Good day and thank you for standing by. Welcome to the Kforce first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand this conference call to David Dunkel, Chairman and CEO. You may begin.

Good afternoon. I would like to remind you that this call may contain certain statements that are forward-looking. These statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. You can find additional information about 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. I am incredibly proud of the continued outstanding execution by the entire Kforce team in delivering first quarter results that were at the high end of our elevated expectations and that improved as the quarter progressed. This extraordinary execution follows on the heels of a great 2020 where our largest business, technology, demonstrated remarkable resilience against the backdrop of an unprecedented macro environment. The momentum we have built and increasing expectations of demand for technology resources have significantly raised our expectations for the second quarter and our ongoing performance, which Dave Kelly will cover in some detail in a moment. As I reflect on our strategic decision to focus our business on domestic technology staffing and solutions, it's important to remember that prior to the Great Recession, the domestic technology staffing market was roughly $20 billion in size and the third largest staffing market segment behind industrial and clerical staffing. The most recent update from Staffing Industry Analysts noted that the domestic technology staffing market became the largest market segment in 2020, with spend of nearly $31 billion. Over the same period, our technology business grew in excess of two times the market rate. Additionally, the technology professional services…

Thank you Dave. And thanks to all of you for your interest in Kforce. The momentum across our business is accelerating. Total revenues for the first quarter grew 10.1% on a year-over-year billing day basis as the improvements we are seeing in our technology business and strategic areas in FA are being complemented by the COVID business. I am extremely pleased with the 3.1% sequential and 6.3% year-over-year billing day growth in our technology business. This is the best sequential growth in a first quarter we have on record and perhaps the best March performance we have ever experienced at Kforce. More typically, we experience a sequential revenue decline on a billing day basis in the first quarter given seasonal year-end assignment ends. However, we had remarkably low assignment ends at the end of 2020 and a very strong first quarter with respect to new assignment starts. In fact, we returned to pre-holiday levels of consultants on assignment by the end of January. Typically, it takes until the end of the quarter to return to these levels. For additional perspective, going back to the Great Recession, the range of sequential billing day declines in our technology business was about 1% to nearly 6%. So this result is tremendously encouraging relative to that range. We believe that this speaks volumes as to the vital, non-discretionary mission critical work that we are performing across our client portfolio, which I will further elaborate on shortly. Enhancing our growth rate is an improving bill rate trend. Bill rates have increased 4.4% year-over-year in technology to $80 an hour. Volume, however, is the most significant driver to our growth. Billable consultants on assignment began increasing shortly after the inception of the pandemic and have grown sequentially for three consecutive quarters. Consultants on assignment are now…

Thank you Joe. First quarter revenues of $363.2 million were near the high end of our guidance and the positive trends we are seeing across our business, especially in our technology business, lead us to provide second quarter guidance that significantly exceeds our previous expectations. Earnings per share of $0.62 in the first quarter grew 47.6% year-over-year. We are also significantly increasing our EPS expectations for the second quarter due to the strength of our revenue growth. Our gross profit percentage in the quarter of 27.2% decreased 100 basis points year-over-year primarily as a result of a decrease in overall flex gross profit margins, which also declined by 100 basis points, to 25.2%. Specific to technology flex margins, we experienced a 70 basis point decline year-over-year. This decline was partially related to spread compression, which was driven by year-over-year growth in some of our largest clients with a margin profile slightly lower than the average of our tech business as a whole. I should note that as we grow our business with these lower gross margin clients, we are able to continue to expand operating margins as the benefits of scale more than offset the lower gross margins. We also experienced higher payroll taxes in Q1, as states began to raise rates and also slightly higher healthcare costs versus the first quarter last year. Sequentially, spreads in our technology business expanded from Q4 as we continue to have success growing our higher end managed solutions offering. Flex margins in FA declined 200 basis points year-over-year, with our lower margin COVID project portfolio being the primary contributor to this decline. As we look forward to Q2, we expect spreads in both our technology and FA businesses to be relatively stable. Should we begin seeing wage inflation within our consultant population, we…

[Operator Instructions]. And our first question comes from Mark Marcon from Baird. Your line is now open.

Hi. It's Mark Marcon. First of all, congratulations on the strong progress that you are exhibiting. I am wondering if you can talk a little bit more on the tech flex side. It's apparent across the board that the economy is improving and that the market is growing and the secular trends in terms of digital technology are continuing to gain steam. But what I am wondering about is, Joe and Dave, you both made comments with regards to share gains and I am wondering if you could elaborate a little bit there in terms of where are you seeing the share gains? How pronounced are they? Is it geographic? Is it by vertical? Relative to who do you think you are gaining share? How should we think about that going forward? How sustainable is it?

Yes. Mark, this is Joe. Very good question. I would say, from a broad standpoint, the reference to share gain is really just benchmarking ourselves at a high level against what SIA is saying is taking place in staffing as a whole in terms of growth. So I think it's important to note that. What we are staying specific to clients that we are involved with is, we are continuing to see vendor consolidation and knock on wood, fortunate to this point in time, we have had very good outcomes when going through vendor consolidation and our opportunity to be a winner on that front and actually pick up more share associated with that. I can kind of give you one example. A large client had probably about eight or nine vendors working on the engagement that had roughly about 100 consultants on that engagement. They wanted to consolidate it down into one vendor. We won that assignment. We actually had about 50% of that share at that point in time and now we have 100% of the share. So we see that going on broad-based within clients. So I would say, it's really client specific where we are doing business and then it's the overall market.

Great. And then can you talk about the uniformity, just from a regional perspective in terms of the growth that you are seeing? I mean you are talking about high mid teens, mid to high teens in terms of Q2 growth? Is that across the board? Or are there any specific drivers to that as we look at tech flex?

I would say that the market as a whole, what we saw in the beginning of the year is, we saw our enterprise clients come screaming right out of the blocks in terms of ramping up third hiring for critical project initiatives that they were looking to get after, part of why we referenced it. We saw a little bit more growth in our enterprise clients versus what we call our market-based clients in Q1. I will tell you, we have entered the early part here of Q2, it's much more balanced. We are seeing growth broad-based. So we have really seen it across our top five industries, with four or five of those being in the double digits. And we are seeing it across all geographies. So pretty much it's broad-based, large companies, small companies, medium-sized companies. I mean, technology, the impact, kind of the best example that I could give on the imperative for organizations to adjust from a digital standpoint is if we look at online retailing and the impact to those that weren't prepared for online retailing when the pandemic hit, online retailing was growing at about 1%, grabbing about 1% market share since the early days of dotcom. In the first eight weeks of the pandemic, online retailing captured close to 10% additional spend. So that's just one example of one industry that's happening. But that's happening within all sectors and all industries. So we are very confident in terms of what the ongoing prospects are. So it's not a single client, it's not a single vertical, it's not single region, it's basically broad-based.

Great. And then can you talk a little bit, just staying on revenue, can we talk about F&A and the special COVID projects that you are doing? You gave the guidance here for the second quarter with regards to the anticipated spend that's well ahead of what we were previously anticipating. How do you think the balance of the year is going to go? And what caused your change in terms of guidance for the second quarter in terms of the projected spend? You had previously been conservative in terms of assuming it was going to fall off.

Yes. Hi Mark. This is Dave Kelly. Yes, you are right. We have been talking about that last quarter that we thought things would drop off. I am excited actually because it continues to give us an opportunity to invest in the business so that we can make those investments that we think are going to help us in the long term, especially with respect to our tech business, which we still think is going to be exiting this year at about 85% of total revenues. But basically what happened is, we have talked about the strategic partners that have come to us and asked for us to participate with them. We actually had another project, a government request, with one of these partners. And as a result, we had a little bit stronger growth in the second quarter than we had anticipated and matter of fact, as we look forward into the third quarter, I think I had indicated second quarter we think $30 million-ish in revenue in the second quarter. Probably about those levels now in the third quarter. Pretty unpredictable business. So I still would say, still our planning assumptions here are that it will tail off and be relatively minimal at the end of the year, but we will get a little bit of revenue lift both in the second quarter and in the third quarter. So for us, it's been a great thing. As I said, it's been a great opportunity for us to take advantage of and invest further in our core business, in particular, technology.

Great. And then can you just talk about the margin implications here with regards to, you know, you are guiding to a nice improvement with regards to the EBIT margins here for Q2 and obviously that's complemented by some of the government business, the COVID business that's coming in. But how should we think with the divestiture of the corporate headquarters, with moving to more online work, what are the long term implications? How should we think about the metrics that you have historically given us from a revenue and margin perspective and the targets?

Sure. Yes. No problem, Mark. A good question. So we had said last quarter, we provided some updated guidance as to what we thought our operating margins would be at certain revenue levels. We have not changed those expectation. Certainly, when we are talking about, it was not with the expectation that some of this COVID revenue, which frankly is a little bit lower margin than the rest of the business and we are doing it because it's the right thing to do would impact us. So as we look into the second quarter, certainly that's having a slight operating margin impact as it is flex margin impact. The corporate headquarters that I had mentioned, we are going to be leasing it back for a year-and-a-half. It cost us about $300,000 incrementally because, again, obviously as a tenant versus being an owner there are costs, but we still expect that we are going to save $1.5 million to $2 million a year for the foreseeable future. And it also give our people a very exciting new space to take advantage of the hybrid model that we have been really focused on. So it is really a great opportunity we think for us there. So I would say, all-in-all, haven't changed our expectations. As we grow our operating margins, we still expect to improve at the levels we had said before, approaching 8%. Certainly, as we get past the $400 million mark, it's more pure technology in our core FA business. So we haven't changed our posture. We are just trying to manage through this environment to take advantage frankly of some of this COVID revenue to even better prepare ourselves for the future.

Perfect. Thank you.

And thank you. And our next question comes from Tim Mulrooney from William Blair. Your line is now open.

Good afternoon.

Hi Tim.

Good afternoon. Can you hear me okay? So I just want to stick on that for a second. I mean I appreciate all the color you gave for the second quarter. But notice you didn't update full year guide that you gave last quarter. Are you still comfortable with that annual guidance range you gave previously? Or is that just no longer relevant, given how, I mean I think you said in your prepared remarks, even things are coming in better than you expected?

Yes. Tim, this is Dave Kelly I guess, a couple of things. So just the primary reason we wanted to make sure we provided some perspective was to share with you how the business post-COVID was going to change. And we still feel that quite frankly our technology footprint,, with the pace that it's growing, right, 15% or more in the second quarter is certainly going to eclipse some of the thought process that we had. And so overall, obviously the revenue trends that we are seeing and the bottomline trends that we are seeing are positive. But we didn't expect that we would look at that and say, we are going to provide an update to that. But clearly here, things are going quite a bit better, both from a topline and bottomline perspective than we had thought. Our tech business is growing certainly at a much stronger clip than we had expected and frankly we provided that, as I said, as really a courtesy to make sure you understood how the business was going to change rather than giving you guidance for the full-year.

Yes. No, I appreciate that. I figured that was the case, but just wanted to clarify that for anyone that was not sure. So I appreciate that.

Sure.

Let's see, what else. Yes, so one of your competitors, they recently talked about having to layer some costs back into the business over the coming quarters in anticipation of hiring more folks ahead of the strong demand for IT staffing that this may somewhat limit margin expansion on their side of their effectiveness for a little while. Should we expect a similar dynamic with your company and maybe temper expectations around tech flex margins a little bit over the next several quarters?

Yes. Tim, this is Joe. You asked that question in two different ways. I want to make sure you have the right answer because part of it you were talking about the tech flex margins. And then with layering and headcount, it really ripples to operating margin. So are you looking for more around the operating margin?

I am looking specifically for operating margin. Sorry to confuse. Thanks.

Yes. I just wanted to make sure I answer your questions appropriately. I guess, for starters and Dave had mentioned this, we are committed to the operating margin targets that we have put out there, irrespective of what we experience and what changes go about. As we all know, as everybody come down to the pandemic, a lot of expenses have coming out of the P&L. Other certain expenses have gone into the P&L. As we come out of this, that's going to move around. Certain of those expenses, you are going to have more travel expense come in. You obviously are going to have more headcount. Wage expenses is going to come in as you start to ramp up headcount. And that's going to be offset in other areas with things like what we are doing from a real estate footprint and various other things leveraging technology for productivity improvements. As I mentioned, we just completed the final rollout of our overall Dynamics platform for our front office. We have high expectations in terms of productivity gains on that front. So as I mentioned on the call last quarter, our intent here as we move to 2021 is, we will be incrementally adding to headcount where productivity levels and capacity warrant that so that we can continue to fuel the business beyond 2021 into the future. As I mentioned in my opening comments, we are also going to continue to add headcount into our managed teams and solutions area, which is outpacing even our overall technology of growth. It's been a big contributor to that growth. But all of those things are built into, we are going to obtain and hit the operating margin targets that we put into the marketplace.

Okay. Maybe sticking on that managed services since you mentioned it. I know this is an important growth driver for you. But if I just step back and think about how that's evolved over maybe the last 12 to 18 months, how did that perform during the pandemic? Was there disruption to that type of work? Or did it hold up better than you had expected, the managed services work? And then you are you seeing an acceleration in this type of work as we emerge from the pandemic?

Yes. I would say, I would start with probably a broader answer to that question, which is our technology business was down 3% at the trough of the pandemic. I mean if you compare that to other sectors within staffing and then going back into the financial crisis, our business was down, I think it was 6.5%. So there is no question, technology isn't the cyclical play that it used to be back when I got into this business probably three years ago. There is a secular shift that is taking place. You can't do anything without touching technology at this point in time with everything going more consumer facing. So our business in managed teams and solutions performed well, just as the overall technology business did during the pandemic. I would say, one of the things that we did experience that we did not anticipate, realizing most of that work is really teams of people. We thought it would be a little bit more complex to be able to staff and manage that work in a remote environment. Actually, we found it to be very seamless. In fact, some of our clients saw productivity gain on the teams that were being put in and installed in remote versus even when we are had those teams fully physical. So that business performed well during the downside of the pandemic. It outperformed the overall technology business. So it was actually up on a year-over-year and sequential basis throughout the pandemic and it's continued to perform. We are seeing clients engage more on that type of work really because what they are looking for are the right partners that can take on a little bit more responsibility. They are lean from a staff standpoint. So any leverage that they can get from additional leadership on their teams as well as to offload it on certain engagements so that they have the bandwidth to be able to take care of the overall increase of projects that are coming their way has really demonstrated, I would say, we have seen more engagements coming in here in the last quarter than what we were seeing on the back-end of the year. So it's accelerating as overall technology spends accelerate. So great value relative to solution providers and everybody's looking at how to best manage their overall SG&A line item. So all the momentum is in the right places for that business to continue to prosper.

Okay. I appreciate all the color there. Congrats on a great quarter. Thank you.

Thank you Tim.

And thank you. And our next question comes from Josh Vogel from Sidoti. Your line is now open.

Thanks. Good afternoon everyone. First question, obviously seeing strong reception in the marketplace in managed services, perhaps solutions practice. I was curious is there been an opportunity to rollout this offering to FA clients, especially as they continue to migrate FA towards higher end skillsets that are more closely aligned with your tech disciplines?

Yes. David kind of touched upon that a little bit in his opening remarks. It's really one of many drivers on migration of our traditional FA footprint, really into those type of skillsets that fit much more closely with what we are bringing to the market from a technology standpoint. So that absolutely is a direction where we are headed and we believe we have engaged already on certain types of projects where those two blend together. We view that that is a great opportunistic space to leverage what our historic core competencies are, both from the FA standpoint as well as technology and bring those together from a managed teams and solution standpoint, especially when you look at all the momentum in and around the data-driven type projects, which have a technology component, they have a decision support type component in and around analyzing the data. So it fits real well. So yes, you are spot on.

Okay. Great. Thanks. And I apologize because bouncing back and forth between a couple of calls. So I did miss some of the prepared remarks. So as this business matures more, I am just curious, is there a material difference in the margin profile or profitability versus traditional flex work?

Yes. I think, go ahead Joe.

Yes. I think was going to say and we had mentioned this as well, Josh, to your point. So we have seen and this is a great complement to our technology business. But what we are seeing right now, margins in this business are about 400 basis points, gross margins I should say are about 400 basis points higher in this business, this managed services, managed teams business than in the rest of our technology business. And so that's certainly one of the reasons why we have got a fair amount of confidence that our margins are going to be pretty stable as we look forward, even as we grow business in some of the larger clients. So it's a wonderful complement to the business, both in terms of meeting client needs as well bringing stability and greater opportunity and maintaining our margin profile.

All right. Great. Sounds like I missed all the juicy details in your prepared remarks. Sorry about that which actually kind of leads into my next question because I know you did discuss it, but can you just tell me what the expected COVID contribution is for Q2 and the balance of the year?

Yes. Sure. No problem, Josh. So as we had indicated, we had actually a pretty good Q1 certainly and our Q2 expectations have been raised as a result. I think we had indicated between $20 million and $33 million. So roughly $30 million-ish in the second quarter. Part of that is the result of a new project at one of our partners that came to us and asked that we assist in. So as we look forward to the third quarter, those revenue levels we think will sustain but still think that they will tail off near the end of the year and that revenues will be minimal from that business as we go into 2022.

Okay. Yes. That kind of led into my next question because it does seem like COVID is around to stay, whether it becomes the new flu and we potentially see year-over-year bi-annual vaccination schedules. And I was just curious, do you think there is an element of these government-sponsored initiatives that could long-term [indiscernible]?

Yes. Again, I think we continue to see this as pretty fluid, pretty volatile. And clearly the circumstances surrounding the country are a big driver, certainly a driver to the new opportunity that we have. So hard for us to predict. I think we can plan with an expectation that it isn't here and we are going to take advantage it is here.

Yes. Josh. This is Joe. And I would add on to that just so that it's crystal clear. The businesses that has come our way here is through long-standing relationships. So we have supported this business really for two main reasons. One, in support of our partners who had depended upon us in the past. Two, given the nature of what the overall U.S. economy was going through and the impact to people, it was the right thing to do because we had the capability to staff these engagements at scale, which few have the capability. So it was morally the right thing to do. This is not business that we are pursuing from a long-term standpoint. It's for those really two drivers. As Dave had mentioned, we are 85% technology. As we exit, we have migrated on our FA footprint upstream to align much more closely with our technology footprint. That is the future of Kforce. It is not in this space. I just want to make sure we are crystal clear on that.

Yes. Totally understood. Thanks. And lastly, a lot of supply constraints such as scarcity of finding IT resource [indiscernible]? Higher level, what are you seeing today and what's being done on your end to improve candidate engagement to meet current and potential order flow and/or take share?

So it's a great question. I mean, it really never slowed down. I would say, it dove little bit during the thick of the pandemic because everybody was trying to reset and figure out. Our delivery transformation initiative which we have been after for the better part of three years now, which our TRM is a subcomponent of that overall strategy, has been an area that we have made great investments. We have a lot of innovation going on. So we are after technology tools to improve our people's capability to access candidates quickly and move them through the process efficiently. And we are going to continue to make investments on that front, no different than what we announced a while back with our relationship with the WorkLLama from our KFORCEconnect which is our referral platform as well as many other technologies that we are starting to deploy that they have in their suite of services, all coupled with, I think, that best measurement that's out there is what our NPS stores are telling us. And we continue to have world-class, from a client and consultant standpoint. So we are going to continue to invest in technology to drive performance and get our people competitive edge on ultimately being able to assess candidates more rapidly than anybody else in the marketplace. But it is a war out there for talent.

Yes, Of course. Well, certainly impressive results last year and start this year. And thanks for taking my questions.

Thank you Josh.

Thanks Josh.

And thank you. And our next question comes from Tobey Sommer from Truist Securities. Your line is now open.

Hi. Good evening. This is Jasper Bibb, on for Toby. I wanted to circle back to your comments on capacity during your prepared remarks. How are you thinking about growing recruiter headcount versus revenue going forward, given the productivity gains you are seeing there?

Yes. It's a god question. I would say, for starters, we have capacity to do more across all of our 10-year groups. So we are very comfortable in terms of where we are. We think we are in a great spot from a capacity standpoint, mainly driven by some of the things that we just spoke about because of all the technology enablement investment. We spent a lot of time also looking at enhancing our overall processes and really the ongoing strengthening of our culture. I believe our culture has becomes stronger through these trying times, which is just, I can't tell you how proud I am of our teams in terms of what they have demonstrated in terms of teamwork working across country because one of the things we also have to realize is the world has changed drastically in terms of how you source and identify candidates for the end client. You are no longer constrained by geographical boundaries. That also provides productivity opportunities for our people to leverage candidates that are willing to go out of market and work with our teams across the country. So all those things play productivity. I mean, pre-pandemic, we were successfully driving 10% productivity gain with our technology associates and that has ticked right back up where it left off. So from a hiring standpoint, the hiring that we are doing here in 2021 is not going to impact 2021. That is really to fuel 2021 forward. So we feel very comfortable with where we are in terms of capacity, currently to support the business and then what we are doing to continually support the business on an ongoing basis.

I was hoping you could -- Go ahead.

Well, I was just going to add to Joe's comments. So we talked about the technology investments. And we are in a really great place to be able to do that, right. So as a firm, we generate a lot of cash. We think the right thing to do is invest in the future of the business. we are sitting here and as we move in the second quarter, we have got additional cash, right. We are going to sell a building. We are going to generate proceeds. We are going to generate significant cash to invest in the business and think about ways that benefit shareholders best, right in deployment of capital, inclusively thinking about our stock. So I think, frankly, I am camping at a much better place from the ability to invest in the business.

Thanks for that. And last question for me. I was hoping you could comment on the perm business and should we expect the company to, I guess, fully practice in a cyclical rebound in that market, given that you have, I guess, strategically shifted more resources towards temp in tech flex in recent years?

I would say and again I touched upon this a little bit in my opening comments. We expect that business to perform pretty comparable on a sequential basis, obviously drive year-over-year up substantially, given the big impact on the full-time hiring was in Q2 of last year. It's been a very important part of the service offerings that we bring to our clients, from a tech standpoint, realizing 85% of our revenue stream exiting this year will be technology focused. We service that business in a blended model. So it's not dedicated direct hire permanent placement teams within our tech offering. And that's so that our people can provide the right employment opportunity for the candidate as well as service that client based upon what their need is there. So we view this, yes, we will participate but unlike some of our competitors that might be out there that have very dedicated practices in and around this, we view it as an integrated component of our overall, specially on the technology side, the offerings that we are bringing to the client. So many of our clients in today's day and age, they really look at bringing on resources with conversion opportunities which, again I think I have stated this multiple times, I don't think there is a higher acknowledgment of us doing a good job for our client and the candidate than when we put somebody on an engagement from a contracting standpoint and then that turns into a full-time. So a lot that is not really seen because many of those when they convert do not have fees associated with them. But they ultimately are a full-time hire and that is a reasonable percentage of our population end up converting into full-time opportunity. So that's an indirect way that we are participating in that overall permanent market. So we prefer to go this route, having grown up in this business starting as a search consultant 33 years ago and then being on the flex side of the business and then running operations, there is no question that a blended model of this nature is much more client-centric and candidate-centric than when you partition these two types of offerings in the marketplace.

I appreciate the color. Thank you for taking the questions, guys.

Thank you. And I am showing no further questions. I would now like to turn the call back to David Dunkel, Chairman and CEO, for closing remarks.

Thank you Justin. I appreciate it. Well, let me just say, thank you for all of your interest and support for Kforce. As we continue to persevere during these unprecedented times, I especially want to say thank you to each and every member of our field and corporate teams, just extraordinary efforts in very difficult circumstances and also to our consultants and our clients and thank you for your trust in Kforce in allowing us to partner with you and allowing us the privilege of serving you. We delivered another quarter of exceptional results and we are excited about how we are beginning 2021. We look forward to talking with you again at the end of the second quarter. Thank you very much.

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