Kforce Inc. (KFRC) Q3 2021 Earnings Report, Transcript and Summary

00:06 Good day and thanks for standing by. Welcome to the Kforce Q3 Twenty Twenty One Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentations, there will be question-and-answer session. [Operator Instructions]. 00:31 I would now like to now hand the call over to David Dunkel, Chairman and Chief Executive Officer. Please, go ahead.

00:44 Good afternoon. I'd 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. 01:10 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 in our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website. 01:32 We are very pleased that revenue and earnings per share both meaningfully exceeded a range of guidance for the third quarter, driven again by the strong performance of our technology business. The nearly thirty percent year over year growth rate in our technology business continues to be among the best in class in our industry. 01:55 The exceptional growth rate in Q3 of this year follows on market leading performance in twenty twenty. Where we saw only minimal revenue declines and technology during the height of the pandemic. Strikingly, technology revenues are up nearly twenty four percent from the Q3 twenty nineteen levels. It is clear to us that we have been successful and continuing to capture meaningful market share. 02:25 The foundation for our current performance was built during the multiyear strategic journey that began more than ten years ago. To focus our business on providing high end domestic technology services to innovative and industry leading companies. While this journey has neither been easy nor perfect, we believe our strategic actions are the foundation of our success. 02:51 The driver to our strategy was the recognition of the strategic role of technology, we play in all functional areas within an enterprise, which has played out to an even greater degree than we had expected. There were simply no other market we would want to be focused in other than the domestic technology market as it has in our view, the greatest prospects for sustained profitable revenue growth. 03:17 Concurrently, we continue to make progress in our objective of migrating our FA Business towards higher end skill sets. That are more synergistic with our technology offerings. With our revenues now concentrated approximately eighty five percent in technology, coupled with a complementary finance and accounting footprint we are ideally positioned. 03:41 During the lowest point, the COVID-19 crisis we identified several opportunities to assist our clients and providing resources to help key areas of relief efforts associated with the pandemic. The revenue streams from these projects provided us an important bridge to navigate through the pandemic. Not only did they allow us to retain the existing infrastructure in our business, but they provided an opportunity to increase investments that we believe, will further enable sustained above market growth in the future. 04:16 Our objective was to replace these non-strategic revenue streams as they declined with a much higher quality technology revenue stream. Evident in our results is that we have executed consistent well our expectations, and I am grateful for our team's efforts and supporting these critical COVID initiatives while also driving considerable success in our technology business. As as we stated on the second quarter earnings call, we have not further pursued these opportunities. 04:48 We also continue to make great progress in positioning our firm to have a more flexible hybrid work environment for our Kforce Reimagined initiative. Joe Liberatore, President will elaborate further in his remarks. Our business continues to generate significant operating cash flows and we again active in repurchasing stock during the third quarter. The strength in our balance sheet and availability under our a new two hundred million credit facility allows us to be opportunistic with respect to returning additional capital to our shareholders, while continuing to evaluate potential acquisitions. However, our belief is that a focus on organic growth provides us the best opportunity for long-term success. 05:35 Accordingly, we will continue to apply very stringent cultural and financial criteria to any potential transaction. As we are sensitive in the distraction and acquisition could create. Given our confidence in our future growth prospects, we expect to remain active in repurchasing our shares at current stock price levels. 05:57 As we look ahead, we are incredibly excited about our strategic position. I am so proud in particular of our highly tenured strong management team and dedicated associates. We have the right team in place to capture additional market share within what we believe will be a continued strong demand environment for our services. 06:17 It's our belief that the pandemic has exponentially elevated the imperative for companies to rapidly digitize their businesses transform business models and drive productivity gains through technology investment. 06:31 I will now turn the call over to Joe Liberatore, who will give greater insights into our performance, recent operating trends and other insights into our operating environment. Dave Kelly, CFO will then give greater detail on our financial results and position as well as our financial expectations and guidance for the fourth quarter. Joe?

06:52 Thank you, Dave and thanks to all you for your interest in Kforce. We continue to see unprecedented demand across our business and accordingly are experiencing record levels of revenue growth. Our exceptional overall performance continues to be propelled by the strength of our one point three billion dollars high end technology business, which grew in excess of eight percent sequentially and nearly thirty percent organically year-over-year in the third quarter. The operating trends we are experiencing our technology business have been impressive as front end KPIs and new assignment starts have been extremely strong and the duration of our assignments continue increase as well. Encouragingly, our new assignment starts were stronger as September versus the full quarter and is strengthened further thus far October. 07:38 Consultants on assignment increased seven percent from the end of the second quarter to the end of the third quarter and has grown nearly twenty eight percent over the third quarter of twenty twenty. We are seeing strength across virtually every industry we serve. We believe these trends are great indicators of our ability to continue delivering sequential billing day growth and sustaining our elevated year-over-year growth rates in the fourth quarter on an increasingly difficult comp. While the clear driving factor to our technology growth is the number of consultants on assignment, we continue to see increases in our average bill rate which grew one point two percent sequentially and two point four percent off of already elevated prior year levels to approximately eighty two dollars per hour. There's been much discussion and headlines surrounding the recent talent shortage and other staffing end markets, principally in lower skill areas the Kforce does not support. As well as wage pressure at a more macro level. 08:33 The reality for us is that we've been navigating supply constrained environments for over a decade in our technology business. So, this is not new to us, and we believe that we are well equipped to address these challenges and to believe over time, wage pressure serve as a tailwind to our business through future bill rate increases. We continue to see the acceleration of critical technology initiatives within our clients in areas such as cloud, mobile, data analytics, project and program management, with a strong focus geared towards improving the consumers digital experience. The investments that we've made in front end technology and process over the last several years have matured our capability to efficiently provide clients with highly diverse top talent at scale in a boundary environment across the U. S. 09:22 A significant accelerant into our overall technology growth has been the investments we've made, and we'll continue to make in our managed team and solutions capabilities to meet the evolving needs of our clients. We have continued to add highly talented experienced resources to our team and are investing to arm them with state-of-the-art tools and technology. Data point that support the success we are experiencing in this higher value capability or an increase in average bill rates of eleven percent from twenty eighteen levels and a twenty five percent increase in average assignment length from approximately eight to ten months over the same period. 10:00 We feel extremely confident in the positioning of our technology business and the ability to continue expanding our market share beyond traditional areas of technology staffing. Given the momentum that we've carried into the fourth quarter, we expect revenues in our technology business may grow approximately twenty nine percent on a year-over-year basis which would represent an excess of thirty percent growth over fourth quarter of twenty nineteen. We are clearly continuing to take market share. Our FA Flex revenues were down forty one point three percent year-over-year in the third quarter, which included an expected forty four million dollars year-over-year decline from our supportive of initiatives tied to the economic fallout and the recovery efforts from the COVID-19 pandemic. 10:44 These revenue streams were approximately eight million dollars in the third quarter, and we expect to defer a decline to approximately four million dollars in the fourth quarter. We made a conscious decision to pursue business beyond our existing commitments once it became clear, the recovery was well underway, and this has allowed us to focus our efforts on our forward looking Strategy. 11:05 Our non-COVID FA Flex business declined one percent sequentially but grew four percent year over year. As we mentioned previously, we are transitioning our FA Business towards a more highly skilled assignments, such as analytics and distance support that are less susceptible to technological change and automation and more synergistic with our technology footprint. We will continue to support lower end skill sets for certain clients where we have longstanding relationships that are strategically important to Kforce’s overall ongoing success. We have seen natural assignment ends of lower skilled FA roles in twenty twenty one where strategic client relationships do not exist and expect that to continue into the fourth quarter. We expect our non-COVID FA revenues to be down in the mid-single digits on a year over year basis and when combined with the expected COVID revenue decline, total FA Flex maybe down over thirty percent year-over-year in the fourth quarter. 12:04 Direct higher revenues in the third quarter increased nearly eleven percent sequentially and approximately fifty five percent year-over-year as the microeconomic environment has continued to improve. While this is not an area of heavy investment for us, it remains an important part of our portfolio to meet our client needs. We expect that direct higher revenues may see a typical seasonal sequential decline, but to increase over thirty percent year-over-year in the fourth quarter as clients continue to demonstrate a high degree of confidence in the recovery through the addition of full time staff. 12:38 We are continuing to invest in strategic initiative and technologies that best position our firm for long-term sustainable profitable growth. From a technology perspective, our fully integrated CRM and TRM systems are cloud based and seamlessly integrate with other Microsoft offerings. Investments to further develop these tools along with enhancing capabilities and other areas are continuing. We believe great opportunities still exist to further enhance productivity, which will drive future profitable growth. 13:10 With great anticipation from our people, we announced in September that we signed a lease for our future corporate headquarters, which we anticipate occupying in the fourth quarter of twenty twenty two. This new space will be modern open, and technology enabled to provide a flexible environment for our people to work effectively. Our approach to the design of our corporate headquarters is consistent with the approach we are taking the each of our field offices across the U. S. We are referring to this new era of Kforce work environment as office occasional, whereby our people have maximum flexibility and choice in designing their workdays that is rooted in trust and supported by the integrated technology aligned with our evolved operating model. 13:51 We will have a remote first approach but encourage our people to leverage physical office space when desirable for activities best done through in person active collaborations such as training, team building, client and candidate interactions. We expect our work environment to further improve the retention of our most talented associates as well as attract highly-talented new associates. 14:16 Productivity metrics continue to improve across our tenure associates. We have continued to make measured investments in internal talent to take advantage of the heightened market demand, while also investing in technology to further drive productivity improvements. Overall capacity remains sufficient to support our growth and should improve due to our continued investments in technology and greater enablement of our communication and collaboration tools and processes that have been so successful for us since we transitioned to remote work last March. We have supported and retained our best people structurally reduced our fixed cost and are refining a more scalable operating model that we expect will result in positive operating leverage as our solid growth continues to compound and we reimagine the future of how we work. Our customer and employee satisfaction levels continue to be at an all-time high. 15:10 We continue to carry the highest glass door rating among our peers and maintain a world class net promoter score from our clients consultants and are the most recognized firm by technology consultants part SIA. I greatly appreciate the trust our clients consultants in candidates have placed in Kforce. Our teams continue to inspire me daily as we work together creating something beyond special for tomorrow and into the future to position Kforce is the most desirable destination for top professionals in our industry. I will now turn the call over to Dave Kelly, Kforce’s Chief Financial Officer. Dave?

15:48 Thank you, Joe. We are very pleased third quarter revenues was four hundred two point seven million dollars exceeded the high end of our guidance. Profitability levels also exceeded the high end of our guidance with earnings per share of zero point nine six dollars in the third quarter. Our gross profit percentage in the quarter of twenty nine point six percent increased one hundred and twenty basis points year-over-year as a result of a greater mix of direct higher revenues and an increase in inflects gross profit margins, which improved fifty basis points year-over-year to twenty seven point two percent. Flex margins in our technology business were up forty basis points year-over-year. As pay rates have increased over the past year, we've been able to effectively pass these increases through to our clients. Bill pay spreads have improved slightly year-over-year, partly as a result of our success, growing higher margin, managed service and solutions revenues. 16:48 We are also benefiting from slightly lower benefit costs. Less margins and FA expanded one hundred and thirty basis points year-over-year, primarily due to the decline in lower margin COVID projects in Q3 twenty twenty one compared to a year ago as well as flex margin gains and our non-COVID-19 business as a result of the strategic shift to highly skilled rules. This strategic shift has allowed us to increase the average flex margin for new assignment starts in our non-COVID FA business in the third quarter of twenty twenty one by approximately one hundred and sixty basis points versus the pre-pandemic comparable period in twenty nineteen. 17:32 As we look forward to Q4, we expect spreads in our technology business to be stable with third quarter levels though overall technology margins will be lower due to the usual seasonal holiday impacts of fewer billing days, an increased paid time off. An FA overall margins are expected to have moderate expansion from our repositioning efforts and the further decline of lower margin COVID projects. Should we begin seeing wage inflation within our consultant population, which we have not yet experienced in any meaningful way we are confident in our ability to work with our clients to appropriately align building. 18:13 Overall, SG&A expenses increased as a percentage of revenue by one hundred and thirty basis points year-over-year, principally due to higher levels of performance based compensation as a result of our record setting revenue growth and continued technology investments. This trend is expected to continue for the remainder of the year. 18:34 Our third quarter operating margin of seven point three percent exceeded the top end of our guidance by thirty basis points. We believe the improving quality of our revenue stream, continued productivity improvements and ongoing the lower structural operating costs will collectively allow us to continue to invest aggressively in our business to drive sustained above market growth rates, while driving continued improvements in profitability levels. 19:01 On the second quarter earnings call, we mentioned that we anticipated to sustain and potentially accelerate investments in talent attraction within our technology business and certain technologies to take advantage of the strong technology demand environment and to enhance our longer term growth prospects. The impact from these incremental investments is expected to last through the first half of twenty twenty two while additional leaseback costs from our recently sold headquarters will cease at the end of twenty twenty two. 19:33 We had previously stated that as revenues reached four hundred million dollars quarterly that operating margin would be at least seven point eight percent. We expect to return to this margin trajectory by Q2 twenty twenty two and also to derive annual savings and approximately one point five million dollars as we transition to our new headquarters at the end of twenty twenty two. 19:56 We continue to investigate additional opportunities to improve our operating model to drive additional future profitability improvements. We've had great success in rebuilding our front office technology processes and tools over the past five years and as we mentioned last quarter, we believe the equal opportunity exists to drive significant efficiencies in the back office. And dramatically improved how our back office supports the firm. We are still in the preliminary phases of assessing the opportunities in this area. This transformation is expected to be planned in phases and involve upfront costs in each phase. With that said, once complete, this investment, along with other areas of opportunity will enhance our ability to generate double digit operating margins as we grow. 20:43 We look forward to sharing further details at potential timing and impact on future calls. Our effective tax rate in the third quarter was twenty seven point five percent which was consistent with our expectations. EBITDA in the third quarter was thirty three point eight million dollars which represents a nine point two percent increase from the third quarter last year. 21:06 Despite the payment of approximately nineteen million dollars related to payroll tax deferrals, stemming from the Cares act of twenty twenty, operating cash flows were twenty three point four million dollars in the third quarter. We returned twenty point two million dollars in capital to our shareholders via fourteen point nine million dollars in share repurchases and five point three million dollars in dividends. We ended the quarter with fifteen point six million dollars in net cash. 21:36 The number of billing days are sixty one days in the fourth quarter of twenty twenty one, which are three fewer than the third quarter twenty twenty one and one last day than the fourth quarter of twenty twenty. We expect Q4 revenues to be in the range of three ninety four million dollars to four zero two billion dollars and earnings per share to be between zero point nine two dollars and one dollar. Gross margins are expected to be between twenty nine percent and twenty point two percent, our Flex margins are expected to be between twenty six point eight percent and twenty seven percent. SG&A as a percent of revenue is expected to be between twenty two point one percent and twenty two point three percent and operating margins should be between six point four percent and six point eight percent. We expect the seasonal impact to operating margins in the fourth quarter to be seventy basis points on three less billing days sequentially. 22:32 Weighted average diluted shares outstanding are expected to be approximately twenty point nine million dollars for Q4. The effective tax rate is expected to be nineteen point five percent and reflects an anticipated tax benefit from the vesting of its restricted stock that typically takes place in the fourth quarter. The reduced tax rate will provide approximately zero point one zero dollars of incremental earnings per share and is reflected our guidance. 22:58 Our guidance does not consider the potential negative impact on the demand environment from a significant increase in COVID-19 variant cases. The effect if any of charges related to any one time costs, cost or charges related to any pending tax or legal matters, the impact on revenues of any disruption in government funding or the firm's response to regulatory, legal or future tax changes. 23:24 Overall, we believe we're in an exceptional place. We believe the strategic decision to focus our business in providing domestic technology solution is paying dividends. In a range of guidance at the midpoint applies organic growth in our technology business of approximately twenty nine percent. We couldn't be more excited about our future growth prospects with eighty five percent of our revenues focused on technology and an FA Business that is more directly focused on complementing those technology efforts. 23:56 Our shareholders continue to benefit from strong performance and efficient capital allocation as exhibited by a return on invested capital of approximately forty percent. Our predictable cash flows provide significant future flexibility to make investments in continue returning capital to our shareholders. 24:15 On behalf of our entire management team, I'd like to extend the sincere thank you to our teams for their efforts in outperforming market expectations through the adversity and uncertainty of the past year and a half and continuing to build on that success. 24:31 Operator, we'll now open the call up for questions.

24:48 [Operator Instructions] Your first question comes from the line of Josh Vogel of Sidoti. Your line is open.

25:11 Thank you. Good afternoon, everyone. Couple of questions here. First one, we think about managed teams and is offering. How big is to the pie is that today what's the growth you see in the past two quarters? And then I have two follow on from there.

25:35 Yeah, Josh, this is Joe Liberatore. It continues to become a larger percentage of our overall tech business; it's outpacing the growth of our overall tech business by considerable amount. So, as we put out there a couple years ago, our objective by twenty twenty four was for this to be roughly twenty percent plus of our overall technology business and we're making great progress towards accomplishing that objective that we have there.

26:07 That's helpful. Thanks. And in the past, you talked about it being about four hundred or so basis point higher margin versus pet staffing. Is that sustainable longer term or is there even a chance to expand upon that when you see even more economies of scale?

26:22 Yes, I would say then I'll let Dave Kelly add any additional color. Based on what we're seeing today, that's been pretty consistent for us over time. I think as we continue to get more experiences underneath our belt, meaning past performance, that provides us an opportunity to move to the next level in terms of the value add that we're bringing about to the clients. So, as we move closer to what that true solution space, we do believe that there would be additional margin opportunity how that gets diluted across the overall business. It's really hard to say at this point in time. But where we're heavily focused right now, is really in between that kind of staff augmentation. And then when you consider what traditional outing companies perform mainly driven by our ability to really be nimble, a little bit more cost attractive than those legacy providers so that we can provide a higher value outcome, which is really more synergistic with the past performance that we've had with our clients, I would say these offerings really position us to take more ownership, while still providing the end client with the control over the solution to looking for. So, this space really provides us an opportunity to improve margins from a long-term standpoint really by leveraging our core recruitment capabilities and we have elected to keep this business very cure within our technology business within the defined offerings that we're bringing to the market. So, we're taking on varying degree and responsibility. The more responsibility that we take on, the higher the margin profile starts to become so very very synergistic relationship between what we're doing in this space and staffing.

28:13 That helpful. Thanks.

28:15 Yeah, go ahead, done, I think Joe said it well, just as a point of clarification, right? So, we talk about margins, right? So that's gross margin opportunity there about four hundred basis points, so.

28:26 Yes, of course. And clearly a dark player and that capturing structure, but when we think about managed solutions offering and where you stand in the marketplace in the past, you talked about it being a different buyer within your clients. So, I was just curious when we think about the MSP work opportunity today is the business you're winning coming from an existing set of clients or more from those that you had and obviously recently been working with?

28:58 Yeah. The main business that we're capturing at this point in time, it's coming from existing clients. And when we talk about a different buyer, it's really there's different players that are involved in the decision making process. But at the end of the day, the direct hiring managers that we have past performance with from a staff augmentation standpoint, it's those trusted relationships that are allowing us to capture this business and these engagements are typically with those hiring managers that we built relationships with over the course of many, many years.

29:31 Okay. Great. If I can shift give your inflationary environment, well documented labor shortage, especially in IT, I guess it's surprising to hear that not yet seeing wage inflation amongst your clients, and I'm curious, why do you think that is?

29:49 Yes, I would say I mean, and I mentioned it in my opening remarks when you look at this, the business that we're doing specifically in this managed teams and solutions where bill rates have escalated more than ten percent over the last several years. So, there is escalations that's taken place. I wouldn't say anything remotely like what we're seeing in the lower skill area. I mean, I share this with our team members. I go through this drive through car wash by, close to my house and they were advertising for seventeen dollars an hour full benefits and I mean, this is the person that's collecting cash as you go in. So, I mean that's where a lot of the inflation – wage inflation has happened, It is happening with technology specialists, probably not to the same degree on a percentage basis.

30:41 All right, great. And just last one for me and kind of fishing here, I know you've given quarterly guidance, but I was just looking at FA next year and with the absence of the COVID work and as you transition to more highly skilled assignments and away from lower bill rate work, we're basically looking at you I'm backing into about two ten million dollars this year. I guess, I'm trying to get a sense of what next year looks like and how much more work do you have to transition away from offset by I guess organic growth in the other skill sets. Just like kind of an early reader target you after for twenty twenty two would be helpful there.

31:19 Yes. Yeah, Josh, this is Dave Kelly. So obviously, what's going to change for twenty twenty one to twenty twenty two, right? So, we had north of one hundred million dollars of COVID revenue. So, in the aggregate, obviously, you're going to expect your financial accounting revenue to be down. I think as Joe said, we've had a nice bridge from that COVID revenue, obviously allowing us to continue to grow our investments in tech and have pretty good success in our strategic financial economy business which has mentioned this performed as we expected reasonably well. So, I think the strategic part of the business that we have is going to grow. We've done a good job I think, we made a comment at the beginning of the year. That's the business that we were going to continue to pursue. Would be burning off as we move through the year that has been the case and the significant amount that has burned off. So, as we look to next year, certainly, F&A year-over-year is going to be down, but that is really a business mix change that we are planning for, and I'm very pleased with the footprint that we're left with, which is inclusive of I think Joe said eighty five to going on ninety percent tax. So, a nice mix force.

32:36 Okay.

32:40 I was just going to give you just a little bit more for hyperscale you get a little bit better feel, right, when we talk about this repositioning that when we're going through. Some of the type of business problems that our team is now solving that historically we have is if you look at like a lean organization and lack of real time data to make business decisions, we're currently working with the client to provide data analyst data visualization, power DI resources and analysts for shopper insights. So, that really what they're trying to get after is looking at a trend analysis for what's happening with consumer behavior, so, we're supporting that multiple departments within this particular client from corporate logistics e-commerce operations. So, I give that as the example because you can see how that really blends into the space that we're after from a technology standpoint and the synergy between where we're repositioning to with our technology business, but yet getting after these analysts and senior analysts and compensation oriented type roles above and beyond what one would traditionally call higher end FA.

33:53 All right, great. Well, thanks for taking my questions.

34:08 [Operator Instructions] Your next question comes from the line of Tobey Sommer of Truist. Your line is open.

34:15 Hey, good afternoon. This is Jasper Bibb for Tobey. I just wanted to ask about how you expect of the remote work initiatives you talked about might improve your operating margins going forward and practice does this entail, exiting some of the field office leases or just kind of leveraging the existing cost base across larger teams and recruiters?

34:39 I would say, I would say we're really looking at more so reshaping how the physical office is used on a move forward basis very similar to what I mentioned to my opening comments. So, I think no different than what we're doing here our Tampa corporate headquarters where we reduced our footprint by probably over seventy five percent from where we were because our people will still be going into the offices and we'll still be utilizing the offices, but not for the nine to five daily in the office when it really makes sense for people to get together for those human interaction elements that are more productive whereas you have to realize in the nature of our business, our people spend a lot of time on the sales front. They're out of the customer site, a high percentage of their day historically. On the recruitment delivery side of the house, those people are on the phone, a heavy percentage of their day. So, what we found as we've gone through the pandemic and looked and observed how our people have been operating, if there's a lot of things that they can do from a remote standpoint actually more effective than when they're physically having to burn time going into the office and then time home on the commute. 35:55 So we're really excited about the overall model. We've been working on this model almost from month two into the pandemic, we put pulled together our best people. And this is totally technology enabled. In fact, we're rolling out some technology that we've been working on for the better part of the year here in the coming month or two. That really further operationalize our ability to keep everybody connected whether they're in office or whether they're remote or whether they're working from a Starbucks. So, we're very excited about the productivity gains that we've already seen, I mean our productivity is up another twenty percent this quarter on a year-over-year basis. So, we've continued to see our people become more and more productive with this much more flexible type of a workflow that we're really empowering with technology and processes.

36:49 Yes. So just to add just a couple of other details as Joe talked about great color for Joe. So how does this manifest so if we talk about how we're changing the office, but this happens gradually over a number of years, obviously, we've had offices around the country as we renew those, it gives us an opportunity to think about real estate opportunities in office occasional strategically over the next couple of years. I also mentioned that this is not just a field office opportunity. And Joe mentioned our headquarters at the end of next year and when we occupy that, we'll see some opportunity there for future – for additional reduction of about one point five million dollars a year in operating costs from a smaller footprint there, Technology enabled really really points to what technology can do for you and part of the reason why we think technology is a great business to be it, right? So allows people as Joe said to work all around the country for our clients as well. So, I think it is a change that we are seeing in the marketplace benefits is both on the top line and the bottom line.

37:57 Yes, thanks very much.

37:58 What we're hearing from our people because we constantly been survey and throughout the course of the pandemic and now as we're moving into post situation. What we're hearing from our people is no different than what you read in the newspaper or any white paper out there. In fact, there we're just a couple of surveys that came out on technology, specific individuals. I mean in seven out of ten technology workers basically said if they can't have that right balance and then office and remote, they're looking for a new job. There was just actually a Kaiser Family Foundation Survey that just came out as well, talking about vaccination, vaccinated and non-vaccinated in mandates and so we're really seeing reshaping of the overall workforce where people are looking for choice and flexibility. And we've been out in front of this, like I said, literally since month, two, and we're moving to where the people want to go versus trying to force individuals and doing things that they don't want to give up the freedom that they have. But yet, they do want to get together with associates and get together with clients and so and so forth. So, there's a real nice balance it can be able year?

39:10 Yeah. Now, it makes sense. And then I just want to ask, are you seeing any changes to IT procurement or customer behavior that might be contributing to some of your market share gains. I mean, we've heard a bit about vendor consolidation at larger accounts is that something you're seeing at a material level at this point?

39:34 Yes, I would say the number one driver to what we're experiencing, and I think the overall space is experiencing is digitization it's table stakes in this new environment that we're in. I mean, there's no company out there that can afford not to opt into digitizing their business. And they can't even opt into really slow adoption. I mean, this is, we're in a massive digital trend across the board. So, I would say one, the marketplace is there. I mean, unlike anything I've seen in my thirty three plus year or so even in the craziness.com, we've never seen anything as structurally driven across all industries and all organizations of what's taking place right now. So, I'd say one thing is the market is there. And you're hearing that from other comparable providers to Kforce out that there, that their business is performing well. 40:30 I would say in addition to that, I think our people are executing on all fronts and we're very blessed to have a blue chip customer base that are at the forefront on driving a lot of these things. So, we probably have some momentum on those fronts that maybe some others don't have quite as much momentum just because of the nature of all the work that we've done on our strategic portfolio over the better force of the last twenty years constantly refining it. So, it's really twofold, it's the markets there and then our teams have just done a tremendous job of executing and then I would say the third leg of that stool is, our people are more productive because of a lot of the things that we've put in place over the course of the last eighteen to twenty months.

41:15 Got it. Last question for me. Some of those larger IT services companies were citing headwind this quarter from higher expected attrition? Is that something dynamic you've seen in your business with either recruiter churn or consultants just ending assignments early to pursue other opportunities?

41:34 Yes. I mean, you don't have to go forward to read something on the great resignation, which is impacting organizations across the land. And again, I think part of this is driven by people trying to align their views and how they desire to work with how organizations are requiring them to work not to mention that obviously, the remote capability of individuals has opened up a much broader job opportunity. We're starting to see more of what I'll call the coast impact, whether it's East Coast or West Coast going into Central U. S. paying comparable wages to try and attract talent and allowing those individuals to remain in their geographies. So, I think everybody is feeling this I think those organizations that aren't being progressive and listening to the employees and working with the employees are probably feeling a little bit more pain. I mean, give you a prime example. We have certain clients that we're working with that are preparing us to be prepared to help them step up as they're implementing some of their vaccine mandates. So, the good news for Kforce is we're we don't have a designated pool of individuals that we're trying to redeploy like a large IT services organization that might not be aligning with what the individuals are looking for our objective is we go into the marketplace, and we match those individuals not just from a skill standpoint, but from what they're looking for from an overall employment experience and we match those with the organizations that align. So, actually, I think a lot of the things that are taking place in the marketplace are really a great backdrop wind in our sales, I guess, for lack of a better term versus any type of remote headwind for us.

43:23 Yeah. Thanks for the questions, that’s very helpful.

43:35 [Operator Instructions] Your next question comes from the line of Mark Marcon of Baird. Your line is open.

43:42 And good afternoon and congratulations on the strong results. Wondering if you can talk a little bit more about the last point that you brought up with regards to consultants basically reassessing where they want to work. Are you seeing any sort of behavior where people are becoming more confident in their ability to work when they want to work on the assignments that they want to work and therefore are more likely to stay in a contract role relative to seeking a permanent rule?

44:22 Yeah, Mark, I would say on the last part of that question, we haven't really seen anything shipped with the consultant base, which means, we have a high percentage of our consultants that end up converting to full time employees with organizations over time. At this point in time, we're back to pretty much the same levels that we saw pre-pandemic. So, I would say still pretty much business as usual there. I think these other things come into play as to as this organization the right match for me, not just what I'm going to be working on, but just some of the views and some of my desires. So, I'd say that's one piece of the puzzle. The other aspects that we're saying is had the consultants really changed their tune? The consultant realized this is all about reference how referenceable they are. So, consultants are finishing the obligations they have out there. Are you seeing some people that might be getting bought away for very large increases and ending assignments early. Yes, but that always happens at different points in time, whether it's something happening specifically within organization within an industry. So, I wouldn't say that there's anything pervasive out there. I mean, the real key is as they can pull today is really now more geographic agnostic than it's ever been. So, that's really opened up there opportunities to explore a broader spectrum of opportunities. 45:46 And one of the things we really like about the managed teams and the solution space is what we're seeing is those types of engagements actually are probably even more pro, people being in a remote situation than when somebody's just performing a straight up staff augmentation. So, I mean, it's exciting times. You've been around this industry a long time as I have. And the pendulum always in one favor or the other. It's either the employee or consultant is in really more control of driving the market. Or the employer as when you go during the pandemic, people were not making moves at all because everybody was trying to hold on to the job, they had employers have a lot of power then. But those employers didn't treat people right through those times. They're feeling probably a higher rate of attrition right now than those that we're very empathetic and worked with the employees. So, I would say right now, the last time we've ever seen anything to the magnitude of where it is right now where the employee and or consultant or jobseeker really is in control was probably at the peak of the [Indiscernible] and I would say it's even more exacerbated right now than it was even at that point in time.

47:02 Yes. I mean, I remember during that time period, there were some people who were leaving permanent positions in order to take contract positions just to control their work-life balance a little bit better and to take time when they felt like it. So, I just didn't know if that was coming to the four. Can you talk a little bit more about managed solutions with regards to the geographic agnostic behavior that you're seeing with regards to the consultants and the clients and what percentage of the jobs could end up being done remotely that you're filling on the It side relative to say a year ago two years ago?

47:46 Yes, I'd would say one of the one of the facts that has come out of everything that the world has been through over the course of the last near twenty plus months If there is one skilled – one skill category that is clearly proven the capability of being highly productive and effective in a remote environment. It's technologist far and away from probably any other skill area that you could go out into the marketplace and design from a broad-based standpoint and especially the higher up you go in that skill category, the more remote capable those skills are. Obviously, if you're down at the lower end and somebody is dealing with break fix or implementation at the desktop. Those people have to be on-site, but that's not a lot of our Kforce place. I mean, our average bill rate is eighty two dollars an hour. So, there's no hiding from that. We're not doing a lot of that lower end tech work so a very, very high percentage of our workforce is remote capable. 48:50 And the client, the client see that as well. You do have certain clients and a lot of this is I would say, manager driven of wanting to get back to the way that the world used to be that somebody's not productive or I can't tell how they're effectively they're really working unless I can see them. I mean, there's been a plethora of articles that are out there that are guiding people and trying to wake people up on this front. But overall, I just think when you were in this solution, outcome based scenario, there is a deliverable. So, the client actually doesn't have as much vested interest am I getting every hour or work out of that person. So that's what I'm saying. Just especially in that world. We did not even see the clients being more receptive to remote workers in those scenarios. But even on the staff outside, many clients that realize to get the best talent in the marketplace that they're going to have to adhere to what individuals are looking for from this life work balance.

49:51 Great. And then you've obviously done a great job in terms of raising the bill rates and maintaining the flex gross margin. Wondering how you're thinking about that beyond the current quarter, but just thinking about next year and the following year that the environment stays the same. How would you assume that's going to end up evolving?

50:14 Hey, Mark, Dave Kelly, I quite frankly think that I wouldn't expect to see change in those behaviors, right? So, we've seen over the course of the last number of years, even frankly through the pandemic rising wages, rising bill rates and we've maintained margins. We've maintained gross margins in times that were lower demand and now increasing demand. And I don't have any reason to expect that will be any different as we move forward. And frankly rising wages are reflect because we are able to pass those through higher bill rates. We have a bigger pool of gross profit dollars at the end of the day. It is quite frankly a positive for us to be in this type of an environment. So, I wouldn’t see anything really changing. I think we've had, I mean, I had been here twenty one years not as long as Joe, but we've always done a good job managing those rising pay rates and I expect that will continue to be the case. Our leadership is extremely low, and they understand the value that we're delivering to our clients and our clients quite frankly understand that too.

51:23 So, it sounds like gross margins – flex gross margins will probably be stable. Obviously, bill rates going. How should we think about the SG&A leverage obviously gave us color in terms of going out through Q2 of twenty twenty two. But like beyond that, like what point should we think about the margins really expanding on a year-over-year basis in a material way? What revenue level would we need to see, and you've obviously margins up, but just a little bit more color there.

51:56 Yeah, I mean, I have a couple of points that I would make, right? So, as we talked about, we're making investments now, right? So, as we get into twenty twenty two. The expectation I think that we had is that we're going to see some improvements in margin. And we're going to see them because of those investments to diminishing, we talked about this office occasional progression that we expect to make the investments that we have been making in enhancing productivity. And we've indicated at four hundred million dollars seven point eight percent margin is doable in the path that we were on – we are on, I should say, well eventually, we think lead to double digit margins. So, it will be gradual. We've got investments that are generating improvements and we continue expect that to be the case. So, to me gradual as we grow improving margin profile.

52:55 Dave, could you just give us a little bit more about you just said double digit margins? What revenue level or what incremental margins should people build in once we hit that get past that second quarter of twenty twenty two and kind of the glide path?

53:13 Yeah. Mark, I don't think I put a revenue figure out there and as we make investments sometimes it's not precisely linear anyway. So, I think I would say it would be gradual we're confident that we're on the right path but haven't put a figure out there. So, I think as we continue to grow and certainly as we grow at twenty nine percent year-over-year in tech. The opportunity to generate greater incremental profitability should manifest itself reasonably quickly, but we think, we'll continue to see continued improvements and certainly as we deliver the fourth quarter results, we'll certainly more to say about.

53:56 Great. And then lastly, just capital allocation, priorities, I mean clearly been buying back stock, how should we, how should we think about it?

54:05 I think you should think about nothing has changed. It's clear that the organic growth trajectory that we have and not being distracted through acquisitions has served us quite well, as evidenced by growth rates that I think are pretty darn good and don't want to stray from that path. We think that over the years and continue to return capital to shareholders through increasing the dividend as well as buying back stock is the right path for us and unless something significant where to change, which I don't expect that to will that path should continue.

54:46 Great. Thank you.

54:53 There no further questions at this time. I would now like to turn the call back to Mr. Dunkel. Please go ahead, sir.

55:01 Okay, great. Thank you and thank you all for your interest in support for Kforce. So, I really want to take this opportunity to say thanks to each and every member of our field and corporate change for just extraordinary efforts and incredible results and to our consultants and our clients, for the trust that you've placed in Kforce and partnering with you and allowing us to privilege serving you. We’ve delivered another quarter of exceptional results, and we look forward to talking with you again after the fourth quarter in early twenty two and delivering more exceptional results. So, thank you very much and have a good evening.

55:41 This concludes today's conference call. Thank you for participating. You may now disconnect.