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Edited Transcript of KFRC.OQ earnings conference call or presentation 2-Nov-20 10:00pm GMT

·42 min read

Q3 2020 Kforce Inc Earnings Call Tampa Nov 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Kforce Inc earnings conference call or presentation Monday, November 2, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David L. Dunkel Kforce Inc. - Chairman & CEO * David M. Kelly Kforce Inc. - Chief Financial & Administrative Officer and Secretary * Joseph J. Liberatore Kforce Inc. - President ================================================================================ Conference Call Participants ================================================================================ * 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 * Tobey O'Brien Sommer Truist Securities, Inc., Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2020 Kforce Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. David Dunkel, Chairman and CEO. Sir, you may begin. . -------------------------------------------------------------------------------- David L. Dunkel, Kforce Inc. - Chairman & CEO [2] -------------------------------------------------------------------------------- Good afternoon. I would like to remind you that this call may contain certain statements that are forward looking, including statements regarding the impact, opportunities and benefits from actions taken related to the COVID-19 economic and health crisis. These statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We can not undertake any duty to update any forward-looking statements. You can find additional information about 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. It is becoming clearer each day that the COVID-19 pandemic has triggered a generational change in the shape and conduct of business and personal lives. Prior to the pandemic, our society and the business community at large were rapidly transforming and embracing digital models and technology investment. The pandemic has exponentially accelerated the pace of this technological revolution. Companies that previously conducted their customer engagement, largely in person or through more traditional bricks-and-mortar, have been forced to convert that engagement online, oftentimes through self-service digital platforms. Education and learning companies and institutions and their students are adapting to virtual learning. Health care companies are working aggressively to address consumer desires for telehealth. Retailers across industries have been forced to invest more heavily in online engagement and delivery platforms, and fintech continues to disrupt elements of the financial services industry. These are just a few examples of businesses and industries being redefined. It is not optional to make these investments as organizations and entire industries are rapidly transforming. We believe these macro and secular trends play to the heart of the position of Kforce as a 100% domestic professional services and solutions firm, principally focused on providing critical technology talent and solutions to world-class companies. The demand for our services and the resilience of our revenue stream during the pandemic are a testament to the longer-term strategic decisions we made to focus on addressing client needs driven by these trends. We observed these changes beginning to unfold during the financial crisis as mobility began to take hold during the early stages of personal devices with the release of the first iPhone in June of 2007. Our results confirm our strategy as we experienced sequential revenue growth in all lines of business in the third quarter and significantly improved our profitability levels. Most encouragingly, we experienced sequential growth of nearly 2% in our technology business, which is roughly 80% of overall revenues. We have also experienced a return close to pre-COVID-19 start levels in technology over the past 4 weeks. We continue to perform exceptionally well and capture market share against the backdrop of an unprecedented macroeconomic landscape resulting from the sudden and dramatic effects of the global pandemic. Our business footprint has and should continue to insulate the firm from the consequences of economic disruption and position us to significantly outperform our competitors as conditions improve. I continue to be amazed by the incredible focus, execution and dedication our leaders and associates have displayed during these difficult times. Our people have successfully tackled a sudden shift to working fully remotely, many juggling family responsibilities during the school year and the spring and now here in the fall, while still driving success for our firm. Our investments in a cloud-based technology-enabled operating model and the flexibility and support we have provided to our people have allowed them to excel in this virtual work environment. Our people have been nothing short of tremendous, and they have proven to be one of the best teams in the industry. As we look to the future, we believe that the current crisis has only strengthened the secular drivers of demand in technology the company has accelerate investments in their digital transformation efforts. We will continue to place a priority on allocating capital to grow our technology business. We have exercised caution as we have fortified our strong balance sheet in the near term, ending the third quarter with net cash on our balance sheet. The strength of our performance and financial position allows us to be flexible in how we deploy capital in the future. We are taking the opportunity during this pandemic to build on our success and assess areas of our business model where we might gain additional advantage by exploring new tools and approaches that could increase the effectiveness of our people and improve the engagement experience of our clients and candidates. Over the last 2 quarters, we have also initiated activities to streamline our field office layout and geographic footprint by leveraging existing tools, which will generate additional longer-term efficiencies. We expect to reinvest some of these savings, as we have been doing, in new technologies and tools to meaningfully improve our flexibility and capability in providing exceptional service in a more virtualized work environment and in onboarding new associates that will position us to capture greater share in the eventual economic recovery. 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 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 third quarter performance, recent operating trends and other insights into our operating environment. Dave Kelly, CFO, will then give greater detail on our financial results, including cash flows and balance sheet position as well as guidance for the fourth quarter. Joe? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [3] -------------------------------------------------------------------------------- Thank you, Dave, and thanks to all of you for your interest in Kforce. Our results for the third quarter and our expectations for fourth quarter performance continue to demonstrate a remarkable level of resilience and represent further confirmation of our strategic decision to focus our business to take advantage of the secular shift in technology demand. The higher-end technology skill set that we support have demonstrated a greater ability to work effectively remotely during the pandemic. Our strategic journey has included shedding a number of nonstrategic businesses and also limiting our exposure to the highly cyclical direct hire business. Overall revenues grew 5.7% in the third quarter on a year-over-year basis, and importantly, all of our lines of businesses grew sequential basis and exceeded our expectations. Let me give you a little bit more color on each line of business. With respect to our Technology Flex business, flex revenues grew 1.7% sequentially and declined 4.2% year-over-year due to more difficult prior year comps. As noted on last quarter's call, we began to see mild growth in billable headcount beginning in early June and this growth continued throughout the third quarter and through October, which we believe reflects clients' growing confidence in restarting projects and seeking resources for key initiatives. Technology billable headcount is now 8% larger than the low point in early June. Job order flow and new assignment activity have continued to increase over the last several weeks. While job orders certainly remain at levels significantly lower than pre-pandemic, we are finding the quality of job orders is higher as clients are executing against overall higher mix of critical technology initiatives. Average new assignment starts in the most recent 4 weeks is at 95% levels of a year ago, and the average bill rate has increased 4.6% from Q3 last year. This is encouraging as we progress through the fourth quarter that still has an era of uncertainty around rising COVID cases, election outcomes and potential pent-up demand of paid time off and furlough activity around the holidays. Our internal metrics and revenue trends continue to point to an improving environment. The majority of assignment ends we experienced at the onset of the pandemic, as noted previously, were principally concentrated in the travel and leisure, retail and health care sectors. We experienced growth sequentially in retail space, though travel leisure and health care experienced some weakness sequentially and remain well below pre-pandemic levels. Financial services, insurance and telecom have shown relative resilience throughout the pandemic and grew on a sequential basis. We continue to experience the acceleration of technology-driven, mission-critical strategic consumer direct initiative within world-class companies. We have matured our capability to source and deliver diverse skill sets of qualified talent at scale, further supported by the backdrop of the evolving trend breaking down geographic constraints to source top talent for these large users that have priority needs for large-scale talent across the U.S. We are well positioned to further evolve our offerings to meet these clients' changing needs through our recruiting core competency and inclusive of expanding demand for managed services and solutions that have historically been provided by large solution providers. Due to our longevity in the market and reputation for delivering quality services, we are seeing increasing demand, supporting clients' needs in the managed teams, services and solutions areas. Revenues 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 expand our market share. We expect the level of fourth quarter sequential growth in tech to accelerate slightly from third quarter levels on a billing day basis. Though current expectations for U.S. GDP to decline by approximately 4% for full year, we expect full year flexible revenues in our technology business to decline between only 1% and 2%. Our performance compares extremely favorable to the overall economic trends and is notably better than that experienced during the 2008, 2009 recession, which further supports the secular story. Moving to our FA business. Flex revenues were up nearly 52% year-over-year in the third quarter, primarily as a result of the contribution of approximately $51 million of revenue from our support of government-sponsored initiatives tied to the COVID-19 pandemic. These opportunities have provided an important level of support to our core FA Flex business as we have navigated the revenue reductions brought on by the crisis with many of the roles within FA Flex not being as remote-friendly. Towards the end of the third quarter, we began to see declines in these lower-level, predominantly customer service and call center roles as government-sponsored customer needs are declining with improvement in the economic and employment trends. This revenue stream remains fluid as we expect the revenues related to the COVID initiatives could be in the range of $25 million to $30 million in the fourth quarter. The expected run rate of the revenue supporting the COVID initiatives as we exit the fourth quarter of 2020 suggests we could see up to $10 million in revenue in the first quarter of 2021. Our core Flex business grew slightly on a sequential basis and declined approximately 25% year-over-year, exceeding our expectations. As we have discussed, we felt the negative impacts from the current crisis earlier and more deeply in this line of business. Since the middle of June, we've experienced modest growth in our billable headcount throughout the third quarter and into October. Given our progress in growing this business from its low point late in the second quarter, we expect that we could see sequential growth in the fourth quarter in the mid- to high single digits on a billing day basis. When combined with the midpoint of the range of our COVID revenue, total FA Flex may be down approximately 18% sequentially and up nearly 21% year-over-year. Direct hire revenues in the third quarter increased approximately 32% sequentially and declined nearly 27% year-over-year. Direct hire revenues are inherently less predictable and in the most recessionary cycles, this service offering tends to be most impacted by the economic uncertainty. We have also, by design, reduced our concentration of direct hire revenues from 22.5% of revenues at the peak of the economic expansion prior to the dot.com bust to approximately 2% of revenues in the third quarter. While direct hire remains an important part of our service offerings to clients over the long term, we have not allocated significant investment here in part due to the sensitivity of the revenue stream to economic cycles and the disruptive technologies that have continued to evolve in this space. Additionally, we're able to provide direct hire capability in our technology practice through the same channel utilized in our Technology Flex business as the skill sets we service are similar. We expect direct hire revenues in the fourth quarter may be stable to slightly down versus Q3 levels given the traditional seasonality in this business. We've continued to invest in the strategic initiatives to better position our firm for the long term. Several years ago, we made a strategic decision to leverage Microsoft's suite of product offerings for our cloud-based technologies. This includes our customer relationship management system, which we implemented in 2017; and our talent relationship management system, which we're in the process of implementing, with the last phase slated for early 2021. This, combined with the seamless integration of these technologies with other Microsoft Office 365 products such as Outlook, Teams and Power BI, has provided us significant efficiencies with a fully integrated platform, especially as we shifted our associates to a work-remote environment in mid-March. Our team also significantly advanced efforts in the evolution of a fully integrated hybrid operating model to enhance the online experience of our internal team and with our clients, candidates and consultants, in part leveraging our KFORCEconnect from a sourcing, referral and engagement standpoint in a boundaryless environment. These and many other efforts underway will position us with maximum flexibility regardless of what lies ahead during these uncertain times. We are continuing to manage the productivity of our associates as we typically do with an elevated focus on retaining our most productive associates so we are best positioned to take advantage of the market subsequent to the crisis. We, by design, experienced decline in overall performer headcount in the third quarter due to the natural performance managed attrition. Though as we continue to experience improving trends, particularly in our technology business and gain confidence in strong tech market in 2021, we have begun efforts to increase associate levels at a measured pace to assist in sustaining our above-market growth rates. These actions will add to the existing capacity of our current associates. Overall capacity should continue to be positively impacted by the improving productivity generated by our technology investments and greater enablement of our current communication 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 competitive advantage for the strongest companies, and we believe we are ideally situated to take advantage of the market as conditions continue to recover on what we believe could be an accelerated digitally-led expansion. We've retained our best people, taking cost out of the system and refined a more leverageable model, which will result in positive leverage as growth accelerates as we reimagine the future that lies ahead. I greatly appreciate the trust of our clients, consultants and candidates have placed in Kforce, and I couldn't be prouder of our teams' attitude and efforts executing 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. - Chief Financial & Administrative Officer and Secretary [4] -------------------------------------------------------------------------------- Thank you, Joe. Revenues of $365.4 million in the quarter grew 6.5% sequentially and 5.7% year-over-year. Earnings per share of $0.89 grew 30.9% year-over-year as we generated solid leverage from our top line growth and continued SG&A discipline. Our gross profit percentage in the quarter of 28.4% was stable sequentially and decreased 140 basis points year-over-year, primarily as a result of a lower direct hire revenue mix and a decrease in overall Flex gross profit margins. Our Flex gross profit percentage of 26.7% declined 30 basis points sequentially and 50 basis points year-over-year, primarily due to the negative impact from the higher mix of revenues from the COVID-19 business, which carries a lower overall margin profile. Flex margins in our technology business decreased 60 basis points sequentially and 30 basis points year-over-year primarily as a result of slight spread compression. Approximately 30 to 40 basis points of the sequential decline was due to unique circumstances in the third quarter relating to client furlough activities and rebate adjustments. Flex margins in our FA business declined 170 basis points year-over-year driven by the lower margin COVID-19 business. Average bill rates in technology of roughly $80 per hour were stable sequentially and up roughly 4.6% year-over-year. We believe this year-over-year increase was driven in part by business mix as our clients have generally retained the more highly skilled consultants given the scarcity of talent. The majority of the assignments that were ended at the onset of the pandemic were on average in lower skill, lower bill rate areas. New starts during the pandemic have typically been at or near our current average bill rate of $80 per hour. We expect tech bill rates should remain elevated, but we may see some return of assignments with rates closer to our prior averages. Average bill rates in our core FA business of approximately $37 per hour are close to pre-pandemic levels due to shifts in the mix of assignments. As we look forward to the fourth quarter, we would expect general stability in our bill/pay spreads in our overall technology business as we continue to benefit from a greater mix of more profitable managed services revenues that have a higher-than-average margins. This greater mix would be expected to offset any slight spread compression in the remainder of our technology staffing business. Overall, FA Flex gross profit margins are expected to be stable to slightly down sequentially. Our strong results, the improvements we've made in associate productivity and continued strong cost discipline have allowed us to sustain or accelerate expenditures on strategic activities, such as technology investments while also retaining critical resources through the pandemic. We also have been able to accelerate our efforts to reposition our FA business and have begun streamlining our physical office footprint, which has resulted in a reduction in future real estate spend. We believe all of these activities will position us well to continue to outperform the market as the crisis subsides. Overall SG&A expenses declined in terms of absolute dollars sequentially and declined approximately 270 basis points as a percentage of revenue. Roughly 80% of our SG&A expenses are variable in nature, which allows us significant flexibility to manage our cost structure. We expect SG&A expense to decline further in Q4 in terms of dollars, given lower revenues from the COVID initiatives and to increase slightly from Q3 levels as a percentage of revenue. Our third quarter operating margin was 7.3%, which significantly exceeds our operating margin target at these revenue levels. Our effective tax rate in the third quarter was 27.2%, which was slightly higher than we anticipated. Next, I'll spend a few minutes discussing our operating cash flows and liquidity position. Operating cash flows were $55 million in the third quarter. Our profitable revenue growth sequentially of more than $20 million and the performance of our high-quality accounts receivable portfolio, which saw a decrease in days sales outstanding of 6 days sequentially, were critical drivers to our strong cash flow. We also continued to benefit from the deferral of approximately $12 million in payroll taxes under the CARES Act in the third quarter, bringing the total deferral on a year-to-date basis to $25 million. The strong operating cash flows in the third quarter resulted in us finishing the quarter with $1.3 million of net cash on hand, a quarter sooner than we anticipated being debt-free. We have a very strong balance sheet, which provides ample liquidity to operate the business even in extreme conditions and flexibility to opportunistically allocate resources. Our working capital balance as of September 30, net of cash on hand, was approximately $110 million, which serves as a reliable source of liquidity if revenues were to contract. We have a $300 million revolving credit facility that matures in May 2022. Our trailing 12 months EBITDA as of September 30, 2020, was roughly $92 million, which currently provides incremental borrowing capacity should we need it, of roughly $150 million. This capacity, in addition to the $101.3 million cash on hand and future expected positive free cash flow, allows us to be flexible in making continued investments in our business, deploying capital in other areas such as acquisition and returning capital to our shareholders. The continued macroeconomic uncertainty and the unpredictability of our current COVID-19 revenue stream necessitates continuing to provide a broader range in our guidance. Our billing days are 62 days in the fourth quarter, which is 2 fewer than in Q3 2020 and the same as Q4 2019. We expect Q4 revenues to be in the range of $337 million to $347 million and earnings per share to be between $0.70 and $0.78. The lower end of revenue and EPS guidance contemplates the COVID-19 projects slowing at a greater pace than anticipated and the potential impact of the recent flare-up in COVID cases. Gross margins are expected to be between 28.1% and 28.3%, while Flex margins are expected to be between 26.5% and 26.7%. SG&A as a percent of revenue is expected to be between 21.4% and 21.6%, and operating margin should be between 6.2% and 6.6%. Weighted average diluted shares outstanding are expected to be approximately 21.2 million for Q4, and the anticipated effective tax rate is 23.5%. This lower tax rate is the result of tax benefits expected to be realized upon vesting of our long-term incentive awards, which happens annually in the fourth quarter. This guidance does not consider the potential negative impact on the demand environment from a significant increase of COVID-19 cases in effect -- 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. Kforce outperformed the market during the Great Recession, and we have delivered superior results again in the third quarter against a very challenging global and U.S. economic backdrop. Our balance sheet is very strong, our strategic position and client portfolio is in the ideal position, and our performance continues to be encouraging. Lastly, I'd like to extend a sincere thank you to all of our teams for their efforts over the last several quarters to ensure that we are living up to our brand promise of providing great results through strategic partnership and knowledge sharing. Operator, we'd now like to turn the call open to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question or comment comes from the line of Tobey Sommer from Truist Securities. -------------------------------------------------------------------------------- Tobey O'Brien Sommer, Truist Securities, Inc., Research Division - MD [2] -------------------------------------------------------------------------------- I was curious if you could give us your perspective on whether or not reshoring or onshoring is a phenomenon that your clients are undertaking and/or do you hear they're expecting to undertake it? And how significant a driver, if so, may that be? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [3] -------------------------------------------------------------------------------- Yes, Tobey, this is Joe. Needless to say, I mean, obviously, the off-shoring is not a big piece of what we do, but we haven't really seen any material shift in the amount of things coming back onshore. I know coming out of the initial front end of the pandemic, there was a lot of talk about this early on, but we really haven't heard of any major shifts outside of certain things in very much isolation, so we've really seen it more modestly. And I think if you look at the results of any of the major global integrators, their reports have continued to be pretty strong in terms of new engagements that they're capturing. So this would further support -- there's really not any major shift that's taking place. -------------------------------------------------------------------------------- Tobey O'Brien Sommer, Truist Securities, Inc., Research Division - MD [4] -------------------------------------------------------------------------------- And when we look at your balance sheet as well as your cash flow and your stated goal to move more into managed services, how are you feeling about utilizing that capital to start to move towards that goal? Or are we still kind of in the midst of uncertainty and better to be prudent and wait? -------------------------------------------------------------------------------- David L. Dunkel, Kforce Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Tobey, this is Dave Dunkel. We've been pretty conservative in deploying the capital. And I would say that we will continue to be conservative. However, if we find the right match and the right portfolio of customers and the right skill sets and the right team, we'll do it. So it's not -- it isn't a won't do it, but we're certainly going to be more selective and be a little bit more conservative than we would be under ordinary circumstances. So the analogy is it's not the beginning of the monopoly game. We don't need to buy everything we land on, so we're going to be selective. And when we find the right thing, then we'll go forward. -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [6] -------------------------------------------------------------------------------- Yes. And Tobey, what I would also add to that is you may recall, I think it was in our May 2019 call, David put out that our near-term goal for our managed teams, managed services solutions was to make up about 20% of our tech revenues within a 5-year period. I mean at this point in time, I mean, our internal teams have done a really nice job, and we're tracking ahead of this at this point in time. -------------------------------------------------------------------------------- Tobey O'Brien Sommer, Truist Securities, Inc., Research Division - MD [7] -------------------------------------------------------------------------------- Okay. I guess you prompted a follow-up before I get to my last question. And what does tracking ahead mean when we've only got an end point and a 5-year time line? Could you give us a little more context around that, please? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [8] -------------------------------------------------------------------------------- Yes. I guess the context that I would give you is our intent is when this starts to become a meaningful part of our overall tech revenues, we intend to start breaking this out. And if we continue to track the way we are at this point in time, we could see that happening as early as the back end of next year, if not into the early part of 2020. -------------------------------------------------------------------------------- Tobey O'Brien Sommer, Truist Securities, Inc., Research Division - MD [9] -------------------------------------------------------------------------------- Okay. And then I was hoping you could -- my last question. Could you give us a little bit of color about your COVID-related work? It looks like you're going to be -- that's going to be a 10% customer, if not more, by the end of the year. So you'll probably -- for regulatory reasons, you can give us a little bit. Could you give us some insight as to what you're doing and what the variability is that may cause it to go up or down? Because we don't know that much about it. If it's linked to cases, then certainly, those are on the rise, unfortunately. So any kind of color and inputs you could give would be helpful. -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [10] -------------------------------------------------------------------------------- Yes. Actually, no, I get -- I would correct you. I mean I think in my opening comments, I tried to make it clear. We hit our high-water mark here in Q3, and the range that we provided for Q4 is literally roughly half of what we did in Q3. So we see that beginning to tail off. And as I put out there, we see it tailing off more as we're heading into the beginning of 2021. So it's not going to remotely come close to a 10% or even a 5% share of our revenue on an annualized basis. So that -- this is very project-related to support: one, a client that we had a long-standing relationship with; and two, for a very good cause because of what our capabilities were. So we took advantage of this as a bridge, not knowing what was coming our way going into the pandemic and as we've seen things play out in our tech business because of the remote capability and now the acceleration of digitization of everybody's business, our intent is to let this tail off as this project winds down, and we're not looking to replace that business. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question or comment comes from the line of Mark Marcon from Baird. -------------------------------------------------------------------------------- Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12] -------------------------------------------------------------------------------- Just wondering if you could give us a little bit more color with regards to the specific factors in terms of the dynamics that you're seeing on the Tech Flex side. You gave us the color with regards to travel, leisure and health care being down. I'm wondering how big is that at this point in time. Now that it started to decline, how much more does it have to be? And then on the financial services to telecom, which have been resilient, can you describe some of the underlying dynamics there that you're seeing? Is it growing? Is it -- how would you describe it? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [13] -------------------------------------------------------------------------------- Yes. So I guess I'll start with travel and leisure. Travel and leisure doesn't make up a high percentage in terms of any of our industry verticals, and we've actually seen the bottoms from a travel and leisure standpoint. In fact, what we're starting to see is those clients are starting to onboard consultants because they're getting after things that they need to be doing with their business to be prepared for post-pandemic or the back end of the pandemic. So we're actually seeing net headcount here at the latter part of Q3 and heading into Q4 within the travel and leisure clients that we have. We have a very nominal footprint in the airlines. But obviously, with a strong South Florida presence, we had a decent footprint within the cruise lines, but they're doing some really neat things within the cruise lines. In fact, there was a really nice Wall Street Journal article talking about some of the things that they're having to be innovative in and around to get through the CDC and be able to reopen. So a lot of nice things happening there. In terms of our sectors, we saw nice sequential performance from financial services, insurance, communication and also retail. And so I think they all have unique dynamics going on within them. Well, within communications, we -- there's this race for the end customer. So a lot of work happening within those organizations in and around consumer facing, digitization aspects. And then actually, even within retail, what we saw early on is those retail entities that had not made great strides to digitize their business and interact with our clients from an online standpoint have really ramped up their efforts. So even some of the clients where we saw an initial impact there, we've also seen them begin to ramp up their headcounts. -------------------------------------------------------------------------------- Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14] -------------------------------------------------------------------------------- Great. And can you talk a little bit about the -- just staying on Tech Flex. Just what would you envision the impact being with regards to the new changes with regards to ]? How would you characterize that? -------------------------------------------------------------------------------- David M. Kelly, Kforce Inc. - Chief Financial & Administrative Officer and Secretary [15] -------------------------------------------------------------------------------- Mark, this is Dave Kelly. So I guess a couple of comments that I would make. So some of these executive orders, I know, have been challenged, I know in the court. So I think it's very, first of all, difficult to say what those changes are and whether they're going to be sustained at this point. But I think a couple of things, I think, at least for us, are pretty clear. During the administration that exists today, I think that there's a recognition that technology talent is hard to find. And I think the -- in the space that we play and I think just generally in specialty staffing, there has not been a significant impact here during the last 3.5 years. And if that were to continue, I don't expect, frankly, that, that would change because these are essential workers to drive the U.S. economy. I think something like 22% or 25% technology workers are non-U. S. citizens. So you can't really cut that off, and I don't think that, that, frankly, has been the current administration's intent. And as we look forward, if the Democrats were to win, clearly, they've been pretty vocal in terms of their desire to bring in more talent, highly talented technology workers. So I think as an industry and certainly for Kforce as a company, we feel very good about the environment regardless of what happens in the ability for us to access these technology workers as part of the skill sets that we have. We don't bring people in, so we're really pretty much agnostic about what happens. -------------------------------------------------------------------------------- Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16] -------------------------------------------------------------------------------- Great. And then can you talk -- it sounds like we've got some really nice opportunities for further efficiencies as we go out towards next year. Dave, you mentioned streamlining the field office by geographic footprint. Could you just add a little more color to that? And particularly as some of your internal IT initiatives are completed in early 2021, how we should think about the margin profile changing? Because it does -- you did a really nice job this quarter here on the margin side. And I'm just wondering how we should think about the potential for further margin expansion? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [17] -------------------------------------------------------------------------------- Yes. Let me -- this is Joe. Let me handle the first part of your question. I'll let Dave Kelly chime in on the second part. So since really the early part of May, when we launched some internal initiatives, we've made considerable project to reimagine what our office of the future will look like. Given the pandemic dynamics, things that we're learning through this and being a completely 100% virtual as well as looking at what's happening with client drivers and our consultant drivers and also internal dynamics that are happening is everybody is experiencing this remote work. So I would say, in summary, we subscribe to very similar thoughts that have been represented by the likes of the CEO of Google, the CEO of HP and actually hear more recently in the last day or 2, the CEO of Dropbox, that the office of the future will not be a place where people show up to work each and every day. Instead, it's going to be a location where people meet to collaborate and for community. So this will ultimately result in opportunities for us to reduce our overall real estate cost by creating really a more seamlessly integrated hybrid workspace, where it will really be irrelevant if somebody is physically in an office or if they're working somewhere remote. And so we believe this is going to allow us the opportunity to reinvest into the business to more effectively support our overall business with technology and really a model that's also going to provide us cost leverage. -------------------------------------------------------------------------------- David M. Kelly, Kforce Inc. - Chief Financial & Administrative Officer and Secretary [18] -------------------------------------------------------------------------------- Yes. Mark, I would add to that. So really, the investments that Joe is talking about are going to continue to drive what we've been after for the last couple of years and what's been driving our profitability improvements, and that's improving productivity, right? We've done a great job doing that year after year after year now. And these further investments, we think, will have significant returns very quickly in terms of where associated productivity is going to go. You mentioned, I appreciate you recognizing that, we've had some nice improvement in our operating profit. And for us, we had previously stated that our operating margin targets at $250 million in revenue, we'd be about 6.5% operating margin. And then when we get to the $400 million, we'd be about 7.7 -- or 7.7% operating margin. For us, obviously, we're tracking slightly ahead of that. So productivity improvements going well on top of that, the opportunities that we've seen with some of the changes is how we're going to operate that Joe elaborated on put us in a very comfortable position, we think, to meet or exceed those targets that we previously put out there. So yes, we feel very good about the future. As we grow these revenues, we'll be able to grow more profitably even than we had expected before the pandemic. -------------------------------------------------------------------------------- Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19] -------------------------------------------------------------------------------- Great. Just one last follow-on to that. Just can you talk a little bit about the headcount, where you're positioned from a capacity perspective? And you talked about some -- potentially some modest adds. How are we thinking about those? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [20] -------------------------------------------------------------------------------- Yes. So we have capacity across all of our tenure groups because that's really how we look at our population, and I've gone into great lengths on this in the past on how much productivity over time really ramps up as we hold on to people. So for example, a key -- a couple of key capacity measures that we really own in on because they're the output, our new starts per associates and billable consultants per associate, so both of these are running well below pandemic levels. So we have capacity in getting back to where we were pre-pandemic. And as you mentioned, in my prepared remarks, I mentioned that we've begun to modestly add to headcount, and that's really so that we're prepared to sustain long-term growth as we start to look out past 2021, provided the economy continues to recover. So I think these efforts, coupled with the leverage we will continue to obtain from all the technology investments that we've been making, inclusive of our most recent effort around our talent relationship management system, that really gives us confidence in our ability to sustain long-term growth and not run into any capacity issues. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question or comment comes from the line of Josh Vogel from Sidoti & Company. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [22] -------------------------------------------------------------------------------- I just wanted to maybe build off one of the earlier questions when you talk about reinvesting in new technologies, planning to onboard new associates. I know it's early yet, and obviously, a fluid situation. But when we frame the leverage in the model and operating expenses for 2021, can you maybe give us a sense of what that cadence could look like as the year progresses? -------------------------------------------------------------------------------- David M. Kelly, Kforce Inc. - Chief Financial & Administrative Officer and Secretary [23] -------------------------------------------------------------------------------- So Josh, just to be clear, so in terms of how we think of things unfolding, obviously, as we look to '21 and we're already starting to see -- obviously, Joe spends a lot of time, growth in our Tech Flex business. I think we've talked about a market that we think is going to continue to improve, obviously a lot less cyclicality to that business. So 80% of our revenues is going to be good, obviously, we think, as we move forward. A lot of these savings that Joe mentioned that we are going to be realizing, we're already beginning to realize. It's going to continue to drive improvements in SG&A levels. We are -- as we have been, we'll probably continue to invest technologically at the same pace, so I don't see a big change in terms of what CapEx might be looking like. And because we're going to -- we have been investing, we'll continue to invest. Obviously, a lot of the solutions that we're putting in place were SaaS-based solutions, so that already is coming through in some of our SG&A costs. So I think it's a matter of growing revenues as we kind of replace some of that COVID business with a higher quality, higher profitability, technology business and F&A business combined. That will help from a gross margin standpoint and drive as well profitability improvements. So you've got a number of things working in our favor here. -------------------------------------------------------------------------------- Joshua David Vogel, Sidoti & Company, LLC - Analyst [24] -------------------------------------------------------------------------------- I appreciate the insights there. Looking at the balance sheet and ending the quarter with a net cash balance 1 quarter ahead of the schedule is pretty impressive. And outside of the reinvestment you're talking about and the dividend, how well should we think about your capital allocation strategies -- priorities today? -------------------------------------------------------------------------------- David M. Kelly, Kforce Inc. - Chief Financial & Administrative Officer and Secretary [25] -------------------------------------------------------------------------------- Yes. I mean I would say that I'll just kind of reiterate a little bit about what Dave said. Certainly, we want to be opportunistic as we think about adding to the skill sets and the tools that we can in meeting customer needs as we think about our managed services business. We've been looking. We expect to continue to be looking at that, but we want to be very careful that we make the right choice if we buy something to fit it to our culture. And then as we think about the dividend, and obviously, historically, we think our stock opportunistically valued is a good place to put capital as well. So I don't think really our strategy has changed, quite frankly, other than, I think, in the very near term, we've got to make sure that we're appropriately cautious, as Dave said, in case something happens that might require companies to pull back a little bit. So as Dave said it and I apologize for repeating it, but there's nothing we have to do. We're in a great place, and it allows us a lot of flexibility. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- (Operator Instructions) Our next question or comment comes from the line of Sam Kusswurm from William Blair. -------------------------------------------------------------------------------- Samuel Kusswurm, William Blair & Company L.L.C., Research Division - Analyst [27] -------------------------------------------------------------------------------- Am I coming through all right? -------------------------------------------------------------------------------- David L. Dunkel, Kforce Inc. - Chairman & CEO [28] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [29] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- David L. Dunkel, Kforce Inc. - Chairman & CEO [30] -------------------------------------------------------------------------------- Yes. Just fine. -------------------------------------------------------------------------------- Samuel Kusswurm, William Blair & Company L.L.C., Research Division - Analyst [31] -------------------------------------------------------------------------------- I have a few questions related to market share. You commented a few times about the market share opportunity that will be available to you as we come out of this downturn. I guess I was wondering if you might expand on where you see the market share coming from. Are you increasing wallet share with current customers or maybe reaching out to new customers who might have previously been serviced by competitors who aren't weathering the downturn as well as you have? -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [32] -------------------------------------------------------------------------------- Yes. It's a great question. It's really both. So we are continuing to see clients looking at consolidation of their vendor list, which we're positioned very well for. So that's clients looking to narrow down the amount of vendors they're using and giving more of their wallet share to those vendors that have a long-standing track record. Likewise, in any downturn such as this, we've seen some of the smaller, more mid-sized clients maybe that we're doing more business in the small business area, which we've heard certain competitors talk about how that particular segment has been impacted during this downturn in comparison to Kforce. We're predominantly focused on Fortune 1000, which have held up very well. So we've seen a lot of those competitors have scaled back some of their resources. So that really provides us an opportunity to take advantage of capturing customer share in clients who maybe were a little bit earlier in our development efforts. So through the downturns of 2008, 2009 and this current climate, historically, we've outpaced the market by more than 2x, and we foresee that continuing into the near future. -------------------------------------------------------------------------------- Samuel Kusswurm, William Blair & Company L.L.C., Research Division - Analyst [33] -------------------------------------------------------------------------------- Great. Well, appreciate the color there. My next question kind of relates to the acceleration of the remote work model. We're more than 8 months into this new COVID world. Are you getting the sense that clients who previously preferred local staffing resources will be permanently okay with remote services? And if so, how does this change the competitive environment? I think it makes you more competitive against smaller, localized firms, but maybe increases the way as you would compete against other larger IT staffing firms. I would just love to hear your thoughts around that. -------------------------------------------------------------------------------- Joseph J. Liberatore, Kforce Inc. - President [34] -------------------------------------------------------------------------------- Yes. I would say in this boundaryless environment that's evolving, we view that our national presence really supported by our local expertise is providing us a key differentiator versus most of the competitors out there. And potentially, long term really is the winning formula. So in terms of the local competitors or the regional competitors, no doubt there's a shift because we're hearing it from our clients. Because clients clearly have opened up to hiring resources outside their geographies where they typically would have required them within where they had physical presence, and we see that as a trend. So this is not just talk. I mean we're actually starting to see RFPs and RFIs come through, where they're asking us to provide menus, different skill set accessible in different marketplaces and what the rates are in those marketplaces. So we're really excited about the opportunities this creates between our local presence domestically across the U.S. and our national recruiting centralized capabilities. We couldn't be positioned more effectively to deliver in that environment. And I would say that's probably the key differentiator when we look at those handful of other national providers who obviously also have that same footprint that we have. I do believe we're in year 20 now of our centralized delivery evolution. So we've learned a lot that others are learning along the way, and I think that, that can really propel us as well. And then we entered into a joint venture a little bit over a year ago with a company by name of WorkLlama that has some very innovative technologies that we've been deploying in and around candidate engagement as well as referral type tools in a really mobile-type platform. So when we kind of couple all those things together, we think we're in a great spot. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Thank you. I show no additional questions in the queue at this time. I'd like to turn the conference over -- back over to Mr. David Dunkel, Chairman and CEO, for any closing comments. -------------------------------------------------------------------------------- David L. Dunkel, Kforce Inc. - Chairman & CEO [36] -------------------------------------------------------------------------------- Well, thank you very much for your interest and support of Kforce. And as we forge ahead through these unprecedented times, I would like to say thank you to each and every member of our field and corporate teams for the incredible efforts and to our consultants and our clients for your trust in Kforce in partnering with you and allowing us the privilege of serving you. We delivered another quarter of exceptional results and are excited about the foundation we are setting for 2021. We look forward to talking with you again in the new year. Thank you very much. Good evening. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.