Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Kforce Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Joe Liberatore, President and CEO. Please go ahead.

Good afternoon. This call contains 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 our 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. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the impact these items and events have on the financial results. Our earnings press release provides the reconciliation of differences between GAAP and non-GAAP financial measures. Let me begin by offering some commentary about the current operating environment, which is informed by our internal metrics and discussions with clients and our associates. As we have mentioned on prior earnings calls, we experienced unprecedented demand in our technology business beginning in 2021 and continuing largely for the first half of 2022 driven by our clients’ acceleration of their digital spend and transformation efforts geared towards employee engagement in a more remote-centric environment and their customer experiences. The unprecedented demand fueled the two-year growth rate in our Technology business of approximately 44%, which yet again significantly exceeded the market benchmarks. We had previously noted a slowdown in demand during the second half of the year and more recently have seen a higher level of project scrutiny being exercised by our clients given…

Thank you, Joe. Overall revenues grew slightly more than 2% year-over-year in the fourth quarter. Our Technology business, which continues to be the primary driver of our success, performed slightly ahead of our expectations with year-over-year growth of nearly 8% in the fourth quarter and 18% growth for the full year of 2022. Our technology business now has an annual run rate of $1.5 billion and represents approximately 90% of our total revenues. We believe our strong, consistent outperformance of the market over many years has resulted from our execution and dedicated focus in the domestic technology market. As Joe mentioned in his commentary, our recent operating trends and activity levels have experienced a degree of softening as clients appear to be more cautious given the uncertain macro-economic environment. This trend began in the second half of 2022 and has continued into the new year. Sales cycles are becoming longer due to extended interview processes and more scrutiny around budgets. Year-end assignment attrition was also slightly higher compared to the last few years. However, our clients continue to pursue essential technology projects, even as they become cautious due to the economic uncertainty. Overall average bill rates in Technology continued to improve with 1.7% sequential growth to approximately $90 per hour. While the pace of bill rate growth may moderate in the near-term, we expect that the continued scarcity of highly skilled technology talent will drive continued bill rate expansion over time. Further, as our portfolio of managed teams and solutions engagements continues to grow, we would expect average bill rates to expand along with improved revenue visibility and margins. Critical technology initiatives continue with our clients in areas of cloud, digital, UI/UX, data analytics, project, and program management. Conversations with our clients suggest that they will continue to prioritize significant…

Thank you, Kye. We are pleased with our performance in 2022 as full year revenues of approximately $1.71 billion increased nearly 8% year-over-year, led again by market share gains in our Technology business. GAAP earnings per share were $3.68. Normalized for impairment charges related to our joint venture, adjusted earnings per share of $4.25 improved approximately 20% year-over-year. Fourth quarter revenues of $419.7 million grew 2.3% year-over-year and adjusted earnings per share were $0.93. Overall gross margins decreased 70 basis points year-over-year and 50 basis points sequentially to 28.5% in the fourth quarter principally due to a lower mix of direct hire revenue. Flex margins of 26.1% in our Technology business, which met our expectations in the fourth quarter, increased 10 basis points sequentially and declined 30 basis points year-over-year. For the full year 2022, Flex margins in Technology of 26.4% were unchanged from 2021 levels. Top technology talent remains scarce, and we have seen consistent wage increases over many years. We have had good success passing through these increases to our clients due to the critical work our consultants perform. This has led to relative stability in the margin profile of our Technology business throughout economic expansions and declines, which is our expectation as we move forward. Flex margins in our FA business declined 210 basis points sequentially as a result of a short-term lower margin project associated with Hurricane Ian relief. As we look forward to Q1, we expect spreads in our Technology business to be stable with fourth quarter levels, though overall Technology Flex margins will be lower due to seasonal payroll tax resets. Overall gross margins are also expected to decline due to lower direct hire revenues. While we believe that clients may be slightly more price sensitive in the current macro environment, we believe our…

[Operator Instructions] Our first question will come from the line of Mark Marcon with Baird. Please go ahead.

Hi, good afternoon and thanks for taking my question. Wondering if you can provide a little bit more color in terms of what you're seeing with regards to the clients on the IT Flex side? You mentioned that for the most part, the impacts are relatively moderate by vertical, but can you talk a little bit about which verticals, I know there is no drastic impacts, but any sort of like changes that you're seeing just on the margin of certain verticals, which ones are the strongest, which ones are showing a little bit more of the macro uncertainty?

You know, this is Kye Mitchell. We didn't see a lot of significant client-wide trends. Most of it has been very much pruning by select clients, there's nothing to indicate that any industry or any particular client is down significantly is system [indiscernible] sluggish being out of the gate. We've seen in the last couple of weeks front-end indicators picked back up, job orders for instance is one that we look at, but nothing that would indicate anything industry wide or client-specific, it's just more pruning after a busy couple of years.

Got it. And then with regards to the pricing, you kind of give us an indication with regards to how we should think about the bill rates, do you think that continues over the course of the year in terms of just slightly more moderate increases in terms of the bill rates or are there any chances that we could end up seeing bill rates decline if the environment becomes a little bit more challenging?

Mark, this is Dave Kelly. So in terms of bill rates, I think obviously we've seen some pretty significant increases over the last couple of years, but very much stability in margins, flexible margins themselves. I would say generally speaking, we've been saying this from quite some time, we expect ongoing stability in margins in terms of bill rates, if you kind of look at times if there is a slowdown, you see pretty stable bill rates, if there is anything, it's been relatively minor. So again, I think as it relates to both margins and bill rates, you're going to -- you're going to see a pretty stable picture based on what we're seeing today.

Great. And then question for Joe and Kye, I know it's only been less than a month since chat GPT emerged. But there's clearly, there's a lot of buzz around AI, which there has been buzz around AI before, but this is really making it even more obvious. I'm wondering if you can talk a little bit about your early impressions with regards to the opportunities for Kforce to leverage -- the opportunities that they're going to come there specifically with regards to either practices that you might unfold or what you may end up doing with regards to increasing the efficiencies on the SG&A side?

That's a great question Mark. It kind of takes me back and obviously, I'm sure you've seen what's going on with Google as well. So we have the AI arms race going on and it takes me back to 2018 with a great book that one of our probably the most strategic client recommended to be, called AI superpowers, if you haven't read that book, I strongly recommend it because I mean you could see all these things coming and evolving. We sit here and we look at all these technology innovations as opportunistic on both fronts. One, we've applied a lot of different technologies internally that has allowed us to continue to drive productivity. So from that standpoint, great opportunity to further drive greater efficiencies in a lot of what we do inside our firm, applying whether it's chat technology and or various other artificial intelligence type technologies, from a opportunity standpoint as well on the client front, one of the things I love about what we do for a living is we are not dependent on any particular technology any particular industry. Any particular type of methodologies that are evolving as time goes on a kind of takes me back to when I first got into this business right, everything was assembler and COBOL, and then as co-generation came that became about it was going to impact our business, and it didn't actually enhance the business. This is just I mean this is going to this is a constant evolution. So will it change, how that happens over time as it continues to evolve, there's no question it well, but then that's going to create needs in other areas in terms of the overall what it takes to really deploy as well as create technology and then drive change management with technology within organizations, I don't know, Kye, if you have anything else that you wanted to add?

No, I think you hit it, Joe.

So that market, it's really opportunity on both fronts, in terms of it will create new business opportunities. I think it's just too early to tell on that front and then obviously internal opportunities in terms of how we can deploy and apply things.

And then one last one, just on the SG&A side, you've already rationalized your real estate footprint. How much more should we expect over the course of this year?

So, Mark as far as the real estate footprint, and obviously, we've been talking about obfuscation and deploying that across the country. Actually, we reduced our real estate footprint by about 40% but we still probably got about three years to annualize the leases that currently exist. And as we do that, we plan to deploy that same type of footprint across the country. So we've got some time to go there. So I think there's opportunity there for us and we're always looking at opportunity as it relates to other areas, right, I mentioned on my remarks, and we've been pretty consistent in investing in our business over the years, right. We've talked at length about the improvements we've seen in productivity because of the front office tools, our CRM and TRM tools. We're currently in the process that we started last year, we're looking at the reengineering of all of our back office tools, which although, it's going to take a little bit of time will be another big leg up. So as it relates to the business, as we grow, obviously, we get the benefits of scale, we expect continued productivity improvements that will help from an SG&A standpoint in the front of the house and we expect to overlay that over time with back-office improvements as well. So we think there is a fair run rate as we grow, to continue to increase operating margins. We've said in the past, double-digit operating margins are that which we should expect, we still expect that to be the case.

Terrific, thank you.

Your next question comes from the line of Tim Mulrooney with William Blair. Please go ahead.

Hi, this is Sam for Tim. Thanks for taking the questions here. I guess to start we've seen a lot of announcements about headcount reductions recently, particularly across the tech industry, but then payrolls came out last week and were much stronger than expected. How would you characterize the tightness of the IT labor market right now relative to last quarter, is it easy or pretty much steady state?

In regards to candidate supply, we've been in a very candidate constrained environment for well over a decade and frankly that has changed and likely will change in the current environment, it does appear that some of the largest companies may have over hired and as I mentioned, are doing a little bit of pruning over the last few months and I think that you're seeing selective pruning in those investments There might be a bit of incremental supply the clients are still being really selective and in our hiring process and we don't see that impacting any future expectation for what that candidate supply looks like, I think it's going to continue to be a tight one. And I think also, we're seeing some folks looking to go into the office, again, which is probably a little bit of any pressure off through those candidates that are there out there. So scene overall, it's very similar to what it has been and I don't expect to see a lot of change there.

So, Kye, let me add. Sam, just to kind of as a reminder, our technology footprint is pretty high at the value chain right. We talk about things like cloud, application modernization, data analytics, digital transformation and our average bill rate is $90-an-hour, as you might expect, do you think about what that means from a payroll perspective. Kye mentioned scarce talent, four years, right, the world has not produced enough of those skill sets and that is still the case, so a big driver to the expectation of continued scarcity in the areas that we play.

That's very helpful. Appreciate the color there. You touched on this in your prepared remarks, but can you maybe expand a little bit more about client behavior in this environment, what you're hearing from clients these days from both the demand side as well as client behavior on the process side and have they given any indication on how they're thinking about their own staffing needs in the months ahead here?

As we mentioned, I think there's more scrutiny on budget that what we've seen in the last two years, it's not anything unusual to prior cycles, but that there is more scrutiny around that. However, clients are very much committed to continuing in the areas of strategic investments. For example, cloud, digital transformation. If they're doing a cloud project, they're not going to stop migrating to the cloud. So we believe we're very well positioned strategically in the right areas where clients are continuing to invest. We've seen some good wins as we come into the first of the year, we had a recent win with a health care company to help them in their cloud migration. We had a recent win with the customer to help them create new tools that help improve employee productivity. So I think the space, we're playing in we continue to see clients investments there.

Yes, I would add, as Kye mentioned clients still funding critical projects that have been true historically right. I'll just remind you during the Great Recession, technology critical spend was far more robust than other industries and other disciplines within the staffing and just recently in the pandemic our technology revenues actually were flat. When we had obviously a significant decline. So kind of a reflection of what we're seeing and that is on top of obviously, significant growth in technology prior to that and then subsequent to that. So a lot of resilience in the technology revenue stream here regardless of the climate.

That's helpful. I appreciate that both. I think we'll leave it there. Thank you.

Your next question comes from the line of Tobey Sommer with Truist Securities. Please go ahead.

Thank you. Wanted to ask you about managed teams and project solutions, can you give us some color there along basic dimensions either size kind of margin profile, if not specifics, maybe juxtapose it and compare it with existing businesses. You talk about project nature, maybe description of what kind of things you take on versus things you won't, any kind of things that will help us get a better overall understanding of what you're doing, where you're going with that would be helpful. Thanks.

Yes, thanks Tobey relative, relative to that solution set that we're bringing to market, right, we've taken a little alternative approach to maybe what you hear from some of our direct competitors in the marketplace because we view that this is integrated into who we are, with our technology focus DNA and how we can leverage all of our capabilities within Kforce through our integrated sales strategy, because that's really what unlocks the value here. And so I think we stated in the past you know, our margin profile is roughly 400 basis points higher when we do this type of work, because of the additional value that we're bringing and moving up that value chain and the further we go up the chain, the more that margin expansion on average, we've been roughly about 400 basis points. In terms of the footprint that we're after I mean had articulated the key areas and part of the reason why we focus on the areas that we do cloud data and various other ones because they play off of each other, because often when a client is working and has an initiative going on with cloud, well that's going to also drive their data needs so based upon when we get engaged it allows us to get honed in on these different areas and teach them at the different phases of an overall macro project. And from a duration standpoint, our efforts in this area is typically over a longer duration than that average roughly 10 contract that we spoke about. So we see some of these projects are multi-year, but on average they're going to be of a greater duration. Kyle, I don't know if you want to talk a little bit more of the particulars.

Yes, Tobey we see -- as Joe said, we see longer duration. We do see clients in areas we're spending continue to look for everything from solutions through managed teams. Managed teams is something we're a lot of demand for people to want to have to go to the various different staff providers. They want somebody within the game to bring on a whole pot or on a whole team. And it creates great opportunities for us, and we're continuing to see strong demand in that space.

And when you reference margins, is that at the GP level? Or is that sort of more at the bottom line level?

Yes, Tobey, the answer here is really both, right? So we're sitting here at a higher gross margin profile. As you'd expect, right, as we deliver more at that mine, it translates. So it's an important business for us.

Okay. Perfect. Where do you see Flex gross margins trending in the quarter? If you -- if we look at the model, Flex gross margins on a year-over-year basis did start to contract a little bit. And I'm just trying to reconcile that because I don't know whether managed teams and other things muddy the waters and in the way that we can sort of extracted and draw conclusions from those kind of numbers. Thanks.

Yes, I think a couple of things. So if I look at full year margins, they're actually in Technology is where we're focused they were flat. Yes, they were down in a very minor way as I think about the spreads to that business, that's unchanged, right? So as I've mentioned, as I look sequentially, obviously, we get impacted by payroll taxes in the first quarter. But I think the buzzword here is really stability. We're not looking for any significant change from where we're at. And we're not seeing anything that suggests that we should do otherwise.

Okay. And then I'm curious, you touched on this in another question, but I'm going to ask you different. When you plan for recessions and you think about how the business will perform, we have, I guess, three examples in the last 20-some years. You've got the tech bubble, the Great Recession in 2020. They all have peculiarities, different depths. Which ones do you use to inform your planning for the business? And are there any adjustments you'd make because we often hear from investors that 2020 was unique and for IT, maybe unique in that the pandemic encouraged some spending on IT that a normal recession absent a pandemic may not. Thanks.

Yes, it's a great question. And as you all know, because you've been around the space for a while. No two are the same and they all react differently. And I think we're in probably one of the more unique environments, this will be -- well, if recession truly ever gets coined, right? And I think this has been the most telegraphed recessionary period in history. So if it ultimately plays out that way, I would say what's really so significantly different this time around is just the overall labor market. We've seen labor markets are impacted. By the way, they're never impacted it severely, especially in the high skilled areas as what one believes, although the last two recessions have been impacted or I should say, if I look at the financial crisis and we look at what happened during the pandemic, those probably had more labor impact than any of the other prior recessions, if you go back over the course of the last 50 years. But this one, when you just look at -- when you look at the amount of jobs and then you look at the available pool of talent. They say, if this were to contract even rather extensively. I mean, you're still going to have one-plus job per person in the marketplace. And as you all know, when we're sitting here focused on technology, which has always been an outlier in terms of supply/demand, we feel very good about those fronts. So we have a very flexible and elastic model that has natural throttles within it. We have a variable cost structure. So as things -- if things were to get tight and there were to be revenue impacts, even although we really didn't experience any of that during the pandemic and it…

So Tobey, let me amplify a point that Joe made in terms of managing through various cycles, right? He had mentioned we just increased our dividend. We just increased the authorization on our buyback. In good times and bad, we generate a significant amount of cash. I think in excess of $130 million, certainly in operating cash flows this coming year. And so we have been very consistent how we've thought about the use of that cash. I don't have any expectation that that's going to change either. So this is the last piece kind of about how we think about managing the business.

Okay. If I kind of just double-click on my question. When you look back at 2020, do you think that there were unique features to the pandemic that contributed to IT's resilience that if we have a sort of a similar contoured economic contraction without unique pandemic features, would the business and industry perform differently?

Yes. I think coming out, I think the pandemic was a big wake-up call for many organizations that were slow in getting after digitizing their business, looking at how they were leveraging data, moving their businesses to the cloud. I think that was a huge wake-up call for all businesses. So there is no question that, that created an acceleration of investment in technology. However, what it also did is it actually -- it moved forward the adoption of technology by years. I mean, I can sit here and say exactly how many years but I look at us at Kforce and I look at how we're deploying and leveraging technologies that we already had, that we were having trouble getting traction with but now has fully embraced whether it be teams or various other tools that we've implemented. So that acceleration, there's no question. It created an excess of demand, right? And you have to delink some of these head reduction that you hear in the marketplace in comparison to what technology really has done. So everybody is having to do these things, digitize their business, move to the cloud, figure out how they monetize and leverage data to be more competitive. So it is not an option to invest in these areas. So we see the need continuing on in these areas irrespective of what economic backdrop. I mean, I think if it was a tougher economic climate, we do see some car pack and certain technology initiatives, absolutely. But these mission-critical imperative skill areas and projects that companies have to work on, they have to do this or they're putting their business at risk from a competitive long-term sustainability standpoint. So I'd say that's what's really different. I mean, we are in more of what I would consider a normal operating environment versus those couple of years post pandemic, where everybody was scrambling but normal is a pretty healthy environment to be as well is the way that we look at it.

Thank you very much.

Your next question will come from the line of Kartik Mehta with Northcoast Research. Please go ahead.

Thank you. Have you seen a change at all in the competitive landscape maybe since you're seeing a little bit of softening. Has there been any change?

There's been a slight softening as we said in our opening comments, we did see a little bit higher than usual attrition numbers at the end of the year. And I think the way the holiday fell to it just pushed everything out a little bit. So was sluggish coming out of it, we have seen, like I mentioned, partake in the last couple of weeks, we've seen that front-end indicators pick back up. It will be interesting too, with clients seeing the latest BLS numbers and everything. I think a lot of it was clients is taking longer to scrutinize and wondering where the macroeconomic is going, but I think there's some positive indicators now for them.

Yes. And Kartik, I think you're also asking about, I'm assuming the direct competitive landscape?

Yes, correct. Yes.

Yes. So what we're seeing from a competitive landscape standpoint is with the larger players that we compete with, things have remained pretty constant. Probably the biggest place that we've seen some competitive dynamics is when we look at the local operators and the smaller players in the space, they are feeling a little bit of pressure. And by the way, this is typically what we see as the cycles evolve and the environment becomes a little bit more difficult, right? They're typically more single company dependent. And as you look at defaults going up on credit and those types of things, they don't have a lot of room to play with nor do they have really strong balance sheet. So I suspect if things were to be tougher throughout the course of 2023. What's going to happen is our competitive landscape is going to shrink, mobile operator or regional operator standpoint, which just provides us more market share opportunity. And that's why historically, if you go back and look at Kforce's performance, we always come out on the back end of the stronger than where we went in, and I don't foresee this being any different irrespective of how the market plays out this year.

And then you've talked about obviously the sales cycle lengthening a little bit, and we're coming off some pretty tough comparisons where things really were really good. If you compare that to pre-pandemic levels, how would that compare rather than the last kind of two years that were really strong. Just comparing it to previous to pandemic before there was this big surge in demand?

We're still very stable to what we saw during pre-pandemic. We haven't seen a real dip from those levels.

Perfect. Thank you very much. Really appreciate it.

[Operator Instructions] Your next question comes from the line of Marc Riddick with Sidoti. Please go ahead.

Hi, good evening. So I wanted to first really do appreciate the update as far as the return of capital to shareholders. Certainly, that's substantial in terms like this. So it's certainly nice to see. But I was wondering if this is sort of, I guess, maybe just trying to sort of look at this as a slightly different vantage. But I was kind of curious as to whether or not the things that you're seeing with your bullishness on the company as well as what you're seeing with clients, I was sort of curious as to how much that's actually changed from when we last -- from your last call in the third quarter. I mean was there -- is there anything that you've seen in that time frame that's necessarily sort of changed your outlook, bullishness, bearishness or any signposts that you think have necessarily been altered over the last few months?

Yes. I would say we've been bullish for quite some time now. I mean, I think the pandemic, while it was a heretic experience to go through, I think it's forever changed Kforce, and I think it changed the trust within Kforce, and I think it also has changed our ability to move quickly, adjust rapidly because our teams had to learn and how to deal with so much change management over those periods of time that I think we are a very different organization than we were in the early part of 2020 prior to going into that. And that really excites me because when I look at what our team has been able to accomplish over the course of the last three years, in the face of some of the most emotionally and mentally challenging situations that probably anybody in the business world has ever faced, I'm just blown away with our teams have accomplished and where we are today with our Office Occasional model with real technology applied, with real cultural shift taking place and then just how we've also elevated our game with our end clients. So no, I mean, nothing has changed since we spoke to you back end of October of last year. We've been on this attitude for quite some time. We are playing offense, and we are going to continue to play offense and why is that? Because we can and we have the right team to do it.

Excellent. I was wondering if you could talk a little bit about if -- with some of your engagements with clients, has there been much of an impact or benefit from either increased or installed M&A activity or business transitions that you're seeing? Or is that fairly similar to what we saw? So we know obviously, a lot of M&A sort of dried up last year. I was sort of curious as to whether or not any of that was driving changes or the way they were looking at things? Thank you.

No. We haven't seen any significant impacts from that. Clients are pretty much business as usual. As you know, we haven't done any M&A in many, many years. We have a couple of clients but there are -- our largest client makes up only 5% of revenue. We have a couple of clients right now that we're benefiting from them going through some M&A activity, but it's really not an impact on what we're seeing.

Okay. Great. Thank you very much.

Sure. Thank you.

We have no further questions at this time. I'll hand the call back over to Joe Liberatore for any closing remarks.

Well, thank you for your interest and support of Kforce. I'd like to say thank you to every Kforcer for your extraordinary efforts and to our consultants and our clients for your trust in Kforce and partnering with you and allowing us the privilege to serve you. We look forward to talking to you again after our first quarter of 2023.

Ladies and gentlemen, that concludes today's meeting. Thank you all for joining. You may now disconnect.