Good day, ladies and gentlemen and thank you for standing by. Welcome to the Third Quarter 2020 Kforce Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would now like to turn the conference over to Mr. David Dunkel, Chairman and CEO. Sir, you may begin.

Good afternoon. I would like to remind you that this call may contain certain statements that are forward-looking, including statements regarding the impact, opportunities and benefits from actions taken related to the COVID-19 economic and health crisis. 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 this quarter’s 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. It is becoming clearer each day that the COVID-19 pandemic has triggered a generational change in the shape and conduct of business and personal lives. Prior to the pandemic, our society and the business community at large, were rapidly transforming and embracing digital models and technology investment. The pandemic has exponentially accelerated the pace of this technological revolution. Companies that previously conducted their customer engagement largely in person or through more traditional bricks and mortar have been forced to convert that engagement online, oftentimes through self-service digital platforms. Education and learning companies and institutions and their students are adapting to virtual learning. Healthcare companies are working aggressively to address consumer desires for telehealth. Retailers across industries have been forced to invest more heavily in online engagement and delivery platforms and FinTech continues to disrupt elements of the financial services industry. These are just a few examples of businesses and industries being redefined. It is not optional to make these investments as organizations and entire industries are rapidly transforming. We believe these macro and secular trends play to the heart of…

Thank you, Jay and thanks to all of you for your interest in Kforce. Our results for the third quarter and our expectations for fourth quarter performance continue to demonstrate a remarkable level of resilience and represent further confirmation of our strategic decision to focus our business to take advantage of the secular shift in technology demand. The higher end technology skill set that we support have demonstrated a greater ability to work effectively remotely during the pandemic. Our strategic journey has included shedding a number of non-strategic businesses and also limiting our exposure to the highly cyclical direct hire business. Overall, revenues grew 5.7% in the third quarter on a year-over-year basis and importantly, all of our lines of businesses grew sequential basis and exceeded our expectations. Let me give you a little bit of more color on each line of business. With respect to our technology flex business, flex revenues grew 1.7% sequentially and declined 4.2% year-over-year due to more difficult prior year comps. As noted on last quarter’s call, we began to see mild growth in billable headcount beginning in early June and this growth continued throughout the third quarter and through October, which we believe reflects clients’ growing confidence in restarting projects and seeking resources for key initiatives. Technology billable headcount is now 8% larger than the low point in early June. Job order flow and new assignment activity have continued to increase over the last several weeks. While job orders certainly remain at levels significantly lower than pre-pandemic, we are finding that the quality of job orders is higher as clients are executing against overall higher mix of critical technology initiatives. Average new assignment starts in the most recent 4 weeks is at 95% levels of a year ago and the average bill rate has…

Thank you, Joe. Revenues of $365.4 million in the quarter grew 6.5% sequentially and 5.7% year-over-year. Earnings per share of $0.89 grew 30.9% year-over-year, as we generated solid leverage from our top line growth and continued SG&A discipline. Our gross profit percentage in the quarter of 28.4% was stable sequentially and decreased 140 basis points year-over-year primarily as a result of a lower Direct Hire revenue mix and a decrease in overall flex gross profit margins. Our flex gross profit percentage of 26.7% declined 30 basis points sequentially and 50 basis points year-over-year primarily due to the negative impact from the higher mix of revenues from the COVID-19 business, which carries a lower overall margin profile. Flex margins in our technology business decreased 60 basis points sequentially and 30 basis points year-over-year primarily as a result of slight spread compression. Approximately 30 to 40 basis points of the sequential decline, was due to unique circumstances in the third quarter relating to client furlough activities and rebate adjustments. Flex margins in our FA business declined 170 basis points year-over-year driven by the lower margin COVID-19 business. Average bill rates in technology of roughly $80 per hour were stable sequentially and up roughly 4.6% year-over-year. We believe this year-over-year increase was driven in part by business mix as our clients have generally retained the more highly skilled consultants given the scarcity of talent. The majority of the assignments that were ended at the onset of the pandemic were on average in lower skill, lower bill rate areas. New starts during the pandemic have typically been at or near our current average bill rate of $80 per hour. We expect tech bill rates should remain elevated, but we may see some return of assignments with rates closer to our prior averages. Average bill…

Yes, sir. [Operator Instructions] Our first question or comment comes from the line of Tobey Sommer from Truist Securities. Your line is open.

Thank you. I was curious if you could give us your perspective on whether or not reshoring or onshoring is a phenomenon that your clients are undertaking and/or do you hear they are expecting to undertake it and how significant a driver is, if so may that be?

Tobey, this is Joe. Needless to say, I mean, obviously, the offshore is not a big piece of what we do, but we haven’t really seen any material shift in the amount of payments coming back onshore. I know, coming out of the initial front end of the pandemic, there was a lot of talk about this early on, but we really haven’t heard of any major shift outside of certain things in very much isolation. So, we have really seen it more modestly. And I think if you look at the results of any of the major global integrators, there the forecast continued to be pretty strong in terms of new engagements that they are capturing. So, this would further support – there is really not any major shift that’s taking place.

And when we look at your balance sheet as well as your cash flow and your stated goal to move more into managed services, how are you feeling about utilizing that capital to start to move towards that goal or are we still kind of in the midst of uncertainty and better to be prudent and wait?

We have been price conservative in deploying the capital. And I would say that we will continue to be conservative however. If we find the right match and the right portfolio of customers and the right skill sets and every team will do it. So, it’s not – it isn’t a long due, but we are certainly going to be more selective, a little bit more conservative, that we would be under ordinary circumstances. So the analogy is, not the beginning of the monopoly game, we don’t need to buy everything we land on. So we are going to be selective and when we find the right thing, then we will go for forward.

What I would also add to that is you may recall I think it was in our May 2019 call, David put out that our near term goal for our manage teams managed services solutions was to make up about 20% of our tech revenues within a five year period. I mean, at this point in time, I mean, our internal teams have done a really nice job. And we are tracking ahead of this at this point in time.

Okay, I guess you prompting a follow up before I get to my last question. And what does tracking ahead mean, when we have only got an end point in a five year timeline? Could you give us a little more context around that please?

Yes, I get the context that I give you, our intent is, when this starts to become a meaningful part of our overall tech revenues, we intend to start breaking this out. And if we continue to track the way we are, at this point in time, we could see that happening as early as the back end of next year, if not into the early part of 2020.

Okay. And I was hoping you could my last question can you give us a little bit of color about your COVID related work? It looks like you are going to be, that is going to be a 10% customer, if not more by the end of the year. So you will probably for regulatory reasons, a little bit, can you give us some insight as to what you are doing and what the variability is that may cause it to go up or down and because we don’t know that much about it. If it’s linked to cases, and certainly, those are on the rise, unfortunately. So any, any kind of color and inputs you could get would be helpful?

Actually, now I guess I would correct you. I mean, I think in my opening comments, I tried to make it clear, we hit our high watermark here in Q3. And, the range that we provided for Q4 is literally, roughly half of what we did in Q3. So we see that beginning to tail off. And as I put out there, we see a tailing off more as we are heading into the beginning of 2021. So it’s not going to remotely come close to a 10% or even a 5% share of our revenue on an annualized basis. So that, this is very project related to support one client that we had a long standing relationship with and two for a very good cause, because of what our capabilities were. So we took advantage of this as a bridge, not knowing what is coming our way going into the pandemic. And as we have seen things play out in our tech business because of the remote capability. And now the acceleration of digitization of everybody’s business our intent is, to let this tail off as this project winds down, and we are not looking to replace that business.

Thank you.

Thank you. Our next question or comment comes from the line of Mark Marcon from Baird. Your line is open.

Good afternoon, everybody. I was wondering if you could give us a little bit of color with regards to [indiscernible] factors in terms of the dynamics that you are seeing on the Tech Flex side, you gave us the color with regards to travel leisure and healthcare even down, I am wondering how big is that, at this point in time now that it starts to pickup and how much more does it have to develop? And then on the financial services, telecom, which have been resilient and can you describe some of the underlying dynamics there that you are seeing, is it growing, is it – how do you describe it?

Yes. So, I would just hope so with on travel and leisure, travel and leisure doesn’t make up a high percentage in terms of any of our industry verticals and we have actually seen the bottoms from a travel and leisure standpoint. In fact, what we are starting to see is those clients are starting to onboard consultants, because they are getting after things that they need to be doing with their business to be prepared for post-pandemic or more of the back end of the pandemic. So we are actually seeing that headcount here at the latter part of Q3 and heading into Q4 within the travel and leisure clients that we have, we have a very nominal footprint in the airline, but obviously, with a strong South Florida presence, we had a decent footprint within the cruise lines, but they are doing some really neat things within the cruise lines. In fact, there was a really nice Wall Street Journal article talking about some of the things that they are having to be innovative in and around to get through the CDC and be able to reopen. So, a lot of nice things happening there. In terms of our sectors, we saw nice sequential performance from financial services, insurance, communications and also retail. And so I think they all have unique dynamics going on within them. Within communications, we – there is this race for the end customer, so a lot of work happening within those organizations in and around consumer-facing digitization aspects. And then actually, even within retail, what we saw early on is those retail entities that had not made great strides to digitize their business and interact with their clients from an online standpoint, have really ramped up their efforts, so even some of the clients where we saw an initial impact there, we have also seen them begin to ramp up their headcount.

Great. And then can you talk a little bit about the just staying on Tech Flex, just what would you envision the impact being with regards to the new changes with regards to [indiscernible], how would you characterize that?

So, hey, Mark, this is Dave Kelly. So, I guess couple of comments that I would make. So some of these executive orders that I know have been challenged I know in the court. So, I think it’s very first of all difficult to say what those changes are and whether they are going to be sustained at this point. But I think maybe a couple of things, I think at least for us are pretty clear. During the administration that exists today, I think that there is a recognition that technology and talent is hard to find and I think in the space that we play and I think just generally in specialty staffing, there has not been a significant impact here during the last 3.5 years. And if that were to continue, I don’t expect frankly that, that would change, because these are essential workers to drive the U.S. economy, I think something like 22% or 25% of technology workers are non-U.S. citizens. So, you can’t really cut that off. And I don’t think that frankly has been in the current administration’s intent. And as we look forward, if the Democrats were to win, clearly, they have been pretty vocal in terms of their desire to bring in more talent – highly talented technology workers. So, I think as an industry and certainly for Kforce as a company, we feel very good about the environment and regardless of what happens in the ability for us to access these technology workers as part of the skill sets that we have. We don’t bring people in. So we are really pretty much agnostic about what happens.

Great. And then can you talk – it sounds like we have got some really nice opportunities for further efficiencies as we go out towards next year. Dave, you mentioned streamlining for the office by geographic footprint? Could you just add a little more color to that and particularly, as some of your internal IT initiatives are completed in early 2021, how we should think about the margin profile changing, because it does, you did a really nice this quarter here on the margin side and I am just wondering, we should think about the potential for further margin expansion?

Yes, let me – this is Joe. Let me handle the first part of your question. I will let Dave Kelly chime in on the second part. So, since really the early part of May, when we launched some internal initiatives, we have made considerable project to reimagine what our office of the future will look like given the high pandemic dynamics, things that we are learning through this and being a completely 100% virtual as well as looking at what’s happening with client drivers and our consultant drivers. And also internal dynamics that are happening is everybody is experiencing this remote work. So I would say in summary, we subscribed to very similar thoughts that have been represented by the likes the CEO of Google, the CEO of HP and actually hear more recently, in the last day or two, the CEO of Dropbox, that the office of the future will not be a place where people show up to work each and everyday. Instead, it’s going to be a location where people meet, to collaborate, and for community. So this will ultimately result in opportunities for us to reduce our overall real estate costs, by creating really a more seamlessly integrated hybrid workspace, where it will really be irrelevant if somebody is physically in an office, or if they are working somewhere remote. And so we believe this is going to allow us the opportunity to reinvest into the business to more effectively, support our overall business with technology in a really a model that’s also going to provide us cost leverage.

Yes, Mark I would like to add to that. So really, the investments that Joe is talking about are going to continue to drive what we have been after for the last couple years, and what has been driving our profitability improvements. And that’s improving productivity, right. They have done a great job doing that year after year after year now, and these other investments we think, will have significant returns very quickly, in terms of where associate productivity is going to go, you mentioned I appreciate you recognizing that we have had some nice improvements in our operating profit. And, for us, we had previously stated that our operating margin targets at $250 million in revenue, we would be about 6.5% operating margin. And then when we got the $400 million, we would be at 7.7%, operating margin. For us obviously, we are tracking slightly ahead of that, so productivity improvements going well, on top of that, the opportunities that we have seen with some of the changes as to how we are going to operate to Joe elaborated on, but he has done a very comfortable position, we think, to meet or exceed those, those targets that we previously put out there. So yes, we feel very good about the future as we grow these revenues will be able to grow more profitably, even when we would expected it before the pandemic.

Okay, there is one last follow-on to that. In fact, a little bit of that headcount, where you are positioned from a capacity perspective, and you talked about some, potentially some modest adds. How are we thinking about those?

So we have capacity across all of our 10 year groups, because that’s really how we look at our population. And I have gone into great lengths on this in the past on how much productivity over time really ramps up as we hold on to people. So for example, a key a couple key capacity measures that we really holding in on because they are the output, our new starts per associates and billable consultants are set yet. So both of these are running well below pandemic level so we have capacity in getting back to where we were pre pandemic. And as you have mentioned, in my prepared remarks, I mentioned that we have begun to modestly add to headcount. And that is really so that we are prepared to sustain long term growth, as we start to look out past 2021, providing the economy continues to recover. So I think these efforts coupled with leverage, we will continue to have pain from all the technology investments that we have been making, inclusive of our most recent effort around our talent relationship management system, that really gives us confidence in our ability to sustain long term growth, and not to run into any capacity issues.

Thank you.

Our next question or comment comes from the line of Josh Vogel from Sidoti & Company. Your line is open.

Thanks. Good evening everyone. Just want to maybe build up on one of the earlier questions you talked about reinvesting in new technologies planning to onboard new associates. I know it’s early yet, and obviously a fluid situation. But when we frame the leverage in the model and operating expenses for 2021, you may be give us a sense of what that cadence can look like as the year progresses?

So Josh, just to be clear, so in terms of how we think of things unfolding, obviously, as we looked at ‘21 and we were already starting to see, obviously don’t spend a lot of time growth in our Tech Flex business I think we have talked about a market that we think is going to continue to improve obviously a lot less cyclicality to that business. So, 80% of our revenues is going to be good. Obviously, we think as we move forward, but a lot of these savings that Joe mentioned that we are going to be realizing, we are already beginning to realize it’s going to continue to drive improvements in SG&A level, where we are – as we have been, we will probably continue to invest technologically at the same pace, I don’t see a big change in terms of what CapEx might be looking like. And because we are going to – we have been investing, we will continue to invest obviously in a lot of the solutions that we are putting in place our SaaS-based solutions so that already is coming through in some of our SG&A cost. So, I think it’s a matter of growing revenues as we kind of replace some of that COVID business with the higher quality, higher profitability, technology business, and F&A business combined. That will help from a gross margin standpoint and drive as well profitability improvements and so a number of things working in our favor.

Appreciate the insights there. And looking at the balance sheet and ending the quarter with the net cash balance, one quarter ahead of schedule is pretty impressive. And outside of the reinvestment you are talking about and the dividend, how else should we think about your capital allocation strategy priorities today?

Yes, I mean, I would say that I will just kind of reiterate a little bit about what Dave said. Certainly, we want to be opportunistic as we think about adding to the skill sets and the tools that we can in meeting customer needs as we think about our managed services business. We have been looking, we expect to continue to be looking at that, but we are going to be very careful that we make the right choice if we buy something to fit into our culture. And then as we think about the dividend and obviously historically, we think our stock opportunistically valued is a good place to put capital as well. So I don’t think really our strategy has changed quite frankly other than I think in the very near-term, we have got to make sure that we are appropriately cautious as Dave said, in case something happens that might require companies to pullback a little bit. So, I think Dave said and I apologize for repeating it, but we are – we have to do in a great place, it allows us a lot of flexibility.

Alright, great. Well, thank you.

Thank you. [Operator Instructions] Our next question or comment comes from the line of Sam [indiscernible] from William Blair. Your line is open.

Good afternoon, [indiscernible].

Yes, understand.

I have a few questions related to market share. You commented a few times about the market share opportunity that will be available to you as they come out of this downturn? I guess, I was wondering if you might expand on where you see the market share coming from, are you increasing wallet share with current customers or maybe reaching out to new customers, you might have previously been serviced by competitors who aren’t weathering the downturn as well if you have?

Yes, it’s a great question. It’s really both. So, we are continuing to see our clients looking at consolidation of their vendor list, which were positioned very well for. So that’s clients looking to narrow down the amount of vendors they are using and giving more of their wallet share to those vendors that have a longstanding track record. Likewise, in any downturn such as this, we have seen some of the smaller or more midsized clients, maybe they were doing more business in the small business area, which we have heard certain competitors talk about how that particular segment has been impacted during this downturn in comparison to Kforce where we are predominantly focused on Fortune 1000, which has held up very well. So we have seen a lot of those competitors had scaled back some of their resources. So that really provides us an opportunity to take advantage of capturing customer share in clients when we maybe were a little bit earlier in our development efforts. So, through the downturns of 2008, 2009 and this current climate, historically, we have outpaced the market by more than 2x and we foresee that continuing into the near future.

Great. I will appreciate the color there. The next question kind of relates to the acceleration to the remote work model, we are more than 8 months into this new COVID world, are you getting the sense that clients who previously preferred local staffing resources will be permanently okay with remote services? And if so, how does it change the competitive environment? I think it makes you more competitive against smaller localized firms, but maybe increases the ways you would compete against other larger IT staffing firms. I would just love to hear your thoughts around that?

Yes, I would say in this boundary-less environment, it’s evolving. We view that our national presence really supported by our local expertise is providing us the key differentiator versus most of the competitors out there. And potentially long-term really is the winning formula. So, in terms of the local competitors or the regional competitors, no doubt, there is a shift, because we are hearing it from our clients. Because clients clearly have opened up to hiring resources outside of geographies, where they typically would have required them within where they had physical presence and we see that as a trend. So, this is not just talk, I mean, we are actually starting to see RFPs and RFIs come through, where they are asking us to provide menus of different skillset accessible and different marketplaces and what the rates are in those marketplaces. So we are really excited about the opportunities, that creates between our local presence domestically across the U.S., and our national recruiting centralized capabilities, we couldn’t be positioned more effectively to deliver in that environment. And I would say that’s probably the key differentiator when we look at those handful of other national providers who obviously also have that same footprint that we have. I do believe, we are in year ‘20 now of our centralized delivery evolution. So we have learned a lot that others are learning along the way. And I think that, that can really propel us as well. And then we entered into a joint venture little bit over a year ago, with a company by the name of WorkLLama that has some very innovative technologies that we have been deploying in and around candidate engagement as well as referral type tools in a really mobile type platform. So, when we kind of couple all those things together, we think we are in a great spot.

Great. That really helps frame the issue there. Best of luck in the next quarter guys.

Thank you.

Thank you very much.

Thank you. I am showing no additional questions in the queue at this time. I’d like to turn the conference over back over to Mr. David Dunkel, Chairman and CEO for any closing comments.

Thank you very much for your interest and support of Kforce. And as we forge ahead through these unprecedented times, I would like to say thank you to each and every member of our field and corporate teams for the incredible efforts and to our consultants and our clients for your trust in Kforce and partnering with you and allowing us the privilege of serving you. We delivered another quarter of exceptional results that are excited about the foundation we are setting for 2021 and we look forward to talking with you again in the New Year. Thank you very much. Good evening.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.