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Pressure builds against Kforce

A biting analyst's report, cutbacks and sluggish sales send its stock plunging. The company says it's okay.


© St. Petersburg Times, published June 24, 2000

TAMPA -- For months, Inc. has been following the adage "You have to spend money to make money."

The Tampa-based staffing company has spent more than $50-million moving its business online. On Super Bowl Sunday, the former Romac International spent $4.5-million on TV commercials touting its new Kforce name.

But since then, Kforce's drive to grow its information-technology staffing business has sputtered, part of an industrywide slowdown in hiring.

So now it's slashing costs as it scrambles to meet analysts' earnings projections. Kforce has laid off 150 administrative workers, and executives may cut this year's ambitious ad budget, perhaps scuttling plans for a second Super Bowl ad. All this hasn't escaped Wall Street's attention. Three analysts have downgraded their recommendations on Kforce stock this month, including a scathing report Thursday from Dain Rauscher Wessels analyst Theresa Matacia, who described a company struggling with high turnover, poorly executed technology changes and low morale.

Kforce's stock tumbled 34 percent Thursday on the heels of that report. Though it rebounded 13 percent Friday to close at $5.16 a share, up 59 cents, the stock market has definitely turned bearish. Its stock traded as high as $18.25 in January, when investors figured the company would be clicking by this summer.

The good news, if there is any? "I think Thursday was the bottom for the stock," said John Mahoney, an analyst at Raymond James & Associates.

Kforce officials would say little about the company's situation Friday, though they made a point of trying to refute Matacia's report. In it, she downgraded her recommendation from "buy-aggressive" to "neutral" and cut her earnings estimate for 2000 from 53 cents per share to 15 cents.

"Our knowledge is inconsistent with the sources of information the analyst used for her report," said Bill Sanders, Kforce's chief financial officer.

Other analysts aren't as negative, saying they still expect the company to meet analysts' consensus earnings estimates of 49 cents per share for the year.

Still, they worry about Kforce's revenue growth -- or lack of it. On Friday, the company said it expects second-quarter revenues in the $200-million range, not the $210-million that analysts had been forecasting. The new figure isn't much higher than Kforce's year-ago quarterly revenues, $189-million.

The biggest problem: Companies are hiring fewer information-technology specialists, and that niche accounts for 56 percent of Kforce's staffing business.

"The growth fell off a cliff last year as Y2K neared, and it hasn't rebounded as many people had hoped," said Mahoney, the Raymond James analyst. He took over coverage of the stock a week ago; predecessor Mercedes Sanchez cut the firm's recommendation from "strong buy" to "buy" on June 7.

"There's also an undercurrent here that's longer-term into the future," Mahoney said. "Many companies are outsourcing their e-business work instead of hiring their own people."

The trend couldn't come at a worse time for Kforce, which had hoped to be giving the market nothing but good news by now.

The optimism of investors has disappeared in recent weeks, fueled by an executive's departure and some eyebrow-raising stock sales. Kforce's chief information officer, Ken Graham, left a month ago and sold all 40,000 of his Kforce shares May 31.

Also in May, Maureen Rorech Dunkel, a company founder and the wife of Kforce chief executive David Dunkel, sold 111,712 shares.

Kforce execs played down the events Friday, saying chief information officers often move from company to company, and that Graham's severance agreement required him to sell his shares. They wouldn't elaborate on the stock sales by Rorech Dunkel, best-known in the Tampa Bay area for buying a collection of Princess Diana's gowns and taking them on tour around the country.

Across the country, investors are wary of any dot-com stocks these days, and that hurts Kforce in two ways -- it has become a dot-com, with much of its staffing business online, and a large percentage of its revenues depend on the hiring generated by other companies' technology growth.

Kforce's challenge in coming months is to get its revenue growth going, which still largely depends on its salespeople. Kforce officials said Friday that the company isn't in the disarray that the Dain Rauscher Wessels report described. Kforce's staff turnover isn't excessive, they said, and morale is holding steady. Still, the company faces plenty of skeptics.

"The market wants revenue growth, not cost-cutting," said analyst Mahoney.

-- Information from Dow Jones News Service was used in this report.

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