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Edited Transcript of KFRC.OQ earnings conference call or presentation 8-Feb-21 10:00pm GMT

·38 min read

Q4 2020 Kforce Inc Earnings Call Tampa Feb 9, 2021 (Thomson StreetEvents) -- Edited Transcript of Kforce Inc earnings conference call or presentation Monday, February 8, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David L. Dunkel Kforce Inc. - Chairman & CEO * David M. Kelly Kforce Inc. - Executive VP, Chief Financial & Administrative Officer and Secretary * Joseph J. Liberatore Kforce Inc. - President ================================================================================ Conference Call Participants ================================================================================ * Jasper James Bibb Truist Securities, Inc., Research Division - Associate * Joshua David Vogel Sidoti & Company, LLC - Analyst * Mark Steven Marcon Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Samuel Kusswurm William Blair & Company L.L.C., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Kforce Q4 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your first speaker today to David Dunkel, Chairman and CEO. Thank you. Please go ahead. -------------------------------------------------------------------------------- David L. Dunkel, Kforce Inc. - Chairman & CEO [2] -------------------------------------------------------------------------------- Good afternoon. I'd like to remind you that this call may contain certain statements that are forward-looking, including statements regarding the impact, opportunities and benefits from actions taken related to the COVID-19 economic and health crisis. These statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. You can find additional information about this quarter's results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website. Let me start with some commentary about 2020. Reflecting back and considering all of the significant challenges our nation and world endured, it is remarkable to see how we have persevered, adapted, survived and, in some cases, prospered. We began the year with great optimism for continued prosperity. The suddenness of the COVID pandemic and its dramatic effect on businesses, communities and families cannot be overstated. Followed by civil unrest and other social issues, disruption to our daily lives has been very significant. We now face a change in administration that brings with it new questions and concerns about regulatory and fiscal policies. The uncertainty of 2020 has carried over into 2021. Through it all, the heroes of those who have stepped up through incredible personal sacrifice to serve others experiencing crisis. I am most proud of the leaders of Kforce and our wonderful people who not only adapted to dramatic change in their own lives, but also founded in their hearts to serve others and their communities through our Corporate Social Responsibilities initiatives. Against this backdrop, our talented team also delivered extraordinary financial results, and we are grateful and proud of their exceptional efforts. Years of preparation at Kforce, had us strategically situated as we entered the pandemic in early 2020 because of the decisions we made to principally focus our efforts on helping world-class companies solve their strategic objectives by providing critical technology talent and solutions. The pandemic heightened the urgency to rapidly digitize operating models to meet competitive threats from existing and emerging disruptors. Financially, on a billing day basis, we achieved year-over-year revenue and earnings per share growth of approximately 3% and 14%, respectively. Full year revenues in our technology business were only down approximately 1% year-over-year despite a very difficult economic landscape. In the fourth quarter, we continued to take market share, and our results exceeded our expectations across each of our lines of business. Most notably, our technology business grew 6% sequentially. During the year, we also continued to adapt operationally as the situation required. We seamlessly transitioned our entire workforce to work remote within 24 hours, advanced our Kforce reimagined initiative as we look to define a more flexible future operating model and work environment, and made significant progress implementing our talent relationship management system. From a governance standpoint, we continued with our Board refreshment activities and are pleased to welcome Catherine Cloudman as the newest member of our outstanding Board of Directors. As we look to 2021, we are very excited about our strategic position and ability to execute within what we believe will be a continued strong demand environment for our services. 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. We believe the macro and secular trends play to the heart of the position of Kforce as a technology and professional services and solutions firm. We will continue to place a priority on improving associate productivity while allocating capital to grow our technology business, especially in our managed teams and managed solutions practice, where we have continued to experience tremendous market receptivity and success. The strength of our performance and financial position allows us great flexibility in how we deploy capital in the future. We are migrating our FA business toward higher-end skill sets for decision support and analytics, which are more closely aligned to certain technology disciplines. We are also positioning our firm to have a more flexible work environment post-pandemic by leveraging many of our ongoing internal technology investments and utilizing available tools, such that our employees will have a blend of in-office and remote work. We expect that this shift will result in fewer offices and a smaller physical footprint per office. Though it will take a few years to transition fully, we have made good progress during 2020. We expect that these decisions will result in a more profitable and higher-quality revenue stream. We expect to continue to manage our business in a disciplined manner, as we always have, based upon operating trends. Through these uncertain and trying times, we will continue to put the health and safety of our associates first. They are the key to our future success, and we know that their resilience and determination will drive increasing success as we move through and beyond the current situation. I will now turn the call over to Joe Liberatore, President, 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 first quarter. Joe? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [3] -------------------------------------------------------------------------------- Thank you, Dave, and thanks to all of you for your interest in Kforce. I want to first echo Dave’s comments and give a sincere thanks to every Kforcer for the personal sacrifices they’ve made in Elevating their game and delivering tremendous results in 2020 against a very challenging backdrop. As to the fourth quarter, total revenues grew 5.3% on a year-over-year basis and exceeded our expectations across each of our lines of business, especially in our technology business where revenues resumed growth on a year-over-year basis. Let me give you a little more color on each line of business. With respect to our technology business, the nearly 6% sequential increase in revenues is a meaningful acceleration from the roughly 2% sequential increase we experienced in the third quarter and, as Dave noted, resulted in year-over-year growth of almost 1%. These increases are primarily volume-driven as we have grown our consultants on assignment by 15% since early June 2020. Encouragingly, the pace at which we were growing our consultants on assignment meaningfully accelerated in the fourth quarter. We are benefiting from a combination of solid new assignment activity as well as continued lower levels of assignment ends. These trends have continued into the first quarter and we experienced the lowest level of assignment ends at year end that we have on record. Job order flow and new assignment activity have continued to increase. In fact, new assignment activity increased 16% sequentially in the fourth quarter. While job orders remain at levels lower than pre-pandemic, they continue to increase. We are also continuing to see significantly higher fill ratios due to the improved job order quality as clients are executing against an overall higher mix of critical technology initiatives. We also believe the trends we are experiencing are reflective of the growing confidence in restarting projects that may have been deferred or delayed, the scarcity of higher-end IT resources, and securing resources for new transformative initiatives. There remains broad strength in demand across multiple industries. We experienced growth sequentially in the Professional Services, Insurance and Retail industries, while other key industry sectors experienced stability. Financial Services, Insurance and Professional Services have shown relative resilience throughout the pandemic and have shown growth on a year-over-year basis. We continue to see the acceleration of critical technology initiatives within our clients in areas such as cloud, mobile, data analytics and cyber, with a strong focus geared towards improving the consumer’s digital experience. The investments that we made in frontend technology and processes over the last 3 years have matured our capabilities to efficiently provide these clients with highly diverse top talent, at scale, in a boundaryless environment across the U.S. Over the last 3 years, we have also significantly invested in our managed teams and solutions capabilities in order to provide a higher value, differentiated offering to our clients. We've been experiencing tremendous success in bringing this offering to our clients due to strong long-standing partnerships we have built and our reputation for delivering quality services. We intend on making further investments in this capability in 2021. I thought it would help if I provided a relevant client engagement to help solidify the type of business we are driving in this offering. The first engagement with a telecommunication client related to their legacy infrastructure that was compromising their service offering to their end customers. Our client needed a partner with proven cloud strategy and implementation expertise to deliver a holistic solution from architecture to implementation and AWS. As a strategic partner, we were responsible for defining the cloud strategy, including future state cloud architecture and implementation road map. We were also responsible for cloud-native development and implementation, including data security, compliance and reporting. Our client is now able to focus on new pursuits and data monetization strategies with a flexible solution complete with multi-tenant capacity. The second engagement was with a health care client that was embarking to build a new custom greenfield application as part of its digital transformation strategy. Kforce delivered a scalable outcome-based solution, initially deploying 4 scrum teams to take over the legacy application support and enhancements. We were able to ramp up quickly and exceed the performance targets and delivery schedule. Due to our successful partnership, this client has now engaged us to support the application integration-related to a recent business acquisition. Revenue in this offering are accelerating at a significantly greater pace than our overall technology business. We feel extremely confident in the positioning of our technology business and the ability to continue expanding our market share. As to early first quarter trends, consultants on assignment are up 2% on a year-over-year basis and new assignment starts have continued to be strong. Thus, we expect first quarter revenues in our technology business could increase in mid-single digits on a year-over-year basis. Moving to our FA business. Flex revenues were up nearly 26% year-over-year in the fourth quarter, primarily as a result of the contribution of approximately $28 million of revenue from our support of government-sponsored initiatives tied to the economic fallout from the COVID-19 pandemic. These opportunities have continued to provide an important level of support to our overall FA Flex business. The COVID revenue stream remains fluid, and we expect that revenues could be in the range of $22.5 million to $27.5 million in the first quarter and a range of $10 million to $15 million in the second quarter based upon current information. Our non-COVID FA Flex business grew 13% on a sequential basis and declined approximately 17% year-over-year. We have collectively grown our consultants on assignment by 33% since the early June 2020. As Dave mentioned, we are intensifying our efforts to migrate our FA business towards more highly skilled assignments, such as analytics and decision support roles that are less susceptible to technological change and automation and are more synergistic with our technology footprint. To that end, we expect to experience natural assignment ends of our lower skilled FA roles in 2021 where strategic client relationships do not exist. We expect our non-COVID FA revenues to be down in the mid-single digits sequentially and down on a year-over-year basis, consistent with fourth quarter levels. When combined with the midpoint of the range for COVID revenues, total FA Flex may be down sequentially in the high single digits and up year-over-year, low to mid-20% range. Direct Hire revenues in the fourth quarter increased approximately 8% sequentially and declined 13% on a year-over-year. Direct Hire remains an important part of our service offering to clients though we've not allocated significant investments here due primarily to its sensitivity to economic cycles. We expect Direct Hire revenues may be roughly flat on a year-over-year basis in the first quarter. We are continuing to invest in strategic initiatives to better position our firm for the long-term, sustainable profitable growth. These investments include our CRM and TRM systems, both of which are cloud-based and seamlessly integrate with other Microsoft product offerings; thus, providing us significant efficiencies. Our team has also significantly advanced efforts in the evolution of a fully integrated hybrid operating model to enhance the online experience of our internal team and the interaction with our clients, candidates and consultants. These and many other efforts will position us with maximum flexibility regardless of what lies ahead. We are continuing to manage the productivity of our associates. In the fourth quarter, we began making selective investments to increase the number of associates in our technology business so that we're able to take advantage of the expected economic acceleration in 2021. Overall capacity remains sufficient to support above-market growth rates and should improve due to our continued investment in technology and greater enablement of communication and collaboration tools and processes that have been so successful for us during the transition to remote work. Our experience has been that recessionary cycles result in a competitive advantage for the strongest companies and we believe we are ideally situated to take advantage of the market as conditions continue to recover and what we believe could be an accelerated digitally led expansion in 2021 and beyond. We have supported and retained our best people, structurally reduced our fixed costs, and are refining a more leverageable model that we expect will result in positive leverage as growth accelerates as we reimagine the future. Our customers and employee satisfaction levels are at an all-time high. We carry the highest Glassdoor rating among our peers, achieved a world-class Net Promoter Score from our clients and consultants and we're the most recognized firm by technology and consultants per SIA. I greatly appreciate the trust our clients, consultants and candidates have placed in Kforce, and I couldn't be prouder of our team's attitude and efforts executing in a fully remote capacity while managing through these remarkable times. I will now turn the call over to Dave Kelly, Kforce's Chief Financial Officer. Dave? -------------------------------------------------------------------------------- David M. Kelly, Kforce Inc. - Executive VP, Chief Financial & Administrative Officer and Secretary [4] -------------------------------------------------------------------------------- Thank you, Joe. The ability of our team to execute extremely well in our core business during this very difficult year, and the critical decisions made to pursue business outside of our core, allowed us to do to not only maintain valuable infrastructure but to also deliver exceptional results to our shareholders. Full year revenues of $1.4 billion and earnings per share of $2.62, represent year-over-year increases of 3.3% on a billing day basis and 14.4%, respectively. Driven by our strong tech performance, fourth quarter revenues of $354 million significantly exceeded our expectations and reflect a continuing strengthening of performance in each quarter since the beginning of the pandemic. Earnings per share of $0.86 grew 30.3% year-over-year. Our gross profit percentage in the quarter of 28.4% was stable sequentially and decreased 80 basis points year-over-year as a result of lower direct hire revenue mix and a decrease in overall flex gross profit margins. Our flex gross profit percentage of 26.5% declined 20 basis points sequentially due to usual holiday impacts and 40 basis points year-over-year. The primary driver to the flex margin decline was the impact of the lower margin COVID-19 revenue on our FA business. Flex margins in FA declined 100 basis points year-over-year. Flex margins in our technology business declined 30 basis points year-over-year due primarily to slight spread compression and slightly higher health care costs. Average bill rates in technology of nearly $80 per hour have increased nearly 4% over the past year. As we've previously stated, our clients have generally retained the more highly skilled and highly compensated consultants since the onset of the pandemic, given the scarcity of talent, which has positively influenced both overall bill rate and overall length of assignment. Average bill rates in our FA business, exclusive of COVID-19 revenues were generally stable at $37 per hour. As we look forward to Q1, we expect bill rates and bill pay spreads in both our technology and FA businesses to be relatively stable. We are seeing continued growth in our managed teams and solutions business, which carries an overall higher average bill rate. This higher rate -- these higher rate, higher margin projects should help bring rate and spread stability in a competitive environment, and over the longer term, create leverage to increase margins and overall profitability. While we expect stability in overall spreads, flex margins will be negatively impacted in the first quarter by approximately 110 basis points relative to Q4 due to seasonal payroll tax resets. Overall SG&A expenses decreased as a percentage of revenue by 170 basis points year-over-year due to improved associate productivity, solid expense management and lower costs in areas such as travel and office expenses. These positive trends will continue into the first quarter as we embrace the remote work environment brought on by the pandemic. SG&A expenses in Q1 will be up slightly from Q4 in terms of percentage due primarily to payroll tax resets, but will be lower than the first quarter last year in terms of both percentage and dollars despite significantly higher revenues. Our fourth quarter operating margin was 6.8%, which once again exceeded previously communicated operating margin targets. We believe the improving quality of our revenue stream, continued productivity improvements and ongoing lower operating costs will collectively drive improved profitability. As a result, we are raising our operating margin targets by approximately 20 basis points from prior expectations. This increase is reflected in our full year 2021 expectation of operating margins of between 6% and 6.3%. Our effective tax rate in the third quarter was 20.1%, which was lower than we anticipated due to a greater tax benefit realized upon the vesting of our long-term incentive awards as a result of an increase in Kforce's stock price. The majority of our long-term incentive awards vest annually in the fourth quarter. Next, I'll spend a few minutes discussing our operating cash flows and liquidity position. Operating cash flows were $15 million in the fourth quarter and slightly greater than $109 million for the full year. We continued to benefit from the deferral of approximately $13 million in payroll taxes under the CARES Act in the fourth quarter, bringing the total deferral for the year to nearly $39 million. Our strong operating cash flows resulted in us ending 2020 with $3.5 million in net cash versus net debt of $45.2 million at the end of 2019. In addition to retiring all of our outstanding debt, we returned approximately $46 million in capital to our shareholders in 2020 through $29.4 million in share repurchases and $16.8 million in dividend payments. We generated roughly $97 million in EBITDA in 2020. Our strong cash flows, debt-free balance sheet and $300 million revolving credit facility provide ample liquidity to operate the business even in extreme conditions, and flexibility to opportunistically allocate resources to areas such as acquisitions and returning capital to our shareholders while also continuing to make investments to organically grow the business. As a signal of our belief in the strength of our operating trends going into 2021, our Board of Directors approved a 15% increase to our quarterly dividend effective in the first quarter. This increase will bring our dividend yield to roughly 2% at current stock price levels. The continued macroeconomic uncertainty and the unpredictability of our current COVID-19 revenue stream leads us to continue providing a broader range in our guidance. Our billing days are 63 days in the first quarter, which is 1 day more than Q4 2020 and 1 day fewer in Q1 2020. We expect Q1 revenues to be in the range of $354 million to $364 million, and earnings per share to be between $0.57 and $0.65. Gross margins are expected to be between 27.4% and 27.6% while Flex margins are expected to be between 25.4% and 25.6%. SG&A as a percent of revenue is expected to be between 21.6% and 21.8%, and operating margins should be between 5.2% and 5.6%. Weighted average diluted shares outstanding are expected to be approximately $21.5 million in Q1, and the anticipated effective tax rate is 28%. As a reminder, first quarter operating margins are typically impacted by approximately 150 basis points due to seasonal impacts of annual payroll tax resets. This also impacts earnings per share by approximately $0.20. This guidance does not consider the potential negative impact on the demand environment from a significant increase in COVID-19 cases, the effect, if any, of charges related to any onetime costs, costs 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 towards regulatory, legal or future tax law changes. To better assist in understanding how our business may change over the course of 2021, we've provided some detail on our full year revenue and profitability expectations in our press release. This information reflects an expectation of full year revenue growth in our technology business of between 8% and 12%. Ranges provided for our FA unit reflect the net impact of revenue declines from business that we are no longer pursuing due to our strategic migration to higher-end skill sets. We've also provided our most up-to-date expectations for our COVID-19 revenues, which we currently believe may end in the first half of the year. In terms of profitability, we've reflected the improved operating margins I mentioned earlier and resulting earnings per share. We are very pleased with our performance in 2020 and believe that demand for technology resources in 2021 will continue to strengthen. As our revenue mix evolves, we expect to enter 2022 with 85% of our revenues focused in technology, which permeates every aspect of business and society, and an FA business that is directly focused on complementing those technology efforts. We built an exceptional team and armed them with a technology-enabled operating model that we believe will allow us to outperform the market on a sustained basis. Our strong financial position and bias for ongoing investment will further enable the team to excel in providing resources and solutions critical to the success of every company in every industry. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts in overcoming the challenges of the past year and making it a resounding success. Operator, we'd now like to turn the call over for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Josh Vogel from Sidoti & Company. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [2] -------------------------------------------------------------------------------- First one, thinking about the tech Flex bill rates, we're in the upper 70s for the year. And I know that you've talked in the past, it was driven by business mix and clients generally retaining more highly skilled consultants. But do you still think the bill rates will remain elevated? And for how long before we may see certain kind of assignments with rates to your prior averages? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [3] -------------------------------------------------------------------------------- Yes, Josh, this is Joe Liberatore. I would say what you're seeing in the bill rates is really indicative of 2 things. One, it's our strategic focus of the business that we're going after and the nature of that work. Coupled with the pandemic really was just an accelerator of where we were already going. So we don't foresee anything in the near-term that's going to start moving bill rates down. So we're not artificially inflated from a bill rate standpoint. I mean these are the going rates for those skill areas. -------------------------------------------------------------------------------- David M. Kelly, Kforce Inc. - Executive VP, Chief Financial & Administrative Officer and Secretary [4] -------------------------------------------------------------------------------- So Josh, I'll just emphasize what Joe said because I made a comment in my prepared remarks. So the managed services managed teams businesses carrying higher bill rates. So our expectation here is that is a great counter to any activity that might be in lower bill rates in the longer term. If that business grows, that will have a positive effect for us. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [5] -------------------------------------------------------------------------------- Yes, makes sense. How much revenue is coming from the managed teams and solutions practice? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [6] -------------------------------------------------------------------------------- Yes. We haven't broke that out specifically. Our intent is as that also become a more meaningful mix of our overall tech business that we will be breaking that out at some point in the future. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [7] -------------------------------------------------------------------------------- Understood. Shifting gears a little bit. When we think about paring down the physical office footprint. I know you gave guidance for Q1, but how should we think about a good SG&A run rate going forward and other levers that can move it up or down from quarter-to-quarter. -------------------------------------------------------------------------------- David M. Kelly, Kforce Inc. - Executive VP, Chief Financial & Administrative Officer and Secretary [8] -------------------------------------------------------------------------------- Yes, Josh, this is Dave Kelly. So part of the reason why we gave you the full year expectations is to give you an idea of that, right? So we see benefits across a number of things, right? Certainly, real estate is one of them, improving productivity, right, yielding returns on the investments that we made is also a big part of it, right? We've been after this for a number of years, which led us, actually for the second time in 2 years, to raise the incremental profitability expectations that we had previously provided. So we -- if you kind of look at that guidance that we gave guidance, if you look at the expectations that we have provided for the full year operating margins between 6% and 6.3%, if you would have compared that to prior years, it would have been 20 basis points lower. So it's a number of different things that are driving and certainly there is opportunity here from a real estate perspective, with things like travel, right, the idea of how we operate is having a positive impact year for us. But for us, we also want to make sure that we give ourselves enough opportunity to reinvest in the business, right? We've had a lot of nice returns from our technology investments. We think that continued investment is going to be critical for us because we're after sustained continued profitability improvement. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [9] -------------------------------------------------------------------------------- All right. Great. And just last one and I'll hop back in the queue. Talking about the migration efforts in the FA business, is that complete? Or when is that going to be complete in 2021? And then should we inherently expect to see an increase from that $37 bill rate level going forward? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [10] -------------------------------------------------------------------------------- Yes. The team did a lot of nice work throughout the course of 2020. And our efforts were accelerated as the pandemic hit. As we all know that that really hit the lower skilled areas much harder than the higher skill areas. So we really accelerated our overall strategic plan that we were executing in Q3 and Q4. So a lot of that work is behind us. There'll be continued ongoing alignment that will be taking place here through the course of 2021 and ramping up in certain areas. So what we would anticipate over time as the bill rates will gradually increase. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question comes from the line of Tobey Sommer from Truist. -------------------------------------------------------------------------------- Jasper James Bibb, Truist Securities, Inc., Research Division - Associate [12] -------------------------------------------------------------------------------- This is Jasper Bibb on for Tobey. I wanted to ask about what kinds of consulting capabilities you'd be interested in having to the managed team's business to kind of fuel your growth there? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [13] -------------------------------------------------------------------------------- Yes. We've remained active in looking at opportunities in the marketplace. Obviously, cultural and then the nature of the type of portfolio that's brought to the table are 2 paramount things that we're looking at because we are confident that we can build this business organically if we need to. So we don't have to do an acquisition. So we're going to continue to be very selective. But -- and it really anything in and around digital because that's where our clients are really pushing a lot of work to our area of expertise. So we're going to anything digital transformation, cloud are really important practice areas for us as we look forward as well as in the big data area, that laundry list that I ran through in my opening comments. -------------------------------------------------------------------------------- Jasper James Bibb, Truist Securities, Inc., Research Division - Associate [14] -------------------------------------------------------------------------------- And then just with respect to moving kind of the F&A segment further upmarket, what percentage of that business would you say is kind of higher skill versus lower skill today, just so we can kind of think about the time line of repositioning that business. -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [15] -------------------------------------------------------------------------------- Yes. Today, I guess it's important to really before speaking to the future, kind of step back and look historically. I mean we've been uniquely qualified due to our centralized recruitment capability to service high volume, lower bill rate, lower scale. And we've concentrated in an area for many years. However, over time, those skill areas are going to be the ones that are going to be most impacted by technology advancements. So as we emerge from the pandemic, our strategy to rebuild this in the skill areas, as Dave had mentioned and I had mentioned, really require more human intellect, such as the analytics, decision support. We will continue to support certain strategic customers in the higher volume business just because of the nature of our relationship and the needs that they have. But long term, we believe this really insulates us from disintermediation through technology advancements, coupled with these more intellectual areas are highly synergistic with our technology footprint. So I would say if we were to look at it today, it probably accounts for about 19% of kind of our total job postings at this point in time. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question comes from the line of Sam Kusswurm from William Blair. -------------------------------------------------------------------------------- Samuel Kusswurm, William Blair & Company L.L.C., Research Division - Analyst [17] -------------------------------------------------------------------------------- My [compu], all right? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [18] -------------------------------------------------------------------------------- Yes, Sam, we can hear you, sure. -------------------------------------------------------------------------------- Samuel Kusswurm, William Blair & Company L.L.C., Research Division - Analyst [19] -------------------------------------------------------------------------------- Perfect. Your F&A business benefited from some large onetime projects last year. But I'm curious if additional stimulus packages are passed, if you think there's potential for more of that type of government work to come in? Or is that more of a onetime opportunity? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [20] -------------------------------------------------------------------------------- Yes. As we -- we started saying this on the back half of last year. These were opportunistic situation with a lot of unknowns going into the downturn and through long-standing relationships. We had partners that had reached out to us as they had engaged and received contracts. So we really supported them for 2 main drivers, not knowing what was going to lie ahead for us. And likewise, because of how meaningful that work was, especially at that point in time with everything that was going on in the domestic U.S. However, we've always -- as we come out of this, really view that more as a bridge and that will allow us to continually basically replace that business as it falls off with higher quality tech business, it fits much more within our overall strategic plan. As we start to look out to 2022, we really look at more of a 85%, 15% type mix between tech and FA, just to give you kind of a pulse on what our intent is there. So no, I mean, we're selectively continuing to support those customers that we've committed to, but we're not actively out pursuing to onboard more of that business. It doesn't align with the strategies that we've laid out on this call. -------------------------------------------------------------------------------- Samuel Kusswurm, William Blair & Company L.L.C., Research Division - Analyst [21] -------------------------------------------------------------------------------- Perfect. That's helpful. Maybe switching gears then. I wanted to ask a little bit about managed solutions still. I know it's been a growth driver for you, but I wonder how the pandemic has impacted things. If there was any disruption or if it outperformed expectations during this period? And then are there any specific client groups or project types you found more success growing the service model out too? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [22] -------------------------------------------------------------------------------- Yes. So I'll start on the back end. Those areas that we've been mentioning really have continued to accelerate. So I'd say the pandemic has been an accelerant to everything that we were pursuing from a managed teams solution standpoint for really 2 reasons. One, it doesn't matter what industry, it doesn't matter what company is. The amount of initiatives that we're seeing kicked off in and around digitization have increased from where we were at this point last year. So there's a burning need there for every organization. They've seen it through especially the dynamics that have unfolded throughout the pandemic. And really, the second area, I would say that it has really played into that is through the pandemic, we have seen clients pushing more responsibility in our direction because some of them have had to rightsize their team. So they're actually onboarding more flexible resources versus going the FTV route. So that has also played well for managed teams and solutions type work for us. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Mark Marcon from Baird. -------------------------------------------------------------------------------- Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24] -------------------------------------------------------------------------------- I'm wondering, you talked a lot about some of the things that you've been doing. When we think really long term, how do you think about the margin structure really long term? And I'm not talking about just 1 to 2 years, but let's say, we have a normal cycle, and we end up going 5, 6 years out, how do you think that ends up -- we end up progressing through that, particularly, given some of the comments that you made with regards to efficiency and reduced real estate footprint. -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [25] -------------------------------------------------------------------------------- Yes. I'll jump into that, Dave. Yes, I was going to say, I think it's important to step back. If we look at the dotcom recession or we look at the financial crisis, recession, in both of those, from a tech standpoint, what we saw from really peak to trough was about 400 basis points of margin deterioration in comparison to this discretionary cycle where we've roughly experienced about 100 basis points. So needless to say, it hasn't been as deep. So that provides us some, I guess, we're optimistic of what that means just because of the overall demand environment. And then I would couple that with -- we historically do see a higher-margin profile in the managed teams and the solutions business will be performed. So as that continues to become a higher mix of our overall technology business that would provide us opportunity for continued margin expansion. -------------------------------------------------------------------------------- David M. Kelly, Kforce Inc. - Executive VP, Chief Financial & Administrative Officer and Secretary [26] -------------------------------------------------------------------------------- Yes. I would add to what Joe said, and this is no different market, I think that what we've been talking about. This has been a journey that we have been on marching as we grow to improve profitability, to improve productivity and technology investments. I know we said that a little bit earlier. But for us, Joe's points are right on, right? We look at opportunities at the gross margin line in the longer-term is that business mix becomes richer, but really, a huge amount of continued improvements in operating margin are going to come from the efficiencies that we continue to derive, right? So we've said in the past, we're looking at in a clean quarter right now, nearly 8% operating margins. As we get larger as gross margins are potentially positively impacted. I don't know that there's any reason why we wouldn't still target double-digit operating margins. -------------------------------------------------------------------------------- Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27] -------------------------------------------------------------------------------- Great. And then can you talk a little bit about just on the F&A side with some of the longer-term focus on some of the higher value-added skill sets. How would that end up impacting the gross margins within the F&A side? And how we should think about that? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [28] -------------------------------------------------------------------------------- Yes. If we were to look at actual gross margin, one of the dynamics, right, as we go up the food chain from an FA standpoint at a higher bill on -- it will translate to more margin dollars, albeit on a percentage basis, it probably won't move to that extent just because you're dealing with a much higher bill rate so you're dealing with the law of numbers there. Does that make sense, Mark? -------------------------------------------------------------------------------- Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29] -------------------------------------------------------------------------------- It totally does. I appreciate that. Great. And then when you think about like the areas that are emerging that people aren't really thinking about that much with regards to your business. What do you think is going to be the biggest surprise when we think -- when we look back, we're -- in the future, we're 4, 5 years out, and we look back on today, things that you're going to be doing 4 to 5 years from now that people aren't really considering. Do you think there's anything that's going to be materially different? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [30] -------------------------------------------------------------------------------- Well, probably the thing that will be most materially different. And it's the strategies that we're beginning to execute at this point in time, it's going to be the synergy opportunities between these analytic business decision support type roles within and they're not all sitting within finance. In many instances, they're sitting in other operating units. Because some organizations have a very decentralized, some still have a very centralized, but just how synergistic that is with technology and our ability to go into organization to provide that turnkey solution across both of those areas really provides us a lot of opportunity. And it's -- at the end of the day, when we look back 4 or 5 years from now, it is going to be the mix of that higher value oriented work that we're doing from a managed team solution standpoint, of our overall technology footprint is also going to be material. -------------------------------------------------------------------------------- David L. Dunkel, Kforce Inc. - Chairman & CEO [31] -------------------------------------------------------------------------------- Mark, this is Dave Dunkel. I wanted to add something. When you're imagining the future and you start thinking about all of the different applications of technology how pervasive technology is now with robotics, with analytics, with Internet of Things, things that we weren't even considering a few years ago. If there's anything, I think we're in the midst of the digital arms race. And every organization is either facing the challenge of new disruptors or just this rapid digitization of their business and nobody gets to take a pass. So unlike prior cycles where an organization can make a decision and say, well, we're not going to replace our customer-facing applications in this cycle. They're now compelled to do it. They have to do it just because of the competitive nature of it. So there's things today that we're doing that will likely won't be done in the future, and there will be new things that we're doing that we can't even contemplate today. But the one thing that's very clear is technology is underpinning everything from consumer to the business, to the government, every aspect of life has been digitized now, and that's going to continue. So the beautiful thing is, and when we look at where Kforce is today, we're in absolutely the right place to be with 85% exiting this year being in technology and growing. We're in the higher scale technology areas. We're servicing 300-plus of the Fortune 500. And with a domestic focus, operating margin increases continuing, we're actually in a great position right now. It's been a long time getting here, but hats off to our team, to Joe and Dave and our leadership team for what they've accomplished. So we're actually in a great spot. -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [32] -------------------------------------------------------------------------------- Just to piggy back a little bit on where Dave was going there. I'm not sure if you saw the recent announcements both Microsoft and Salesforce around employee experience, platforms, dealing with collaboration, learning, coaching, well-being, along with many other support areas from a remote work. So also, when we look 4, 5 years out, and I think it was SIA just did a poll survey in January. I mean, 83% of IT temporary workers remain remote as of January. So I think they said it best. The trillion-dollar question is what the new normal looks like post-pandemic? So clearly, there's a lot of proving success suggesting the probability of heightened levels of remote work will persist into the future. So -- and we're seeing those similar trends across our clients. So I think the nature of how work is done, will continue to evolve as well as what we look for, 5 years out and just all the technology that's being infused into businesses in support of those businesses. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- I show no further questions in the queue. At this time, I'd like to turn the call back over to Mr. David Dunkel, Chairman and CEO, for closing remarks. -------------------------------------------------------------------------------- David L. Dunkel, Kforce Inc. - Chairman & CEO [34] -------------------------------------------------------------------------------- Great. Thank you very much. First of all, thank you for your interest and support of Kforce. And as we continue to persevere during these unprecedented times, I'd like to again say thank you to each and every member of our field and corporate teams, just for their incredible efforts and to our consultants and our clients for your trust in Kforce and partnering with you and allowing us the privilege of serving you. We delivered another quarter of exceptional results and excited about how we're beginning 2021. And of course, we are very excited to declare Tampa Titletown with the Bucs, the Lightning and the Rays as American League Champs. We look forward to talking with you again after the first quarter. Thank you very much, and good evening. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.