Ladies and gentlemen, thank you for standing by, and welcome to the Kforce Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today to David Dunkel, Chairman and CEO. Thank you. Please go ahead.

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. Let me start with some commentary about 2020. Reflecting back and considering all of the significant challenges our nation and world endured, it is remarkable to see how we have persevered, adapted, survived and in some cases, prospered. We began the year with great optimism for continued prosperity. The suddenness of the COVID pandemic and its dramatic effect on businesses, communities and families cannot be overstated. Followed by civil unrest and other social issues, disruption to our daily lives has been very significant. We now face a change in administration that brings with it new questions and concerns about regulatory and fiscal policies. The uncertainty of 2020 has carried over into 2021. Through it all, the heroes of those who have stepped up through incredible personal sacrifice to serve others experiencing crisis. I am most proud of the leaders of Kforce and our wonderful people, who not only adapted to dramatic change in their own lives, but also found it in their hearts to serve others in their communities, through our Corporate Social Responsibilities initiatives. Against this backdrop, our talented…

Thank you, Dave, and thanks for all of your interests in Kforce. I want to first echo Dave’s comments and give a sincere thanks to every Kforcer for the personal sacrifices they’ve made in elevating their game and delivering tremendous results in 2020 against a very challenging backdrop. As to the fourth quarter, total revenues grew 5.3% on a year-over-year basis and exceeded our expectations across each of our lines of business, especially in our technology business where revenues resumed growth on a year-over-year basis. Let me give you a little more color on each line of business. With respect to our technology business, the nearly 6% sequential increase in revenues is a meaningful acceleration from the roughly 2% sequential increase we experienced in the third quarter, and as Dave noted, resulted in year-over-year growth of almost 1%. These increases are primarily volume-driven as we have grown our consultants on assignment by 15% since early June 2020. Encouragingly, the pace at which we were growing our consultants on assignment meaningfully accelerated in the fourth quarter. We are benefiting from a combination of solid new assignment activity, as well as continued lower levels of assignment ends. These trends have continued into the first quarter and we experienced the lowest level of assignment ends at year end that we have on record. Job order flow and new assignment activity have continued to increase. In fact, new assignment activity increased 16% sequentially in the fourth quarter. While job orders remain at levels lower than pre-pandemic, they continue to increase. We are also continuing to see significantly higher fill ratios due to the improved job order quality, as clients are executing against an overall higher mix of critical technology initiatives. We also believe the trends we are experiencing are reflective of the growing confidence…

Thank you, Joe. The ability of our team to execute extremely well in our core business during this very difficult year and the critical decisions made to pursue business outside of our core, allowed us to not only maintain valuable infrastructure, but to also deliver exceptional results to our shareholders. Full year revenues of $1.4 billion and earnings per share of $2.62 represent year-over-year increases of 3.3% on a billing day basis and 14.4%, respectively. Driven by our strong tech performance, fourth quarter revenues of $354 million significantly exceeded our expectations and reflect a continued strengthening of performance in each quarter, since the beginning of the pandemic. Earnings per share of $0.86 grew 30.3% year-over-year. Our gross profit percentage in the quarter of 28.4% was stable sequentially, and decreased 80 basis points year-over-year 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 26.5% declined 20 basis points sequentially due to usual holiday impacts, and 40 basis points year-over-year. The primary driver to the flex margin decline was the impact of the lower margin COVID-19 revenue on our FA business. Flex margins in FA declined 100 basis points year-over-year. Flex margins in our technology business declined 30 basis points year-over-year, due primarily to slight spread compression and slightly higher healthcare costs. Average bill rates in technology of nearly $80 per hour have increased nearly 4% over the past year. As we have previously stated, our clients have generally retained the more highly skilled and highly compensated consultants since the onset of the pandemic, given the scarcity of talent, which has positively influenced both overall bill rate and overall length of assignment. Average bill rates in our FA business, exclusive of COVID-19 revenues, were generally stable…

Thank you, sir. [Operator Instructions] I show our first question comes from the line of Josh Vogel from Sidoti & Company. Please go ahead.

Thank you. Good evening, guys. Thanks for taking my questions. First one, thinking about the tech Flex bill rates, we are in the upper 70s for the year. I know that you have talked in the past that was driven by business mix and clients generally retaining more highly skilled consultants. But do you still think the bill rates will remain elevated? And for how long before we may see some amount of assignments with rates to your prior averages?

Yes. Josh, this is Joe Liberatore. I would say, what you’re seeing in the bill rates is really indicative of two things. One, it's our strategic focus of the business that we’re going after and the nature of that work, coupled with the pandemic really was just an accelerator of where we were already going. So, we don’t foresee anything in the near-term, that’s going to start moving bill rates down. So we are not artificially inflated from a bill rate standpoint, I mean, these are the going rates for those skill areas.

Okay.

So, Josh. I’ll just emphasis what Joe said, because I made a comment in my prepared remarks. So, the managed services, managed teams businesses account carrying higher bill rates, so our expectation here, is, that is a great counter to any activity that might be a lower bill rates in the longer-term. If that business grows, that will have a positive effect for us.

Yes, makes sense. How much revenue is coming from the managed teams and solutions practice?

Yes, we haven't broke that out specifically. Our intent is as that also become a more meaningful mix of our overall tech business that we will be breaking that out at some point in the future.

Understood. Shifting gears a little bit when we think about paring down the physical office footprint. I know you gave guidance for Q1, but how should we think about a good SG&A run rate going forward and other levers that can move it up or down from quarter-to-quarter?

Yes, Josh, this is Dave Kelly. So part of the reason why we gave you the full-year expectations is to give you an idea of that, right? So we see benefits across a number of things, right? Certainly, real estate is one of them, improving productivity, right, yielding returns on the investments that we made, is also a big part of it, right? We've been after this for a number of years, which led us actually for the second time in two years to raise the incremental profitability expectations that we had previously provided. So we - if you kind of look at that guidance that we gave guidance, if you look at the expectations that we had provided for the full-year, operating margins between 6% and 6.3%, if you would compare that to prior years, it would have been 20 basis points lower. So it's a number of different things that are driving and certainly, there's opportunity here from a real estate perspective. But things like travel, like the idea of how we operate is having a positive impact here for us. But for us, we also want to make sure that we give ourselves enough opportunity to reinvest in the business, right? We've had a lot of nice returns from our technology investments. We think that continued investment is going to be critical for us, because we're after sustained continued profitability improvement.

All right, great. And just last one, and I'll hop back in the queue. Talking about the migration efforts in the FA business, is that complete or when is that going to be complete in 2021? And then should we inherently expect to see an increase from that $37 bill rate level going forward?

Yes, the team did a lot of nice work throughout the course of 2020. And our efforts were accelerated as the pandemic hit, as we all know that really hit the lower skilled areas much harder than the higher skill areas. So we really accelerated our overall strategic plan that we were executing in Q3 and Q4. So a lot of that work is behind us. There'll be continued ongoing alignment that will be taking place here through the course of 2021, in ramping up in certain areas. So what we would anticipate over time is that bill rates will gradually increase.

All right, great. Well, thanks for taking my questions.

Thanks, Josh.

Thank you. Our next question comes from the line of Tobey Sommer from Truist. Please go ahead.

Hey, good evening. This is Jasper Bibb on for Toby. I wanted to ask about what kinds of consulting capabilities you'd be interested in having to the managed team’s business to kind of fuel your growth there?

Yes, we've remained active in looking at opportunities in the marketplace. Obviously, cultural and then the nature of the type of portfolio that's brought to the table are two paramount things that we're looking at, because we are confident that we can build this business organically if we need to. So we don't have to do an acquisition, so we're going to continue to be very selective. But it really anything in and around digital, because that's where our clients are really pushing a lot of work to our area of expertise. So, we're going to do anything digital transformation, cloud, are really important practice areas for us as we look forward, as well as in the Big Data area that laundry list that I ran through in my opening comments.

Thanks. And then just with respect to moving kind of the F&A segment further up market. What percentage of that business would you say is kind of higher skilled versus lower skilled today, just so we can kind of think about the timeline of repositioning that business?

Yes. Today, I guess it's important to really before speaking in the future kind of step back and look historically, I mean, we've been uniquely qualified due to our centralized recruitment capability to service high volume, lower bill rate, lower skill. And we've concentrated in an area for many years. However, over time, those skill areas are going to be the ones that are going to be most impacted by technology advancements. So, as we emerge from the pandemic, our strategy to rebuild this in the skill areas, as David mentioned, and I mentioned, really require more human intellect such as the analytics decision support. We will continue to support certain strategic customers in the higher volume business, just because of the nature of our relationship and the need that they have. The long-term, we believe this really insulates us from disintermediation through technology advancements, coupled with these more intellectual areas are highly synergistic with our technology footprint. So I would say if we were to look at it today, it probably accounts for about 19% of kind of our total job postings at this point in time.

Okay, great. Thanks for taking the question.

Sure.

Thank you. Our next question comes from the line of Sam Kusswurm from William Blair. Please go ahead.

Hey, everyone, mic comes through all right.

Yes.

Yes Sam, we can hear you. Sure.

Perfect. Your FA business benefited from some large one time project last year. So I'm curious if additional stimulus packages are passed, if you think there's potential for more of that type of government work to come in, or is that more of a onetime opportunity?

We started stating this on the back half of last year. These were opportunistic situation with a lot of unknowns going into the downturn. And through long standing relationships, we had partners that had reached out to us as they had engaged and received contracts. So we really supported them for two main drivers, not knowing what was going to lie ahead for us. And likewise, because of how meaningful that work was, especially at that point in time with everything that was going on in the domestic U.S. However, we've always, as we come out of this really viewed that more as a bridge. And that will allow us to continually basically replace that business as it falls off with higher quality tech business, it's much more within our overall strategic plan. As we start to look out to 2022, we really look at more of 85%, 15% type mix between tech and FA, just to give you kind of a pulse on what our intent is there. So now, I mean, we're selectively continuing to support those customers that we've committed to, but we're not actively out pursuing to on-board more of that business that doesn't align with the strategies that we've laid out on this call.

Perfect. That's helpful. Maybe switching gears then. I wanted to ask a little bit about managed solution skill. I know it's been a growth driver for years. But I wonder how the pandemic has impacted things, if there was any disruption or if it outperformed expectations during this period? And then are there any specific client groups or project types you found more successful in the service model out too?

Yes. So I'll start on the back end. Those areas that we've been mentioning really have continued to accelerate. So I'd say the pandemic has been an accelerant to everything that we were pursuing from a managed teams solution standpoint for really two reasons. One, it doesn't matter what industry, doesn't matter what company is. The amount of initiatives that we're seeing kicked off, in and around digitization, have increased from where we were at this point last year. So there's a burning need there for every organization, they've seen it through, especially the dynamics that have unfolded throughout the pandemic. And really, the second area I would say that has really played into that is through the pandemic, we have seen clients pushing more responsibility in our direction, because some of them have had to rightsize their team, so they're actually on-boarding more flexible resources versus going the FTV route. So that has also played well for managed teams and solutions type workforce.

Okay. I appreciate the color guys.

Sure.

Thank you. [Operator Instructions] I show our next question comes from the line of Mark Marcon from Baird. Please go ahead.

Hey, good afternoon, and thanks for taking my question. Wondering, you talked a lot about some of the things that you’ve been doing. When we think really long-term, how do you think about the margin structure really long-term? And I am not talking about just one to two years, but, let’s say we have a normal cycle and we end up going five six years out. How do you think that ends up -- we end up progressing through that, particularly, given some of the comments that you’ve made with regards efficiency and reduced real-estate footprint?

I’ll jump into that, Dave. Yes, I was going to say, I think it's important to step back. If we look at the dotcom recession or we look at the financial crisis, recession, in both of those from a tech standpoint, what we saw from really peak to trough was about 400 basis points of margin deterioration in comparison to this recessionary cycle where we roughly experienced about 100 basis points. So needless to say, it hasn't been as deep. So that provides us some I guess -- we're optimistic of what that means just because of the overall demand environment. And then, I would couple that with that we historically do see a higher margin profile in the managed teams and the solutions business so we performed. So if that continues to become a higher mix of overall technology business that would provide this opportunity for continued margin expansion.

Yes, I would add to what Joe said, and this is no different, Mark. I think that what we've been talking about this has been a journey that we have been on marching as we grow to improve profitability by improve productivity and technology investments. And we said that a little bit earlier. But for us, Joe’s points are right on. We look at opportunities at the gross margin line in the longer term as that business mix becomes richer. But really, a huge amount of continued improvement in operating margin are going to come from the efficiencies that we continue to derive. So we've said in the past, we're looking in a clean quarter right now, nearly 8% operating margins, as we get larger, and as gross margins are potentially positively impacted, I don't know that there's any reason why we wouldn't still target double digit operating margins.

Great. And then can you talk a little bit about this time the FA side with some of the longer term focus on some of the higher value added skill sets. How would that end up impacting the gross margins within the FA side? And how we should think about that?

Yes, if we are to look at actual gross margin, one of the dynamics right as we go up the food chain from an FA standpoint is a higher bill. It will translate to more margin dollars, albeit on a percentage basis. It probably won't move to that extent just because you're dealing with a much higher bill rate, so you're dealing with the law of numbers there. Does that make sense, Mark?

It totally does. I appreciate that. Great. And then, when you think about, like, the areas that are emerging, that people aren't really thinking about that much, with regards to your business. What do you think is going to be the biggest surprise when we think, when we look back, we're in the future, we're four or five years out and we look back on today, things that you're going to be doing four to five years from now that people aren't really considering? Do you think there's anything that’s going to be materially different?

So probably, you’re saying that will be most materially different and it’s the strategies that we're beginning to execute at this point in time, it's going to be the synergy opportunities between these analytic business decision support type roles within. And they're not all sitting within finance, in many instances they're sitting in other operating units, because some organizations have a very decentralized, some still have a very centralized. But just how synergistic that is with technology and our ability to grow into organizations and provide that that turnkey solution across both of those areas really provides us a lot of opportunity. And it's, at the end of the day, when we look back four or five years from now, it is going to be the mix of that higher value, oriented work that we're doing from a managed team solution standpoint of our overall technology footprint is also going to be material.

Mark, this is Dave. I wanted to add something, when you're imagining the future, and you start thinking about all of the different applications of technology, how pervasive technology is now with robotics, with analytics, with Internet of Things, things that we weren't even considering a years ago. If there's anything, I think we're in the midst of the digital arms race. And every organization is either facing the challenge of new disruptors or just this rapid digitization of their business, and nobody gets to take a pass. So unlike prior cycles, where an organization can make a decision and say, well, we're not going to replace our customer facing applications in the cycle, they are now compelled to do what they have to do it, just because of the competitive nature of it. So there's things today that we're doing that will likely won't be done in the future. And there'll be new things that we're doing that we can't even contemplate today. But the one thing that's very clear is technology is underpinning everything, from consumer to business to government, every aspect of life has been digitized now, and that's going to continue. So the beautiful thing is, when we look at where Kforce is today, we're in absolutely the right place to be with 85% exiting this year, being in technology and growing. We're in the higher skilled technology areas, we're servicing 300 plus of the Fortune 500, and with a domestic focus, operating margin increases continuing. We're actually in a great position right now. It's been a long time getting here. But hats off to our team to Joe and Dave, our leadership team for what they've accomplished. So we're actually in a great spot.

Great.

To piggyback a little bit on where Dave is going there. I'm not sure if you saw the recent announcements, both Microsoft and Salesforce around employee experience platforms dealing with collaboration, learning, coaching, wellbeing, along with many other support areas from a remote work. So also, when we look four or five years out, and I think it was SIA just did a poll survey in January. I mean, 83% of IT temporary workers remain remote as of January. So I think they said it best, the trillion dollar question is what the new normal looks like post-pandemic. So clearly, there's a lot of proven success suggesting the probability of heightened levels of remote work will persist into the future, and we're seeing those similar trends across our clients. So I think the nature of how work is done will continue to evolve as well as what we look for five years out, and just all the technology that's being infused into businesses in support of those businesses.

It’s a great point. Thank you.

Sure.

Thank you, Mark.

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call back over to Mr. David Dunkel, Chairman and CEO for closing remarks.

Great, thank you very much. First of all, thank you for your interest and support of Kforce. And as we continue to persevere during these unprecedented times, I'd like to again say thank you to each and every member of our field and corporate teams, just for their 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 and are excited about how we're beginning 2021. And of course, we are very excited to declare Tampa Titletown with the Bucs the Lightning and the Rays as American League champs. We look forward to talking with you again after the first quarter. Thank you very much and good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.