Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Kforce Inc. Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Michael Blackman, Chief Corporate Development Officer. Thank you. Please go ahead.

Good morning. 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 Securities and Exchange Commission. 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?

Thank you, Michael. You can find additional information about this quarter’s results in our earnings release in our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website. Unless otherwise indicated, our commentary relates to results from our continuing operations. I would like to begin by providing some commentary on 2019 and the activities completed to position our firm for significant future success. Last year, with the successful divestitures of our KGS and Trauma FX businesses, we completed a multi-year effort to exit all non-core businesses and focus our offerings solely on the domestic technical and professional staffing and solutions markets. The completion of these efforts positions us to allocate our investments and dedicate our resources to growing our footprint and service offerings in technology and areas within finance and accounting, which complement the massive data and digital transformation efforts taking place within all organizations. These combined segments make up one of the largest and arguably, most strategic investments to the long-term success of organizations served by specialty staffing and solutions firms. Technology now comprises nearly 80% of overall revenues. Clients looking to meet their talent needs in technology are looking for partners that are able to provide resources at scale across a diverse range of skill sets and project management models across multiple geographies and with a focus on compliance. We have built a business that is able to do just that without distraction and it is helping us to increase clients and market share. Our shareholders gained immediate benefit from the 2019 divestitures through our repurchase of approximately 13% of outstanding shares utilizing the approximately $102 million of net proceeds derived from the transactions. We were able to recapture all of the earnings per share lost from the KGS operations…

Thank you, Dave and thanks to all of you for your interest in Kforce. Before I begin discussion on our fourth quarter results, I would like to echo Dave’s comments and specifically congratulate and thank our team on the progress we have made over the course of many years. We have built a platform, team and client portfolio that should allow us to consistently outperform our competitors in meeting client needs for technology and key finance and accounting talent across industries and skill sets. We believe that focus will win in the future where the war for top talent is intense and the demands of the client are growing significantly given the strong secular drivers. As it relates to our fourth quarter performance, total revenues of $336.2 million were within our range of guidance, but certainly below our expectations due to a number of factors that I will enumerate throughout these remarks. Let me begin the quarterly discussion by providing some details about the performance in each of our business lines. Our technology business continues to be our growth driver and now has exceeded the market growth rate for the ninth consecutive quarter. In the fourth quarter, our Technology Flex business grew 4.8% year-over-year. The operating trends in this business sustained the strong trends we experienced in Q3 through October and the majority of November. However, as we entered the holiday season, we saw significant increase in year-end planning activities by some of our large clients both to minimize fourth quarter expense and also secure crucial talent for the upcoming year. Specifically, we saw more significant furlough activity than we had anticipated coupled with a spike in conversions, which were almost 50% greater than the already elevated level experienced in the fourth quarter of 2018. We also experienced some client…

Thanks very much, Joe. Revenues of $336.2 million in the quarter grew 1.8% year-over-year and earnings per share from continuing operations of $0.66 grew 22.2% year-over-year. Our gross profit percentage in the quarter of 29.2% decreased 40 basis points year-over-year as a result of a lower Direct Hire revenue mix and a decline in our Flex gross profit percentage. Our Flex gross profit percentage decreased 20 basis points year-over-year. As it relates specifically to our Tech Flex business, the year-over-year 20 basis point decline is the result of slightly higher healthcare costs. Bill/pay spreads in this business have been stable over the past year due primarily to diversifying and expanding relationships outside of our very largest clients. This next tier of clients typically has a more attractive margin profile. Additionally, revenue from managed services projects, which also have a more attractive margin profile, is also increasing. The 20 basis point decline in FA Flex margins is being driven by slightly lower spreads. Looking forward, we expect continued success in both our portfolio management activities and the growth in revenue from managed services projects. We expect these efforts to result in stable tech margins prospectively exclusive of seasonality impacts. Specifically, in the first quarter, we expect that overall Flex margins will be negatively impacted by approximately 110 basis points relative to Q4 due to seasonal payroll tax resets. We have been able to maintain a consistent level of SG&A dollars spent year-over-year and drive operating leverage while growing revenues and significantly increasing technology investments. This is the result of continuing to drive operating efficiencies and improving the productivity of our associates. SG&A as a percent of revenue declined 50 basis points year-over-year. Our fourth quarter operating margin of 5.8% was on track with our operating margin objectives. During this economic cycle,…

Thank you. [Operator Instructions] Our first question comes from Tobey Sommer with SunTrust. Your line is now open.

Thank you. Within the Tech Flex business, could you quantify the impact of elevated furloughs and conversions on the rate of top line growth?

Hi, Tobey. This is Dave Kelly. I don’t have the precise number. I would tell you that as we have in the past we typically get furloughs late in the year, but they certainly were magnified this year. I think, we probably because of how holidays fell, the fact that both Christmas and New Years was on Wednesday and we had a very short period of time between Thanksgiving. So I would tell you we anticipated some furloughs, but I mean, I think materially more than we would have anticipated. Additionally, as we talked about, I think really important that talks about demand for tech talent, Joe talked about the elevated level of furloughs – or I am sorry of convergence that we saw, you can bind those things, we are probably talking about collectively somewhere $5 million to $8 million more than we had anticipated.

Thank you. And then I wanted to ask a question on the managed services, what sort of margin differential is there in that part of your business versus the rest of the book and as you think about your – hitting your target over a multiple year period, are you going to be able to accomplish that organically or is it going to require some acquisitions? Thanks.

Hi, Tobey. So, let me start with the back end, I’ll Joe elaborate after if he wants to. So, clearly this is an important part of our business and it’s been growing well in excess of overall Tech Flex rates. I think we have said in the past that at these accelerated growth rates, we think we can reach some of the targets that we have internally organically. But as we think about acquisitions and our focus, it clearly is in this area, not necessary, but potentially additive. In terms of the margin profile as you’d expect, I guess number one, first of all, these are longer term assignments generally speaking, so good for the overall stability of the revenue stream. I think important to note, they are more sophisticated projects. So, it’s a bill rates are strong in these projects. If we kind of look at what we have done so far, hard to measure project by project. Obviously they are different, but the margins, Tech Flex margins are at least 300 basis points better on average than the typical Tech Flex staff augmentation project that we would have.

Thanks. And last question mean for me and I will get back into queue, last quarter you gave us kind of an illustrative view of little bit longer term not necessarily guidance, but kind of a cadence, are you still comfortable with the 6% rate of growth or better over a longer stretch of time in Tech Flex?

Hi. Tobey, this is Dave again. Yes, I appreciate that. Yes, so as a reminder obviously, we wanted to kind of bring some better understanding on a quarterly basis to what the impacts of the seasonality of our business were. And as to your point, give you some reflection of what we believe is a very strong environment Tech Flex. So, I will remind you, Dave’s comment I think over the last decade, our compound annual growth rate in an environment that continues to evolve and continues to require more tech resources has been 8.5%. So, do we think on a sustained basis 6% is a reasonable number to expect from us? Clearly, history suggests that it is. So, we feel very good. I have mentioned we think as the year goes by, we will see improvement in our growth rates in Tech Flex, again because of the demand environment, because of the skill sets we have deployed. So, yes, still feel very confident about the market and our prospects.

Thank you.

Thank you. Our next question comes from Mark Marcon with Baird. Your line is now open.

Good morning. Thanks for taking my questions. Just stat at the end of the fourth quarter when we started seeing elevated level of conversions, how broad-based was that?

Yes, Mark. This is Joe Liberatore. I would say, it’s broad-based, but it was very highly concentrated in what we call our enterprise on our clients, which are some of the largest consumers in this space. We definitely saw much more elevated levels taking place within those customers. In fact, we just came out of one of our quarterly reviews with one of those key customers and they actually made the statement that they converted more people than they have ever done in the past in Q4. So, we saw that across a number of key customers. We called out specifically financial services, but we also did see that in certain other large clients as well.

Joe, what was the underlying rationale that they have provided, I mean, I’ve got my suspicions which seem obvious, but just wondering what they were articulating? And then what are they articulating in terms of thoughts about the same level of activity going forward?

Yes. I’d say the real – the key driver to it is the nature of this cycle and that really the secular aspects associated with the engagement that they are deploying this talent on. They foresee the long-term need for the talent. So, as people have been in there on contract and they have gotten to know the organization, the organization has gotten to know their capabilities. They are basically securing the talent from a long-term standpoint. And I’d say even we see this happening within the financial services and it’s been out there with certain executives in financial services stating that they are preparing for imminent recession at some given point in time. I believe, as I read through those tea leaves what they are saying is we are going to need these resources irrespective of what happens in the market. So, even in a recessionary period, they are going to have to continue to deploy those applications that are customer-facing, consumer driven to stay competitive with traditional and non-traditional players. So I think that’s playing a big part in it.

If that continues and it goes at a potentially increasing rate, to what extent is that end up making it more difficult to achieve the 6% longer term growth rate?

Yes, we feel confident with the 6%. What we are seeing partially happen in here, Mark, is basically things are moving from a Direct Hire where you would typically see that in the Direct Hire to these right-to-hire for conversions. So, it’s kind of – it’s just moving from one bucket to the other bucket doesn’t change the overall demand within the space. So, we don’t really have concerns about that. We have been stating this for the better part of last 3 or 4 years. It is probably about 4 years ago, where we saw conversion levels start to escalate higher than what we had experienced in the past and they have remained at those levels. This Q4, in particular, was as David – as I had mentioned 50% higher for us than we experienced last year. And that was very specific to certain clients and their talent strategies. So, I wouldn’t extrapolate that that was something that was broad-based across the entire sector.

Yes, I would add, Mark, just a little bit more color. So during the cycle just generally obviously, we have seen a fair amount of conversion activity consistently. This was as Joe said a heightened quarter here, but even with that elevated relative to last cycle conversion activity as I mentioned our Tech Flex growth rates are still 8.5%. Additionally, as we talk about lengthening assignments and we also talk about some of the individuals that we might have an assignment that are more difficult to convert. I think frankly we feel very good about the sustainability of the revenue stream and of course clients are going to want talent, but being able to outrun that we have got a high degree of confidence.

The last piece of that I would add on to that, Mark and I have mentioned this in the past, having entered this industry really on the Direct Hire front back in 1988, there is no grater compliments we get than when a consultant converts to full time employment with an organization, because that means our people are living out our mission, our vision that we are getting the right people with the right organization. So while there is some near-term pain associated with loosing that billable, the long-term gain to the organization by having an ally inside the organization and somebody that we felt furthered their career and also solve a client problem, I mean, it’s well worked that the near term pain associated with that from how it plays out in terms of what we are doing for people’s careers.

That’s great perspective. With regards to the talent management system that’s going to be deployed, can you talk a little bit about that productivity gains and also potential expense savings that may end up getting as well and how you are thinking about that?

Yes, I will touch on the productivity and then I will be hand it over to Dave to talk about from the expense standpoint. In reality, what we are doing here is we are moving into completely digitizing how we are interacting with our clients and candidates within our talent relationship management. This kind of mirrors what we have done from a client relationship management, so it allows us to kind of bring that holistic solutions to the table. So what we foresee over time is what the technology will allow us to do is to leverage those things that technology is capable of accelerating, so that our people can spend much more of their time focused on the relationship aspects of the business. The things that only people can do, especially in the employment space, which is highly complex as people are navigating their careers. So, when it comes to things such as identification of talent, when it comes to matching and those types of things, that’s where we see a lot of opportunity for technology to come into play to drive efficiencies and productivity for our individuals so that they can focus in, on working with people through the more complex human interaction relationship access that take place through really any time of employment, whether it’s the temporary employment or from a full-time Direct Hire standpoint.

Yes, Mark, this is Dave Kelly. So let me start. When you talked about expense by starting with the end, which is we have made operating margin commitments with the full expectation that these technology investments are going to continue to drive increasing productivity and therefore increasing operating margin. So they are already baked in to the expectations that we have had. And we know that because over the course of last few years, we have implemented CRM in the process of making other technology investments inclusive of the CRM and those are currently driving the beginning productivity improvement. So these are SaaS-based licenses. They are being baked in to SG&A, but SG&A is staying flat. I think I had mentioned SG&A dollars year-over-year are flat year-over-year. So we feel very confident that we are going to get improved productivity, improved efficiency, actually SG&A dollars as a percentage of revenue are going to go down over time even with these incremental costs and EPS obviously is going to continue to improve. So this is all part of a long-term strategy, no different than what we have been talking about for the last 3 years.

Thanks. Thanks for confirming that. I was assuming that costs would go down over time and the efficiencies would go up, otherwise, you would be putting it in. I was just wondering if you were running like dual costs and if there was any to be any sort of step function in terms of once the implementation is done and the old systems off and everybody is on that there will be a step function. So that’s what I was just trying to get at?

Okay.

And would there potentially be any sort of step function once the completion is done?

The step function that you would see there that would basically improve operating leverage in comparison to cost. It’s going to come through acceleration of productivity, Mark, because of the nature of how systems have changed from there really being a CapEx item to everything migrating to more SaaS licensing. Because realize what we are doing with our TRM is that TRM is just the core platform. That platform now allows us to plug in a lot of innovative technologies that are evolving in the marketplace which will then kind of be accelerators to productivity gain opportunities for our associates.

Thanks. And David, in your opening comments, it did seem like you were talking a little bit more about potentially the – you’ve already been doing things in terms of managed services, potentially looking at acquisitions. Can you just give – given the wide experiences that you’ve had and all the lessons learned over the decades like what are some of the ideal characteristics that you would be looking for in terms of selecting a potential add-on to that of the overall platform?

Actually, we were thinking about running a Super Bowl ad, Mark….

I wonder how many people remember.

As a matter of record, we opened our board meeting with the 20-year look back and ran the Super Bowl ad. By the way, it was surprisingly prophetic, as we looked at the things that we anticipated and we were reminiscing about how we had the vision, we just happen to miss the technology infrastructure that was necessary to deliver on the brilliant strategy that we had. We do now that a couple of the firms that were identified in the Super Bowl ad, HotJobs and Monster are now gone, who had indicated to us that we were going to be gone. So if we look back on it, we made a call back in ‘12 and ‘13 to focus on technology domestic tech. We could see clearly the secular shift and during that time, we have also seen the migration up with the clients as they are looking to us, particularly with agile methodologies and the other tools that are coming in, the speed of innovation to utilize our firm and our services to come upstream. So as we look at that, we have seen the opportunity. We’ve had very disciplined acquisition strategy over the past several years. We will point out that we haven’t done an acquisition since 2008. We have had a very focused effort to accomplish that. A whole team we have identified characteristics that we are looking for, size that we are looking for, skill sets that we are looking for. One of the important elements is the continuing contribution from management, while we believe we have a great story to tell as we integrate and populate the skill sets into our organization. Number one consideration is culture, how well do they fit with us? So we feel very confident that based on where we are that we will identify something, but we are going to stay disciplined. When we do, it’s going to be additive. It’s not something we have to do as we have demonstrated that organically we can grow and still grow very well rates within our solutions and team businesses are growing at substantially faster rates than tech than our traditional tech business. But we do believe that we will identify something. We don’t have to do it, but we would like to do it. So, all those that are listening on the call that would like to join the team we would be happy to have a conversation.

David, and you – I know culture is preeminent and obviously strategic fit. From a size perspective, what’s kind of the ideal parameter?

We can do depending on pricing, of course, we can go anywhere into the hundreds. I don’t think that we are going to do something in the billions yet, but that maybe coming, but certainly in the revenue area, in the hundreds would make sense, 100 plus. We would like to get something with enough scale that it would give us a platform, but at the same time would also allow us to take what they have already done and rolled that out to our other clients with some of the qualifications that they have already demonstrated. So we would bring that also in with our – what we’ve already accomplished which by the way is pretty substantial. It’s amazing to see just how quickly we have been able to grab a hold of some very significant managed solutions kinds of businesses.

It’s one, Mark. It’s one of the big, big opportunities as those organizations that we have spoke with up to this point in time, they see the value being associated with somebody at the scale of a Kforce and the access to the pedigree client portfolio that our people have nurtured relationships. So this is one of those scenarios where we are looking for one plus one to be much greater than two as we consider those targets that we are pursuing.

Terrific. I appreciate the perspective. Thank you.

Thank you. Our next question comes from Tim Mulrooney with William Blair. Your line is now open.

Good morning, everybody.

Good morning.

So in your prepared remarks, you mentioned length of assignment now 10 months in Tech Flex, if I recall correctly, it wasn’t that long ago that it was 8 months and even 6 months only a few years ago. What’s driving that increase in the length of assignment and what are the implications if any that has on your financial profile if it continues to increase?

Yes, I’ll address the first part and then I’ll let Dave Kelly address the communications on the financials. From a standpoint of what’s driving it? It’s just the nature of what’s happening in business. Much of the work that we are doing now is focus on the customer-facing type applications that organizations are addressing so that they can serve other consumer base and they can protect either their footholds of relative to organizations that are coming at them from a disruptive standpoint, the non-traditionals as well as their traditional competitors that are making strides on these front. So we are not – the nature of this environment in comparison to like what we saw during a dotcom environment. With dotcom, everybody was trying to figure out, what’s this new medium and how am I going to do business on this new medium? Those days are past and everybody now has the internet somewhat figured out. And what’s happening is now there is these platform plays coming about, which is how do I leverage the technology to drive operational efficiencies and improve the customer experience and the customer journey. And so we see those as ongoing and I think that’s part of what’s driving the duration of assignment is it’s moving from one project to the next project to the next project. So they are keeping the consultants and basically enrolling them from engagement to engagement and engagement. Unlike the past when somebody is implementing an ERP system and somebody might be in there for 2 years, because it was just this massive project that was going on and on and on. So I’d say that’s one driver. The other driver is the nature of the types of engagements that we are working with, with our end customers, where they are looking for us to take on a little bit more of the responsibility within the engagement. So we are moving up that value chain and we are playing a different role on that project versus just putting somebody in, in a staff spot on the team. We are putting in groups of individuals that are playing key roles in the nature of the project work that’s taking place. So it’s really when you kind of put those two things together, those are some of the market drivers that are really extending those project durations. And the third piece of the leg of this stool is just top talent is not easy to find. So when organizations are procuring top talent and they realize they have that top talent, they are wanting to hold on to that talent and looking for other opportunities where they can redeploy that talent, because they know how difficult it is to go back out into the market, to procure that same level of talent all over again if they can even get it.

So, Tim, before a little on the financials, but first of all, just to amplify Joe’s point, remember our average bill rate is $75 an hour. You look across the technology space it’s amongst the highest that is also the place where it’s hardest to find talent. So the desire for our clients to find that higher paid talent is something again, I think differentiates our firm. So that is driving some of that, I think tenure increase. In terms of what it does for our financials, I mean, again, not surprising as to what you would expect. When you’ve got lengthening assignments, you have got the opportunity for our associates to work on those other things, right it helps with revenue growth, it helps with productivity. Certainly, it helps with turnover of our associates. It helps on many different fronts and again, meeting the clients’ needs. Our clients were happy. They are going to come to us and again give us an opportunity because we have access to that top talent for opportunities that others might not see. So it’s gotten multiple positive impacts for us.

Got it. Very helpful. Thank you and good luck this year.

Thank you very much.

Thank you. [Operator Instructions] Our next question comes from John Healy with Northcoast Research. Your line is now open.

Thank you. Want to ask a big picture question, looking at 2019, kind of the rear view, I know there is a lot of moving parts with weather and client activity and things like that, but have you just looked at orders or potential assignments, how would you characterize that growth relative to revenue growth for the company on the IT flex side in 2019 and maybe how might that compare to the last couple of years?

Yes, this is Joe. I would say from an order flow. Order flow has been at elevated levels and has continued to be at elevated levels. In fact as this year started out, we saw order flow immediately pick right back up to where it left off. So the demand in the marketplace, the health of the market I’ve been doing this going on 32 years now. The closest comparison that I can give in terms of this demand environment was the peak of the dotcom era. As I mentioned earlier, I do believe what we are dealing with from a business standpoint today versus dotcom is very different, because the technology drivers are much secular versus cyclical, more panic driven like the dotcom was. Organizations realize that they need to be making these investments. The investments are proving out to be real and obtainable in terms of driving business results, so much different from that standpoint. So we have really seen, we have seen no blips at all from an order flow standpoint and demand standpoint.

Great. That’s helpful. And then just a couple of housekeeping questions for me, is there any way to think about tax rate for this year as well as potential just CapEx for this year?

Yes, so John, this is Dave Kelly. So CapEx is going to be about where it has been, right. So we typically see about $10 million the last couple of years, because of some of the technology investments that we are making. So that’s meaningful when you think about the cash flows that we generate. In terms of tax rate, I think I had indicated to you that the expectation of tax rate in the first quarter is 26.5, that is an expectation that I would have on a regular basis throughout the year obviously, I mentioned this quarter and we would see the same although to a lesser impact tax credit in the fourth quarter as the next tranche of long-term incentives passed. But again, I don’t think it’s going to be a 600 basis point. It’s probably – again, it depends on how high the stock goes this year as to how big of a difference it is. You kind of look for the full year, you kind of blend the fourth quarter in, you are probably looking it closer to 26%.

Great. Thank you guys.

You bet. Thanks, John.

Thank you. And I am showing no further questions in the queue at this time. I will now turn the call back to David Dunkel, Chairman and CEO for any closing remarks.

Okay, great. Well, thank you all for your interest and support for Kforce. And while we always have much to do, again, I’d like to say thank you to each and every member of our field and corporate teams and to our consultants and our clients for allowing us the privilege of serving you. And as we have stated we believe that the future for Kforce is very bright. Thank you very much.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program and you may now disconnect.