Michael Blackman - Chief Corporate Development Officer David Dunkel - Chairman & Chief Executive Officer Joseph Liberatore - President David Kelly - Chief Financial Officer.

Mark Marcon - Robert W. Baird Anjaneya Singh - Credit Suisse Ato Garrett - Deutsche Bank.

Good day ladies and gentlemen, and welcome to the Kforce Inc Q1 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now turn the conference over to Michael Blackman, Chief Corporate Development Officer. You may begin..

Great, thank you. Good afternoon, and welcome to the Kforce Q1 2015 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 the call over to David Dunkel, Chairman and CEO.

Dave?.

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 pleased with our seventh consecutive quarter of double-digit year-over-year revenue growth. First quarter revenues were $312.6 million, earnings per share of $0.20 exceeded our expectations and indicate we are making progress towards our operating margin and profitability targets as we focus on accelerating revenue and even greater EPS growth.

We are pleased with our balance revenue growth continuing across all business lines and we continue to invest in revenue generating talent in all of our staffing and solutions business to sustain this broad based growth given the excellent market opportunities. Demand remains very strong across all industries and geographies in both Tech and FA.

Recent market visits by our executives to meet with clients, consultants, and our field teams confirmed, one, that the pace of technology innovation and change is accelerating as macro trends towards mobility, big data, cyber security and web based customer delivery and servicing systems fuel competition.

Economic uncertainty, tepid GDP and the resulting monetary policy fluctuations drive the desire for greater flexibility and nimbleness. And three, project duration continues to drive specialized in focus outsourced solutions. Four, talent shortages as a result of the rapid shift towards a knowledge economy compelled new strategies for our customers.

Unemployment rates for college educated is near historical lows. All these taken together confirm that the secular shift towards staffing and outsourced solutions continues and has overtaken cyclical underpinnings. The unemployment rate for college educated workers continues to decline and is currently at 2.5%.

Looking ahead technology demand continues to be very strong and outpace supply across nearly every skillset, industry vertical and geographical market. As a result we are continuing to adjust our strategy to facilitate our ability to move quickly by aligning delivery with our customers.

Our recently opened West NRC along with other activities is a part of that strategy. Very high demand, structural labor issues and skill shortages were likely to create further scarcity in top talent.

Finance and Accounting is also experiencing solid demand following improvements in the financial services industry, including some stabilization in mortgaged services.

Healthcare sector growth has been a contributor to our recent success, as well as the growing need for resources to support the ever changing compliance and regulatory environment in the wake of Dodd-Frank. KGS has performed well in a difficult environment with stable service revenues and strong product revenues.

Finally, our direct hire investments are resulting in revenue growth ahead of our expectations. Staffing industry analyst project 7% growth in both the technology and finance and accounting staffing markets for 2015. Also the temp penetration rate has now exceeded 2% for eight straight months and remains above the previous cycle peak of 1.95%.

We set out on a mission several years ago to build a firm that stand above market revenue growth and increasing profitability. We have made significant progress in achieving those goals as we strive to delight and further deepen relationships with our clients.

While much work remains, we believe we remain on track to achieve our previously stated goal to achieve 7.5% operating margins at $1.6 billion at annualized revenue. I will now turn the call over to Joe Liberatore, our President, who will provide further details on our Q1 operating results.

Dave Kelly, Chief Financial Officer, will then add further color on our Q1 operating trends and financial results, as well as provide guidance on Q2.

Joe?.

Thank you, Dave, and thanks to all of you for your interest in Kforce. I'm pleased with our performance in Q1. Our strategy is implemented in this New Era of Kforce continue to generate positive results as we remained focused on providing premier service to our clients, consultants and candidates.

Tech Flex staffing, our largest business unit which represent 66.7% of total firm revenue grew 8.3% year-over-year against a very difficult 18.2% comp. Overall our key performance indicators for technology remained at/or near record high levels indicating continued strengthening of already strong levels.

New starts volumes returned to pre-holiday levels in mid-March after a series of weather disruptions earlier in the quarter in the northeast where we have significant revenue concentration. Our current pipeline suggest an acceleration in starts volume as we head into May.

Demand is positive across many industries with our top five being financial services, manufacturing, health services, insurance and communications which continue to outperform overall Tech Flex growth averages. We also experienced another quarter of elevated conversion levels which also impacted revenue trends.

Though conversions have a near term negative impact on Flex revenue, it is a positive indicator of the strength in the overall tech demand and customer confidence. We expect Q2 year-over-year growth for Tech Flex to be similar to levels as Q1 and for growth to exceed 10% in the second half of 2015.

Finance and Accounting Flex which represents 21.2% of our total firm revenues grew revenues by 15.9% year-over-year. This business is also experiencing all-time highs in KPIs. Growth by industry is diverse.

The contributing drivers to the year-over-year success continue to be financial services and healthcare project revenue, both of which the National Recruiting Center positions us to maximize. Our decision to invest in management and implement operating model adjustments have contributed to market share gains and client based diversification.

We expect Q2 Flex revenues to increase sequentially and year-over-year growth to remain near Q1 levels. Year-over-year revenue growth for the first quarter for our Tech and FA Flex business were driven from a diverse blend of clients, both large and small.

Our Top 25 clients contributed 36.5% of total revenues, an increase of 250 basis points year-over-year from 34% in Q1 2014. This along with above market growth rates suggest that we have been successful in taking customer share within our largest clients as we continue to invest to further delight these key customers.

Our overall service capability is enhanced by our National Recruiting Center. Revenues for Kforce Government Solutions increased 13.7% year-over-year, services revenue which is about 85% of this units total revenues have been stable of the past year and the year-over-year growth is attributable primarily to an increase in product revenue.

We expect services revenues to remain flat in Q2 and for a decline in product revenues, and therefore total revenues to decline slightly from Q1 levels and to be flat to slightly up year-over-year.

As we enter Q2, over half of the 36% of revenue under recompete this year have been won by KGS which significantly reduces the risk of revenue volatility in this unit during 2015. The outstanding contract under recompete with this unit’s largest customer, that has been mentioned on the fire falls has not yet been awarded.

While KGS recently was awarded a new unrelated procurement with this customer. The outstanding recompete represents approximately $7 million in annual revenues which is only 7% of this units total revenues.

A competitive climate for this business remains challenging due to the increasing trend for contract awards to be based on the lowest priced technically acceptable criteria. As a result, we continue to refine our service model to ensure profitability impacts are minimized.

Direct higher revenues from placements and conversions increased 24.7% year-over-year, but will remain less than 4% of total firm revenues. We've made some select investment in direct higher over the past few quarters from which we are deriving benefit and will continue to do so as opportunities present themselves.

Our objective is to meet the talent needs of our clients through whatever means they prefer, and providing a meaningful capability to deliver resources through direct hire who remains important in meeting those needs. We expect sequential improvement in direct hire revenues in Q2 or year-over-year growth rates are expected to decline.

Revenue generating headcount increased 8.7% year-over-year in Q1. We continue to invest an additional revenue generating performers and anticipate year-over-year head count growth to remain near these levels respectively though below revenue growth rates.

We believe capacity exists and significant opportunity to improve productivity remains, as our newer hires become more experienced. Through this balanced approach to hiring, we expect to drive both revenue growth and operating leverage as we move into the second half of 2015.

Overall, our business units are performing well and we remain focused on executing our strategy for market share expansion and becoming a top provider for our clients, all while staying in our path for operating margin improvement.

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

Dave?.

Thank you, Joe. Total revenues for the quarter were $312.6 million which represented a 1.9% sequential decline and an increase of 10.8% year-over-year. Revenues were negatively impacted by approximately $1.5 million from winter storms at our northeast corridor market subsequent to providing a revenue guidance.

Our Flex staffing revenues collectively grew 10% year-over-year and our government business increased 13.7% year-over-year. Direct higher revenues of $12.1 million increased 24.7% year-over-year.

First quarter income and earnings per share from continuing operations were $5.8 million and $0.20 respectively, which represent 32% and 54% year-over-year improvements versus $4.4 million and $0.13 in Q1 2014. Gross profit percentage in Q1 was 30.3% which decreased 60 basis points sequentially and increased 70 basis points year-over-year.

The year-over-year improvement in margins is due to a combination of higher mix of direct higher revenues as a percentage of total revenues and an increase in Flex gross profit margins. Flex gross profit percentage of 27.5% in Q1 decreased 70 basis points sequentially and increased 40 basis points year-over-year.

The sequential decrease is attributed to payroll tax resets which impacted margins by approximately 100 basis points which was slightly better than we had expected.

The year-over-year Flex margin increase was primarily due to an improvement in government margins from a higher percentage of product sales as well as a slight reduction in health insurance expense in our Flexible staffing businesses due to lower claims activity. Bill pay spreads in our Tech and FA Flex businesses remain flat year-over-year.

Looking forward, assuming a consistent operating environment and economic landscape, we expect pay rates and bill rates to increase in tandem, leading to relatively stable Flex margins.

Q1 2015 operating margins of 3.2% improved 60 basis points from 2.6% in Q1 of 2014 driven from the gross margin improvement and operating margin leverage gains over the past year.

We expect operating margins to continue to improve as we take advantage of scale and the increasing productivity of our revenue generating population as they gain additional tenure with our firm. As we look at our balance sheet and cash flows, our accounts receivable portfolio continues to perform well.

Capital expenditures for Q1 were $1.6 million and remain at steady levels. Bank debt at the end of the quarter was $94.3 million as compared to $93.3 million at the end of Q4 2015, and $61.2 million at the end of Q1 2014.

Stock repurchases in Q1 were down from the level seen in the second half of 2014 with the surge last year being driven from cash availability due to the sale of our HIM business. We repurchased approximately 275,000 shares in the quarter for approximately $6.4 million, and will continue to evaluate future stock repurchases as cash flows want.

There is approximately $23 million available for repurchases under current board authorization. With respect to guidance on continuing operations, the second quarter of 2015 has 64 billing days compared to 63 billing days in the first quarter.

We expect Q2 revenue maybe in the $330 million to $335 million range, and for earnings per share from continuing operations to be between $0.34 and $0.36. Gross margins are expected to be between 31% and 31.3%. SG&A as a percentage of revenue is expected to be between 25.3% and 25.6%.

We expect a decrease in payroll taxes in cost of sales and SG&A combined to positively impact EPS by approximately $0.09 to $0.10 relative to the first quarter. Operating margins are expected to be between 5% and 5.3%. Our effective tax rate in Q2 is expected to be 39.5%.

This guidance assumes weighted average diluted shares outstanding of approximately $28.5 million for Q2.

The guidance does not consider the effect, if any of charges related to the impairment of intangible assets, any one-time costs, costs related to the settlements of any pending legal matters, the impact on revenues of any disruption in government funding or the firms response to regulatory, legal or tax law changes.

We expect operating profits margins to improve to 6% as annualized revenues reach $1.4 billion and for scale and productivity gains due to increasing associate tenure to allow us to reach 7.5% operating margin at $1.6 billion in annualized revenues.

We believe our last two years of efforts towards improving profitability, narrowing our focus and investing in revenue generation has put us well on the path to reach these goals. Nicole, we’d now like to open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Ato Garrett at Deutsche Bank. Your line is now open..

I had couple of quick questions. Looking first at the gross margin for Tech Flex specifically, looks like margin were down slightly on a year-over-year basis as on Tech Flex.

I was wondering if you can speak for that a little bit, just given some of the things that we've seen regarding to - whether that's may be an effect of additional labor market tightness, kind of pushing up pay rates faster than bill rates or something else was driving that?.

So Tech Flex spreads or Tech Flex margins in the aggregate year-over-year were down actually just 10 basis points year-over-year.

Spreads for bill and pay rates were basically flat, we've seen, as I think we've talked about on prior calls, an increase in pay rates but we've been able to pass through those pay rate increases in the form of bill rate increases, so those have been staying flat really all year.

So that minor change really is just a matter of small variation and benefits in unemployment related cost. So very minor stuff there..

Okay, great.

Then also, can you - you mentioned you're going to continue to invest in revenue generating head count, can you talk about where you're going to be making those investments, or might what verticals are…?.

Yes, typically where we are at this point in the cycle is we'll be investing pretty proportional to how the revenue is growing is really what the game plan is, as well as we'll be investing in those teams where we have the highest level of productivity..

Okay, great.

And finally, can you talk about how your growth rate might have varied between large clients versus small clients?.

Actually the strategy that we deployed coming into the new area, little bit over two years ago, now about two and a half years ago was to focus concentration on those clients where we had a good footprint and we felt we can capture significant share within those clients.

I mean I think I mentioned this last quarter as well but we're seeing in our top counts that we're probably growing at about two times the overall business and that would be both for the Tech Flex as well as finance and accounting services lines..

Okay.

I just want to confirm there [you are right] [Ph] about the impact of weather, you said that was about $1.5 million?.

Yes, just to give you the full story, so when we're on the call last quarter we had said at the time and the call was in late January, February actually that we had already seen a $2 million impact. In addition to that $2 million we're highly concentrated in northeast and Washington, we saw an additional $1.5 million.

So about $3.5 million total weather impact for this quarter..

We have about 30% of our total revenues tied up in the northeast corridor when we look at KGS, if you back KGS out of that we have about 25% of our staffing revenues tied up in there.

KGS we're able to recoup some of those hours, on staffing, we lose those hours; the bigger revenue impact is not the loss billable hours, it's really the delays in interviews, the delays in starts, things getting in the way of that process, just because of delays and people being out and also in Q1 quite few of those storms hit on Mondays which really create a ripple effect for the whole week..

Great. Thank you very much..

Thank you. Our next question comes from the line of Mark Marcon of Robert W. Baird. Your line is now open..

Good afternoon, and congratulations on the results.

With regards to the sizing of the KGS business that's up for the recompete, is that - how are you factoring that into the guidance that you gave for KGS?.

Mark, this is Dave Kelly. So as we look forward, and this is not necessarily been any different than what we've seen in the last few quarters. Our service revenues here have been very flat and our guidance is generally indicated - is an expectation that that will continue to be the case.

So when we're talking about recompetes, that's really our services revenues which - as Joe mentioned, we've had half or more of the recompetes already won this year, so we feel very good about the prospects and the visibility in the near term for that business..

Okay, great.

Just to be clear, you're neither assuming that you - are you assuming that you keep that contract in that one specific contract that you mentioned multiple times, are you assuming that stays in place for its entirety in Q2?.

Yes. So Mark, first - and there has been a lot of conversation around this, that specific contract although it's with our largest client, is only $7 million [in total] [ph] [indiscernible] revenue, just to make sure everybody heard it.

So we don't know when it's going to be awarded, at this point it may not even be awarded in the second quarter so, we were expecting business as usual..

Okay, great. Thanks for the clarification there. And then with regards to the headcount increases, would you expect that as the pace of revenue growth continues to be the same that you would maintain this pace of headcount increases, and thanks for giving those intermediate benchmarks in terms of $1.4 billion and 6%.

So as we model things out getting towards $1.6 billion, is that how we should look at it?.

Mark, we've put out there for quite some time as you are well aware, our objective was 10% year-over-year headcount growth, and that was predicating against more towards the mid-teens total firm revenue growth rate.

So I would say if we were to stay in the growth range where we are right now, probably what you saw this quarter will be more in those ballparks.

We start moving into lower teens, mid-teens, growth rates, you're going to see that bump back up closer to the 10% but again it's very important to note that's not linear on a quarter-by-quarter basis, I mean we're dealing with turnover in there, we're dealing with performance management within there.

So when we talk about those percentages, those are really more when you look at things over an annualized type period but any one given quarter there could be 200 basis points swing in one direction than the other..

Great.

And then with regards to the really strong growth that you're seeing on the F&A side, I appreciate the color that was provided, can you talk a little bit more about the healthcare vertical and what you're seeing there, like how much of that growth is being driven by that?.

We've experienced a nice growth within the healthcare vertical, fir probably the past four quarters now, the margin [up][ph] as a contributor on a percentage basis, as well as aggregate in growth. And that's really more in and around our great demand from the a cycle standpoint.

And that's more project based type business, so it's a high volume and needs, they have to be staffed very rapidly in a place very well for our NRC model.

In fact, when we look at the NRC and we look at our F&A space, and our premier partners, they are contributing about 87% from the servicing side of that business at this point in time, so it just plays very well with those high volume type needs..

Great, thank you very much..

Sure, thanks Mark..

[Operator Instructions] Our next question comes from Anjaneya Singh from Credit Suisse. Your line is now open..

Hi, thanks for taking my questions. I guess first off, I just wanted to hit on bill pay spreads, I think some of your competitors have started this fee - some expansion in bill pay spreads, admittedly still at the lower end of things.

Is there a reason why you don't think you will see this or why you're not planning for it? Is that just assume there is upside, just wondering if you help us think about that?.

So Anjaneya, this is Dave again.

So as I said we have not seen an expansion in bill pay spreads, part of that certainly for us as Joe mentioned, we've had some success in growing our large clients more, so makes a little bit from that [ph] but we haven't seen big improvements in that spread as a matter of fact they have been stable for the last year and so that's the plan/platform that we're using to the extent that things improve.

Yes, it will be upside but certainly we're not anticipating it will be making decisions on how we think about running the business, how we think about the operating margin targets that we have - who wants to discipline that from what we currently know. And we see a change, this is the operating environment we have..

Got it.

And if we were sort of hold gross margin, sort of constant for client mix, how is the gross margin within the bigger clients, where your Top 25 clients trending inside Flex and was there any benefit to gross margin this quarter from the growth you saw from your smaller clients?.

Yes, actually similar trends that I think where we've stated in the past where we've not seen a material difference between our larger strategic accounts as well as the spot market. In fact, when we look at bill rates, our bill rates are about 4.2% higher in the spot market than in the strategic accounts and pay rates are 3.7% higher.

So they’ve really been moving in concert, we haven't seen a material difference in that in the spaces where we quite realize we're doing a lot about debt work, we're doing project managers. So in the level positions we're paying, we're seeing a lot of similarities from the spot as well as strategic accounts..

Got it, that's helpful.

One last one for me, with regards to direct higher fees, are you noticing any trends that you would call out there with regards to the strength there, was this just a one-off quarter, is this primarily attributable to your headcount investments or are you seeing some stronger trends in that market?.

Yes, the year-over-year is - last year in Q1 I would say we had a lower than normalized Q1, so we're working off with lower comp which is really what's driving the year-over-year which is why we stated that you will see that somewhat sequentially go up slightly but you’ll see the year-over-year come down because we rebounded our last Q2.

We're not seeing anything material change in terms of what we're getting on in average fee.

Now if you were to go back and look at our numbers, there is a little dynamic because we had a bulk arrangement on the back end of 2013 that kind of drove the average rate down but if you were to look at our numbers, you will see the average rates been staying pretty constant.

In terms of - we did see an acceleration and conversions and that both conversions, where we're getting some fee and conversion where somebody has been on assignment for an extended period of time, and we view that it's just an indication that's the most successful thing I guess that can happen in our environment because we're here for the employment of individuals with our clients and when we make that right match which is one of our brand promises and that contract turns into a permanent higher, I think that sets volumes for the quality of the job that our team is doing in terms of making the right match because that's ultimately our contractor that wants to go to work full-time at a client we've placed him with, and it's a client that appreciates the value that consultant is bringing on board.

So we have seen that accelerating but again, I think that's just showing that the confidence that our clients have and where we are in the cycle and the work can perhaps get it..

Got it, that's very helpful. Thank you..

[Operator Instructions] Our next question comes from the line of Ato Garrett of Deutsche Bank. Your line is now open..

Just a one follow-up.

Previously you guys were giving us some inter-quarter trends about how - for each month in the quarter and little bit of inside of what you've seen so far this quarter - I was wondering if you can go over that if you have a similar disclosure you can make currently?.

Sure.

So generally speaking, the first quarter played out in January, typically how we would see, right, there is a rebuild February and this is generally I think in both Tech and F&A, it was a little bit slower than we thought and then we got back into March and we saw some good improvement in March and we're starting to see some of that as well continue for early April..

And I would add that when we're really looking at trajectory of the business, I think one of the biggest indicators we've seen here as we've started the second quarter is we've seen a significant ramp up in our KPIs and KPIs across the board and that's both, within Finance and Accounting and Tech Flex. We've seen a pretty significant uptick there..

Great.

Do you have any comments you would like to make on direct hire, what you've seen so far and how that's trended?.

I think in the first quarter results are reflective of the strength we're seeing in the business and then I think as we look into the second quarter we're looking at a good start to the quarter there as well..

Great, thanks again..

Thank you. And our next question comes from the line of Tobey Sommer SunTrust. Your line is now open..

Thanks. This is Frank in for Tobey. Real quickly on the weather impact, can you parcel out by Segminis or technology or F&A, was there a waiting there or was it pretty….

Frank, I really don't have that, it's pretty much proportional to the revenue size, right, so we're two times Tech Flex for [indiscernible], so that's what I would use..

Okay.

And I think I may have just missed this, did you have a cash from operations number?.

I did not provide you the cash from operations now but if you just give me a second, so cash flow from operations in the first quarter - it's a good question. So the cash flow a little over $11 million and you’ll see that when we file our Q, little bit over cash coming $11 million..

Okay, great. And we've talked a lot about candidates in a tighter labor market on the technology side. Could you give us a little color on what you're seeing in terms of getting candid and the labor market on the F&A side and the feedback you're getting from clients and your purchase there..

I would say in the segments of finance and accounting where we do the majority of our business, we haven't really seen anything materially relative to supply/demand. So we're still having success in attracting candidates and we haven't run into the same type of supply constraints that we're seeing in some of the demand tech areas..

I would say one other thing that the clients are recognizing the labor market shift. So there is an urgency on their part to streamline hiring a recognition that they need to retain the talent. So the market is certainly caught on for the talent shortages..

And I would say not from a finance and accounting direct hire, we work a little bit further upstream. There I think you are seeing some supply constraints happening as you start to move to the higher skilled areas within finance and accounting..

Alright, great, that's very helpful. Thank you..

Thank you. And our next question comes from Morris Arginine of Griffin Securities [ph]. Your line is now open..

Hi, just on MLC, if it plays out in this past quarter going forward.

What percent of revenues do you see across the hiring additions just some of the intricacy that's going on with NRC please?.

Well the NRC relative to total revenues is contributing about 36.7%, it's fairly consistent across Tech and FA, Tech’s about 35.5%, FA Flex is at 37.3%, and then they are pushing close to 50% within KGS.

Really the dynamic there is there is a heavier waiting towards our larger customers, so in fact we're north of 50% with our premier partners and as I mentioned in my earlier comments from FA and some of our larger clients where at about 87%..

In hiring in NRC?.

Hiring, we've been pretty consistent from a NRC standpoint with how we're looking at our revenue generating across the board. So we allocate proportional to NRC based upon where they are from productivity standpoint and servicing the various segments that they are working on..

Thank you..

Sure..

Thank you. And I'm showing no further questions at this time..

All right, great. Again, we tell you that we appreciate your interest and support for Kforce. And I would like to say thanks to each and every member of our field and corporate teams, they have done a fantastic job again. And also to our consultants and our clients for allowing us to privilege of serving them.

Thank you very much for your interest in Kforce and have a good evening..

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day everyone..