Executives
Tyra Tutor - Senior VP, Corporate Development
Tim Payne - President and CEO
Bob Crouch - Senior VP and CFO
Analysts
Kevin McVeigh - Credit Suisse
Andrew Steinerman - Bear Stearns.
T.C. Robillard - Banc of America Securities
Mike Jacob - Suntrust Robinson Humphrey
Clint Fendley - Davenport Capital
James Janesky - Stifel Nicolaus
Michel Morin - Merrill Lynch
Tobey Sommer - Suntrust Robinson Humphrey
MPS Group Inc. (MPS) Q4 2007 Earnings Call February 7, 2008 10:00 AM ET
Operator
Good day and welcome to the MPS Group Inc. Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Senior Vice President of Corporate Development, Ms. Tyra Tutor. Ms. Tutor, go ahead.
Tyra Tutor
Thank you and good morning. Welcome to MPS Group's Fourth Quarter 2007 Earnings Call.
Before we get started today, the company would like to caution all listeners that the information provided today that is not historical, should be considered forward-looking information. All forward-looking information is subject to uncertainties and risks that maybe described in today's call or described in our press release issued this morning that was furnished with our Form 8-K also filed this morning. And in other filings including our most recent Form 10 K.
Should any of these risks, uncertainties or other factors materialize, or should underlying assumptions proved incorrect, actual results, performance or achievement of the company may vary materially from those stated or implied by forward-looking statements made today. As you all know, forward-looking statements are made based on information available today, and are not guarantees of performance.
In addition, during this call and in our press release, we have presented non-GAAP financial measures. Please consult both the press release and our Form 8-K for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measure. Today's press release and the Form 8-K are now available on our website at mpsgroup.com.
Now, I will turn the call over to MPS Group's President and Chief Executive Officer, Tim Payne.
Tim Payne
Thank you, Tyra. Good morning everyone and welcome to our fourth quarter 2007 earnings call. We appreciate your attendance. Again, my name is Tim Payne, I'm the CEO of MPS Group, and speaking with me will be Bob Crouch, who is our Senior Vice President and Chief Financial Officer, and also Richard White, who is the President of our Beeline business unit.
In our call today, I would like to briefly touch on results for the quarter, and give our assessment of the current business environment as it pertains to demand for our staffing and permanent placement services.
Next what I'd like to do is to provide a few highlights for the quarter, from our individual business units. You make have learnt recently that our Beeline unit will soon be completing the acquisition of the assets of Ensemble Chimes Global, which recently declared Chapter 7 Bankruptcy.
We've received a lot of interest in this acquisition and question. So, as part of our business highlights today, I am going to ask Richard White to provide us with an update on this acquisition.
After our Beeline discussion, Bob Crouch is going be providing us with detail financial analysis of our fourth quarter, and also talk about guidance for our first quarter. And at the end of all this, we will wrap the call and then take questions from call participants.
With respect to our fourth quarter, we are really pleased with the results. Revenues came in at $570 million, which was up 17% versus last year, and our earnings per share were $0.24 which was up 20% from last year also. Both revenue and earnings were above the range of guidance that we had previously provided.
As for the current business environment, a couple comments. Obviously there has been a lot of discussion lately regarding the potential for an economic slow down in 2008. Currently, we are not seeing broad based signals that would indicate a hiring recession is imminent, and in general demand for our services appears to be very solid both in United States and Europe.
Demand for permanent placement services remains good, and we believe this is significant because employers tend to freeze full time hiring, when they believe that there business is about to softened and this does not appear to be happening.
We have heard some negative rumblings from clients with direct ties to the residential housing market such as home improvement retailers and mortgage services. As all of this relates to activity at year end, the fall off in billable headcount that we saw was not as large as it has been in the past two years, and the bounce back effect, which the amount of hiring which takes place basically from January 1 to mid-February. The bounce effect was similar to what we saw in the past two years, with the exception of those certain areas that are closely tied to residential real estate.
However, just to clarify this, the current bounce back that we are seeing is much stronger than we would expect to see in a recession year, such as what we saw in 2001. So, all-in-all, it's our current belief that the demand and hiring environments remain positive, and we are going to run our accordingly.
Now a few comments about our business unit performance. Here in the U.S., we saw a very nice growth from our professional staffing units, in particular growth was strong in Entegee, our engineering staffing unit and Special Counsel, our legal staffing unit. The engineering market is a very interesting right now, as we seem to be seeing a general shortage of engineers both in the U.S. and in Europe.
As for the legal market, we have been seeing a nice uptick in large document review projects, which contributed to the good results for the quarter for Special Counsel. In our US Professional Staff segment we also continue to see good demand for permanent placement services, with permanent placement fees up 29% versus last year.
In our European Professional Staffing unit known as Badenoch & Clark, we are very pleased with how we closed out the year. On an organic basis for the quarter, revenue was up 11% versus last year. Badenoch & Clark's operating income for the quarter was up nicely as well. We saw a good increase in gross margin which resulted from both in increase in staffing margins and permanent placement revenues. We continue to expand the Badenoch & Clark business across continental Europe and just recently we expanded to Asia and Australia as well.
Turning now to the Information Technology front, we saw a steady growth in our Modis U.S. unit at about 6% versus last year and also in Modis International, our U.K. based IT business which was up about 8% on an organic basis versus last year.
We continue to see gross margin expansion in Modis International, which I think as all of you know, is something we have been working on for some time and has contributed to a very sizeable growth in operating income for the quarter. Our IT earnings in the US were somewhat negatively impacted by a write-off of receivables due to the Chapter 7 Bankruptcy Filing of Ensemble Chimes Globa. And just to clarify, this write-off was really in our Modis division; the staffing provider, it really had nothing to do with our purchase of the assets of Ensemble Chimes Global.
But, overall we believe that the IT staffing market appears to be solid in both the US and in Europe, and again we are going to run our business accordingly. So, as a final unit comment, I would like to turn to Beeline for just a moment and ask Richard White, who is the President of Beeline to give us an update on the ECG acquisition. So Richard?
Richard White
Thank you, Tim. Good morning. My name is Richard White and I am President of Beeline. I am very pleased to have this opportunity to share with you a brief update on Beeline's pending acquisition of the Ensemble Chimes Global assets. Throughout the discussion I will refer to the company as ECG and software as Chimes, in the general class of softwares, VMS or Vendor Management Solutions.
As we assess the situation surrounding the ECG's Chapter 7 filing, we realized this had the potential to be an exciting opportunity for Beeline. While there are still questions to be answered as we continue to work through the transaction and transition process, additional feedback from our potential new clients, suppliers and employees has reinforced our belief that the deal will provide Beeline an opportunity to grow its market share, while returning some stability to a disrupted segment of the VMS market.
Beeline currently processes in excess of $2.3 billion in client spending on contingent labor and our current install base of more than 60 VMS clients makes us an industry leader.
Before walking through our rationale for the acquisition, I want to make it clear that prior to deciding to move forward with this opportunity, we spend a considerable amount of time devising a plan of attack, which include the strategy that protected the current support and service levels we offer our existing Beeline clients.
We value these relationships and realize in maintaining our delivery and service levels to our current installed base is our first order of business each and everyday. But clearly, Beeline is said to purchase the intellectual property and the tangible assets of ECG after being the winning bidder on January 23.
We expect to take full possessions of the assets on February the 8th. These assets include the software, hardware, data center arrangements, procedures, practices, client list and any other information housed by EGC. We did not acquire the client and supplier contracts, or any of the liabilities associated with Axiom or ECG operations, which means we are not responsible for any unpaid supplier receivables. While this creates the need to enter into new agreements with the existing clients and suppliers, it also provides clarity to all involved with respect to our role.
We're also approved and recommended by the trustee to process time prior to our assets takeover. I am pleased to say as I share this update with you this morning all the applications are operating in the same manner and at the same level of availability as prior to the bankruptcy event.
Now I would like to share a rationale for undertaking this acquisition. At a bare minimum the acquisition provides Beeline a means to grow our market share of VMS installations. Many of the accounts impacted by the active bankruptcy have been long time users of the Chimes application. And as a result there were many instances of sizeable investment made by clients to integrate the Chimes applications and service into their own systems and business processes.
By returning the existing applications to a stable and predictable state, we believe many ECG clients will opt to continue to utilize the software at least for an interim period. We view this in part as an exercise in business continuity, and as a result believe that the notion that a new solution can be just be dropped into this complex situations, while doable sometimes it's not practical. We also believe that some clients will opt to bringing their process back in house and consider going after RFP for replacement product.
By positioning ourselves to work with these clients during the interim, Beeline has also positioned itself as a strong and viable candidate as a replacement service in technology, should they decide to go after RFP in the future.
Lastly, over the last several years, we've had many interactions with the ECG client base. Our understanding of the market and familiarity with these clients has allowed us to respond quickly in this time of crisis and disruption, and allowed us to evaluate the opportunities rapidly. Our strategy moving forward involves three basic phases. One; continue to stabilized the applications and the services. Two; retain the key accounts and re-established relationships and service. And three; provide a long-term transition strategy to Beeline software platform.
So far we have been successful in the stabilization phase. Stabilization of the applications was aided by Beeline immediately hiring a core technology [enhance] and service team intimately knowledgeable of the installed base.
I am pleased to say; that ECG key employees have joined Beeline and are committed to return these assets to service, as clients return in the fall on either an interim or permanent basis will add the onsite and support staff required for the incremental work load.
Like you know that we've also been working diligently towards entering interim arrangements with the key accounts and sponsors, it is a little early to provide a clear accounting in the results, but the initial indications are very encouraging. Since there isn’t one thought that fits recovery plan, we're working each clients, provide the application as well as the level of onsite and offsite support required.
In summary, this opportunity for Beeline is perfectly aligned with our strategy, with the focus on workforce solutions Beeline is positioning to provide a full suite of software and service that help our clients attract retain and develop talent. We've long been a leader with our VMS with our software and managed service solutions.
In recent years, we have continued to expand our product lines to encompass a full time management suite which includes applicant tracking, employee development, learning management and e-learning creative services. We recently expanded these footprints to include recruitment processes outsourcing as a service to help clients with their full time employee recruitment sourcing needs.
Before returning the presentation back to Tim, I’d like to just conclude by recognizing the hard work of our employees including our new Beeline employees from ECG and the continued support of our clients in helping us grow and mature our product offerings. Tim,
Tim Payne
Thank you, Richard. At this point our Chief Financial Officer, Bob Crouch is going to provide us with some detailed financial updates
Bob Crouch
All right, Thanks, Tim. I'll give a brief summary of really the consolidated highlights for the year and then dig in to the fourth quarter, and then hopefully update you guys with some guidance for the first quarter ’08.
And before we discuss the quarter, I want to point our highlights for December 31, 2007. We had revenue of $2.172 billion, our EBITDA was $154 million, operating income of $134 million, our diluted EPS was $0.86, and we have cash flow from operations of $132 million, which I think was a great year for MPS in ’07.
As we look at the fourth quarter, which was probably our best quarter in ’07, and we reported revenue of $570 million which as Tim said was above our guidance of $545 million to $560 million, mainly because the December trends were very strong, our earnings per share of $0.24 was above our guidance of $0.22 to $0.23 that we gave in October.
When you look at the consolidated results, our revenue was up 17.3% without the impact of currency. Quarterly revenue was up 14.5% and without the effects of both, currency and acquisitions, revenue increased 9.4% from the prior year. Total permanent placement revenue was 6% of consolidated revenue in the quarter, which was up from 4.4% in the fourth quarter of '06.
We are very pleased to report a gross profit margin of 29.5%, which was an increase of higher 8 basis points compared to the prior year and 50 basis points higher than the third quarter of '07. Our SG&A expenses were 22.2% of revenue, compared to 20.7% in the prior year and were up 80 basis points as a percentage of revenue compared to the third quarter '07, and I will discuss that later.
In the fourth quarter, we recognized a bad debt charge of approximately $2.5 million, as Tim said, related to Chimes bankruptcy, which was mostly in Modis and was a primary reason SG&A as a percentage of revenue increased sequentially. As we discussed in our third quarter call, the majority of the year-over-year increase is due to the increase in our headcount of over 10% from a year ago, mainly in the form of sales and recruiting staff.
Our consolidated EBITDA was $41.9 million, up 23% and our operating income was $36.4 million, which was up 22% from the prior year. Net income for the fourth quarter was $23.6 million, up 15% from the fourth quarter of '06. Our EPS was $0.24, up 20% from the prior year and our tax provision for the quarter was 37% as we recognized the net benefit related to our state taxes.
As we look at our segments, in our North American Information Technology Services segment, we reported revenue of $161.1 million, which was an increase of 11.3% compared to the prior year, and without the effect of an acquisition it grew 7.4% on an organic basis.
Segment gross margin was 30.2% for the quarter, which was up a 110 basis points when compared to the prior year. Modis increased its permanent placement revenues as a percentage of revenue to 2.5% from 1.7% in the prior year. SG&A expenses increased when compared to the prior year in each unit, in our North American IT segment as the company made investments over the course of the year.
Most notably in our Modis North America unit, we increased our sales and recruiting personnel earlier in the year, as we've previously discussed, in addition it's in Modis where we recognized the write-off the Chimes receivables of $2.5 million in the fourth quarter.
In our Beeline unit, we've been hiring personnel to prepare for new client implementations which have been order to us, but we've not yet implemented. In addition, we will experience an increase in expenses of Beeline in the first half of '08 as we integrate the Chimes acquisition.
Operating income was $9.5 million, while EBITDA was $11.6 million. Both were down from the prior year due to the bad debt charge associated with the Chimes bankruptcy.
North American Professional Services segment reported revenue of $177.3 million, which is an increase of 15.3% compared to the fourth quarter of last year, and without the effect of acquisitions this segments grew 10.8% on organic basis. This segments gross margin increased 120 basis points to 32.6% for the quarter, increasing its perm placements as a percentage of revenue to 5.9% from 5.3% in the prior year, and increasing its contract margins by 80 basis points year-over-year.
SG&A expenses as a percentage of revenues increased by 30 basis points compared to the prior year, and operating income was $19.6 million, which was increase at 26% compared to the fourth quarter of '06, and EBITDA was $21 million, which also represented an increase of 24.4%.
As I switch the International segments, the International IT Services segment reported revenue of $82.4 million, which was an increase of 14.5% compared to the fourth quarter of '06. Excluding the impact of changes in foreign currency exchange rate, the international IT services units' revenue was up 7.7% versus the prior year quarter.
The company strategy in this unit is more focused towards gross margin improvement rather than revenue growth and it showed once again, as the unit increases gross margin by 160 basis points to 18.1% from 16.5% the prior year with increases coming both from 130 basis point increase in contract gross margins, as well as increasing direct hires as a percentage of revenue to 2.8% from 2.5% in the fourth quarter of '06.
SG&A expenses as a percentage of revenue were down to 220 basis points from the prior year. This is primarily due to the elimination of an unprofitable operation in '07 and to additional restructuring efficiencies.
Operating income was $5.1 million, which was an increase of 165% compared to prior year and EBITDA was $5.9 million, which was an increase over 137%. International Professional Services segment reported revenue of $149.2 million, which is up 29.3% compared to the fourth quarter of '06. Excluding the impact of changes in foreign currency and in acquisition, International Professional Services segment revenue was up 11% versus the prior year quarter. This segments gross margin was 31.5% during the quarter, as compared to 27.8% in the year earlier period.
Permanent placement revenue accounted for 12% of segments revenue as compared to 8% the prior year, and this increase in permanent placement was both due to the internal execution, combined with the previously announced acquisition of Judd Farris, which had large concentration of permanent placement revenue.
SG&A expenses increased both sequentially and when compared to the prior year due primarily to the increase in expenses associated with the Judd Farris acquisition. In addition during the second half '07, the company invested in the startup operations in the high-end permanent placements sectors and in continental Europe which resulted in an increase in our cost structure.
On a sequential basis before the acquisition and exchange rates, SG&A expenses were constant in real dollar terms. Operating income was $10.3 million, which is an increase of 40.3% throughout the prior year and EBITDA of $11.7 million, which has increased 41%.
As we look at our balance sheet, our balance sheet continues to be very strong, our cash position as of December 31 was $105.3 million and we had $2.5 million in short-term investments. During the fourth quarter, we generated approximately $52 million in operating cash flow, which resulted in $132 million for the year.
Our CapEx for the quarter was $5 million, and as far as from a buyback standpoint, during the quarter the company repurchased 4.7 million shares of our stock for $54 million. For the year-ended December 31, ’07, we purchased 7.8 million shares for a total price of $95 million. The company’s Board of Directors recently approved an additional 75 million stock buyback authorization which when combined with the remaining 16.2 million from the previous authorization leaves our current authorization available at 91.2 million for future buybacks.
When we look at trending standpoint, as we entered the fourth quarter, and we had a great fourth quarter, and the big question was, how would the trends play out on both the temporary and direct hire side as we move the December and whether or not we experienced additional seasonal impact of lower direct hire and holiday time-off in last couple of weeks of December. I think I mentioned it before the encouraging thing is that our business on both the temporary and direct hire side maintain the momentum through December and the holiday effect was not as large as we had anticipated.
As we transition from for that, the last few weeks of December through the holidays and in to January, we always experience a seasonal fall-off of headcount of the temporary side as we started up January. The encouraging trend as Tim talked about before was that on the temporary side of the business that the year end fall-off was slightly less than what we experienced last year and the rebound in January was very similar to what we experienced last year, except when you consider certain clients that have impacted by the mortgage and housing and related slowed down.
On the direct hire side, we are generally experiencing stronger trends than we did experience last January, so that's very positive. So based on our current trends, we are encouraged as we enter in to '08 by the relative strength we experienced in December and now it appears have carried over to January. However, we are very cognizant of the fact that many economists are forecasting a slowdown or recession and we recognize that we will not be immune to either one of these situations should they occur.
So with the above trends taken into consideration combined with the seasonal impact of payroll tax related expenses we recognized in the first quarter every year, our expectations are for the first quarter of '08 for revenue between $550 million and $580 million, and earnings per share of $0.18 to $0.22. The high end of our range would represent a GAAP increase in revenue of approximately 14% and an approximate organic growth rate of 9%, while the low end assumes 8% and 3% respectively.
At the high end of the range as soon as we experienced growth in billable headcount and from placement fees consistent with the rates we experienced in the fourth quarter, the low end of our range is an attempt to quantify what we believe our results would be, if we are impacted during the first quarter by a potential economic slowdown.
Our earnings guidance includes approximately $0.015 per share quarterly expense resulting from equity compensation and assumes our effective tax rate will be approximately 39%. In addition, we estimate our share count to be approximately 95 million in the first quarter based upon our current shares outstanding as of today's date.
Tim, I'll turn the call back to you.
Tim Payne
Thank you. To wrap things up this morning, I would like to take a few moments to reflect upon some of the changes that have taken place in our company since the 2000-2001 timeframe. With all the talk recently about a potential hiring recession in 2008, I believe this will be helpful because it will allow everyone to assess how the company is positioned in the event if there is a recession in 2008.
The last hiring recession which for us occurred primarily in the United States, took place roughly form March of 2001 to June of 2003. Since that event and partly as a result of lessons learned in that event, we've taken a number of steps that we believe make the company a better performer in good times and more resilient in not so good times.
What we've done is create greater diversity both from a geographic and a services standpoint, and we've also changed our business model so there is more variable cost in nature. So, let me make a few comments now to illustrate what we've done over these past few years.
In 2000, roughly 60% of our business was in the Information Technology Specialty. We believe this is significant, because the IT staffing is generally more cynical than the professional staffing specialties. Today IT services represent just 43% of our mix of business, with the remainder represented by professional disciplines.
The way that we've accomplished this was not by focusing less on IT, but by rapidly growing our other specialty such as Accounting, Healthcare and Legal Services. To put this in perspective, today our Global Accounting business is over $650 million, our Legal business is over $160 million, and our Healthcare business which really didn't even exist until 2002 is over $100 million.
So these relatively higher margin businesses now [leave us] better able to perform well in up cycles and also help to make us more variable in down cycles. A second goal of ours over the past two years was to expand internationally and improve our geographic diversity.
In 2000, over 75% of our business was in the United States, today just 57% of our business is in the United States, and we have expanded to a total of 13 countries. We expect that within a few years our business mix will be 50% United States and 50% International, with a good part of our international growth occurring in Continental Europe. We believe that this geographic diversity will make us less susceptible to a down turn in any one corner of the world.
Another important step we took was to make our business model more variable cost in nature. Looking back to the 2000 or so timeframe, we still have a good portion of our business tied to a, so called bench model that uses salaried billable staff. And while we still have some bench staff today and this is appropriate given some of the businesses that we're in. The vast number of our billable staff today work under hourly arrangements. This helps to make us very nimble in the event that we see staff reduction by clients, since the cost of our billable staff tends to be eliminated very quickly when there are such events.
And finally, as most observers know, we have been focusing on and we've made great strides in recent years in growing the amount of permanent placement services that we deliver to clients. This was an important issue for us because permanent placement is a very profitable part of our business that does very well during strong hiring environments.
And well arguably this is an area that could fall off somewhat during a hiring downturn, but it's important to note that permanent placement still represents only about 6% of our overall business. So they would not likely be a large negative impacted if there was such occurrence.
We actually have a longer term goal, while continuing to grow our term business and we hope to get it at some point to about 10% of our overall total business. And then, just looking ahead on one last financial note as Bob pointed out, we do have a strong balance sheet with over $100 million in cash and we have no borrowings on our $250 million credit facility. So financially we feel pretty well positioned as well.
So thanks again to all of you today for your attendance. We are entering 2008 under the belief that we will continue to see a positive hiring environment. But in the event that we don’t, we believe we are very well positioned to manage the company through a more challenging times should they occur.
So, Operator we're now ready to take questions.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions). We'll go first to Kevin McVeigh with Credit Suisse.
Kevin McVeigh - Credit Suisse
Hey Bob, Tim, real nice quarter. I wanted to follow-up a little bit on the buyback if possible, you increased that significantly. I wonder if you could just give us a sense of capital allocation across buyback versus acquisitions as we look into 2008.
Bob Crouch
Yeah. I think Kevin if you look, this is Bob. Obviously, based on our result for last quarter, we are a lot more focused on the buyback and I think with the recent authorization and at the share price we are today, we will be very focused on that. We are also focused on acquisitions, we are constantly out there looking, and always having in the pipeline, sometimes it works, sometimes they don't. As Chimes kind of came up out of no where and we were able to take advantage of that. So we're looking at both sides, but obviously we're more of focused on the buyback right now based on valuation.
Kevin McVeigh - Credit Suisse
I am sorry, go ahead Tim
Tim Payne
I just -- one comment to it, that some of our acquisition activity is now focused on continental Europe, and in general there aren’t as many of the types of targets that we would like to find there, so the acquisition activity has been a little bit leaner for us lately, just because of the types of companies we're looking for and where we're looking from them.
Kevin McVeigh - Credit Suisse
Okay. And then, just, the first quarter guidance was very, very helpful. I wonder if you can just give us a sense of kind of margins directionally by individual segment if possible.
Bob Crouch
I think we had very good margins in the fourth quarter and the trends are very good. You will see a seasonal down tick in the US, while the payroll tax resets in the first quarter, but I would hold the line really on international IT segment. I think we've done a good job there, I wouldn’t expect anymore great things out of that. I think flat we'd be very pleased with on the professional side and in international that should be about steady state right there. We are doing a good job in the perm side. If any pressure on the temp side we are offsetting it on the perm side, even though the temp margins did go up, and then the US will have the seasonal down tick about 50 basis points in each unit.
Kevin McVeigh - Credit Suisse
That's great. Thank you very much.
Bob Crouch
Sure, thanks Kevin.
Operator
We will take the next question from Andrew Steinerman with Bear Stearns.
Andrew Steinerman - Bear Stearns.
Hi Bob. You were kind enough give the temp contract of gross margins by segment to overall. Could you give us some comment on just '08 trends, how are the gross margins in temp favorable, was it more effort on the wage side or more effort on the ['08] side?
Bob Crouch
I think if you look at it sequentially Andrew, I think we had a little bit of an increase in bill rate, but if you look at year-over-year standpoint from Q4 this year to Q4 of last year. Truly I don't want to give it by every single division, but if you had to break it down, about half the growth came from bill rate, half from headcount in hours. So we are definitely in a positive bill rate environment.
Andrew Steinerman - Bear Stearns.
Okay.
Bob Crouch
So that's obviously influencing some of that gross margin.
Andrew Steinerman - Bear Stearns.
Okay, thanks. And when you think about just the IT staffing business in North America, how would you describe the bill rate environment?
Bob Crouch
It's positive.
Andrew Steinerman - Bear Stearns
Okay, thanks so much. Appreciate.
Bob Crouch
Bye.
Tim Payne
Thanks Andrew.
Operator
Thank you. We will go next to T.C. Robillard with Banc of America Securities.
T.C. Robillard - Banc of America Securities
Great, thank you. Just wanted to get a sense. You guys are doing a great of job of laying out what's different now versus the last downturn in terms of MPS specifically. I know there is a lot of a variable to this and this is a bit of loaded question to you guys, but I think one that I'd like to try to get some sense on where margins could go, should we see a U.S. recession. Not a prolonged one, similar to kind of the last downturn.
Given your mix differentials your variable cost differentials, where do you think margins can go? I mean the last time it looks like you guys bottomed out down under 2%. So I am assuming it's going to be better than that, but I just wanted to get maybe some more specifics or color around that?
Bob Crouch
That's a pretty good question. I am trying to model it all together. I think it's hard because I am probably not going to give you a specific answer. But I think if you look at it now, we are in so many bubbles back then, that you just knew you were going to bottom-out in a very profitable bubble like our e-business bubble, Y2K was profitable work, on the IT side everything was a lot higher, there was lot less rational spending. I think if you look the last few years a lot more rational spending among clients. So I think you had a greater impact back then, than you do now. But I definitely don't think we'll hit those types of margins at all.
And it really just it depend like we're in a strange environment where our perm is still very strong. So perm is still strong and you just have to factor in, where everything's going to -- what's going to happen to perm, what's going happen on the temp side and different areas, and so much for our company now is international, but all I can tell you is that we believe we'll be much higher than we were last time. It's too hard to quantify because got to take in too many factors.
T.C. Robillard - Banc of America Securities
Fair enough. I thought I'd take a shot at it.
Bob Crouch
Definitely. I mean I mean, I don't see it being where we were last time.
T.C. Robillard - Banc of America Securities
And just following up on Andrew's question on the temp gross margins trends, how should we be looking at that going forward. I mean obviously you guys are very fond with the demand environment you are seeing, over the next quarter or so, and what you are seeing in your backlog. But how should we be thinking about the temp gross margins as we go forward from a bill rate standpoint. Do you guys still have some positive tailwind there? Just trying to decipher how we should be looking at the margin expansion going forward?
Tim Payne
Well, we always try to look forecast as much growth as we can with temp margins being constant, I know you've probably heard us say that before. So I think that what's you got to focus on. If we can get temp constant and keep growing our firm side then you'd be having some up side potentials, but otherwise it's been a positive environment. Obviously you can see in our numbers, and the bill rate environments been positive, so we've benefited from that. How long that sticks around, I think your guess is as good as ours.
T.C. Robillard - Banc of America Securities
And so your first quarter guidance then you are looking for stable temp margins then?
Tim Payne
Yeah. You are going to have, but you are going to have a dip in the U.S as all the payroll tax resets occur just like it does every year.
T.C. Robillard - Banc of America Securities
Yeah. So would that be stable year-on-year? I mean I understand the sequential progression, but how should we think it on the year-on-year basis?
Bob Crouch
Stable from the prior year, yeah it will be up from the prior year, just from where we are at now.
T.C. Robillard - Banc of America Securities
Okay, great. Thanks so much guys.
Tim Payne
Thank you
Bob Crouch
Thank you.
Operator
We will go next to Brandt Sakakeeny with Deutsche Bank.
Unidentified Analyst
Hi, it's [Adrian] for Brandt. I was wondering if you could provide us a little bit more color on what's sort of trends you are seeing in Europe, is there a couple of standout geographies that are really growing?
Tim Payne
Well, a good deal of our business in Europe is in the United Kingdom, and we tended to view -- I know there is been some talk about we state of the market there. And we of course being in IT and professional specialties, we seem to be holding up pretty well from a demand environment, and we feel pretty good about what's going on there. Maybe a little bit of softness in some of their financial, the financial companies in London, but in general, the U.K environment for us is still holding up pretty well. We also have a nice presence in the Netherlands and business there seems to be decent as well.
And the big market that we would like to expand into with all of our business lines in a greater way would be Germany. We have a small presence there, both on the professional side and the IT, but we think over the next several years it's that scenario that we could grow significantly. As far as some of the other countries of Europe, we really don't have probably a sizable enough presence there to be able to comment on that very much.
Unidentified Analyst
Okay, that's really helpful. And then shifting back to the US, I am just wondering if there are few other segments you are thinking about moving into. I know you mentioned in the past some of the specialty issues like education have been nice areas of growth. So I’m just wondering if there are few other targets you have going forward into ‘08?
Tim Payne
Yeah. We like the – we have some presence in marketing; staffing and we have a pretty sizable presence in the whole sort of interactive marketing through our Idea Integration Group. And with what's going on with internet, advertising and that market growing as it is, we think that we can really beef up that interactive marketing and marketing staffing specialty for us. So that will be an area of focus.
We talk about our healthcare division, but it's really not sort – it's not one uniform line of business. We obviously do a lot of travel and those things, but we've gotten into a lot of other areas, such as, pharmacy and therapy and providing people to schools and things of that sort. So, in the year ahead too, I think what we will do is within healthcare we'll continue to broaden and look at new specialties in that area as well. But those will be the primary areas.
Unidentified Analyst
Thank you. That's very helpful.
Tim Payne
Thank you
Operator
(Operator Instructions). We'll go next to Tobey Sommer with Suntrust Robinson Humphrey.
Mike Jacob - Suntrust Robinson Humphrey
Yes. This is actually Mike Jacobs in for Tobey Sommer. Had a question regarding the Chimes acquisition, can you give us a sense of what you've baked in for Chimes to contribute to the first quarter, maybe just revenue or maybe EPS.
Bob Crouch
If you look at what we did with Chimes as far as what we've baked into our first quarter projection, is that what your question is?
Mike Jacob - Suntrust Robinson Humphrey
Correct.
Bob Crouch
Really, nothing additional from Chimes. What's you are going to have there is, you're going to have some costs in the near term. We've just hired on a lot of their folks and lot of great folks up there, and so we did not factor that in. Anything we get is going to be above and beyond what we projected. And I think when you looked at that, I think we disclosed what we paid for that asset was about $8 million. When we looked at that from evaluation standpoint, we felt that if we could look at that as a one-time revenue type acquisition and get in there and get that, we'd be very happy. From the diligence we did, we were pretty confident that we could get $8 million to $10 million out of that, and we've gotten in there and I think we are encouraged by what we see. So that's just upside for us.
Tim Payne
But in terms of timing I think as some of those clients may come on line it would probably more of a second quarter issue than the first quarter.
Bob Crouch
Yeah, that's right. You're going to have a little bit cost in the first quarter from that and we've factored those costs in.
Mike Jacob - Suntrust Robinson Humphrey
Okay. And then also what do you expect the primary use of cash to be going forward with over $100 million in cash in the balance sheet.
Bob Crouch
Well I think we are looking at obviously we have increased our stock buyback authorization and we are very heavy into that last quarter. So you will see us utilize our stock buyback going forward. And then as far as acquisitions there really, you can't ever time those out perfectly but we've got a few in the pipeline that we are looking at also. So you will see it's mostly, for certain stock buyback of an acquisitions as they come.
Mike Jacob - Suntrust Robinson Humphrey
Okay. Thank you very much.
Tim Payne
Thanks Mike.
Operator
We'll go next to Clint Fendley with Davenport
Clint Fendley - Davenport Capital
Thank you. Good morning everyone. Tim obviously the perm trends have been strong here, you guys have added the headcount during the last few quarters. This is probably a stretch but is it possible that these additional people have allowed you to gain additional share and what otherwise would potentially be a softening marketing here.
Tim Payne
I think that we're encouraged by the level of productivity that they have reached. And we did last year, of course, we talked a lot about some of the perm people we are hiring and that was primarily in our professional U.S. and also professional Europe. And, yes we're still kind of a small player in the firm business, we're obviously not in Europe the size of a Michael Page and we're obviously here in the U.S not the size of a Robert Half. So yes, I think we have been doing a good job of getting a little bit more market share.
Clint Fendley - Davenport Capital
Okay. Thank you
Operator
We'll go next to, James Janesky with Stifel Nicolaus.
James Janesky - Stifel Nicolaus
Yes. Bob, if you mentioned this I missed it. What is perm now overall as a percentage of revenues?
Bob Crouch
I think it was 6%. Yes, I think 6% now compared to 4.4% in the fourth quarter of '06.
James Janesky - Stifel Nicolaus
Okay. And what are you're hiring trends or your plans in the first quarter at least, with respect to both perm and flexible recruiters.
Bob Crouch
Well. We did a lot of hiring over the past -- at the end of '06 and then through '07, and we're certainly not immune to some of the talks that’s going all about the economy going forward. So I think in the near-term probably the first and second quarter we'll be looking primarily at replacement hires both in the temp and in the perm side of the business trying to keep our staff levels up to the area that they are. And then as we asses the market as we go through the year, we may start to add some more. But for now we are maybe being a little bit cautious in that area.
James Janesky - Stifel Nicolaus
Okay, thanks. And you did a good job of explaining how different the company is in the current cycle versus 2001. And with that in mind, how do you think it will be different and if there is a slow down coming how you would see it? And with that in mind be, can you give us an idea of what your financial services exposure is overall, where, what divisions that might be concentrated and what trends you are seeing there?
Tim Payne
I'll comment on the first part of the question and then Bob can comment on the -- talk about the financial services. I think what you'll see now is, part of what, if there is downturn, of course part of what it's going to depend upon is, is it concentrated primarily in United states or is it more of a global sort of a thing.
But if we assume well looking back to the last cycle, our US business was hit pretty hard and our UK business was hit a little bit but not as hard, it sort of weathered things a little bit better. So if were to go forward and we were to assume that any impact would be primarily in United States. I think what you'd see from us is you'd see overall a little bit less of a fall off in revenue than what we might have seen last time.
You'd see - because we do have more perm placement revenue now than we have last time, you'd see may be a slightly bigger impact there. Again because so much what we were doing last time was IT which tends to be tied more to cycles. I think you would see some of our businesses such as our healthcare and our accounting business, particularly, those areas because there is such a genuine shortage of people in those areas. I think you would see those businesses hold up a little bit better than our overall business did in the last time. So that's been the intent and I probably can't really quantify it for you more than that. But Bob could talk about our exposure to financial service?
Bob Crouch
Sure. We anticipated this question Jim. If you look at it on a consolidated basis with all our units, we think the exposure is about 10% of the financial services and home builders.
And if you look at where the majority that concentration comes from, it's in our Modis North America unit, where it's probably double that in Modis North America.
But having said that, and having just discussed this with the several of our market leaders in Modis North America yesterday in detail, is that, when you look at these financial services companies, half the house is still buying, it's the other half, the mortgage side or the investment banking side, which really related to CDO products and things like that. They are not buying or they are laying-off folks right now. So, you've almost kind of got to bifurcate each client down to where we are attacking that client right now, where we are in, which departments. But that is the gross number that really is, I don't it's as high as that when you dig into it.
James Janesky - Stifel Nicolaus & Company
Okay. Thanks, that's helpful. Just a final question Bob, was the $2.5 million pretax?
Bob Crouch
Yes.
James Janesky - Stifel Nicolaus & Company
Okay. Great, thank you
Bob Crouch
Thanks Jim.
Operator
We'll go next to Michel Morin with Merrill Lynch
Michel Morin - Merrill Lynch
Yeah, good morning. Just wanted to focus a little bit on the International Professional segment. You mentioned in your prepared remarks the spike in SG&A. I was wondering if you could give us a bit more color on what you are doing in terms of the high-end perm that you are starting up in continental Europe, and also whether or not spike in SG&A some of it might have been a bit temporary as you integrate the recent acquisition? Thank you
Tim Payne
Yeah, the higher-end perm business is it's really across a number of different industries. For us it's really an attempt, we’ve done a very good job I think in the past as doing more of the mid-level type perm business and you have to have to get to the higher level where you are getting greater fees and so forth. You really have to have a focused effort and hire people that are really dedicated to that. And that's going to be really across all of our businesses there, in the UK, in Netherlands, and Germany will ultimately move into those areas.
One of the things that we did do, which brings us very much into the higher end perm is we did an acquisition last year of a company Judd Farris, which is in the property recruitment area that does a quite a bit of the higher end perm. And Bob, could you talk about that?
Bob Crouch
Yeah, I think Michelle if you look at the cost, if you look at it in dollar terms, or pound terms or however you want to look at it. If you look in dollar terms, obviously Judd Farris added a SG&A base which increased our cost in the third and the fourth quarter. I think we did that acquisition in the second month of the third quarter. But if you look at it from an SG&A or the percentage of revenue standpoint, with a lot of the revenue from Judd Farris coming from the perm side of business, their SG&A as a percentage of revenue is a lot higher than the base that was there before, the professional and international base was about double what the base was before.
So I think we've been running about at 21% SG&A as a percentage of revenue. Judd Farris was about a 40% SG&A as a percentage of revenue business, because of its perm concentration. So that naturally ticked up that business. And as far as one time -- any one time items in there, that cost structure is what it is right now. The one-time item that we have in there are just the investments in those new ventures in Germany and in the high end perm in the UK.
Michel Morin - Merrill Lynch
Great. Okay, thank you. And then shifting back to the US; is there anything in your gross profit line that is, things related to workers comp or state unemployment, insurance taxes.
Bob Crouch
Yeah, in the first quarter we'll definitely get not from the orders comps sides, but the state employment taxes will definitely brings down gross margin as we enter the first quarter with all the payroll tax resets.
Michel Morin - Merrill Lynch
But in the fourth quarter was there anything helping margin there?
Bob Crouch
We had a slight benefit in our engineering unit from a payroll tax standpoint. So that did help a little bit on the engineering sides.
Michel Morin - Merrill Lynch
Great. Thanks very much.
Bob Crouch
Thank you.
Operator
We’ll take a follow-up from Tobey Sommer with Suntrust Robinson Humphrey.
Tobey Sommer - Suntrust Robinson Humphrey
Thank you. Just wanted to ask a question about the Modis in North America. If you're seeing any changes in demand or any opportunities for you to perhaps focus sales on some larger customers, we've heard that from a competitor that they thought could perhaps generate some more top line growth in addition to some of the small medium sized businesses trying to sell more to larger businesses. Is there any change in your strategy or everything you're perceiving in the marketplace that would suggest that's an opportunity?
Tim Payne
No in fact, Tobey historically in our Modis North America businesses, it has tended to be sort of big clients focused. And one of things we've been talking about the last couple years is a desire on our part, not to get away from big clients per say, but maybe to get away from some of the big clients that don't pay very well and focus a little bit more of our sales efforts on the middle tier clients where pricing tends to be a little bit better.
In terms of demand, we haven't seen anything currently where we would say that there is a bigger clients are buying more than the mid-tier clients. So I guess I'd have to say, probably our strategy is going to continue to go kind of in the opposite direction of that where it will continue to try to get to more to mid-tier where the pricing is a little bit more favorable.
Tobey Sommer - Suntrust Robinson Humphrey
Thanks. And one last question. Wanted to ask if you'd consider a 10b5 plans for your stock repurchases so as to not preclude you from blackout periods. And if so kind of what your thought process was there?
Tim Payne
Yeah. Toby, we've knocked that idea around a little bit. One thing when you do file 10b5 plan you've got to give specific instructions on how to execute that plan. So the good part is during the blackout period the broker has instructions and allows the purchase, but the other side is it takes away flexibility from you when you are not in a blackout period.
And really when you look at it from our standpoint, the blackout periods tend to be just around the earnings timeframe. So we have not filed one in the past.
Tobey Sommer - Suntrust Robinson Humphrey
Thank you very much.
Tim Payne
Sure.
Tobey Sommer - Suntrust Robinson Humphrey
Thank you.
Operator
We will take a follow-up from Kevin McVeigh with Credit Suisse.
Kevin McVeigh - Credit Suisse
Hey, Tim or Bob. Can you just remind us what percentage of revenue is large versus small to medium sized clients today versus 2000?
Tim Payne
I am sorry, repeat that one again.
Kevin McVeigh - Credit Suisse
Could you just tell us about how much of a percentage of revenue is large client today versus small and medium today versus 2000 for the company overall?
Bob Crouch
I don't have that, but I would guess it's down quiet a bit because when went back in 2000 the big buyers were on the IT side. We were so focused not [to know] who most of your big buyers are in our company.
Kevin McVeigh - Credit Suisse
Yeah.
Bob Crouch
So with IT a smaller percentage of our company now, it's got be a smaller now.
Tim Payne
Yeah. And if you look at the three verticals where we've had a lot of our growth. In the legal business we are doing a lot of business with their big law firms, but overall as they would be sort of mid-tier in terms of sizes of the companies.
In healthcare we are doing a lot of business with hospitals, so they'd be more mid-tier as well, and then also our accounting business has grown quite a bit and that's tends to be more the mid-tier sort of thing too. So I am sorry we don't have an exact number for you, perhaps we can come up with that and give that to you in the future.
Kevin McVeigh - Credit Suisse
No, that's helpful, that's helpful. Thank you
Tim Payne
Thanks
Operator
We'll take a follow-up from Tobey Sommer with Suntrust Robinson Humphrey.
Tobey Sommer - Suntrust Robinson Humphrey
Thank you. In the Legal business, I was wondering if you could comment for – on the outlook for sort of large projects, document review and others as you head into 2008? Thanks.
Tim Payne
Right now, the market is pretty good, but it's a very unpredictable. You never know when the big cases are going to come up, you never know if they are going to settle early and some of the documents review will not be needed. The biggest thing that we've done I think is, we've positioned ourselves to be able to take advantage of those cases when they do come around. And in order to take advantage of it, you have to have generally some facilities typically in the larger legal markets, such as DC, New York, Chicago, Houston for us. You have to have the facilities ready and available so that you can fill them when the cases is due come along.
There is a cost associated with that, obviously, and there’s going to be times when those facilities sit sort of ideal. But the nice thing about that business is that when the business does come, the margins tend to be pretty good on them, and there tends to be not a lot of cost of sales associated with wining those. So, overall it's been a very good business for us. So we feel pretty good about it going into 2008 that the document review market is going to be pretty good.
Operator
And at this time we have no further questions in the queue. I’d like to turn the conference back over to Tim for any additional or closing remarks.
Tim Payne
Thank you. Again, Thank you all, once again for attending the conference call today. Again, we certainly hear a lot of the same things that other folks are hearing about the potential for the economy and for hiring. We are moving forward with our plans for having another year of growth in 2008. We'll be monitoring the situation carefully and also should be very prudent with our hiring and our cost as we move forward. But at the same time, as I think you can tell, we are not seeing a lot of indications that would make us too concerned right now that there is going to be a big fall off in the near future. So, that's our plan and we will keep you posted. Thank you.
Operator
Thank you. That does conclude today's call. We thank you for your participation and you may disconnect at this time.
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