that $0.03 to $0.05 on a quarterly basis.

Hamzah Mazari - Credit Suisse

Great. And just a follow-up question, on headcount growth, I realized that’s below revenue growth right now, could you give us a sense of – do you feel you’ve built up enough capacity that we may begin to see some operating leverage in the model come through or do you continue to ramp up the headcount, what’s your thought process there?

David Dunkel

I will tell you, we’re going to continue to add headcount in high demand areas where we have productivity levels that warrant it. Although, as I think we said before, we don’t see adding headcount at the same level that we experienced on the backend of 2012, and then into the early parts of 2013. We’ve been adding headcount proportionately toward a revenue growth, about 90% of our headcount has been directed towards our Tech Flex operating model, and as I’ve mentioned, a high percentage of that on deliveries are realizing supply demand, it’s harder to get after the candid, so that’s where we have been ramping up our hiring. So we will continue to moderate hiring activities. Dave, I don’t know if you have any other comments.

David Kelly

Yes, I would add, so as we think about future state operating margin, this is a key expectation in the model. We laid out in the past to exceed peak margins. Our expectation is we’re going to get some additional operating margin in our estimates 1.2% is what we indicated as a result of this sustained pattern of growth rates exceeding hiring.

Hamzah Mazari - Credit Suisse

And just last question, I’ll turn it over. Do you have a sense of what the underlying market growth rate is in Tech Flex? Is it high single digits and you guys are surpassing the market by 1200 basis points, or how do you think about the underlying market versus your numbers?

David Kelly

Yes, tapping industry associates in 2013 and 2014 both, which is probably the most widely used information in the marketplace, projects growth in Tech Flex to be approximately 7% in 2014 after a 7% year in 2013. So obviously our growth rates have impacted back half of the year, significant decreases.

Hamzah Mazari - Credit Suisse

And you believe those numbers are right.

David Kelly

That is the best gauge that we have and certainly – yes, we don’t have any reason to dispute it.

Hamzah Mazari - Credit Suisse

Okay. Great. Thank you.

Operator

Our next question comes from Paul Ginocchio with Deutsche Bank. Your line is open.

Paul Ginocchio – Deutsche Bank

Thanks. Joe, just question around the acceleration of Tech Flex. Any way to distinguish between what’s the internal initiatives versus is the market accelerating? And then second, just because Tech Flex is growing so fast because there is - we hear about talent scarcity all the time in IT. Just wondering why yourself and others aren’t showing more gross margin expansion in Tech if there is such talent scarcity?

Joseph Liberatore

I know it’s two very good questions. Relative to internal, external, I have to go back to where Dave just mentioned. I think as we look at FIA numbers over the course of the last three or four years, they have been pretty constant and pretty much in that range through this entire recovery. So I would attribute our acceleration in performance to, it’s internal. No different than what we weren’t performing at the market, it was internal. Now that we’re out-performing the market it’s internal. Our teams have put forth tremendous effort not just in hiring people and ramping those people but it’s everything across the board. It’s the narrowing of our focus, it’s the upgrading of leadership. It’s the account assignments that we are putting people on. It’s narrowing our skill, recruiting effort so that people going after the high finance people, so when they find somebody we have multiple places to deploy that person. I mean this is wholesale. We’ve been after this for the better part of five, going on six quarters now and the teams responded and it’s showing up in the result.

Relative to gross margin, it’s interesting because it’s one that we’re still working through trying to really figure out what’s taking place in the marketplace, because having been in this business, the amount of time that I’ve been in the business, the cycle that looks most like this cycle would be dot come era in terms of supply demand imbalance. I mean if we go back and we look at our Flex margins during that cycle, we were in the low 27%. There’s one big difference though in that cycle versus this cycle. We haven’t seen GDP expansion in this cycle, which is unlike any other cycle that I’ve ever operated in, in terms of looking at -- this is happening topline revenue in the market expansion that’s taking place. So when we look at these GDP levels and we look at our clients’ inability to pass along the pricing to their end users, we don’t know how much of that is coming back to us.

Likewise on top of that, when we look at margins, I sit here and say it’s going been about 14, going on 15 years now, with the VMS, and VMOs have been integrating into the business. The clients have access to a lot more information, which is really driving a lot of their vendor consolidation because the large consumers of the services we provide, they fully understand the volume rate gain. And so there’s volume there, that gives you more security from your revenue, you gain operating leverage and efficiency there. There is some exchange from a rate standpoint now. I will say in our largest customers, we are seeing dollar GDP expansion albeit we’re not seeing margin expansion. So we are seeing bill rates, we are seeing bill rates go up. But much of that bill rate is going back to the candidate to attract and retain the candidate.

And then the last piece I would probably add to margin is the competitive landscape that we see today is unlike anything that I personally have experienced in 26 years in this industry. We have had quite a few professional providers that are in our space that have been absorbed by the clerical type firms which is driving a dynamic – we still have a very aggressive second tier marketplace of the local operators and regional operators and then you have a couple others that are really growing some revenue share that are driving margins down. But at the end of the day, I think the customers are paying market. What happens when GDP expansion comes about is really what the question would be.

Paul Ginocchio – Deutsche Bank

That’s great. And then if I could just on more – I appreciate the completeness of that answer. The year to date growth rate you quoted that would include the $2 million to $3 million of revenue?

David Kelly

The year to date growth – that’s exactly right. So one of the dynamics I think Tech Flex, Joe had mentioned that we’re almost back to the headcount level in January that we experienced in December. That is after a little bit slower start in the first couple weeks due to the weather impact on that. But yes, that includes that number I guess.

David Dunkel

And Paul, outside of the billable hours that we lose because of the weather impact, you also have an impact in terms of you have interviews that are cancelled, do you have interviews that are postponed, you have the late start. So even in spite of all those headwinds, I’m very pleased with where our rebound is. I wish I was sitting here and weather hasn’t been what’s been because I would be excited at this point in time about what Q1 prospects are.

Paul Ginocchio – Deutsche Bank

And is that 2 million to 3 million of weather hit proportionate to your revenue exposure by discipline?

David Kelly

Well, it is. It certainly is, Paul. We’ve got a strong concentration in the Northeast and the Southeast. So – but it’s pretty well distributed between Tech Flex proportionate to the size of the revenue stream.

David Dunkel

Yes, you get a little bit more revenue impact when we have weather conditions such as this. You will feel a little bit more in the finance and accounting product line, just because those people don’t have the ability to work as remotely as now much of our Tech Flex population, a lot of those people can get activities done remotely. And then when we look at HIM business, because of the transition that’s taken place there into a remote coding that business is actually almost ventilated from weather dynamic at this point in time, let’ say with the winter [ph] census in the hospital.

Paul Ginocchio – Deutsche Bank

Great. Thanks, very much.

Operator

Our next question comes from Mark Marcon with Robert W. Baird. Your line is open.

Mark Marcon – Robert W. Baird

Good afternoon. On the F&A side, you seem to be doing better than others. I’m wondering if you can just talk a little bit more about what you’re doing there, where the pockets of strength are and it looks like through January things continue to progress nicely. So just -- do you think that’s sustainable?

David Dunkel

Mark, I said it’s really -- there’s two pieces to that question. One is we were underperforming the market for a period of time and our teams have worked really on our operating model and getting much more outbound which is a theme that it’s not just in F&A, it’s across the enterprise which I think is making a difference. And how we’re balancing our resources from an outbound standpoint versus a delivery standpoint within our F&A model. Our FA people have done a nice job working on the model and of itself. So that’s playing a piece on it.

The other piece that has been playing is we’ve experienced double-digit growth in what I would consider more bulk-type FA opportunities and that’s not just the on staff opportunities, it’s also within FA where customers are looking to hire multiple individuals in a very short time and that’s really where our, I would say, our NRC integrated delivery strategy with the service built higher volume opportunity has really played very much in our favor.

Mark Marcon – Robert W. Baird

That’s great color. It seems like the margins have held up pretty darn well given that there’s more bulk. Is there a reason for that?

David Dunkel

Part of that is that -- because you’re looking at just an average margin there. Part of that is the transitioning of our business because in our core FA business we’ve been moving upstream a little bit more there and out of the lower end FA business. So that’s part of where you see some of that margin improvement taking place when you look at the margin profile as a whole because actually in the large customer footprint we’ve actually had some margin compression though it’s even offsetting that as well.

Mark Marcon – Robert W. Baird

That’s great. And then can you just expand a little bit with regards to the increased focus on the government services side? What are the specific areas that may be de-emphasized in the areas that are specifically being emphasized and how we should think about that?

David Kelly

Yeah, Mark. This is Dave Kelly. So our objective in the changes that we announced were to basically focus on what we believed to be a higher quality revenue stream in that business and that’s the solution-based longer term project-based business focused on prime and try to deemphasize some of those areas that weren’t part of that core business. So specifically we’ve mentioned in prior quarters we had a small product business that we still have that we are looking to de-emphasize as well as some of the shorter duration things that might be better -- basically pure staff augmentation business that don’t lend themselves specifically to the solutions provider.

Mark Marcon – Robert W. Baird

Okay. That small product that you’re referring to, that’s a defense related product?

David Kelly

That is the Trauma Training Unit that we have and so as we kind of think about this business going forward, we look at the Q1. As Joe mentioned, our expectations of quarterly revenues are basically flat inclusive of this change.

Joseph Liberatore

Yeah, Mark. This is consistent with the strategy that we’ve been executing across the entire enterprise, which is to simplify things, to narrow our focus and hone in and so that’s why we’re challenging every aspect of our business so that we do those things that we know we can win and compete that are core to our business.

Mark Marcon – Robert W. Baird

Great. And what’s the -- what are the margin profiles on the prime relative to the areas that you’re de-emphasizing?

David Dunkel

Well. Prime business gives us a greater degree of control as well. But typically our prime business is a more profitable piece of business moderating that in the government space, obviously, as some of the initiatives with the administration has out there to be more cost-conscious and did things on a lowest cost technically acceptable bid, decision based. So there’s pressures even when you are a solutions provider on margins there. It’s our expectation that margins in that space well are going to be flat.

Mark Marcon – Robert W. Baird

Great. Thank you.

Operator

Our next question comes from Jordan Macca [ph] with Macquarie. Your line is open.

Kevin McVeigh – Macquarie Research

Great. Actually this is Kevin. Hey congrats on just the great job and the guidance which is really strong. As we think about the cost actions that you guys announced last year kind of $0.03 to $0.05, how did that impact Q1? And then as we think about that through ‘14, how should we think about kind of -- is it a pretty straight line 3 to 5 or does that step up through the year? And then just organizationally how the folks receive it, obviously the staff really reacted well too but how was it from an organizational perspective?

David Dunkel

I will let Joe talk about the organization but as relates to the cost, Kevin. As I mentioned -- we saw a partial benefit of that. We said it was going to be about $0.03 to $0.05. And as we look a little bit more closely where we’re at now, we probably got about $0.02 in the fourth quarter and we still got some carryover work that’s going to probably will benefit for another penny or two in the first quarter and then fully realize the benefits. So we’re looking at – we said $0.03, $0.05, probably $0.04 to $0.05 on a quarterly basis and on an ongoing basis from Q3 forward.

Joseph Liberatore

Yeah. I’d say on how the internal people have received things, -- this is a message from day 1 as we started to go through our succession planning. We’re playing for win and we’re playing to be the gold standard. We’re not playing to be average and our performance with average. So I’d say that people that are here they understand that. They have all parted with friends and co-workers, they’ve been here for a while, but they understand the business to move forward for the health of the firm.

So I’d say it’s very well received. I don’t want to necessarily stay with the non-event, but I think now people are really starting to see the by-product of the activities that we’ve taken in terms of removing a lot of the metrics of the activities that were within the firm, streamlining, decision making our ability, to operating in agile type environment, to move more rapidly and adjust to the demands that are coming upon us. We’re seeing that directly on customer decisions and customer fronts whether it’s opportunity or problem resolution. We’re also seeing it from our revenue enablement standpoint that are supporting those revenue producers and revenue generators in the field, to drive decisions so that we can streamline things and respond more quickly to the demands that our clients are placing upon us. So I would say right now that the tonality within the firm is extremely positive. People are excited about where we are and the prospects of what lie ahead and they’re ready to play ball and take more market share.

Kevin McVeigh – Macquarie Research

Joe, it seems like this is the first quarter and while I can’t remember – or Dave, whoever want to comment on, the revenue actually looks really strong relative to [indiscernible] decision and we’re guilty of lot of mis-modeling it? Is that a function of just a better macro environment, some of the more kind of revenue-producing investments you’ve made in the last of couple of years, kind of maturing or really what’s driving that, because it’s really, really impressive guide particularly given kind -- obviously -- I know the weather is impacting a little bit but that’s a really a big of a headwind but the revenue looks really, really good relative to where consensus had?

Joseph Liberatore

I think yes to all of those, Kevin. If you look at Q4, we built throughout the quarter. So the December levels coming out at Q4 were really at the highest levels of Q4. So when we came down, we kind of came down to an average level of -- based on what would be the normal fall-off – and our team is really focused on the rebuild, somewhat mitigated by the weather. We came right out of the end of the year and bang, we got the East Coast snowstorm and we got this polar vortex stuff and you might [ph] laugh about it because it really is real. I mean there is stuff happening all over, tomorrow Atlantic gets it. So I think the weather has impacted our ability to do even better because our team did come out of the year with an expectation of hitting that prior peak in December earlier. So the weather slowed us down a little bit but we performed well coming out of the end of the year.

Kevin McVeigh – Macquarie Research

Got it. Thanks. And again great job.

David Dunkel

Thanks Kevin.

Operator

Our next question comes from Randy Reece with Avondale Partners. Your line is open.

Randle Reece – Avondale Partners

Good afternoon. I was wondering what the changes -- strategic changes in government solution will look like in terms of the margin structure of that business -- gross margin and cost margin?

David Kelly

The impact of these changes on government business, I think I mentioned, our expectations are we are looking at a relatively flat trajectory for that business both on the top line and from a margin perspective. We've been talking over the course of 2013 that they have done a nice job in winning some new business, a lot of those wins are solution based business that we look to build on with some very important customers, places like VA [ph] which is very much sheltered from a lot of sequestration impact. So we’ve got a very solid foundation for that business. It’s going to give us an opportunity as we're into 2014, truly transition out of some of that – on some of the other business, we look severe changes to the trajectory of the business.

Randle Reece – Avondale Partners

And then technology staffing business, if you look on a year-over-year perspective, you mentioned that large customers might have outperformed. Are there any differences in other ways you can dissect the business such as more project staffing versus augmentation in the other verticals, the way you look at it?

David Dunkel

Randy, I would say from a project standpoint, staff augmentation, I mean we are seeing an increase in mix of what I would consider statement of work type business compared to pure staff aug but at this point in time I don’t think that’s significantly moving the needle. And part of that’s by product of the relationship building that we've been after with our clients. So we’re getting opportunities to take a swing at business that’s a little bit more upstream. So we are seeing a little bit more on that front, so we’re organizing a little bit more around the business in those areas and where we see the high demand areas.

When we look at mobility, and we look at business intelligence, we see that broad base across our entire customer base. So we are doing some more statement of work, project oriented type activities in those areas. From an industry vertical standpoint, as I mentioned in my opening comments, I mean our top 6 industries have all performed very well year-over-year. So that's pretty much the backdrop that I would give you there.

Randle Reece – Avondale Partners

I have heard from other players in business that the year was very inconsistent across the geographic markets that – a big differences in performance between Boston, New York, Chicago, Austin and so on. But they're anticipating maybe more consistent comps this year. Do you have a feel for that?

David Dunkel

My only comment related to that having been in this business 26 years give me a market that is averaging – give me an above average leader in that marketplace and they will perform. When we look at opportunity by geography, we only go to one place when we are not capturing market share growing the business. And we haven't done our job in terms of getting the best leader we can get in that marketplace because the markets – when we are sitting here at 3% market share, how can I use the market geography as an excuse for not performing, it’s internal. Every one of our markets broad base across geographies has demand, has job flow and has needs.

Randle Reece – Avondale Partners

Thank you very much.

David Dunkel

Thank you Randle.

Operator

Our next question comes from Morris Ajzenman with Griffin Securities. Your line is opne.

Morris Ajzenman – Griffin Securities

Hi guys. A number of quarters ago, you articulated specifically really dramatically stepping up the hiring the professional staff, and it appears to be really playing out helping currently. My question is going back to a number of quarters back, you gave us different book [ph] as a percent of total staffing under one year experience to two years experience, two to three and above and you gave us a percent of your total staff and their productivity and clearly picked up as an ace. Can you kind of refresh as to where you were or entering the fourth quarter based on those bucket and their level of productivity? And then based on your plans you have currently, what would that look like as we exit 2014?

David Dunkel

So I would say that, the good news is, even with the hiring increase going back to Q4 2012, we remain very consistent with our performance in each one of those categories. So while hiring more people and having more people transitioned into the different buckets, our average performance for the most part has stayed very constant. So I view that as a big positive. What I had shared back then is typically our four year plus population is about 50% more productive than our two to four year population. Our two to four year population is about 100% more productive than our one to two-year population. And then we’re about 200% increase when we have somebody go from one year into the one to two year category.

Where we are right now is about 33% of our total population has greater than two years. So that’s what I have referenced in my opening comments that – in that less than 15 month category we believe we have a lot of capacity that’s building.

Morris Ajzenman – Griffin Securities

And can you kind of project where that would be 12 months out based on internal sort of hiring, how is that further ramps up as a percent of total staffing, plus two years whatever?

Joseph Liberatore

The only reason I can’t tell you where we would be on a percent standpoint because a lot of that is driven by what activities happen on the front end, which moves that. I also don't want to mislead you when I stated that our two plus year population is 33%, we have a lot more people in that two plus year population today than we did a year ago. So we are moving people into those populations and we are holding onto them at higher rates than we've done historically. So all the populations are growing in number – in aggregate numbers.

David Kelly

This is Dave Kelly. I would add to that. So as we look at decisions for hiring on a go forward basis we look at the productivity metrics and the distribution of people that Joe mentioned. But our objective here is we can – we have to look out because of the ramp is to continue to hire, continue to add people on a consistent basis to sustain this revenue growth. And we’ve got probably 20 years of information that we’ve modeled to help us determine the appropriate level of hiring that we should have in any particular quarter. But certainly our bias is to continue to add people and sustain the growth rates that we have had, and we believe that we can add as Joe mentioned at levels that are less than the revenue growth rate that we currently have to sustain that.

Morris Ajzenman – Griffin Securities

Right. But you made comments earlier, your rate of additions is going to be clearly at a lesser rate than it was a year ago. So based on that formula and how it matures, you are going to have a sales force that’s going to be more productive because you are not hiring at the same aggressive rate [ph] than were a year ago. Is that a fair inference?

David Kelly

I think that, that’s right and then the other piece of it is right, we can generate additional productivity with additional tenure – you are right – it’s going to allow us to hire at lower levels than a year ago.

Morris Ajzenman – Griffin Securities

That’s part of what Dave shared I believe at JPFT [ph] conference, Michael and Dave when they presented relative to future state operating margin, I mean that’s a big part of where operating margin leverage is going to be coming from?

Last question, trade receivables, you talked about days sales outstanding being under 60 days thereabouts. In the third quarter trade receivables were actually down but year-over-year it was 151 and 179. Clearly I guess we should look at it as reflection of strong demand that is driving revenue growth over the next quarter or two. Is that a fair way to look at it or is there sort of unturned other sort of ramification out of that?

David Kelly

I would say – there is two things. Certainly the first piece as you mentioned – the revenue growth year-over-year at 12.3%, it's a big driver to the increase – in the amount of receivables. The other thing that I would say in terms of days sales outstanding, Joe mentioned the success we’ve had with larger clients and growing their revenue stream, with very high credit quality client. But what we see when we get to a larger client terms that are somewhat longer duration than some smaller client, so that will also – we have strong growth of our larger clients, to increase accounts receivable days sales outstanding. So it’s really those two things in tandem that are driving that.

Joseph Liberatore

And just on that as well also with some of those larger consumers, they are very sophisticated and many of them built into their contracts, to actually rebate for repayment. So you also have that side that you get the positive aspect from the large clients.

Morris Ajzenman – Griffin Securities

Thank you.

David Dunkel

Thank you Morris.

David Kelly

Thank you Morris.

Operator

Our next question comes from Tobey Sommer with SunTrust. Your line is open.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you very much for letting me fit in another question. I assume to be wintry Atlanta.

David Dunkel

[Indiscernible].

Tobey Sommer – SunTrust Robinson Humphrey

I [Indiscernible] call tonight that tomorrow office will be closed. I wanted to get a sense – maybe Dave, you talked about the temp job growth being surprisingly strong given the tepid economic environment. What kind of growth and maybe pricing gross margins might the business be able to achieve, for some strange reason we do get an extra point and point and a half of GDP growth?

David Dunkel

Yes, as Joe said well, I think in the end it comes down to what the end customer – what are they able to pass along and we have seen relatively low inflation to deflation for the majority of products that are out there. So when you think about it if they are able to pass along price increases, then we are going to see those margins start to expand. In the meantime I think we’ve done exceptionally well in price in this kind of an environment. This is new for staffing because historically we would not be growing at these levels, at this level of GDP. So it’s actually I think a combination of factors, that all of the regulatory changes, uncertainty and I believe finally we have seen the secular shift away from seeing staffing as just a something to be used during the cycle to being a strategic part of a plan for an organization where they have seen the benefit of it, certainly project cycles and so forth and there are changes. So I think we are entering a new era for staffing as a whole, which has benefited us, and benefitted others in our industry and our industry as a whole is actually in a time of prosperity and we see that continuing for the foreseeable future.

Tobey Sommer – SunTrust Robinson Humphrey

Last question for me is, within the financial services area, in your Tech flex, has growth from that customer set than above average?

David Dunkel

Well actually growth on a year-over-year standpoint has been pretty consistent with what we are seeing across-the-board and I will say that’s in combination with -- that's one of our two largest industries. So it’s consistent on a percentage basis on a much larger number.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you very much.

David Dunkel

Thank you.

Operator

This ends the Q&A session. I will turn it back to David Dunkel, Chairman and CEO for closing remarks.

David Dunkel

All right, well we appreciate your interest in 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 our consultants and clients for allowing us the privilege of serving you and we look forward to talking with you again for our first quarter call. Thank you very much.

Operator

Ladies and gentlemen, thanks for participating today’s program. This concludes the program. You may all disconnect.

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