Kforce Inc. (KFRC) Earnings Call Transcript & Summary

Okay. Good afternoon. I'm Stephanie Yee. I work with Andrew Steinerman, covering the business and information services industry at JPMorgan. And we are very pleased today to have with us Kforce. So we have Jeff Hakim -- sorry, Jeff Hackman, CFO; Dave Kelly, COO; and Michael Blackman, Chief Corporate Development Officer. Thank you for being here.

Thank you.

Great. Thank you, Stephanie, and thanks to you, Andrew, and the whole team at JPMorgan to what's always a highlight on our annual conference schedule. I'd just like to start with just a little history and a reset with Kforce. Kforce, public since 1995, really actually has roots going back to 1962. A real change in the model took place subsequent to the Great Recession of 2008 and 2009, at which point in time, Kforce's revenue, 100% domestic, I might add, was only about 50% in our technology practice. During the Great Recession of '08-'09, we noted, Jeff, year-over-year, I think the revenue in technology was down about...

About 7%.

About 7%, which was, of course, way less worse than the decline seen in that same time period among general staffers, where many were mid-20%. So at the time, Kforce, we had a nursing division, a pharmaceutical division, a medical coding business and of course, government business. We decided at the time to begin the process of divesting out of those areas and to narrow our focus, focus wins into our technology practice where we sit today with technology at 90% plus of our revenue stream. 97% of that is in a run rate-flexible business. So we're very pleased where we sit today. Our bill rate in technology is approximately $90 an hour, average length of assignment about 10 months. So these are truly highly skilled technologists. We work across roughly 75% of the Fortune 500 companies. And we're very excited that as successful as we've been in the technology staffing realm, it's about a $44 billion market segment domestically. We have about a 4% market share. We're very excited going forward as we follow our clients, utilizing us around managed teams and solutions, which is an addressable market that's every bit of 4, 5x the size of the staffing market. And these -- how can I put it, in these interesting macroeconomic times, Joe Liberatore, our CEO, is a 35-year veteran. This is a management team that has seen cycles come, seen cycles go, knows how to manage through them. Dave Kelly, our former CFO, now Chief Operating Officer, a 23-year Kforce veteran. Jeff Hackman, our Chief Financial Officer, the new guy at what, 17 years ago?

In my 15th year, Michael.

15 years.

Yes.

Okay, yes, the new guy...

You can give me another 2, that's fine.

That's right. So we're, again, very excited to be here today, very excited about our market position. Very excited about the steps we have taken to narrow our focus. And with that, Jeff, why don't you go over a couple of financial highlights?

Sure. And Stephanie, thank you again for the attendance here at the conference. Let me make just a couple of comments about third quarter results, which were significantly stronger than we expected. Results in our technology business in the third quarter, we're yet again at the top of our peer group. About midway through the third quarter, we saw really good stability in the number of consultants that we had on assignment in our technology business. And that was -- notable was the assignment retention was much better than we expected, which led to that stability in the number of consultants on assignment that significantly contributed to the better-than-expected results. In October, and we mentioned this on our earnings call, actually saw a good inflection point in the new assignment starts that we saw in our technology business as well. So really encouraged by the results that we were seeing in our technology business. Stephanie, you'll probably have a question in this regard. But you're not going to find Michael and Dave and myself up here trying to play economist. You're also not going to hear us call on a bottom. But certainly, when you look at the performance of our business in 2023, it is behaving similarly to what we experienced back in the '08-'09 Great Recession. We were down 2 consecutive quarters of sequential billing day declines before resuming growth. We were down about 7% in 2009 for the full year. That happens to be effectively what we're seeing in 2023, being down about 7% for the full year. You fast forward to the 2020 pandemic, we, again, were down 2 consecutive quarters of billing day declines before resuming growth. Actually, in 2020, we were effectively flat for the full year. So really good resiliency there. In 2023, the third quarter was our third quarter of sequential billing day declines. And most importantly for us, based on the trends that we saw midway through the third quarter as well as the combination of that with the new assignment improvement in October, the midpoint of our guidance for the fourth quarter called for our technology business to be up slightly on a sequential basis, billing day adjusted. So I think a really encouraging note. The other comment I'd give you is we're controlling what we can control. It's been a key theme from Joe Liberatore, our CEO, can't control what the macro environment is going to do. We have taken a number of measures and steps from an SG&A standpoint to control that, of course, more tightly controlling discretionary spend. Back in July, we announced a rebalance of our associate headcount based on the revenue levels that we were seeing to try to mitigate, obviously, the pressure that we were seeing from the revenue declines. The last point I'll leave you with before passing it over to Dave, and it's a statistic I'd like to give. When I first joined Kforce in 2007, we had roughly 42 million shares outstanding. And currently, we have roughly 19.5 million. So we've got a very strong bias for solid above-market organic growth. We haven't done an acquisition in 15-plus years. And the cash flow that we've been generating in the business, we've been returning to our shareholders via dividends and share repurchases. So with that, Dave, maybe I'll pass it...

Yes, sure. Just a couple of final remarks before we hand it over to you for some questions. Stephanie, I think, obviously, as Jeff and Michael said, promising recent results. We've spent, I think, a lot of time planning for the long term, quite frankly, that is reflective of why we're able to perform the way that we are. Michael talked a lot about the repositioning of this business over a long period of time. I think I would share with you our view remains unchanged as we move forward, right? We are always looking to make investments in this company for the long-term benefit of us for our -- all of our stakeholders, including our clients and our associates. So as we look forward, we feel very good about our positioning in the domestic technology space. I think Jeff, maybe -- or you mentioned -- or Michael, you did, 90% of our revenues are in domestic tech. We don't expect that, that trajectory is going to change. I think it has resulted over a multiple number of years of significant market outperformance. We think that, that is the right path to go to continue to use the cash, obviously, to share with our shareholders, invest in domestic technology. Those investments have resulted in significant improvements in productivity, which has led to great profitability improvements. We continue to believe, as we move forward, that we'll continue to that march towards double-digit operating margins that we've talked about because of the organic-focused business model that we have. And for us, as we like to say, we think the domestic technology is, frankly, one of the most robust markets, companies don't have any optionality in terms of investment. We benefit from that and the ability to access highly skilled talent which, again, critical to our outperformance. So excited about where we are. Very proud of the fact that we've done a nice job, I think, in this slower period managing the firm quite well, with significant capacity as things ultimately improve to take advantage and continue to significantly outperform in the space. So happy to take any questions you have, Stephanie.

Okay. Sounds good. Thank you for that overview. So Jeff, I think you mentioned that Kforce has seen 3 quarters of sequential declines. And Michael kind of started the conversation by highlighting how Kforce has undergo -- sorry, undergone portfolio transformation, selling off businesses. So could you kind of talk about how does that 3 quarters of sequential declines compare to prior recessions? So maybe Kforce was a different business.

Yes. Stephanie, it's a great point. I think when Michael walked through all the divestitures that we've done over the last 15 or 16 years, important to note before going into the Great Recession, technology was only 50% of what we did. And both Michael and Dave hit on this, it's now greater than 90% of what we did or what we do as an organization. And in my opening comments, Stephanie, I compared what we're seeing in 2023 compared to what we saw in 2020, which was 2 consecutive quarters, and we were effectively flat for the year. Back in the Great recession in Q1 and Q2 of 2009, we were down sequentially before resuming growth, and we were down about 7% for the full year. Certainly, in 2023, earlier in the year, we saw more significant declines as clients were looking to rebalance the investments that they were making in technology. But I think encouraging for us is what we experienced midway through the third quarter. We had drawn on what we had been seeing in the months of April, May, June and into July when we thought about third quarter guidance. And we were seeing some pretty consistent reductions in our consultants on average per week, and that was the basis for our guidance for the third quarter. Halfway through, we saw really good assignment retention rates. The incoming demand from a new assignment standpoint was relatively stable at lower levels than certainly what we had been experiencing, let's say, in 2022. So I think with the assignment retention being better as well as the inflection point that we saw with better, modestly better, but certainly better incoming new assignments in October, I think, gives us confidence in the business moving forward. And that's part of what led to the sequential improvement Q3 to Q4 on a billing day basis. So like I said in my remarks, we'll see how 2024 sets up and where the macro environment goes. There's a lot of geopolitical instability as well. But Dave's right. I mean the position, we're coming from a position of strength with roughly doing business with 70% to 75% of the Fortune 500. We focus there intently. We experienced some of the drag earlier in 2023, but the Fortune 500 companies are some of the first to invest as we come out of the down cycle and as they get a little bit more clarity as to what the future holds. So Dave...

No, no, I think you said it well.

Yes. The only thing I would add, I mean, there's a classic cycle, and it appears to be at play, again, as Jeff gave the numbers. As clients sense things are slowing, they first will pull back on the contractor front, the variable front. Then, of course, in late '22 or early '23 across the landscape, we saw many companies do significant core reductions. And what's really interesting in our business, and let me ask the CFO, I mean, have projects continued to pile up on your desk?

Yes.

Yes. So...

The [ volume is now at staff ].

What's different about our industry, it's not as if demand itself evaporated. It's the -- what's the word, the economic impact on the definition of criticality is really what's at play. So where are we now? Perhaps, we're at the point where the piles are really getting pretty high on the desks and yet people don't yet fully trust the macro for many reasons. So they perhaps are bringing in a greater degree of the headcount with what we saw in the data in the third quarter. Of course, the rest, we'll see how it plays out, the rest of the economic cycle. But that's been a timeless cycle at staffing, and it appears to be true again here.

Yes. I guess the only thing I would add, it's interesting you talked about what happens in September, October, et cetera. As we've talked to, obviously, our folks talk to all these clients to try to understand how they're thinking about 2024, and we're not going to predict what's going to happen in the economy. But at least on balance and certainly it varies industry to industry, it looks -- it sounds at least like as things are starting to shape up for 2024, that generally speaking, technology budgets may be slightly more robust than they were in '23. So again, I think another interesting data point here. We'll see how that plays out as, obviously, we get into next year. But again, as we look to where we are today and some of the trends that we've seen recently, certainly, I think it's fair to say a bit more optimistic than maybe we were 3 months ago for sure.

Okay. Sounds great. And I guess you guys haven't provided 2024 guidance or outlook. But staffing industry analysts, they have their forecast for 2024, having IT staffing grow, I think, 5%. Do you feel that, that is directionally correct for the segment that you're in? And do you anticipate that Kforce will grow above that?

Yes, it's an interesting number, right? Staffing industry analysts number, they've got obviously a wide number of companies that they source. I think it's fair to say, in the industry as a whole, that we saw from Q1 to Q2 to Q3 declines, right? So to see those declines throughout the course of the year and try to recapture that revenue and still generate a 5% increase for full year to full year, I think, is maybe a bit aggressive, maybe, I will see. Now I would say, and we just touched on it, certainly, as we sit here today, we've got some data and we've got some conversations, et cetera, that make us more optimistic certainly than we were 3, 4 months ago. But there still remains a fair amount of uncertainty. So to get from here to 5% from here, that's probably obviously more likely than 5% for the full year. So I think there's a lot of the story yet to be written before I would say I see a -- basically to get from here to 5% in the total, the market as a whole will probably have to be up double digits from here. So I don't know that we're necessarily would be making that prognostication as yet.

Okay. That's fair enough. Audience questions?

I'm trying to understand how it works, I guess, [indiscernible] flatness in [ specific division, stability ] should be flat. And it sounds like in contrast, the flatness you might be seeing like a stronger month October so far. Is that first the correct way to interpret your comments? And second, end markets driving that? And any context on that?

Yes, but Dave...

Go ahead, go ahead.

I got one here. It's a good question. And part of the commentary, when you look across at least what we would consider to be our direct competitors results for us are still at the top of our peer group. Part of the story on the sequential growth of Q3 to Q4 was the stabilization. You got to stop going down before you can go up, and the stabilization that we saw when combined with the better incoming demand in October certainly is leading to that sequential growth at the midpoint. And I think competitively speaking, we heard similar tonality on the flatness and stability commentary, but didn't necessarily see many others that were growing sequentially Q3 to Q4. There's probably a lot of things maybe at play there that I don't necessarily want to speculate on, on client portfolio, highly skilled labor versus lower-skilled technology labor and the trends relative to each one of those or the industries of concentration and that type of thing. But certainly, for us, as we look at results for the third quarter and then the guide, certainly, we believe, within the industry, at least our direct competitors to be relatively stronger.

Yes, I would add. So certainly, a month of activity is not a trend, right? We certainly -- but I think it's a positive indicator of the market as a whole. I think we had made comments, if you kind of parse Jeff's comments, we've seen some good stability in terms of the number of people who have been on assignment and on an ongoing basis, that's still being along. So companies are still hesitant to let highly skilled talent grow. And I think as you look across the industry, that theme exists, right? We did see in October, and again, it's not necessarily a trend, I wouldn't say it's a trend yet, but we did have some nice wins. Is that a market share opportunity? Is that the market? Hard to say because it's only a few weeks, but it did lead us to guide, as Jeff alluded to, that we're going to see our technology business actually grow sequentially for the first time in 3, 4 quarters. So are we an outlier? I actually think the industry as a whole seems to be stabilizing, at least had over the course of the last 3 or 4 months. We had a nice October. We're hopeful that, that continues. But obviously, as I said, that's still quite a bit of the story yet to be written.

Good question.

Instead of painting a broad brush with the technology sector, are there sectors inside of it, like, I don't know, people who are doing programming in kinetic robotics or something just, as an example, that are just doing better than others or areas that are actually growing still versus demand being down across the board?

Yes, I'll take the first part, and Jeff, I'll let you take part 2. Yes. One of the real beauties of our model is that it's agnostic. I mean the beauty of this business, what do we get paid for? What are we really good at? We are really good at finding large members of highly skilled technologists and are able to deploy them with us as the employer, offering our clients variability in the time continuum. Average length of assignment now is about 10 months, which is actually probably in the last 5, 6 years pretty much doubled. So in this business, to be successful, you don't have to be predictive. You have to be a really good listener and then have a great team behind you that Jeff has that runs the -- runs some analytics and can we find the candidates, can we get the spread? So we are able to move around. And we're also very agile and can do it very quickly. Jeff, do you want to address any of the particular buckets of skill strain?

Yes. I think it was Joe Liberatore that maybe answered a question similar to this on the earnings call. But when you look at the industries of concentration for us, we're very diversified is the first comment that I'd give you, but certainly seeing sequential growth actually in some industries. Energy and utilities is one. Seeing good trends in the transportation airlines industry for us. Others earlier this year were a bit more challenged, but seeing more recent stabilization, technology companies being one of them. So I do believe that there -- it's not like as if the demand is gone. It's not, right? We can see it. We're oftentimes a microcosm of the overall market. The demand is there. Michael mentioned this in his opening remarks, priorities is an economically sensitive term and to see the stabilization that we've seen, but there is still underlying growth. I mean things like cloud transformation and clients moving from on-prem to cloud, that is still a secular driver of demand. Clients starting to look at their data posture. You've heard all the headlines around gen AI. We've spent some time today talking with investors about that. You've got to really focus on your environments, your cloud environments, your data to make sure that the attachment of the large language models to your data is going to give you the right output, and constantly looking at the app space and digital transformation trends. So there's certainly demand through in the market.

Yes. Let me -- quantitatively in that industry specific, maybe a good way to think about how I can gauge the strength in demand and/or the supply shortage, look at our bill rate, right? So we're sitting here in an environment that, inarguably has been soft, right, in terms of the economic activity. Companies have pulled back a lot of their spend. Our bill rate actually, which is about $90 an hour because we play in a very high-end skill area in, generally speaking, talent acquisition as a whole has actually continued to migrate slightly up in this space, right? So if there wasn't demand, right, this means we've got a shortage of supply of still highly skilled talent. Companies still need and are willing to pay for that talent because in order to get -- and our margins, right, the spread between bill and pay has not changed meaningfully over the course of the last year. So industry to industry, certainly, there are areas that are softer or stronger, skill set to skill set, probably some of that. But overarching commentary would suggest that there is still a high degree of demand for highly skilled, scarce talent. So I continue to really look at the bill rate as a reflection of that.

Yes. Just one last very brief comment. I just want to be very clear. Technology is one of many industries that we service, Jeff, I think you mentioned the airline. And I mean -- so technology is an industry sector in and of itself. I know we've never given a percent, but it's certainly not...

It's not the largest.

It's nowhere near the largest. Great.

Could you comment on kind of what you're seeing in terms of the labor supply of candidates and whether that could be a constraining factor to your growth? If next year, we have a soft landing, we didn't get that kind of recession reset where you have a pool of people unemployed that you can pull from. Just how you're seeing the supply of candidates.

So I'll quickly answer. I know Michael really wants to talk about this, but he's actually -- this answer actually, whether it be 2023 or 2022 or 2015 or 2012 is the same, right? In the highly skilled technology space, there has been and continues to be a shortage of the supply in talent, right? It goes back to the comments that I just made about the fact that companies are still willing to pay for that. That hasn't changed. If you look at the amount of technologists that are coming into the workforce, it is still not enough to keep up with expected demand. So that scarcity has and we expect to continue to exist. And so our competency of identifying and matching that talent to the company's needs is, quite frankly, a big part of why we've been able to outperform. So in a supply-constrained market, we perform as well or better than anybody. But it is certainly a market that has some scarcity of talent.

It's all that I'll add, very brief.

Of course, you know we needed to say something.

It is among technologists. I don't know, a few years old as a survey, we are what we were or are one of the most highly recognized brands. Stephanie, if you're a technologist, you want to go work on the fun, good projects. So us representing roughly 75% of the Fortune 500, that's where those projects are. Not to mention we take care of people, they're offered benefits, they get paid on time. We have great support for our population. So I think it's very fair to say word have gone forth that Kforce superior technologist is a very desirable way for you to get to your career to the next level.

Okay. Maybe we can just talk a little bit about AI, generative AI or not generative AI. But just what digital initiatives you've been working on, how it's helping you, I guess, in your internal staff productivity.

Yes. Stephanie, I would first say that we're early innings on this, right? I think the market is in the early innings. I think some of the technology has been out there for quite some time and perhaps reached a new level in the fall of 2022. We, of course, internally at Kforce are exploring with a number of use cases. Part of that, I mentioned this earlier, is taking a look at the data sets that you're going to power through the large language models to get the results and making sure that you've got the right data, accurate data, timely data that the models are going to key off of. A couple of areas I would expect. We've got several of them, just as we've been making technology investments to improve the capability in the front of the house on our sales and delivery capabilities for sourcing talent. I expect there to be a number of use cases from an AI standpoint that we put to work there to bring some productivity, and other areas of the business, we're exploring with it as well. An example of that is in the proposal phase for clients. We are looking at how we can bring efficiencies and some better effectiveness to that internally as well. So that's internal. I think from a client demand standpoint, we're seeing much of the same, conversations with clients around how their data is structured, how to get access to the data, where it's stored and trying to partner with them on advisory work on what use cases are going to be the most meaningful for their businesses as well.

Yes. I think Joe Liberatore, I think it was on the Q2 earnings call, if I recall correctly. He said it great. Joe has been through the cycles. And we've seen all kinds of things that we're going to do all kinds of things to our industry, and Joe just netted it out. At the end of the day, again, we don't need to be predictive. At the end of the day, it will mean more work for Kforce on top of the internal efficiencies as well.

Okay. And maybe last question. You had mentioned that Kforce has a target of achieving double-digit operating margins. Could you kind of talk about how you would get there and over what time frame?

Yes. I think, Stephanie, it's a good question. I think that's one of the things that we certainly think about, talk about. As we're having strategic conversations internally, our priorities are geared towards attaining double-digit operating margin. We haven't put a date, we haven't put a revenue figure out there, Stephanie, because each one of those is going to be challenged by macro events, et cetera. When you look at where we ended 2022, we were effectively at a 7% operating margin, 6.9%, I think was actual. When you go back 5 or 6 years part of that, I think operating margins improved 250 to 300 basis points. So historically speaking, we've done a really good job of driving improvements in profitability. That certainly has come with scale as we're continuing to outperform the market and continuing to grow the business. Dave mentioned earlier that we're going to continue to invest in the productivity of our people. That's both in the front of the house and the back of the house. That's also a contributor towards it as well. And heading into this pandemic, we had 50 offices, and now we're sitting here with roughly 30. So taking a good hard look, Stephanie, at our fixed cost infrastructure and making sure that we've got the right balance in investments there. That has contributed to our cost efficiencies over the last several years and expect that to continue to play out over the next few as renewals kind of finalized. So scale, investing in productivity, both front of the house and back of the house, continuing to pursue the quality revenue stream. And that is part and parcel to not only traditional technology staff augmentation, but also managed teams and project solutions work, which has 400 to 500 basis points of higher margin and then continuing to challenge our cost structure as well.

Okay. Great. Well, we are just up on time. So thank you so much for the discussion. Appreciate you guys being here.

Thank you.

Thank you very much.

Thank you very much. Appreciate it. Thank you all.