Goo day. And welcome to the Kforce Second Quarter 2022 Earnings Conference Call. Today’s call is being recorded. [Operator Instructions] I would now like to turn the conference over to Joe Liberatore, President and Chief executive Officer. Please go ahead.

Good afternoon. 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. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website. I am pleased with our solid overall performance in the second quarter, which was fueled again by significant sequential and year-over-year growth in our Technology business. There is no doubt that the macro environment has become a bit cloudier over the last several months with persistent historically elevated levels of inflation, which has been at least partially fueled by stimulus activities throughout the pandemic and the continued crisis in Ukraine, significantly rising interest rates and ongoing supply-chain challenges. These and other factors have raised concern as to the pace of overall economic growth. We believe that we are ideally positioned heading into this uncertain macro landscape, however it ultimately plays out. Our confidence is grounded in our strategic position with nearly 90% of our business concentrated in providing high-end technology talent solutions to a diversified set of world-class companies, in attractive end markets, a debt-free balance sheet and improved profitability levels that gives us the flexibility to continue investing in our business. To that end, it is important to remember that flex revenues in our Technology business, which comprised roughly 50% of overall revenue at the time, was only down 7% during the 2008/2009 financial crisis, and in 2020 comprised 75% of overall revenue and was virtually…

Thank you, Joe. Our results in the second quarter show continued success as overall revenues grew 8.2% year-over-year. Our planned COVID- related runoff negatively impacted our year-over-year growth rate. Excluding that decline, our overall revenues would have grown 18% year-over-year. Technology continues to be the key driver to our success. We grew our Technology business approximately 7% sequentially and 24% year-over-year off increasingly difficult prior year comps. We have continued to drive high levels of compounded growth in our Technology business. Our Technology business has grown organically almost 50% over the last two years. This was on top of the revenue stability we experienced throughout the pandemic. As Joe mentioned, our business not only performed exceptionally well leading up to and throughout the 2020 pandemic but also during the 2008-2009 great recession. We believe this demonstrates a stronger correlation of the secular demand drivers in technology to our business, than fluctuations in the macro-economic environment. Our technology growth has exceeded the industry growth benchmarks for over 15 years and has been consistently near or at the top of our industry since the pandemic. Our clients are reluctant to lose key resources, even during challenging macro-economic environments, because of the mission-critical nature of our projects and consultants. 2021 and early 2022 proved to be the strongest demand environment I have seen in my 30-year career in the technology space. Accordingly, our activity levels and trends were also at historically high levels. While our recent operating trends and activity levels have moderated to a degree, demand remains strong and still largely above pre-pandemic levels. We experienced continued acceleration in our average bill rates, which grew 2.4% sequentially and just over 8% year-over-year to approximately $87 per hour. The elevated bill rates have not impacted the demand environment for highly skilled talent, which…

Thank you, Kye. Second quarter revenues of $436.5 million grew 8.2% year-over-year. Earnings per share was $1.30, which included a $0.14 gain recognized as a result of the termination of our outstanding interest rate swaps and reflects an increase of 30% year-over-year. Gross margins increased 50 basis points year-over-year to 30.0% in the second quarter primarily due to a greater mix of direct hire revenues, as flex gross profit margins were generally stable. We also saw sequential improvement in overall gross profit margins due to strength in direct hire revenues and flex margins due to seasonally lower payroll taxes. While direct hire revenues, which constitute less than 4% of total revenues, are not expected to continue growing at this pace, we believe our nearly 90% concentration in technology revenues is notable and provides significant margin stability due to the desire by our clients to increasingly engage us for projects critical to their ongoing success. Flex margins in our Technology business have essentially been unchanged over the past year. Top technology talent remains scarce, and we have continued to see wage increases. We have been able to pass through these increases in our bill rates, due to the critical work our consultants perform. We are also benefiting from a lower percentage of overall payroll taxes than we have seen historically due to Technology being a higher percentage of overall revenues. Our ability to drive more revenue on average from each billable consultant through higher bill rates and longer assignment duration contributes to the reduced percentage of these costs and results in a structurally higher quality revenue stream that we expect to continue going forward. Flex margins in our FA business expanded 210 basis points year-over-year due to a decline in the lower margin COVID project work and repositioning efforts. As we…

[Operator Instructions] We'll take our first question from Tim Mulrooney from William Blair.

Hey, this is Sam Kusswurm on for Tim. Thanks for taking our questions here. Just have a few questions type more your guidance in recent trends. I was hoping you could share first more detail on the types of activity you saw slowed down or moderate in the second quarter? Maybe if there any specific projects or client groups attached that activity? And then second, could you share what kind of macro environment is consequent in your third quarter guidance? And how you compare that to the second quarter?

Hi, it's Kye. I'll start with the industry question first, we saw growth in everyone industries we support except for one, we had a tiny dip sequentially in healthcare. But healthcare was pretty much client specific. We had a client that we had a little bit of decline in. But other than that, we still saw strong growth in each of the industries we support. And then from the macro environment, we're still seeing strong trends. We're still above where we were pre-pandemic, we still see strong demand, especially in the areas that we're focused on like digital, cloud, big data, good demand and all those spaces. So we feel good about where we're going in that macro-economic environment.

Yes, Sam. The other thing that I would add to that, as Kye said, we expect as we move into the third quarter, certainly we've seen now that we are month into the third quarter very good demand environment, particularly technology. If I had to differentiate it a little bit, I would say the last year or so obviously has been a demand environment probably better than we had ever seen. So things certainly are not at those really heightened levels. But as Kye mentioned, they continue to be very strong and better than they were prior to the pandemic. Just to put a little finer point on what she said.

Yes, and when you look at it, we're still up 50% for last two years in technology, which I think is incredible. I'm really proud of the team for those results they've delivered.

We think does well, and it's definitely helpful commentary, maybe just more specifically than for some of your more partner clients, where you provide a lot more of those long-term project support. How recent conversations gone, are there any that are considering pausing or maybe even scaling back some of their IT projects? Or were they still just full steam ahead?

The project space is still going strong, it's still accelerating at a faster pace than any of our other business. We feel really good about where it's going demand in all of our verticals. And again, focused in those tech stacks, we support project solutions is moving very quickly.

Yes, I’d say it's even beyond, this is Joe, beyond project solution, the overall business as a whole. To date, we really haven't seen any shift in demand across the board. So it's not just on projects or solutions oriented business sits on the core staffing businesses well, client sentiment still remains very positive. I mean, as we've stated before these initiatives that they're focused on their mission critical, they're not optional. They're necessary for competitive purposes. So we're seeing the clients continue to move forward and driving all their technology initiatives.

We'll take our next question from Kartik Mehta with Northcoast Research.

Hi, good afternoon, I was just kind of wondering about wage inflation. I know you've had a good year-over-year growth rate and bill rate, and I'm wondering what you're seeing if you anticipate some moderation or the trend to continue.

Yes, I would say what we've seen from a wage inflation standpoint is 2021, in the early part of 2022, were probably the highest levels of wage inflation that I've seen in my 34 years in this industry, and I think if we just got an ISI report earlier this week, I mean, even if you go back to 1985. And what we started to see is more moderation there. So while wages are still continuing to inflate, they're not deflating at the same pace that we were seeing. And I mean, even when I look back to dot.com era, which was probably the highest wage inflation environment that we had experienced from that point. And really, we've never seen anything comparable to the dot.com era. What we experienced these last probably 18 months, or even like anything we experienced there, but we do see more moderation coming into play at this point in time.

Yes, I would say, and to apologize, just to follow on to Joe's point. So as we think about our flexible margins as it relates to wages, right, so we've had very stable in particular in technology flexible margins. So I guess, as I think about it, is we see -- if we see us further slowing, if we see a further acceleration, right, margins have been very stable. And so as we think about the prospects on a move forward basis, our ability to continue to work with our clients to make sure that we're adjusting as necessary, has put us in a really an excellent environment to look forward and expect to execute, and continue to do so in this margin profile.

And then just one last question, just ability to find people, I know, that's been an issue for everybody. And I'm wondering if you're seeing any easing in that, or just the industry you're in, it just continues to be difficult.

I mean, in the technology business, it's still like extremely competitive, we are seeing a little bit of easing it, but it's still, it's extremely competitive. There's still negative unemployment in the technology space. So I think we're going to continue, because there is such a robust pipeline, in the areas that we support, you're going to continue to see some candidate challenges there.

But what I would add to that is over the better part of probably the last five years is we cranked up all of our innovation strategies. I mean, this is an area where we've invested 10s of millions of dollars where we're continuing to invest in tools, processes and technologies to equip our people. So that we can let -- we can leverage everything that's evolving in the marketplace so that our people have the most sophisticated tools to be able to get after candidates quickly on how they leverage the different platforms and tools that we're bringing on board. So this is an area that we really emphasize, because we view that this is an area where automation and technologies can really fuel a lot driving our productivity and performance of our people. So this is front and center, it is core to what we do. People ask me all the time if you were to say what is Kforce’s number one core competency. It's recruitment. It's at the heart of what we do. It's what differentiates us from the big solutions providers out there. Which is why a lot of the big solution providers actually leverage Kforce as a third party to help them find talent because to find the just in time talent in the marketplace, that's what we do for a living and it's what our people are just absolutely phenomenal at. So even against that backdrop that Kye was talking about, we feel very confident in our ability to continue to attract and identify top talent in the marketplace.

We will take our next question from Marc Riddick with Sidoti.

Good afternoon, everyone. So I wanted to touch a little bit on if you could talk a bit about the visibility that you're seeing, I think in the prepared remarks there was comment around the duration, the assignment duration. I was wondering if you could talk a little bit more about that maybe what you're seeing, and maybe what that mix is looking like, or how has that been sort of evolving?

We continue to see our technology assignment duration continues to expand. We're clients, what our people do is so critical to our clients that they want to hang on to that talent. And we have not seen much of a change in that. Once we get them in there. They want to keep up, they want to keep that intellectual capability, and they continue to hang on to our people. I don't see that changing anytime soon. We're really supporting mission critical systems, people are still investing in digital transformation. They still have to move to the cloud. So as we see, as we've gone throughout the year, we're continuing to see our assignments linked in as our focuses, is there on tech 90% of business in tech, we continue to see that duration.

Yes, Mark, I would add to what, this is David Kelly, I would add to add so what Kye said, really over the last five years, that length of assignment is really is doubled, right. I think it's a reflection of some of the comments that Joe has made as Kye as to the scarcity of talent, clients are looking for firms such as Kforce, to meet the solutions that they required to drive their business digital transformation initiatives across many other areas as well. They understand our competency, as Joe said in finding those people. And once they have them on site, they don't want to lose them because they're hard to find. So for us, we look at the average length of assignment here, having increased is something that's probably here to stay.

Yes. And I would add on to that as well, because I think this is a key point that Dave and Kye didn't touch upon, is we are continuing to see our clients convert our consultants. And again I've stated this for years now, I think there's no greater compliment to our team's performance than we put somebody on a contract assignment and that person convert into full time because that means we've really made a great match. But our conversions are up 37% year-over-year, I had commented on this, I believe in our last earnings call where we saw that we had kind of moved back to pre-pandemic levels. We're operating at higher than pre-pandemic levels right now. So I think that also is indicative of where the client confidence is in terms of the technology initiatives that they're investing within. So these growth rates that we're throwing up are even in spite of those high volumes of consultants that are converting. So I think that also gives us a feel for what the demand environment and how robust the overall needs are within the marketplace.

Okay, that's very helpful. Thank you so much, everyone. And then I wanted to shift gears. I know that you've got quite a bit on your plate and a lot to take advantage of going forward, internally, I did want to touch on maybe what your thoughts were as to the current views on a potential for acquisitions, and maybe what that acquisition pipeline looks like whether you're, whether that's commentary on pricing, and maybe some of the competition for assets, things of that nature, and how that maybe as evolved through the year or maybe what you're seeing there. Thank you.

Yes, Mark, Dave Kelly again, so I’d just like to start by pointing out that we actually haven't made an acquisition in over a dozen years. That is, to us a reflection of, we've actually spent quite a bit of time focusing on building an organically growing machine focused in technology and have been quite successful at it. So as you might expect, with those types of results, I think Joe touched on it right 50% growth accounted over the last two years. And exceptional performance of our teams, it makes it very difficult to think about an acquisition that you might do, that might be additive to that type of performance, particularly acquisitions come with integration and acquisitions come with the use of cash, we've been very consistent in our capital allocation strategy, we've increased our dividends, I think, four or five times over the last couple of years, we've been very consistent on buying our stock, we think that has been a great investment for us. So the bar is extremely high. Certainly, we're looking at opportunities. But I think just the fact that we have been in an environment where we haven't done anything in years speaks volumes as to where we think the best use of our cash is, I don't have any expectation in the near term that that's going to change.

Okay, great. And then last thing for me, I wanted to just touch on the commentary around the, what you're seeing with the office-occasional and what's taking place there. And maybe if you can sort of give some thoughts or views as to how that's evolved, whether that's been in line with what your expectations have been, or maybe what you're seeing as far as activity because I would imagine that it would probably vary a bit. But maybe if you talk a little bit about what you're seeing there as to how folks are utilizing it. Thank you.

Yes, I would say that, I would say that our office-occasional strategy, which again, we've been after, since really May of 2020 so went right forward with this. And that was based upon feedback that we're hearing from our people in terms of what their desire was on a move forward basis. And even though there was still a lot of noise, but then we kind of surveyed throughout the pandemic, I would say office-occasional at this point in time has exceeded our expectations. When we look at how our teams have embraced it, all the technology initiatives that were associated with our office cum occasional model have really rolled out on in a flawless manner. We are a Microsoft shop and very centric with Microsoft. So we kind of had a philosophy as we went through that process that if technology we were looking at, if Microsoft could accommodate 80% of what our outcome we were looking for, we would stay with Microsoft and in the Microsoft ecosystem. And I'm telling you there's a great video that just I think hit the web last week Microsoft CEO talking about, in essence, what they're really doing is doubling down on teams and everything integrating into teams and third party partners that they're bringing onto their platform. So part by strategy and part by faith we find ourselves in just such a great spot in terms of where we are with the technology, where we are with our people's attitudes and embracing where the trust level is within Kforce. And then a big part of this as well as adjusting all of our processes and how we apply the technologies to our processes to really make it seamless that people can communicate and integrate, whether they're in office or whether they're working from the beach, or whether they're working from their kitchen table wherever they might be. And our people have embraced it. I'll tell you today we were interviewing, I was interviewing a very high level technologist for an opportunity that we have. And this was an area where he had great interest and understanding where we were and what we were doing. So there's no question directionally this is where the marketplace has gone. This is what the employees have expressed their desires are, and we've embraced it. And I think that's really put us in a really unique spot at this point in time.

[Operator Instructions] We'll take our next question from Tobey Sommer with Truist Securities,

Hey, good afternoon. This is actually Jasper Bibb on for Tobey, maybe just following up on Sam's questions from earlier with financial services being the largest vertical. Could you just comment on how you expect demand in that segment to trend over the balance of the year?

We've seen good growth in financial services and don't have any reason to see that changing, demand still strong. We're still growing there. So financial services is going well. I think in the FA space, there's a little bit of change with just the mortgage industry. But fortunately, we're so focused in on technology, it hasn't had an impact at all on us.

I would say, look, when you look at the financial services space, you haven't, you really have a couple of factors going in there, right? There's so much happening within fin-tech. And then you have the larger financial entities that are having to invest substantial into their technology platforms to combat what's taking place within fin-tech. So I think when you put all that together, you really have positive drivers on really the innovation side within financial services, even the legacy side of what organizations that are having to do as I mean, as we all know, it's not just the largest segment for Kforce, I mean, financial services is the largest segment from a professional staffing and solution standpoint, from a demand out of any industry that's in the marketplace. So we feel very good. And that's one of the areas where we have really depth and breadth of long standing relationships. So our team is -- our teams have done a great job on forging those relationships, and really working with organizations to understand where their priorities are and where their investments are necessary, and aligning in and around those opportunities.

Got it. And then I just wanted to ask about the repositioning of FA flex, based on your guidance looks like it's going to be down pretty steeply in the third quarter and sounds like again in 4Q. So are you expecting that kind of rate of decline to level off in 2023? Or would you expect that business to kind of continue to be in decline over the medium term?

Yes, this is Dave Kelly, I think I would say this, this has been actually, for us a really important part of our story, especially as it relates to modifying and repositioning that what is done to help our technology business. As we look at our strategy moving forward, we had alluded to the fact that we, as you pointed out, would expect to see declines in the third quarter. And for us to continue to fortify our efforts and technology while at the same time supporting the clients that we have in finance and accounting. I think that just reflective of the success that we're having growing our technology business, it stands to reason that that strategy is something that we should continue. So I think as I look at the trajectory of the business as a whole, placing our bets and making sure they're investing in technology, I think we're growing and continue to grow at double market rates there, in some respects, because of the focus investment there. And sometimes at the expense of finance accounting has been a good decision. Yes, I think I would tell you, obviously, that has resulted in that lack of investment has resulted in some of these trends. And I don't know that they would necessarily change from current state right now.

Yes. And what I would add to Dave's comment is our strategy is we've conveyed in prior quarters, is to continue to reposition our FA business and really migrated towards that higher skill roles that are more synergistic with our technology business. We believe that really diverting our resources away from the transactional space, which is more susceptible to automation and much more economic sensitive, really paid dividends for us in the long term. I mean, I think the team has done a really nice job, we've experienced good progress, albeit not at the pace to offset the run off of that legacy FA footprint. I mean, our average bill rate in FA is now approaching $50 an hour, which is up significantly, most sequentially, and on a year-over-year basis. And I think we're also benefiting from a higher flex gross profit margin which increased, I think it was 210 basis points year-over-year as a result of our repositioning. So I think our team has done a really nice job. But again, we're playing for the long game here on not on a quarter by quarter basis, and we're going to continue to make the right strategic calls to move our business forward.

We'll take our next question from Mark Marcon with Baird.

Hey, this is [Inaudible] on for Mark. Thank you for taking our questions. And I'm sorry if any of these questions have been asked already, hopped on late, but you gave some great numbers in terms of how IT Flex is held up during prior recessions. I was wondering if you could give some commentary about how you would think the repositioned FA business would hold up in a recession and kind of how far are you on that reposition journey. At what point do you think that will inflect back to growth?

Yes, I would say, again, this goes back to where we're migrating our FA footprint is very synergistic with our technology footprint more specific on the data side of the equation. And I think when everything that we hear from our end customers and everything that I'm reading, whether it's McKinsey, or it's Gartner or anybody else, I mean, the area of how people are looking to leverage their data, understand their data, even in a more difficult environment, those needs probably don't go away. In fact, they probably become more critical on driving intelligent business decisions. And again, this was a big part of why we went after the repositioning of our business to get away from what historically had been a more transactional business force, which is highly susceptible to economic times and economic cycles.

Great, thank you. And just I guess just one little follow up there. Just following up on that question, as I guess, when do you expect that business to kind of just inflect back to grow kind of how far do you think you are long with that transformation journey? And how is that resonating within the client base?

So I think to answer your last question first, I think is resonating well, we talked about average bill rates at $50 an hour. Joe, I think just mentioned, it is much more synergistic with our technology businesses, quite frankly, certainly from our perspective, more or less, I would say economically sensitive, so certainly resonating with our clients. So that business in and of itself, is doing I think well, I mean, we had indicated in the third quarter that the trends in FA are going to decline because of the investments we're continuing to make in technology. We expect that to continue. So could it go down further from where it is in Q3? Sure. But that's not going to be a bad investment for us because we think it'll be added to our technology business.

And that concludes the question-and-answer session. I'd like to turn the call back over to Joe Liberatore for any additional or closing remarks.

Well, thank you for your interest in Kforce and support of our firm. I'd like to say thank you to every Kforcer for your extraordinary efforts and to our consultants and clients for your trusting Kforce and partnering with you and allowing us the privilege to serve you. We look forward to talking with you again after our third quarter 2022.

That does conclude today's presentation. Thank you for your participation. You may now disconnect.