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

Stephen Sheldon - William Blair & Co. Mark Marcon - Robert W. Baird & Co. Kevin McVeigh - Deutsche Bank Securities, Inc. Tobey Sommer - SunTrust Robinson Humphrey Anjaneya Singh - Credit Suisse Mark Marcon - Robert W. Baird & Co..

Good day, ladies and gentlemen, and welcome to the Kforce Inc., Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks we will host the question-and-answer session and our instructions will follow at that time.

[Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over Mr. Michael Blackman, Chief Corporate Development Officer. Sir, please proceed..

Good afternoon and welcome to the Kforce Q1 call. The prepared remarks of this call are available on the Investor Relations page of the Kforce, Inc., website in the Download Library under Shareholder Tools. Before we get started, we 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 Chief Executive Officer.

Dave?.

mobility, cloud computing, cyber security, e-commerce, machine learning, and digital marketing. Competitive pressures and market shifts compel investment in customer facing applications to support business strategies and sustain relevancy in today’s rapidly changing marketplace.

Customers are becoming increasingly dependent on the efficiencies provided by technology and the need for innovation. Advancements in the use of big data, business intelligence and artificial intelligence have contributed to the demand landscape for technology resources.

The shorter-term project nature requires specific skill sets, which are increasingly driving companies to a greater use of flexible resources. Even as technology investments are no longer optional, an improvement in economic conditions may accelerate demand as technology investments typically increase in more robust periods of growth.

These secular drivers are also impacting Kforce as we focus on driving improved associate productivity, enhancing our operating model and technology platforms and further accelerating topline growth to generate long-term shareholder value.

These targeted investments include enhancing and sustaining sales and delivery training, technology-related investments, including our CRM, and measured and balanced additions to our revenue generating talent. We are pleased to have gone live in April 2017 with the initial pilot of our new customer relationship management.

My compliments to our team involved in this effort as we work towards a full deployment in 2017. We remain confident in our ability to accelerate growth and improve profitability while continuing to make these important investments. I’ll now turn the call over to Joe Liberatore, 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. We continue to make progress in improving revenue growth rates across our flexible staffing businesses as we gain traction with the changes we have been making against the backdrop of a strong demand environment.

Tech Flex, our largest segment, which accounts for 65% of total revenues, increased 2.7% year-over-year. We carried momentum into the beginning of 2017 and experienced a stronger than expected January, followed by a flattening mid quarter with improving trends as we exited March, and our activity levels have remained elevated.

We are also continuing to benefit from positive trends in the length of our average assignment, which we believe is driven by our clients’ desire to retain qualified and skilled high demand IT talent.

Critical to the long-term success of our Tech Flex business is the ability to deliver at scale to larger consumers of flexible technology talent, and further deepening our expertise within growing industry verticals to allow us to expand the breadth of our service offerings to these larger, sophisticated buyers.

Larger customers continue to concentrate spend with larger firms, such as Kforce, that can meet their needs nationally as well as ensure compliance with internal and external policies and regulations. We expect this trend to continue and for spend to become increasingly concentrated.

Our 25 largest Tech Flex customers comprise nearly 50% of Tech Flex revenues. We are focusing investment where we can differentiate ourselves from competition and where we have a strong platform for growth. During the quarter, we experienced year-over-year growth in seven of our top 10 industry verticals.

This suggests that the demand environment continues to be broad based. Manufacturing, communications, energy and retail were particular strengths year-over-year. For the second quarter, we expect Tech Flex revenues to improve sequentially and year-over-year growth to be at or slightly better than Q1 levels.

Our FA Flex business, which represents 24% of our total revenues, increased 7.5% year-over-year. Our activity levels and assignment starts volume were particularly strong in the first quarter, but have decelerated slightly in the month of April.

From an industry perspective, eight out of our top 10 verticals experienced year-over-year growth, including financial services, healthcare, business services and retail. Following project ends and elevated conversions in the first quarter, we have experienced some slowdown in trends.

We may see a slight sequential decline in the second quarter, but year-over-year growth in the mid-single digits. Revenues for Kforce Government Solutions increased 6.6% year-over-year, driven by an increase in services revenue. The growth in this business has come despite the bias towards small business in our largest prime contract, T4 Next Gen.

We are exerting significant energy on new prime and subcontract opportunities across a broader set of opportunities and potential customers to further diversify our footprint. Much like the commercial space, Technology and Finance & Accounting resources are in short supply.

We expect revenues for KGS in the second quarter to be up sequentially on a billing day basis, but maybe flat to the prior year due to higher product revenue in the second quarter of 2016. Direct Hire revenues from placements and conversions is currently 3.4% of total revenues, compared to 3.9% a year ago.

Our objective is to meet the talent needs of our clients through whatever means they prefer, and we will continue to provide this capability, though investments in talent for our Tech Flex business remains our priority. The second quarter of the year is seasonally our peak Direct Hire quarter historically.

So, we expect a sequential increase though year-over-year direct hire revenue is expected to be down.

As Dave mentioned in his opening remarks, we are keenly focused on making investments that provide our revenue generating talent with the necessary training and tools to engage in more strategic conversations and to allow us to elevate the value we are bringing to our clients and our consultants.

After completing the initial rollout of our sales transformation activities in the fourth quarter of 2016, we completed certain follow on activities in the first quarter to further embed our new sales methodology into our day to day activities.

In addition, we rolled out our new customer relationship management system to an initial pilot office last week and continue to work towards a full deployment of this system in 2017.

We believe these investments, among others, will generate a significant return by improving how we consistently engage with and deliver services to our clients, candidates and enhance the effectiveness and efficiency by which we conduct business. Our revenue-generating talent was down 8.1% in the first quarter on a year-over-year basis.

While our sales talent has increased on a year-over-year basis, we have intentionally reduced our delivery talent to ensure optimal ratios, which should improve productivity. We believe that capacity exists within our revenue generating talent to provide ample opportunity for us to further accelerate revenue growth rates.

Thus, we expect associate headcount levels to be stable in the second quarter with first quarter levels and then resume hiring later in the year after further adoption of our new sales methodology and improving productivity.

Our sustained success is tied to our ability to consistently improve associate productivity by ensuring they are engaging with the right customers, leveraging the investments we have made in our new sales methodology, as well as the technology-related investments we are making, inclusive of our new CRM.

We are confident in our ability to realize the benefits of these investments. I will now turn the call over to Dave Kelly, Kforce’s Chief Financial Officer, who will provide additional insights on operating trends and expectations.

Dave?.

Thanks very much Joe. Total revenue for the quarter of $334 million represents growth of 3.7% on a year-over-year basis. The most significant driver to this was an acceleration in total flexible staffing revenue growth, which improved 4% year-over-year.

Earnings per share of $0.23 in the quarter was in line with our expectations as lower than anticipated gross margins were offset by lower operating costs. Our gross profit percentage in the quarter of 29.1% fell short of our expectations and decreased 110 basis points year-over-year.

The year-over-year decline in gross profit margins was driven by a combination of a decline in Flex gross profit margins as well as a reduced concentration of higher margin Direct Hire revenue, which represented 3.4% of revenues in the quarter versus 3.9% a year-ago.

Our Flex gross profit percentage of 26.6% in the first quarter decreased 70 basis points year-over-year. Contributing to these lower margins were a significant number of large healthcare claims in our staffing business.

More significantly, whereas spreads in our FA business were stable with Q4 levels, the year-over-year decline in Bill/Pay spread in our Tech Flex business was greater than anticipated. Though we experienced spread compression at certain large clients, the greatest declines were seen on newer engagements outside of our largest clients.

Rising pay rates due to tight supply are contributing to the compression. As pay pressures intensify, we must continue to educate our clients on the value we provide so that we can effectively pass through these increases.

We believe we can mitigate some of the spread compression through this diligence, though if the current economic landscape continues, where our customers still lack pricing power, we expect margins will continue to be under pressure.

As we look to Q2, early quarter data suggests that Tech Flex and FA Flex spreads are unchanged and that margins will be relatively stable sequentially after taking into account the improvement in Q2 from Q1 of seasonal payroll tax increases. We continue to make progress in reducing operating expenses.

SG&A as a percentage of revenue was 25.4% in the first quarter of 2017 versus 26.5% in the first quarter of 2016. Q1 2016 SG&A included 50 basis points of severance costs.

After accounting for these costs, the year-over-year decrease of 60 basis points is primarily a result of the realization of the benefits from the realignment activities completed in 2016, greater expense control and improved productivity per associate.

The reduction in SG&A was realized despite a year-over-year increase in costs related to investments in technology. We expect SG&A levels to continue to decline as productivity increases in our revenue-generating associate population and we realize the benefits of a more consistent sales methodology enabled by technology improvements.

Q1 2017 operating margins were 3.1% as compared to 2.9% in Q1 2016. We take a longer-term view of our business and expect to continue to make measured investments in additional revenue generating talent and technology enhancements, although as Joe mentioned, we expect that talent investments may be weighted towards the back half of 2017.

With respect to our balance sheet and cash flows, operating cash flows in the first quarter of negative $10.5 million were lower than we anticipated due to an increase in accounts receivable. The first quarter is typically our lowest cash flow quarter. We expect to generate positive operating cash flows in the second quarter of 2017.

Long-term debt at the end of the quarter was $135.7 million, an increase of $20.2 million from Q4 2016. Debt is currently $125.5 million. Capital expenditures for Q1 were approximately $2.3 million. We returned approximately $3 million in dividends to our shareholders in Q1 2017, though we did not repurchase any stock during the quarter.

We continue to believe that our strong balance sheet and future operating cash flows provide ample resources to continue to invest in the growth of our business while returning the cash we generate to our shareholders through our dividend program and share repurchases.

With respect to guidance, the second quarter of 2017 has 64 billing days, which is the same number of days as both Q1 2017 and Q2 2016. We expect Q2 revenue to be in the range of $342 million to $347 million, and for earnings per share to be between $0.45 and $0.47.

This includes the combined sequential improvement to Flex Margins and SG&A of annual payroll tax decreases in Q2 relative to Q1, which is expected to be approximately 13 cents per share. Gross margins are expected to be between 30.2% and 30.4%.

Flex margins are expected to be between 27.5% and 27.7%, which assumes a 100 basis point positive sequential impact from payroll tax resets. SG&A as a percentage of revenue is expected to be between 23.8% and 24%. Operating margins are expected to be between 5.7% and 6%.

This guidance assumes an effective tax rate of 38.4%, which is a bit lower than 2016 as we continue to see an increased benefit from work opportunity tax credits from improved diligence in this area. Weighted average diluted shares outstanding are expected to be approximately $25.6 million for Q2.

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

We continue to be encouraged by our key performance indicators, which continue to suggest strength in demand for professional staffing and more specifically, for Technology and Finance & Accounting talent.

We continue to make progress towards our goal of returning to double-digit year-over-year revenue growth though we are progressing slightly more slowly than we had anticipated.

As the business environment changes, we remain confident in our ability to adapt and to achieve operating margins of 6.3% at $1.4 billion in annualized revenue and 7.5% and $1.6 billion in annualized revenue, despite the recent decline in our gross margins.

Key to the attainment of these commitments are continued improvement in associate productivity and revenue growth that provides further leverage in our overall operating model. Bryan, we’d now like to turn the call over for questions..

Thank you, sir. [Operator Instructions] Our first question will come from the line of Tim McHugh with William Blair. Please proceed..

Thanks guys. It’s Stephen Sheldon and for Tim. I guess first on your Flex gross margin it's continuing to turn down both in 1Q and the 2Q guidance.

It sounds like most that's been driven by larger healthcare claims and Bill/Pay compression in Tech Flex? Can you maybe help quantify the impact of those two items you know as we look at the gross margin in the quarter?.

Yes. So just to clarify the remarks I made as it relates to Q2 margins. We certainly did see a decline in Q1 in particular in Tech Flex, but based upon what we're seeing, our expectation of spreads Q1 to Q2 are to be stable. And so just to make sure that you heard that.

So as it relates to margin, so we've been saying for a number of quarters that there is been pressure on rates because we've seen pay rate impact, right we've got a supply shortage here and have for the last five, six years and we think we've been pretty effective managing that.

So as we look forward certainly part of the impact in Q1, which I think I'd mentioned specifically was related to some compression in those clients which were not our largest clients partly due to the pressure because of pay rates.

I think quite frankly partly due to the fact that we are looking to win business and discipline certainly for us it's something that we're continually looking and so we think these opportunity improve those things.

So I think for us, we look at a place here for margins where that we continue to see kind of the same pattern we've seen over the course of the last couple years..

Yes. One thing I would add there that Dave didn't really touch upon is there's opportunity as well on our end in terms of our internal capability. We're not executing as well as we're capable of executing. We've already put many plans in place to reinvigorate that within our people that are interacting with the clients..

Okay.

And then what about the larger healthcare claims, how much of an impact was that in 1Q?.

Yes. I mean not to quantify, but certainly it had a more significant impact that then we would typically see. We had a number of larger claims then we would typically see. We expect that to be something that won’t perpetuate itself, but certainly 10, 20, 30 basis points..

And then the increasing accounts receivable and the impact it had on free cash flow, was there anything in particular that was driving that increase such as a policy change or is it just maybe getting a little incrementally harder to collecting certain clients and in three quarters?.

Yes. So the really the biggest single impact and by the way the reason that's already been reduced by May 1 by $10 million is there was a single large client in the government's space that there was some delays in billing that since been billed expediting payment and that's been resolved..

Okay, great. Thanks..

Thank you. Our next question will come from Mark Marcon with Robert W. Baird. Please proceed..

Just a follow-up with regards to the Tech Flex’s gross margins, when we take a look at the hourly bill rate, it did decline as well.

So I'm just wondering what are the things that you're doing to raise either the bill rates or increase the spread, how confident are you that you might be able to do that in the back half of the year or should we just kind of plan on taking a look at the Q2 level and then plotting it out to be sequentially on a seasonally adjusted basis relatively stable?.

Yes, Mark, relative to the slight decrease in bill rate that was all within our non-large customers, so really more than new business pursuits is where we experienced that. So there is pressure on those on that front, especially we're not significant inside a customer, there's a lot of competition to get your foot in the door.

And so I would say it materially came down. Where we experienced more in that customer segment was really a slight uptick in the pay rates with the consultant population.

I mean as you well know, I mean supply demand is as tough as we've seen going back to the .com era, but again I'm going to go back to – there's opportunity at our field level to do a better job than we've been doing here more recently, we're much better than this..

Okay.

Is your new CRM system going to be able to help you in terms of to that end?.

I mean absolutely, I mean just because of the access to information that the speed of information as well as we're doing quite a bit from a business intelligence standpoint in terms of understanding what's happening with market pricing across skill sets as well.

In today's day and age, we're aggregating external data with our internal data, so that we can arm our people to have more productive customer conversations as well as conversations with the consultant population..

Okay, and then just a follow-up with regards to the comment in terms of March picking up, did you see that continue into April? How are you thinking about the environment on this time the IT side and then I have an F&A question?.

Yes, I mean we’ve seen consistency, all of our KPIs are very elevated levels and they've continued to remain it at elevated levels and they’ve continue to remain at elevated level. So demand environment hasn't changed..

Great. And then on F&A, it sounds like there are some projects that are ending.

Can you just elaborate a little bit there?.

Yes, I mean you know we do quite a bit of work and reps cycle as well as bulk staffing opportunities and there's peaks and valleys associated with that. So we had benefited going into the back end of last year and then through Q1 with a number of end of year projects with rolled into the beginning of the year.

We typically see on that uptick just with open enrollment and various other things and some of those carryover into Q1 and with just those winding down seasonally we've typically see a little bit of a falloff there.

So I mean overall the demand still there in the marketplace and we haven't seen any concerns as whatsoever in terms of the overall demand in the footprint where we play..

Great. Thank you very much..

Sure. Thanks Mark..

Thank you. Our next question will come from Kevin McVeigh with Deutsche Bank. Please proceed..

Great, thanks. In terms of the CRM system implementation, I wanted to understand kind of how that impacts longer terms that goes in terms of the EBIT margins is 6.3% at $1.4 billion revenue and then kind of 7.5% on $1.6 million.

From a gross versus in operating leverage and I guess where I'm going with this is or we’re going to be positioned for lower gross margins in an effort to capture more incremental leverage on the SG&A line..

Yes, I guess the way that I would answer that is those will be strategic decisions but the tool in and of itself will provide us the opportunity to be able to make those decisions based upon what the market dynamics are.

I mean the CRM collectively just as a frame of reference is we by design implemented our sales methodology in the timeline that we did because that allowed us to really package up a lot of the requirements definition for the CRM.

So within the CRM we have completely embedded our sales methodology so step by step people follow that process they understand where there is gaps in terms of the information that they need to be collecting to really elevate our sales conversations, I'm at the customer front, what a really welcome at least provides us the opportunity to have it is much more strategic conversations, the capture a higher percentage of the statement of work business that's out there, which is really at a higher margin level then what you would see traditional staff logs.

So I think we're giving our people the right tools were given them the right training you know these things don't happen overnight I mean there's an adoption stage, there's an integration and then there's a full implementation and I mean we're well down the road..

And Joe does that impact the strategy at all in terms of the NRC and the sourcing?.

No, it doesn't it – the only thing that it really impacts from an NRC standpoint with the strategy is the technology, we're kind of moving out of the stone ages into the 2000 and terms of remote access anywhere through any device and ability to get into our systems and communicate more effectively whether it be with consultants, whether it be with clients.

So I mean that it's just a whole completely different platform than what our people are having to operate with right now..

Got it. And then just you mentioned a couple times kind of execution at the field.

Was there anything specific there in terms of certain leadership for or was it just wanted to understand that a little bit more?.

Yes, while we threw a lot at our people on the back end of last year. I mean think of where we were this time last year, we had gone through an initial restructuring of our organization moving to one COO structure. So you had a lot of leadership changes that took place through that restructuring and that as we move into the September timeframe.

We really leaned out the organization to increase [span of controls NOI], so you had another wave to took place there and then coming right behind that, we went through our sales methodology training and orientation. So we threw a lot at our people last year and when you throw something everyone want something give.

So I have all the confidence in the world with our team. In our team when we call play, they executed and work on this play to reinvigorate the focus on making sure we're fully pricing to resistance.

We can't change the supply demand environment and the pressures that are out there from a consultant standpoint, the high demand ones know they're in high demand, but you've got to be educating them on the value as to how it maps to what their desires are.

And likewise from the client standpoint, clients at this point in time they do have a little bit control in their core just because of the nature of the overall external climate. So we're pushing against both of those ends..

I understand that. And then just my last one.

Was there anything going on that you didn't buy any stock in the quarter?.

Yes. So Kevin, this is Dave Kelly. So Q1 as I said is typically a low cash flow quarter and as we've said, as we generate cash we think it's prudent to think about returning it to shareholders.

As we forecast expectations for Q1 I said it was even a little bit weaker than we had thought in terms of the cash flow because of the receivable issues I mentioned, but just generally speaking as we're mapping expectations in cash flow, we didn't think it was a prudent use of the credit line this quarter based on what current levels in cash flows..

Understood. Thank you..

Thank you. Our next question will come from the line of Tobey Sommer with SunTrust. Please proceed..

Thanks. I was hoping to get your thoughts on the implications of H1B visa reform for the industry and the company specifically, including if you to qualify whatever exposure you may have to people on visas generating revenue for the company? Thanks..

Tobey, I'd say when I look at industry as a whole based upon the legislation that's out there that's being proposed now, we view it's an opportunity for us and I would say relative specific Kforce based upon legislation that's out there currently which is they're really going after visa dependent firms.

I mean when you look in visa dependent defined as 50% of the population being on visa. So it's clear that the language as it exists today and obviously nothing has been finalized, it's very targeted at the India outsource firms. I mean that's who they're targeting to drive up rates for better market in the U.S. from a competition standpoint.

So we view that’s positive for us, I mean even I don't know if you saw it today, but Infosis announced about 10,000 people that they're going to be adding to staff here in the U.S. and in Indiana, they've gotten some nice tax credits, I think it's roughly almost $16,000 per person, I mean basically I view that as training credit.

And they're going to be building more talent with domestic resources here locally. And for the nature of the work that we perform, I view that was a positive for us because we don't play century level.

We play skilled individual that's what the clients use us for and they're going to be building pools of talent that two, three, five years down the road there's going to be more talent and certain skill sets. And being Kforce, I view our core competency is the identification in the recruitment at top talent.

So I'm actually kind of excited about that..

And could you elaborate on what the company’s exposure is understanding that it’s not a 50% threshold, I don’t think it [indiscernible] so could you talk about that?.

Yes, well I mean we're sub-5%, so they'd have to drop that threshold pretty low and I think we'd be dealing with a completely different backdrop not just for Kforce, but industry as a whole and not even just technologies a whole because that would be pretty much you're saying they're going after every H1B that's out there irrespective of anything.

And I'm very confident that I mean if I got to that extend it's not that material to our revenue stream and that is going to present an opportunity on another front of things were to go in that direction because you're basically saying you're going to kick them all out or are you going to give them all huge increases..

And Tobey, this is Dave. I would add a couple of other points.

So the good news about this is that is elevated the conversation with the clients to address issues that they may not have considered previously strategically determining where their talents coming from, how much they're paying for, where the skills are, where they want to place them, there's opportunities to set up facilities elsewhere in the United States for the client.

So there's a lot of interesting things that are happening as a result of this which by the way I would suggest is what was intended was to create opportunities here in the United States and to level the playing field for compensation for the talent that's here. And those kinds of dynamics have not been lost on our clients.

They're looking at these things. They're considering where they want to do projects now, so ultimately I think it positions us well particularly the higher skilled tech staffing firms to be able to play in that space now. So we actually see this as a longer term positive if the legislation comes out as planned..

Okay. Thank you. Curious about some of the gross margin pressure that you just start in the quarter is being with new clients not the large clients.

Are they generally smaller employer and just kind of curious about that particular component bring contributed margin pressure?.

Again, typically the footprint we go after, we look for significant consumers so these just happened to be entities that are at scale that we're just not as significant with them, we're on the earlier stages of building our relationships there.

Hence also within that portfolio, we typically don't perform quite as much a statement of work type business because we haven't built the relationship in the credibility. And as I mentioned earlier, statement of work business is typically at a higher margin profile, so it winds in nicely, so that's part of why we see that dynamic going on.

This is all part of our overall diversifying our portfolio and penetrating markets deeper and wider..

So that makes sense. In terms of the many changes that you identified in response to a prior question kind of series of changes within the firm that may have been a lot to ask in a relatively short period of time.

How do we look at in their confidence in the next three to six quarters is having kind of a materially smaller amount of prospective changes, so that the entire organization can kind of get some sort of strike?.

It’s a great question. I guess the only thing I can point to is result, realized when we started those – we started those changes in Q1 of last year.

We turned the corner in Q4 to positive year-over-year growth and we're up beyond where we were in Q4, so I'd say to impact that much amount of change on the firm and to have the results going on a positive direction, I couldn't be more proud of our team I mean what they accomplished and to keep us moving in the right direction.

Most organizations when they go through something of that magnitude they have to take a step back before they go forward, we never took a step back..

Okay. Thank you very much..

Thank you. [Operator Instructions] Our next question will come from Anjaneya Singh with Credit Suisse. Please proceed..

Hi. Thanks for taking my question. First off if I look at your guidance and your targets for the 6.3% and 7.5% operating margins, it seems we're still a little ways away from a 6.3% on $350 million-ish of quarterly revenue. So I guess a two part question.

How should we think about the incremental margins involved to hit those targets and then realizing that gross margin pressure has not really been conducive to your goals here? Are you baking in some help from the CRM rollout? I guess what do we need to see to get a little bit closer to your margin targets at these types of revenue levels? It seems like you're just a little ways away from where it can be..

Yes. Anj this is a David Kelly. So as we've thought in our prepared remarks, we pointed to expectations of and key to our profitability is improving productivity of our associate population. We think we're seeing a lot of that.

So I think about our results in the first quarter compared to the guidance that we provided in the second quarter operating margins between 5.7% and 6% and revenue guidance in the [mid-three] 40’s and I think about the incremental profitability that were generated from Q1 to Q2.

And I don't think we've ever thought of this as a linear equation, but frankly I guess my view of that trajectory gives me a lot of confidence that $350 million will be at 6.3%.

So I think that the profitability coming from the productivity improvements at the gross margin levels we're seeing and we've continued to ensure that we're doing the right things to continuing that profitability trajectory even is gross margin has changed.

So a lot of obviously our cost structure is variable, so as we perform and margins are impacts or variable cost. So we think we've got the right levers and we're confident getting there..

Okay. Okay, got it. That's helpful. And then with regards to your commentary regarding spreads, just wanted some clarification there.

Do you think you'll be able to increase spreads or keep them flattish with the diligence efforts that are ongoing with their clients or do we need to see your clients to be able to push some pricing before you're afforded more stable spreads?.

Yes. So certainly as Joe said I think we see opportunity here transactionally speaking through discipline to impact in a positive way spreads. As we've looked at and our expectations in the near-term, spreads to the stables were in the second quarter. So it's a combination of those things. The market is still very tough, right.

And it is a supply constrained market. So we're still fighting that. But we think we've got opportunity..

And part of this is mix of the business as well as I mentioned, we've we started a while back going after and capturing statement a work business. We have a lot of energy and focus on that front.

We need to do better on capturing that that business as well because that helps us from an overall margin profile standpoint as well even in this type of operating climate where there's – it's unique in terms of what we've experienced historically just operating at these GDP levels with a very imbalanced supply demand, most clients and most industries don't have any pricing power.

So I mean all you have to do is watch reporting period and you see everybody delivering on the bottom line and everybody you know limping along on the topline.

So there's a lot of pressure on organizations to drive efficiency, which they're pushing back on vendors and we have a responsibility to continue to look at how we can become more efficient and effective, which is why we're making all the investments and why we've streamlined in the manner that we've done.

I mean I take it back if you go back to our reporting when we turned the page to the new era in January 2013. I mean our SG&A levels were $28.5 million and that was with a very different mix of business in terms of contribution with our HIM unit here.

So this team will execute and we're going to continue to stay focused on and we put targets out there, we're going to have them..

Understood, that’s helpful.

And last one from me on KGS, any update with regards to T4 Next Gen, do you guys have any greater sense whether you'll be able to pursue that to a greater degree I think on the last call, you had expressed some optimism around potentially going after more of that business, just wanted to get an update if any of that's playing out?.

So Anj, the circumstances where the VA is predominantly awarding to small disadvantaged veteran our businesses continues. So our success in the government space in the VA, we've had some certainly some success in people as a prime, but certainly also as saw and I think that the composition of awards in the near-term doesn't look change..

Okay, thank you so much..

Thank you. Our next question will come from line of Mark Marcon with Robert W. Baird. Please proceed..

Two questions, one just philosophically with this tight demand environment and it seems like the situation continues.

Are you thinking about doing any more on the perm side at all?.

Yes, Mark I mean we've integrated perm predominately within our within Tech business and I think if you look at our perm numbers, they stay pretty stable on the Tech side of the equation. So we'll be opportunistic there based upon with client demand is where we're doing business with and those clients.

From an FA standpoint, we have a pretty much standalone just because that nature of the skills that we focus on from a direct hire standpoint in F&A is a much higher level than what we traditionally focus on within our FA flex business.

So we're staying steady and we're going to continue to add resources were productivity warrants, but we're not standing up brand new direct hire teens..

Mark, this is Dave. I had a couple of the things. So one is that hiring models have changed in that space you seen social media is playing a much bigger role.

So from our perspective we look at that market as solving a customer problem, but we don't see the business model really playing well to our strengths and actually see it as being somewhat compromised now.

By the social media changes and actually our focus is to allow our teams to work with the customers to allow them to either hire directly to convert on contract which is a substantial part of our business as well or to use them on a flexible contract basis.

Project lines are much shorter announce to customers or preferring flexible resources the uncertainty still there. So we don't see where we are in the cycle as being an opportunistic time to make a substantial commitment to rapid growth within the direct tire business.

But we will selectively add to that we're going to continue to support our team they've done a great job and we'll continue to deliver that through our Flex teams as well..

Okay. And I apologize if this was asked and I missed it.

But with regards your larger clients are you seeing or hearing any more chatter with regards to the implications in terms of the current administration's limiting of H1B are their expression of desire to do so?.

So Mark I mentioned earlier, this is Dave. There's no question that the chatter has caused clients to really reexamined what they're doing onshore what they're doing offshore, where they're preparing their resources from they also recognize that there's now risk in the visa dependent firms because those dependencies.

So if you consider those firms is now being exposed in terms of pricing so to the degree that they're procuring resources from those firms. Their pricing is them potentially at risk.

So there's a lot of dynamics that are going on here and certainly there is still – question is to what the final legislation is going to look like and what the regulations are going to look like.

But all of the discussion has gotten the attention of our larger customers and they are reexamining whether they want to do on shoring in remote locations and moving more supply, creating supplies, so we're having some interesting conversations with them about that as other firms are in our space. We think ultimately it's good for the industry.

For our industry here in the U.S. and this ultimately is a good thing, but there's still something to settle out here..

It’s great to hear. Thank you..

Thank you..

Thank you. Our next question will come from the line of Tobey Sommer with SunTrust. Please proceed..

Thanks. I was just curious your comment about social media somehow impairing the perm marketplace.

Is it something we're hearing broadly, I would understand another thing you said about kind of tactically not thinking this part of the cycle is a good time to invest in it, but could you expand upon I guess the conclusion that this many years into the expansion of so many years after the advent of social media that it has impaired the perm marketplace? Thanks..

Yes. I think really part of – what you have to remember here Tobey is Dave and I have been around – Dave has been around the perm business over 35 years. I've been around the perm business for 29 years.

So part of what Dave is referencing is what we've seen evolve not just really through social media it's really through the technology enablement of the space.

First with job boards then with other tools with aggregation and ability to now identify people in a more rapid manner in screening capabilities that spaces is continually being exposed for what we call the low hanging fruit. So for example back in the day when I was sitting on a perm desk, the types of people that were my bread and butter.

You're not getting fees for those people today because that is all being accommodated online. So as years continue to pass by what's happening is the skill level and the complexity of a search is moving up the food chain. So you're having to really have a unique proposition and unique talent.

You're not getting the bunches and fall type placements that we used to see in the search business and all Dave was really referencing there as social media continues to evolve as linked in, integrates into dynamics platform as many of these other technologies that are evolving out there.

It's going to continually put more pressure on the search business. If not the search business is not going to go away, but you're going to have to have candidates that are much more unique and not accessible to warrant organizations paying fees because these tools are also – you’re not just going to staffing companies.

These tools are also being deployed by the end customer..

Yes, I think what it does it really forces them to go to the passive candidate where the relationship is in the confidentiality is important. So those are things that I think ultimately are going to protect that space and still have to the degree.

From our perspective, the investment in the search resources than the return, generally year out 24 months to 36 months before you starts to get a return on that investment. So you're making a call on a business cycle, but at this point, there's still a great deal of uncertainty.

This was already long in the two and there are many of the thing that that it's going along way to go. So we've chosen rather than making a bet on the duration of the cycle to actually use the existing resources that we have to meet our customer expectations. End of Q&A.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So that it's my pleasure to hand the conference over back to Mr. David Dunkel, Chairman and Chief Executive Officer for closing comments remarks. Sir..

Thank you so much. Thank you for your interest and support of Kforce. Again I'd like to say thank you to our teammates and to each and every member of our field and corporate teams. You guys have done a fantastic job.

With all of the things you've accomplished and we have high expectations again as we get in the Q2 and thanks to all of our consultants, our clients for allowing us the privilege of serving you. Thank you and I look forward to talking with you again on next call..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you all disconnect. Everybody have a wonderful day..