Hello and welcome to the Kforce Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Joe Liberatore, President and CEO. You may begin.

Good afternoon and thank you for your time today. This call contains certain statements that are forward-looking that 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. 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 our Investor Relations' portion of our website. Our second quarter performance, including the sequential growth in our Technology business, was consistent with our expectations. Operating trends over the first half of 2024 and discussions with our clients indicate to us that the current operating environment continues to be more stable and constructive than it was throughout most of 2023. The opinions on the U.S falling into a recession in the near future remain mixed. While the continued increases in the U.S. stock market indices suggest growing confidence that we may soon reach an inflection point, there still remains significant economic uncertainty as well as heightened geopolitical concerns. Against this backdrop, demand for technology resources and the desire for our clients to initiate new projects has remained consistent over the last three quarters. Clients, broadly speaking, have continued to exercise a degree of caution initiating new technology investments though, the most critical projects continue to be initiated and proceed forward. As we look beyond the current uncertainties, we continue to be encouraged by the building backlog of strategically imperative technology investments that we expect to be high priorities for our clients to initiate at an accelerated pace once the macro uncertainties begin to clear. Given the secular underpinnings, there is simply no other…

Thank you, Joe. Total revenues of $356 million were slightly above the midpoint of our expectations for the second quarter, increasing 1.3% sequentially and down 8.4% year-over-year. Our Technology business grew 1.7% sequentially and declined 6.4% year-over-year. After experiencing some early April assignment ends, consultants on assignment in our Technology business were largely stable throughout the remainder of the second quarter. That said, purchasing activity, even within the same industry, is uneven. We have seen significant growth in some of our largest clients, while others have taken a more conservative approach and reduced investment. This pattern is not industry-specific, but rather reflected across the corporate landscape. It is clear that our clients, broadly speaking, are awaiting a period of increased confidence to begin more aggressively addressing the backlog of important technology initiatives that has built up over the last two years of measured investment. Given no apparent near-term catalyst and a moderation in the U.S. economy, we anticipate relatively stable sequential trends in our Technology business in the third quarter. Encouragingly, overall average bill rates in our Technology business of $90.39, grew 1.2% sequentially and over the last six to eight quarters have largely been stable. The consistent strong demand for highly skilled talent on both traditional staffing assignments or as part of a managed team or project solutions and the options these individuals have kept bill and pay rates stable, even as the overall industry trends have slowed in recent years. Our clients remain focused on critical technology initiatives in the areas of digital, data governance and analytics, AI and ML, UI/UX, cloud, business intelligence, project and program management, and modernization efforts. We have established a foundation of sourcing quality talent, at scale, for our clients across a range of skillsets for more than 60 years. As technology has…

Thank you, Dave. Second quarter revenues of $356.3 million declined 8.4% year-over-year and were just above the midpoint of our expectations. Earnings per share of $0.75 were near the high end of our guidance. Overall gross margins in the second quarter increased 70 basis points sequentially, primarily due to seasonal payroll tax resets and a slightly improved direct hire mix. Margins declined 50 basis points year-over-year to 27.8% due to a combination of a lower mix of direct hire revenue and a slight degree of pricing compression, which has significantly moderated following earlier 2023 pricing sensitivities. In fact, Flex Margins in Q2 in our technology business were unchanged year-over-year. As we look forward to Q3, we again expect them to be essentially unchanged given the stability we are experiencing. Overall SG&A expenses as a percentage of revenue was 21.8%, which is an increase of 50 basis points year-over-year. Our variable-based compensation structure, the adjustments we made in July 2023 to reduce our structural costs to the lower revenue levels, and disciplined cost management has significantly mitigated the impact of lower revenue and gross profit levels on our profitability. With that said, we are continuing to prioritize investments in retaining our most productive associates, making targeted investments in leadership and our sales capabilities and advancing our enterprise initiatives, all of which are expected to significantly contribute to our longer term financial objectives and prepare us well for when companies more aggressively invest in their technology initiatives. Our operating margin of 5.5% was toward the high end of our expectations as we benefited from strong flex margins and lower-than-anticipated SG&A costs. Our effective tax rate in the second quarter was 26.3%, which aligned with expectations. Operating cash flows were approximately $21 million and our return on equity was 35%. We have prudently…

Thank you. [Operator Instructions] Your first question comes from the line of Mark Marcon with Baird. Your line is open.

Good afternoon and thanks for taking my questions. I've got a couple. The first one is, David, when you were going through your prepared comments, you mentioned that you're awaiting a period of increased confidence. And one of the things I'm wondering about, and it's come up because the cycle has been very different than other cycles is to what extent is the lack of confidence or what we're currently seeing in terms of slight revenue declines, a function of a softening economic environment versus how much of it is just that some companies over-hired during the COVID rebound period and now they're overstaffed? And then to what extent do you think we may end up having some sort of impact from uncertainty in terms of how AI is going to end up evolving? And does that cause some IT managers to kind of freeze up? I'm just wondering what your thoughts are there? And what signs you're looking for in terms of an increased level of confidence?

Sure. No, I appreciate the questions, Mark. So, I think you said a lot there, words, I think, that resonate certainly we're continuing to see uncertainty in the marketplace. But the other thing I think is important, we've talked about confidence. We've actually seen a great amount of stability in our business over the course of the last year, right, the last four quarters, both in terms of technology revenue trends as well as our margin trend. So, I think that there is uncertainty as it relates to companies saying, I need to accelerate and have an opportunity to accelerate investments. We all look at the economic data and there's a lot of unevenness there, right? We've had Labor Day that’s been strong. We've had some surprises on the down side and other things, right? We've had inflation. So, I think that uncertainty is really driving companies to say, I've got to do those things that are essential. And as it relates to those things that are opportunities, isn't the time. I think it's also fair, you mentioned a couple of things, and we've mentioned this on prior calls, certainly, during the pandemic, you did see a lot of hiring. So, I think part of what you're seeing is a restraint in adding resources probably does have to do with some pull forward. But having said that, again, those things that are critical, and I don't think that this is industry-specific, it's a company opportunistic. We've got a lot of companies actually are spending more money. We've got some who are more restrained. So, I wouldn't say it's every company is reacting the same way. There's a lot of differences. I think the last question -- the last part of your question related to AI, and I'll just kind of repeat what we've been talking about in the past. I think we're in the early innings as it relates to AI. There's a lot of companies who were thinking about how it might benefit them, but there's a lot of data concerns. As a matter of fact, some of the business that we are seeing from our managed solutions business is driven by companies looking to rationalize their data. But we haven't seen a thrust of significant new AI projects as of yet. So, I early innings there. I don't know necessarily that you're seeing these who are saying, I'm going to wait until the whole AI thing plays out before I make investments because that's going to be too late. Remember, we're dealing with market leaders. Market leaders are constantly looking to invest in their business to maintain the advantages that they have. So, I think many companies don't necessarily have the luxury of just waiting until, and if, the AI train comes. So, hopefully, I answered your questions.

It is and I appreciate the answers, David. And then -- you mentioned we're still expecting double-digit operating margins if we get to $2 billion in annual revenue. If this pattern that -- the stable pattern continues. And let's say it -- hypothetically, that it continues for another year or so, would you continue to maintain over capacity to position yourself for $2 billion in revenue? Or if you were running with revenue levels that were closer to $1.4 billion or $1.5 billion, would you start taking some steps in order to get the margins closer to targeted levels at those revenue levels? How are you thinking about that just given the uncertainty that there?

Yes. So, Mark, I guess a couple of things maybe kind of clarifying our posture in our cost structure. Do we have capacity to grow this business? We sure do. We're not holding on to capacity to meet the needs for a $2 billion revenue stream though. And you obviously followed the company have been very supportive over many years. We've done a good job, I believe, at least during downturns and holding on to adequate capacity such that when things turn, we can take advantage of that. We continue to make investments in technology as well along those lines, right? When I think about our capacity, I would say, just a bit finer point on it, if there is a place where we're investing in resources to drive the business, it's on the sales side. Obviously, a lot of the investments that we've made have enabled the recruiting side of the business. So, those people are increasingly more productive. We know it's taking longer, there's more effort that's taking place to win business. So, if we're holding on to more people, which -- and looking to add, we actually have focused on the sales side. The other thing, though, I think are really important to mention about the cost structure, and Joe alluded to it, I think, in his remarks, as did I. There is a significant amount of investment that we are making to drive longer term benefit, both in terms of productivity, in terms of efficiency, and operating costs. Those are both in the front office and the back office. So, not only are we maintaining capacity, we are taking -- we think it's always in a period such as this opportunistic for us to invest for the long term. So, there's a lot of things that go into this. And we've often said, we want to be prepared to take advantage so that we can accelerate both revenue and operating margin. We think we're on the right track to do that this cycle, just as we have in the past.

And I think, Mark, you mentioned our profitability objectives of double-digit operating margin, it's slightly greater than $2 billion. I think Dave touched on a number of key points. And I think that speaks to, I think, the linear nature of how we might see that operating margin progress towards double-digit as we grow. As you look at the investments that we're making today's point, both from a sales and delivery standpoint disproportionately make the investments to try to drive greater efficiencies in the delivery of that. We've talked also about our back-office transformation program and that is not an insignificant part of getting from where we currently are to our double-digit operating margin as well. And I know we've made comment to this, Mark, in the past, but as you look at our current investment in some of these programs compared to the benefits that we expect, that contribution towards operating margin, we expected about 100 basis points of operating margin. So, you certainly have the linear equation of investing in activity, which I think Dave commented on and a bit of a step equation, certainly on the back office as well.

I appreciate the comment on the back office. I was just more wondering about, again, 2022, we did $1.7 billion. We've been a little bit lower than that and there's a lot of uncertainty that's out there. And I certainly expect that when confidence improves, we'd see a rebound in terms of revenue. But I was just trying to given the overcapacity that you're keeping, if for some reason or other $1.7 billion was more of an organic ceiling. Could we still get to -- other than the 100 bps that you just mentioned, could we still see decent improvement with regards to the margins if you came to the conclusion that it was more of a stable environment as opposed to a growing environment?

Yes, I think just like any good management team, I think we're dynamic in how we think about the business, right? So, we will continue to adapt. As I mentioned, yes, we do have capacity. There's not a huge amount of capacity if we are -- and I think it's fair to say, as we see -- and Jeff just alluded to this, as we see revenues improve and maybe they do improve more slowly than we'd like, we still will see and expect improvements in operating margin in excess of those revenue improvements just because of the way that our model works. So, it will be prudent. We think actually is as revenues might improve, we're going to be able to even more monetize some of those technology investments that we've been making to drive greater productivity. You've seen that -- I mean, you saw that in the last up cycle, where we saw meaningful improvement in operating margin even at modest revenue growth levels. So, I think, again, we will be nimble. We think based upon what we see today, we're on the right path, but we don't have our eyes closed here. And if we think that we're going to see a sustained period of time at a -- in a slower place, of course, we'll consider that in every investment decision we make and how much capacity do we need.

Yes, Mark, this is Joe. The last piece that I'd add on to that is when you think about it, right, this is multidimensional. So, you can't remove time from this equation as well because a lot when we put that out there, to your point, we were at a higher revenue level and we're looking at time and maturation of different things that we have going on from a strategic priority standpoint, mainly the back-office transformation. As time continues to play more, we suspect that we will get greater leverage out of that. So, if we're in a more stable environment, not growth, we still have time working in our favor that will dial into those equations in terms of operating margin. So, that's from the Gemini standpoint from our back office transformation. When we look at our integrated strategy and some of the things that our teams have been working real hard on and refreshing our go-to-market methodologies and how we approach the clients, the more time we have with traction with that, it builds our pipelines, which then starts to position us either to capture market share and/or grow revenue at an accelerated pace. So, you can't neglect the time aspect of these things maturing and the leverage that we'll get from a productivity and efficiency standpoint. So, I just -- that's why it's a very difficult question to answer unless we have all the factors on the table.

I really appreciate that, Joe. And then one last one for me and this is more of a minor numbers question. But you've clearly been deemphasizing F&A, clearly, the emphasis is on IT. You're fulfilling the higher level rules that some of your key strategic clients are interested in. And I fully appreciate all of that and the justification. I'm just wondering, is there a level in terms of F&A, where you would say at a certain quarterly run rate or annual run rate, that should end up basing out? Or is it possible that we could continue these levels of decline for multiple years? Just trying to figure out if that's going to base out at some point?

Yes, so, Mark, this is Dave again. So, obviously, the market for F&A is challenged just in general, right? We've seen that. And I think that in the near term, I don't think that, that expectation has changed. I think for us, I'll continue to say we've done a nice job, I think, in transitioning that business. Our average bill rate there, as I mentioned, is $51 an hour. There's a lot more synergy there as it relates to projects with our Technology business. We've got some very strong people who are involved in that business. And right now, we think we're on the right path. Obviously, we're consistently looking at the market, looking at how we address that business and enhance that business. So, -- but right now, our plans remain unchanged in terms of the direction that we're taking.

Great. Thank you.

Thank you.

Your next question comes from the line of Trevor Romeo with William Blair. Your line is open.

Hi, good afternoon team and thanks for taking the questions. I just had one on kind of the progression of demand over the past several months, I guess. I think you saw that uptick in new assignments in March. And then it sounded like you haven't really seen a further uptick since then. So, just sitting here a few months later, has something changed since March? Or was it kind of more of a one-off increase, I guess, just any thoughts on why that uptick you saw in March was so short-lived?

Yes, Trevor, this is Jeff. It's a good question that you asked. And we talked last quarter about the improvements that we saw in late January, early February, ahead of our Q4 earnings call, and we expected that to manifest itself and yield of new assignment starts in the month of March. We talked about last quarter, we did see that. I think Dave mentioned in his prepared remarks that at the beginning of each quarter, there's a bit of a, I would say, natural quarterly assignment attrition or ends. We saw that in early April. And for the remainder of the second quarter, our consultants on assignment in our Technology business were largely very stable and contemplated, Trevor, and our third quarter guidance is a very similar dynamic as what we experienced during the second quarter, where a little bit of a natural quarter ends in our consultants on assignment and then a stable as you go from there. So, at all of our KPIs, and we, as you well know, Trevor, pay attention to those every day, every week. I think Dave also mentioned in his prepared remarks that absent an event or some driver to a positive inflection point, what we're seeing in the business is great stability at this time. So, -- it was good for us. It was a result of a lot of hard work leading up to being able to sequentially grow Q1 to Q2. And when you look at our Technology business at the midpoint is down very slightly Q2 to Q3. So, very stable as you go.

Just -- maybe Trevor, a couple other data points, right, in terms of stability. I think that is the operative word. Our margin Technology business have been basically unchanged for the last four quarters. Our bill rates, right, I mentioned the $90.39 in average bill rate, actually, that hasn't changed in almost two years. So, you're seeing in an environment where that demand for those talented high-end resources continues to be good. Obviously, those talented resources also have an expectation that they are paid appropriately. So, you're seeing signs of stability in terms of the behavior of our clients. You're seeing signs of stability as it relates to how the talent and supply and demand dynamics in the marketplace. So, a lot of -- yes, the operative word is stability, no question.

Yes. Okay, that makes a lot of sense. Thank you. And I guess kind of along those lines, it was nice to see the sequential revenue growth come through for Tech Flex. I think if you look maybe some of the others in the industry or some others that we've spoken with, didn't necessarily see that sequential growth from Q1 to Q2. Was there anything four specific you think that drove that, like new logos, new project wins, anything like that that drove better performance in Q2?

Trevor, it's a great question. I think it's a combination of a lot of the efforts that we've been after for the better part of the last years and the execution of the team. So, I mean, I would have to give the team the credit on that because as you well know, the market is not expanding, which means it's coming from a market share graph. So, I think our teams are executing more effectively than they have in the past, and we're just getting started on that front. So, I'm very optimistic, especially with some of the programs that we've put in place and where we are in the evolution of those programs. So, I think that's a big piece of what's really unfolded here.

Okay. Thank you all very much.

Thank you.

Thanks Trevor.

Your next question comes from the line of Kartik Mehta with Northcoast Research. Your line is open.

Thank you. Joe, I think maybe you talked about a little bit about pricing competition. And I'm wondering, any concern about pricing competition increasing? Are there others that are keeping capacity because there's a lot of uncertainty in the market? I want to be back at a point when demand really picks up and you don't have the people, if that were to happen. So, I'm wondering if you have any concerns about rising competition or that could be next area where you really have to focus on?

Yes, I would say from a competition standpoint, I'd say that's one of -- every cycle is a little bit different. I would say, in this cycle, we haven't seen the amount of competitors exit the market that we've historically seen during the dot.com downturn or that we saw during the financial crisis. But in terms of pricing, the pricing competition has been pretty stable. We don't -- we haven't seen anybody in the marketplace operating at scale, really coming in with predatory pricing giving the business away. So, -- the demand for technology talent specifically is still very high. So, that's kind of the natural control there is supply/demand from a pricing standpoint. So, we don't see anything on there. And by the way, this is a part of our big moves to really go more after the solutions and the managed service, managed team space is we typically see 300 to 400 basis points better from a pricing standpoint and those types of commitments. And that's part of our business is growing at a faster pace than our traditional staff log business. So, we feel real good. By the way, we spend a lot of time with our people from an education standpoint, on pricing to resistance to make sure that we are providing services at a value relative to the pricing that we're bringing to those clients. And then the last piece that I would mention from a price standpoint is a lot of the space that we are equipped to go after a space that's kind of sits between what I'll call true Consulting business and Staff Augmentation business, and we believe we have a much more efficient model than your traditional consulting players. And that's one of the reasons that clients are looking at and giving us a seat at the table to help them with their solutions is because we can bring the same quality deliverable to the table in a more economic and more efficient means because we're not deploying resources that are sitting on the bench that maybe don't have the exact skills that somebody needs. We're going into the market and we're getting the right skills at the right time at the right price, so the client benefits from that. So, all those things come into play from a pricing standpoint.

And then just one last one. You've talked about looking at a lot of indicators to kind of figure out how business is moving forward. I'm wondering if you're seeing any clients that are slowing down the projects, just you anticipated that they were going to start a project and all of a sudden stop? Or on the other end, you're seeing clients extend projects where you thought maybe there might be a slowdown, maybe even on the margin, just curious since trying to figure out where the fundamentals are moving?

Yes, I would say, as we talk about, right, there certainly is a thorough investigation, I think, by clients to institute projects, right? And there are instances where -- like I said earlier, we've had actually a number of clients who have been aggressive in spending. Certainly, there are just as many clients because we're in the state of equilibrium where they are more hesitant. The one thing I would say, and I think it's in the name of stability, when I think back a year or two ago, there were more clients. And I can't remember the last time I've heard it in any significant way who were ending projects prematurely and saying, I'm not going to continue to spend. I think that they're prudent in their thought process that once they initiate the projects, they are following through on them because as we've talked about, they are of a critical nature. So, I think that stability is something that gives us some confidence that maybe we've rung out some of those things that weren't truly cool. And right now, the spend that's pretty consistent is something that as we have sustained as we look to the near-term, we'll likely continue to be the case until there is some significant movement in terms of sentiment, but we have not seen that yet.

And the one piece that I would add on to that, when you look at the areas of focus that our teams are honing in on when you application development, cloud, data, digital, they all remain -- these are also core to businesses that organizations are having to continue to invest here. It's not something that you can turn off or turn down. I mean these are all paramount to remain competitive in the marketplace as well as advance the business in terms of servicing customers more effectively and providing tools to their internal people. So, we spent a lot of time narrowing our focus over time. First, we narrowed our service lines, then we narrowed our focus within our technology service offering so that we really could get deep and wide in these areas that we believe are critical to the sustainability of ongoing leverage of technology, both internal to organization as well as their ability to effectively service their customers in an efficient manner and remain competitive.

Thank you very much. I really appreciate it.

Sure. Thank you, Kartik.

[Operator Instructions] Your next question comes from the line of Tobey Sommer with Truist. Your line is open. Tobey, your line is open.

Thank you. Just a couple of follow-ups for me. With your managed teams investments, are you gaining new capabilities? Could you put some color around maybe what those investments are achieving compared to a year or two ago? And then, with the F&A, is the repositioning still mid-stream? I had thought that we were -- maybe had most of that behind us? Thanks.

Hi Tobey, this is Dave. I'll answer the F&A question and then Joe can make the additional comments on our Consulting business. So, that repositioning is relatively complete, Tobey, that's why I said, bill rates have gone up significantly. It's a difficult environment right now. I think it's fair to say, right? I don't think we are alone in terms of performance of our F&A business. But no, that repositioning is largely complete. Does that mean we're not looking to enhance that skill set to continue to look for opportunities, synergistic opportunities with our Technology business? It certainly does mean that. But in terms of the business that we are doing, essentially, if I look back a number of years, there was a lot of lower-end finance and accounting, more transactional-type business, we're really not doing any of that anymore. So, what we're seeing now is a market dynamic here predominantly. But no, that is largely complete in terms of the action repositioned.

Thank you.

And Tobey, from a standpoint of what we're doing from our managed teams, managed services solutions front, we went through an organizational restructuring. I guess it was about two years ago at this point in time. The progress that our leadership team has made in that time has just been -- I've been in this business for over 35 years. It's been transformational in terms of the upgrade of talent that they've executed as well as the additional bringing on people that have additional technology expertise, capability, bringing in people who have industry expertise. So, this is what I mean about getting deeper and wider in those areas that we're focused and owning in. So, yes, we brought a lot of talent. We've made a lot of investments in that area. A lot of the individuals we're bringing out, you can pretty much look at any brand that's out there that's highly reputable and we're bringing in individuals from those top-tier consulting organizations that are really helping us without our capability. We've also invested a lot on our delivery performance standpoint because that is so paramount so that we can be communicating with our clients on how we're performing on those projects and have that transparency because that leads to repeat business that also provides us opportunity into other areas within those organizations where we're bringing these services. And we're doing all this in an integrated fashion, leveraging our people who have relationships in the marketplace. Just in fact, here in the in the last quarter or two, I mean we've had some really nice wins in and around our strategy to diversify our service offerings within our current clients, leveraging those relationships and our track record on the staff augmentation. And actually, it's positioning us not to capture more spend. But also when we see the staff augmentation side slowing and/or maybe being compressed from a margin standpoint, it's opening doors for us. I mean just here in the last couple of quarters, we've had some really nice wins in large retail, transportation, financial services clients on those main stream major modernization fronts that I mentioned earlier. In each of these particular cases, our clients have become very challengeable --challenging to win reasonable margin staff augmentation business, so our team pivoted leveraging our Kforce Consulting Solutions, and it's really working well from an integrated standpoint.

Thank you.

Thank you, Tobey.

This concludes the question-and-answer session. I'll turn the call to Joe Liberatore for closing remarks.

Yes. So, thank you for your interest and support in Kforce. I'd like to express my gratitude to every Kforcer for your ongoing efforts and passion, and to our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege to serve you. We look forward to talking with you again after our third quarter 2024.

This concludes today's conference call. Thank you for joining. You may now disconnect.